`[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[S. 349 Placed on Calendar Senate (PCS)]






                                                        Calendar No. 10
110th CONGRESS
  1st Session
                                 S. 349

                           [Report No. 110-1]

 To amend the Internal Revenue Code of 1986 to provide additional tax 
  incentives to employers and employees of small businesses, and for 
                            other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            January 22, 2007

   Mr. Baucus, from the Committee on Finance, reported the following 
     original bill; which was read twice and placed on the calendar

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to provide additional tax 
  incentives to employers and employees of small businesses, and for 
                            other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF CODE; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Small Business and 
Work Opportunity Act of 2007''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; amendment of Code; table of contents.
             TITLE I--SMALL BUSINESS TAX RELIEF PROVISIONS

                     Subtitle A--General Provisions

Sec. 101. Extension of increased expensing for small businesses.
Sec. 102. Extension and modification of 15-year straight-line cost 
                            recovery for qualified leasehold 
                            improvements and qualified restaurant 
                            improvements; 15-year straight-line cost 
                            recovery for certain improvements to retail 
                            space.
Sec. 103. Clarification of cash accounting rules for small business.
Sec. 104. Extension and modification of combined work opportunity tax 
                            credit and welfare-to-work credit.
Sec. 105. Certified professional employer organizations.
                  Subtitle B--Subchapter S Provisions

Sec. 111. Capital gain of S corporation not treated as passive 
                            investment income.
Sec. 112. Treatment of bank director shares.
Sec. 113. Special rule for bank required to change from the reserve 
                            method of accounting on becoming S 
                            corporation.
Sec. 114. Treatment of the sale of interest in a qualified subchapter S 
                            subsidiary.
Sec. 115. Elimination of all earnings and profits attributable to pre-
                            1983 years for certain corporations.
Sec. 116. Expansion of qualifying beneficiaries of an electing small 
                            business trust.
                      TITLE II--REVENUE PROVISIONS

Sec. 201. Modification of effective date of leasing provisions of the 
                            American Jobs Creation Act of 2004.
Sec. 202. Application of rules treating inverted corporations as 
                            domestic corporations to certain 
                            transactions occurring after March 20, 
                            2002.
Sec. 203. Denial of deduction for punitive damages.
Sec. 204. Denial of deduction for certain fines, penalties, and other 
                            amounts.
Sec. 205. Revision of tax rules on expatriation of individuals.
Sec. 206. Limitation on annual amounts which may be deferred under 
                            nonqualified deferred compensation 
                            arrangements.
Sec. 207. Increase in criminal monetary penalty limitation for the 
                            underpayment or overpayment of tax due to 
                            fraud.
Sec. 208. Doubling of certain penalties, fines, and interest on 
                            underpayments related to certain offshore 
                            financial arrangements.
Sec. 209. Increase in penalty for bad checks and money orders.
Sec. 210. Treatment of contingent payment convertible debt instruments.
Sec. 211. Extension of IRS user fees.
Sec. 212. Modification of collection due process procedures for 
                            employment tax liabilities.
Sec. 213. Modifications to whistleblower reforms.
Sec. 214. Modifications of definition of employees covered by denial of 
                            deduction for excessive employee 
                            remuneration.

             TITLE I--SMALL BUSINESS TAX RELIEF PROVISIONS

                     Subtitle A--General Provisions

SEC. 101. EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESSES.

    Section 179 (relating to election to expense certain depreciable 
business assets) is amended by striking ``2010'' each place it appears 
and inserting ``2011''.

SEC. 102. EXTENSION AND MODIFICATION OF 15-YEAR STRAIGHT-LINE COST 
              RECOVERY FOR QUALIFIED LEASEHOLD IMPROVEMENTS AND 
              QUALIFIED RESTAURANT IMPROVEMENTS; 15-YEAR STRAIGHT-LINE 
              COST RECOVERY FOR CERTAIN IMPROVEMENTS TO RETAIL SPACE.

    (a) Extension of Leasehold and Restaurant Improvements.--
            (1) In general.--Clauses (iv) and (v) of section 
        168(e)(3)(E) (relating to 15-year property) are each amended by 
        striking ``January 1, 2008'' and inserting ``April 1, 2008''.
            (2) Effective date.--The amendment made by this subsection 
        shall apply to property placed in service after December 31, 
        2007.
    (b) Modification of Treatment of Qualified Restaurant Property as 
15-Year Property for Purposes of Depreciation Deduction.--
            (1) Treatment to include new construction.--Paragraph (7) 
        of section 168(e) (relating to classification of property) is 
        amended to read as follows:
            ``(7) Qualified restaurant property.--The term `qualified 
        restaurant property' means any section 1250 property which is a 
        building (or its structural components) or an improvement to 
        such building if more than 50 percent of such building's square 
        footage is devoted to preparation of, and seating for on-
        premises consumption of, prepared meals.''.
            (2) Effective date.--The amendment made by this subsection 
        shall apply to any property placed in service after the date of 
        the enactment of this Act, the original use of which begins 
        with the taxpayer after such date.
    (c) Recovery Period for Depreciation of Certain Improvements to 
Retail Space.--
            (1) 15-year recovery period.--Section 168(e)(3)(E) 
        (relating to 15-year property) is amended by striking ``and'' 
        at the end of clause (vii), by striking the period at the end 
        of clause (viii) and inserting ``, and'', and by adding at the 
        end the following new clause:
                            ``(ix) any qualified retail improvement 
                        property placed in service before April 1, 
                        2008.''.
            (2) Qualified retail improvement property.--Section 168(e) 
        is amended by adding at the end the following new paragraph:
            ``(8) Qualified retail improvement property.--
                    ``(A) In general.--The term `qualified retail 
                improvement property' means any improvement to an 
                interior portion of a building which is nonresidential 
                real property if--
                            ``(i) such portion is open to the general 
                        public and is used in the retail trade or 
                        business of selling tangible personal property 
                        to the general public, and
                            ``(ii) such improvement is placed in 
                        service more than 3 years after the date the 
                        building was first placed in service.
                    ``(B) Improvements made by owner.--In the case of 
                an improvement made by the owner of such improvement, 
                such improvement shall be qualified retail improvement 
                property (if at all) only so long as such improvement 
                is held by such owner. Rules similar to the rules under 
                paragraph (6)(B) shall apply for purposes of the 
                preceding sentence.
                    ``(C) Certain improvements not included.--Such term 
                shall not include any improvement for which the 
                expenditure is attributable to--
                            ``(i) the enlargement of the building,
                            ``(ii) any elevator or escalator,
                            ``(iii) any structural component 
                        benefitting a common area, or
                            ``(iv) the internal structural framework of 
                        the building.''.
            (3) Requirement to use straight line method.--Section 
        168(b)(3) is amended by adding at the end the following new 
        subparagraph:
                    ``(I) Qualified retail improvement property 
                described in subsection (e)(8).''.
            (4) Alternative system.--The table contained in section 
        168(g)(3)(B) is amended by inserting after the item relating to 
        subparagraph (E)(viii) the following new item:


``(E)(ix)..................................................        39''.
 

            (5) Effective date.--The amendments made by this section 
        shall apply to property placed in service after the date of the 
        enactment of this Act.

SEC. 103. CLARIFICATION OF CASH ACCOUNTING RULES FOR SMALL BUSINESS.

    (a) Cash Accounting Permitted.--
            (1) In general.--Section 446 (relating to general rule for 
        methods of accounting) is amended by adding at the end the 
        following new subsection:
    ``(g) Certain Small Business Taxpayers Permitted To Use Cash 
Accounting Method Without Limitation.--
            ``(1) In general.--An eligible taxpayer shall not be 
        required to use an accrual method of accounting for any taxable 
        year.
            ``(2) Eligible taxpayer.--For purposes of this subsection, 
        a taxpayer is an eligible taxpayer with respect to any taxable 
        year if--
                    ``(A) for each of the prior taxable years ending on 
                or after the date of the enactment of this subsection, 
                the taxpayer (or any predecessor) met the gross 
                receipts test in effect under section 448(c) for such 
                taxable year, and
                    ``(B) the taxpayer is not subject to section 447 or 
                448.''.
            (2) Expansion of gross receipts test.--
                    (A) In general.--Paragraph (3) of section 448(b) 
                (relating to entities with gross receipts of not more 
                than $5,000,000) is amended to read as follows:
            ``(3) Entities meeting gross receipts test.--Paragraphs (1) 
        and (2) of subsection (a) shall not apply to any corporation or 
        partnership for any taxable year if, for each of the prior 
        taxable years ending on or after the date of the enactment of 
        the Small Business and Work Opportunity Act of 2007, the entity 
        (or any predecessor) met the gross receipts test in effect 
        under subsection (c) for such prior taxable year.''.
                    (B) Conforming amendments.--Section 448(c) of such 
                Code is amended--
                            (i) by striking ``$5,000,000'' in the 
                        heading thereof,
                            (ii) by striking ``$5,000,000'' each place 
                        it appears in paragraph (1) and inserting 
                        ``$10,000,000'', and
                            (iii) by adding at the end the following 
                        new paragraph:
            ``(4) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2008, the dollar amount 
        contained in paragraph (1) shall be increased by an amount 
        equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                2007' for `calendar year 1992' in subparagraph (B) 
                thereof.
        If any amount as adjusted under this subparagraph is not a 
        multiple of $100,000, such amount shall be rounded to the 
        nearest multiple of $100,000.''.
    (b) Clarification of Inventory Rules for Small Business.--
            (1) In general.--Section 471 (relating to general rule for 
        inventories) is amended by redesignating subsection (c) as 
        subsection (d) and by inserting after subsection (b) the 
        following new subsection:
    ``(c) Small Business Taxpayers Not Required To Use Inventories.--
            ``(1) In general.--A qualified taxpayer shall not be 
        required to use inventories under this section for a taxable 
        year.
            ``(2) Treatment of taxpayers not using inventories.--If a 
        qualified taxpayer does not use inventories with respect to any 
        property for any taxable year beginning after the date of the 
        enactment of this subsection, such property shall be treated as 
        a material or supply which is not incidental.
            ``(3) Qualified taxpayer.--For purposes of this subsection, 
        the term `qualified taxpayer' means--
                    ``(A) any eligible taxpayer (as defined in section 
                446(g)(2)), and
                    ``(B) any taxpayer described in section 
                448(b)(3).''.
            (2) Conforming amendments.--
                    (A) Subpart D of part II of subchapter E of chapter 
                1 is amended by striking section 474.
                    (B) The table of sections for subpart D of part II 
                of subchapter E of chapter 1 is amended by striking the 
                item relating to section 474.
    (c) Effective Date and Special Rules.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after the date of the 
        enactment of this Act.
            (2) Change in method of accounting.--In the case of any 
        taxpayer changing the taxpayer's method of accounting for any 
        taxable year under the amendments made by this section--
                    (A) such change shall be treated as initiated by 
                the taxpayer;
                    (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury; and
                    (C) the net amount of the adjustments required to 
                be taken into account by the taxpayer under section 481 
                of the Internal Revenue Code of 1986 shall be taken 
                into account over a period (not greater than 4 taxable 
                years) beginning with such taxable year.

SEC. 104. EXTENSION AND MODIFICATION OF COMBINED WORK OPPORTUNITY TAX 
              CREDIT AND WELFARE-TO-WORK CREDIT.

