IB 

Union Calendar No. 317 

108TH CONGRESS 

2D SESSION H. R. 4520 

[Report No. 108–548, Part I] 

To amend the Internal Revenue Code of 1986 to remove impediments in 

such Code and make our manufacturing, service, and high-technology 

businesses and workers more competitive and productive both at home 

and abroad. 

IN THE HOUSE OF REPRESENTATIVES 

JUNE 4, 2004 

Mr. THOMAS (for himself, Mr. CRANE, Mr. SHAW, Mrs. JOHNSON of Connecticut, Mr. HOUGHTON, Mr. HERGER, Mr. MCCRERY, Mr. CAMP, Mr. 

RAMSTAD, Mr. SAM JOHNSON of Texas, Ms. DUNN, Mr. COLLINS, Mr. 

PORTMAN, Mr. ENGLISH, Mr. HAYWORTH, Mr. HULSHOF, Mr. MCINNIS, 

Mr. LEWIS of Kentucky, Mr. FOLEY, Mr. BRADY of Texas, and Mr. 

RYAN of Wisconsin) introduced the following bill; which was referred to 

the Committee on Ways and Means, and in addition to the Committee 

on Agriculture, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned 

JUNE 16, 2004 

Additional sponsors: Mr. FEENEY, Mr. SESSIONS, Mr. BURR, Ms. HARRIS, 

Mrs. BLACKBURN, Mr. CANTOR, Mr. BROWN of South Carolina, Mr. 

JENKINS, Mr. ISAKSON, Mr. WAMP, Mr. WHITFIELD, Mr. DUNCAN, Mr. 

ROGERS of Kentucky, Mr. KINGSTON, Mr. SMITH of Texas, Mr. 

NEUGEBAUER, Mr. NETHERCUTT, Mr. CARTER, Ms. GRANGER, and Mr. 

CULBERSON

JUNE 16, 2004 

Reported from the Committee on Ways and Means with an amendment 

[Strike out all after the enacting clause and insert the part printed in italic] 

JUNE 16, 2004 

Referral to the Committee on Agriculture extended for a period ending not 

later than June 16, 2004 
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JUNE 16, 2004 

The Committee on Agriculture discharged; committed to the Committee of the 

Whole House on the State of the Union and ordered to be printed 

[For text of introduced bill, see copy of bill as introduced on June 4, 2004] 

A BILL 

To amend the Internal Revenue Code of 1986 to remove 

impediments in such Code and make our manufacturing, 

service, and high-technology businesses and workers more 

competitive and productive both at home and abroad. 

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; ETC. 

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

5 ‘‘American Jobs Creation Act of 2004’’. 

6 (b) AMENDMENT OF 1986 CODE.—Except as otherwise 

7 expressly provided, whenever in this Act an amendment or 

8 repeal is expressed in terms of an amendment to, or repeal 

9 of, a section or other provision, the reference shall be consid10 ered to be made to a section or other provision of the Inter11 nal Revenue Code of 1986. 

12 (c) TABLE OF CONTENTS.—The table of contents of this 

13 Act is as follows: 

Sec. 1. Short title; etc. 

TITLE I—END SANCTIONS AND REDUCE CORPORATE TAX RATES 

FOR DOMESTIC MANUFACTURING AND SMALL CORPORATIONS 

Sec. 101. Repeal of exclusion for extraterritorial income. 
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Sec. 102. Reduced corporate income tax rate for domestic production activities income. 

Sec. 103. Reduced corporate income tax rate for small corporations. 

TITLE II—JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, 

SMALL BUSINESSES, AND FARMERS 

Subtitle A—Small Business Expensing 

Sec. 201. 2-year extension of increased expensing for small business. 

Subtitle B—Depreciation 

Sec. 211. Recovery period for depreciation of certain leasehold improvements and 

restaurant property. 

Sec. 212. Modification of depreciation allowance for aircraft. 

Sec. 213. Modification of placed in service rule for bonus depreciation property. 

Subtitle C—S Corporation Reform and Simplification 

Sec. 221. Members of family treated as 1 shareholder. 

Sec. 222. Increase in number of eligible shareholders to 100. 

Sec. 223. Expansion of bank S corporation eligible shareholders to include IRAs. 

Sec. 224. Disregard of unexercised powers of appointment in determining potential current beneficiaries of ESBT. 

Sec. 225. Transfer of suspended losses incident to divorce, etc. 

Sec. 226. Use of passive activity loss and at-risk amounts by qualified subchapter 

S trust income beneficiaries. 

Sec. 227. Exclusion of investment securities income from passive income test for 

bank S corporations. 

Sec. 228. Treatment of bank director shares. 

Sec. 229. Relief from inadvertently invalid qualified subchapter S subsidiary elections and terminations. 

Sec. 230. Information returns for qualified subchapter S subsidiaries. 

Sec. 231. Repayment of loans for qualifying employer securities. 

Subtitle D—Alternative Minimum Tax Relief 

Sec. 241. Foreign tax credit under alternative minimum tax. 

Sec. 242. Expansion of exemption from alternative minimum tax for small corporations. 

Sec. 243. Income averaging for farmers not to increase alternative minimum tax. 

Subtitle E—Restructuring of Incentives for Alcohol Fuels, Etc. 

Sec. 251. Reduced rates of tax on gasohol replaced with excise tax credit; repeal 

of other alcohol-based fuel incentives; etc. 

Sec. 252. Alcohol fuel subsidies borne by general fund. 

Subtitle F—Stock Options and Employee Stock Purchase Plan Stock Options 

Sec. 261. Exclusion of incentive stock options and employee stock purchase plan 

stock options from wages. 

Subtitle G—Incentives to Reinvest Foreign Earnings in United States 

Sec. 271. Incentives to reinvest foreign earnings in United States. 
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Subtitle H—Other Incentive Provisions 

Sec. 281. Special rules for livestock sold on account of weather-related conditions. 

Sec. 282. Payment of dividends on stock of cooperatives without reducing patronage dividends. 

Sec. 283. Capital gain treatment under section 631(b) to apply to outright sales 

by landowners. 

Sec. 284. Distributions from publicly traded partnerships treated as qualifying 

income of regulated investment companies. 

Sec. 285. Improvements related to real estate investment trusts. 

Sec. 286. Treatment of certain dividends of regulated investment companies. 

Sec. 287. Taxation of certain settlement funds. 

Sec. 288. Expansion of human clinical trials qualifying for orphan drug credit. 

Sec. 289. Simplification of excise tax imposed on bows and arrows. 

Sec. 290. Repeal of excise tax on fishing tackle boxes. 

Sec. 291. Sonar devices suitable for finding fish. 

Sec. 292. Income tax credit to distilled spirits wholesalers for cost of carrying 

Federal excise taxes on bottled distilled spirits. 

Sec. 293. Suspension of occupational taxes relating to distilled spirits, wine, and 

beer. 

Sec. 294. Modification of unrelated business income limitation on investment in 

certain small business investment companies. 

Sec. 295. Election to determine taxable income from certain international shipping activities using per ton rate. 

Sec. 296. Charitable contribution deduction for certain expenses incurred in support of Native Alaskan subsistence whaling. 

TITLE III—TAX REFORM AND SIMPLIFICATION FOR UNITED 

STATES BUSINESSES 

Sec. 301. Interest expense allocation rules. 

Sec. 302. Recharacterization of overall domestic loss. 

Sec. 303. Reduction to 2 foreign tax credit baskets. 

Sec. 304. Look-thru rules to apply to dividends from noncontrolled section 902 

corporations. 

Sec. 305. Attribution of stock ownership through partnerships to apply in determining section 902 and 960 credits. 

Sec. 306. Clarification of treatment of certain transfers of intangible property. 

Sec. 307. United States property not to include certain assets of controlled foreign 

corporation. 

Sec. 308. Election not to use average exchange rate for foreign tax paid other 

than in functional currency. 

Sec. 309. Repeal of withholding tax on dividends from certain foreign corporations. 

Sec. 310. Provide equal treatment for interest paid by foreign partnerships and 

foreign corporations. 

Sec. 311. Look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company income rules. 

Sec. 312. Look-thru treatment for sales of partnership interests. 

Sec. 313. Repeal of foreign personal holding company rules and foreign investment company rules. 

Sec. 314. Determination of foreign personal holding company income with respect 

to transactions in commodities. 

Sec. 315. Modifications to treatment of aircraft leasing and shipping income. 

Sec. 316. Modification of exceptions under subpart F for active financing. 
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TITLE IV—EXTENSION OF CERTAIN EXPIRING PROVISIONS 

Sec. 401. Allowance of nonrefundable personal credits against regular and minimum tax liability. 

Sec. 402. Extension of research credit. 

Sec. 403. Extension of credit for electricity produced from certain renewable resources. 

Sec. 404. Indian employment tax credit. 

Sec. 405. Work opportunity credit. 

Sec. 406. Welfare-to-work credit. 

Sec. 407. Certain expenses of elementary and secondary school teachers. 

Sec. 408. Extension of accelerated depreciation benefit for property on Indian reservations. 

Sec. 409. Charitable contributions of computer technology and equipment used for 

educational purposes. 

Sec. 410. Expensing of environmental remediation costs. 

Sec. 411. Availability of medical savings accounts. 

Sec. 412. Taxable income limit on percentage depletion for oil and natural gas 

produced from marginal properties. 

Sec. 413. Qualified zone academy bonds. 

Sec. 414. District of Columbia. 

Sec. 415. Extension of certain New York Liberty Zone bond financing. 

Sec. 416. Disclosures relating to terrorist activities. 

Sec. 417. Disclosure of return information relating to student loans. 

Sec. 418. Cover over of tax on distilled spirits. 

Sec. 419. Joint review of strategic plans and budget for the Internal Revenue 

Service. 

Sec. 420. Parity in the application of certain limits to mental health benefits. 

Sec. 421. Combined employment tax reporting project. 

Sec. 422. Clean-fuel vehicles. 

TITLE V—DEDUCTION OF STATE AND LOCAL GENERAL SALES 

TAXES 

Sec. 501. Deduction of State and local general sales taxes in lieu of State and 

local income taxes. 

TITLE VI—REVENUE PROVISIONS 

Subtitle A—Provisions to Reduce Tax Avoidance Through Individual and 

Corporate Expatriation 

Sec. 601. Tax treatment of expatriated entities and their foreign parents. 

Sec. 602. Excise tax on stock compensation of insiders in expatriated corporations. 

Sec. 603. Reinsurance of United States risks in foreign jurisdictions. 

Sec. 604. Revision of tax rules on expatriation of individuals. 

Sec. 605. Reporting of taxable mergers and acquisitions. 

Sec. 606. Studies. 

Subtitle B—Provisions Relating to Tax Shelters 

PART I—TAXPAYER-RELATED PROVISIONS

Sec. 611. Penalty for failing to disclose reportable transactions. 

Sec. 612. Accuracy-related penalty for listed transactions, other reportable transactions having a significant tax avoidance purpose, etc. 
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Sec. 613. Tax shelter exception to confidentiality privileges relating to taxpayer 

communications. 

Sec. 614. Statute of limitations for taxable years for which required listed transactions not reported. 

Sec. 615. Disclosure of reportable transactions. 

Sec. 616. Failure to furnish information regarding reportable transactions. 

Sec. 617. Modification of penalty for failure to maintain lists of investors. 

Sec. 618. Penalty on promoters of tax shelters. 

Sec. 619. Modifications of substantial understatement penalty for nonreportable 

transactions. 

Sec. 620. Modification of actions to enjoin certain conduct related to tax shelters 

and reportable transactions. 

Sec. 621. Penalty on failure to report interests in foreign financial accounts. 

Sec. 622. Regulation of individuals practicing before the Department of the 

Treasury. 

PART II—OTHER PROVISIONS

Sec. 631. Treatment of stripped interests in bond and preferred stock funds, etc. 

Sec. 632. Minimum holding period for foreign tax credit on withholding taxes on 

income other than dividends. 

Sec. 633. Disallowance of certain partnership loss transfers. 

Sec. 634. No reduction of basis under section 734 in stock held by partnership 

in corporate partner. 

Sec. 635. Repeal of special rules for FASITs. 

Sec. 636. Limitation on transfer of built-in losses on REMIC residuals. 

Sec. 637. Clarification of banking business for purposes of determining investment of earnings in United States property. 

Sec. 638. Alternative tax for certain small insurance companies. 

Sec. 639. Denial of deduction for interest on underpayments attributable to nondisclosed reportable transactions. 

Sec. 640. Clarification of rules for payment of estimated tax for certain deemed 

asset sales. 

Sec. 641. Recognition of gain from the sale of a principal residence acquired in 

a like-kind exchange within 5 years of sale. 

Sec. 642. Prevention of mismatching of interest and original issue discount deductions and income inclusions in transactions with related foreign persons. 

Sec. 643. Exclusion from gross income for interest on overpayments of income tax 

by individuals. 

Sec. 644. Deposits made to suspend running of interest on potential underpayments. 

Sec. 645. Partial payment of tax liability in installment agreements. 

Sec. 646. Affirmation of consolidated return regulation authority. 

PART III—LEASING

Sec. 647. Reform of tax treatment of certain leasing arrangements. 

Sec. 648. Limitation on deductions allocable to property used by governments or 

other tax-exempt entities. 

Sec. 649. Effective date. 

Subtitle C—Reduction of Fuel Tax Evasion 

Sec. 651. Exemption from certain excise taxes for mobile machinery. 

Sec. 652. Taxation of aviation-grade kerosene. 
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Sec. 653. Dye injection equipment. 

Sec. 654. Authority to inspect on-site records. 

Sec. 655. Registration of pipeline or vessel operators required for exemption of 

bulk transfers to registered terminals or refineries. 

Sec. 656. Display of registration. 

Sec. 657. Penalties for failure to register and failure to report. 

Sec. 658. Collection from customs bond where importer not registered. 

Sec. 659. Modifications of tax on use of certain vehicles. 

Sec. 660. Modification of ultimate vendor refund claims with respect to farming. 

Sec. 661. Dedication of revenues from certain penalties to the Highway Trust 

Fund. 

Sec. 662. Taxable fuel refunds for certain ultimate vendors. 

Sec. 663. Two-party exchanges. 

Sec. 664. Simplification of tax on tires. 

Subtitle D—Nonqualified Deferred Compensation Plans 

Sec. 671. Treatment of nonqualified deferred compensation plans. 

Subtitle E—Other Revenue Provisions 

Sec. 681. Qualified tax collection contracts. 

Sec. 682. Treatment of charitable contributions of patents and similar property. 

Sec. 683. Increased reporting for noncash charitable contributions. 

Sec. 684. Donations of motor vehicles, boats, and aircraft. 

Sec. 685. Extension of amortization of intangibles to sports franchises. 

Sec. 686. Modification of continuing levy on payments to Federal venders. 

Sec. 687. Modification of straddle rules. 

Sec. 688. Addition of vaccines against hepatitis A to list of taxable vaccines. 

Sec. 689. Addition of vaccines against influenza to list of taxable vaccines. 

Sec. 690. Extension of IRS user fees. 

Sec. 691. COBRA fees. 

TITLE VII—MARKET REFORM FOR TOBACCO GROWERS 

Sec. 701. Short title. 

Sec. 702. Effective date. 

Subtitle A—Termination of Federal Tobacco Quota and Price Support 

Programs 

Sec. 711. Termination of tobacco quota program and related provisions. 

Sec. 712. Termination of tobacco price support program and related provisions. 

Sec. 713. Liability. 

Subtitle B—Transitional Payments to Tobacco Quota Holders and Active 

Producers of Tobacco 

Sec. 721. Definitions of active tobacco producer and quota holder. 

Sec. 722. Payments to tobacco quota holders. 

Sec. 723. Transition payments for active producers of quota tobacco. 

Sec. 724. Resolution of disputes. 

Sec. 725. Source of funds for payments. 

TITLE VIII—TRADE PROVISIONS 

Sec. 801. Ceiling fans. 
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Sec. 802. Certain steam generators, and certain reactor vessel heads, used in nuclear facilities. 

1 TITLE I—END SANCTIONS AND 

2 REDUCE CORPORATE TAX 

3 RATES FOR DOMESTIC MANU4 FACTURING AND SMALL COR5 PORATIONS 

6 SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL 

7 INCOME. 

8 (a) IN GENERAL.—Section 114 is hereby repealed. 

9 (b) CONFORMING AMENDMENTS.— 

10 (1) Subpart E of part III of subchapter N of 

11 chapter 1 (relating to qualifying foreign trade in12 come) is hereby repealed. 

13 (2) The table of subparts for such part III is 

14 amended by striking the item relating to subpart E. 

15 (3) The table of sections for part III of sub16 chapter B of chapter 1 is amended by striking the 

17 item relating to section 114. 

18 (4) The second sentence of section 56(g)(4)(B)(i) 

19 is amended by striking ‘‘114 or’’. 

20 (5) Section 275(a) is amended— 

21 (A) by inserting ‘‘or’’ at the end of para22 graph (4)(A), by striking ‘‘or’’ at the end of 

23 paragraph (4)(B) and inserting a period, and by 

24 striking subparagraph (C), and 
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1 (B) by striking the last sentence. 

2 (6) Paragraph (3) of section 864(e) is amend3 ed— 

4 (A) by striking: 

5 ‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO AC6 COUNT.— 

7 ‘‘(A) IN GENERAL.—For purposes of’’; and 

8 inserting: 

9 ‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO AC10 COUNT.—For purposes of’’, and 

11 (B) by striking subparagraph (B). 

12 (7) Section 903 is amended by striking ‘‘114, 

13 164(a),’’ and inserting ‘‘164(a)’’. 

14 (8) Section 999(c)(1) is amended by striking 

15 ‘‘941(a)(5),’’. 

16 (c) EFFECTIVE DATE.—Except as provided in sub17 section (d), the amendments made by this section shall 

18 apply to transactions after December 31, 2004. 

19 (d) TRANSITIONAL RULE FOR 2005 AND 2006.— 

20 (1) IN GENERAL.—In the case of transactions 

21 during 2005 or 2006, the amount includible in gross 

22 income by reason of the amendments made by this 

23 section shall not exceed the applicable percentage of 

24 the amount which would have been so included but for 

25 this subsection. 
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1 (2) APPLICABLE PERCENTAGE.—For purposes of 

2 paragraph (1), the applicable percentage shall be as 

3 follows: 

4 (A) For 2005, the applicable percentage 

5 shall be 20 percent. 

6 (B) For 2006, the applicable percentage 

7 shall be 40 percent. 

8 (e) REVOCATION OF ELECTION TO BE TREATED AS

9 DOMESTIC CORPORATION.—If, during the 1-year period be10 ginning on the date of the enactment of this Act, a corpora11 tion for which an election is in effect under section 943(e) 

12 of the Internal Revenue Code of 1986 revokes such election, 

13 no gain or loss shall be recognized with respect to property 

14 treated as transferred under clause (ii) of section 

15 943(e)(4)(B) of such Code to the extent such property— 

16 (1) was treated as transferred under clause (i) 

17 thereof, or 

18 (2) was acquired during a taxable year to which 

19 such election applies and before May 1, 2003, in the 

20 ordinary course of its trade or business. 

21 The Secretary of the Treasury (or such Secretary’s delegate) 

22 may prescribe such regulations as may be necessary to pre23 vent the abuse of the purposes of this subsection. 

