II 

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. 

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

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

4 OF CONTENTS. 

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

6 ‘‘Small Business and Work Opportunity Act of 2007’’. 


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1 (b) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment 

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

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986. 

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

8 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. 


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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. 

1 TITLE I—SMALL BUSINESS TAX 

2 RELIEF PROVISIONS 

3 Subtitle A—General Provisions 

4 SEC. 101. EXTENSION OF INCREASED EXPENSING FOR 

5 SMALL BUSINESSES. 

6 Section 179 (relating to election to expense certain 

7 depreciable business assets) is amended by striking 

8 ‘‘2010’’ each place it appears and inserting ‘‘2011’’. 

9 SEC. 102. EXTENSION AND MODIFICATION OF 15-YEAR 

10 STRAIGHT-LINE COST RECOVERY FOR QUALI11 FIED LEASEHOLD IMPROVEMENTS AND 

12 QUALIFIED RESTAURANT IMPROVEMENTS; 

13 15-YEAR STRAIGHT-LINE COST RECOVERY 

14 FOR CERTAIN IMPROVEMENTS TO RETAIL 

15 SPACE. 

16 (a) EXTENSION OF LEASEHOLD AND RESTAURANT

17 IMPROVEMENTS.— 


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1 (1) IN GENERAL.—Clauses (iv) and (v) of sec2 tion 168(e)(3)(E) (relating to 15-year property) are 

3 each amended by striking ‘‘January 1, 2008’’ and 

4 inserting ‘‘April 1, 2008’’. 

5 (2) EFFECTIVE DATE.—The amendment made 

6 by this subsection shall apply to property placed in 

7 service after December 31, 2007. 

8 (b) MODIFICATION OF TREATMENT OF QUALIFIED

9 RESTAURANT PROPERTY AS 15-YEAR PROPERTY FOR

10 PURPOSES OF DEPRECIATION DEDUCTION.— 

11 (1) TREATMENT TO INCLUDE NEW CONSTRUC12 TION.—Paragraph (7) of section 168(e) (relating to 

13 classification of property) is amended to read as fol14 lows: 

15 ‘‘(7) QUALIFIED RESTAURANT PROPERTY.—The 

16 term ‘qualified restaurant property’ means any sec17 tion 1250 property which is a building (or its struc18 tural components) or an improvement to such build19 ing if more than 50 percent of such building’s 

20 square footage is devoted to preparation of, and 

21 seating for on-premises consumption of, prepared 

22 meals.’’. 

23 (2) EFFECTIVE DATE.—The amendment made 

24 by this subsection shall apply to any property placed 

25 in service after the date of the enactment of this 


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1 Act, the original use of which begins with the tax2 payer after such date. 

3 (c) RECOVERY PERIOD FOR DEPRECIATION OF CER4 TAIN IMPROVEMENTS TO RETAIL SPACE.— 

5 (1) 15-YEAR RECOVERY PERIOD.—Section 

6 168(e)(3)(E) (relating to 15-year property) is 

7 amended by striking ‘‘and’’ at the end of clause 

8 (vii), by striking the period at the end of clause (viii) 

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

10 following new clause: 

11 ‘‘(ix) any qualified retail improvement 

12 property placed in service before April 1, 

13 2008.’’. 

14 (2) QUALIFIED RETAIL IMPROVEMENT PROP15 ERTY.—Section 168(e) is amended by adding at the 

16 end the following new paragraph: 

17 ‘‘(8) QUALIFIED RETAIL IMPROVEMENT PROP18 ERTY.— 

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

20 retail improvement property’ means any im21 provement to an interior portion of a building 

22 which is nonresidential real property if— 

23 ‘‘(i) such portion is open to the gen24 eral public and is used in the retail trade 


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1 or business of selling tangible personal 

2 property to the general public, and 

3 ‘‘(ii) such improvement is placed in 

4 service more than 3 years after the date 

5 the building was first placed in service. 

6 ‘‘(B) IMPROVEMENTS MADE BY OWNER.— 

7 In the case of an improvement made by the 

8 owner of such improvement, such improvement 

9 shall be qualified retail improvement property 

10 (if at all) only so long as such improvement is 

11 held by such owner. Rules similar to the rules 

12 under paragraph (6)(B) shall apply for pur13 poses of the preceding sentence. 

14 ‘‘(C) CERTAIN IMPROVEMENTS NOT IN15 CLUDED.—Such term shall not include any im16 provement for which the expenditure is attrib17 utable to— 

18 ‘‘(i) the enlargement of the building, 

19 ‘‘(ii) any elevator or escalator, 

20 ‘‘(iii) any structural component bene21 fitting a common area, or 

22 ‘‘(iv) the internal structural frame23 work of the building.’’. 


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1 (3) REQUIREMENT TO USE STRAIGHT LINE

2 METHOD.—Section 168(b)(3) is amended by adding 

3 at the end the following new subparagraph: 

4 ‘‘(I) Qualified retail improvement property 

5 described in subsection (e)(8).’’. 

6 (4) ALTERNATIVE SYSTEM.—The table con7 tained in section 168(g)(3)(B) is amended by insert8 ing after the item relating to subparagraph (E)(viii) 

9 the following new item: 

‘‘(E)(ix) ........................................................................................... 39’’. 

10 (5) EFFECTIVE DATE.—The amendments made 

11 by this section shall apply to property placed in serv12 ice after the date of the enactment of this Act. 

13 SEC. 103. CLARIFICATION OF CASH ACCOUNTING RULES 

14 FOR SMALL BUSINESS. 

15 (a) CASH ACCOUNTING PERMITTED.— 

16 (1) IN GENERAL.—Section 446 (relating to gen17 eral rule for methods of accounting) is amended by 

18 adding at the end the following new subsection: 

19 ‘‘(g) CERTAIN SMALL BUSINESS TAXPAYERS PER20 MITTED TO USE CASH ACCOUNTING METHOD WITHOUT

21 LIMITATION.— 

22 ‘‘(1) IN GENERAL.—An eligible taxpayer shall 

23 not be required to use an accrual method of account24 ing for any taxable year. 


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1 ‘‘(2) ELIGIBLE TAXPAYER.—For purposes of 

2 this subsection, a taxpayer is an eligible taxpayer 

3 with respect to any taxable year if— 

4 ‘‘(A) for each of the prior taxable years 

5 ending on or after the date of the enactment of 

6 this subsection, the taxpayer (or any prede7 cessor) met the gross receipts test in effect 

8 under section 448(c) for such taxable year, and 

9 ‘‘(B) the taxpayer is not subject to section 

10 447 or 448.’’. 

11 (2) EXPANSION OF GROSS RECEIPTS TEST.— 

12 (A) IN GENERAL.—Paragraph (3) of sec13 tion 448(b) (relating to entities with gross re14 ceipts of not more than $5,000,000) is amended 

15 to read as follows: 

16 ‘‘(3) ENTITIES MEETING GROSS RECEIPTS

17 TEST.—Paragraphs (1) and (2) of subsection (a) 

18 shall not apply to any corporation or partnership for 

19 any taxable year if, for each of the prior taxable 

20 years ending on or after the date of the enactment 

21 of the Small Business and Work Opportunity Act of 

22 2007, the entity (or any predecessor) met the gross 

23 receipts test in effect under subsection (c) for such 

24 prior taxable year.’’. 


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1 (B) CONFORMING AMENDMENTS.—Section 

2 448(c) of such Code is amended— 

3 (i) by striking ‘‘$5,000,000’’ in the 

4 heading thereof, 

5 (ii) by striking ‘‘$5,000,000’’ each 

6 place it appears in paragraph (1) and in7 serting ‘‘$10,000,000’’, and 

8 (iii) by adding at the end the fol9 lowing new paragraph: 

10 ‘‘(4) INFLATION ADJUSTMENT.—In the case of 

11 any taxable year beginning in a calendar year after 

12 2008, the dollar amount contained in paragraph (1) 

13 shall be increased by an amount equal to— 

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

15 ‘‘(B) the cost-of-living adjustment deter16 mined under section 1(f)(3) for the calendar 

17 year in which the taxable year begins, by sub18 stituting ‘calendar year 2007’ for ‘calendar year 

19 1992’ in subparagraph (B) thereof. 

20 If any amount as adjusted under this subparagraph 

21 is not a multiple of $100,000, such amount shall be 

22 rounded to the nearest multiple of $100,000.’’. 

23 (b) CLARIFICATION OF INVENTORY RULES FOR

24 SMALL BUSINESS.— 


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1 (1) IN GENERAL.—Section 471 (relating to gen2 eral rule for inventories) is amended by redesig3 nating subsection (c) as subsection (d) and by in4 serting after subsection (b) the following new sub5 section: 

6 ‘‘(c) SMALL BUSINESS TAXPAYERS NOT REQUIRED

7 TO USE INVENTORIES.— 

8 ‘‘(1) IN GENERAL.—A qualified taxpayer shall 

9 not be required to use inventories under this section 

10 for a taxable year. 

11 ‘‘(2) TREATMENT OF TAXPAYERS NOT USING

12 INVENTORIES.—If a qualified taxpayer does not use 

13 inventories with respect to any property for any tax14 able year beginning after the date of the enactment 

15 of this subsection, such property shall be treated as 

16 a material or supply which is not incidental. 

17 ‘‘(3) QUALIFIED TAXPAYER.—For purposes of 

18 this subsection, the term ‘qualified taxpayer’ 

19 means— 

20 ‘‘(A) any eligible taxpayer (as defined in 

21 section 446(g)(2)), and 

22 ‘‘(B) any taxpayer described in section 

23 448(b)(3).’’. 

24 (2) CONFORMING AMENDMENTS.— 


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1 (A) Subpart D of part II of subchapter E 

2 of chapter 1 is amended by striking section 

3 474. 

4 (B) The table of sections for subpart D of 

5 part II of subchapter E of chapter 1 is amend6 ed by striking the item relating to section 474. 

7 (c) EFFECTIVE DATE AND SPECIAL RULES.— 

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

9 this section shall apply to taxable years beginning 

10 after the date of the enactment of this Act. 

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

12 the case of any taxpayer changing the taxpayer’s 

13 method of accounting for any taxable year under the 

14 amendments made by this section— 

15 (A) such change shall be treated as initi16 ated by the taxpayer; 

17 (B) such change shall be treated as made 

18 with the consent of the Secretary of the Treas19 ury; and 

20 (C) the net amount of the adjustments re21 quired to be taken into account by the taxpayer 

22 under section 481 of the Internal Revenue Code 

23 of 1986 shall be taken into account over a pe24 riod (not greater than 4 taxable years) begin25 ning with such taxable year. 


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1 SEC. 104. EXTENSION AND MODIFICATION OF COMBINED 

2 WORK OPPORTUNITY TAX CREDIT AND WEL3 FARE-TO-WORK CREDIT. 

4 (a) EXTENSION.—Section 51(c)(4)(B) (relating to 

5 termination) is amended by striking ‘‘2007’’ and inserting 

6 ‘‘2012’’. 

7 (b) INCREASE IN MAXIMUM AGE FOR DESIGNATED

8 COMMUNITY RESIDENTS.— 

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

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

11 ‘‘(5) DESIGNATED COMMUNITY RESIDENTS.— 

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

13 community resident’ means any individual who 

14 is certified by the designated local agency— 

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

16 age 40 on the hiring date, and 

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

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

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

22 a designated community resident, the term 

23 ‘qualified wages’ shall not include wages paid or 

24 incurred for services performed while the indi25 vidual’s principal place of abode is outside an 


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1 empowerment zone, enterprise community, or 

2 renewal community.’’. 

3 (2) CONFORMING AMENDMENT.—Subparagraph 

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

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

7 (c) CLARIFICATION OF TREATMENT OF INDIVIDUALS

8 UNDER INDIVIDUAL WORK PLANS.—Subparagraph (B) 

9 of section 51(d)(6) (relating to vocational rehabilitation 

10 referral) is amended by striking ‘‘or’’ at the end of clause 

11 (i), by striking the period at the end of clause (ii) and 

12 inserting ‘‘, or’’, and by adding at the end the following 

13 new clause: 

14 ‘‘(iii) an individual work plan devel15 oped and implemented by an employment 

16 network pursuant to subsection (g) of sec17 tion 1148 of the Social Security Act with 

18 respect to which the requirements of such 

19 subsection are met.’’. 

20 (d) TREATMENT OF DISABLED VETERANS UNDER

21 THE WORK OPPORTUNITY TAX CREDIT.— 

22 (1) DISABLED VETERANS TREATED AS MEM23 BERS OF TARGETED GROUP.— 

24 (A) IN GENERAL.—Subparagraph (A) of 

25 section 51(d)(3) (relating to qualified veteran) 


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1 is amended by striking ‘‘agency as being a 

2 member of a family’’ and all that follows and 

3 inserting ‘‘agency as— 

4 ‘‘(i) being a member of a family re5 ceiving assistance under a food stamp pro6 gram under the Food Stamp Act of 1977 

7 for at least a 3-month period ending dur8 ing the 12-month period ending on the hir9 ing date, or 

10 ‘‘(ii) entitled to compensation for a 

11 service-connected disability incurred after 

12 September 10, 2001.’’. 

13 (B) DEFINITIONS.—Paragraph (3) of sec14 tion 51(d) is amended by adding at the end the 

15 following new subparagraph: 

16 ‘‘(C) OTHER DEFINITIONS.—For purposes 

17 of subparagraph (A), the terms ‘compensation’ 

18 and ‘service-connected’ have the meanings given 

19 such terms under section 101 of title 38, 

20 United States Code.’’. 

21 (2) INCREASE IN AMOUNT OF WAGES TAKEN

22 INTO ACCOUNT FOR DISABLED VETERANS.—Para23 graph (3) of section 51(b) is amended— 

24 (A) by inserting ‘‘($12,000 per year in the 

25 case of any individual who is a qualified veteran 


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1 by reason of subsection (d)(3)(A)(ii))’’ before 

2 the period at the end, and 

3 (B) by striking ‘‘ONLY FIRST $6,000 OF’’ 

4 in the heading and inserting ‘‘LIMITATION ON’’. 