    (a) Extension.--Section 51(c)(4)(B) (relating to termination) is 
amended by striking ``2007'' and inserting ``2012''.
    (b) Increase in Maximum Age for Designated Community Residents.--
            (1) In general.--Paragraph (5) of section 51(d) is amended 
        to read as follows:
            ``(5) Designated community residents.--
                    ``(A) In general.--The term `designated community 
                resident' means any individual who is certified by the 
                designated local agency--
                            ``(i) as having attained age 18 but not age 
                        40 on the hiring date, and
                            ``(ii) as having his principal place of 
                        abode within an empowerment zone, enterprise 
                        community, or renewal community.
                    ``(B) Individual must continue to reside in zone or 
                community.--In the case of a designated community 
                resident, the term `qualified wages' shall not include 
                wages paid or incurred for services performed while the 
                individual's principal place of abode is outside an 
                empowerment zone, enterprise community, or renewal 
                community.''.
            (2) Conforming amendment.--Subparagraph (D) of section 
        51(d)(1) is amended to read as follows:
                    ``(D) a designated community resident,''.
    (c) Clarification of Treatment of Individuals Under Individual Work 
Plans.--Subparagraph (B) of section 51(d)(6) (relating to vocational 
rehabilitation referral) is amended by striking ``or'' at the end of 
clause (i), by striking the period at the end of clause (ii) and 
inserting ``, or'', and by adding at the end the following new clause:
                            ``(iii) an individual work plan developed 
                        and implemented by an employment network 
                        pursuant to subsection (g) of section 1148 of 
                        the Social Security Act with respect to which 
                        the requirements of such subsection are met.''.
    (d) Treatment of Disabled Veterans Under the Work Opportunity Tax 
Credit.--
            (1) Disabled veterans treated as members of targeted 
        group.--
                    (A) In general.--Subparagraph (A) of section 
                51(d)(3) (relating to qualified veteran) is amended by 
                striking ``agency as being a member of a family'' and 
                all that follows and inserting ``agency as--
                            ``(i) being a member of a family receiving 
                        assistance under a food stamp program under the 
                        Food Stamp Act of 1977 for at least a 3-month 
                        period ending during the 12-month period ending 
                        on the hiring date, or
                            ``(ii) entitled to compensation for a 
                        service-connected disability incurred after 
                        September 10, 2001.''.
                    (B) Definitions.--Paragraph (3) of section 51(d) is 
                amended by adding at the end the following new 
                subparagraph:
                    ``(C) Other definitions.--For purposes of 
                subparagraph (A), the terms `compensation' and 
                `service-connected' have the meanings given such terms 
                under section 101 of title 38, United States Code.''.
            (2) Increase in amount of wages taken into account for 
        disabled veterans.--Paragraph (3) of section 51(b) is amended--
                    (A) by inserting ``($12,000 per year in the case of 
                any individual who is a qualified veteran by reason of 
                subsection (d)(3)(A)(ii))'' before the period at the 
                end, and
                    (B) by striking ``Only first  $6,000 of'' in the 
                heading and inserting ``Limitation on''.
    (e) Effective Date.--The amendments made by this section shall 
apply to individuals who begin work for the employer after the date of 
the enactment of this Act, in taxable years ending after such date.

SEC. 105. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.

    (a) Employment Taxes.--Chapter 25 (relating to general provisions 
relating to employment taxes) is amended by adding at the end the 
following new section:

``SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.

    ``(a) General Rules.--For purposes of the taxes, and other 
obligations, imposed by this subtitle--
            ``(1) a certified professional employer organization shall 
        be treated as the employer (and no other person shall be 
        treated as the employer) of any work site employee performing 
        services for any customer of such organization, but only with 
        respect to remuneration remitted by such organization to such 
        work site employee, and
            ``(2) exclusions, definitions, and other rules which are 
        based on the type of employer and which would (but for 
        paragraph (1)) apply shall apply with respect to such taxes 
        imposed on such remuneration.
    ``(b) Successor Employer Status.--For purposes of sections 
3121(a)(1), 3231(e)(2)(C), and 3306(b)(1)--
            ``(1) a certified professional employer organization 
        entering into a service contract with a customer with respect 
        to a work site employee shall be treated as a successor 
        employer and the customer shall be treated as a predecessor 
        employer during the term of such service contract, and
            ``(2) a customer whose service contract with a certified 
        professional employer organization is terminated with respect 
        to a work site employee shall be treated as a successor 
        employer and the certified professional employer organization 
        shall be treated as a predecessor employer.
    ``(c) Liability of Certified Professional Employer Organization.--
Solely for purposes of its liability for the taxes, and other 
obligations, imposed by this subtitle--
            ``(1) a certified professional employer organization shall 
        be treated as the employer of any individual (other than a work 
        site employee or a person described in subsection (f)) who is 
        performing services covered by a contract meeting the 
        requirements of section 7705(e)(2), but only with respect to 
        remuneration remitted by such organization to such individual, 
        and
            ``(2) exclusions, definitions, and other rules which are 
        based on the type of employer and which would (but for 
        paragraph (1)) apply shall apply with respect to such taxes 
        imposed on such remuneration.
    ``(d) Treatment of Credits.--
            ``(1) In general.--For purposes of any credit specified in 
        paragraph (2)--
                    ``(A) such credit with respect to a work site 
                employee performing services for the customer applies 
                to the customer, not the certified professional 
                employer organization,
                    ``(B) the customer, and not the certified 
                professional employer organization, shall take into 
                account wages and employment taxes--
                            ``(i) paid by the certified professional 
                        employer organization with respect to the work 
                        site employee, and
                            ``(ii) for which the certified professional 
                        employer organization receives payment from the 
                        customer, and
                    ``(C) the certified professional employer 
                organization shall furnish the customer with any 
                information necessary for the customer to claim such 
                credit.
            ``(2) Credits specified.--A credit is specified in this 
        paragraph if such credit is allowed under--
                    ``(A) section 41 (credit for increasing research 
                activity),
                    ``(B) section 45A (Indian employment credit),
                    ``(C) section 45B (credit for portion of employer 
                social security taxes paid with respect to employee 
                cash tips),
                    ``(D) section 45C (clinical testing expenses for 
                certain drugs for rare diseases or conditions),
                    ``(E) section 51 (work opportunity credit),
                    ``(F) section 51A (temporary incentives for 
                employing long-term family assistance recipients),
                    ``(G) section 1396 (empowerment zone employment 
                credit),
                    ``(H) 1400(d) (DC Zone employment credit),
                    ``(I) Section 1400H (renewal community employment 
                credit), and
                    ``(J) any other section as provided by the 
                Secretary.
    ``(e) Special Rule for Related Party.--This section shall not apply 
in the case of a customer which bears a relationship to a certified 
professional employer organization described in section 267(b) or 
707(b). For purposes of the preceding sentence, such sections shall be 
applied by substituting `10 percent' for `50 percent'.
    ``(f) Special Rule for Certain Individuals.--For purposes of the 
taxes imposed under this subtitle, an individual with net earnings from 
self-employment derived from the customer's trade or business is not a 
work site employee with respect to remuneration paid by a certified 
professional employer organization.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (b) Certified Professional Employer Organization Defined.--Chapter 
79 (relating to definitions) is amended by adding at the end the 
following new section:

``SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS DEFINED.

    ``(a) In General.--For purposes of this title, the term `certified 
professional employer organization' means a person who has been 
certified by the Secretary for purposes of section 3511 as meeting the 
requirements of subsection (b).
    ``(b) General Requirements.--A person meets the requirements of 
this subsection if such person--
            ``(1) demonstrates that such person (and any owner, 
        officer, and such other persons as may be specified in 
        regulations) meets such requirements as the Secretary shall 
        establish with respect to tax status, background, experience, 
        business location, and annual financial audits,
            ``(2) computes its taxable income using an accrual method 
        of accounting unless the Secretary approves another method,
            ``(3) agrees that it will satisfy the bond and independent 
        financial review requirements of subsection (c) on an ongoing 
        basis,
            ``(4) agrees that it will satisfy such reporting 
        obligations as may be imposed by the Secretary,
            ``(5) agrees to verify on such periodic basis as the 
        Secretary may prescribe that it continues to meet the 
        requirements of this subsection, and
            ``(6) agrees to notify the Secretary in writing within such 
        time as the Secretary may prescribe of any change that 
        materially affects whether it continues to meet the 
        requirements of this subsection.
    ``(c) Bond and Independent Financial Review Requirements.--
            ``(1) In general.--An organization meets the requirements 
        of this paragraph if such organization--
                    ``(A) meets the bond requirements of paragraph (2), 
                and
                    ``(B) meets the independent financial review 
                requirements of paragraph (3).
            ``(2) Bond.--
                    ``(A) In general.--A certified professional 
                employer organization meets the requirements of this 
                paragraph if the organization has posted a bond for the 
                payment of taxes under subtitle C (in a form acceptable 
                to the Secretary) in an amount at least equal to the 
                amount specified in subparagraph (B).
                    ``(B) Amount of bond.--For the period April 1 of 
                any calendar year through March 31 of the following 
                calendar year, the amount of the bond required is equal 
                to the greater of--
                            ``(i) 5 percent of the organization's 
                        liability under section 3511 for taxes imposed 
                        by subtitle C during the preceding calendar 
                        year (but not to exceed $1,000,000), or
                            ``(ii) $50,000.
            ``(3) Independent financial review requirements.--A 
        certified professional employer organization meets the 
        requirements of this paragraph if such organization--
                    ``(A) has, as of the most recent review date, 
                caused to be prepared and provided to the Secretary (in 
                such manner as the Secretary may prescribe) an opinion 
                of an independent certified public accountant that the 
                certified professional employer organization's 
                financial statements are presented fairly in accordance 
                with generally accepted accounting principles, and
                    ``(B) provides, not later than the last day of the 
                second month beginning after the end of each calendar 
                quarter, to the Secretary from an independent certified 
                public accountant an assertion regarding Federal 
                employment tax payments and an examination level 
                attestation on such assertion.
        Such assertion shall state that the organization has withheld 
        and made deposits of all taxes imposed by chapters 21, 22, and 
        24 of the Internal Revenue Code in accordance with regulations 
        imposed by the Secretary for such calendar quarter and such 
        examination level attestation shall state that such assertion 
        is fairly stated, in all material respects.
            ``(4) Controlled group rules.--For purposes of the 
        requirements of paragraphs (2) and (3), all professional 
        employer organizations that are members of a controlled group 
        within the meaning of sections 414(b) and (c) shall be treated 
        as a single organization.
            ``(5) Failure to file assertion and attestation.--If the 
        certified professional employer organization fails to file the 
        assertion and attestation required by paragraph (3) with 
        respect to any calendar quarter, then the requirements of 
        paragraph (3) with respect to such failure shall be treated as 
        not satisfied for the period beginning on the due date for such 
        attestation.
            ``(6) Review date.--For purposes of paragraph (3)(A), the 
        review date shall be 6 months after the completion of the 
        organization's fiscal year.
    ``(d) Suspension and Revocation Authority.--The Secretary may 
suspend or revoke a certification of any person under subsection (b) 
for purposes of section 3511 if the Secretary determines that such 
person is not satisfying the representations or requirements of 
subsections (b) or (c), or fails to satisfy applicable accounting, 
reporting, payment, or deposit requirements.
    ``(e) Work Site Employee.--For purposes of this title--
            ``(1) In general.--The term `work site employee' means, 
        with respect to a certified professional employer organization, 
        an individual who--
                    ``(A) performs services for a customer pursuant to 
                a contract which is between such customer and the 
                certified professional employer organization and which 
                meets the requirements of paragraph (2), and
                    ``(B) performs services at a work site meeting the 
                requirements of paragraph (3).
            ``(2) Service contract requirements.--A contract meets the 
        requirements of this paragraph with respect to an individual 
        performing services for a customer if such contract is in 
        writing and provides that the certified professional employer 
        organization shall--
                    ``(A) assume responsibility for payment of wages to 
                such individual, without regard to the receipt or 
                adequacy of payment from the customer for such 
                services,
                    ``(B) assume responsibility for reporting, 
                withholding, and paying any applicable taxes under 
                subtitle C, with respect to such individual's wages, 
                without regard to the receipt or adequacy of payment 
                from the customer for such services,
                    ``(C) assume responsibility for any employee 
                benefits which the service contract may require the 
                organization to provide, without regard to the receipt 
                or adequacy of payment from the customer for such 
                services,
                    ``(D) assume responsibility for hiring, firing, and 
                recruiting workers in addition to the customer's 
                responsibility for hiring, firing and recruiting 
                workers,
                    ``(E) maintain employee records relating to such 
                individual, and
                    ``(F) agree to be treated as a certified 
                professional employer organization for purposes of 
                section 3511 with respect to such individual.
            ``(3) Work site coverage requirement.--The requirements of 
        this paragraph are met with respect to an individual if at 
        least 85 percent of the individuals performing services for the 
        customer at the work site where such individual performs 
        services are subject to 1 or more contracts with the certified 
        professional employer organization which meet the requirements 
        of paragraph (2) (but not taking into account those individuals 
        who are excluded employees within the meaning of section 
        414(q)(5)).
    ``(f) Determination of Employment Status.--Except to the extent 
necessary for purposes of section 3511, nothing in this section shall 
be construed to affect the determination of who is an employee or 
employer for purposes of this title.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (c) Conforming Amendments.--
            (1) Section 3302 is amended by adding at the end the 
        following new subsection:
    ``(h) Treatment of Certified Professional Employer Organizations.--
If a certified professional employer organization (as defined in 
section 7705), or a customer of such organization, makes a contribution 
to the State's unemployment fund with respect to a work site employee, 
such organization shall be eligible for the credits available under 
this section with respect to such contribution.''.
            (2) Section 3303(a) is amended--
                    (A) by striking the period at the end of paragraph 
                (3) and inserting ``; and'' and by inserting after 
                paragraph (3) the following new paragraph:
            ``(4) if the taxpayer is a certified professional employer 
        organization (as defined in section 7705) that is treated as 
        the employer under section 3511, such certified professional 
        employer organization is permitted to collect and remit, in 
        accordance with paragraphs (1), (2), and (3), contributions 
        during the taxable year to the State unemployment fund with 
        respect to a work site employee.'', and
                    (B) in the last sentence--
                            (i) by striking ``paragraphs (1), (2), and 
                        (3)'' and inserting ``paragraphs (1), (2), (3), 
                        and (4)'', and
                            (ii) by striking ``paragraph (1), (2), or 
                        (3)'' and inserting ``paragraph (1), (2), (3), 
                        or (4)''.
            (3) Section 6053(c) (relating to reporting of tips) is 
        amended by adding at the end the following new paragraph:
            ``(8) Certified professional employer organizations.--For 
        purposes of any report required by this subsection, in the case 
        of a certified professional employer organization that is 
        treated under section 3511 as the employer of a work site 
        employee, the customer with respect to whom a work site 
        employee performs services shall be the employer for purposes 
        of reporting under this section and the certified professional 
        employer organization shall furnish to the customer any 
        information necessary to complete such reporting no later than 
        such time as the Secretary shall prescribe.''.
    (d) Clerical Amendments.--
            (1) The table of sections for chapter 25 is amended by 
        adding at the end the following new item:

``Sec. 3511. Certified professional employer organizations.''.
            (2) The table of sections for chapter 79 is amended by 
        inserting after the item relating to section 7704 the following 
        new item:

``Sec. 7705. Certified professional employer organizations defined.''.
    (e) Reporting Requirements and Obligations.--The Secretary of the 
Treasury shall develop such reporting and recordkeeping rules, 
regulations, and procedures as the Secretary determines necessary or 
appropriate to ensure compliance with the amendments made by this 
section with respect to entities applying for certification as 
certified professional employer organizations or entities that have 
been so certified. Such rules shall be designed in a manner which 
streamlines, to the extent possible, the application of requirements of 
such amendments, the exchange of information between a certified 
professional employer organization and its customers, and the reporting 
and recordkeeping obligations of the certified professional employer 
organization.
    (f) User Fees.--Subsection (b) of section 7528 (relating to 
Internal Revenue Service user fees) is amended by adding at the end the 
following new paragraph:
            ``(4) Certified professional employer organizations.--The 
        fee charged under the program in connection with the 
        certification by the Secretary of a professional employer 
        organization under section 7705 shall not exceed $500.''.
    (g) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply with respect to wages for services performed on or after 
        January 1 of the first calendar year beginning more than 12 
        months after the date of the enactment of this Act.
            (2) Certification program.--The Secretary of the Treasury 
        shall establish the certification program described in section 
        7705(b) of the Internal Revenue Code of 1986, as added by 
        subsection (b), not later than 6 months before the effective 
        date determined under paragraph (1).
    (h) No Inference.--Nothing contained in this section or the 
amendments made by this section shall be construed to create any 
inference with respect to the determination of who is an employee or 
employer--
            (1) for Federal tax purposes (other than the purposes set 
        forth in the amendments made by this section), or
            (2) for purposes of any other provision of law.

                  Subtitle B--Subchapter S Provisions

SEC. 111. CAPITAL GAIN OF S CORPORATION NOT TREATED AS PASSIVE 
              INVESTMENT INCOME.

    (a) In General.--Section 1362(d)(3) is amended by striking 
subparagraphs (B), (C), (D), (E), and (F) and inserting the following 
new subparagraph:
                    ``(B) Passive investment income defined.--
                            ``(i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        `passive investment income' means gross 
                        receipts derived from royalties, rents, 
                        dividends, interest, and annuities.
                            ``(ii) Exception for interest on notes from 
                        sales of inventory.--The term `passive 
                        investment income' shall not include interest 
                        on any obligation acquired in the ordinary 
                        course of the corporation's trade or business 
                        from its sale of property described in section 
                        1221(a)(1).
                            ``(iii) Treatment of certain lending or 
                        finance companies.--If the S corporation meets 
                        the requirements of section 542(c)(6) for the 
                        taxable year, the term `passive investment 
                        income' shall not include gross receipts for 
                        the taxable year which are derived directly 
                        from the active and regular conduct of a 
                        lending or finance business (as defined in 
                        section 542(d)(1)).
                            ``(iv) Treatment of certain dividends.--If 
                        an S corporation holds stock in a C corporation 
                        meeting the requirements of section 1504(a)(2), 
                        the term `passive investment income' shall not 
                        include dividends from such C corporation to 
                        the extent such dividends are attributable to 
                        the earnings and profits of such C corporation 
                        derived from the active conduct of a trade or 
                        business.
                            ``(v) Exception for banks, etc.--In the 
                        case of a bank (as defined in section 581) or a 
                        depository institution holding company (as 
                        defined in section 3(w)(1) of the Federal 
                        Deposit Insurance Act (12 U.S.C. 1813(w)(1)), 
                        the term `passive investment income' shall not 
                        include--
                                    ``(I) interest income earned by 
                                such bank or company, or
                                    ``(II) dividends on assets required 
                                to be held by such bank or company, 
                                including stock in the Federal Reserve 
                                Bank, the Federal Home Loan Bank, or 
                                the Federal Agricultural Mortgage Bank 
                                or participation certificates issued by 
                                a Federal Intermediate Credit Bank.''.
    (b) Conforming Amendment.--Clause (i) of section 1042(c)(4)(A) is 
amended by striking ``section 1362(d)(3)(C)'' and inserting ``section 
1362(d)(3)(B)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 112. TREATMENT OF BANK DIRECTOR SHARES.

    (a) In General.--Section 1361 (defining S corporation) is amended 
by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--
            ``(1) In general.--Restricted bank director stock shall not 
        be taken into account as outstanding stock of the S corporation 
        in applying this subchapter (other than section 1368(f)).
            ``(2) Restricted bank director stock.--For purposes of this 
        subsection, the term `restricted bank director stock' means 
        stock in a bank (as defined in section 581) or a depository 
        institution holding company (as defined in section 3(w)(1) of 
        the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), if 
        such stock--
                    ``(A) is required to be held by an individual under 
                applicable Federal or State law in order to permit such 
                individual to serve as a director, and
                    ``(B) is subject to an agreement with such bank or 
                company (or a corporation which controls (within the 
                meaning of section 368(c)) such bank or company) 
                pursuant to which the holder is required to sell back 
                such stock (at the same price as the individual 
                acquired such stock) upon ceasing to hold the office of 
                director.
            ``(3) Cross reference.--

``For treatment of certain distributions with respect to restricted 
                            bank director stock, see section 
                            1368(f).''.
    (b) Distributions.--Section 1368 (relating to distributions) is 
amended by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--If a director receives a 
distribution (not in part or full payment in exchange for stock) from 
an S corporation with respect to any restricted bank director stock (as 
defined in section 1361(f)), the amount of such distribution--
            ``(1) shall be includible in gross income of the director, 
        and
            ``(2) shall be deductible by the corporation for the 
        taxable year of such corporation in which or with which ends 
        the taxable year in which such amount in included in the gross 
        income of the director.''.
    (c) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2006.
            (2) Special rule for treatment as second class of stock.--
        In the case of any taxable year beginning after December 31, 
        1996, restricted bank director stock (as defined in section 
        1361(f) of the Internal Revenue Code of 1986, as added by this 
        section) shall not be taken into account in determining whether 
        an S corporation has more than 1 class of stock.

SEC. 113. SPECIAL RULE FOR BANK REQUIRED TO CHANGE FROM THE RESERVE 
              METHOD OF ACCOUNTING ON BECOMING S CORPORATION.

    (a) In General.--Section 1361, as amended by this Act, is amended 
by adding at the end the following new subsection:
    ``(g) Special Rule for Bank Required To Change From the Reserve 
Method of Accounting on Becoming S Corporation.--In the case of a bank 
which changes from the reserve method of accounting for bad debts 
described in section 585 or 593 for its first taxable year for which an 
election under section 1362(a) is in effect, the bank may elect to take 
into account any adjustments under section 481 by reason of such change 
for the taxable year immediately preceding such first taxable year.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 114. TREATMENT OF THE SALE OF INTEREST IN A QUALIFIED SUBCHAPTER S 
              SUBSIDIARY.

    (a) In General.--Subparagraph (C) of section 1361(b)(3) (relating 
to treatment of terminations of qualified subchapter S subsidiary 
status) is amended--
            (1) by striking ``For purposes of this title,'' and 
        inserting the following:
                            ``(i) In general.--For purposes of this 
                        title,'', and
            (2) by inserting at the end the following new clause:
                            ``(ii) Termination by reason of sale of 
                        stock.--If the failure to meet the requirements 
                        of subparagraph (B) is by reason of the sale of 
                        stock of a corporation which is a qualified 
                        subchapter S subsidiary, the sale of such stock 
                        shall be treated as if--
                                    ``(I) the sale were a sale of an 
                                undivided interest in the assets of 
                                such corporation (based on the 
                                percentage of the corporation's stock 
                                sold), and
                                    ``(II) the sale were followed by an 
                                acquisition by such corporation of all 
                                of its assets (and the assumption by 
                                such corporation of all of its 
                                liabilities) in a transaction to which 
                                section 351 applies.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006 .

SEC. 115. ELIMINATION OF ALL EARNINGS AND PROFITS ATTRIBUTABLE TO PRE-
              1983 YEARS FOR CERTAIN CORPORATIONS.