24 (f) BINDING CONTRACTS.—The amendments made by 

25 this section shall not apply to any transaction in the ordi-
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1 nary course of a trade or business which occurs pursuant 

2 to a binding contract— 

3 (1) which is between the taxpayer and a person 

4 who is not a related person (as defined in section 

5 943(b)(3) of such Code, as in effect on the day before 

6 the date of the enactment of this Act), and 

7 (2) which is in effect on January 14, 2002, and 

8 at all times thereafter. 

9 For purposes of this subsection, a binding contract shall in10 clude a purchase option, renewal option, or replacement op11 tion which is included in such contract and which is en12 forceable against the seller or lessor. 

13 SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR 

14 DOMESTIC PRODUCTION ACTIVITIES INCOME. 

15 (a) LIMITATION ON TAX ON QUALIFIED PRODUCTION

16 ACTIVITIES INCOME.—Section 11 is amended by redesig17 nating subsections (c) and (d) as subsections (d) and (e), 

18 respectively, and by inserting after subsection (b) the fol19 lowing new subsection: 

20 ‘‘(c) LIMITATION ON TAX ON QUALIFIED PRODUCTION

21 ACTIVITIES INCOME.— 

22 ‘‘(1) IN GENERAL.—If a corporation has quali23 fied production activities income for any taxable 

24 year, the tax imposed by this section shall not exceed 

25 the sum of— 
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1 ‘‘(A) a tax computed at the rates and in the 

2 manner as if this subsection had not been en3 acted on the taxable income reduced by the 

4 amount of qualified production activities income, 

5 plus 

6 ‘‘(B) a tax equal to 32 percent (34 percent 

7 in the case of taxable years beginning before 

8 January 1, 2007) of the qualified production ac9 tivities income (or, if less, taxable income). 

10 ‘‘(2) QUALIFIED PRODUCTION ACTIVITIES IN11 COME.— 

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

13 production activities income’ for any taxable 

14 year means an amount equal to the excess (if 

15 any) of— 

16 ‘‘(i) the taxpayer’s domestic production 

17 gross receipts for such taxable year, over 

18 ‘‘(ii) the sum of— 

19 ‘‘(I) the cost of goods sold that are 

20 allocable to such receipts, 

21 ‘‘(II) other deductions, expenses, 

22 or losses directly allocable to such re23 ceipts, and 

24 ‘‘(III) a ratable portion of other 

25 deductions, expenses, and losses that 
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1 are not directly allocable to such re2 ceipts or another class of income. 

3 ‘‘(B) ALLOCATION METHOD.—The Secretary 

4 shall prescribe rules for the proper allocation of 

5 items of income, deduction, expense, and loss for 

6 purposes of determining income attributable to 

7 domestic production activities. 

8 ‘‘(3) DOMESTIC PRODUCTION GROSS RECEIPTS.— 

9 For purposes of this subsection, the term ‘domestic 

10 production gross receipts’ means the gross receipts of 

11 the taxpayer which are derived from— 

12 ‘‘(A) any lease, rental, license, sale, ex13 change, or other disposition of— 

14 ‘‘(i) qualifying production property 

15 which was manufactured, produced, grown, 

16 or extracted in whole or in significant part 

17 by the taxpayer within the United States, 

18 or 

19 ‘‘(ii) any qualified film produced by 

20 the taxpayer, or 

21 ‘‘(B) construction, engineering, or architec22 tural services performed in the United States for 

23 construction projects in the United States. 
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1 ‘‘(4) QUALIFYING PRODUCTION PROPERTY.—For 

2 purposes of this subsection, the term ‘qualifying pro3 duction property’ means— 

4 ‘‘(A) tangible personal property, 

5 ‘‘(B) any computer software, and 

6 ‘‘(C) any property described in section 

7 168(f)(4). 

8 ‘‘(5) QUALIFIED FILM.—For purposes of this 

9 subsection— 

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

11 film’ means any property described in section 

12 168(f)(3) if not less than 50 percent of the total 

13 compensation relating to the production of such 

14 property is compensation for services performed 

15 in the United States by actors, production per16 sonnel, directors, and producers. 

17 ‘‘(B) EXCEPTION.—Such term does not in18 clude property with respect to which records are 

19 required to be maintained under section 2257 of 

20 title 18, United States Code. 

21 ‘‘(6) RELATED PERSONS.—For purposes of this 

22 subsection— 

23 ‘‘(A) IN GENERAL.—The term ‘domestic pro24 duction gross receipts’ shall not include any 

25 gross receipts of the taxpayer derived from prop-
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1 erty leased, licensed, or rented by the taxpayer 

2 for use by any related person. 

3 ‘‘(B) RELATED PERSON.—For purposes of 

4 subparagraph (A), a person shall be treated as 

5 related to another person if such persons are 

6 treated as a single employer under subsection (a) 

7 or (b) of section 52 or subsection (m) or (o) of 

8 section 414, except that determinations under 

9 subsections (a) and (b) of section 52 shall be 

10 made without regard to section 1563(b).’’. 

11 (b) SPECIAL RULE RELATING TO ELECTION TO TREAT

12 CUTTING OF TIMBER AS A SALE OR EXCHANGE.—In the 

13 case of a corporation, any election under section 631(a) of 

14 the Internal Revenue Code of 1986 made for a taxable year 

15 ending on or before the date of the enactment of this Act 

16 may be revoked by the taxpayer for any taxable year ending 

17 after such date. For purposes of determining whether such 

18 taxpayer may make a further election under such section, 

19 such election (and any revocation under this section) shall 

20 not be taken into account. 

21 (c) EFFECTIVE DATE.—The amendment made by this 

22 section shall apply to taxable years beginning after Decem23 ber 31, 2004. 
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1 SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR 

2 SMALL CORPORATIONS. 

3 (a) IN GENERAL.—Subsection (b) of section 11 (relat4 ing to tax imposed on corporations) is amended by redesig5 nating paragraph (2) as paragraph (6) and by striking 

6 paragraph (1) and inserting the following new paragraphs: 

7 ‘‘(1) FOR TAXABLE YEARS BEGINNING AFTER

8 2012.—In the case of taxable years beginning after 

9 2012, the amount of the tax imposed by subsection (a) 

10 shall be determined in accordance with the following 

11 table: 

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$20,000,000.

$13,750, plus 32% of the excess over 

$75,000. 

Over $20,000,000 .............................. $6,389,750, plus 35% of the excess over 

$20,000,000. 

12 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN 2011 OR

13 2012.—In the case of taxable years beginning in 2011 

14 or 2012, the amount of the tax imposed by subsection 

15 (a) shall be determined in accordance with the fol16 lowing table: 

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$5,000,000.

$13,750, plus 32% of the excess over 

$75,000. 

Over $5,000,000 but not over 

$10,000,000.

$1,589,750, plus 34% of the excess over 

$5,000,000. 

Over $10,000,000 .............................. $3,289,750, plus 35% of the excess over 

$10,000,000. 
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1 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN 2008, 

2 2009, OR 2010.—In the case of taxable years beginning 

3 in 2008, 2009, or 2010, the amount of the tax im4 posed by subsection (a) shall be determined in accord5 ance with the following table: 

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$1,000,000.

$13,750, plus 32% of the excess over 

$75,000. 

Over $1,000,000 but not over 

$10,000,000.

$309,750, plus 34% of the excess over 

$1,000,000. 

Over $10,000,000 .............................. $3,369,750, plus 35% of the excess over 

$10,000,000. 

6 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN 2005, 

7 2006, OR 2007.—In the case of taxable years beginning 

8 in 2005, 2006, or 2007, the amount of the tax im9 posed by subsection (a) shall be determined in accord10 ance with the following table: 

‘‘If taxable income is: The tax is: 

Not over $50,000 .............................. 15% of taxable income. 

Over $50,000 but not over $75,000 $7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$1,000,000.

$13,750, plus 33% of the excess over 

$75,000. 

Over $1,000,000 but not over 

$10,000,000.

$319,000, plus 34% of the excess over 

$1,000,000. 

Over $10,000,000 .............................. $3,379,000, plus 35% of the excess over 

$10,000,000. 

11 ‘‘(5) PHASEOUT OF LOWER RATES FOR CERTAIN

12 TAXPAYERS.— 

13 ‘‘(A) GENERAL RULE FOR YEARS BEFORE

14 2013.— 
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1 ‘‘(i) IN GENERAL.—In the case of tax2 able years beginning before 2013 with re3 spect to a corporation which has taxable in4 come in excess of the applicable amount for 

5 any taxable year, the amount of tax deter6 mined under paragraph (1), (2), (3) or (4) 

7 for such taxable year shall be increased by 

8 the lesser of (I) 5 percent of such excess, or 

9 (II) the maximum increase amount. 

10 ‘‘(ii) MAXIMUM INCREASE AMOUNT.— 

11 For purposes of clause (i)— 

‘‘In the case of any taxable year

beginning during: 

The applicable 

amount is: 

The maximum 

increase 

amount is: 

2005, 2006, or 2007 ................................... $1,000,000 $21,000

2008, 2009, or 2010 ................................... $1,000,000 $30,250

2011 or 2012 ............................................... $5,000,000 $110,250. 

12 ‘‘(B) HIGHER INCOME CORPORATIONS.—In 

13 the case of a corporation which has taxable in14 come in excess of $20,000,000 ($15,000,000 in 

15 the case of taxable years beginning before 2013), 

16 the amount of the tax determined under the fore17 going provisions of this subsection shall be in18 creased by an additional amount equal to the 

19 lesser of (i) 3 percent of such excess, or (ii) 

20 $610,250 ($100,000 in the case of taxable years 

21 beginning before 2013).’’. 

22 (b) CONFORMING AMENDMENTS.— 
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1 (1) Section 904(b)(3)(D)(ii) is amended to read 

2 as follows: 

3 ‘‘(ii) in the case of a corporation, sec4 tion 1201(a) applies to such taxable year.’’. 

5 (2) Section 1201(a) is amended by striking ‘‘the 

6 last 2 sentences of section 11(b)(1)’’ and inserting 

7 ‘‘section 11(b)(5)’’. 

8 (3) Section 1561(a) is amended— 

9 (A) by striking ‘‘the last 2 sentences of sec10 tion 11(b)(1)’’ and inserting ‘‘section 11(b)(5)’’, 

11 and 

12 (B) by striking ‘‘such last 2 sentences’’ and 

13 inserting ‘‘section 11(b)(5)’’. 

14 (c) EFFECTIVE DATE.—The amendments made by this 

15 section shall apply to taxable years beginning after Decem16 ber 31, 2004. 
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1 TITLE II—JOB CREATION TAX IN2 CENTIVES FOR MANUFACTUR3 ERS, SMALL BUSINESSES, AND 

4 FARMERS 

5 Subtitle A—Small Business 

6 Expensing 

7 SEC. 201. 2-YEAR EXTENSION OF INCREASED EXPENSING 

8 FOR SMALL BUSINESS. 

9 Subsections (b), (c), and (d) of section 179 are each 

10 amended by striking ‘‘2006’’ each place it appears and in11 serting ‘‘2008’’. 

12 Subtitle B—Depreciation 

13 SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CER14 TAIN LEASEHOLD IMPROVEMENTS AND RES15 TAURANT PROPERTY. 

16 (a) 15-YEAR RECOVERY PERIOD.—Subparagraph (E) 

17 of section 168(e)(3) (relating to classification of certain 

18 property) is amended by striking ‘‘and’’ at the end of clause 

19 (ii), by striking the period at the end of clause (iii) and 

20 inserting a comma, and by adding at the end the following 

21 new clauses: 

22 ‘‘(iv) any qualified leasehold improve23 ment property placed in service before Jan24 uary 1, 2006, and 
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1 ‘‘(v) any qualified restaurant property 

2 placed in service before January 1, 2006.’’ 

3 (b) QUALIFIED LEASEHOLD IMPROVEMENT PROP4 ERTY.—Subsection (e) of section 168 is amended by adding 

5 at the end the following new paragraph: 

6 ‘‘(6) QUALIFIED LEASEHOLD IMPROVEMENT

7 PROPERTY.—The term ‘qualified leasehold improve8 ment property’ has the meaning given such term in 

9 section 168(k)(3) except that the following special 

10 rules shall apply: 

11 ‘‘(A) IMPROVEMENTS MADE BY LESSOR.—In 

12 the case of an improvement made by the person 

13 who was the lessor of such improvement when 

14 such improvement was placed in service, such 

15 improvement shall be qualified leasehold im16 provement property (if at all) only so long as 

17 such improvement is held by such person. 

18 ‘‘(B) EXCEPTION FOR CHANGES IN FORM OF

19 BUSINESS.—Property shall not cease to be quali20 fied leasehold improvement property under sub21 paragraph (A) by reason of— 

22 ‘‘(i) death, 

23 ‘‘(ii) a transaction to which section 

24 381(a) applies, 
22 

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1 ‘‘(iii) a mere change in the form of 

2 conducting the trade or business so long as 

3 the property is retained in such trade or 

4 business as qualified leasehold improvement 

5 property and the taxpayer retains a sub6 stantial interest in such trade or business, 

7 ‘‘(iv) the acquisition of such property 

8 in an exchange described in section 1031, 

9 1033, or 1038 to the extent that the basis of 

10 such property includes an amount rep11 resenting the adjusted basis of other prop12 erty owned by the taxpayer or a related 

13 person, or 

14 ‘‘(v) the acquisition of such property 

15 by the taxpayer in a transaction described 

16 in section 332, 351, 361, 721, or 731 (or the 

17 acquisition of such property by the taxpayer 

18 from the transferee or acquiring corporation 

19 in a transaction described in such section), 

20 to the extent that the basis of the property 

21 in the hands of the taxpayer is determined 

22 by reference to its basis in the hands of the 

23 transferor or distributor.’’. 
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1 (c) QUALIFIED RESTAURANT PROPERTY.—Subsection 

2 (e) of section 168 (as amended by subsection (b)) is further 

3 amended by adding at the end the following new paragraph: 

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

5 term ‘qualified restaurant property’ means any sec6 tion 1250 property which is an improvement to a 

7 building if— 

8 ‘‘(A) such improvement is placed in service 

9 more than 3 years after the date such building 

10 was first placed in service, and 

11 ‘‘(B) more than 50 percent of the building’s 

12 square footage is devoted to preparation of, and 

13 seating for on-premises consumption of, prepared 

14 meals.’’. 

15 (d) REQUIREMENT TO USE STRAIGHT LINE METH16 OD.— 

17 (1) Paragraph (3) of section 168(b) is amended 

18 by adding at the end the following new subpara19 graphs: 

20 ‘‘(G) Qualified leasehold improvement prop21 erty described in subsection (e)(6). 

22 ‘‘(H) Qualified restaurant property de23 scribed in subsection (e)(7).’’. 
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1 (2) Subparagraph (A) of section 168(b)(2) is 

2 amended by inserting before the comma ‘‘not referred 

3 to in paragraph (3)’’. 

4 (e) ALTERNATIVE SYSTEM.—The table contained in 

5 section 168(g)(3)(B) is amended by adding at the end the 

6 following new items: 

‘‘(E)(iv) ....................................................................... 39

‘‘(E)(v) ........................................................................ 39’’.

7 (f) EFFECTIVE DATE.—The amendments made by this 

8 section shall apply to property placed in service after the 

9 date of the enactment of this Act. 

10 SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE 

11 FOR AIRCRAFT. 

12 (a) AIRCRAFT TREATED AS QUALIFIED PROPERTY.— 

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

14 168(k) is amended by redesignating subparagraphs 

15 (C) through (F) as subparagraphs (D) through (G), 

16 respectively, and by inserting after subparagraph (B) 

17 the following new subparagraph: 

18 ‘‘(C) CERTAIN AIRCRAFT.—The term ‘quali19 fied property’ includes property— 

20 ‘‘(i) which meets the requirements of 

21 clauses (ii) and (iii) of subparagraph (A), 

22 ‘‘(ii) which is an aircraft which is not 

23 a transportation property (as defined in 
25 

•HR 4520 RH 

1 subparagraph (B)(iii)) other than for agri2 cultural or firefighting purposes, 

3 ‘‘(iii) which is purchased and on which 

4 such purchaser, at the time of the contract 

5 for purchase, has made a nonrefundable de6 posit of the lesser of— 

7 ‘‘(I) 10 percent of the cost, or 

8 ‘‘(II) $100,000, and 

9 ‘‘(iv) which has— 

10 ‘‘(I) an estimated production pe11 riod exceeding 4 months, and 

12 ‘‘(II) a cost exceeding $200,000.’’. 

13 (2) PLACED IN SERVICE DATE.—Clause (iv) of 

14 section 168(k)(2)(A) is amended by striking ‘‘sub15 paragraph (B)’’ and inserting ‘‘subparagraphs (B) 

16 and (C)’’. 

17 (b) CONFORMING AMENDMENTS.— 

18 (1) Section 168(k)(2)(B) is amended by adding 

19 at the end the following new clause: 

20 ‘‘(iv) APPLICATION OF SUBPARA21 GRAPH.—This subparagraph shall not 

22 apply to any property which is described in 

23 subparagraph (C).’’. 
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1 (2) Section 168(k)(4)(A)(ii) is amended by strik2 ing ‘‘paragraph (2)(C)’’ and inserting ‘‘paragraph 

3 (2)(D)’’. 

4 (3) Section 168(k)(4)(B)(iii) is amended by in5 serting ‘‘and paragraph (2)(C)’’ after ‘‘of this para6 graph)’’. 

7 (4) Section 168(k)(4)(C) is amended by striking 

8 ‘‘subparagraphs (B) and (D)’’ and inserting ‘‘sub9 paragraphs (B), (C), and (E)’’. 

10 (5) Section 168(k)(4)(D) is amended by striking 

11 ‘‘Paragraph (2)(E)’’ and inserting ‘‘Paragraph 

12 (2)(F)’’. 

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

14 section shall take effect as if included in the amendments 

15 made by section 101 of the Job Creation and Worker Assist16 ance Act of 2002. 

17 SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR 

18 BONUS DEPRECIATION PROPERTY. 

19 (a) IN GENERAL.—Section 168(k)(2)(D) (relating to 

20 special rules) is amended by adding at the end the following 

21 new clause: 

22 ‘‘(iii) SYNDICATION.—For purposes of 

23 subparagraph (A)(ii), if— 
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1 ‘‘(I) property is originally placed 

2 in service after September 10, 2001, by 

3 the lessor of such property, 

4 ‘‘(II) such property is sold by 

5 such lessor or any subsequent pur6 chaser within 3 months after the date 

7 so placed in service (or, in the case of 

8 multiple units of property subject to 

9 the same lease, within 3 months after 

10 the date the final unit is placed in 

11 service, so long as the period between 

12 the time the first unit is placed in 

13 service and the time the last unit is 

14 placed in service does not exceed 12 

15 months), and 

16 ‘‘(III) the user of such property 

17 after the last sale during such 3-month 

18 period remains the same as when such 

19 property was originally placed in serv20 ice, 

21 such property shall be treated as originally 

22 placed in service not earlier than the date 

23 of such last sale, so long as no previous 

24 owner of such property elects the applica-
28 

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1 tion of this subsection with respect to such 

2 property.’’. 

3 (b) EFFECTIVE DATE.—The amendments made by this 

4 section shall take effect as if included in the amendments 

5 made by section 101 of the Job Creation and Worker Assist6 ance Act of 2002; except that the parenthetical material in 

7 section 168(k)(2)(D)(iii)(II) of the Internal Revenue Code 

8 of 1986, as added by this section, shall apply to property 

9 sold after June 4, 2004. 