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

6 this section shall apply to individuals who begin work for 

7 the employer after the date of the enactment of this Act, 

8 in taxable years ending after such date. 

9 SEC. 105. CERTIFIED PROFESSIONAL EMPLOYER ORGANI10 ZATIONS. 

11 (a) EMPLOYMENT TAXES.—Chapter 25 (relating to 

12 general provisions relating to employment taxes) is 

13 amended by adding at the end the following new section: 

14 ‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI15 ZATIONS. 

16 ‘‘(a) GENERAL RULES.—For purposes of the taxes, 

17 and other obligations, imposed by this subtitle— 

18 ‘‘(1) a certified professional employer organiza19 tion shall be treated as the employer (and no other 

20 person shall be treated as the employer) of any work 

21 site employee performing services for any customer 

22 of such organization, but only with respect to remu23 neration remitted by such organization to such work 

24 site employee, and 


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1 ‘‘(2) exclusions, definitions, and other rules 

2 which are based on the type of employer and which 

3 would (but for paragraph (1)) apply shall apply with 

4 respect to such taxes imposed on such remuneration. 

5 ‘‘(b) SUCCESSOR EMPLOYER STATUS.—For purposes 

6 of sections 3121(a)(1), 3231(e)(2)(C), and 3306(b)(1)— 

7 ‘‘(1) a certified professional employer organiza8 tion entering into a service contract with a customer 

9 with respect to a work site employee shall be treated 

10 as a successor employer and the customer shall be 

11 treated as a predecessor employer during the term 

12 of such service contract, and 

13 ‘‘(2) a customer whose service contract with a 

14 certified professional employer organization is termi15 nated with respect to a work site employee shall be 

16 treated as a successor employer and the certified 

17 professional employer organization shall be treated 

18 as a predecessor employer. 

19 ‘‘(c) LIABILITY OF CERTIFIED PROFESSIONAL EM20 PLOYER ORGANIZATION.—Solely for purposes of its liabil21 ity for the taxes, and other obligations, imposed by this 

22 subtitle— 

23 ‘‘(1) a certified professional employer organiza24 tion shall be treated as the employer of any indi25 vidual (other than a work site employee or a person 


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1 described in subsection (f)) who is performing serv2 ices covered by a contract meeting the requirements 

3 of section 7705(e)(2), but only with respect to remu4 neration remitted by such organization to such indi5 vidual, and 

6 ‘‘(2) exclusions, definitions, and other rules 

7 which are based on the type of employer and which 

8 would (but for paragraph (1)) apply shall apply with 

9 respect to such taxes imposed on such remuneration. 

10 ‘‘(d) TREATMENT OF CREDITS.— 

11 ‘‘(1) IN GENERAL.—For purposes of any credit 

12 specified in paragraph (2)— 

13 ‘‘(A) such credit with respect to a work 

14 site employee performing services for the cus15 tomer applies to the customer, not the certified 

16 professional employer organization, 

17 ‘‘(B) the customer, and not the certified 

18 professional employer organization, shall take 

19 into account wages and employment taxes— 

20 ‘‘(i) paid by the certified professional 

21 employer organization with respect to the 

22 work site employee, and 

23 ‘‘(ii) for which the certified profes24 sional employer organization receives pay25 ment from the customer, and 


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1 ‘‘(C) the certified professional employer or2 ganization shall furnish the customer with any 

3 information necessary for the customer to claim 

4 such credit. 

5 ‘‘(2) CREDITS SPECIFIED.—A credit is specified 

6 in this paragraph if such credit is allowed under— 

7 ‘‘(A) section 41 (credit for increasing re8 search activity), 

9 ‘‘(B) section 45A (Indian employment 

10 credit), 

11 ‘‘(C) section 45B (credit for portion of em12 ployer social security taxes paid with respect to 

13 employee cash tips), 

14 ‘‘(D) section 45C (clinical testing expenses 

15 for certain drugs for rare diseases or condi16 tions), 

17 ‘‘(E) section 51 (work opportunity credit), 

18 ‘‘(F) section 51A (temporary incentives for 

19 employing long-term family assistance recipi20 ents), 

21 ‘‘(G) section 1396 (empowerment zone em22 ployment credit), 

23 ‘‘(H) 1400(d) (DC Zone employment cred24 it), 


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1 ‘‘(I) Section 1400H (renewal community 

2 employment credit), and 

3 ‘‘(J) any other section as provided by the 

4 Secretary. 

5 ‘‘(e) SPECIAL RULE FOR RELATED PARTY.—This 

6 section shall not apply in the case of a customer which 

7 bears a relationship to a certified professional employer 

8 organization described in section 267(b) or 707(b). For 

9 purposes of the preceding sentence, such sections shall be 

10 applied by substituting ‘10 percent’ for ‘50 percent’. 

11 ‘‘(f) SPECIAL RULE FOR CERTAIN INDIVIDUALS.— 

12 For purposes of the taxes imposed under this subtitle, an 

13 individual with net earnings from self-employment derived 

14 from the customer’s trade or business is not a work site 

15 employee with respect to remuneration paid by a certified 

16 professional employer organization. 

17 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

18 such regulations as may be necessary or appropriate to 

19 carry out the purposes of this section.’’. 

20 (b) CERTIFIED PROFESSIONAL EMPLOYER ORGANI21 ZATION DEFINED.—Chapter 79 (relating to definitions) is 

22 amended by adding at the end the following new section: 


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1 ‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI2 ZATIONS DEFINED. 

3 ‘‘(a) IN GENERAL.—For purposes of this title, the 

4 term ‘certified professional employer organization’ means 

5 a person who has been certified by the Secretary for pur6 poses of section 3511 as meeting the requirements of sub7 section (b). 

8 ‘‘(b) GENERAL REQUIREMENTS.—A person meets the 

9 requirements of this subsection if such person— 

10 ‘‘(1) demonstrates that such person (and any 

11 owner, officer, and such other persons as may be 

12 specified in regulations) meets such requirements as 

13 the Secretary shall establish with respect to tax sta14 tus, background, experience, business location, and 

15 annual financial audits, 

16 ‘‘(2) computes its taxable income using an ac17 crual method of accounting unless the Secretary ap18 proves another method, 

19 ‘‘(3) agrees that it will satisfy the bond and 

20 independent financial review requirements of sub21 section (c) on an ongoing basis, 

22 ‘‘(4) agrees that it will satisfy such reporting 

23 obligations as may be imposed by the Secretary, 

24 ‘‘(5) agrees to verify on such periodic basis as 

25 the Secretary may prescribe that it continues to 

26 meet the requirements of this subsection, and 


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1 ‘‘(6) agrees to notify the Secretary in writing 

2 within such time as the Secretary may prescribe of 

3 any change that materially affects whether it con4 tinues to meet the requirements of this subsection. 

5 ‘‘(c) BOND AND INDEPENDENT FINANCIAL REVIEW

6 REQUIREMENTS.— 

7 ‘‘(1) IN GENERAL.—An organization meets the 

8 requirements of this paragraph if such organiza9 tion— 

10 ‘‘(A) meets the bond requirements of para11 graph (2), and 

12 ‘‘(B) meets the independent financial re13 view requirements of paragraph (3). 

14 ‘‘(2) BOND.— 

15 ‘‘(A) IN GENERAL.—A certified profes16 sional employer organization meets the require17 ments of this paragraph if the organization has 

18 posted a bond for the payment of taxes under 

19 subtitle C (in a form acceptable to the Sec20 retary) in an amount at least equal to the 

21 amount specified in subparagraph (B). 

22 ‘‘(B) AMOUNT OF BOND.—For the period 

23 April 1 of any calendar year through March 31 

24 of the following calendar year, the amount of 

25 the bond required is equal to the greater of— 


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1 ‘‘(i) 5 percent of the organization’s li2 ability under section 3511 for taxes im3 posed by subtitle C during the preceding 

4 calendar year (but not to exceed 

5 $1,000,000), or 

6 ‘‘(ii) $50,000. 

7 ‘‘(3) INDEPENDENT FINANCIAL REVIEW RE8 QUIREMENTS.—A certified professional employer or9 ganization meets the requirements of this paragraph 

10 if such organization— 

11 ‘‘(A) has, as of the most recent review 

12 date, caused to be prepared and provided to the 

13 Secretary (in such manner as the Secretary 

14 may prescribe) an opinion of an independent 

15 certified public accountant that the certified 

16 professional employer organization’s financial 

17 statements are presented fairly in accordance 

18 with generally accepted accounting principles, 

19 and 

20 ‘‘(B) provides, not later than the last day 

21 of the second month beginning after the end of 

22 each calendar quarter, to the Secretary from an 

23 independent certified public accountant an as24 sertion regarding Federal employment tax payVerDate Aug 31 2005 03:20 Jan 23, 2007 Jkt 059200 PO 00000 Frm 00022 Fmt 6652 Sfmt 6201 E:\BILLS\S349.PCS S349

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1 ments and an examination level attestation on 

2 such assertion. 

3 Such assertion shall state that the organization has 

4 withheld and made deposits of all taxes imposed by 

5 chapters 21, 22, and 24 of the Internal Revenue 

6 Code in accordance with regulations imposed by the 

7 Secretary for such calendar quarter and such exam8 ination level attestation shall state that such asser9 tion is fairly stated, in all material respects. 

10 ‘‘(4) CONTROLLED GROUP RULES.—For pur11 poses of the requirements of paragraphs (2) and (3), 

12 all professional employer organizations that are 

13 members of a controlled group within the meaning 

14 of sections 414(b) and (c) shall be treated as a sin15 gle organization. 

16 ‘‘(5) FAILURE TO FILE ASSERTION AND ATTES17 TATION.—If the certified professional employer orga18 nization fails to file the assertion and attestation re19 quired by paragraph (3) with respect to any cal20 endar quarter, then the requirements of paragraph 

21 (3) with respect to such failure shall be treated as 

22 not satisfied for the period beginning on the due 

23 date for such attestation. 


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1 ‘‘(6) REVIEW DATE.—For purposes of para2 graph (3)(A), the review date shall be 6 months 

3 after the completion of the organization’s fiscal year. 

4 ‘‘(d) SUSPENSION AND REVOCATION AUTHORITY.— 

5 The Secretary may suspend or revoke a certification of 

6 any person under subsection (b) for purposes of section 

7 3511 if the Secretary determines that such person is not 

8 satisfying the representations or requirements of sub9 sections (b) or (c), or fails to satisfy applicable accounting, 

10 reporting, payment, or deposit requirements. 

11 ‘‘(e) WORK SITE EMPLOYEE.—For purposes of this 

12 title— 

13 ‘‘(1) IN GENERAL.—The term ‘work site em14 ployee’ means, with respect to a certified profes15 sional employer organization, an individual who— 

16 ‘‘(A) performs services for a customer pur17 suant to a contract which is between such cus18 tomer and the certified professional employer 

19 organization and which meets the requirements 

20 of paragraph (2), and 

21 ‘‘(B) performs services at a work site 

22 meeting the requirements of paragraph (3). 

23 ‘‘(2) SERVICE CONTRACT REQUIREMENTS.—A 

24 contract meets the requirements of this paragraph 

25 with respect to an individual performing services for 


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1 a customer if such contract is in writing and pro2 vides that the certified professional employer organi3 zation shall— 

4 ‘‘(A) assume responsibility for payment of 

5 wages to such individual, without regard to the 

6 receipt or adequacy of payment from the cus7 tomer for such services, 

8 ‘‘(B) assume responsibility for reporting, 

9 withholding, and paying any applicable taxes 

10 under subtitle C, with respect to such individ11 ual’s wages, without regard to the receipt or 

12 adequacy of payment from the customer for 

13 such services, 

14 ‘‘(C) assume responsibility for any em15 ployee benefits which the service contract may 

16 require the organization to provide, without re17 gard to the receipt or adequacy of payment 

18 from the customer for such services, 

19 ‘‘(D) assume responsibility for hiring, fir20 ing, and recruiting workers in addition to the 

21 customer’s responsibility for hiring, firing and 

22 recruiting workers, 

23 ‘‘(E) maintain employee records relating to 

24 such individual, and 


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1 ‘‘(F) agree to be treated as a certified pro2 fessional employer organization for purposes of 

3 section 3511 with respect to such individual. 

4 ‘‘(3) WORK SITE COVERAGE REQUIREMENT.— 

5 The requirements of this paragraph are met with re6 spect to an individual if at least 85 percent of the 

7 individuals performing services for the customer at 

8 the work site where such individual performs serv9 ices are subject to 1 or more contracts with the cer10 tified professional employer organization which meet 

11 the requirements of paragraph (2) (but not taking 

12 into account those individuals who are excluded em13 ployees within the meaning of section 414(q)(5)). 

14 ‘‘(f) DETERMINATION OF EMPLOYMENT STATUS.— 

15 Except to the extent necessary for purposes of section 

16 3511, nothing in this section shall be construed to affect 

17 the determination of who is an employee or employer for 

18 purposes of this title. 

19 ‘‘(g) REGULATIONS.—The Secretary shall prescribe 

20 such regulations as may be necessary or appropriate to 

21 carry out the purposes of this section.’’. 

22 (c) CONFORMING AMENDMENTS.— 

23 (1) Section 3302 is amended by adding at the 

24 end the following new subsection: 


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1 ‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM2 PLOYER ORGANIZATIONS.—If a certified professional em3 ployer organization (as defined in section 7705), or a cus4 tomer of such organization, makes a contribution to the 

5 State’s unemployment fund with respect to a work site 

6 employee, such organization shall be eligible for the credits 

7 available under this section with respect to such contribu8 tion.’’. 