    In the case of a corporation which is--
            (1) described in section 1311(a)(1) of the Small Business 
        Job Protection Act of 1996, and
            (2) not described in section 1311(a)(2) of such Act,
the amount of such corporation's accumulated earnings and profits (for 
the first taxable year beginning after the date of the enactment of 
this Act) shall be reduced by an amount equal to the portion (if any) 
of such accumulated earnings and profits which were accumulated in any 
taxable year beginning before January 1, 1983, for which such 
corporation was an electing small business corporation under subchapter 
S of the Internal Revenue Code of 1986.

SEC. 116. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL 
              BUSINESS TRUST.

    (a) No Look Through for Eligibility Purposes.--Clause (v) of 
section 1361(c)(2)(B) is amended by adding at the end the following new 
sentence: ``This clause shall not apply for purposes of subsection 
(b)(1)(C).''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

                      TITLE II--REVENUE PROVISIONS

SEC. 201. MODIFICATION OF EFFECTIVE DATE OF LEASING PROVISIONS OF THE 
              AMERICAN JOBS CREATION ACT OF 2004.

    (a) Leases to Foreign Entities.--Section 849(b) of the American 
Jobs Creation Act of 2004 is amended by adding at the end the following 
new paragraph:
            ``(5) Leases to foreign entities.--In the case of tax-
        exempt use property leased to a tax-exempt entity which is a 
        foreign person or entity, the amendments made by this part 
        shall apply to taxable years beginning after December 31, 2006, 
        with respect to leases entered into on or before March 12, 
        2004.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect as if included in the enactment of the American Jobs Creation 
Act of 2004.

SEC. 202. APPLICATION OF RULES TREATING INVERTED CORPORATIONS AS 
              DOMESTIC CORPORATIONS TO CERTAIN TRANSACTIONS OCCURRING 
              AFTER MARCH 20, 2002.

    (a) In General.--Section 7874(b) (relating to inverted corporations 
treated as domestic corporations) is amended to read as follows:
    ``(b) Inverted Corporations Treated as Domestic Corporations.--
            ``(1) In general.--Notwithstanding section 7701(a)(4), a 
        foreign corporation shall be treated for purposes of this title 
        as a domestic corporation if such corporation would be a 
        surrogate foreign corporation if subsection (a)(2) were applied 
        by substituting `80 percent' for `60 percent'.
            ``(2) Special rule for certain transactions occurring after 
        march 20, 2002.--
                    ``(A) In general.--If--
                            ``(i) paragraph (1) does not apply to a 
                        foreign corporation, but
                            ``(ii) paragraph (1) would apply to such 
                        corporation if, in addition to the substitution 
                        under paragraph (1), subsection (a)(2) were 
                        applied by substituting `March 20, 2002' for 
                        `March 4, 2003' each place it appears,
                then paragraph (1) shall apply to such corporation but 
                only with respect to taxable years of such corporation 
                beginning after December 31, 2006.
                    ``(B) Special rules.--Subject to such rules as the 
                Secretary may prescribe, in the case of a corporation 
                to which paragraph (1) applies by reason of this 
                paragraph--
                            ``(i) the corporation shall be treated, as 
                        of the close of its last taxable year beginning 
                        before January 1, 2007, as having transferred 
                        all of its assets, liabilities, and earnings 
                        and profits to a domestic corporation in a 
                        transaction with respect to which no tax is 
                        imposed under this title,
                            ``(ii) the bases of the assets transferred 
                        in the transaction to the domestic corporation 
                        shall be the same as the bases of the assets in 
                        the hands of the foreign corporation, subject 
                        to any adjustments under this title for built-
                        in losses,
                            ``(iii) the basis of the stock of any 
                        shareholder in the domestic corporation shall 
                        be the same as the basis of the stock of the 
                        shareholder in the foreign corporation for 
                        which it is treated as exchanged, and
                            ``(iv) the transfer of any earnings and 
                        profits by reason of clause (i) shall be 
                        disregarded in determining any deemed dividend 
                        or foreign tax creditable to the domestic 
                        corporation with respect to such transfer.
                    ``(C) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or appropriate to 
                carry out this paragraph, including regulations to 
                prevent the avoidance of the purposes of this 
                paragraph.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2006.

SEC. 203. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES.

    (a) Disallowance of Deduction.--
            (1) In general.--Section 162(g) (relating to treble damage 
        payments under the antitrust laws) is amended--
                    (A) by redesignating paragraphs (1) and (2) as 
                subparagraphs (A) and (B), respectively,
                    (B) by striking ``If'' and inserting:
            ``(1) Treble damages.--If'', and
                    (C) by adding at the end the following new 
                paragraph:
            ``(2) Punitive damages.--No deduction shall be allowed 
        under this chapter for any amount paid or incurred for punitive 
        damages in connection with any judgment in, or settlement of, 
        any action. This paragraph shall not apply to punitive damages 
        described in section 104(c).''.
            (2) Conforming amendment.--The heading for section 162(g) 
        is amended by inserting ``Or Punitive Damages'' after ``Laws''.
    (b) Inclusion in Income of Punitive Damages Paid by Insurer or 
Otherwise.--
            (1) In general.--Part II of subchapter B of chapter 1 
        (relating to items specifically included in gross income) is 
        amended by adding at the end the following new section:

``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR OTHERWISE.

    ``Gross income shall include any amount paid to or on behalf of a 
taxpayer as insurance or otherwise by reason of the taxpayer's 
liability (or agreement) to pay punitive damages.''.
            (2) Reporting requirements.--Section 6041 (relating to 
        information at source) is amended by adding at the end the 
        following new subsection:
    ``(h) Section To Apply to Punitive Damages Compensation.--This 
section shall apply to payments by a person to or on behalf of another 
person as insurance or otherwise by reason of the other person's 
liability (or agreement) to pay punitive damages.''.
            (3) Conforming amendment.--The table of sections for part 
        II of subchapter B of chapter 1 is amended by adding at the end 
        the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to damages paid or incurred on or after the date of the enactment 
of this Act.

SEC. 204. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER 
              AMOUNTS.

    (a) In General.--Subsection (f) of section 162 (relating to trade 
or business expenses) is amended to read as follows:
    ``(f) Fines, Penalties, and Other Amounts.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        deduction otherwise allowable shall be allowed under this 
        chapter for any amount paid or incurred (whether by suit, 
        agreement, or otherwise) to, or at the direction of, a 
        government or entity described in paragraph (4) in relation to 
        the violation of any law or the investigation or inquiry by 
        such government or entity into the potential violation of any 
        law.
            ``(2) Exception for amounts constituting restitution or 
        paid to come into compliance with law.--Paragraph (1) shall not 
        apply to any amount which--
                    ``(A) the taxpayer establishes--
                            ``(i) constitutes restitution (including 
                        remediation of property) for damage or harm 
                        caused by or which may be caused by the 
                        violation of any law or the potential violation 
                        of any law, or
                            ``(ii) is paid to come into compliance with 
                        any law which was violated or involved in the 
                        investigation or inquiry, and
                    ``(B) is identified as restitution or as an amount 
                paid to come into compliance with the law, as the case 
                may be, in the court order or settlement agreement.
        A taxpayer shall not meet the requirements of subparagraph (A) 
        solely by reason an identification under subparagraph (B). This 
        paragraph shall not apply to any amount paid or incurred as 
        reimbursement to the government or entity for the costs of any 
        investigation or litigation.
            ``(3) Exception for amounts paid or incurred as the result 
        of certain court orders.--Paragraph (1) shall not apply to any 
        amount paid or incurred by order of a court in a suit in which 
        no government or entity described in paragraph (4) is a party.
            ``(4) Certain nongovernmental regulatory entities.--An 
        entity is described in this paragraph if it is--
                    ``(A) a nongovernmental entity which exercises 
                self-regulatory powers (including imposing sanctions) 
                in connection with a qualified board or exchange (as 
                defined in section 1256(g)(7)), or
                    ``(B) to the extent provided in regulations, a 
                nongovernmental entity which exercises self-regulatory 
                powers (including imposing sanctions) as part of 
                performing an essential governmental function.
            ``(5) Exception for taxes due.--Paragraph (1) shall not 
        apply to any amount paid or incurred as taxes due.''.
    (b) Reporting of Deductible Amounts.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 is amended by inserting after section 6050V the 
        following new section:

``SEC. 6050W. INFORMATION WITH RESPECT TO CERTAIN FINES, PENALTIES, AND 
              OTHER AMOUNTS.

    ``(a) Requirement of Reporting.--
            ``(1) In general.--The appropriate official of any 
        government or entity which is described in section 162(f)(4) 
        which is involved in a suit or agreement described in paragraph 
        (2) shall make a return in such form as determined by the 
        Secretary setting forth--
                    ``(A) the amount required to be paid as a result of 
                the suit or agreement to which paragraph (1) of section 
                162(f) applies,
                    ``(B) any amount required to be paid as a result of 
                the suit or agreement which constitutes restitution or 
                remediation of property, and
                    ``(C) any amount required to be paid as a result of 
                the suit or agreement for the purpose of coming into 
                compliance with any law which was violated or involved 
                in the investigation or inquiry.
            ``(2) Suit or agreement described.--
                    ``(A) In general.--A suit or agreement is described 
                in this paragraph if--
                            ``(i) it is--
                                    ``(I) a suit with respect to a 
                                violation of any law over which the 
                                government or entity has authority and 
                                with respect to which there has been a 
                                court order, or
                                    ``(II) an agreement which is 
                                entered into with respect to a 
                                violation of any law over which the 
                                government or entity has authority, or 
                                with respect to an investigation or 
                                inquiry by the government or entity 
                                into the potential violation of any law 
                                over which such government or entity 
                                has authority, and
                            ``(ii) the aggregate amount involved in all 
                        court orders and agreements with respect to the 
                        violation, investigation, or inquiry is $600 or 
                        more.
                    ``(B) Adjustment of reporting threshold.--The 
                Secretary may adjust the $600 amount in subparagraph 
                (A)(ii) as necessary in order to ensure the efficient 
                administration of the internal revenue laws.
            ``(3) Time of filing.--The return required under this 
        subsection shall be filed not later than--
                    ``(A) 30 days after the date on which a court order 
                is issued with respect to the suit or the date the 
                agreement is entered into, as the case may be, or
                    ``(B) the date specified Secretary.
    ``(b) Statements To Be Furnished to Individuals Involved in the 
Settlement.--Every person required to make a return under subsection 
(a) shall furnish to each person who is a party to the suit or 
agreement a written statement showing--
            ``(1) the name of the government or entity, and
            ``(2) the information supplied to the Secretary under 
        subsection (a)(1).
The written statement required under the preceding sentence shall be 
furnished to the person at the same time the government or entity 
provides the Secretary with the information required under subsection 
(a).
    ``(c) Appropriate Official Defined.--For purposes of this section, 
the term `appropriate official' means the officer or employee having 
control of the suit, investigation, or inquiry or the person 
appropriately designated for purposes of this section.''.
            (2) Conforming amendment.--The table of sections for 
        subpart B of part III of subchapter A of chapter 61 is amended 
        by inserting after the item relating to section 6050V the 
        following new item:

``Sec. 6050W. Information with respect to certain fines, penalties, and 
                            other amounts.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or incurred on or after the date of the enactment 
of this Act, except that such amendments shall not apply to amounts 
paid or incurred under any binding order or agreement entered into 
before such date. Such exception shall not apply to an order or 
agreement requiring court approval unless the approval was obtained 
before such date.

SEC. 205. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.