10 Subtitle C—S Corporation Reform 

11 and Simplification 

12 SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHARE13 HOLDER. 

14 (a) IN GENERAL.—Paragraph (1) of section 1361(c) 

15 (relating to special rules for applying subsection (b)) is 

16 amended to read as follows: 

17 ‘‘(1) MEMBERS OF FAMILY TREATED AS 1

18 SHAREHOLDER.— 

19 ‘‘(A) IN GENERAL.—For purpose of sub20 section (b)(1)(A)— 

21 ‘‘(i) except as provided in clause (ii), 

22 a husband and wife (and their estates) shall 

23 be treated as 1 shareholder, and 

24 ‘‘(ii) in the case of a family with re25 spect to which an election is in effect under 
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1 subparagraph (D), all members of the fam2 ily shall be treated as 1 shareholder. 

3 ‘‘(B) MEMBERS OF THE FAMILY.—For pur4 pose of subparagraph (A)(ii)— 

5 ‘‘(i) IN GENERAL.—The term ‘members 

6 of the family’ means the common ancestor, 

7 lineal descendants of the common ancestor, 

8 and the spouses (or former spouses) of such 

9 lineal descendants or common ancestor. 

10 ‘‘(ii) COMMON ANCESTOR.—For pur11 poses of this paragraph, an individual shall 

12 not be considered a common ancestor if, as 

13 of the later of the effective date of this para14 graph or the time the election under section 

15 1362(a) is made, the individual is more 

16 than 3 generations removed from the young17 est generation of shareholders who would 

18 (but for this clause) be members of the fam19 ily. For purposes of the preceding sentence, 

20 a spouse (or former spouse) shall be treated 

21 as being of the same generation as the indi22 vidual to which such spouse is (or was) 

23 married. 

24 ‘‘(C) EFFECT OF ADOPTION, ETC.—In deter25 mining whether any relationship specified in 
30 

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1 subparagraph (B) exists, the rules of section 

2 152(b)(2) shall apply. 

3 ‘‘(D) ELECTION.—An election under sub4 paragraph (A)(ii)— 

5 ‘‘(i) may, except as otherwise provided 

6 in regulations prescribed by the Secretary, 

7 be made by any member of the family, and 

8 ‘‘(ii) shall remain in effect until termi9 nated as provided in regulations prescribed 

10 by the Secretary.’’. 

11 (b) RELIEF FROM INADVERTENT INVALID ELECTION

12 OR TERMINATION.—Section 1362(f) (relating to inadvertent 

13 invalid elections or terminations), as amended by section 

14 229, is amended— 

15 (1) by inserting ‘‘or section 1361(c)(1)(A)(ii)’’ 

16 after ‘‘section 1361(b)(3)(B)(ii),’’ in paragraph (1), 

17 and 

18 (2) by inserting ‘‘or section 1361(c)(1)(D)(iii)’’ 

19 after ‘‘section 1361(b)(3)(C),’’ in paragraph (1)(B). 

20 (c) EFFECTIVE DATES.— 

21 (1) SUBSECTION (a).—The amendment made by 

22 subsection (a) shall apply to taxable years beginning 

23 after December 31, 2004. 
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1 (2) SUBSECTION (b).—The amendments made by 

2 subsection (b) shall apply to elections and termi3 nations made after December 31, 2004. 

4 SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHARE5 HOLDERS TO 100. 

6 (a) IN GENERAL.—Section 1361(b)(1)(A) (defining 

7 small business corporation) is amended by striking ‘‘75’’ 

8 and inserting ‘‘100’’. 

9 (b) EFFECTIVE DATE.—The amendment made by this 

10 section shall apply to taxable years beginning after Decem11 ber 31, 2004. 

12 SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 

13 SHAREHOLDERS TO INCLUDE IRAS. 

14 (a) IN GENERAL.—Section 1361(c)(2)(A) (relating to 

15 certain trusts permitted as shareholders) is amended by in16 serting after clause (v) the following new clause: 

17 ‘‘(vi) In the case of a corporation 

18 which is a bank (as defined in section 581), 

19 a trust which constitutes an individual re20 tirement account under section 408(a), in21 cluding one designated as a Roth IRA 

22 under section 408A, but only to the extent 

23 of the stock held by such trust in such bank 

24 as of the date of the enactment of this 

25 clause.’’. 
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1 (b) TREATMENT AS SHAREHOLDER.—Section 

2 1361(c)(2)(B) (relating to treatment as shareholders) is 

3 amended by adding at the end the following new clause: 

4 ‘‘(vi) In the case of a trust described in 

5 clause (vi) of subparagraph (A), the indi6 vidual for whose benefit the trust was cre7 ated shall be treated as a shareholder.’’. 

8 (c) SALE OF BANK STOCK IN IRA RELATING TO S 

9 CORPORATION ELECTION EXEMPT FROM PROHIBITED

10 TRANSACTION RULES.—Section 4975(d) (relating to ex11 emptions) is amended by striking ‘‘or’’ at the end of para12 graph (14), by striking the period at the end of paragraph 

13 (15) and inserting ‘‘; or’’, and by adding at the end the 

14 following new paragraph: 

15 ‘‘(16) a sale of stock held by a trust which con16 stitutes an individual retirement account under sec17 tion 408(a) to the individual for whose benefit such 

18 account is established if— 

19 ‘‘(A) such stock is in a bank (as defined in 

20 section 581), 

21 ‘‘(B) such stock is held by such trust as of 

22 the date of the enactment of this paragraph, 

23 ‘‘(C) such sale is pursuant to an election 

24 under section 1362(a) by such bank, 
33 

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1 ‘‘(D) such sale is for fair market value at 

2 the time of sale (as established by an inde3 pendent appraiser) and the terms of the sale are 

4 otherwise at least as favorable to such trust as 

5 the terms that would apply on a sale to an unre6 lated party, 

7 ‘‘(E) such trust does not pay any commis8 sions, costs, or other expenses in connection with 

9 the sale, and 

10 ‘‘(F) the stock is sold in a single transaction 

11 for cash not later than 120 days after the S cor12 poration election is made.’’. 

13 (d) CONFORMING AMENDMENT.—Section 512(e)(1) is 

14 amended by inserting ‘‘1361(c)(2)(A)(vi) or’’ before 

15 ‘‘1361(c)(6)’’. 

16 (e) EFFECTIVE DATE.—The amendments made by this 

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

18 Act. 

19 SEC. 224. DISREGARD OF UNEXERCISED POWERS OF AP20 POINTMENT IN DETERMINING POTENTIAL 

21 CURRENT BENEFICIARIES OF ESBT. 

22 (a) IN GENERAL.—Section 1361(e)(2) (defining poten23 tial current beneficiary) is amended— 

24 (1) by inserting ‘‘(determined without regard to 

25 any power of appointment to the extent such power 
34 

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1 remains unexercised at the end of such period)’’ after 

2 ‘‘of the trust’’ in the first sentence, and 

3 (2) by striking ‘‘60-day’’ in the second sentence 

4 and inserting ‘‘1-year’’. 

5 (b) EFFECTIVE DATE.—The amendments made by this 

6 section shall apply to taxable years beginning after Decem7 ber 31, 2004. 

8 SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 

9 DIVORCE, ETC. 

10 (a) IN GENERAL.—Section 1366(d)(2) (relating to in11 definite carryover of disallowed losses and deductions) is 

12 amended to read as follows: 

13 ‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED

14 LOSSES AND DEDUCTIONS.— 

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

16 subparagraph (B), any loss or deduction which 

17 is disallowed for any taxable year by reason of 

18 paragraph (1) shall be treated as incurred by the 

19 corporation in the succeeding taxable year with 

20 respect to that shareholder. 

21 ‘‘(B) TRANSFERS OF STOCK BETWEEN

22 SPOUSES OR INCIDENT TO DIVORCE.—In the case 

23 of any transfer described in section 1041(a) of 

24 stock of an S corporation, any loss or deduction 

25 described in subparagraph (A) with respect such 
35 

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1 stock shall be treated as incurred by the corpora2 tion in the succeeding taxable year with respect 

3 to the transferee.’’ 

4 (b) EFFECTIVE DATE.—The amendment made by this 

5 section shall apply to taxable years beginning after Decem6 ber 31, 2004. 

7 SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 

8 AMOUNTS BY QUALIFIED SUBCHAPTER S 

9 TRUST INCOME BENEFICIARIES. 

10 (a) IN GENERAL.—Section 1361(d)(1) (relating to spe11 cial rule for qualified subchapter S trust) is amended— 

12 (1) by striking ‘‘and’’ at the end of subpara13 graph (A), 

14 (2) by striking the period at the end of subpara15 graph (B) and inserting ‘‘, and’’, and 

16 (3) by adding at the end the following new sub17 paragraph: 

18 ‘‘(C) for purposes of applying sections 465 

19 and 469 to the beneficiary of the trust, the dis20 position of the S corporation stock by the trust 

21 shall be treated as a disposition by such bene22 ficiary.’’. 

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

24 section shall apply to transfers made after December 31, 

25 2004. 
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1 SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME 

2 FROM PASSIVE INCOME TEST FOR BANK S 

3 CORPORATIONS. 

4 (a) IN GENERAL.—Section 1362(d)(3) (relating to 

5 where passive investment income exceeds 25 percent of gross 

6 receipts for 3 consecutive taxable years and corporation has 

7 accumulated earnings and profits) is amended by adding 

8 at the end the following new subparagraph: 

9 ‘‘(F) EXCEPTION FOR BANKS; ETC.—In the 

10 case of a bank (as defined in section 581), a 

11 bank holding company (within the meaning of 

12 section 2(a) of the Bank Holding Company Act 

13 of 1956 (12 U.S.C. 1841(a))), or a financial 

14 holding company (within the meaning of section 

15 2(p) of such Act), the term ‘passive investment 

16 income’ shall not include— 

17 ‘‘(i) interest income earned by such 

18 bank or company, or 

19 ‘‘(ii) dividends on assets required to be 

20 held by such bank or company, including 

21 stock in the Federal Reserve Bank, the Fed22 eral Home Loan Bank, or the Federal Agri23 cultural Mortgage Bank or participation 

24 certificates issued by a Federal Intermediate 

25 Credit Bank.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2004. 

4 SEC. 228. TREATMENT OF BANK DIRECTOR SHARES. 

5 (a) IN GENERAL.—Section 1361 (defining S corpora6 tion) is amended by adding at the end the following new 

7 subsection: 

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

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

10 stock shall not be taken into account as outstanding 

11 stock of the S corporation in applying this subchapter 

12 (other than section 1368(f)). 

13 ‘‘(2) RESTRICTED BANK DIRECTOR STOCK.—For 

14 purposes of this subsection, the term ‘restricted bank 

15 director stock’ means stock in a bank (as defined in 

16 section 581), a bank holding company (within the 

17 meaning of section 2(a) of the Bank Holding Com18 pany Act of 1956 (12 U.S.C. 1841(a))), or a financial 

19 holding company (within the meaning of section 2(p) 

20 of such Act), registered with the Federal Reserve Sys21 tem, if such stock— 

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

23 under applicable Federal or State law in order 

24 to permit such individual to serve as a director, 

25 and 
38 

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

2 bank or company (or a corporation which con3 trols (within the meaning of section 368(c)) such 

4 bank or company) pursuant to which the holder 

5 is required to sell back such stock (at the same 

6 price as the individual acquired such stock) upon 

7 ceasing to hold the office of director. 

8 ‘‘(3) CROSS REFERENCE.— 

‘‘For treatment of certain distributions with respect to restricted bank director stock, see section 

1368(f).’’. 

9 (b) DISTRIBUTIONS.—Section 1368 (relating to dis10 tributions) is amended by adding at the end the following 

11 new subsection: 

12 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di13 rector receives a distribution (not in part or full payment 

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

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

16 1361(f)), the amount of such distribution— 

17 ‘‘(1) shall be includible in gross income of the di18 rector, and 

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

20 taxable year of such corporation in which or with 

21 which ends the taxable year in which such amount in 

22 included in the gross income of the director.’’. 
39 

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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2004. 

4 SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALI5 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 

6 AND TERMINATIONS. 

7 (a) IN GENERAL.—Section 1362(f) (relating to inad8 vertent invalid elections or terminations) is amended— 

9 (1) by inserting ‘‘, section 1361(b)(3)(B)(ii),’’ 

10 after ‘‘subsection (a)’’ in paragraph (1), 

11 (2) by inserting ‘‘, section 1361(b)(3)(C),’’ after 

12 ‘‘subsection (d)’’ in paragraph (1)(B), 

13 (3) by amending paragraph (3)(A) to read as 

14 follows: 

15 ‘‘(A) so that the corporation for which the 

16 election was made is a small business corpora17 tion or a qualified subchapter S subsidiary, as 

18 the case may be, or’’, 

19 (4) by amending paragraph (4) to read as fol20 lows: 

21 ‘‘(4) the corporation for which the election was 

22 made, and each person who was a shareholder in such 

23 corporation at any time during the period specified 

24 pursuant to this subsection, agrees to make such ad25 justments (consistent with the treatment of such cor-
40 

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1 poration as an S corporation or a qualified sub2 chapter S subsidiary, as the case may be) as may be 

3 required by the Secretary with respect to such pe4 riod,’’, and 

5 (5) by inserting ‘‘or a qualified subchapter S 

6 subsidiary, as the case may be’’ after ‘‘S corporation’’ 

7 in the matter following paragraph (4). 

8 (b) EFFECTIVE DATE.—The amendments made by this 

9 section shall apply to taxable years beginning after Decem10 ber 31, 2004. 

11 SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUB12 CHAPTER S SUBSIDIARIES. 

13 (a) IN GENERAL.—Section 1361(b)(3)(A) (relating to 

14 treatment of certain wholly owned subsidiaries) is amended 

15 by inserting ‘‘and in the case of information returns re16 quired under part III of subchapter A of chapter 61’’ after 

17 ‘‘Secretary’’. 

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

19 section shall apply to taxable years beginning after Decem20 ber 31, 2004. 

21 SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EM22 PLOYER SECURITIES. 

23 (a) IN GENERAL.—Subsection (f) of section 4975 (re24 lating to other definitions and special rules) is amended 

25 by adding at the end the following new paragraph: 
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1 ‘‘(7) S CORPORATION REPAYMENT OF LOANS FOR

2 QUALIFYING EMPLOYER SECURITIES.—A plan shall 

3 not be treated as violating the requirements of section 

4 401 or 409 or subsection (e)(7), or as engaging in a 

5 prohibited transaction for purposes of subsection 

6 (d)(3), merely by reason of any distribution (as de7 scribed in section 1368(a)) with respect to S corpora8 tion stock that constitutes qualifying employer securi9 ties, which in accordance with the plan provisions is 

10 used to make payments on a loan described in sub11 section (d)(3) the proceeds of which were used to ac12 quire such qualifying employer securities (whether or 

13 not allocated to participants). The preceding sentence 

14 shall not apply in the case of a distribution which is 

15 paid with respect to any employer security which is 

16 allocated to a participant unless the plan provides 

17 that employer securities with a fair market value of 

18 not less than the amount of such distribution are allo19 cated to such participant for the year which (but for 

20 the preceding sentence) such distribution would have 

21 been allocated to such participant.’’. 

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

23 section shall apply to distributions with respect to S cor24 poration stock made after December 31, 2004. 
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1 Subtitle D—Alternative Minimum 

2 Tax Relief 

3 SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MIN4 IMUM TAX. 

5 (a) IN GENERAL.— 

6 (1) Subsection (a) of section 59 is amended by 

7 striking paragraph (2) and by redesignating para8 graphs (3) and (4) as paragraphs (2) and (3), respec9 tively. 

10 (2) Section 53(d)(1)(B)(i)(II) is amended by 

11 striking ‘‘and if section 59(a)(2) did not apply’’. 

12 (b) EFFECTIVE DATE.—The amendments made by this 

13 section shall apply to taxable years beginning after Decem14 ber 31, 2004. 

15 SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE 

16 MINIMUM TAX FOR SMALL CORPORATIONS. 

17 (a) IN GENERAL.—Subparagraphs (A) and (B) of sec18 tion 55(e)(1) are each amended by striking ‘‘$7,500,000’’ 

19 each place it appears and inserting ‘‘$20,000,000’’. 

20 (b) EFFECTIVE DATE.—The amendment made by this 

21 section shall apply to taxable years beginning after Decem22 ber 31, 2005. 
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1 SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO IN2 CREASE ALTERNATIVE MINIMUM TAX. 

3 (a) IN GENERAL.—Subsection (c) of section 55 (defin4 ing regular tax) is amended by redesignating paragraph 

5 (2) as paragraph (3) and by inserting after paragraph (1) 

6 the following new paragraph: 

7 ‘‘(2) COORDINATION WITH INCOME AVERAGING

8 FOR FARMERS.—Solely for purposes of this section, 

9 section 1301 (relating to averaging of farm income) 

10 shall not apply in computing the regular tax liabil11 ity.’’. 

12 (b) EFFECTIVE DATE.—The amendment made by sub13 section (a) shall apply to taxable years beginning after De14 cember 31, 2003. 

15 Subtitle E—Restructuring of 

16 Incentives for Alcohol Fuels, Etc. 

17 SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED 

18 WITH EXCISE TAX CREDIT; REPEAL OF OTHER 

19 ALCOHOL-BASED FUEL INCENTIVES; ETC. 

20 (a) EXCISE TAX CREDIT FOR ALCOHOL FUEL MIX21 TURES.— 

22 (1) IN GENERAL.—Subsection (f) of section 6427 

23 is amended to read as follows: 

24 ‘‘(f) ALCOHOL FUEL MIXTURES.— 
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1 ‘‘(1) IN GENERAL.—The amount of credit which 

2 would (but for section 40(c)) be determined under sec3 tion 40(a)(1) for any period— 

4 ‘‘(A) shall, with respect to taxable events oc5 curring during such period, be treated— 

6 ‘‘(i) as a payment of the taxpayer’s li7 ability for tax imposed by section 4081, and 

8 ‘‘(ii) as received at the time of the tax9 able event, and 

10 ‘‘(B) to the extent such amount of credit ex11 ceeds such liability for such period, shall (except 

12 as provided in subsection (k)) be paid subject to 

13 subsection (i)(3) by the Secretary without inter14 est. 

15 ‘‘(2) SPECIAL RULES.— 

16 ‘‘(A) ONLY CERTAIN ALCOHOL TAKEN INTO

17 ACCOUNT.—For purposes of paragraph (1), sec18 tion 40 shall be applied— 

19 ‘‘(i) by not taking into account alcohol 

20 with a proof of less than 190, and 

21 ‘‘(ii) by treating as alcohol the alcohol 

22 gallon equivalent of ethyl tertiary butyl 

23 ether or other ethers produced from such al24 cohol. 
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1 ‘‘(B) TREATMENT OF REFINERS.—For pur2 poses of paragraph (1), in the case of a mix3 ture— 

4 ‘‘(i) the alcohol in which is described 

5 in subparagraph (A)(ii), and 

6 ‘‘(ii) which is produced by any person 

7 at a refinery prior to any taxable event, 

8 section 40 shall be applied by treating such per9 son as having sold such mixture at the time of 

10 its removal from the refinery (and only at such 

11 time) to another person for use as a fuel. 