9 (2) Section 3303(a) is amended— 

10 (A) by striking the period at the end of 

11 paragraph (3) and inserting ‘‘; and’’ and by in12 serting after paragraph (3) the following new 

13 paragraph: 

14 ‘‘(4) if the taxpayer is a certified professional 

15 employer organization (as defined in section 7705) 

16 that is treated as the employer under section 3511, 

17 such certified professional employer organization is 

18 permitted to collect and remit, in accordance with 

19 paragraphs (1), (2), and (3), contributions during 

20 the taxable year to the State unemployment fund 

21 with respect to a work site employee.’’, and 

22 (B) in the last sentence— 

23 (i) by striking ‘‘paragraphs (1), (2), 

24 and (3)’’ and inserting ‘‘paragraphs (1), 

25 (2), (3), and (4)’’, and 


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1 (ii) by striking ‘‘paragraph (1), (2), or 

2 (3)’’ and inserting ‘‘paragraph (1), (2), 

3 (3), or (4)’’. 

4 (3) Section 6053(c) (relating to reporting of 

5 tips) is amended by adding at the end the following 

6 new paragraph: 

7 ‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR8 GANIZATIONS.—For purposes of any report required 

9 by this subsection, in the case of a certified profes10 sional employer organization that is treated under 

11 section 3511 as the employer of a work site em12 ployee, the customer with respect to whom a work 

13 site employee performs services shall be the employer 

14 for purposes of reporting under this section and the 

15 certified professional employer organization shall 

16 furnish to the customer any information necessary 

17 to complete such reporting no later than such time 

18 as the Secretary shall prescribe.’’. 

19 (d) CLERICAL AMENDMENTS.— 

20 (1) The table of sections for chapter 25 is 

21 amended by adding at the end the following new 

22 item: 

‘‘Sec. 3511. Certified professional employer organizations.’’. 


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1 (2) The table of sections for chapter 79 is 

2 amended by inserting after the item relating to sec3 tion 7704 the following new item: 

‘‘Sec. 7705. Certified professional employer organizations defined.’’. 

4 (e) REPORTING REQUIREMENTS AND OBLIGA5 TIONS.—The Secretary of the Treasury shall develop such 

6 reporting and recordkeeping rules, regulations, and proce7 dures as the Secretary determines necessary or appro8 priate to ensure compliance with the amendments made 

9 by this section with respect to entities applying for certifi10 cation as certified professional employer organizations or 

11 entities that have been so certified. Such rules shall be 

12 designed in a manner which streamlines, to the extent pos13 sible, the application of requirements of such amendments, 

14 the exchange of information between a certified profes15 sional employer organization and its customers, and the 

16 reporting and recordkeeping obligations of the certified 

17 professional employer organization. 

18 (f) USER FEES.—Subsection (b) of section 7528 (re19 lating to Internal Revenue Service user fees) is amended 

20 by adding at the end the following new paragraph: 

21 ‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR22 GANIZATIONS.—The fee charged under the program 

23 in connection with the certification by the Secretary 

24 of a professional employer organization under sec25 tion 7705 shall not exceed $500.’’. 


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1 (g) EFFECTIVE DATES.— 

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

3 this section shall apply with respect to wages for 

4 services performed on or after January 1 of the first 

5 calendar year beginning more than 12 months after 

6 the date of the enactment of this Act. 

7 (2) CERTIFICATION PROGRAM.—The Secretary 

8 of the Treasury shall establish the certification pro9 gram described in section 7705(b) of the Internal 

10 Revenue Code of 1986, as added by subsection (b), 

11 not later than 6 months before the effective date de12 termined under paragraph (1). 

13 (h) NO INFERENCE.—Nothing contained in this sec14 tion or the amendments made by this section shall be con15 strued to create any inference with respect to the deter16 mination of who is an employee or employer— 

17 (1) for Federal tax purposes (other than the 

18 purposes set forth in the amendments made by this 

19 section), or 

20 (2) for purposes of any other provision of law. 


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1 Subtitle B—Subchapter S 

2 Provisions 

3 SEC. 111. CAPITAL GAIN OF S CORPORATION NOT TREATED 

4 AS PASSIVE INVESTMENT INCOME. 

5 (a) IN GENERAL.—Section 1362(d)(3) is amended by 

6 striking subparagraphs (B), (C), (D), (E), and (F) and 

7 inserting the following new subparagraph: 

8 ‘‘(B) PASSIVE INVESTMENT INCOME DE9 FINED.— 

10 ‘‘(i) IN GENERAL.—Except as other11 wise provided in this subparagraph, the 

12 term ‘passive investment income’ means 

13 gross receipts derived from royalties, rents, 

14 dividends, interest, and annuities. 

15 ‘‘(ii) EXCEPTION FOR INTEREST ON

16 NOTES FROM SALES OF INVENTORY.—The 

17 term ‘passive investment income’ shall not 

18 include interest on any obligation acquired 

19 in the ordinary course of the corporation’s 

20 trade or business from its sale of property 

21 described in section 1221(a)(1). 

22 ‘‘(iii) TREATMENT OF CERTAIN LEND23 ING OR FINANCE COMPANIES.—If the S 

24 corporation meets the requirements of sec25 tion 542(c)(6) for the taxable year, the 


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1 term ‘passive investment income’ shall not 

2 include gross receipts for the taxable year 

3 which are derived directly from the active 

4 and regular conduct of a lending or finance 

5 business (as defined in section 542(d)(1)). 

6 ‘‘(iv) TREATMENT OF CERTAIN DIVI7 DENDS.—If an S corporation holds stock 

8 in a C corporation meeting the require9 ments of section 1504(a)(2), the term ‘pas10 sive investment income’ shall not include 

11 dividends from such C corporation to the 

12 extent such dividends are attributable to 

13 the earnings and profits of such C corpora14 tion derived from the active conduct of a 

15 trade or business. 

16 ‘‘(v) EXCEPTION FOR BANKS, ETC.— 

17 In the case of a bank (as defined in section 

18 581) or a depository institution holding 

19 company (as defined in section 3(w)(1) of 

20 the Federal Deposit Insurance Act (12 

21 U.S.C. 1813(w)(1)), the term ‘passive in22 vestment income’ shall not include— 

23 ‘‘(I) interest income earned by 

24 such bank or company, or 


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1 ‘‘(II) dividends on assets required 

2 to be held by such bank or company, 

3 including stock in the Federal Reserve 

4 Bank, the Federal Home Loan Bank, 

5 or the Federal Agricultural Mortgage 

6 Bank or participation certificates 

7 issued by a Federal Intermediate 

8 Credit Bank.’’. 

9 (b) CONFORMING AMENDMENT.—Clause (i) of sec10 tion 1042(c)(4)(A) is amended by striking ‘‘section 

11 1362(d)(3)(C)’’ and inserting ‘‘section 1362(d)(3)(B)’’. 

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

13 this section shall apply to taxable years beginning after 

14 the date of the enactment of this Act. 

15 SEC. 112. TREATMENT OF BANK DIRECTOR SHARES. 

16 (a) IN GENERAL.—Section 1361 (defining S corpora17 tion) is amended by adding at the end the following new 

18 subsection: 

19 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.— 

20 ‘‘(1) IN GENERAL.—Restricted bank director 

21 stock shall not be taken into account as outstanding 

22 stock of the S corporation in applying this sub23 chapter (other than section 1368(f)). 

24 ‘‘(2) RESTRICTED BANK DIRECTOR STOCK.— 

25 For purposes of this subsection, the term ‘restricted 


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1 bank director stock’ means stock in a bank (as de2 fined in section 581) or a depository institution 

3 holding company (as defined in section 3(w)(1) of 

4 the Federal Deposit Insurance Act (12 U.S.C. 

5 1813(w)(1)), if such stock— 

6 ‘‘(A) is required to be held by an individual 

7 under applicable Federal or State law in order 

8 to permit such individual to serve as a director, 

9 and 

10 ‘‘(B) is subject to an agreement with such 

11 bank or company (or a corporation which con12 trols (within the meaning of section 368(c)) 

13 such bank or company) pursuant to which the 

14 holder is required to sell back such stock (at 

15 the same price as the individual acquired such 

16 stock) upon ceasing to hold the office of direc17 tor. 

18 ‘‘(3) CROSS REFERENCE.— 

‘‘For treatment of certain distributions with respect to restricted bank director 

stock, see section 1368(f).’’. 

19 (b) DISTRIBUTIONS.—Section 1368 (relating to dis20 tributions) is amended by adding at the end the following 

21 new subsection: 

22 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di23 rector receives a distribution (not in part or full payment 

24 in exchange for stock) from an S corporation with respect 


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1 to any restricted bank director stock (as defined in section 

2 1361(f)), the amount of such distribution— 

3 ‘‘(1) shall be includible in gross income of the 

4 director, and 

5 ‘‘(2) shall be deductible by the corporation for 

6 the taxable year of such corporation in which or with 

7 which ends the taxable year in which such amount 

8 in included in the gross income of the director.’’. 

9 (c) EFFECTIVE DATES.— 

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

11 this section shall apply to taxable years beginning 

12 after December 31, 2006. 

13 (2) SPECIAL RULE FOR TREATMENT AS SECOND

14 CLASS OF STOCK.—In the case of any taxable year 

15 beginning after December 31, 1996, restricted bank 

16 director stock (as defined in section 1361(f) of the 

17 Internal Revenue Code of 1986, as added by this 

18 section) shall not be taken into account in deter19 mining whether an S corporation has more than 1 

20 class of stock. 


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1 SEC. 113. SPECIAL RULE FOR BANK REQUIRED TO CHANGE 

2 FROM THE RESERVE METHOD OF ACCOUNT3 ING ON BECOMING S CORPORATION. 

4 (a) IN GENERAL.—Section 1361, as amended by this 

5 Act, is amended by adding at the end the following new 

6 subsection: 

7 ‘‘(g) SPECIAL RULE FOR BANK REQUIRED TO

8 CHANGE FROM THE RESERVE METHOD OF ACCOUNTING

9 ON BECOMING S CORPORATION.—In the case of a bank 

10 which changes from the reserve method of accounting for 

11 bad debts described in section 585 or 593 for its first tax12 able year for which an election under section 1362(a) is 

13 in effect, the bank may elect to take into account any ad14 justments under section 481 by reason of such change for 

15 the taxable year immediately preceding such first taxable 

16 year.’’. 

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

18 this section shall apply to taxable years beginning after 

19 December 31, 2006. 

20 SEC. 114. TREATMENT OF THE SALE OF INTEREST IN A 

21 QUALIFIED SUBCHAPTER S SUBSIDIARY. 

22 (a) IN GENERAL.—Subparagraph (C) of section 

23 1361(b)(3) (relating to treatment of terminations of quali24 fied subchapter S subsidiary status) is amended— 

25 (1) by striking ‘‘For purposes of this title,’’ and 

26 inserting the following: 


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1 ‘‘(i) IN GENERAL.—For purposes of 

2 this title,’’, and 

3 (2) by inserting at the end the following new 

4 clause: 

5 ‘‘(ii) TERMINATION BY REASON OF

6 SALE OF STOCK.—If the failure to meet 

7 the requirements of subparagraph (B) is 

8 by reason of the sale of stock of a corpora9 tion which is a qualified subchapter S sub10 sidiary, the sale of such stock shall be 

11 treated as if— 

12 ‘‘(I) the sale were a sale of an 

13 undivided interest in the assets of 

14 such corporation (based on the per15 centage of the corporation’s stock 

16 sold), and 

17 ‘‘(II) the sale were followed by an 

18 acquisition by such corporation of all 

19 of its assets (and the assumption by 

20 such corporation of all of its liabil21 ities) in a transaction to which section 

22 351 applies.’’. 

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

24 this section shall apply to taxable years beginning after 

25 December 31, 2006 . 


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1 SEC. 115. ELIMINATION OF ALL EARNINGS AND PROFITS 

2 ATTRIBUTABLE TO PRE-1983 YEARS FOR CER3 TAIN CORPORATIONS. 

4 In the case of a corporation which is— 

5 (1) described in section 1311(a)(1) of the Small 

6 Business Job Protection Act of 1996, and 

7 (2) not described in section 1311(a)(2) of such 

8 Act, 

9 the amount of such corporation’s accumulated earnings 

10 and profits (for the first taxable year beginning after the 

11 date of the enactment of this Act) shall be reduced by an 

12 amount equal to the portion (if any) of such accumulated 

13 earnings and profits which were accumulated in any tax14 able year beginning before January 1, 1983, for which 

15 such corporation was an electing small business corpora16 tion under subchapter S of the Internal Revenue Code of 

17 1986. 

18 SEC. 116. EXPANSION OF QUALIFYING BENEFICIARIES OF 

19 AN ELECTING SMALL BUSINESS TRUST. 

20 (a) NO LOOK THROUGH FOR ELIGIBILITY PUR21 POSES.—Clause (v) of section 1361(c)(2)(B) is amended 

22 by adding at the end the following new sentence: ‘‘This 

23 clause shall not apply for purposes of subsection 

24 (b)(1)(C).’’. 


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

2 this section shall take effect on the date of the enactment 

3 of this Act. 

4 TITLE II—REVENUE PROVISIONS 

5 SEC. 201. MODIFICATION OF EFFECTIVE DATE OF LEASING 

6 PROVISIONS OF THE AMERICAN JOBS CRE7 ATION ACT OF 2004. 

8 (a) LEASES TO FOREIGN ENTITIES.—Section 849(b) 

9 of the American Jobs Creation Act of 2004 is amended 

10 by adding at the end the following new paragraph: 

11 ‘‘(5) LEASES TO FOREIGN ENTITIES.—In the 

12 case of tax-exempt use property leased to a tax-ex13 empt entity which is a foreign person or entity, the 

14 amendments made by this part shall apply to taxable 

15 years beginning after December 31, 2006, with re16 spect to leases entered into on or before March 12, 

17 2004.’’. 