    (a) In General.--Subpart A of part II of subchapter N of chapter 1 
is amended by inserting after section 877 the following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

    ``(a) General Rules.--For purposes of this subtitle--
            ``(1) Mark to market.--Except as provided in subsections 
        (d) and (f), all property of a covered expatriate to whom this 
        section applies shall be treated as sold on the day before the 
        expatriation date for its fair market value.
            ``(2) Recognition of gain or loss.--In the case of any sale 
        under paragraph (1)--
                    ``(A) notwithstanding any other provision of this 
                title, any gain arising from such sale shall be taken 
                into account for the taxable year of the sale, and
                    ``(B) any loss arising from such sale shall be 
                taken into account for the taxable year of the sale to 
                the extent otherwise provided by this title, except 
                that section 1091 shall not apply to any such loss.
        Proper adjustment shall be made in the amount of any gain or 
        loss subsequently realized for gain or loss taken into account 
        under the preceding sentence.
            ``(3) Exclusion for certain gain.--
                    ``(A) In general.--The amount which, but for this 
                paragraph, would be includible in the gross income of 
                any individual by reason of this section shall be 
                reduced (but not below zero) by $600,000. For purposes 
                of this paragraph, allocable expatriation gain taken 
                into account under subsection (f)(2) shall be treated 
                in the same manner as an amount required to be 
                includible in gross income.
                    ``(B) Cost-of-living adjustment.--
                            ``(i) In general.--In the case of an 
                        expatriation date occurring in any calendar 
                        year after 2007, the $600,000 amount under 
                        subparagraph (A) shall be increased by an 
                        amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for such calendar year, 
                                determined by substituting `calendar 
                                year 2006' for `calendar year 1992' in 
                                subparagraph (B) thereof.
                            ``(ii) Rounding rules.--If any amount after 
                        adjustment under clause (i) is not a multiple 
                        of $1,000, such amount shall be rounded to the 
                        next lower multiple of $1,000.
            ``(4) Election to continue to be taxed as united states 
        citizen.--
                    ``(A) In general.--If a covered expatriate elects 
                the application of this paragraph--
                            ``(i) this section (other than this 
                        paragraph and subsection (i)) shall not apply 
                        to the expatriate, but
                            ``(ii) in the case of property to which 
                        this section would apply but for such election, 
                        the expatriate shall be subject to tax under 
                        this title in the same manner as if the 
                        individual were a United States citizen.
                    ``(B) Requirements.--Subparagraph (A) shall not 
                apply to an individual unless the individual--
                            ``(i) provides security for payment of tax 
                        in such form and manner, and in such amount, as 
                        the Secretary may require,
                            ``(ii) consents to the waiver of any right 
                        of the individual under any treaty of the 
                        United States which would preclude assessment 
                        or collection of any tax which may be imposed 
                        by reason of this paragraph, and
                            ``(iii) complies with such other 
                        requirements as the Secretary may prescribe.
                    ``(C) Election.--An election under subparagraph (A) 
                shall apply to all property to which this section would 
                apply but for the election and, once made, shall be 
                irrevocable. Such election shall also apply to property 
                the basis of which is determined in whole or in part by 
                reference to the property with respect to which the 
                election was made.
    ``(b) Election To Defer Tax.--
            ``(1) In general.--If the taxpayer elects the application 
        of this subsection with respect to any property treated as sold 
        by reason of subsection (a), the payment of the additional tax 
        attributable to such property shall be postponed until the due 
        date of the return for the taxable year in which such property 
        is disposed of (or, in the case of property disposed of in a 
        transaction in which gain is not recognized in whole or in 
        part, until such other date as the Secretary may prescribe).
            ``(2) Determination of tax with respect to property.--For 
        purposes of paragraph (1), the additional tax attributable to 
        any property is an amount which bears the same ratio to the 
        additional tax imposed by this chapter for the taxable year 
        solely by reason of subsection (a) as the gain taken into 
        account under subsection (a) with respect to such property 
        bears to the total gain taken into account under subsection (a) 
        with respect to all property to which subsection (a) applies.
            ``(3) Termination of postponement.--No tax may be postponed 
        under this subsection later than the due date for the return of 
        tax imposed by this chapter for the taxable year which includes 
        the date of death of the expatriate (or, if earlier, the time 
        that the security provided with respect to the property fails 
        to meet the requirements of paragraph (4), unless the taxpayer 
        corrects such failure within the time specified by the 
        Secretary).
            ``(4) Security.--
                    ``(A) In general.--No election may be made under 
                paragraph (1) with respect to any property unless 
                adequate security is provided to the Secretary with 
                respect to such property.
                    ``(B) Adequate security.--For purposes of 
                subparagraph (A), security with respect to any property 
                shall be treated as adequate security if--
                            ``(i) it is a bond in an amount equal to 
                        the deferred tax amount under paragraph (2) for 
                        the property, or
                            ``(ii) the taxpayer otherwise establishes 
                        to the satisfaction of the Secretary that the 
                        security is adequate.
            ``(5) Waiver of certain rights.--No election may be made 
        under paragraph (1) unless the taxpayer consents to the waiver 
        of any right under any treaty of the United States which would 
        preclude assessment or collection of any tax imposed by reason 
        of this section.
            ``(6) Elections.--An election under paragraph (1) shall 
        only apply to property described in the election and, once 
        made, is irrevocable. An election may be made under paragraph 
        (1) with respect to an interest in a trust with respect to 
        which gain is required to be recognized under subsection 
        (f)(1).
            ``(7) Interest.--For purposes of section 6601--
                    ``(A) the last date for the payment of tax shall be 
                determined without regard to the election under this 
                subsection, and
                    ``(B) section 6621(a)(2) shall be applied by 
                substituting `5 percentage points' for `3 percentage 
                points' in subparagraph (B) thereof.
    ``(c) Covered Expatriate.--For purposes of this section--
            ``(1) In general.--Except as provided in paragraph (2), the 
        term `covered expatriate' means an expatriate.
            ``(2) Exceptions.--An individual shall not be treated as a 
        covered expatriate if--
                    ``(A) the individual--
                            ``(i) became at birth a citizen of the 
                        United States and a citizen of another country 
                        and, as of the expatriation date, continues to 
                        be a citizen of, and is taxed as a resident of, 
                        such other country, and
                            ``(ii) has not been a resident of the 
                        United States (as defined in section 
                        7701(b)(1)(A)(ii)) during the 5 taxable years 
                        ending with the taxable year during which the 
                        expatriation date occurs, or
                    ``(B)(i) the individual's relinquishment of United 
                States citizenship occurs before such individual 
                attains age 18\1/2\, and
                    ``(ii) the individual has been a resident of the 
                United States (as so defined) for not more than 5 
                taxable years before the date of relinquishment.
    ``(d) Exempt Property; Special Rules for Pension Plans.--
            ``(1) Exempt property.--This section shall not apply to the 
        following:
                    ``(A) United states real property interests.--Any 
                United States real property interest (as defined in 
                section 897(c)(1)), other than stock of a United States 
                real property holding corporation which does not, on 
                the day before the expatriation date, meet the 
                requirements of section 897(c)(2).
                    ``(B) Specified property.--Any property or interest 
                in property not described in subparagraph (A) which the 
                Secretary specifies in regulations.
            ``(2) Special rules for certain retirement plans.--
                    ``(A) In general.--If a covered expatriate holds on 
                the day before the expatriation date any interest in a 
                retirement plan to which this paragraph applies--
                            ``(i) such interest shall not be treated as 
                        sold for purposes of subsection (a)(1), but
                            ``(ii) an amount equal to the present value 
                        of the expatriate's nonforfeitable accrued 
                        benefit shall be treated as having been 
                        received by such individual on such date as a 
                        distribution under the plan.
                    ``(B) Treatment of subsequent distributions.--In 
                the case of any distribution on or after the 
                expatriation date to or on behalf of the covered 
                expatriate from a plan from which the expatriate was 
                treated as receiving a distribution under subparagraph 
                (A), the amount otherwise includible in gross income by 
                reason of the subsequent distribution shall be reduced 
                by the excess of the amount includible in gross income 
                under subparagraph (A) over any portion of such amount 
                to which this subparagraph previously applied.
                    ``(C) Treatment of subsequent distributions by 
                plan.--For purposes of this title, a retirement plan to 
                which this paragraph applies, and any person acting on 
                the plan's behalf, shall treat any subsequent 
                distribution described in subparagraph (B) in the same 
                manner as such distribution would be treated without 
                regard to this paragraph.
                    ``(D) Applicable plans.--This paragraph shall apply 
                to--
                            ``(i) any qualified retirement plan (as 
                        defined in section 4974(c)),
                            ``(ii) an eligible deferred compensation 
                        plan (as defined in section 457(b)) of an 
                        eligible employer described in section 
                        457(e)(1)(A), and
                            ``(iii) to the extent provided in 
                        regulations, any foreign pension plan or 
                        similar retirement arrangements or programs.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Expatriate.--The term `expatriate' means--
                    ``(A) any United States citizen who relinquishes 
                citizenship, and
                    ``(B) any long-term resident of the United States 
                who--
                            ``(i) ceases to be a lawful permanent 
                        resident of the United States (within the 
                        meaning of section 7701(b)(6)), or
                            ``(ii) commences to be treated as a 
                        resident of a foreign country under the 
                        provisions of a tax treaty between the United 
                        States and the foreign country and who does not 
                        waive the benefits of such treaty applicable to 
                        residents of the foreign country.
            ``(2) Expatriation date.--The term `expatriation date' 
        means--
                    ``(A) the date an individual relinquishes United 
                States citizenship, or
                    ``(B) in the case of a long-term resident of the 
                United States, the date of the event described in 
                clause (i) or (ii) of paragraph (1)(B).
            ``(3) Relinquishment of citizenship.--A citizen shall be 
        treated as relinquishing United States citizenship on the 
        earliest of--
                    ``(A) the date the individual renounces such 
                individual's United States nationality before a 
                diplomatic or consular officer of the United States 
                pursuant to paragraph (5) of section 349(a) of the 
                Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
                    ``(B) the date the individual furnishes to the 
                United States Department of State a signed statement of 
                voluntary relinquishment of United States nationality 
                confirming the performance of an act of expatriation 
                specified in paragraph (1), (2), (3), or (4) of section 
                349(a) of the Immigration and Nationality Act (8 U.S.C. 
                1481(a)(1)-(4)),
                    ``(C) the date the United States Department of 
                State issues to the individual a certificate of loss of 
                nationality, or
                    ``(D) the date a court of the United States cancels 
                a naturalized citizen's certificate of naturalization.
        Subparagraph (A) or (B) shall not apply to any individual 
        unless the renunciation or voluntary relinquishment is 
        subsequently approved by the issuance to the individual of a 
        certificate of loss of nationality by the United States 
        Department of State.
            ``(4) Long-term resident.--The term `long-term resident' 
        has the meaning given to such term by section 877(e)(2).
    ``(f) Special Rules Applicable to Beneficiaries' Interests in 
Trust.--
            ``(1) In general.--Except as provided in paragraph (2), if 
        an individual is determined under paragraph (3) to hold an 
        interest in a trust on the day before the expatriation date--
                    ``(A) the individual shall not be treated as having 
                sold such interest,
                    ``(B) such interest shall be treated as a separate 
                share in the trust, and
                    ``(C)(i) such separate share shall be treated as a 
                separate trust consisting of the assets allocable to 
                such share,
                    ``(ii) the separate trust shall be treated as 
                having sold its assets on the day before the 
                expatriation date for their fair market value and as 
                having distributed all of its assets to the individual 
                as of such time, and
                    ``(iii) the individual shall be treated as having 
                recontributed the assets to the separate trust.
        Subsection (a)(2) shall apply to any income, gain, or loss of 
        the individual arising from a distribution described in 
        subparagraph (C)(ii). In determining the amount of such 
        distribution, proper adjustments shall be made for liabilities 
        of the trust allocable to an individual's share in the trust.
            ``(2) Special rules for interests in qualified trusts.--
                    ``(A) In general.--If the trust interest described 
                in paragraph (1) is an interest in a qualified trust--
                            ``(i) paragraph (1) and subsection (a) 
                        shall not apply, and
                            ``(ii) in addition to any other tax imposed 
                        by this title, there is hereby imposed on each 
                        distribution with respect to such interest a 
                        tax in the amount determined under subparagraph 
                        (B).
                    ``(B) Amount of tax.--The amount of tax under 
                subparagraph (A)(ii) shall be equal to the lesser of--
                            ``(i) the highest rate of tax imposed by 
                        section 1(e) for the taxable year which 
                        includes the day before the expatriation date, 
                        multiplied by the amount of the distribution, 
                        or
                            ``(ii) the balance in the deferred tax 
                        account immediately before the distribution 
                        determined without regard to any increases 
                        under subparagraph (C)(ii) after the 30th day 
                        preceding the distribution.