12 ‘‘(3) MIXTURES NOT USED AS FUEL.—Rules 

13 similar to the rules of subparagraphs (A) and (D) of 

14 section 40(d)(3) shall apply for purposes of this sub15 section. 

16 ‘‘(4) TERMINATION.—This section shall apply 

17 only to periods to which section 40 applies, deter18 mined by substituting in section 40(e)— 

19 ‘‘(A) ‘December 31, 2010’ for ‘December 31, 

20 2007’, and 

21 ‘‘(B) ‘January 1, 2011’ for ‘January 1, 

22 2008’.’’ 

23 (2) REVISION OF RULES FOR PAYMENT OF CRED24 IT.—Paragraph (3) of section 6427(i) is amended to 

25 read as follows: 
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1 ‘‘(3) SPECIAL RULE FOR ALCOHOL MIXTURE

2 CREDIT.— 

3 ‘‘(A) IN GENERAL.—A claim may be filed 

4 under subsection (f)(1)(B) by any person for any 

5 period— 

6 ‘‘(i) for which $200 or more is payable 

7 under such subsection (f)(1)(B), and 

8 ‘‘(ii) which is not less than 1 week. 

9 In the case of an electronic claim, this subpara10 graph shall be applied without regard to clause 

11 (i). 

12 ‘‘(B) PAYMENT OF CLAIM.—Notwith13 standing subsection (f)(1)(B), if the Secretary 

14 has not paid pursuant to a claim filed under 

15 this section within 45 days of the date of the fil16 ing of such claim (20 days in the case of an elec17 tronic claim), the claim shall be paid with inter18 est from such date determined by using the over19 payment rate and method under section 6621. 

20 ‘‘(C) TIME FOR FILING CLAIM.—No claim 

21 filed under this paragraph shall be allowed un22 less filed on or before the last day of the first 

23 quarter following the earliest quarter included in 

24 the claim.’’ 
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1 (b) REPEAL OF OTHER INCENTIVES FOR FUEL MIX2 TURES.— 

3 (1) Subsection (b) of section 4041 is amended to 

4 read as follows: 

5 ‘‘(b) EXEMPTION FOR OFF-HIGHWAY BUSINESS

6 USE.— 

7 ‘‘(1) IN GENERAL.—No tax shall be imposed by 

8 subsection (a) or (d)(1) on liquids sold for use or used 

9 in an off-highway business use. 

10 ‘‘(2) TAX WHERE OTHER USE.—If a liquid on 

11 which no tax was imposed by reason of paragraph (1) 

12 is used otherwise than in an off-highway business use, 

13 a tax shall be imposed by paragraph (1)(B), (2)(B), 

14 or (3)(A)(ii) of subsection (a) (whichever is appro15 priate) and by the corresponding provision of sub16 section (d)(1) (if any). 

17 ‘‘(3) OFF-HIGHWAY BUSINESS USE DEFINED.— 

18 For purposes of this subsection, the term ‘off-highway 

19 business use’ has the meaning given to such term by 

20 section 6421(e)(2); except that such term shall not, for 

21 purposes of subsection (a)(1), include use in a diesel22 powered train.’’ 

23 (2) Section 4041(k) is hereby repealed. 

24 (3) Section 4081(c) is hereby repealed. 

25 (4) Section 4091(c) is hereby repealed. 
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1 (c) TRANSFERS TO HIGHWAY TRUST FUND.—Para2 graph (4) of section 9503(b) is amended by adding ‘‘or’’ 

3 at the end of subparagraph (B), by striking the comma at 

4 the end of subparagraph (C) and inserting a period, and 

5 by striking subparagraphs (D), (E), and (F). 

6 (d) CONFORMING AMENDMENTS.— 

7 (1) Subsection (c) of section 40 is amended to 

8 read as follows: 

9 ‘‘(c) COORDINATION WITH EXCISE TAX BENEFITS.— 

10 The amount of the credit determined under this section with 

11 respect to any alcohol shall, under regulations prescribed 

12 by the Secretary, be properly reduced to take into account 

13 the benefit provided with respect to such alcohol under sec14 tion 6427(f).’’ 

15 (2) Subparagraph (B) of section 40(d)(4) is 

16 amended by striking ‘‘under section 4041(k) or 

17 4081(c)’’ and inserting ‘‘under section 6427(f)’’. 

18 (e) EFFECTIVE DATES.— 

19 (1) IN GENERAL.—Except as provided by para20 graph (2), the amendments made by this section shall 

21 apply to fuel sold or used after September 30, 2004. 

22 (2) SUBSECTION (c).—The amendments made by 

23 subsection (c) shall apply to taxes imposed after Sep24 tember 30, 2003. 
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1 SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL 

2 FUND. 

3 (a) TRANSFERS TO FUND.—Section 9503(b)(1) is 

4 amended by adding at the end the following new flush sen5 tence: 

6 ‘‘For purposes of this paragraph, the amount of taxes 

7 received under section 4081 shall include any amount 

8 treated as a payment under section 6427(f)(1)(A) and 

9 shall not be reduced by the amount paid under section 

10 6427(f)(1)(B).’’. 

11 (b) TRANSFERS FROM FUND.—Subparagraph (A) of 

12 section 9503(c)(2) is amended by adding at the end the fol13 lowing new sentence: ‘‘Clauses (i)(III) and (ii) shall not 

14 apply to claims under section 6427(f)(1)(B).’’ 

15 (c) EFFECTIVE DATE.— 

16 (1) SUBSECTION (a).—The amendment made by 

17 subsection (a) shall apply to taxes received after Sep18 tember 30, 2004. 

19 (2) SUBSECTION (b).—The amendment made by 

20 subsection (b) shall apply to amounts paid after Sep21 tember 30, 2004, and (to the extent related to section 

22 34 of the Internal Revenue Code of 1986) to fuel used 

23 after such date. 
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1 Subtitle F—Stock Options and Em2 ployee Stock Purchase Plan 

3 Stock Options 

4 SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 

5 EMPLOYEE STOCK PURCHASE PLAN STOCK 

6 OPTIONS FROM WAGES. 

7 (a) EXCLUSION FROM EMPLOYMENT TAXES.— 

8 (1) SOCIAL SECURITY TAXES.— 

9 (A) Section 3121(a) (relating to definition 

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

11 of paragraph (20), by striking the period at the 

12 end of paragraph (21) and inserting ‘‘; or’’, and 

13 by inserting after paragraph (21) the following 

14 new paragraph: 

15 ‘‘(22) remuneration on account of— 

16 ‘‘(A) a transfer of a share of stock to any 

17 individual pursuant to an exercise of an incen18 tive stock option (as defined in section 422(b)) or 

19 under an employee stock purchase plan (as de20 fined in section 423(b)), or 

21 ‘‘(B) any disposition by the individual of 

22 such stock.’’. 

23 (B) Section 209(a) of the Social Security 

24 Act is amended by striking ‘‘or’’ at the end of 

25 paragraph (17), by striking the period at the end 
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1 of paragraph (18) and inserting ‘‘; or’’, and by 

2 inserting after paragraph (18) the following new 

3 paragraph: 

4 ‘‘(19) Remuneration on account of— 

5 ‘‘(A) a transfer of a share of stock to any 

6 individual pursuant to an exercise of an incen7 tive stock option (as defined in section 422(b) of 

8 the Internal Revenue Code of 1986) or under an 

9 employee stock purchase plan (as defined in sec10 tion 423(b) of such Code), or 

11 ‘‘(B) any disposition by the individual of 

12 such stock.’’. 

13 (2) RAILROAD RETIREMENT TAXES.—Subsection 

14 (e) of section 3231 is amended by adding at the end 

15 the following new paragraph: 

16 ‘‘(12) QUALIFIED STOCK OPTIONS.—The term 

17 ‘compensation’ shall not include any remuneration on 

18 account of— 

19 ‘‘(A) a transfer of a share of stock to any 

20 individual pursuant to an exercise of an incen21 tive stock option (as defined in section 422(b)) or 

22 under an employee stock purchase plan (as de23 fined in section 423(b)), or 

24 ‘‘(B) any disposition by the individual of 

25 such stock.’’. 
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1 (3) UNEMPLOYMENT TAXES.—Section 3306(b) 

2 (relating to definition of wages) is amended by strik3 ing ‘‘or’’ at the end of paragraph (17), by striking the 

4 period at the end of paragraph (18) and inserting ‘‘; 

5 or’’, and by inserting after paragraph (18) the fol6 lowing new paragraph: 

7 ‘‘(19) remuneration on account of— 

8 ‘‘(A) a transfer of a share of stock to any 

9 individual pursuant to an exercise of an incen10 tive stock option (as defined in section 422(b)) or 

11 under an employee stock purchase plan (as de12 fined in section 423(b)), or 

13 ‘‘(B) any disposition by the individual of 

14 such stock.’’. 

15 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS16 QUALIFYING DISPOSITIONS.—Section 421(b) (relating to ef17 fect of disqualifying dispositions) is amended by adding at 

18 the end the following new sentence: ‘‘No amount shall be 

19 required to be deducted and withheld under chapter 24 with 

20 respect to any increase in income attributable to a disposi21 tion described in the preceding sentence.’’. 

22 (c) WAGE WITHHOLDING NOT REQUIRED ON COM23 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER24 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

25 423(c) (relating to special rule where option price is be-
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1 tween 85 percent and 100 percent of value of stock) is 

2 amended by adding at the end the following new sentence: 

3 ‘‘No amount shall be required to be deducted and withheld 

4 under chapter 24 with respect to any amount treated as 

5 compensation under this subsection.’’. 

6 (d) EFFECTIVE DATE.—The amendments made by this 

7 section shall apply to stock acquired pursuant to options 

8 exercised after the date of the enactment of this Act. 

9 Subtitle G—Incentives to Reinvest 

10 Foreign Earnings in United States 

11 SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN 

12 UNITED STATES. 

13 (a) IN GENERAL.—Subpart F of part III of subchapter 

14 N of chapter 1 (relating to controlled foreign corporations) 

15 is amended by adding at the end the following new section: 

16 ‘‘SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION. 

17 ‘‘(a) DEDUCTION.— 

18 ‘‘(1) IN GENERAL.—In the case of a corporation 

19 which is a United States shareholder, there shall be 

20 allowed as a deduction an amount equal to 85 percent 

21 of the dividends which are received by such share22 holder from controlled foreign corporations during the 

23 election period. 

24 ‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON25 TROLLED FOREIGN CORPORATIONS.—If, within the 
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1 election period, a United States shareholder receives a 

2 distribution from a controlled foreign corporation 

3 which is excluded from gross income under section 

4 959(a), such distribution shall be treated for purposes 

5 of this section as a dividend to the extent of any 

6 amount included in income by such United States 

7 shareholder under section 951(a)(1)(A) as a result of 

8 any dividend paid during the election period to— 

9 ‘‘(A) such controlled foreign corporation 

10 from another controlled foreign corporation that 

11 is in a chain of ownership described in section 

12 958(a), or 

13 ‘‘(B) any other controlled foreign corpora14 tion in such chain of ownership, but only to the 

15 extent of distributions described in section 959(b) 

16 which are made during the election period to the 

17 controlled foreign corporation from which such 

18 United States shareholder received such distribu19 tion. 

20 ‘‘(b) LIMITATIONS.— 

21 ‘‘(1) IN GENERAL.—The amount of dividends 

22 taken into account under subsection (a) shall not ex23 ceed the greater of— 

24 ‘‘(A) $500,000,000, 
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1 ‘‘(B) the amount shown on the applicable fi2 nancial statement as earnings permanently rein3 vested outside the United States, or 

4 ‘‘(C) in the case of an applicable financial 

5 statement which fails to show a specific amount 

6 of earnings permanently reinvested outside the 

7 United States and which shows a specific 

8 amount of tax liability attributable to such earn9 ings, the amount of such earnings determined in 

10 such manner as the Secretary may prescribe. 

11 Except as provided in subparagraph (C), if there is 

12 no statement or such statement fails to show a specific 

13 amount of such earnings or liability, such amount 

14 shall be treated as being zero for purposes of this 

15 paragraph. 

16 ‘‘(2) DIVIDENDS MUST BE EXTRAORDINARY.— 

17 The amount of dividends taken into account under 

18 subsection (a) shall not exceed the excess (if any) of— 

19 ‘‘(A) the dividends received during the tax20 able year by such shareholder from controlled 

21 foreign corporations, over 

22 ‘‘(B) the annual average for the base period 

23 years of— 
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1 ‘‘(i) the dividends received during each 

2 base period year by such shareholder from 

3 such corporations, 

4 ‘‘(ii) the amounts includible in such 

5 shareholder’s gross income for each base pe6 riod year under section 951(a)(1)(B) with 

7 respect to such corporations, and 

8 ‘‘(iii) the amounts that would have 

9 been included for each base period year but 

10 for section 959(a) with respect to such cor11 porations. 

12 The amount taken into account under clause 

13 (iii) for any base period year shall not include 

14 any amount which is not includible in gross in15 come by reason of an amount described in clause 

16 (ii) with respect to a prior taxable year. 

17 ‘‘(3) REQUIREMENT TO INVEST IN UNITED

18 STATES.—Subsection (a) shall not apply to any divi19 dend received by a United States shareholder unless 

20 the amount of the dividend is invested in the United 

21 States pursuant to a plan describing the expenditures 

22 to be made with such amount— 

23 ‘‘(A) which, before the dividend is received, 

24 is approved by the president or chief executive of25 ficer of such shareholder, and 
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1 ‘‘(B) which is approved by the Board of Di2 rectors (or management committee) of such 

3 shareholder no later than its first meeting on or 

4 after the date the dividend is received. 

5 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur6 poses of this section— 

7 ‘‘(1) ELECTION PERIOD.—The term ‘election pe8 riod’ means— 

9 ‘‘(A) if this section applies to the taxpayer’s 

10 last taxable year beginning before the date of the 

11 enactment of this section, any 6-month or shorter 

12 period during such year which is after the date 

13 of the enactment of this section and which is se14 lected by the taxpayer, and 

15 ‘‘(B) if this section applies to the taxpayer’s 

16 first taxable year beginning on or after such 

17 date, the 1st 6 months of such taxable year. 

18 ‘‘(2) APPLICABLE FINANCIAL STATEMENT.—The 

19 term ‘applicable financial statement’ means the most 

20 recently audited financial statement (including notes 

21 and other documents which accompany such state22 ment)— 

23 ‘‘(A) which is certified on or before March 

24 31, 2003, as being prepared in accordance with 

25 generally accepted accounting principles, and 
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1 ‘‘(B) which is used for the purposes of a 

2 statement or report— 

3 ‘‘(i) to creditors, 

4 ‘‘(ii) to shareholders, or 

5 ‘‘(iii) for any other substantial nontax 

6 purpose. 

7 In the case of a corporation required to file a finan8 cial statement with the Securities and Exchange 

9 Commission, such term means the most recent such 

10 statement filed on or before March 31, 2003. 

11 ‘‘(3) BASE PERIOD YEARS.—The base period 

12 years are the 3 taxable years— 

13 ‘‘(A) which are among the 5 most recent 

14 taxable years ending on or before March 31, 

15 2003, and 

16 ‘‘(B) which are determined by dis17 regarding— 

18 ‘‘(i) 1 taxable year for which the sum 

19 of the amounts described in clauses (i), (ii), 

20 and (iii) of subsection (b)(2)(B) is the larg21 est, and 

22 ‘‘(ii) 1 taxable year for which such 

23 sum is the smallest. 
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1 Rules similar to the rules of subparagraphs (A) and 

2 (B) of section 41(f)(3) shall apply for purposes of this 

3 paragraph. 

4 ‘‘(4) COORDINATION WITH DIVIDENDS RECEIVED

5 DEDUCTION.—No deduction shall be allowed under 

6 section 243 or 245 for any dividend for which a de7 duction is allowed under this section. 

8 ‘‘(d) DENIAL OF FOREIGN TAX CREDIT.— 

9 ‘‘(1) IN GENERAL.—No credit shall be allowed 

10 under section 901 for any taxes paid or accrued (or 

11 treated as paid or accrued) with respect to the deduct12 ible portion of any dividend or of any amount de13 scribed in subsection (a)(2). No deduction shall be al14 lowed under this chapter for any tax for which credit 

15 is not allowable by reason of the preceding sentence. 

16 ‘‘(2) DEDUCTIBLE PORTION.—For purposes of 

17 paragraph (1), unless the taxpayer otherwise specifies, 

18 the deductible portion of any dividend is the amount 

19 which bears the same ratio to the amount of such div20 idend as the amount allowed as a deduction under 

21 subsection (a) for the taxable year bears to the 

22 amount described in subsection (b)(2)(A) for such 

23 year. 

24 ‘‘(e) INCREASE IN TAX ON INCLUDED AMOUNTS NOT

25 REDUCED BY CREDITS, ETC.— 
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1 ‘‘(1) IN GENERAL.—Any tax under this chapter 

2 by reason of nondeductible CFC dividends shall not be 

3 treated as tax imposed by this chapter for purposes 

4 of determining— 

5 ‘‘(A) the amount of any credit allowable 

6 under this chapter, or 

7 ‘‘(B) the amount of the tax imposed by sec8 tion 55. 

9 Subparagraph (A) shall not apply to the credit under 

10 section 53 or to the credit under section 27(a) with 

11 respect to taxes attributable to such dividends. 

12 ‘‘(2) INCLUSIONS MAY NOT BE OFFSET BY NET

13 OPERATING LOSSES.— 

14 ‘‘(A) IN GENERAL.—The taxable income of 

15 any United States shareholder for any taxable 

16 year shall in no event be less than the amount 

17 of nondeductible CFC dividends received during 

18 such year. 

19 ‘‘(B) COORDINATION WITH SECTION 172.— 

20 The nondeductible CFC dividends for any tax21 able year shall not be taken into account— 

22 ‘‘(i) in determining under section 172 

23 the amount of any net operating loss for 

24 such taxable year, and 
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1 ‘‘(ii) in determining taxable income for 

2 such taxable year for purposes of the 2nd 

3 sentence of section 172(b)(2). 

4 ‘‘(3) NONDEDUCTIBLE CFC DIVIDENDS.—For 

5 purposes of this subsection, the term ‘nondeductible 

6 CFC dividends’ means the excess of the amount of 

7 dividends taken into account under subsection (a) 

8 over the deduction allowed under subsection (a) for 

9 such dividends. 

10 ‘‘(f) ELECTION.—This section shall apply for the tax11 payer’s first taxable year beginning on or after the date 

12 of the enactment of this section if the taxpayer elects its 

13 application for such taxable year. The taxpayer may elect 

14 to apply this section to the taxpayer’s last taxable year be15 ginning before the date of the enactment of this section in 

16 lieu of such first taxable year.’’ 

17 (b) ALTERNATIVE MINIMUM TAX.—Subparagraph (C) 

18 of section 56(g)(4) is amended by adding at the end the 

19 following new clause: 

20 ‘‘(v) SPECIAL RULE FOR CERTAIN DIS21 TRIBUTIONS FROM CONTROLLED FOREIGN

22 CORPORATIONS.—Clause (i) shall not apply 

23 to any deduction allowable under section 

24 965.’’. 
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1 (c) CLERICAL AMENDMENT.—The table of sections for 

2 subpart F of part III of subchapter N of chapter 1 is 

3 amended by adding at the end the following new item: 

‘‘Sec. 965. Temporary dividends received deduction.’’. 