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

19 this section shall take effect as if included in the enact20 ment of the American Jobs Creation Act of 2004. 


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1 SEC. 202. APPLICATION OF RULES TREATING INVERTED 

2 CORPORATIONS AS DOMESTIC CORPORA3 TIONS TO CERTAIN TRANSACTIONS OCCUR4 RING AFTER MARCH 20, 2002. 

5 (a) IN GENERAL.—Section 7874(b) (relating to in6 verted corporations treated as domestic corporations) is 

7 amended to read as follows: 

8 ‘‘(b) INVERTED CORPORATIONS TREATED AS DO9 MESTIC CORPORATIONS.— 

10 ‘‘(1) IN GENERAL.—Notwithstanding section 

11 7701(a)(4), a foreign corporation shall be treated for 

12 purposes of this title as a domestic corporation if 

13 such corporation would be a surrogate foreign cor14 poration if subsection (a)(2) were applied by sub15 stituting ‘80 percent’ for ‘60 percent’. 

16 ‘‘(2) SPECIAL RULE FOR CERTAIN TRANS17 ACTIONS OCCURRING AFTER MARCH 20, 2002.— 

18 ‘‘(A) IN GENERAL.—If— 

19 ‘‘(i) paragraph (1) does not apply to 

20 a foreign corporation, but 

21 ‘‘(ii) paragraph (1) would apply to 

22 such corporation if, in addition to the sub23 stitution under paragraph (1), subsection 

24 (a)(2) were applied by substituting ‘March 

25 20, 2002’ for ‘March 4, 2003’ each place 

26 it appears, 


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1 then paragraph (1) shall apply to such corpora2 tion but only with respect to taxable years of 

3 such corporation beginning after December 31, 

4 2006. 

5 ‘‘(B) SPECIAL RULES.—Subject to such 

6 rules as the Secretary may prescribe, in the 

7 case of a corporation to which paragraph (1) 

8 applies by reason of this paragraph— 

9 ‘‘(i) the corporation shall be treated, 

10 as of the close of its last taxable year be11 ginning before January 1, 2007, as having 

12 transferred all of its assets, liabilities, and 

13 earnings and profits to a domestic corpora14 tion in a transaction with respect to which 

15 no tax is imposed under this title, 

16 ‘‘(ii) the bases of the assets trans17 ferred in the transaction to the domestic 

18 corporation shall be the same as the bases 

19 of the assets in the hands of the foreign 

20 corporation, subject to any adjustments 

21 under this title for built-in losses, 

22 ‘‘(iii) the basis of the stock of any 

23 shareholder in the domestic corporation 

24 shall be the same as the basis of the stock 

25 of the shareholder in the foreign corporaVerDate Aug 31 2005 03:20 Jan 23, 2007 Jkt 059200 PO 00000 Frm 00041 Fmt 6652 Sfmt 6201 E:\BILLS\S349.PCS S349

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1 tion for which it is treated as exchanged, 

2 and 

3 ‘‘(iv) the transfer of any earnings and 

4 profits by reason of clause (i) shall be dis5 regarded in determining any deemed divi6 dend or foreign tax creditable to the do7 mestic corporation with respect to such 

8 transfer. 

9 ‘‘(C) REGULATIONS.—The Secretary may 

10 prescribe such regulations as may be necessary 

11 or appropriate to carry out this paragraph, in12 cluding regulations to prevent the avoidance of 

13 the purposes of this paragraph.’’. 

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

15 this section shall apply to taxable years beginning after 

16 December 31, 2006. 

17 SEC. 203. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES. 

18 (a) DISALLOWANCE OF DEDUCTION.— 

19 (1) IN GENERAL.—Section 162(g) (relating to 

20 treble damage payments under the antitrust laws) is 

21 amended— 

22 (A) by redesignating paragraphs (1) and 

23 (2) as subparagraphs (A) and (B), respectively, 

24 (B) by striking ‘‘If’’ and inserting: 

25 ‘‘(1) TREBLE DAMAGES.—If’’, and 


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1 (C) by adding at the end the following new 

2 paragraph: 

3 ‘‘(2) PUNITIVE DAMAGES.—No deduction shall 

4 be allowed under this chapter for any amount paid 

5 or incurred for punitive damages in connection with 

6 any judgment in, or settlement of, any action. This 

7 paragraph shall not apply to punitive damages de8 scribed in section 104(c).’’. 

9 (2) CONFORMING AMENDMENT.—The heading 

10 for section 162(g) is amended by inserting ‘‘OR PU11 NITIVE DAMAGES’’ after ‘‘LAWS’’. 

12 (b) INCLUSION IN INCOME OF PUNITIVE DAMAGES

13 PAID BY INSURER OR OTHERWISE.— 

14 (1) IN GENERAL.—Part II of subchapter B of 

15 chapter 1 (relating to items specifically included in 

16 gross income) is amended by adding at the end the 

17 following new section: 

18 ‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR19 ANCE OR OTHERWISE. 

20 ‘‘Gross income shall include any amount paid to or 

21 on behalf of a taxpayer as insurance or otherwise by rea22 son of the taxpayer’s liability (or agreement) to pay puni23 tive damages.’’. 


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1 (2) REPORTING REQUIREMENTS.—Section 6041 

2 (relating to information at source) is amended by 

3 adding at the end the following new subsection: 

4 ‘‘(h) SECTION TO APPLY TO PUNITIVE DAMAGES

5 COMPENSATION.—This section shall apply to payments by 

6 a person to or on behalf of another person as insurance 

7 or otherwise by reason of the other person’s liability (or 

8 agreement) to pay punitive damages.’’. 

9 (3) CONFORMING AMENDMENT.—The table of 

10 sections for part II of subchapter B of chapter 1 is 

11 amended by adding at the end the following new 

12 item: 

‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’. 

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

14 this section shall apply to damages paid or incurred on 

15 or after the date of the enactment of this Act. 

16 SEC. 204. DENIAL OF DEDUCTION FOR CERTAIN FINES, 

17 PENALTIES, AND OTHER AMOUNTS. 

18 (a) IN GENERAL.—Subsection (f) of section 162 (re19 lating to trade or business expenses) is amended to read 

20 as follows: 

21 ‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.— 

22 ‘‘(1) IN GENERAL.—Except as provided in para23 graph (2), no deduction otherwise allowable shall be 

24 allowed under this chapter for any amount paid or 

25 incurred (whether by suit, agreement, or otherwise) 


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1 to, or at the direction of, a government or entity de2 scribed in paragraph (4) in relation to the violation 

3 of any law or the investigation or inquiry by such 

4 government or entity into the potential violation of 

5 any law. 

6 ‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING

7 RESTITUTION OR PAID TO COME INTO COMPLIANCE

8 WITH LAW.—Paragraph (1) shall not apply to any 

9 amount which— 

10 ‘‘(A) the taxpayer establishes— 

11 ‘‘(i) constitutes restitution (including 

12 remediation of property) for damage or 

13 harm caused by or which may be caused by 

14 the violation of any law or the potential 

15 violation of any law, or 

16 ‘‘(ii) is paid to come into compliance 

17 with any law which was violated or in18 volved in the investigation or inquiry, and 

19 ‘‘(B) is identified as restitution or as an 

20 amount paid to come into compliance with the 

21 law, as the case may be, in the court order or 

22 settlement agreement. 

23 A taxpayer shall not meet the requirements of sub24 paragraph (A) solely by reason an identification 

25 under subparagraph (B). This paragraph shall not 


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1 apply to any amount paid or incurred as reimburse2 ment to the government or entity for the costs of 

3 any investigation or litigation. 

4 ‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN5 CURRED AS THE RESULT OF CERTAIN COURT OR6 DERS.—Paragraph (1) shall not apply to any 

7 amount paid or incurred by order of a court in a 

8 suit in which no government or entity described in 

9 paragraph (4) is a party. 

10 ‘‘(4) CERTAIN NONGOVERNMENTAL REGU11 LATORY ENTITIES.—An entity is described in this 

12 paragraph if it is— 

13 ‘‘(A) a nongovernmental entity which exer14 cises self-regulatory powers (including imposing 

15 sanctions) in connection with a qualified board 

16 or exchange (as defined in section 1256(g)(7)), 

17 or 

18 ‘‘(B) to the extent provided in regulations, 

19 a nongovernmental entity which exercises self20 regulatory powers (including imposing sanc21 tions) as part of performing an essential gov22 ernmental function. 

23 ‘‘(5) EXCEPTION FOR TAXES DUE.—Paragraph 

24 (1) shall not apply to any amount paid or incurred 

25 as taxes due.’’. 


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1 (b) REPORTING OF DEDUCTIBLE AMOUNTS.— 

2 (1) IN GENERAL.—Subpart B of part III of 

3 subchapter A of chapter 61 is amended by inserting 

4 after section 6050V the following new section: 

5 ‘‘SEC. 6050W. INFORMATION WITH RESPECT TO CERTAIN 

6 FINES, PENALTIES, AND OTHER AMOUNTS. 

7 ‘‘(a) REQUIREMENT OF REPORTING.— 

8 ‘‘(1) IN GENERAL.—The appropriate official of 

9 any government or entity which is described in sec10 tion 162(f)(4) which is involved in a suit or agree11 ment described in paragraph (2) shall make a return 

12 in such form as determined by the Secretary setting 

13 forth— 

14 ‘‘(A) the amount required to be paid as a 

15 result of the suit or agreement to which para16 graph (1) of section 162(f) applies, 

17 ‘‘(B) any amount required to be paid as a 

18 result of the suit or agreement which con19 stitutes restitution or remediation of property, 

20 and 

21 ‘‘(C) any amount required to be paid as a 

22 result of the suit or agreement for the purpose 

23 of coming into compliance with any law which 

24 was violated or involved in the investigation or 

25 inquiry. 


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1 ‘‘(2) SUIT OR AGREEMENT DESCRIBED.— 

2 ‘‘(A) IN GENERAL.—A suit or agreement is 

3 described in this paragraph if— 

4 ‘‘(i) it is— 

5 ‘‘(I) a suit with respect to a vio6 lation of any law over which the gov7 ernment or entity has authority and 

8 with respect to which there has been 

9 a court order, or 

10 ‘‘(II) an agreement which is en11 tered into with respect to a violation 

12 of any law over which the government 

13 or entity has authority, or with re14 spect to an investigation or inquiry by 

15 the government or entity into the po16 tential violation of any law over which 

17 such government or entity has author18 ity, and 

19 ‘‘(ii) the aggregate amount involved in 

20 all court orders and agreements with re21 spect to the violation, investigation, or in22 quiry is $600 or more. 

23 ‘‘(B) ADJUSTMENT OF REPORTING

24 THRESHOLD.—The Secretary may adjust the 

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1 essary in order to ensure the efficient adminis2 tration of the internal revenue laws. 

3 ‘‘(3) TIME OF FILING.—The return required 

4 under this subsection shall be filed not later than— 

5 ‘‘(A) 30 days after the date on which a 

6 court order is issued with respect to the suit or 

7 the date the agreement is entered into, as the 

8 case may be, or 

9 ‘‘(B) the date specified Secretary. 

10 ‘‘(b) STATEMENTS TO BE FURNISHED TO INDIVID11 UALS INVOLVED IN THE SETTLEMENT.—Every person re12 quired to make a return under subsection (a) shall furnish 

13 to each person who is a party to the suit or agreement 

14 a written statement showing— 

15 ‘‘(1) the name of the government or entity, and 

16 ‘‘(2) the information supplied to the Secretary 

17 under subsection (a)(1). 

18 The written statement required under the preceding sen19 tence shall be furnished to the person at the same time 

20 the government or entity provides the Secretary with the 

21 information required under subsection (a). 

22 ‘‘(c) APPROPRIATE OFFICIAL DEFINED.—For pur23 poses of this section, the term ‘appropriate official’ means 

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1 tigation, or inquiry or the person appropriately designated 

2 for purposes of this section.’’. 

3 (2) CONFORMING AMENDMENT.—The table of 

4 sections for subpart B of part III of subchapter A 

5 of chapter 61 is amended by inserting after the item 

6 relating to section 6050V the following new item: 

‘‘Sec. 6050W. Information with respect to certain fines, penalties, and other 

amounts.’’. 

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

8 this section shall apply to amounts paid or incurred on 

9 or after the date of the enactment of this Act, except that 

10 such amendments shall not apply to amounts paid or in11 curred under any binding order or agreement entered into 

12 before such date. Such exception shall not apply to an 

13 order or agreement requiring court approval unless the ap14 proval was obtained before such date. 

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

16 INDIVIDUALS. 

17 (a) IN GENERAL.—Subpart A of part II of sub18 chapter N of chapter 1 is amended by inserting after sec19 tion 877 the following new section: 

20 ‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION. 

21 ‘‘(a) GENERAL RULES.—For purposes of this sub22 title— 

23 ‘‘(1) MARK TO MARKET.—Except as provided in 

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1 patriate to whom this section applies shall be treated 

2 as sold on the day before the expatriation date for 

3 its fair market value. 

4 ‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the 

5 case of any sale under paragraph (1)— 

6 ‘‘(A) notwithstanding any other provision 

7 of this title, any gain arising from such sale 

8 shall be taken into account for the taxable year 

9 of the sale, and 

10 ‘‘(B) any loss arising from such sale shall 

11 be taken into account for the taxable year of 

12 the sale to the extent otherwise provided by this 

13 title, except that section 1091 shall not apply to 

14 any such loss. 

15 Proper adjustment shall be made in the amount of 

16 any gain or loss subsequently realized for gain or 

17 loss taken into account under the preceding sen18 tence. 