                    ``(C) Deferred tax account.--For purposes of 
                subparagraph (B)(ii)--
                            ``(i) Opening balance.--The opening balance 
                        in a deferred tax account with respect to any 
                        trust interest is an amount equal to the tax 
                        which would have been imposed on the allocable 
                        expatriation gain with respect to the trust 
                        interest if such gain had been included in 
                        gross income under subsection (a).
                            ``(ii) Increase for interest.--The balance 
                        in the deferred tax account shall be increased 
                        by the amount of interest determined (on the 
                        balance in the account at the time the interest 
                        accrues), for periods after the 90th day after 
                        the expatriation date, by using the rates and 
                        method applicable under section 6621 for 
                        underpayments of tax for such periods, except 
                        that section 6621(a)(2) shall be applied by 
                        substituting `5 percentage points' for `3 
                        percentage points' in subparagraph (B) thereof.
                            ``(iii) Decrease for taxes previously 
                        paid.--The balance in the tax deferred account 
                        shall be reduced--
                                    ``(I) by the amount of taxes 
                                imposed by subparagraph (A) on any 
                                distribution to the person holding the 
                                trust interest, and
                                    ``(II) in the case of a person 
                                holding a nonvested interest, to the 
                                extent provided in regulations, by the 
                                amount of taxes imposed by subparagraph 
                                (A) on distributions from the trust 
                                with respect to nonvested interests not 
                                held by such person.
                    ``(D) Allocable expatriation gain.--For purposes of 
                this paragraph, the allocable expatriation gain with 
                respect to any beneficiary's interest in a trust is the 
                amount of gain which would be allocable to such 
                beneficiary's vested and nonvested interests in the 
                trust if the beneficiary held directly all assets 
                allocable to such interests.
                    ``(E) Tax deducted and withheld.--
                            ``(i) In general.--The tax imposed by 
                        subparagraph (A)(ii) shall be deducted and 
                        withheld by the trustees from the distribution 
                        to which it relates.
                            ``(ii) Exception where failure to waive 
                        treaty rights.--If an amount may not be 
                        deducted and withheld under clause (i) by 
                        reason of the distributee failing to waive any 
                        treaty right with respect to such 
                        distribution--
                                    ``(I) the tax imposed by 
                                subparagraph (A)(ii) shall be imposed 
                                on the trust and each trustee shall be 
                                personally liable for the amount of 
                                such tax, and
                                    ``(II) any other beneficiary of the 
                                trust shall be entitled to recover from 
                                the distributee the amount of such tax 
                                imposed on the other beneficiary.
                    ``(F) Disposition.--If a trust ceases to be a 
                qualified trust at any time, a covered expatriate 
                disposes of an interest in a qualified trust, or a 
                covered expatriate holding an interest in a qualified 
                trust dies, then, in lieu of the tax imposed by 
                subparagraph (A)(ii), there is hereby imposed a tax 
                equal to the lesser of--
                            ``(i) the tax determined under paragraph 
                        (1) as if the day before the expatriation date 
                        were the date of such cessation, disposition, 
                        or death, whichever is applicable, or
                            ``(ii) the balance in the tax deferred 
                        account immediately before such date.
                Such tax shall be imposed on the trust and each trustee 
                shall be personally liable for the amount of such tax 
                and any other beneficiary of the trust shall be 
                entitled to recover from the covered expatriate or the 
                estate the amount of such tax imposed on the other 
                beneficiary.
                    ``(G) Definitions and special rules.--For purposes 
                of this paragraph--
                            ``(i) Qualified trust.--The term `qualified 
                        trust' means a trust which is described in 
                        section 7701(a)(30)(E).
                            ``(ii) Vested interest.--The term `vested 
                        interest' means any interest which, as of the 
                        day before the expatriation date, is vested in 
                        the beneficiary.
                            ``(iii) Nonvested interest.--The term 
                        `nonvested interest' means, with respect to any 
                        beneficiary, any interest in a trust which is 
                        not a vested interest. Such interest shall be 
                        determined by assuming the maximum exercise of 
                        discretion in favor of the beneficiary and the 
                        occurrence of all contingencies in favor of the 
                        beneficiary.
                            ``(iv) Adjustments.--The Secretary may 
                        provide for such adjustments to the bases of 
                        assets in a trust or a deferred tax account, 
                        and the timing of such adjustments, in order to 
                        ensure that gain is taxed only once.
                            ``(v) Coordination with retirement plan 
                        rules.--This subsection shall not apply to an 
                        interest in a trust which is part of a 
                        retirement plan to which subsection (d)(2) 
                        applies.
            ``(3) Determination of beneficiaries' interest in trust.--
                    ``(A) Determinations under paragraph (1).--For 
                purposes of paragraph (1), a beneficiary's interest in 
                a trust shall be based upon all relevant facts and 
                circumstances, including the terms of the trust 
                instrument and any letter of wishes or similar 
                document, historical patterns of trust distributions, 
                and the existence of and functions performed by a trust 
                protector or any similar adviser.
                    ``(B) Other determinations.--For purposes of this 
                section--
                            ``(i) Constructive ownership.--If a 
                        beneficiary of a trust is a corporation, 
                        partnership, trust, or estate, the 
                        shareholders, partners, or beneficiaries shall 
                        be deemed to be the trust beneficiaries for 
                        purposes of this section.
                            ``(ii) Taxpayer return position.--A 
                        taxpayer shall clearly indicate on its income 
                        tax return--
                                    ``(I) the methodology used to 
                                determine that taxpayer's trust 
                                interest under this section, and
                                    ``(II) if the taxpayer knows (or 
                                has reason to know) that any other 
                                beneficiary of such trust is using a 
                                different methodology to determine such 
                                beneficiary's trust interest under this 
                                section.
    ``(g) Termination of Deferrals, etc.--In the case of any covered 
expatriate, notwithstanding any other provision of this title--
            ``(1) any period during which recognition of income or gain 
        is deferred shall terminate on the day before the expatriation 
        date, and
            ``(2) any extension of time for payment of tax shall cease 
        to apply on the day before the expatriation date and the unpaid 
        portion of such tax shall be due and payable at the time and in 
        the manner prescribed by the Secretary.
    ``(h) Imposition of Tentative Tax.--
            ``(1) In general.--If an individual is required to include 
        any amount in gross income under subsection (a) for any taxable 
        year, there is hereby imposed, immediately before the 
        expatriation date, a tax in an amount equal to the amount of 
        tax which would be imposed if the taxable year were a short 
        taxable year ending on the expatriation date.
            ``(2) Due date.--The due date for any tax imposed by 
        paragraph (1) shall be the 90th day after the expatriation 
        date.
            ``(3) Treatment of tax.--Any tax paid under paragraph (1) 
        shall be treated as a payment of the tax imposed by this 
        chapter for the taxable year to which subsection (a) applies.
            ``(4) Deferral of tax.--The provisions of subsection (b) 
        shall apply to the tax imposed by this subsection to the extent 
        attributable to gain includible in gross income by reason of 
        this section.
    ``(i) Special Liens for Deferred Tax Amounts.--
            ``(1) Imposition of lien.--
                    ``(A) In general.--If a covered expatriate makes an 
                election under subsection (a)(4) or (b) which results 
                in the deferral of any tax imposed by reason of 
                subsection (a), the deferred amount (including any 
                interest, additional amount, addition to tax, 
                assessable penalty, and costs attributable to the 
                deferred amount) shall be a lien in favor of the United 
                States on all property of the expatriate located in the 
                United States (without regard to whether this section 
                applies to the property).
                    ``(B) Deferred amount.--For purposes of this 
                subsection, the deferred amount is the amount of the 
                increase in the covered expatriate's income tax which, 
                but for the election under subsection (a)(4) or (b), 
                would have occurred by reason of this section for the 
                taxable year including the expatriation date.
            ``(2) Period of lien.--The lien imposed by this subsection 
        shall arise on the expatriation date and continue until--
                    ``(A) the liability for tax by reason of this 
                section is satisfied or has become unenforceable by 
                reason of lapse of time, or
                    ``(B) it is established to the satisfaction of the 
                Secretary that no further tax liability may arise by 
                reason of this section.
            ``(3) Certain rules apply.--The rules set forth in 
        paragraphs (1), (3), and (4) of section 6324A(d) shall apply 
        with respect to the lien imposed by this subsection as if it 
        were a lien imposed by section 6324A.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (b) Inclusion in Income of Gifts and Bequests Received by United 
States Citizens and Residents From Expatriates.--Section 102 (relating 
to gifts, etc. not included in gross income) is amended by adding at 
the end the following new subsection:
    ``(d) Gifts and Inheritances From Covered Expatriates.--
            ``(1) Treatment of gifts and inheritances.--
                    ``(A) In general.--Subsection (a) shall not exclude 
                from gross income the value of any property acquired by 
                gift, bequest, devise, or inheritance from a covered 
                expatriate after the expatriation date.
                    ``(B) Determination of basis.--Notwithstanding 
                sections 1015 or 1022, the basis of any property 
                described in subparagraph (A) in the hands of the donee 
                or the person acquiring such property from the decedent 
                shall be equal to the fair market value of the property 
                at the time of the gift, bequest, devise, or 
                inheritance.
            ``(2) Exceptions for transfers otherwise subject to estate 
        or gift tax.--Paragraph (1) shall not apply to any property if 
        either--
                    ``(A) the gift, bequest, devise, or inheritance 
                is--
                            ``(i) shown on a timely filed return of tax 
                        imposed by chapter 12 as a taxable gift by the 
                        covered expatriate, or
                            ``(ii) included in the gross estate of the 
                        covered expatriate for purposes of chapter 11 
                        and shown on a timely filed return of tax 
                        imposed by chapter 11 of the estate of the 
                        covered expatriate, or
                    ``(B) no such return was timely filed but no such 
                return would have been required to be filed even if the 
                covered expatriate were a citizen or long-term resident 
                of the United States.
            ``(3) Definitions.--For purposes of this subsection, any 
        term used in this subsection which is also used in section 877A 
        shall have the same meaning as when used in section 877A.''.
    (c) Definition of Termination of United States Citizenship.--
Section 7701(a) is amended by adding at the end the following new 
paragraph:
            ``(50) Termination of united states citizenship.--
                    ``(A) In general.--An individual shall not cease to 
                be treated as a United States citizen before the date 
                on which the individual's citizenship is treated as 
                relinquished under section 877A(e)(3).
                    ``(B) Dual citizens.--Under regulations prescribed 
                by the Secretary, subparagraph (A) shall not apply to 
                an individual who became at birth a citizen of the 
                United States and a citizen of another country.''.
    (d) Ineligibility for Visa or Admission to United States.--
            (1) In general.--Section 212(a)(10)(E) of the Immigration 
        and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to 
        read as follows:
                    ``(E) Former citizens not in compliance with 
                expatriation revenue provisions.--Any alien who is a 
                former citizen of the United States who relinquishes 
                United States citizenship (within the meaning of 
                section 877A(e)(3) of the Internal Revenue Code of 
                1986) and who is not in compliance with section 877A of 
                such Code (relating to expatriation) is 
                inadmissible.''.
            (2) Availability of information.--
                    (A) In general.--Section 6103(l) (relating to 
                disclosure of returns and return information for 
                purposes other than tax administration) is amended by 
                adding at the end the following new paragraph:
            ``(21) Disclosure to deny visa or admission to certain 
        expatriates.--Upon written request of the Attorney General or 
        the Attorney General's delegate, the Secretary shall disclose 
        whether an individual is in compliance with section 877A (and 
        if not in compliance, any items of noncompliance) to officers 
        and employees of the Federal agency responsible for 
        administering section 212(a)(10)(E) of the Immigration and 
        Nationality Act solely for the purpose of, and to the extent 
        necessary in, administering such section 212(a)(10)(E).''.
                    (B) Safeguards.--Section 6103(p)(4) (relating to 
                safeguards) is amended by striking ``or (20)'' each 
                place it appears and inserting ``(20), or (21)''.
            (3) Effective dates.--The amendments made by this 
        subsection shall apply to individuals who relinquish United 
        States citizenship on or after the date of the enactment of 
        this Act.
    (e) Conforming Amendments.--
            (1) Section 877 is amended by adding at the end the 
        following new subsection:
    ``(h) Application.--This section shall not apply to an expatriate 
(as defined in section 877A(e)) whose expatriation date (as so defined) 
occurs on or after the date of the enactment of this subsection.''.
            (2) Section 2107 is amended by adding at the end the 
        following new subsection:
    ``(f) Application.--This section shall not apply to any expatriate 
subject to section 877A.''.
            (3) Section 2501(a)(3) is amended by adding at the end the 
        following new subparagraph:
                    ``(C) Application.--This paragraph shall not apply 
                to any expatriate subject to section 877A.''.
            (4) Section 6039G(a) is amended by inserting ``or 877A'' 
        after ``section 877(b)''.
            (5) The second sentence of section 6039G(d) is amended by 
        inserting ``or who relinquishes United States citizenship 
        (within the meaning of section 877A(e)(3))'' after ``section 
        877(a))''.
    (f) Clerical Amendment.--The table of sections for subpart A of 
part II of subchapter N of chapter 1 is amended by inserting after the 
item relating to section 877 the following new item:

``Sec. 877A. Tax responsibilities of expatriation.''.
    (g) Effective Date.--
            (1) In general.--Except as provided in this subsection, the 
        amendments made by this section shall apply to expatriates 
        (within the meaning of section 877A(e) of the Internal Revenue 
        Code of 1986, as added by this section) whose expatriation date 
        (as so defined) occurs on or after the date of the enactment of 
        this Act.
            (2) Gifts and bequests.--Section 102(d) of the Internal 
        Revenue Code of 1986 (as added by subsection (b)) shall apply 
        to gifts and bequests received on or after the date of the 
        enactment of this Act, from an individual or the estate of an 
        individual whose expatriation date (as so defined) occurs after 
        such date.
            (3) Due date for tentative tax.--The due date under section 
        877A(h)(2) of the Internal Revenue Code of 1986, as added by 
        this section, shall in no event occur before the 90th day after 
        the date of the enactment of this Act.

SEC. 206. LIMITATION ON ANNUAL AMOUNTS WHICH MAY BE DEFERRED UNDER 
              NONQUALIFIED DEFERRED COMPENSATION ARRANGEMENTS.

    (a) In General.--Section 409A(a) of the Internal Revenue Code of 
1986 (relating to inclusion of gross income under nonqualified deferred 
compensation plans) is amended--
            (1) by striking ``and (4)'' in subclause (I) of paragraph 
        (1)(A)(i) and inserting ``(4), and (5)'', and
            (2) by adding at the end the following new paragraph:
            ``(5) Annual limitation on aggregate deferred amounts.--
                    ``(A) Limitation.--The requirements of this 
                paragraph are met if the plan provides that the 
                aggregate amount of compensation which is deferred for 
                any taxable year with respect to a participant under 
                the plan may not exceed the applicable dollar amount 
                for the taxable year.
                    ``(B) Inclusion of future earnings.--If an amount 
                is includible under paragraph (1) in the gross income 
                of a participant for any taxable year by reason of any 
                failure to meet the requirements of this paragraph, any 
                income (whether actual or notional) for any subsequent 
                taxable year shall be included in gross income under 
                paragraph (1)(A) in such subsequent taxable year to the 
                extent such income--
                            ``(i) is attributable to compensation (or 
                        income attributable to such compensation) 
                        required to be included in gross income by 
                        reason of such failure (including by reason of 
                        this subparagraph), and
                            ``(ii) is not subject to a substantial risk 
                        of forfeiture and has not been previously 
                        included in gross income.
                    ``(C) Aggregation rule.--For purposes of this 
                paragraph, all nonqualified deferred compensation plans 
                maintained by all employers treated as a single 
                employer under subsection (d)(6) shall be treated as 1 
                plan.
                    ``(D) Applicable dollar amount.--For purposes of 
                this paragraph--
                            ``(i) In general.--The term `applicable 
                        dollar amount' means, with respect to any 
                        participant, the lesser of--
                                    ``(I) the average annual 
                                compensation which was payable during 
                                the base period to the participant by 
                                the employer maintaining the 
                                nonqualified deferred compensation plan 
                                (or any predecessor of the employer) 
                                and which was includible in the 
                                participant's gross income for taxable 
                                years in the base period, or
                                    ``(II) $1,000,000.
                            ``(ii) Base period.--
                                    ``(I) In general.--The term `base 
                                period' means, with respect to any 
                                computation year, the 5-taxable year 
                                period ending with the taxable year 
                                preceding the computation year.
                                    ``(II) Elections made before 
                                computation year.--If, before the 
                                beginning of the computation year, an 
                                election described in paragraph (4)(B) 
                                is made by the participant to have 
                                compensation for services performed in 
                                the computation year deferred under a 
                                nonqualified deferred compensation 
                                plan, the base period shall be the 5-
                                taxable year period ending with the 
                                taxable year preceding the taxable year 
                                in which the election is made.
                                    ``(III) Computation year.--For 
                                purposes of this clause, the term 
                                `computation year' means any taxable 
                                year of the participant for which the 
                                limitation under subparagraph (A) is 
                                being determined.
                                    ``(IV) Special rule for employees 
                                of less than 5 years.--If a participant 
                                did not perform services for the 
                                employer maintaining the nonqualified 
                                deferred compensation plan (or any 
                                predecessor of the employer) during the 
                                entire 5-taxable year period referred 
                                to in subparagraph (A) or (B), only the 
                                portion of such period during which the 
                                participant performed such services 
                                shall be taken into account.''.
    (b) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2006, 
        except that--
                    (A) the amendments shall only apply to amounts 
                deferred after December 31, 2006 (and to earnings on 
                such amounts), and
                    (B) taxable years beginning on or before December 
                31, 2006, shall be taken into account in determining 
                the average annual compensation of a participant during 
                any base period for purposes of section 409A(a)(5)(D) 
                of the Internal Revenue Code of 1986 (as added by such 
                amendments).
            (2) Guidance relating to certain existing arrangements.--
        Not later than 60 days after the date of the enactment of this 
        Act, the Secretary of the Treasury shall issue guidance 
        providing a limited period during which a nonqualified deferred 
        compensation plan adopted before December 31, 2006, may, 
        without violating the requirements of section 409A(a) of such 
        Code, be amended--
                    (A) to provide that a participant may, no later 
                than December 31, 2007, cancel or modify an outstanding 
                deferral election with regard to all or a portion of 
                amounts deferred after December 31, 2006, to the extent 
                necessary for the plan to meet the requirements of 
                section 409A(a)(5) of such Code (as added by the 
                amendments made by this section), but only if amounts 
                subject to the cancellation or modification are, to the 
                extent not previously included in gross income, 
                includible in income of the participant when no longer 
                subject to substantial risk of forfeiture, and
                    (B) to conform to the requirements of section 
                409A(a)(5) of such Code (as added by the amendments 
                made by this section) with regard to amounts deferred 
                after December 31, 2006.

SEC. 207. INCREASE IN CRIMINAL MONETARY PENALTY LIMITATION FOR THE 
              UNDERPAYMENT OR OVERPAYMENT OF TAX DUE TO FRAUD.

    (a) In General.--Section 7206 (relating to fraud and false 
statements) is amended--
            (1) by striking ``Any person who--'' and inserting ``(a) In 
        General.--'', and
            (2) by adding at the end the following new subsection:
    ``(b) Increase in Monetary Limitation for Underpayment or 
Overpayment of Tax Due to Fraud.--If any portion of any underpayment 
(as defined in section 6664(a)) or overpayment (as defined in section 
6401(a)) of tax required to be shown on a return is attributable to 
fraudulent action described in subsection (a), the applicable dollar 
amount under subsection (a) shall in no event be less than an amount 
equal to such portion. A rule similar to the rule under section 6663(b) 
shall apply for purposes of determining the portion so attributable.''.
    (b) Increase in Penalties.--
            (1) Attempt to evade or defeat tax.--Section 7201 is 
        amended--
                    (A) by striking ``$100,000'' and inserting 
                ``$500,000'',
                    (B) by striking ``$500,000'' and inserting 
                ``$1,000,000'', and
                    (C) by striking ``5 years'' and inserting ``10 
                years''.
            (2) Willful failure to file return, supply information, or 
        pay tax.--Section 7203 is amended--
                    (A) in the first sentence--
                            (i) by striking ``Any person'' and 
                        inserting the following:
    ``(a) In General.--Any person'', and
                            (ii) by striking ``$25,000'' and inserting 
                        ``$50,000'',
                    (B) in the third sentence, by striking ``section'' 
                and inserting ``subsection'', and
                    (C) by adding at the end the following new 
                subsection:
    ``(b) Aggravated Failure To File.--
            ``(1) In general.--In the case of any failure described in 
        paragraph (2), the first sentence of subsection (a) shall be 
        applied by substituting--
                    ``(A) `felony' for `misdemeanor',
                    ``(B) `$500,000 ($1,000,000' for `$25,000 
                ($100,000', and
                    ``(C) `10 years' for `1 year'.''.
            ``(2) Failure described.--A failure described in this 
        paragraph is a failure to make a return described in subsection 
        (a) for a period of 3 or more consecutive taxable years if the 
        aggregate tax liability for such period is not less than 
        $100,000.''.
            (3) Fraud and false statements.--Section 7206(a) (as 
        redesignated by subsection (a)) is amended--
                    (A) by striking ``$100,000'' and inserting 
                ``$500,000'',
                    (B) by striking ``$500,000'' and inserting 
                ``$1,000,000'', and
                    (C) by striking ``3 years'' and inserting ``5 
                years''.
    (c) Effective Date.--The amendments made by this section shall 
apply to actions, and failures to act, occurring after the date of the 
enactment of this Act.

SEC. 208. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST ON 
              UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE FINANCIAL 
              ARRANGEMENTS.