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

5 section shall apply to taxable years ending on or after the 

6 date of the enactment of this Act. 

7 Subtitle H—Other Incentive 

8 Provisions 

9 SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON AC10 COUNT OF WEATHER-RELATED CONDITIONS. 

11 (a) RULES FOR REPLACEMENT OF INVOLUNTARILY

12 CONVERTED LIVESTOCK.—Subsection (e) of section 1033 

13 (relating to involuntary conversions) is amended— 

14 (1) by striking ‘‘CONDITIONS.—For purposes’’ 

15 and inserting ‘‘CONDITIONS.— 

16 ‘‘(1) IN GENERAL.—For purposes’’, and 

17 (2) by adding at the end the following new para18 graph: 

19 ‘‘(2) EXTENSION OF REPLACEMENT PERIOD.— 

20 ‘‘(A) IN GENERAL.—In the case of drought, 

21 flood, or other weather-related conditions de22 scribed in paragraph (1) which result in the 

23 area being designated as eligible for assistance 

24 by the Federal Government, subsection (a)(2)(B) 
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1 shall be applied with respect to any converted 

2 property by substituting ‘4 years’ for ‘2 years’. 

3 ‘‘(B) FURTHER EXTENSION BY SEC4 RETARY.—The Secretary may extend on a re5 gional basis the period for replacement under 

6 this section (after the application of subpara7 graph (A)) for such additional time as the Sec8 retary determines appropriate if the weather-re9 lated conditions which resulted in such applica10 tion continue for more than 3 years.’’. 

11 (b) INCOME INCLUSION RULES.—Subsection (e) of sec12 tion 451 (relating to special rule for proceeds from livestock 

13 sold on account of drought, flood, or other weather-related 

14 conditions) is amended by adding at the end the following 

15 new paragraph: 

16 ‘‘(3) SPECIAL ELECTION RULES.—If section 

17 1033(e)(2) applies to a sale or exchange of livestock 

18 described in paragraph (1), the election under para19 graph (1) shall be deemed valid if made during the 

20 replacement period described in such section.’’. 

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

22 section shall apply to any taxable year with respect to 

23 which the due date (without regard to extensions) for the 

24 return is after December 31, 2002. 
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1 SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA2 TIVES WITHOUT REDUCING PATRONAGE DIVI3 DENDS. 

4 (a) IN GENERAL.—Subsection (a) of section 1388 (re5 lating to patronage dividend defined) is amended by adding 

6 at the end the following: ‘‘For purposes of paragraph (3), 

7 net earnings shall not be reduced by amounts paid during 

8 the year as dividends on capital stock or other proprietary 

9 capital interests of the organization to the extent that the 

10 articles of incorporation or bylaws of such organization or 

11 other contract with patrons provide that such dividends are 

12 in addition to amounts otherwise payable to patrons which 

13 are derived from business done with or for patrons during 

14 the taxable year.’’. 

15 (b) EFFECTIVE DATE.—The amendment made by this 

16 section shall apply to distributions in taxable years begin17 ning after the date of the enactment of this Act. 

18 SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 

19 631(b) TO APPLY TO OUTRIGHT SALES BY 

20 LANDOWNERS. 

21 (a) IN GENERAL.—The first sentence of section 631(b) 

22 (relating to disposal of timber with a retained economic in23 terest) is amended by striking ‘‘retains an economic interest 

24 in such timber’’ and inserting ‘‘either retains an economic 

25 interest in such timber or makes an outright sale of such 

26 timber’’. 
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1 (b) CONFORMING AMENDMENTS.— 

2 (1) The third sentence of section 631(b) is 

3 amended by striking ‘‘The date of disposal’’ and in4 serting ‘‘In the case of disposal of timber with a re5 tained economic interest, the date of disposal’’. 

6 (2) The heading for section 631(b) is amended by 

7 striking ‘‘WITH A RETAINED ECONOMIC INTEREST’’. 

8 (c) EFFECTIVE DATE.—The amendments made by this 

9 section shall apply to sales after December 31, 2004. 

10 SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PART11 NERSHIPS TREATED AS QUALIFYING INCOME 

12 OF REGULATED INVESTMENT COMPANIES. 

13 (a) IN GENERAL.—Paragraph (2) of section 851(b) 

14 (defining regulated investment company) is amended to 

15 read as follows: 

16 ‘‘(2) at least 90 percent of its gross income is de17 rived from— 

18 ‘‘(A) dividends, interest, payments with re19 spect to securities loans (as defined in section 

20 512(a)(5)), and gains from the sale or other dis21 position of stock or securities (as defined in sec22 tion 2(a)(36) of the Investment Company Act of 

23 1940, as amended) or foreign currencies, or other 

24 income (including but not limited to gains from 

25 options, futures or forward contracts) derived 
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1 with respect to its business of investing in such 

2 stock, securities, or currencies, and 

3 ‘‘(B) distributions or other income derived 

4 from an interest in a qualified publicly traded 

5 partnership (as defined in subsection (h)); and’’. 

6 (b) SOURCE FLOW-THROUGH RULE NOT TO APPLY.— 

7 The last sentence of section 851(b) is amended by inserting 

8 ‘‘(other than a qualified publicly traded partnership as de9 fined in subsection (h))’’ after ‘‘derived from a partner10 ship’’. 

11 (c) LIMITATION ON OWNERSHIP.—Subsection (c) of 

12 section 851 is amended by redesignating paragraph (5) as 

13 paragraph (6) and inserting after paragraph (4) the fol14 lowing new paragraph: 

15 ‘‘(5) The term ‘outstanding voting securities of 

16 such issuer’ shall include the equity securities of a 

17 qualified publicly traded partnership (as defined in 

18 subsection (h)).’’. 

19 (d) DEFINITION OF QUALIFIED PUBLICLY TRADED

20 PARTNERSHIP.—Section 851 is amended by adding at the 

21 end the following new subsection: 

22 ‘‘(h) QUALIFIED PUBLICLY TRADED PARTNERSHIP.— 

23 For purposes of this section, the term ‘qualified publicly 

24 traded partnership’ means a publicly traded partnership 

25 described in section 7704(b) other than a partnership which 
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1 would satisfy the gross income requirements of section 

2 7704(c)(2) if qualifying income included only income de3 scribed in subsection (b)(2)(A).’’. 

4 (e) DEFINITION OF QUALIFYING INCOME.—Section 

5 7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ and 

6 inserting ‘‘section 851(b)(2)(A)’’. 

7 (f) LIMITATION ON COMPOSITION OF ASSETS.—Sub8 paragraph (B) of section 851(b)(3) is amended to read as 

9 follows: 

10 ‘‘(B) not more than 25 percent of the value 

11 of its total assets is invested in— 

12 ‘‘(i) the securities (other than Govern13 ment securities or the securities of other reg14 ulated investment companies) of any one 

15 issuer, 

16 ‘‘(ii) the securities (other than the secu17 rities of other regulated investment compa18 nies) of two or more issuers which the tax19 payer controls and which are determined, 

20 under regulations prescribed by the Sec21 retary, to be engaged in the same or similar 

22 trades or businesses or related trades or 

23 businesses, or 
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1 ‘‘(iii) the securities of one or more 

2 qualified publicly traded partnerships (as 

3 defined in subsection (h)).’’. 

4 (g) APPLICATION OF SPECIAL PASSIVE ACTIVITY RULE

5 TO REGULATED INVESTMENT COMPANIES.—Subsection (k) 

6 of section 469 (relating to separate application of section 

7 in case of publicly traded partnerships) is amended by add8 ing at the end the following new paragraph: 

9 ‘‘(4) APPLICATION TO REGULATED INVESTMENT

10 COMPANIES.—For purposes of this section, a regulated 

11 investment company (as defined in section 851) hold12 ing an interest in a qualified publicly traded partner13 ship (as defined in section 851(h)) shall be treated as 

14 a taxpayer described in subsection (a)(2) with respect 

15 to items attributable to such interest.’’. 

16 (h) EFFECTIVE DATE.—The amendments made by this 

17 section shall apply to taxable years beginning after the date 

18 of the enactment of this Act. 

19 SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE IN20 VESTMENT TRUSTS. 

21 (a) EXPANSION OF STRAIGHT DEBT SAFE HARBOR.— 

22 Section 856 (defining real estate investment trust) is 

23 amended— 

24 (1) in subsection (c) by striking paragraph (7), 

25 and 
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1 (2) by adding at the end the following new sub2 section: 

3 ‘‘(m) SAFE HARBOR IN APPLYING SUBSECTION

4 (c)(4).— 

5 ‘‘(1) IN GENERAL.—In applying subclause (III) 

6 of subsection (c)(4)(B)(iii), except as otherwise deter7 mined by the Secretary in regulations, the following 

8 shall not be considered securities held by the trust: 

9 ‘‘(A) Straight debt securities of an issuer 

10 which meet the requirements of paragraph (2). 

11 ‘‘(B) Any loan to an individual or an es12 tate. 

13 ‘‘(C) Any section 467 rental agreement (as 

14 defined in section 467(d)), other than with a per15 son described in subsection (d)(2)(B). 

16 ‘‘(D) Any obligation to pay rents from real 

17 property (as defined in subsection (d)(1)). 

18 ‘‘(E) Any security issued by a State or any 

19 political subdivision thereof, the District of Co20 lumbia, a foreign government or any political 

21 subdivision thereof, or the Commonwealth of 

22 Puerto Rico, but only if the determination of 

23 any payment received or accrued under such se24 curity does not depend in whole or in part on 

25 the profits of any entity not described in this 
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1 subparagraph or payments on any obligation 

2 issued by such an entity. 

3 ‘‘(F) Any security issued by a real estate 

4 investment trust. 

5 ‘‘(G) Any other arrangement as determined 

6 by the Secretary. 

7 ‘‘(2) SPECIAL RULES RELATING TO STRAIGHT

8 DEBT SECURITIES.— 

9 ‘‘(A) IN GENERAL.—For purposes of para10 graph (1)(A), securities meet the requirements of 

11 this paragraph if such securities are straight 

12 debt, as defined in section 1361(c)(5) (without 

13 regard to subparagraph (B)(iii) thereof). 

14 ‘‘(B) SPECIAL RULES RELATING TO CERTAIN

15 CONTINGENCIES.—For purposes of subparagraph 

16 (A), any interest or principal shall not be treat17 ed as failing to satisfy section 1361(c)(5)(B)(i) 

18 solely by reason of the fact that— 

19 ‘‘(i) the time of payment of such inter20 est or principal is subject to a contingency, 

21 but only if— 

22 ‘‘(I) any such contingency does 

23 not have the effect of changing the ef24 fective yield to maturity, as deter25 mined under section 1272, other than a 
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1 change in the annual yield to maturity 

which does not exceed the greater of 1 2 ⁄4

3 of 1 percent or 5 percent of the annual 

4 yield to maturity, or 

5 ‘‘(II) neither the aggregate issue price 

6 nor the aggregate face amount of the issuer’s 

7 debt instruments held by the trust exceeds 

8 $1,000,000 and not more than 12 months of 

9 unaccrued interest can be required to be 

10 prepaid thereunder, or 

11 ‘‘(ii) the time or amount of payment is 

12 subject to a contingency upon a default or 

13 the exercise of a prepayment right by the 

14 issuer of the debt, but only if such contin15 gency is consistent with customary commer16 cial practice. 

17 ‘‘(C) SPECIAL RULES RELATING TO COR18 PORATE OR PARTNERSHIP ISSUERS.—In the case 

19 of an issuer which is a corporation or a partner20 ship, securities that otherwise would be described 

21 in paragraph (1)(A) shall be considered not to be 

22 so described if the trust holding such securities 

23 and any of its controlled taxable REIT subsidi24 aries (as defined in subsection (d)(8)(A)(iv)) 

25 hold any securities of the issuer which— 
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1 ‘‘(i) are not described in paragraph (1) 

2 (prior to the application of this subpara3 graph), and 

4 ‘‘(ii) have an aggregate value greater 

5 than 1 percent of the issuer’s outstanding 

6 securities determined without regard to 

7 paragraph (3)(A)(i). 

8 ‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP

9 SECURITIES.— 

10 ‘‘(A) IN GENERAL.—For purposes of apply11 ing subclause (III) of subsection (c)(4)(B)(iii)— 

12 ‘‘(i) a trust’s interest as a partner in 

13 a partnership (as defined in section 

14 7701(a)(2)) shall not be considered a secu15 rity, and 

16 ‘‘(ii) the trust shall be deemed to own 

17 its proportionate share of each of the assets 

18 of the partnership. 

19 ‘‘(B) DETERMINATION OF TRUST’S INTER20 EST IN PARTNERSHIP ASSETS.—For purposes of 

21 subparagraph (A), with respect to any taxable 

22 year beginning after the date of the enactment of 

23 this subparagraph— 

24 ‘‘(i) the trust’s interest in the partner25 ship assets shall be the trust’s proportionate 
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1 interest in any securities issued by the part2 nership (determined without regard to sub3 paragraph (A)(i) and paragraph (4), but 

4 not including securities described in para5 graph (1)), and 

6 ‘‘(ii) the value of any debt instrument 

7 shall be the adjusted issue price thereof, as 

8 defined in section 1272(a)(4). 

9 ‘‘(4) CERTAIN PARTNERSHIP DEBT INSTRUMENTS

10 NOT TREATED AS A SECURITY.—For purposes of ap11 plying subclause (III) of subsection (c)(4)(B)(iii)— 

12 ‘‘(A) any debt instrument issued by a part13 nership and not described in paragraph (1) shall 

14 not be considered a security to the extent of the 

15 trust’s interest as a partner in the partnership, 

16 and 

17 ‘‘(B) any debt instrument issued by a part18 nership and not described in paragraph (1) shall 

19 not be considered a security if at least 75 percent 

20 of the partnership’s gross income (excluding 

21 gross income from prohibited transactions) is de22 rived from sources referred to in subsection 

23 (c)(3). 

24 ‘‘(5) SECRETARIAL GUIDANCE.—The Secretary is 

25 authorized to provide guidance (including through the 
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1 issuance of a written determination, as defined in sec2 tion 6110(b)) that an arrangement shall not be con3 sidered a security held by the trust for purposes of ap4 plying subclause (III) of subsection (c)(4)(B)(iii) not5 withstanding that such arrangement otherwise could 

6 be considered a security under subparagraph (F) of 

7 subsection (c)(5).’’. 

8 (b) CLARIFICATION OF APPLICATION OF LIMITED

9 RENTAL EXCEPTION.—Subparagraph (A) of section 

10 856(d)(8) (relating to special rules for taxable REIT sub11 sidiaries) is amended to read as follows: 

12 ‘‘(A) LIMITED RENTAL EXCEPTION.— 

13 ‘‘(i) IN GENERAL.—The requirements 

14 of this subparagraph are met with respect 

15 to any property if at least 90 percent of the 

16 leased space of the property is rented to per17 sons other than taxable REIT subsidiaries 

18 of such trust and other than persons de19 scribed in paragraph (2)(B). 

20 ‘‘(ii) RENTS MUST BE SUBSTANTIALLY

21 COMPARABLE.—Clause (i) shall apply only 

22 to the extent that the amounts paid to the 

23 trust as rents from real property (as defined 

24 in paragraph (1) without regard to para25 graph (2)(B)) from such property are sub-
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1 stantially comparable to such rents paid by 

2 the other tenants of the trust’s property for 

3 comparable space. 

4 ‘‘(iii) TIMES FOR TESTING RENT COM5 PARABILITY.—The substantial com6 parability requirement of clause (ii) shall be 

7 treated as met with respect to a lease to a 

8 taxable REIT subsidiary of the trust if such 

9 requirement is met under the terms of the 

10 lease— 

11 ‘‘(I) at the time such lease is en12 tered into, 

13 ‘‘(II) at the time of each extension 

14 of the lease, including a failure to exer15 cise a right to terminate, and 

16 ‘‘(III) at the time of any modi17 fication of the lease between the trust 

18 and the taxable REIT subsidiary if the 

19 rent under such lease is effectively in20 creased pursuant to such modification. 

21 With respect to subclause (III), if the tax22 able REIT subsidiary of the trust is a con23 trolled taxable REIT subsidiary of the trust, 

24 the term ‘rents from real property’ shall not 

25 in any event include rent under such lease 
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1 to the extent of the increase in such rent on 

2 account of such modification. 

3 ‘‘(iv) CONTROLLED TAXABLE REIT

4 SUBSIDIARY.—For purposes of clause (iii), 

5 the term ‘controlled taxable REIT sub6 sidiary’ means, with respect to any real es7 tate investment trust, any taxable REIT 

8 subsidiary of such trust if such trust owns 

9 directly or indirectly— 

10 ‘‘(I) stock possessing more than 50 

11 percent of the total voting power of the 

12 outstanding stock of such subsidiary, 

13 or 

14 ‘‘(II) stock having a value of more 

15 than 50 percent of the total value of the 

16 outstanding stock of such subsidiary. 

17 ‘‘(v) CONTINUING QUALIFICATION

18 BASED ON THIRD PARTY ACTIONS.—If the 

19 requirements of clause (i) are met at a time 

20 referred to in clause (iii), such requirements 

21 shall continue to be treated as met so long 

22 as there is no increase in the space leased 

23 to any taxable REIT subsidiary of such 

24 trust or to any person described in para25 graph (2)(B). 
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1 ‘‘(vi) CORRECTION PERIOD.—If there is 

2 an increase referred to in clause (v) during 

3 any calendar quarter with respect to any 

4 property, the requirements of clause (iii) 

5 shall be treated as met during the quarter 

6 and the succeeding quarter if such require7 ments are met at the close of such suc8 ceeding quarter.’’. 

9 (c) DELETION OF CUSTOMARY SERVICES EXCEP10 TION.—Subparagraph (B) of section 857(b)(7) (relating to 

11 redetermined rents) is amended by striking clause (ii) and 

12 by redesignating clauses (iii), (iv), (v), (vi), and (vii) as 

13 clauses (ii), (iii), (iv), (v), and (vi), respectively. 

14 (d) CONFORMITY WITH GENERAL HEDGING DEFINI15 TION.—Subparagraph (G) of section 856(c)(5) (relating to 

16 treatment of certain hedging instruments) is amended to 

17 read as follows: 

18 ‘‘(G) TREATMENT OF CERTAIN HEDGING IN19 STRUMENTS.—Except to the extent provided by 

20 regulations, any income of a real estate invest21 ment trust from a hedging transaction (as de22 fined in clause (ii) or (iii) of section 

23 1221(b)(2)(A)) which is clearly identified pursu24 ant to section 1221(a)(7), including gain from 

25 the sale or disposition of such a transaction, 
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1 shall not constitute gross income under para2 graph (2) to the extent that the transaction 

3 hedges any indebtedness incurred or to be in4 curred by the trust to acquire or carry real estate 

5 assets.’’. 

6 (e) CONFORMITY WITH REGULATED INVESTMENT

7 COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re8 lating to imposition of tax in case of failure to meet certain 

9 requirements) is amended by striking ‘‘90 percent’’ and in10 serting ‘‘95 percent’’. 