19 ‘‘(3) EXCLUSION FOR CERTAIN GAIN.— 

20 ‘‘(A) IN GENERAL.—The amount which, 

21 but for this paragraph, would be includible in 

22 the gross income of any individual by reason of 

23 this section shall be reduced (but not below 

24 zero) by $600,000. For purposes of this para25 graph, allocable expatriation gain taken into acVerDate Aug 31 2005 03:20 Jan 23, 2007 Jkt 059200 PO 00000 Frm 00051 Fmt 6652 Sfmt 6201 E:\BILLS\S349.PCS S349

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1 count under subsection (f)(2) shall be treated in 

2 the same manner as an amount required to be 

3 includible in gross income. 

4 ‘‘(B) COST-OF-LIVING ADJUSTMENT.— 

5 ‘‘(i) IN GENERAL.—In the case of an 

6 expatriation date occurring in any calendar 

7 year after 2007, the $600,000 amount 

8 under subparagraph (A) shall be increased 

9 by an amount equal to— 

10 ‘‘(I) such dollar amount, multi11 plied by 

12 ‘‘(II) the cost-of-living adjust13 ment determined under section 1(f)(3) 

14 for such calendar year, determined by 

15 substituting ‘calendar year 2006’ for 

16 ‘calendar year 1992’ in subparagraph 

17 (B) thereof. 

18 ‘‘(ii) ROUNDING RULES.—If any 

19 amount after adjustment under clause (i) 

20 is not a multiple of $1,000, such amount 

21 shall be rounded to the next lower multiple 

22 of $1,000. 

23 ‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS

24 UNITED STATES CITIZEN.— 


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1 ‘‘(A) IN GENERAL.—If a covered expatriate 

2 elects the application of this paragraph— 

3 ‘‘(i) this section (other than this para4 graph and subsection (i)) shall not apply to 

5 the expatriate, but 

6 ‘‘(ii) in the case of property to which 

7 this section would apply but for such elec8 tion, the expatriate shall be subject to tax 

9 under this title in the same manner as if 

10 the individual were a United States citizen. 

11 ‘‘(B) REQUIREMENTS.—Subparagraph (A) 

12 shall not apply to an individual unless the indi13 vidual— 

14 ‘‘(i) provides security for payment of 

15 tax in such form and manner, and in such 

16 amount, as the Secretary may require, 

17 ‘‘(ii) consents to the waiver of any 

18 right of the individual under any treaty of 

19 the United States which would preclude as20 sessment or collection of any tax which 

21 may be imposed by reason of this para22 graph, and 

23 ‘‘(iii) complies with such other re24 quirements as the Secretary may prescribe. 


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1 ‘‘(C) ELECTION.—An election under sub2 paragraph (A) shall apply to all property to 

3 which this section would apply but for the elec4 tion and, once made, shall be irrevocable. Such 

5 election shall also apply to property the basis of 

6 which is determined in whole or in part by ref7 erence to the property with respect to which the 

8 election was made. 

9 ‘‘(b) ELECTION TO DEFER TAX.— 

10 ‘‘(1) IN GENERAL.—If the taxpayer elects the 

11 application of this subsection with respect to any 

12 property treated as sold by reason of subsection (a), 

13 the payment of the additional tax attributable to 

14 such property shall be postponed until the due date 

15 of the return for the taxable year in which such 

16 property is disposed of (or, in the case of property 

17 disposed of in a transaction in which gain is not rec18 ognized in whole or in part, until such other date as 

19 the Secretary may prescribe). 

20 ‘‘(2) DETERMINATION OF TAX WITH RESPECT

21 TO PROPERTY.—For purposes of paragraph (1), the 

22 additional tax attributable to any property is an 

23 amount which bears the same ratio to the additional 

24 tax imposed by this chapter for the taxable year 

25 solely by reason of subsection (a) as the gain taken 


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1 into account under subsection (a) with respect to 

2 such property bears to the total gain taken into ac3 count under subsection (a) with respect to all prop4 erty to which subsection (a) applies. 

5 ‘‘(3) TERMINATION OF POSTPONEMENT.—No 

6 tax may be postponed under this subsection later 

7 than the due date for the return of tax imposed by 

8 this chapter for the taxable year which includes the 

9 date of death of the expatriate (or, if earlier, the 

10 time that the security provided with respect to the 

11 property fails to meet the requirements of paragraph 

12 (4), unless the taxpayer corrects such failure within 

13 the time specified by the Secretary). 

14 ‘‘(4) SECURITY.— 

15 ‘‘(A) IN GENERAL.—No election may be 

16 made under paragraph (1) with respect to any 

17 property unless adequate security is provided to 

18 the Secretary with respect to such property. 

19 ‘‘(B) ADEQUATE SECURITY.—For purposes 

20 of subparagraph (A), security with respect to 

21 any property shall be treated as adequate secu22 rity if— 

23 ‘‘(i) it is a bond in an amount equal 

24 to the deferred tax amount under para25 graph (2) for the property, or 


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1 ‘‘(ii) the taxpayer otherwise estab2 lishes to the satisfaction of the Secretary 

3 that the security is adequate. 

4 ‘‘(5) WAIVER OF CERTAIN RIGHTS.—No elec5 tion may be made under paragraph (1) unless the 

6 taxpayer consents to the waiver of any right under 

7 any treaty of the United States which would pre8 clude assessment or collection of any tax imposed by 

9 reason of this section. 

10 ‘‘(6) ELECTIONS.—An election under paragraph 

11 (1) shall only apply to property described in the elec12 tion and, once made, is irrevocable. An election may 

13 be made under paragraph (1) with respect to an in14 terest in a trust with respect to which gain is re15 quired to be recognized under subsection (f)(1). 

16 ‘‘(7) INTEREST.—For purposes of section 

17 6601— 

18 ‘‘(A) the last date for the payment of tax 

19 shall be determined without regard to the elec20 tion under this subsection, and 

21 ‘‘(B) section 6621(a)(2) shall be applied by 

22 substituting ‘5 percentage points’ for ‘3 per23 centage points’ in subparagraph (B) thereof. 

24 ‘‘(c) COVERED EXPATRIATE.—For purposes of this 

25 section— 


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1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (2), the term ‘covered expatriate’ means an 

3 expatriate. 

4 ‘‘(2) EXCEPTIONS.—An individual shall not be 

5 treated as a covered expatriate if— 

6 ‘‘(A) the individual— 

7 ‘‘(i) became at birth a citizen of the 

8 United States and a citizen of another 

9 country and, as of the expatriation date, 

10 continues to be a citizen of, and is taxed 

11 as a resident of, such other country, and 

12 ‘‘(ii) has not been a resident of the 

13 United States (as defined in section 

14 7701(b)(1)(A)(ii)) during the 5 taxable 

15 years ending with the taxable year during 

16 which the expatriation date occurs, or 

17 ‘‘(B)(i) the individual’s relinquishment of 

18 United States citizenship occurs before such individual attains age 181 19 ⁄2, and 

20 ‘‘(ii) the individual has been a resident of 

21 the United States (as so defined) for not more 

22 than 5 taxable years before the date of relin23 quishment. 

24 ‘‘(d) EXEMPT PROPERTY; SPECIAL RULES FOR PEN25 SION PLANS.— 


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1 ‘‘(1) EXEMPT PROPERTY.—This section shall 

2 not apply to the following: 

3 ‘‘(A) UNITED STATES REAL PROPERTY IN4 TERESTS.—Any United States real property in5 terest (as defined in section 897(c)(1)), other 

6 than stock of a United States real property 

7 holding corporation which does not, on the day 

8 before the expatriation date, meet the require9 ments of section 897(c)(2). 

10 ‘‘(B) SPECIFIED PROPERTY.—Any prop11 erty or interest in property not described in 

12 subparagraph (A) which the Secretary specifies 

13 in regulations. 

14 ‘‘(2) SPECIAL RULES FOR CERTAIN RETIRE15 MENT PLANS.— 

16 ‘‘(A) IN GENERAL.—If a covered expatriate 

17 holds on the day before the expatriation date 

18 any interest in a retirement plan to which this 

19 paragraph applies— 

20 ‘‘(i) such interest shall not be treated 

21 as sold for purposes of subsection (a)(1), 

22 but 

23 ‘‘(ii) an amount equal to the present 

24 value of the expatriate’s nonforfeitable ac25 crued benefit shall be treated as having 


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1 been received by such individual on such 

2 date as a distribution under the plan. 

3 ‘‘(B) TREATMENT OF SUBSEQUENT DIS4 TRIBUTIONS.—In the case of any distribution 

5 on or after the expatriation date to or on behalf 

6 of the covered expatriate from a plan from 

7 which the expatriate was treated as receiving a 

8 distribution under subparagraph (A), the 

9 amount otherwise includible in gross income by 

10 reason of the subsequent distribution shall be 

11 reduced by the excess of the amount includible 

12 in gross income under subparagraph (A) over 

13 any portion of such amount to which this sub14 paragraph previously applied. 

15 ‘‘(C) TREATMENT OF SUBSEQUENT DIS16 TRIBUTIONS BY PLAN.—For purposes of this 

17 title, a retirement plan to which this paragraph 

18 applies, and any person acting on the plan’s be19 half, shall treat any subsequent distribution de20 scribed in subparagraph (B) in the same man21 ner as such distribution would be treated with22 out regard to this paragraph. 

23 ‘‘(D) APPLICABLE PLANS.—This para24 graph shall apply to— 


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1 ‘‘(i) any qualified retirement plan (as 

2 defined in section 4974(c)), 

3 ‘‘(ii) an eligible deferred compensation 

4 plan (as defined in section 457(b)) of an 

5 eligible employer described in section 

6 457(e)(1)(A), and 

7 ‘‘(iii) to the extent provided in regula8 tions, any foreign pension plan or similar 

9 retirement arrangements or programs. 

10 ‘‘(e) DEFINITIONS.—For purposes of this section— 

11 ‘‘(1) EXPATRIATE.—The term ‘expatriate’ 

12 means— 

13 ‘‘(A) any United States citizen who relin14 quishes citizenship, and 

15 ‘‘(B) any long-term resident of the United 

16 States who— 

17 ‘‘(i) ceases to be a lawful permanent 

18 resident of the United States (within the 

19 meaning of section 7701(b)(6)), or 

20 ‘‘(ii) commences to be treated as a 

21 resident of a foreign country under the 

22 provisions of a tax treaty between the 

23 United States and the foreign country and 

24 who does not waive the benefits of such 


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1 treaty applicable to residents of the foreign 

2 country. 

3 ‘‘(2) EXPATRIATION DATE.—The term ‘expa4 triation date’ means— 

5 ‘‘(A) the date an individual relinquishes 

6 United States citizenship, or 

7 ‘‘(B) in the case of a long-term resident of 

8 the United States, the date of the event de9 scribed in clause (i) or (ii) of paragraph (1)(B). 

10 ‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A 

11 citizen shall be treated as relinquishing United 

12 States citizenship on the earliest of— 

13 ‘‘(A) the date the individual renounces 

14 such individual’s United States nationality be15 fore a diplomatic or consular officer of the 

16 United States pursuant to paragraph (5) of sec17 tion 349(a) of the Immigration and Nationality 

18 Act (8 U.S.C. 1481(a)(5)), 

19 ‘‘(B) the date the individual furnishes to 

20 the United States Department of State a signed 

21 statement of voluntary relinquishment of 

22 United States nationality confirming the per23 formance of an act of expatriation specified in 

24 paragraph (1), (2), (3), or (4) of section 349(a) 


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1 of the Immigration and Nationality Act (8 

2 U.S.C. 1481(a)(1)–(4)), 

3 ‘‘(C) the date the United States Depart4 ment of State issues to the individual a certifi5 cate of loss of nationality, or 

6 ‘‘(D) the date a court of the United States 

7 cancels a naturalized citizen’s certificate of nat8 uralization. 

9 Subparagraph (A) or (B) shall not apply to any indi10 vidual unless the renunciation or voluntary relin11 quishment is subsequently approved by the issuance 

12 to the individual of a certificate of loss of nationality 

13 by the United States Department of State. 

14 ‘‘(4) LONG-TERM RESIDENT.—The term ‘long15 term resident’ has the meaning given to such term 

16 by section 877(e)(2). 

17 ‘‘(f) SPECIAL RULES APPLICABLE TO BENE18 FICIARIES’ INTERESTS IN TRUST.— 

19 ‘‘(1) IN GENERAL.—Except as provided in para20 graph (2), if an individual is determined under para21 graph (3) to hold an interest in a trust on the day 

22 before the expatriation date— 

23 ‘‘(A) the individual shall not be treated as 

24 having sold such interest, 


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1 ‘‘(B) such interest shall be treated as a 

2 separate share in the trust, and 

3 ‘‘(C)(i) such separate share shall be treat4 ed as a separate trust consisting of the assets 

5 allocable to such share, 

6 ‘‘(ii) the separate trust shall be treated as 

7 having sold its assets on the day before the ex8 patriation date for their fair market value and 

9 as having distributed all of its assets to the in10 dividual as of such time, and 

11 ‘‘(iii) the individual shall be treated as hav12 ing recontributed the assets to the separate 

13 trust. 

14 Subsection (a)(2) shall apply to any income, gain, or 

15 loss of the individual arising from a distribution de16 scribed in subparagraph (C)(ii). In determining the 

17 amount of such distribution, proper adjustments 

18 shall be made for liabilities of the trust allocable to 

19 an individual’s share in the trust. 

20 ‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI21 FIED TRUSTS.— 

22 ‘‘(A) IN GENERAL.—If the trust interest 

23 described in paragraph (1) is an interest in a 

24 qualified trust— 


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1 ‘‘(i) paragraph (1) and subsection (a) 

2 shall not apply, and 

3 ‘‘(ii) in addition to any other tax im4 posed by this title, there is hereby imposed 

5 on each distribution with respect to such 

6 interest a tax in the amount determined 

7 under subparagraph (B). 