    (a) Determination of Penalty.--
            (1) In general.--Notwithstanding any other provision of 
        law, in the case of an applicable taxpayer--
                    (A) the determination as to whether any interest or 
                applicable penalty is to be imposed with respect to any 
                arrangement described in paragraph (2), or to any 
                underpayment of Federal income tax attributable to 
                items arising in connection with any such arrangement, 
                shall be made without regard to the rules of 
                subsections (b), (c), and (d) of section 6664 of the 
                Internal Revenue Code of 1986, and
                    (B) if any such interest or applicable penalty is 
                imposed, the amount of such interest or penalty shall 
                be equal to twice that determined without regard to 
                this section.
            (2) Applicable taxpayer.--For purposes of this subsection--
                    (A) In general.--The term ``applicable taxpayer'' 
                means a taxpayer which--
                            (i) has underreported its United States 
                        income tax liability with respect to any item 
                        which directly or indirectly involves--
                                    (I) any financial arrangement which 
                                in any manner relies on the use of 
                                offshore payment mechanisms (including 
                                credit, debit, or charge cards) issued 
                                by banks or other entities in foreign 
                                jurisdictions, or
                                    (II) any offshore financial 
                                arrangement (including any arrangement 
                                with foreign banks, financial 
                                institutions, corporations, 
                                partnerships, trusts, or other 
                                entities), and
                            (ii) has neither signed a closing agreement 
                        pursuant to the Voluntary Offshore Compliance 
                        Initiative established by the Department of the 
                        Treasury under Revenue Procedure 2003-11 nor 
                        voluntarily disclosed its participation in such 
                        arrangement by notifying the Internal Revenue 
                        Service of such arrangement prior to the issue 
                        being raised by the Internal Revenue Service 
                        during an examination.
                    (B) Authority to waive.--The Secretary of the 
                Treasury or the Secretary's delegate may waive the 
                application of paragraph (1) to any taxpayer if the 
                Secretary or the Secretary's delegate determines that 
                the use of such offshore payment mechanisms is 
                incidental to the transaction and, in addition, in the 
                case of a trade or business, such use is conducted in 
                the ordinary course of the type of trade or business of 
                the taxpayer.
                    (C) Issues raised.--For purposes of subparagraph 
                (A)(ii), an item shall be treated as an issue raised 
                during an examination if the individual examining the 
                return--
                            (i) communicates to the taxpayer knowledge 
                        about the specific item, or
                            (ii) has made a request to the taxpayer for 
                        information and the taxpayer could not make a 
                        complete response to that request without 
                        giving the examiner knowledge of the specific 
                        item.
    (b) Applicable Penalty.--For purposes of this section, the term 
``applicable penalty'' means any penalty, addition to tax, or fine 
imposed under chapter 68 of the Internal Revenue Code of 1986.
    (c) Effective Date.--The provisions of this section shall apply to 
interest, penalties, additions to tax, and fines with respect to any 
taxable year if, as of the date of the enactment of this Act, the 
assessment of any tax, penalty, or interest with respect to such 
taxable year is not prevented by the operation of any law or rule of 
law.

SEC. 209. INCREASE IN PENALTY FOR BAD CHECKS AND MONEY ORDERS.

    (a) In General.--Section 6657 (relating to bad checks) is amended--
            (1) by striking ``$750'' and inserting ``$1,250'', and
            (2) by striking ``$15'' and inserting ``$25''.
    (b) Effective Date.--The amendments made by this section apply to 
checks or money orders received after the date of the enactment of this 
Act.

SEC. 210. TREATMENT OF CONTINGENT PAYMENT CONVERTIBLE DEBT INSTRUMENTS.

    (a) In General.--Section 1275(d) (relating to regulation authority) 
is amended--
            (1) by striking ``The Secretary'' and inserting the 
        following:
            ``(1) In general.--The Secretary'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Treatment of contingent payment convertible debt.--
                    ``(A) In general.--In the case of a debt instrument 
                which--
                            ``(i) is convertible into stock of the 
                        issuing corporation, into stock or debt of a 
                        related party (within the meaning of section 
                        267(b) or 707(b)(1)), or into cash or other 
                        property in an amount equal to the approximate 
                        value of such stock or debt, and
                            ``(ii) provides for contingent payments,
                any regulations which require original issue discount 
                to be determined by reference to the comparable yield 
                of a noncontingent fixed-rate debt instrument shall be 
                applied as if the regulations require that such 
                comparable yield be determined by reference to a 
                noncontingent fixed-rate debt instrument which is 
                convertible into stock.
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), the comparable yield shall be determined without 
                taking into account the yield resulting from the 
                conversion of a debt instrument into stock.''.
    (b) Cross Reference.--Section 163(e)(6) (relating to cross 
references) is amended by adding at the end the following:
                    ``For the treatment of contingent payment 
                convertible debt, see section 1275(d)(2).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to debt instruments issued on or after the date of the enactment 
of this Act.

SEC. 211. EXTENSION OF IRS USER FEES.

    Subsection (c) of section 7528 (relating to Internal Revenue 
Service user fees) is amended by striking ``September 30, 2014'' and 
inserting ``September 30, 2016''.

SEC. 212. MODIFICATION OF COLLECTION DUE PROCESS PROCEDURES FOR 
              EMPLOYMENT TAX LIABILITIES.

    (a) In General.--Section 6330(f) (relating to jeopardy and State 
refund collection) is amended--
            (1) by striking ``; or'' at the end of paragraph (1) and 
        inserting a comma,
            (2) by adding ``or'' at the end of paragraph (2), and
            (3) by inserting after paragraph (2) the following new 
        paragraph:
            ``(3) the Secretary has served a levy in connection with 
        the collection of taxes under chapter 21, 22, 23, or 24,''.
    (b) Effective Date.--The amendments made by this section shall 
apply to levies issued on or after the date that is 120 days after the 
date of the enactment of this Act.

SEC. 213. MODIFICATIONS TO WHISTLEBLOWER REFORMS.

    (a) Modification of Tax Threshold for Awards.--Subparagraph (B) of 
section 7623(b)(5), as added by the Tax Relief and Health Care Act of 
2006, is amended by striking ``$2,000,000'' and inserting ``$20,000''.
    (b) Whistleblower Office.--
            (1) In general.--Section 7623 is amended by adding at the 
        end the following new subsections:
    ``(c) Whistleblower Office.--
            ``(1) In general.--There is established in the Internal 
        Revenue Service an office to be known as the `Whistleblower 
        Office' which--
                    ``(A) shall at all times operate at the direction 
                of the Commissioner and coordinate and consult with 
                other divisions in the Internal Revenue Service as 
                directed by the Commissioner,
                    ``(B) shall analyze information received from any 
                individual described in subsection (b) and either 
                investigate the matter itself or assign it to the 
                appropriate Internal Revenue Service office,
                    ``(C) shall monitor any action taken with respect 
                to such matter,
                    ``(D) shall inform such individual that it has 
                accepted the individual's information for further 
                review,
                    ``(E) may require such individual and any legal 
                representative of such individual to not disclose any 
                information so provided,
                    ``(F) in its sole discretion, may ask for 
                additional assistance from such individual or any legal 
                representative of such individual, and
                    ``(G) shall determine the amount to be awarded to 
                such individual under subsection (b).
            ``(2) Funding for office.--There is authorized to be 
        appropriated $10,000,000 for each fiscal year for the 
        Whistleblower Office. These funds shall be used to maintain the 
        Whistleblower Office and also to reimburse other Internal 
        Revenue Service offices for related costs, such as costs of 
        investigation and collection.
            ``(3) Request for assistance.--
                    ``(A) In general.--Any assistance requested under 
                paragraph (1)(F) shall be under the direction and 
                control of the Whistleblower Office or the office 
                assigned to investigate the matter under subparagraph 
                (A). No individual or legal representative whose 
                assistance is so requested may by reason of such 
                request represent himself or herself as an employee of 
                the Federal Government.
                    ``(B) Funding of assistance.--From the amounts 
                available for expenditure under subsection (b), the 
                Whistleblower Office may, with the agreement of the 
                individual described in subsection (b), reimburse the 
                costs incurred by any legal representative of such 
                individual in providing assistance described in 
                subparagraph (A).
    ``(d) Reports.--The Secretary shall each year conduct a study and 
report to Congress on the use of this section, including--
            ``(1) an analysis of the use of this section during the 
        preceding year and the results of such use, and
            ``(2) any legislative or administrative recommendations 
        regarding the provisions of this section and its 
        application.''.
            (2) Conforming amendment.--Section 406 of division A of the 
        Tax Relief and Health Care Act of 2006 is amended by striking 
        subsections (b) and (c).
            (3) Report on implementation.--Not later than 6 months 
        after the date of the enactment of this Act, the Secretary of 
        the Treasury shall submit to Congress a report on the 
        establishment and operation of the Whistleblower Office under 
        section 7623(c) of the Internal Revenue Code of 1986.
    (c) Publicity of Award Appeals.--Paragraph (4) of section 7623(b), 
as added by the Tax Relief and Health Care Act of 2006, is amended to 
read as follows:
            ``(4) Appeal of award determination.--
                    ``(A) In general.--Any determination regarding an 
                award under paragraph (1), (2), or (3) may, within 30 
                days of such determination, be appealed to the Tax 
                Court (and the Tax Court shall have jurisdiction with 
                respect to such matter).
                    ``(B) Publicity of appeals.--Notwithstanding 
                sections 7458 and 7461, the Tax Court may, in order to 
                preserve the anonymity, privacy, or confidentiality of 
                any person under this subsection, provide by rules 
                adopted under section 7453 that portions of filings, 
                hearings, testimony, evidence, and reports in 
                connection with proceedings under this subsection may 
                be closed to the public or to inspection by the 
                public.''.
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to information 
        provided on or after the date of the enactment of this Act.
            (2) Publicity of award appeals.--The amendment made by 
        subsection (c) shall take effect as if included in the 
        amendments made by section 406 of the Tax Relief and Health 
        Care Act of 2006.

SEC. 214. MODIFICATIONS OF DEFINITION OF EMPLOYEES COVERED BY DENIAL OF 
              DEDUCTION FOR EXCESSIVE EMPLOYEE REMUNERATION.

    (a) In General.--Paragraph (3) of section 162(m) is amended to read 
as follows:
            ``(3) Covered employee.--For purposes of this subsection, 
        the term `covered employee' means, with respect to any taxpayer 
        for any taxable year, an individual who--
                    ``(A) was the chief executive officer of the 
                taxpayer, or an individual acting in such a capacity, 
                at any time during the taxable year,
                    ``(B) is 1 of the 4 highest compensated officers of 
                the taxpayer for the taxable year (other than the 
                individual described in subparagraph (A)), or
                    ``(C) was a covered employee of the taxpayer (or 
                any predecessor) for any preceding taxable year 
                beginning after December 31, 2006.
        In the case of an individual who was a covered employee for any 
        taxable year beginning after December 31, 2006, the term 
        `covered employee' shall include a beneficiary of such employee 
        with respect to any remuneration for services performed by such 
        employee as a covered employee (whether or not such services 
        are performed during the taxable year in which the remuneration 
        is paid).''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2006.
                                                        Calendar No. 10

110th CONGRESS

  1st Session

                                 S. 349

                           [Report No. 110-1]

_______________________________________________________________________

                                 A BILL

 To amend the Internal Revenue Code of 1986 to provide additional tax 
  incentives to employers and employees of small businesses, and for 
                            other purposes.

_______________________________________________________________________

                            January 22, 2007

                 Read twice and placed on the calendar`