11 (f) SAVINGS PROVISIONS.— 

12 (1) RULES OF APPLICATION FOR FAILURE TO

13 SATISFY SECTION 856(c)(4).—Section 856(c) (relating 

14 to definition of real estate investment trust) is amend15 ed by inserting after paragraph (6) the following new 

16 paragraph: 

17 ‘‘(7) RULES OF APPLICATION FOR FAILURE TO

18 SATISFY PARAGRAPH (4).— 

19 ‘‘(A) DE MINIMIS FAILURE.—A corporation, 

20 trust, or association that fails to meet the re21 quirements of paragraph (4)(B)(iii) for a par22 ticular quarter shall nevertheless be considered to 

23 have satisfied the requirements of such para24 graph for such quarter if— 
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1 ‘‘(i) such failure is due to the owner2 ship of assets the total value of which does 

3 not exceed the lesser of— 

4 ‘‘(I) 1 percent of the total value of 

5 the trust’s assets at the end of the quar6 ter for which such measurement is 

7 done, and 

8 ‘‘(II) $10,000,000, and 

9 ‘‘(ii)(I) the corporation, trust, or asso10 ciation, following the identification of such 

11 failure, disposes of assets in order to meet 

12 the requirements of such paragraph within 

13 6 months after the last day of the quarter 

14 in which the corporation, trust or associa15 tion’s identification of the failure to satisfy 

16 the requirements of such paragraph oc17 curred or such other time period prescribed 

18 by the Secretary and in the manner pre19 scribed by the Secretary, or 

20 ‘‘(II) the requirements of such para21 graph are otherwise met within the time pe22 riod specified in subclause (I). 

23 ‘‘(B) FAILURES EXCEEDING DE MINIMIS

24 AMOUNT.—A corporation, trust, or association 

25 that fails to meet the requirements of paragraph 
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1 (4) for a particular quarter shall nevertheless be 

2 considered to have satisfied the requirements of 

3 such paragraph for such quarter if— 

4 ‘‘(i) such failure involves the ownership 

5 of assets the total value of which exceeds the 

6 de minimis standard described in subpara7 graph (A)(i) at the end of the quarter for 

8 which such measurement is done, 

9 ‘‘(ii) following the corporation, trust, 

10 or association’s identification of the failure 

11 to satisfy the requirements of such para12 graph for a particular quarter, a descrip13 tion of each asset that causes the corpora14 tion, trust, or association to fail to satisfy 

15 the requirements of such paragraph at the 

16 close of such quarter of any taxable year is 

17 set forth in a schedule for such quarter filed 

18 in accordance with regulations prescribed 

19 by the Secretary, 

20 ‘‘(iii) the failure to meet the require21 ments of such paragraph for a particular 

22 quarter is due to reasonable cause and not 

23 due to willful neglect, 
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1 ‘‘(iv) the corporation, trust, or associa2 tion pays a tax computed under subpara3 graph (C), and 

4 ‘‘(v)(I) the corporation, trust, or asso5 ciation disposes of the assets set forth on the 

6 schedule specified in clause (ii) within 6 

7 months after the last day of the quarter in 

8 which the corporation, trust or association’s 

9 identification of the failure to satisfy the re10 quirements of such paragraph occurred or 

11 such other time period prescribed by the 

12 Secretary and in the manner prescribed by 

13 the Secretary, or 

14 ‘‘(II) the requirements of such para15 graph are otherwise met within the time pe16 riod specified in subclause (I). 

17 ‘‘(C) TAX.—For purposes of subparagraph 

18 (B)(iv)— 

19 ‘‘(i) TAX IMPOSED.—If a corporation, 

20 trust, or association elects the application of 

21 this subparagraph, there is hereby imposed 

22 a tax on the failure described in subpara23 graph (B) of such corporation, trust, or as24 sociation. Such tax shall be paid by the cor25 poration, trust, or association. 
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1 ‘‘(ii) TAX COMPUTED.—The amount of 

2 the tax imposed by clause (i) shall be the 

3 greater of— 

4 ‘‘(I) $50,000, or 

5 ‘‘(II) the amount determined 

6 (pursuant to regulations promulgated 

7 by the Secretary) by multiplying the 

8 net income generated by the assets de9 scribed in the schedule specified in sub10 paragraph (B)(ii) for the period speci11 fied in clause (iii) by the highest rate 

12 of tax specified in section 11. 

13 ‘‘(iii) PERIOD.—For purposes of clause 

14 (ii)(II), the period described in this clause 

15 is the period beginning on the first date 

16 that the failure to satisfy the requirements 

17 of such paragraph (4) occurs as a result of 

18 the ownership of such assets and ending on 

19 the earlier of the date on which the trust 

20 disposes of such assets or the end of the first 

21 quarter when there is no longer a failure to 

22 satisfy such paragraph (4). 

23 ‘‘(iv) ADMINISTRATIVE PROVISIONS.— 

24 For purposes of subtitle F, the taxes im25 posed by this subparagraph shall be treated 
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1 as excise taxes with respect to which the de2 ficiency procedures of such subtitle apply.’’. 

3 (2) MODIFICATION OF RULES OF APPLICATION

4 FOR FAILURE TO SATISFY SECTIONS 856(c)(2) OR

5 856(c)(3).—Paragraph (6) of section 856(c) (relating 

6 to definition of real estate investment trust) is amend7 ed by striking subparagraphs (A) and (B), by redesig8 nating subparagraph (C) as subparagraph (B), and 

9 by inserting before subparagraph (B) (as so redesig10 nated) the following new subparagraph: 

11 ‘‘(A) following the corporation, trust, or as12 sociation’s identification of the failure to meet 

13 the requirements of paragraph (2) or (3), or of 

14 both such paragraphs, for any taxable year, a 

15 description of each item of its gross income de16 scribed in such paragraphs is set forth in a 

17 schedule for such taxable year filed in accordance 

18 with regulations prescribed by the Secretary, 

19 and’’. 

20 (3) REASONABLE CAUSE EXCEPTION TO LOSS OF

21 REIT STATUS IF FAILURE TO SATISFY REQUIRE22 MENTS.—Subsection (g) of section 856 (relating to 

23 termination of election) is amended— 
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1 (A) in paragraph (1) by inserting before the 

2 period at the end of the first sentence the fol3 lowing: ‘‘unless paragraph (5) applies’’, and 

4 (B) by adding at the end the following new 

5 paragraph: 

6 ‘‘(5) ENTITIES TO WHICH PARAGRAPH AP7 PLIES.—This paragraph applies to a corporation, 

8 trust, or association— 

9 ‘‘(A) which is not a real estate investment 

10 trust to which the provisions of this part apply 

11 for the taxable year due to one or more failures 

12 to comply with one or more of the provisions of 

13 this part (other than subsection (c)(6) or (c)(7) 

14 of section 856), 

15 ‘‘(B) such failures are due to reasonable 

16 cause and not due to willful neglect, and 

17 ‘‘(C) if such corporation, trust, or associa18 tion pays (as prescribed by the Secretary in reg19 ulations and in the same manner as tax) a pen20 alty of $50,000 for each failure to satisfy a pro21 vision of this part due to reasonable cause and 

22 not willful neglect.’’. 

23 (4) DEDUCTION OF TAX PAID FROM AMOUNT RE24 QUIRED TO BE DISTRIBUTED.—Subparagraph (E) of 

25 section 857(b)(2) is amended by striking ‘‘(7)’’ and 
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1 inserting ‘‘(7) of this subsection, section 

2 856(c)(7)(B)(iii), and section 856(g)(1).’’. 

3 (5) EXPANSION OF DEFICIENCY DIVIDEND PRO4 CEDURE.—Subsection (e) of section 860 is amended 

5 by striking ‘‘or’’ at the end of paragraph (2), by strik6 ing the period at the end of paragraph (3) and insert7 ing ‘‘; or’’, and by adding at the end the following 

8 new paragraph: 

9 ‘‘(4) a statement by the taxpayer attached to its 

10 amendment or supplement to a return of tax for the 

11 relevant tax year.’’. 

12 (g) EFFECTIVE DATES.— 

13 (1) IN GENERAL.—Except as provided in para14 graph (2), the amendments made by this section shall 

15 apply to taxable years beginning after December 31, 

16 2000. 

17 (2) SUBSECTIONS (c) THROUGH (f).—The 

18 amendments made by subsections (c), (d), (e), and (f) 

19 shall apply to taxable years beginning after the date 

20 of the enactment of this Act. 

21 SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGU22 LATED INVESTMENT COMPANIES. 

23 (a) TREATMENT OF CERTAIN DIVIDENDS.— 

24 (1) NONRESIDENT ALIEN INDIVIDUALS.—Section 

25 871 (relating to tax on nonresident alien individuals) 
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1 is amended by redesignating subsection (k) as sub2 section (l) and by inserting after subsection (j) the fol3 lowing new subsection: 

4 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REGU5 LATED INVESTMENT COMPANIES.— 

6 ‘‘(1) INTEREST-RELATED DIVIDENDS.— 

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

8 subparagraph (B), no tax shall be imposed under 

9 paragraph (1)(A) of subsection (a) on any inter10 est-related dividend received from a regulated in11 vestment company. 

12 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

13 shall not apply— 

14 ‘‘(i) to any interest-related dividend re15 ceived from a regulated investment com16 pany by a person to the extent such divi17 dend is attributable to interest (other than 

18 interest described in subparagraph (E) (i) 

19 or (iii)) received by such company on in20 debtedness issued by such person or by any 

21 corporation or partnership with respect to 

22 which such person is a 10-percent share23 holder, 

24 ‘‘(ii) to any interest-related dividend 

25 with respect to stock of a regulated invest-
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1 ment company unless the person who would 

2 otherwise be required to deduct and with3 hold tax from such dividend under chapter 

4 3 receives a statement (which meets require5 ments similar to the requirements of sub6 section (h)(5)) that the beneficial owner of 

7 such stock is not a United States person, 

8 and 

9 ‘‘(iii) to any interest-related dividend 

10 paid to any person within a foreign coun11 try (or any interest-related dividend pay12 ment addressed to, or for the account of, 

13 persons within such foreign country) during 

14 any period described in subsection (h)(6) 

15 with respect to such country. 

16 Clause (iii) shall not apply to any dividend with 

17 respect to any stock which was acquired on or 

18 before the date of the publication of the Sec19 retary’s determination under subsection (h)(6). 

20 ‘‘(C) INTEREST-RELATED DIVIDEND.—For 

21 purposes of this paragraph, an interest-related 

22 dividend is any dividend (or part thereof) which 

23 is designated by the regulated investment com24 pany as an interest-related dividend in a writ25 ten notice mailed to its shareholders not later 
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1 than 60 days after the close of its taxable year. 

2 If the aggregate amount so designated with re3 spect to a taxable year of the company (includ4 ing amounts so designated with respect to divi5 dends paid after the close of the taxable year de6 scribed in section 855) is greater than the quali7 fied net interest income of the company for such 

8 taxable year, the portion of each distribution 

9 which shall be an interest-related dividend shall 

10 be only that portion of the amounts so designated 

11 which such qualified net interest income bears to 

12 the aggregate amount so designated. 

13 ‘‘(D) QUALIFIED NET INTEREST INCOME.— 

14 For purposes of subparagraph (C), the term 

15 ‘qualified net interest income’ means the quali16 fied interest income of the regulated investment 

17 company reduced by the deductions properly al18 locable to such income. 

19 ‘‘(E) QUALIFIED INTEREST INCOME.—For 

20 purposes of subparagraph (D), the term ‘quali21 fied interest income’ means the sum of the fol22 lowing amounts derived by the regulated invest23 ment company from sources within the United 

24 States: 
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1 ‘‘(i) Any amount includible in gross 

2 income as original issue discount (within 

3 the meaning of section 1273) on an obliga4 tion payable 183 days or less from the date 

5 of original issue (without regard to the pe6 riod held by the company). 

7 ‘‘(ii) Any interest includible in gross 

8 income (including amounts recognized as 

9 ordinary income in respect of original issue 

10 discount or market discount or acquisition 

11 discount under part V of subchapter P and 

12 such other amounts as regulations may pro13 vide) on an obligation which is in registered 

14 form; except that this clause shall not apply 

15 to— 

16 ‘‘(I) any interest on an obligation 

17 issued by a corporation or partnership 

18 if the regulated investment company is 

19 a 10-percent shareholder in such cor20 poration or partnership, and 

21 ‘‘(II) any interest which is treated 

22 as not being portfolio interest under 

23 the rules of subsection (h)(4). 

24 ‘‘(iii) Any interest referred to in sub25 section (i)(2)(A) (without regard to the 
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1 trade or business of the regulated investment 

2 company). 

3 ‘‘(iv) Any interest-related dividend in4 cludable in gross income with respect to 

5 stock of another regulated investment com6 pany. 

7 ‘‘(F) 10-PERCENT SHAREHOLDER.—For 

8 purposes of this paragraph, the term ‘10-percent 

9 shareholder’ has the meaning given such term by 

10 subsection (h)(3)(B). 

11 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.— 

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

13 subparagraph (B), no tax shall be imposed under 

14 paragraph (1)(A) of subsection (a) on any short15 term capital gain dividend received from a regu16 lated investment company. 

17 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

18 UNDER SUBSECTION (a)(2).—Subparagraph (A) 

19 shall not apply in the case of any nonresident 

20 alien individual subject to tax under subsection 

21 (a)(2). 

22 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI23 DEND.—For purposes of this paragraph, a short24 term capital gain dividend is any dividend (or 

25 part thereof) which is designated by the regu-
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1 lated investment company as a short-term cap2 ital gain dividend in a written notice mailed to 

3 its shareholders not later than 60 days after the 

4 close of its taxable year. If the aggregate amount 

5 so designated with respect to a taxable year of 

6 the company (including amounts so designated 

7 with respect to dividends paid after the close of 

8 the taxable year described in section 855) is 

9 greater than the qualified short-term gain of the 

10 company for such taxable year, the portion of 

11 each distribution which shall be a short-term 

12 capital gain dividend shall be only that portion 

13 of the amounts so designated which such quali14 fied short-term gain bears to the aggregate 

15 amount so designated. 

16 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 

17 purposes of subparagraph (C), the term ‘quali18 fied short-term gain’ means the excess of the net 

19 short-term capital gain of the regulated invest20 ment company for the taxable year over the net 

21 long-term capital loss (if any) of such company 

22 for such taxable year. For purposes of this sub23 paragraph— 

24 ‘‘(i) the net short-term capital gain of 

25 the regulated investment company shall be 
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1 computed by treating any short-term cap2 ital gain dividend includible in gross in3 come with respect to stock of another regu4 lated investment company as a short-term 

5 capital gain, and 

6 ‘‘(ii) the excess of the net short-term 

7 capital gain for a taxable year over the net 

8 long-term capital loss for a taxable year (to 

9 which an election under section 4982(e)(4) 

10 does not apply) shall be determined without 

11 regard to any net capital loss or net short12 term capital loss attributable to trans13 actions after October 31 of such year, and 

14 any such net capital loss or net short-term 

15 capital loss shall be treated as arising on 

16 the 1st day of the next taxable year. 

17 To the extent provided in regulations, clause (ii) 

18 shall apply also for purposes of computing the 

19 taxable income of the regulated investment com20 pany.’’ 

21 (2) FOREIGN CORPORATIONS.—Section 881 (re22 lating to tax on income of foreign corporations not 

23 connected with United States business) is amended by 

24 redesignating subsection (e) as subsection (f) and by 
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1 inserting after subsection (d) the following new sub2 section: 

3 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS OF

4 REGULATED INVESTMENT COMPANIES.— 

5 ‘‘(1) INTEREST-RELATED DIVIDENDS.— 

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

7 subparagraph (B), no tax shall be imposed under 

8 paragraph (1) of subsection (a) on any interest9 related dividend (as defined in section 871(k)(1)) 

10 received from a regulated investment company. 

11 ‘‘(B) EXCEPTION.—Subparagraph (A) shall 

12 not apply— 

13 ‘‘(i) to any dividend referred to in sec14 tion 871(k)(1)(B), and 

15 ‘‘(ii) to any interest-related dividend 

16 received by a controlled foreign corporation 

17 (within the meaning of section 957(a)) to 

18 the extent such dividend is attributable to 

19 interest received by the regulated investment 

20 company from a person who is a related 

21 person (within the meaning of section 

22 864(d)(4)) with respect to such controlled 

23 foreign corporation. 

24 ‘‘(C) TREATMENT OF DIVIDENDS RECEIVED

25 BY CONTROLLED FOREIGN CORPORATIONS.—The 
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1 rules of subsection (c)(5)(A) shall apply to any 

2 interest-related dividend received by a controlled 

3 foreign corporation (within the meaning of sec4 tion 957(a)) to the extent such dividend is attrib5 utable to interest received by the regulated in6 vestment company which is described in clause 

7 (ii) of section 871(k)(1)(E) (and not described in 

8 clause (i) or (iii) of such section). 

9 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.— 

10 No tax shall be imposed under paragraph (1) of sub11 section (a) on any short-term capital gain dividend 

12 (as defined in section 871(k)(2)) received from a regu13 lated investment company.’’. 

14 (3) WITHHOLDING TAXES.— 

15 (A) Section 1441(c) (relating to exceptions) 

16 is amended by adding at the end the following 

17 new paragraph: 

18 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM REG19 ULATED INVESTMENT COMPANIES.— 

20 ‘‘(A) IN GENERAL.—No tax shall be re21 quired to be deducted and withheld under sub22 section (a) from any amount exempt from the 

23 tax imposed by section 871(a)(1)(A) by reason of 

24 section 871(k). 
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1 ‘‘(B) SPECIAL RULE.—For purposes of sub2 paragraph (A), clause (i) of section 871(k)(1)(B) 

3 shall not apply to any dividend unless the regu4 lated investment company knows that such divi5 dend is a dividend referred to in such clause. A 

6 similar rule shall apply with respect to the ex7 ception contained in section 871(k)(2)(B).’’. 

8 (B) Section 1442(a) (relating to with9 holding of tax on foreign corporations) is amend10 ed— 

11 (i) by striking ‘‘and the reference in 

12 section 1441(c)(10)’’ and inserting ‘‘the ref13 erence in section 1441(c)(10)’’, and 

14 (ii) by inserting before the period at 

15 the end the following: ‘‘, and the references 

16 in section 1441(c)(12) to sections 871(a) 

17 and 871(k) shall be treated as referring to 

18 sections 881(a) and 881(e) (except that for 

19 purposes of applying subparagraph (A) of 

20 section 1441(c)(12), as so modified, clause 

21 (ii) of section 881(e)(1)(B) shall not apply 

22 to any dividend unless the regulated invest23 ment company knows that such dividend is 

24 a dividend referred to in such clause)’’. 
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1 (b) ESTATE TAX TREATMENT OF INTEREST IN CER2 TAIN REGULATED INVESTMENT COMPANIES.—Section 2105 

3 (relating to property without the United States for estate 

4 tax purposes) is amended by adding at the end the following 

5 new subsection: 

6 ‘‘(d) STOCK IN A RIC.— 

7 ‘‘(1) IN GENERAL.—For purposes of this sub8 chapter, stock in a regulated investment company (as 

9 defined in section 851) owned by a nonresident not 

10 a citizen of the United States shall not be deemed 

11 property within the United States in the proportion 

12 that, at the end of the quarter of such investment 

13 company’s taxable year immediately preceding a de14 cedent’s date of death (or at such other time as the 

15 Secretary may designate in regulations), the assets of 

16 the investment company that were qualifying assets 

17 with respect to the decedent bore to the total assets of 

18 the investment company. 