8 ‘‘(B) AMOUNT OF TAX.—The amount of 

9 tax under subparagraph (A)(ii) shall be equal to 

10 the lesser of— 

11 ‘‘(i) the highest rate of tax imposed by 

12 section 1(e) for the taxable year which in13 cludes the day before the expatriation date, 

14 multiplied by the amount of the distribu15 tion, or 

16 ‘‘(ii) the balance in the deferred tax 

17 account immediately before the distribution 

18 determined without regard to any increases 

19 under subparagraph (C)(ii) after the 30th 

20 day preceding the distribution. 

21 ‘‘(C) DEFERRED TAX ACCOUNT.—For pur22 poses of subparagraph (B)(ii)— 

23 ‘‘(i) OPENING BALANCE.—The open24 ing balance in a deferred tax account with 

25 respect to any trust interest is an amount 


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•S 349 PCS

1 equal to the tax which would have been im2 posed on the allocable expatriation gain 

3 with respect to the trust interest if such 

4 gain had been included in gross income 

5 under subsection (a). 

6 ‘‘(ii) INCREASE FOR INTEREST.—The 

7 balance in the deferred tax account shall 

8 be increased by the amount of interest de9 termined (on the balance in the account at 

10 the time the interest accrues), for periods 

11 after the 90th day after the expatriation 

12 date, by using the rates and method appli13 cable under section 6621 for underpay14 ments of tax for such periods, except that 

15 section 6621(a)(2) shall be applied by sub16 stituting ‘5 percentage points’ for ‘3 per17 centage points’ in subparagraph (B) there18 of. 

19 ‘‘(iii) DECREASE FOR TAXES PRE20 VIOUSLY PAID.—The balance in the tax de21 ferred account shall be reduced— 

22 ‘‘(I) by the amount of taxes im23 posed by subparagraph (A) on any 

24 distribution to the person holding the 

25 trust interest, and 


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1 ‘‘(II) in the case of a person 

2 holding a nonvested interest, to the 

3 extent provided in regulations, by the 

4 amount of taxes imposed by subpara5 graph (A) on distributions from the 

6 trust with respect to nonvested inter7 ests not held by such person. 

8 ‘‘(D) ALLOCABLE EXPATRIATION GAIN.— 

9 For purposes of this paragraph, the allocable 

10 expatriation gain with respect to any bene11 ficiary’s interest in a trust is the amount of 

12 gain which would be allocable to such bene13 ficiary’s vested and nonvested interests in the 

14 trust if the beneficiary held directly all assets 

15 allocable to such interests. 

16 ‘‘(E) TAX DEDUCTED AND WITHHELD.— 

17 ‘‘(i) IN GENERAL.—The tax imposed 

18 by subparagraph (A)(ii) shall be deducted 

19 and withheld by the trustees from the dis20 tribution to which it relates. 

21 ‘‘(ii) EXCEPTION WHERE FAILURE TO

22 WAIVE TREATY RIGHTS.—If an amount 

23 may not be deducted and withheld under 

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1 ing to waive any treaty right with respect 

2 to such distribution— 

3 ‘‘(I) the tax imposed by subpara4 graph (A)(ii) shall be imposed on the 

5 trust and each trustee shall be person6 ally liable for the amount of such tax, 

7 and 

8 ‘‘(II) any other beneficiary of the 

9 trust shall be entitled to recover from 

10 the distributee the amount of such tax 

11 imposed on the other beneficiary. 

12 ‘‘(F) DISPOSITION.—If a trust ceases to be 

13 a qualified trust at any time, a covered expa14 triate disposes of an interest in a qualified 

15 trust, or a covered expatriate holding an inter16 est in a qualified trust dies, then, in lieu of the 

17 tax imposed by subparagraph (A)(ii), there is 

18 hereby imposed a tax equal to the lesser of— 

19 ‘‘(i) the tax determined under para20 graph (1) as if the day before the expatria21 tion date were the date of such cessation, 

22 disposition, or death, whichever is applica23 ble, or 

24 ‘‘(ii) the balance in the tax deferred 

25 account immediately before such date. 


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1 Such tax shall be imposed on the trust and 

2 each trustee shall be personally liable for the 

3 amount of such tax and any other beneficiary 

4 of the trust shall be entitled to recover from the 

5 covered expatriate or the estate the amount of 

6 such tax imposed on the other beneficiary. 

7 ‘‘(G) DEFINITIONS AND SPECIAL RULES.— 

8 For purposes of this paragraph— 

9 ‘‘(i) QUALIFIED TRUST.—The term 

10 ‘qualified trust’ means a trust which is de11 scribed in section 7701(a)(30)(E). 

12 ‘‘(ii) VESTED INTEREST.—The term 

13 ‘vested interest’ means any interest which, 

14 as of the day before the expatriation date, 

15 is vested in the beneficiary. 

16 ‘‘(iii) NONVESTED INTEREST.—The 

17 term ‘nonvested interest’ means, with re18 spect to any beneficiary, any interest in a 

19 trust which is not a vested interest. Such 

20 interest shall be determined by assuming 

21 the maximum exercise of discretion in 

22 favor of the beneficiary and the occurrence 

23 of all contingencies in favor of the bene24 ficiary. 


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1 ‘‘(iv) ADJUSTMENTS.—The Secretary 

2 may provide for such adjustments to the 

3 bases of assets in a trust or a deferred tax 

4 account, and the timing of such adjust5 ments, in order to ensure that gain is 

6 taxed only once. 

7 ‘‘(v) COORDINATION WITH RETIRE8 MENT PLAN RULES.—This subsection shall 

9 not apply to an interest in a trust which 

10 is part of a retirement plan to which sub11 section (d)(2) applies. 

12 ‘‘(3) DETERMINATION OF BENEFICIARIES’ IN13 TEREST IN TRUST.— 

14 ‘‘(A) DETERMINATIONS UNDER PARA15 GRAPH (1).—For purposes of paragraph (1), a 

16 beneficiary’s interest in a trust shall be based 

17 upon all relevant facts and circumstances, in18 cluding the terms of the trust instrument and 

19 any letter of wishes or similar document, histor20 ical patterns of trust distributions, and the ex21 istence of and functions performed by a trust 

22 protector or any similar adviser. 

23 ‘‘(B) OTHER DETERMINATIONS.—For pur24 poses of this section— 


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1 ‘‘(i) CONSTRUCTIVE OWNERSHIP.—If 

2 a beneficiary of a trust is a corporation, 

3 partnership, trust, or estate, the share4 holders, partners, or beneficiaries shall be 

5 deemed to be the trust beneficiaries for 

6 purposes of this section. 

7 ‘‘(ii) TAXPAYER RETURN POSITION.— 

8 A taxpayer shall clearly indicate on its in9 come tax return— 

10 ‘‘(I) the methodology used to de11 termine that taxpayer’s trust interest 

12 under this section, and 

13 ‘‘(II) if the taxpayer knows (or 

14 has reason to know) that any other 

15 beneficiary of such trust is using a 

16 different methodology to determine 

17 such beneficiary’s trust interest under 

18 this section. 

19 ‘‘(g) TERMINATION OF DEFERRALS, ETC.—In the 

20 case of any covered expatriate, notwithstanding any other 

21 provision of this title— 

22 ‘‘(1) any period during which recognition of in23 come or gain is deferred shall terminate on the day 

24 before the expatriation date, and 


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1 ‘‘(2) any extension of time for payment of tax 

2 shall cease to apply on the day before the expatria3 tion date and the unpaid portion of such tax shall 

4 be due and payable at the time and in the manner 

5 prescribed by the Secretary. 

6 ‘‘(h) IMPOSITION OF TENTATIVE TAX.— 

7 ‘‘(1) IN GENERAL.—If an individual is required 

8 to include any amount in gross income under sub9 section (a) for any taxable year, there is hereby im10 posed, immediately before the expatriation date, a 

11 tax in an amount equal to the amount of tax which 

12 would be imposed if the taxable year were a short 

13 taxable year ending on the expatriation date. 

14 ‘‘(2) DUE DATE.—The due date for any tax im15 posed by paragraph (1) shall be the 90th day after 

16 the expatriation date. 

17 ‘‘(3) TREATMENT OF TAX.—Any tax paid under 

18 paragraph (1) shall be treated as a payment of the 

19 tax imposed by this chapter for the taxable year to 

20 which subsection (a) applies. 

21 ‘‘(4) DEFERRAL OF TAX.—The provisions of 

22 subsection (b) shall apply to the tax imposed by this 

23 subsection to the extent attributable to gain includ24 ible in gross income by reason of this section. 


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1 ‘‘(i) SPECIAL LIENS FOR DEFERRED TAX

2 AMOUNTS.— 

3 ‘‘(1) IMPOSITION OF LIEN.— 

4 ‘‘(A) IN GENERAL.—If a covered expatriate 

5 makes an election under subsection (a)(4) or 

6 (b) which results in the deferral of any tax im7 posed by reason of subsection (a), the deferred 

8 amount (including any interest, additional 

9 amount, addition to tax, assessable penalty, and 

10 costs attributable to the deferred amount) shall 

11 be a lien in favor of the United States on all 

12 property of the expatriate located in the United 

13 States (without regard to whether this section 

14 applies to the property). 

15 ‘‘(B) DEFERRED AMOUNT.—For purposes 

16 of this subsection, the deferred amount is the 

17 amount of the increase in the covered expatri18 ate’s income tax which, but for the election 

19 under subsection (a)(4) or (b), would have oc20 curred by reason of this section for the taxable 

21 year including the expatriation date. 

22 ‘‘(2) PERIOD OF LIEN.—The lien imposed by 

23 this subsection shall arise on the expatriation date 

24 and continue until— 


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1 ‘‘(A) the liability for tax by reason of this 

2 section is satisfied or has become unenforceable 

3 by reason of lapse of time, or 

4 ‘‘(B) it is established to the satisfaction of 

5 the Secretary that no further tax liability may 

6 arise by reason of this section. 

7 ‘‘(3) CERTAIN RULES APPLY.—The rules set 

8 forth in paragraphs (1), (3), and (4) of section 

9 6324A(d) shall apply with respect to the lien im10 posed by this subsection as if it were a lien imposed 

11 by section 6324A. 

12 ‘‘(j) REGULATIONS.—The Secretary shall prescribe 

13 such regulations as may be necessary or appropriate to 

14 carry out the purposes of this section.’’. 

15 (b) INCLUSION IN INCOME OF GIFTS AND BEQUESTS

16 RECEIVED BY UNITED STATES CITIZENS AND RESIDENTS

17 FROM EXPATRIATES.—Section 102 (relating to gifts, etc. 

18 not included in gross income) is amended by adding at 

19 the end the following new subsection: 

20 ‘‘(d) GIFTS AND INHERITANCES FROM COVERED EX21 PATRIATES.— 

22 ‘‘(1) TREATMENT OF GIFTS AND INHERIT23 ANCES.— 

24 ‘‘(A) IN GENERAL.—Subsection (a) shall 

25 not exclude from gross income the value of any 


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1 property acquired by gift, bequest, devise, or in2 heritance from a covered expatriate after the 

3 expatriation date. 

4 ‘‘(B) DETERMINATION OF BASIS.—Not5 withstanding sections 1015 or 1022, the basis 

6 of any property described in subparagraph (A) 

7 in the hands of the donee or the person acquir8 ing such property from the decedent shall be 

9 equal to the fair market value of the property 

10 at the time of the gift, bequest, devise, or inher11 itance. 

12 ‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE

13 SUBJECT TO ESTATE OR GIFT TAX.—Paragraph (1) 

14 shall not apply to any property if either— 

15 ‘‘(A) the gift, bequest, devise, or inherit16 ance is— 

17 ‘‘(i) shown on a timely filed return of 

18 tax imposed by chapter 12 as a taxable gift 

19 by the covered expatriate, or 

20 ‘‘(ii) included in the gross estate of 

21 the covered expatriate for purposes of 

22 chapter 11 and shown on a timely filed re23 turn of tax imposed by chapter 11 of the 

24 estate of the covered expatriate, or 


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1 ‘‘(B) no such return was timely filed but 

2 no such return would have been required to be 

3 filed even if the covered expatriate were a cit4 izen or long-term resident of the United States. 

5 ‘‘(3) DEFINITIONS.—For purposes of this sub6 section, any term used in this subsection which is 

7 also used in section 877A shall have the same mean8 ing as when used in section 877A.’’. 

9 (c) DEFINITION OF TERMINATION OF UNITED

10 STATES CITIZENSHIP.—Section 7701(a) is amended by 

11 adding at the end the following new paragraph: 

12 ‘‘(50) TERMINATION OF UNITED STATES CITI13 ZENSHIP.— 

14 ‘‘(A) IN GENERAL.—An individual shall 

15 not cease to be treated as a United States cit16 izen before the date on which the individual’s 

17 citizenship is treated as relinquished under sec18 tion 877A(e)(3). 

19 ‘‘(B) DUAL CITIZENS.—Under regulations 

20 prescribed by the Secretary, subparagraph (A) 

21 shall not apply to an individual who became at 

22 birth a citizen of the United States and a cit23 izen of another country.’’. 

24 (d) INELIGIBILITY FOR VISA OR ADMISSION TO

25 UNITED STATES.— 


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1 (1) IN GENERAL.—Section 212(a)(10)(E) of the 

2 Immigration and Nationality Act (8 U.S.C. 

3 1182(a)(10)(E)) is amended to read as follows: 

4 ‘‘(E) FORMER CITIZENS NOT IN COMPLI5 ANCE WITH EXPATRIATION REVENUE PROVI6 SIONS.—Any alien who is a former citizen of 

7 the United States who relinquishes United 

8 States citizenship (within the meaning of sec9 tion 877A(e)(3) of the Internal Revenue Code 

10 of 1986) and who is not in compliance with sec11 tion 877A of such Code (relating to expatria12 tion) is inadmissible.’’. 