19 ‘‘(2) QUALIFYING ASSETS.—For purposes of this 

20 subsection, qualifying assets with respect to a dece21 dent are assets that, if owned directly by the decedent, 

22 would have been— 

23 ‘‘(A) amounts, deposits, or debt obligations 

24 described in subsection (b) of this section, 
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1 ‘‘(B) debt obligations described in the last 

2 sentence of section 2104(c), or 

3 ‘‘(C) other property not within the United 

4 States.’’ 

5 (c) TREATMENT OF REGULATED INVESTMENT COMPA6 NIES UNDER SECTION 897.— 

7 (1) Paragraph (1) of section 897(h) is amended 

8 by striking ‘‘REIT’’ each place it appears and insert9 ing ‘‘qualified investment entity’’. 

10 (2) Paragraphs (2) and (3) of section 897(h) are 

11 amended to read as follows: 

12 ‘‘(2) SALE OF STOCK IN DOMESTICALLY CON13 TROLLED ENTITY NOT TAXED.—The term ‘United 

14 States real property interest’ does not include any in15 terest in a domestically controlled qualified invest16 ment entity. 

17 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON18 TROLLED QUALIFIED INVESTMENT ENTITIES.—In the 

19 case of a domestically controlled qualified investment 

20 entity, rules similar to the rules of subsection (d) 

21 shall apply to the foreign ownership percentage of any 

22 gain.’’ 

23 (3) Subparagraphs (A) and (B) of section 

24 897(h)(4) are amended to read as follows: 
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1 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—The 

2 term ‘qualified investment entity’ means any 

3 real estate investment trust and any regulated 

4 investment company. 

5 ‘‘(B) DOMESTICALLY CONTROLLED.—The 

6 term ‘domestically controlled qualified invest7 ment entity’ means any qualified investment en8 tity in which at all times during the testing pe9 riod less than 50 percent in value of the stock 

10 was held directly or indirectly by foreign per11 sons.’’ 

12 (4) Subparagraphs (C) and (D) of section 

13 897(h)(4) are each amended by striking ‘‘REIT’’ and 

14 inserting ‘‘qualified investment entity’’. 

15 (5) The subsection heading for subsection (h) of 

16 section 897 is amended by striking ‘‘REITS’’ and in17 serting ‘‘CERTAIN INVESTMENT ENTITIES’’. 

18 (d) EFFECTIVE DATE.— 

19 (1) IN GENERAL.—Except as otherwise provided 

20 in this subsection, the amendments made by this sec21 tion shall apply to dividends with respect to taxable 

22 years of regulated investment companies beginning 

23 after December 31, 2004. 
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1 (2) ESTATE TAX TREATMENT.—The amendment 

2 made by subsection (b) shall apply to estates of dece3 dents dying after December 31, 2004. 

4 (3) CERTAIN OTHER PROVISIONS.—The amend5 ments made by subsection (c) (other than paragraph 

6 (1) thereof) shall take effect after December 31, 2004. 

7 SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS. 

8 (a) IN GENERAL.—Subsection (g) of section 468B (re9 lating to clarification of taxation of certain funds) is 

10 amended to read as follows: 

11 ‘‘(g) CLARIFICATION OF TAXATION OF CERTAIN

12 FUNDS.— 

13 ‘‘(1) IN GENERAL.—Except as provided in para14 graph (2), nothing in any provision of law shall be 

15 construed as providing that an escrow account, settle16 ment fund, or similar fund is not subject to current 

17 income tax. The Secretary shall prescribe regulations 

18 providing for the taxation of any such account or 

19 fund whether as a grantor trust or otherwise. 

20 ‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET21 TLEMENT FUNDS.—An escrow account, settlement 

22 fund, or similar fund shall be treated as beneficially 

23 owned by the United States and shall be exempt from 

24 taxation under this subtitle if— 
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1 ‘‘(A) it is established pursuant to a consent 

2 decree entered by a judge of a United States Dis3 trict Court, 

4 ‘‘(B) it is created for the receipt of settle5 ment payments as directed by a government en6 tity for the sole purpose of resolving or satisfying 

7 one or more claims asserting liability under the 

8 Comprehensive Environmental Response, Com9 pensation, and Liability Act of 1980, 

10 ‘‘(C) the authority and control over the ex11 penditure of funds therein (including the expend12 iture of contributions thereto and any net earn13 ings thereon) is with such government entity, 

14 and 

15 ‘‘(D) upon termination, any remaining 

16 funds will be disbursed to such government enti17 ty for use in accordance with applicable law. 

18 For purposes of this paragraph, the term ‘government 

19 entity’ means the United States, any State or polit20 ical subdivision thereof, the District of Columbia, any 

21 possession of the United States, and any agency or 

22 instrumentality of any of the foregoing.’’. 

23 (b) EFFECTIVE DATE.—The amendment made by this 

24 section shall apply to taxable years beginning after Decem25 ber 31, 2004. 
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1 SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALI2 FYING FOR ORPHAN DRUG CREDIT. 

3 (a) IN GENERAL.—Paragraph (2) of section 45C(b) 

4 (relating to qualified clinical testing expenses) is amended 

5 by adding at the end the following new subparagraph: 

6 ‘‘(C) TREATMENT OF CERTAIN EXPENSES

7 INCURRED BEFORE DESIGNATION.—For purposes 

8 of subparagraph (A)(ii)(I), if a drug is des9 ignated under section 526 of the Federal Food, 

10 Drug, and Cosmetic Act not later than the due 

11 date (including extensions) for filing the return 

12 of tax under this subtitle for the taxable year in 

13 which the application for such designation of 

14 such drug was filed, such drug shall be treated 

15 as having been designated on the date that such 

16 application was filed.’’. 

17 (b) EFFECTIVE DATE.—The amendment made by sub18 section (a) shall apply to expenses incurred after the date 

19 of the enactment of this Act. 

20 SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 

21 BOWS AND ARROWS. 

22 (a) BOWS.—Paragraph (1) of section 4161(b) (relating 

23 to bows) is amended to read as follows: 

24 ‘‘(1) BOWS.— 

25 ‘‘(A) IN GENERAL.—There is hereby im26 posed on the sale by the manufacturer, producer, 
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1 or importer of any bow which has a peak draw 

2 weight of 30 pounds or more, a tax equal to 11 

3 percent of the price for which so sold. 

4 ‘‘(B) ARCHERY EQUIPMENT.—There is here5 by imposed on the sale by the manufacturer, pro6 ducer, or importer— 

7 ‘‘(i) of any part or accessory suitable 

8 for inclusion in or attachment to a bow de9 scribed in subparagraph (A), and 

10 ‘‘(ii) of any quiver or broadhead suit11 able for use with an arrow described in 

12 paragraph (2), 

13 a tax equal to 11 percent of the price for which 

14 so sold.’’. 

15 (b) ARROWS.—Subsection (b) of section 4161 (relating 

16 to bows and arrows, etc.) is amended by redesignating para17 graph (3) as paragraph (4) and inserting after paragraph 

18 (2) the following: 

19 ‘‘(3) ARROWS.— 

20 ‘‘(A) IN GENERAL.—There is hereby im21 posed on the sale by the manufacturer, producer, 

22 or importer of any arrow, a tax equal to 12 per23 cent of the price for which so sold. 

24 ‘‘(B) EXCEPTION.—In the case of any arrow 

25 of which the shaft or any other component has 
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1 been previously taxed under paragraph (1) or 

2 (2)— 

3 ‘‘(i) section 6416(b)(3) shall not apply, 

4 and 

5 ‘‘(ii) the tax imposed by subparagraph 

6 (A) shall be an amount equal to the excess 

7 (if any) of— 

8 ‘‘(I) the amount of tax imposed by 

9 this paragraph (determined without re10 gard to this subparagraph), over 

11 ‘‘(II) the amount of tax paid with 

12 respect to the tax imposed under para13 graph (1) or (2) on such shaft or com14 ponent. 

15 ‘‘(C) ARROW.—For purposes of this para16 graph, the term ‘arrow’ means any shaft de17 scribed in paragraph (2) to which additional 

18 components are attached.’’. 

19 (c) CONFORMING AMENDMENTS.—Section 4161(b)(2) 

20 is amended— 

21 (1) by inserting ‘‘(other than broadheads)’’ after 

22 ‘‘point’’, and 

23 (2) by striking ‘‘ARROWS.—’’ in the heading and 

24 inserting ‘‘ARROW COMPONENTS.—’’. 
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1 (d) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to articles sold by the manufacturer, 

3 producer, or importer after December 31, 2004. 

4 SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE 

5 BOXES. 

6 (a) REPEAL.—Paragraph (6) of section 4162(a) (de7 fining sport fishing equipment) is amended by striking sub8 paragraph (C) and by redesignating subparagraphs (D) 

9 through (J) as subparagraphs (C) through (I), respectively. 

10 (b) EFFECTIVE DATE.—The amendments made this 

11 section shall apply to articles sold by the manufacturer, 

12 producer, or importer after December 31, 2004. 

13 SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH. 

14 (a) NOT TREATED AS SPORT FISHING EQUIPMENT.— 

15 Subsection (a) of section 4162 (relating to sport fishing 

16 equipment defined) is amended by inserting ‘‘and’’ at the 

17 end of paragraph (8), by striking ‘‘, and’’ at the end of 

18 paragraph (9) and inserting a period, and by striking 

19 paragraph (10). 

20 (b) CONFORMING AMENDMENT.—Section 4162 is 

21 amended by striking subsection (b) and by redesignating 

22 subsection (c) as subsection (b). 

23 (c) EFFECTIVE DATE.—The amendments made this 

24 section shall apply to articles sold by the manufacturer, 

25 producer, or importer after December 31, 2004. 
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1 SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS 

2 WHOLESALERS FOR COST OF CARRYING FED3 ERAL EXCISE TAXES ON BOTTLED DISTILLED 

4 SPIRITS. 

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

6 A of chapter 51 (relating to gallonage and occupational 

7 taxes) is amended by adding at the end the following new 

8 section: 

9 ‘‘SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER’S AVER10 AGE COST OF CARRYING EXCISE TAX. 

11 ‘‘(a) IN GENERAL.—For purposes of section 38, in the 

12 case of an eligible wholesaler, the amount of the distilled 

13 spirits wholesalers credit for any taxable year is the amount 

14 equal to the product of— 

15 ‘‘(1) the number of cases of bottled distilled spir16 its— 

17 ‘‘(A) which were bottled in the United 

18 States, and 

19 ‘‘(B) which are purchased by such whole20 saler during the taxable year directly from the 

21 bottler of such spirits, and 

22 ‘‘(2) the average tax-financing cost per case for 

23 the most recent calendar year ending before the begin24 ning of such taxable year. 

25 ‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 

26 section, the term ‘eligible wholesaler’ means any person who 
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1 holds a permit under the Federal Alcohol Administration 

2 Act as a wholesaler of distilled spirits. 

3 ‘‘(c) AVERAGE TAX-FINANCING COST.— 

4 ‘‘(1) IN GENERAL.—For purposes of this section, 

5 the average tax-financing cost per case for any cal6 endar year is the amount of interest which would ac7 crue at the deemed financing rate during a 60-day 

8 period on an amount equal to the deemed Federal ex9 cise per case. 

10 ‘‘(2) DEEMED FINANCING RATE.—For purposes 

11 of paragraph (1), the deemed financing rate for any 

12 calendar year is the average of the corporate overpay13 ment rates under paragraph (1) of section 6621(a) 

14 (determined without regard to the last sentence of 

15 such paragraph) for calendar quarters of such year. 

16 ‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON

17 CASE.—For purposes of paragraph (1), the deemed 

18 Federal excise tax per case of 12 80-proof 750ml bot19 tles is $22.83. 

20 ‘‘(4) NUMBER OF CASES IN LOT.—For purposes 

21 of this section, the number of cases in any lot of dis22 tilled spirits shall be determined by dividing the 

23 number of liters in such lot by 9.’’ 

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

2 striking ‘‘plus’’ at the end of paragraph (14), by 

3 striking the period at the end of paragraph (15) and 

4 inserting ‘‘, plus’’, and by adding at the end the fol5 lowing new paragraph: 

6 ‘‘(16) in the case of an eligible wholesaler (as de7 fined in section 5011(b)), the distilled spirits whole8 salers credit determined under section 5011(a).’’ 

9 (2) Subsection (d) of section 39 (relating to 

10 carryback and carryforward of unused credits) is 

11 amended by adding at the end the following new 

12 paragraph: 

13 ‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT

14 BEFORE JANUARY 1, 2005.—No portion of the unused 

15 business credit for any taxable year which is attrib16 utable to the credit determined under section 5011(a) 

17 may be carried back to a taxable year beginning be18 fore January 1, 2005.’’. 

19 (3) The table of sections for subpart A of part I 

20 of subchapter A of chapter 51 is amended by adding 

21 at the end the following new item: 

‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of carrying excise tax.’’. 

22 (c) EFFECTIVE DATE.—The amendments made by this 

23 section shall apply to taxable years beginning after Decem24 ber 31, 2004. 
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1 SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELAT2 ING TO DISTILLED SPIRITS, WINE, AND BEER. 

3 (a) IN GENERAL.—Subpart G of part II of subchapter 

4 A of chapter 51 is amended by redesignating section 5148 

5 as section 5149 and by inserting after section 5147 the fol6 lowing new section: 

7 ‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 

8 ‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 

9 5091, 5111, 5121, and 5131, the rate of tax imposed under 

10 such sections for the suspension period shall be zero. During 

11 such period, persons engaged in or carrying on a trade or 

12 business covered by such sections shall register under section 

13 5141 and shall comply with the recordkeeping requirements 

14 under this part. 

15 ‘‘(b) SUSPENSION PERIOD.—For purposes of sub16 section (a), the suspension period is the period beginning 

17 on July 1, 2004, and ending on June 30, 2007.’’. 

18 (b) CONFORMING AMENDMENT.—Section 5117 is 

19 amended by adding at the end the following new subsection: 

20 ‘‘(d) SPECIAL RULE DURING SUSPENSION PERIOD.— 

21 Except as provided in subsection (b) or by the Secretary, 

22 during the suspension period (as defined in section 5148) 

23 it shall be unlawful for any dealer to purchase distilled 

24 spirits for resale from any person other than a wholesale 

25 dealer in liquors who is required to keep records under sec26 tion 5114.’’. 
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1 (c) CLERICAL AMENDMENT.—The table of sections for 

2 subpart G of part II of subchapter A of chapter 51 is 

3 amended by striking the last item and inserting the fol4 lowing new items: 

‘‘Sec. 5148. Suspension of occupational tax. 

‘‘Sec. 5149. Cross references.’’. 

5 (d) EFFECTIVE DATE.—The amendments made by this 

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

7 Act. 

8 SEC. 294. MODIFICATION OF UNRELATED BUSINESS IN9 COME LIMITATION ON INVESTMENT IN CER10 TAIN SMALL BUSINESS INVESTMENT COMPA11 NIES. 

12 (a) IN GENERAL.—Paragraph (6) of section 514(c) (re13 lating to acquisition indebtedness) is amended to read as 

14 follows: 

15 ‘‘(6) CERTAIN FEDERAL FINANCING.— 

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

17 section, the term ‘acquisition indebtedness’ does 

18 not include— 

19 ‘‘(i) an obligation, to the extent that it 

20 is insured by the Federal Housing Adminis21 tration, to finance the purchase, rehabilita22 tion, or construction of housing for low and 

23 moderate income persons, or 
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1 ‘‘(ii) indebtedness incurred by a small 

2 business investment company licensed under 

3 the Small Business Investment Act of 1958 

4 and formed after the date of the enactment 

5 of the American Jobs Creation Act of 2004, 

6 if such indebtedness is evidenced by a deben7 ture— 

8 ‘‘(I) issued by such company 

9 under section 303(a) of such Act, and 

10 ‘‘(II) held or guaranteed by the 

11 Small Business Administration. 

12 ‘‘(B) LIMITATION.—Subparagraph (A)(ii) 

13 shall not apply with respect to any small busi14 ness investment company during any period 

15 that— 

16 ‘‘(i) any organization which is exempt 

17 from tax under this title (other than a gov18 ernmental unit) owns more than 25 percent 

19 of the capital or profits interest in such 

20 company, or 

21 ‘‘(ii) organizations which are exempt 

22 from tax under this title (including govern23 mental units other than any agency or in24 strumentality of the United States) own, in 

25 the aggregate, 50 percent or more of the 
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1 capital or profits interest in such com2 pany.’’. 

3 (b) EFFECTIVE DATE.—The amendment made by this 

4 section shall apply to indebtedness incurred by small busi5 ness investment companies formed after the date of the en6 actment of the American Jobs Creation Act of 2004. 

7 SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME 

8 FROM CERTAIN INTERNATIONAL SHIPPING 

9 ACTIVITIES USING PER TON RATE. 

10 (a) IN GENERAL.—Chapter 1 of the Internal Revenue 

11 Code of 1986 is amended by inserting after subchapter Q 

12 the following new subchapter: 

13 ‘‘Subchapter R—Election To Determine Tax14 able Income From Certain International 

15 Shipping Activities Using per Ton Rate 

‘‘Sec. 1352. Alternative tax on qualifying shipping activities. 

‘‘Sec. 1353. Taxable income from qualifying shipping activities. 

‘‘Sec. 1354. Qualifying shipping tax election; revocation; termination. 

‘‘Sec. 1355. Definitions and special rules. 

‘‘Sec. 1356. Qualifying shipping activities. 

‘‘Sec. 1357. Items not subject to regular tax; depreciation; interest. 

‘‘Sec. 1358. Allocation of credits, income, and deductions. 

‘‘Sec. 1359. Disposition of qualifying shipping assets. 

16 ‘‘SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING 

17 ACTIVITIES. 

18 ‘‘(a) IN GENERAL.—The taxable income of an electing 

19 corporation from qualifying shipping activities shall be the 

20 amount determined under this subchapter, and the cor21 porate percentages of the items of income, gain, loss, deduc-
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1 tion, or credit of an electing corporation and of other mem2 bers of the electing group of such corporation which would 

3 otherwise be taken into account by reason of its qualifying 

4 shipping activities shall be taken into account to the extent 

5 provided in section 1357. 

6 ‘‘(b) ALTERNATIVE TAX.—The taxable income of an 

7 electing corporation from qualifying shipping activities, if 

8 otherwise taxable under section 11, 55, 882, 887, or 1201(a) 

9 shall be subject to tax only under this section at the max10 imum rate specified in section 11(b). The income of a for11 eign corporation shall not be subject to tax under this sub12 chapter to the extent its income is excludible from gross in13 come under section 883(a)(1). 

14 ‘‘SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING 

15 ACTIVITIES. 

16 ‘‘(a) IN GENERAL.—For purposes of this subchapter, 

17 the taxable income of an electing corporation from quali18 fying shipping activities shall be its corporate income per19 centage of the sum of the amounts determined under sub20 section (b) for each qualifying vessel operated by such elect21 ing corporation or other electing entity. 

22 ‘‘(b) AMOUNTS.—For purposes of subsection (a), the 

23 amount of taxable income of an electing entity for each 

24 qualifying vessel shall equal the product of— 
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1 ‘‘(1) the daily notional taxable income from the 

2 operation of the qualifying vessel in United States 

3 foreign trade, and 

4 ‘‘(2) the number of days during the taxable year 

5 that the electing entity operated such vessel as a 

6 qualifying vessel in United States foreign trade. 