13 (2) AVAILABILITY OF INFORMATION.— 

14 (A) IN GENERAL.—Section 6103(l) (relat15 ing to disclosure of returns and return informa16 tion for purposes other than tax administration) 

17 is amended by adding at the end the following 

18 new paragraph: 

19 ‘‘(21) DISCLOSURE TO DENY VISA OR ADMIS20 SION TO CERTAIN EXPATRIATES.—Upon written re21 quest of the Attorney General or the Attorney Gen22 eral’s delegate, the Secretary shall disclose whether 

23 an individual is in compliance with section 877A 

24 (and if not in compliance, any items of noncompli25 ance) to officers and employees of the Federal agenVerDate Aug 31 2005 03:20 Jan 23, 2007 Jkt 059200 PO 00000 Frm 00076 Fmt 6652 Sfmt 6201 E:\BILLS\S349.PCS S349

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1 cy responsible for administering section 

2 212(a)(10)(E) of the Immigration and Nationality 

3 Act solely for the purpose of, and to the extent nec4 essary in, administering such section 

5 212(a)(10)(E).’’. 

6 (B) SAFEGUARDS.—Section 6103(p)(4) 

7 (relating to safeguards) is amended by striking 

8 ‘‘or (20)’’ each place it appears and inserting 

9 ‘‘(20), or (21)’’. 

10 (3) EFFECTIVE DATES.—The amendments 

11 made by this subsection shall apply to individuals 

12 who relinquish United States citizenship on or after 

13 the date of the enactment of this Act. 

14 (e) CONFORMING AMENDMENTS.— 

15 (1) Section 877 is amended by adding at the 

16 end the following new subsection: 

17 ‘‘(h) APPLICATION.—This section shall not apply to 

18 an expatriate (as defined in section 877A(e)) whose expa19 triation date (as so defined) occurs on or after the date 

20 of the enactment of this subsection.’’. 

21 (2) Section 2107 is amended by adding at the 

22 end the following new subsection: 

23 ‘‘(f) APPLICATION.—This section shall not apply to 

24 any expatriate subject to section 877A.’’. 


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1 (3) Section 2501(a)(3) is amended by adding at 

2 the end the following new subparagraph: 

3 ‘‘(C) APPLICATION.—This paragraph shall 

4 not apply to any expatriate subject to section 

5 877A.’’. 

6 (4) Section 6039G(a) is amended by inserting 

7 ‘‘or 877A’’ after ‘‘section 877(b)’’. 

8 (5) The second sentence of section 6039G(d) is 

9 amended by inserting ‘‘or who relinquishes United 

10 States citizenship (within the meaning of section 

11 877A(e)(3))’’ after ‘‘section 877(a))’’. 

12 (f) CLERICAL AMENDMENT.—The table of sections 

13 for subpart A of part II of subchapter N of chapter 1 

14 is amended by inserting after the item relating to section 

15 877 the following new item: 

‘‘Sec. 877A. Tax responsibilities of expatriation.’’. 

16 (g) EFFECTIVE DATE.— 

17 (1) IN GENERAL.—Except as provided in this 

18 subsection, the amendments made by this section 

19 shall apply to expatriates (within the meaning of 

20 section 877A(e) of the Internal Revenue Code of 

21 1986, as added by this section) whose expatriation 

22 date (as so defined) occurs on or after the date of 

23 the enactment of this Act. 

24 (2) GIFTS AND BEQUESTS.—Section 102(d) of 

25 the Internal Revenue Code of 1986 (as added by 


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1 subsection (b)) shall apply to gifts and bequests re2 ceived on or after the date of the enactment of this 

3 Act, from an individual or the estate of an individual 

4 whose expatriation date (as so defined) occurs after 

5 such date. 

6 (3) DUE DATE FOR TENTATIVE TAX.—The due 

7 date under section 877A(h)(2) of the Internal Rev8 enue Code of 1986, as added by this section, shall 

9 in no event occur before the 90th day after the date 

10 of the enactment of this Act. 

11 SEC. 206. LIMITATION ON ANNUAL AMOUNTS WHICH MAY 

12 BE DEFERRED UNDER NONQUALIFIED DE13 FERRED COMPENSATION ARRANGEMENTS. 

14 (a) IN GENERAL.—Section 409A(a) of the Internal 

15 Revenue Code of 1986 (relating to inclusion of gross in16 come under nonqualified deferred compensation plans) is 

17 amended— 

18 (1) by striking ‘‘and (4)’’ in subclause (I) of 

19 paragraph (1)(A)(i) and inserting ‘‘(4), and (5)’’, 

20 and 

21 (2) by adding at the end the following new 

22 paragraph: 

23 ‘‘(5) ANNUAL LIMITATION ON AGGREGATE DE24 FERRED AMOUNTS.— 


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1 ‘‘(A) LIMITATION.—The requirements of 

2 this paragraph are met if the plan provides that 

3 the aggregate amount of compensation which is 

4 deferred for any taxable year with respect to a 

5 participant under the plan may not exceed the 

6 applicable dollar amount for the taxable year. 

7 ‘‘(B) INCLUSION OF FUTURE EARNINGS.— 

8 If an amount is includible under paragraph (1) 

9 in the gross income of a participant for any 

10 taxable year by reason of any failure to meet 

11 the requirements of this paragraph, any income 

12 (whether actual or notional) for any subsequent 

13 taxable year shall be included in gross income 

14 under paragraph (1)(A) in such subsequent tax15 able year to the extent such income— 

16 ‘‘(i) is attributable to compensation 

17 (or income attributable to such compensa18 tion) required to be included in gross in19 come by reason of such failure (including 

20 by reason of this subparagraph), and 

21 ‘‘(ii) is not subject to a substantial 

22 risk of forfeiture and has not been pre23 viously included in gross income. 

24 ‘‘(C) AGGREGATION RULE.—For purposes 

25 of this paragraph, all nonqualified deferred 


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1 compensation plans maintained by all employers 

2 treated as a single employer under subsection 

3 (d)(6) shall be treated as 1 plan. 

4 ‘‘(D) APPLICABLE DOLLAR AMOUNT.—For 

5 purposes of this paragraph— 

6 ‘‘(i) IN GENERAL.—The term ‘applica7 ble dollar amount’ means, with respect to 

8 any participant, the lesser of— 

9 ‘‘(I) the average annual com10 pensation which was payable during 

11 the base period to the participant by 

12 the employer maintaining the non13 qualified deferred compensation plan 

14 (or any predecessor of the employer) 

15 and which was includible in the par16 ticipant’s gross income for taxable 

17 years in the base period, or 

18 ‘‘(II) $1,000,000. 

19 ‘‘(ii) BASE PERIOD.— 

20 ‘‘(I) IN GENERAL.—The term 

21 ‘base period’ means, with respect to 

22 any computation year, the 5-taxable 

23 year period ending with the taxable 

24 year preceding the computation year. 


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1 ‘‘(II) ELECTIONS MADE BEFORE

2 COMPUTATION YEAR.—If, before the 

3 beginning of the computation year, an 

4 election described in paragraph (4)(B) 

5 is made by the participant to have 

6 compensation for services performed 

7 in the computation year deferred 

8 under a nonqualified deferred com9 pensation plan, the base period shall 

10 be the 5-taxable year period ending 

11 with the taxable year preceding the 

12 taxable year in which the election is 

13 made. 

14 ‘‘(III) COMPUTATION YEAR.—For 

15 purposes of this clause, the term 

16 ‘computation year’ means any taxable 

17 year of the participant for which the 

18 limitation under subparagraph (A) is 

19 being determined. 

20 ‘‘(IV) SPECIAL RULE FOR EM21 PLOYEES OF LESS THAN 5 YEARS.—If 

22 a participant did not perform services 

23 for the employer maintaining the non24 qualified deferred compensation plan 

25 (or any predecessor of the employer) 


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1 during the entire 5-taxable year pe2 riod referred to in subparagraph (A) 

3 or (B), only the portion of such period 

4 during which the participant per5 formed such services shall be taken 

6 into account.’’. 

7 (b) EFFECTIVE DATE.— 

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

9 this section shall apply to taxable years beginning 

10 after December 31, 2006, except that— 

11 (A) the amendments shall only apply to 

12 amounts deferred after December 31, 2006 

13 (and to earnings on such amounts), and 

14 (B) taxable years beginning on or before 

15 December 31, 2006, shall be taken into account 

16 in determining the average annual compensa17 tion of a participant during any base period for 

18 purposes of section 409A(a)(5)(D) of the Inter19 nal Revenue Code of 1986 (as added by such 

20 amendments). 

21 (2) GUIDANCE RELATING TO CERTAIN EXISTING

22 ARRANGEMENTS.—Not later than 60 days after the 

23 date of the enactment of this Act, the Secretary of 

24 the Treasury shall issue guidance providing a limited 

25 period during which a nonqualified deferred comVerDate Aug 31 2005 03:20 Jan 23, 2007 Jkt 059200 PO 00000 Frm 00083 Fmt 6652 Sfmt 6201 E:\BILLS\S349.PCS S349

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1 pensation plan adopted before December 31, 2006, 

2 may, without violating the requirements of section 

3 409A(a) of such Code, be amended— 

4 (A) to provide that a participant may, no 

5 later than December 31, 2007, cancel or modify 

6 an outstanding deferral election with regard to 

7 all or a portion of amounts deferred after De8 cember 31, 2006, to the extent necessary for 

9 the plan to meet the requirements of section 

10 409A(a)(5) of such Code (as added by the 

11 amendments made by this section), but only if 

12 amounts subject to the cancellation or modifica13 tion are, to the extent not previously included 

14 in gross income, includible in income of the par15 ticipant when no longer subject to substantial 

16 risk of forfeiture, and 

17 (B) to conform to the requirements of sec18 tion 409A(a)(5) of such Code (as added by the 

19 amendments made by this section) with regard 

20 to amounts deferred after December 31, 2006. 

21 SEC. 207. INCREASE IN CRIMINAL MONETARY PENALTY 

22 LIMITATION FOR THE UNDERPAYMENT OR 

23 OVERPAYMENT OF TAX DUE TO FRAUD. 

24 (a) IN GENERAL.—Section 7206 (relating to fraud 

25 and false statements) is amended— 


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1 (1) by striking ‘‘Any person who—’’ and insert2 ing ‘‘(a) IN GENERAL.—’’, and 

3 (2) by adding at the end the following new sub4 section: 

5 ‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN6 DERPAYMENT OR OVERPAYMENT OF TAX DUE TO

7 FRAUD.—If any portion of any underpayment (as defined 

8 in section 6664(a)) or overpayment (as defined in section 

9 6401(a)) of tax required to be shown on a return is attrib10 utable to fraudulent action described in subsection (a), the 

11 applicable dollar amount under subsection (a) shall in no 

12 event be less than an amount equal to such portion. A 

13 rule similar to the rule under section 6663(b) shall apply 

14 for purposes of determining the portion so attributable.’’. 

15 (b) INCREASE IN PENALTIES.— 

16 (1) ATTEMPT TO EVADE OR DEFEAT TAX.— 

17 Section 7201 is amended— 

18 (A) by striking ‘‘$100,000’’ and inserting 

19 ‘‘$500,000’’, 

20 (B) by striking ‘‘$500,000’’ and inserting 

21 ‘‘$1,000,000’’, and 

22 (C) by striking ‘‘5 years’’ and inserting 

23 ‘‘10 years’’. 


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1 (2) WILLFUL FAILURE TO FILE RETURN, SUP2 PLY INFORMATION, OR PAY TAX.—Section 7203 is 

3 amended— 

4 (A) in the first sentence— 

5 (i) by striking ‘‘Any person’’ and in6 serting the following: 

7 ‘‘(a) IN GENERAL.—Any person’’, and 

8 (ii) by striking ‘‘$25,000’’ and insert9 ing ‘‘$50,000’’, 

10 (B) in the third sentence, by striking ‘‘sec11 tion’’ and inserting ‘‘subsection’’, and 

12 (C) by adding at the end the following new 

13 subsection: 

14 ‘‘(b) AGGRAVATED FAILURE TO FILE.— 

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

16 described in paragraph (2), the first sentence of sub17 section (a) shall be applied by substituting— 

18 ‘‘(A) ‘felony’ for ‘misdemeanor’, 

19 ‘‘(B) ‘$500,000 ($1,000,000’ for ‘$25,000 

20 ($100,000’, and 

21 ‘‘(C) ‘10 years’ for ‘1 year’.’’. 

22 ‘‘(2) FAILURE DESCRIBED.—A failure described 

23 in this paragraph is a failure to make a return de24 scribed in subsection (a) for a period of 3 or more 


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1 consecutive taxable years if the aggregate tax liabil2 ity for such period is not less than $100,000.’’. 

3 (3) FRAUD AND FALSE STATEMENTS.—Section 

4 7206(a) (as redesignated by subsection (a)) is 

5 amended— 

6 (A) by striking ‘‘$100,000’’ and inserting 

7 ‘‘$500,000’’, 

8 (B) by striking ‘‘$500,000’’ and inserting 

9 ‘‘$1,000,000’’, and 

10 (C) by striking ‘‘3 years’’ and inserting ‘‘5 

11 years’’. 

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

13 this section shall apply to actions, and failures to act, oc14 curring after the date of the enactment of this Act. 

15 SEC. 208. DOUBLING OF CERTAIN PENALTIES, FINES, AND 

16 INTEREST ON UNDERPAYMENTS RELATED TO 

17 CERTAIN OFFSHORE FINANCIAL ARRANGE18 MENTS. 

19 (a) DETERMINATION OF PENALTY.— 

20 (1) IN GENERAL.—Notwithstanding any other 

21 provision of law, in the case of an applicable tax22 payer— 

23 (A) the determination as to whether any 

24 interest or applicable penalty is to be imposed 

25 with respect to any arrangement described in 


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1 paragraph (2), or to any underpayment of Fed2 eral income tax attributable to items arising in 

3 connection with any such arrangement, shall be 

4 made without regard to the rules of subsections 

5 (b), (c), and (d) of section 6664 of the Internal 

6 Revenue Code of 1986, and 

7 (B) if any such interest or applicable pen8 alty is imposed, the amount of such interest or 

9 penalty shall be equal to twice that determined 

10 without regard to this section. 

11 (2) APPLICABLE TAXPAYER.—For purposes of 

12 this subsection— 

13 (A) IN GENERAL.—The term ‘‘applicable 

14 taxpayer’’ means a taxpayer which— 

15 (i) has underreported its United 

16 States income tax liability with respect to 

17 any item which directly or indirectly in18 volves— 

19 (I) any financial arrangement 

20 which in any manner relies on the use 

21 of offshore payment mechanisms (in22 cluding credit, debit, or charge cards) 

23 issued by banks or other entities in 

24 foreign jurisdictions, or 


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1 (II) any offshore financial ar2 rangement (including any arrange3 ment with foreign banks, financial in4 stitutions, corporations, partnerships, 

5 trusts, or other entities), and 

6 (ii) has neither signed a closing agree7 ment pursuant to the Voluntary Offshore 

8 Compliance Initiative established by the 

9 Department of the Treasury under Rev10 enue Procedure 2003–11 nor voluntarily 

11 disclosed its participation in such arrange12 ment by notifying the Internal Revenue 

13 Service of such arrangement prior to the 

14 issue being raised by the Internal Revenue 

15 Service during an examination. 

16 (B) AUTHORITY TO WAIVE.—The Sec17 retary of the Treasury or the Secretary’s dele18 gate may waive the application of paragraph (1) 

19 to any taxpayer if the Secretary or the Sec20 retary’s delegate determines that the use of 

21 such offshore payment mechanisms is incidental 

22 to the transaction and, in addition, in the case 

23 of a trade or business, such use is conducted in 

24 the ordinary course of the type of trade or busi25 ness of the taxpayer. 


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1 (C) ISSUES RAISED.—For purposes of sub2 paragraph (A)(ii), an item shall be treated as 

3 an issue raised during an examination if the in4 dividual examining the return— 

5 (i) communicates to the taxpayer 

6 knowledge about the specific item, or 

7 (ii) has made a request to the tax8 payer for information and the taxpayer 

9 could not make a complete response to 

10 that request without giving the examiner 

11 knowledge of the specific item. 

12 (b) APPLICABLE PENALTY.—For purposes of this 

13 section, the term ‘‘applicable penalty’’ means any penalty, 

14 addition to tax, or fine imposed under chapter 68 of the 

15 Internal Revenue Code of 1986. 

16 (c) EFFECTIVE DATE.—The provisions of this section 

17 shall apply to interest, penalties, additions to tax, and 

18 fines with respect to any taxable year if, as of the date 

19 of the enactment of this Act, the assessment of any tax, 

20 penalty, or interest with respect to such taxable year is 

21 not prevented by the operation of any law or rule of law. 

22 SEC. 209. INCREASE IN PENALTY FOR BAD CHECKS AND 

23 MONEY ORDERS. 

24 (a) IN GENERAL.—Section 6657 (relating to bad 

25 checks) is amended— 


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1 (1) by striking ‘‘$750’’ and inserting ‘‘$1,250’’, 

2 and 

3 (2) by striking ‘‘$15’’ and inserting ‘‘$25’’. 

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

5 this section apply to checks or money orders received after 

6 the date of the enactment of this Act. 

7 SEC. 210. TREATMENT OF CONTINGENT PAYMENT CON8 VERTIBLE DEBT INSTRUMENTS. 

9 (a) IN GENERAL.—Section 1275(d) (relating to regu10 lation authority) is amended— 

11 (1) by striking ‘‘The Secretary’’ and inserting 

12 the following: 

13 ‘‘(1) IN GENERAL.—The Secretary’’, and 

14 (2) by adding at the end the following new 

15 paragraph: 

16 ‘‘(2) TREATMENT OF CONTINGENT PAYMENT

17 CONVERTIBLE DEBT.— 

18 ‘‘(A) IN GENERAL.—In the case of a debt 

19 instrument which— 

20 ‘‘(i) is convertible into stock of the 

21 issuing corporation, into stock or debt of a 

22 related party (within the meaning of sec23 tion 267(b) or 707(b)(1)), or into cash or 

24 other property in an amount equal to the 


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1 approximate value of such stock or debt, 

2 and 

3 ‘‘(ii) provides for contingent pay4 ments, 

5 any regulations which require original issue dis6 count to be determined by reference to the com7 parable yield of a noncontingent fixed-rate debt 

8 instrument shall be applied as if the regulations 

9 require that such comparable yield be deter10 mined by reference to a noncontingent fixed11 rate debt instrument which is convertible into 

12 stock. 

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

14 subparagraph (A), the comparable yield shall be 

15 determined without taking into account the 

16 yield resulting from the conversion of a debt in17 strument into stock.’’. 

18 (b) CROSS REFERENCE.—Section 163(e)(6) (relating 

19 to cross references) is amended by adding at the end the 

20 following: 

21 ‘‘For the treatment of contingent payment 

22 convertible debt, see section 1275(d)(2).’’. 

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

24 this section shall apply to debt instruments issued on or 

25 after the date of the enactment of this Act. 


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1 SEC. 211. EXTENSION OF IRS USER FEES. 

2 Subsection (c) of section 7528 (relating to Internal 

3 Revenue Service user fees) is amended by striking ‘‘Sep4 tember 30, 2014’’ and inserting ‘‘September 30, 2016’’. 

5 SEC. 212. MODIFICATION OF COLLECTION DUE PROCESS 

6 PROCEDURES FOR EMPLOYMENT TAX LI7 ABILITIES. 

8 (a) IN GENERAL.—Section 6330(f) (relating to jeop9 ardy and State refund collection) is amended— 

10 (1) by striking ‘‘; or’’ at the end of paragraph 

11 (1) and inserting a comma, 

12 (2) by adding ‘‘or’’ at the end of paragraph (2), 

13 and 

14 (3) by inserting after paragraph (2) the fol15 lowing new paragraph: 

16 ‘‘(3) the Secretary has served a levy in connec17 tion with the collection of taxes under chapter 21, 

18 22, 23, or 24,’’. 

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

20 this section shall apply to levies issued on or after the date 

21 that is 120 days after the date of the enactment of this 

22 Act. 

23 SEC. 213. MODIFICATIONS TO WHISTLEBLOWER REFORMS. 

24 (a) MODIFICATION OF TAX THRESHOLD FOR

25 AWARDS.—Subparagraph (B) of section 7623(b)(5), as 

26 added by the Tax Relief and Health Care Act of 2006, 


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1 is amended by striking ‘‘$2,000,000’’ and inserting 

2 ‘‘$20,000’’. 

3 (b) WHISTLEBLOWER OFFICE.— 

4 (1) IN GENERAL.—Section 7623 is amended by 

5 adding at the end the following new subsections: 

6 ‘‘(c) WHISTLEBLOWER OFFICE.— 

7 ‘‘(1) IN GENERAL.—There is established in the 

8 Internal Revenue Service an office to be known as 

9 the ‘Whistleblower Office’ which— 

10 ‘‘(A) shall at all times operate at the direc11 tion of the Commissioner and coordinate and 

12 consult with other divisions in the Internal Rev13 enue Service as directed by the Commissioner, 

14 ‘‘(B) shall analyze information received 

15 from any individual described in subsection (b) 

16 and either investigate the matter itself or assign 

17 it to the appropriate Internal Revenue Service 

18 office, 

19 ‘‘(C) shall monitor any action taken with 

20 respect to such matter, 

21 ‘‘(D) shall inform such individual that it 

22 has accepted the individual’s information for 

23 further review, 


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1 ‘‘(E) may require such individual and any 

2 legal representative of such individual to not 

3 disclose any information so provided, 

4 ‘‘(F) in its sole discretion, may ask for ad5 ditional assistance from such individual or any 

6 legal representative of such individual, and 

7 ‘‘(G) shall determine the amount to be 

8 awarded to such individual under subsection 

9 (b). 

10 ‘‘(2) FUNDING FOR OFFICE.—There is author11 ized to be appropriated $10,000,000 for each fiscal 

12 year for the Whistleblower Office. These funds shall 

13 be used to maintain the Whistleblower Office and 

14 also to reimburse other Internal Revenue Service of15 fices for related costs, such as costs of investigation 

16 and collection. 

17 ‘‘(3) REQUEST FOR ASSISTANCE.— 

18 ‘‘(A) IN GENERAL.—Any assistance re19 quested under paragraph (1)(F) shall be under 

20 the direction and control of the Whistleblower 

21 Office or the office assigned to investigate the 

22 matter under subparagraph (A). No individual 

23 or legal representative whose assistance is so re24 quested may by reason of such request repVerDate Aug 31 2005 03:20 Jan 23, 2007 Jkt 059200 PO 00000 Frm 00095 Fmt 6652 Sfmt 6201 E:\BILLS\S349.PCS S349

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1 resent himself or herself as an employee of the 

2 Federal Government. 

3 ‘‘(B) FUNDING OF ASSISTANCE.—From 

4 the amounts available for expenditure under 

5 subsection (b), the Whistleblower Office may, 

6 with the agreement of the individual described 

7 in subsection (b), reimburse the costs incurred 

8 by any legal representative of such individual in 

9 providing assistance described in subparagraph 

10 (A). 

11 ‘‘(d) REPORTS.—The Secretary shall each year con12 duct a study and report to Congress on the use of this 

13 section, including— 

14 ‘‘(1) an analysis of the use of this section dur15 ing the preceding year and the results of such use, 

16 and 

17 ‘‘(2) any legislative or administrative rec18 ommendations regarding the provisions of this sec19 tion and its application.’’. 

20 (2) CONFORMING AMENDMENT.—Section 406 

21 of division A of the Tax Relief and Health Care Act 

22 of 2006 is amended by striking subsections (b) and 

23 (c). 

24 (3) REPORT ON IMPLEMENTATION.—Not later 

25 than 6 months after the date of the enactment of 


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1 this Act, the Secretary of the Treasury shall submit 

2 to Congress a report on the establishment and oper3 ation of the Whistleblower Office under section 

4 7623(c) of the Internal Revenue Code of 1986. 

5 (c) PUBLICITY OF AWARD APPEALS.—Paragraph (4) 

6 of section 7623(b), as added by the Tax Relief and Health 

7 Care Act of 2006, is amended to read as follows: 

8 ‘‘(4) APPEAL OF AWARD DETERMINATION.— 

9 ‘‘(A) IN GENERAL.—Any determination re10 garding an award under paragraph (1), (2), or 

11 (3) may, within 30 days of such determination, 

12 be appealed to the Tax Court (and the Tax 

13 Court shall have jurisdiction with respect to 

14 such matter). 

15 ‘‘(B) PUBLICITY OF APPEALS.—Notwith16 standing sections 7458 and 7461, the Tax 

17 Court may, in order to preserve the anonymity, 

18 privacy, or confidentiality of any person under 

19 this subsection, provide by rules adopted under 

20 section 7453 that portions of filings, hearings, 

21 testimony, evidence, and reports in connection 

22 with proceedings under this subsection may be 

23 closed to the public or to inspection by the pub24 lic.’’. 

25 (d) EFFECTIVE DATE.— 


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1 (1) IN GENERAL.—Except as provided in para2 graph (2), the amendments made by this section 

3 shall apply to information provided on or after the 

4 date of the enactment of this Act. 

5 (2) PUBLICITY OF AWARD APPEALS.—The 

6 amendment made by subsection (c) shall take effect 

7 as if included in the amendments made by section 

8 406 of the Tax Relief and Health Care Act of 2006. 

9 SEC. 214. MODIFICATIONS OF DEFINITION OF EMPLOYEES 

10 COVERED BY DENIAL OF DEDUCTION FOR EX11 CESSIVE EMPLOYEE REMUNERATION. 

12 (a) IN GENERAL.—Paragraph (3) of section 162(m) 

13 is amended to read as follows: 

14 ‘‘(3) COVERED EMPLOYEE.—For purposes of 

15 this subsection, the term ‘covered employee’ means, 

16 with respect to any taxpayer for any taxable year, an 

17 individual who— 

18 ‘‘(A) was the chief executive officer of the 

19 taxpayer, or an individual acting in such a ca20 pacity, at any time during the taxable year, 

21 ‘‘(B) is 1 of the 4 highest compensated of22 ficers of the taxpayer for the taxable year 

23 (other than the individual described in subpara24 graph (A)), or 


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1 ‘‘(C) was a covered employee of the tax2 payer (or any predecessor) for any preceding 

3 taxable year beginning after December 31, 

4 2006. 

5 In the case of an individual who was a covered em6 ployee for any taxable year beginning after Decem7 ber 31, 2006, the term ‘covered employee’ shall in8 clude a beneficiary of such employee with respect to 

9 any remuneration for services performed by such 

10 employee as a covered employee (whether or not 

11 such services are performed during the taxable year 

12 in which the remuneration is paid).’’. 

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

14 this section shall apply to taxable years beginning after 

15 December 31, 2006. 


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Calendar No. 10 

110TH CONGRESS 

1ST SESSION S. 349 

[Report No. 110

–1] 

A BILL 

To amend the Internal Revenue Code of 1986 to 

purposes. and employees of small businesses, and for other provide additional tax incentives to employers 

JANUARY 22, 2007 

Read twice and placed on the calendar 


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