7 ‘‘(c) DAILY NOTIONAL TAXABLE INCOME.—For pur8 poses of subsection (b), the daily notional taxable income 

9 from the operation of a qualifying vessel is 40 cents for each 

10 100 tons of the net tonnage of the vessel, up to 25,000 net 

11 tons, and 20 cents for each 100 tons of the net tonnage of 

12 the vessel, in excess of 25,000 net tons. 

13 ‘‘(d) MULTIPLE OPERATORS OF VESSEL.—If 2 or more 

14 persons have a joint interest in a qualifying vessel and are 

15 treated as operators of that vessel, the taxable income from 

16 the operation of such vessel for that time (as determined 

17 under this section) shall be allocated among such persons 

18 on the basis of their ownership and charter interests in such 

19 vessel or on such other basis as the Secretary may prescribe 

20 by regulations. 

21 ‘‘(e) NONCORPORATE PERCENTAGE.—Notwithstanding 

22 any contrary provision of this subchapter, the noncorporate 

23 percentage of any item of income, gain, loss, deduction, or 

24 credit of any member of an electing group shall be taken 
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1 into account for all purposes of this subtitle as if this sub2 chapter were not in effect. 

3 ‘‘SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REVOCA4 TION; TERMINATION. 

5 ‘‘(a) IN GENERAL.—Except as provided in subsections 

6 (b) and (f), a qualifying shipping tax election may be made 

7 in respect of any qualifying entity. 

8 ‘‘(b) CONDITION OF ELECTION.—An election may be 

9 made by a member of a controlled group under this sub10 section for any taxable year only if all qualifying entities 

11 that are members of the controlled group join in the election. 

12 ‘‘(c) WHEN MADE.—An election under subsection (a) 

13 may be made by a qualifying entity in such form as pre14 scribed by the Secretary. Such election shall be filed with 

15 the qualifying entity’s return for the first taxable year to 

16 which the election shall apply, by the due date for such re17 turn (including any applicable extensions). 

18 ‘‘(d) YEARS FOR WHICH EFFECTIVE.—An election 

19 under subsection (a) shall be effective for the taxable year 

20 of the qualifying entity for which it is made and for all 

21 succeeding taxable years of the entity, until such election 

22 is terminated under subsection (e). 

23 ‘‘(e) TERMINATION.— 

24 ‘‘(1) BY REVOCATION.— 
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1 ‘‘(A) IN GENERAL.—An election under sub2 section (a) may be terminated by revocation. 

3 ‘‘(B) WHEN EFFECTIVE.—Except as pro4 vided in subparagraph (C)— 

5 ‘‘(i) a revocation made during the tax6 able year and on or before the 15th day of 

7 the 3rd month thereof shall be effective on 

8 the 1st day of such taxable year, and 

9 ‘‘(ii) a revocation made during the tax10 able year but after such 15th day shall be 

11 effective on the 1st day of the following tax12 able year. 

13 ‘‘(C) REVOCATION MAY SPECIFY PROSPEC14 TIVE DATE.—If the revocation specifies a date for 

15 revocation which is on or after the day on which 

16 the revocation is made, the revocation shall be ef17 fective on and after the date so specified. 

18 ‘‘(2) BY ENTITY CEASING TO BE QUALIFYING EN19 TITY.— 

20 ‘‘(A) IN GENERAL.—An election under sub21 section (a) shall be terminated whenever (at any 

22 time on or after the 1st day of the 1st taxable 

23 year for which the entity is an electing entity) 

24 such entity ceases to be a qualifying entity. 
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1 ‘‘(B) WHEN EFFECTIVE.—Any termination 

2 under this paragraph shall be effective on and 

3 after the date of cessation. 

4 ‘‘(f) ELECTION AFTER TERMINATION.—If a qualifying 

5 entity has made an election under subsection (a) and if such 

6 election has been terminated under subsection (e), such enti7 ty (and any successor entity) shall not be eligible to make 

8 an election under subsection (a) for any taxable year before 

9 its 5th taxable year which begins after the 1st taxable year 

10 for which such termination is effective, unless the Secretary 

11 consents to such election. 

12 ‘‘SEC. 1355. DEFINITIONS AND SPECIAL RULES. 

13 ‘‘(a) DEFINITIONS.—For purposes of this subchapter: 

14 ‘‘(1) The term ‘controlled group’ means any 

15 group of trusts and business entities whose members 

16 would be treated as a single employer under the rules 

17 of section 52(a) (without regard to paragraphs (1) 

18 and (2) thereof) and section 52(b)(1). 

19 ‘‘(2) The term ‘corporate income percentage’ 

20 means the least aggregate share, expressed as a per21 centage, of any item of income or gain of an electing 

22 corporation or electing group of which such corpora23 tion is a member from qualifying shipping activities 

24 that would, but for an election in effect under this 

25 subchapter, be required to be reported on the Federal 
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1 income tax return of an electing corporation during 

2 any taxable period. In the case of an electing group 

3 which includes two or more electing corporations, the 

4 corporate income percentage of each such corporation 

5 shall be determined on the basis of such corporations’ 

6 direct and indirect ownership and charter interests in 

7 qualifying vessels of the electing group or on such 

8 other basis as the Secretary may prescribe by regula9 tions. 

10 ‘‘(3) The term ‘corporate loss percentage’ means 

11 the greatest aggregate share, expressed as a percent12 age, of any item of loss, deduction or credit of an 

13 electing corporation or electing group of which such 

14 corporation is a member from qualifying shipping ac15 tivities that would, but for an election in effect under 

16 this subchapter, be required to be reported on the Fed17 eral income tax return of an electing corporation dur18 ing any taxable period. 

19 ‘‘(4) The term ‘corporate percentages’ means the 

20 corporate income percentage and the corporate loss 

21 percentage. 

22 ‘‘(5) The term ‘electing corporation’ means any 

23 C corporation that is an electing entity or that would, 

24 but for an election in effect under this subchapter, be 

25 required to report any item of income, gain, loss, de-
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1 duction, or credit of an electing entity on its Federal 

2 income tax return. 

3 ‘‘(6) The term ‘electing entity’ means any quali4 fying entity for which an election is in effect under 

5 this subchapter. 

6 ‘‘(7) The term ‘electing group’ means a controlled 

7 group of which one or more members is an electing 

8 entity. 

9 ‘‘(8) The term ‘noncorporate percentage’ means 

10 the difference between one hundred percent and the 

11 corporate income percentage or corporate loss percent12 age, as applicable. 

13 ‘‘(9) The term ‘qualifying entity’ means a trust 

14 or business entity that— 

15 ‘‘(A) operates one or more qualifying ves16 sels, and 

17 ‘‘(B) meets the shipping activity require18 ment in subsection (c). 

19 ‘‘(10) The term ‘qualifying shipping assets’ 

20 means any qualifying vessel and other assets which 

21 are used in core qualifying activities as described in 

22 section 1356(b). 

23 ‘‘(11) The term ‘qualifying vessel’ means a self24 propelled (or a combination self-propelled and non25 self-propelled) United States flag vessel of not less 
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1 than 10,000 deadweight tons used in the United 

2 States foreign trade. 

3 ‘‘(12) The term ‘United States domestic trade’ 

4 means the transportation of goods or passengers be5 tween places in the United States. 

6 ‘‘(13) The term ‘United States flag vessel’ means 

7 any vessel documented under the laws of the United 

8 States. 

9 ‘‘(14) The term ‘United States foreign trade’ 

10 means the transportation of goods or passengers be11 tween a place in the United States and a foreign 

12 place or between foreign places. 

13 ‘‘(b) OPERATING A VESSEL.—For purposes of this sub14 chapter: 

15 ‘‘(1) Except as provided in paragraph (2), an 

16 entity is treated as operating any vessel owned by, or 

17 chartered (including a time charter) to, the entity. 

18 ‘‘(2) An entity is treated as operating a vessel 

19 that it has chartered out on bareboat charter terms 

20 only if— 

21 ‘‘(A) the vessel is temporarily surplus to the 

22 entity’s requirements and the term of the charter 

23 does not exceed three years; or 

24 ‘‘(B) the vessel is bareboat chartered to a 

25 member of a controlled group which includes 
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1 such entity or to an unrelated third party that 

2 sub-bareboats or time charters the vessel to a 

3 member of such controlled group (including the 

4 owner). 

5 ‘‘(c) SHIPPING ACTIVITY REQUIREMENT.—For pur6 poses of this section, the shipping activity requirement is 

7 met for a taxable year only by an entity described in para8 graph (1), (2), or (3). 

9 ‘‘(1) An entity in the first taxable year of its 

10 qualifying shipping tax election if, for the preceding 

11 taxable year, the test in paragraph (4) is met. 

12 ‘‘(2) An entity in the second or any subsequent 

13 taxable year of its qualifying shipping tax election if, 

14 for each of the two preceding taxable years, the test 

15 in paragraph (4) is met. 

16 ‘‘(3) An entity that would be described in para17 graph (1) or (2) if the test in paragraph (4) were ap18 plied on an aggregate basis to the controlled group of 

19 which such entity is a member, and vessel charters be20 tween members of the controlled group were dis21 regarded. 

22 ‘‘(4) The test in this paragraph is met if on av23 erage at least 25 percent of the aggregate tonnage of 

24 qualifying vessels operated by the entity were owned 

25 by the entity or chartered to the entity on bareboat 
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1 charter terms. For purposes of the preceding sentence, 

2 vessels chartered (including time chartered) to an en3 tity by a member of a controlled group which includes 

4 the entity, or by a third party that bareboat charters 

5 the vessels from the entity or a member of the entity’s 

6 controlled group, shall be treated as chartered to the 

7 entity on bareboat charter terms. 

8 ‘‘(d) EFFECT OF TEMPORARILY CEASING TO OPERATE

9 A QUALIFYING VESSEL.— 

10 ‘‘(1) A temporary cessation by an electing entity 

11 in operation of a qualifying vessel shall be dis12 regarded for purposes of subsections (b) and (c) if the 

13 electing entity gives timely notice to the Secretary 

14 stating— 

15 ‘‘(A) that it has temporarily ceased to oper16 ate the qualifying vessel, and 

17 ‘‘(B) its intention to resume operating the 

18 qualifying vessel. 

19 ‘‘(2) Notice shall be deemed timely if given not 

20 later than the due date (including extensions) for the 

21 electing entity’s tax return (as set forth in section 

22 6072(b)) for the taxable year in which the temporary 

23 cessation begins. 

24 ‘‘(3) The treatment provided by paragraph (1) 

25 shall continue until the earlier of— 
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1 ‘‘(A) the electing entity abandoning its in2 tention to resume operation of the qualifying ves3 sel, or 

4 ‘‘(B) the electing entity resuming operation 

5 of the qualifying vessel. 

6 ‘‘(e) EFFECT OF TEMPORARILY OPERATING A QUALI7 FYING VESSEL IN THE UNITED STATES DOMESTIC

8 TRADE.— 

9 ‘‘(1) The temporary operation in the United 

10 States domestic trade of any qualifying vessel which 

11 had been used in the United States foreign trade shall 

12 be disregarded for purposes of this subchapter if the 

13 electing entity gives timely notice to the Secretary 

14 stating— 

15 ‘‘(A) that it temporarily operates or has op16 erated in the United States domestic trade a 

17 qualifying vessel which had been used in the 

18 United States foreign trade, and 

19 ‘‘(B) its intention to resume operation of 

20 the vessel in the United States foreign trade. 

21 ‘‘(2) Notice shall be deemed timely if given not 

22 later than the due date (including extensions) for the 

23 electing entity’s tax return (as set forth in section 

24 6072(b)) for the taxable year in which the temporary 

25 cessation begins. 
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1 ‘‘(3) The treatment provided by paragraph (1) 

2 shall continue until the earlier of— 

3 ‘‘(A) the electing entity abandoning its in4 tention to resume operations of the vessel in the 

5 United States foreign trade, or 

6 ‘‘(B) the electing entity resuming operation 

7 of the vessel in the United States foreign trade. 

8 ‘‘(f) EFFECT OF CHANGE IN USE.— 

9 ‘‘(1) Except as provided in subsection (e), a ves10 sel that is used other than for operations in the 

11 United States foreign trade on other than a tem12 porary basis ceases to be a qualifying vessel when 

13 such use begins. 

14 ‘‘(2) For purposes of this subsection, a change in 

15 use of a vessel, other than a commencement of oper16 ation in the United States domestic trade, is taken to 

17 be permanent unless there are circumstances indi18 cating that it is temporary. 

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 ‘‘SEC. 1356. QUALIFYING SHIPPING ACTIVITIES. 

23 ‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur24 poses of this subchapter the ‘qualifying shipping activities’ 

25 of an electing entity consist of— 
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1 ‘‘(1) core qualifying activities, 

2 ‘‘(2) qualifying secondary activities, and 

3 ‘‘(3) qualifying incidental activities. 

4 ‘‘(b) CORE QUALIFYING ACTIVITIES.— 

5 ‘‘(1) The ‘core qualifying activities’ of an elect6 ing entity are— 

7 ‘‘(A) its activities in operating qualifying 

8 vessels in United States foreign trade, and 

9 ‘‘(B) other activities of the electing entity 

10 and other members of its electing group that are 

11 an integral part of its business of operating 

12 qualifying vessels in United States foreign trade, 

13 including ownership or operation of barges, con14 tainers, chassis, and other equipment that are 

15 the complement of, or used in connection with, a 

16 qualifying vessel in United States foreign trade, 

17 the inland haulage of cargo shipped, or to be 

18 shipped, on qualifying vessels in United States 

19 foreign trade, and the provision of terminal, 

20 maintenance, repair, logistical, or other vessel, 

21 container, or cargo-related services that are an 

22 integral part of operating qualifying vessels in 

23 United States foreign trade. 
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1 ‘‘(2) ‘Core qualifying activities’ do not include 

2 the provision by an entity of facilities or services to 

3 any person, other than— 

4 ‘‘(A) another member of such entity’s elect5 ing group, 

6 ‘‘(B) a consignor, consignee, or other cus7 tomer of such entity’s business of operating 

8 qualifying vessels in United States foreign trade, 

9 or 

10 ‘‘(C) a member of an alliance, joint venture, 

11 pool, partnership or similar undertaking involv12 ing the operation of qualifying vessels in United 

13 States foreign trade of which such entity is a 

14 member. 

15 ‘‘(c) QUALIFYING SECONDARY ACTIVITIES.—For pur16 poses of this subsection— 

17 ‘‘(1) the term ‘secondary activities’ means activi18 ties that are not core qualifying activities, and— 

19 ‘‘(A) are the active management or oper20 ation of vessels in the United States foreign 

21 trade, 

22 ‘‘(B) the provision of vessel, container, or 

23 cargo-related facilities or services to any person, 

24 or 
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1 ‘‘(C) such other activities as may be pre2 scribed by the Secretary pursuant to regulations, 

3 and 

4 ‘‘(2) the ‘qualified secondary activities’ of an 

5 electing entity are its secondary activities and the sec6 ondary activities of other members of its electing 

7 group, but only to the extent that, without regard to 

8 this subchapter, the aggregate gross income derived by 

9 the electing entity and the other members of its elect10 ing group from such activities does not exceed 20 per11 cent of the aggregate gross income derived by the elect12 ing entity and the other members of its electing group 

13 from their core qualifying activities. 

14 ‘‘(d) QUALIFYING INCIDENTAL ACTIVITIES.—Ship15 ping-related activities carried on by an electing entity or 

16 another member of its electing group are qualified inci17 dental activities of the electing entity if— 

18 ‘‘(1) incidental to its core qualifying activities, 

19 ‘‘(2) not qualifying secondary activities, and 

20 ‘‘(3) without regard to this subchapter, the aggre21 gate gross income derived by the electing entity and 

22 other members of its electing group from such activi23 ties does not exceed 0.1 percent of such entities’ aggre24 gate gross income from their core qualifying activi25 ties. 
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1 ‘‘SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRE2 CIATION; INTEREST. 

3 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in4 come of an electing entity shall not include the corporate 

5 income percentage of— 

6 ‘‘(1) income from qualifying shipping activities 

7 in the United States foreign trade, 

8 ‘‘(2) income from money, bank deposits and 

9 other temporary investments which are reasonably 

10 necessary to meet the working capital requirements of 

11 qualifying shipping activities, and 

12 ‘‘(3) income from money or other intangible as13 sets accumulated pursuant to a plan to purchase 

14 qualifying shipping assets. 

15 ‘‘(b) ELECTING GROUP MEMBER.—Gross income of a 

16 member of an electing group that is not an electing entity 

17 shall not include the corporate income percentage of its in18 come from qualifying shipping activities that are taken into 

19 account under this subchapter as qualifying shipping ac20 tivities of an electing entity. 

21 ‘‘(c) DENIAL OF LOSSES, DEDUCTIONS, AND CRED22 ITS.— 

23 ‘‘(1) GENERAL RULE.—Subject to paragraph (2), 

24 the corporate loss percentage of each item of loss, de25 duction (other than for interest expense), or credit of 

26 any taxpayer with respect to any activity the income 
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1 from which is excluded from gross income under this 

2 section shall be disallowed. 

3 ‘‘(2) DEPRECIATION.—Notwithstanding para4 graph (1), the deduction for depreciation of a quali5 fying shipping asset shall be allowed in determining 

6 the adjusted basis of such asset for purposes of deter7 mining gain from its disposition. 

8 ‘‘(A) Except as provided in subparagraph 

9 (B), the straight line method of depreciation 

10 shall apply to the corporate income percentage of 

11 qualifying shipping assets the income from oper12 ation of which is excluded from gross income 

13 under this section. 

14 ‘‘(B) Subparagraph (A) shall not apply to 

15 any qualifying shipping asset which is subject to 

16 a charter entered into prior to the effective date 

17 of this subchapter. 

18 ‘‘(3) INTEREST.—The corporate loss percentage 

19 of an electing entity’s interest expense shall be dis20 allowed in the ratio that the fair market value of its 

21 qualifying vessel assets bears to the fair market value 

22 of its total assets. 

23 ‘‘(d) SECTION INAPPLICABLE TO UNRELATED PER24 SONS.—This section shall not apply to a taxpayer that is 

25 not a member of an electing group. 
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1 ‘‘SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DE2 DUCTIONS. 

3 ‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur4 poses of this chapter, the qualifying shipping activities of 

5 an electing entity shall be treated as a separate trade or 

6 business activity from all other activities conducted by the 

7 entity. 

8 ‘‘(b) EXCLUSION OF CREDITS OR DEDUCTIONS.— 

9 ‘‘(1) No deduction shall be allowed against the 

10 taxable income of an electing corporation from quali11 fying shipping activities, and no credit shall be al12 lowed against the tax imposed by section 1352(b). 

13 ‘‘(2) No deduction shall be allowed for any net 

14 operating loss attributable to the qualifying shipping 

15 activities of a corporation to the extent that such loss 

16 is carried forward by the corporation from a taxable 

17 year preceding the first taxable year for which such 

18 corporation was an electing corporation. 

19 ‘‘(c) TRANSACTIONS NOT AT ARM’S LENGTH.—Section 

20 482 shall apply in accordance with this subsection to a 

21 transaction or series of transactions— 

22 ‘‘(1) as between an electing entity and another 

23 person, or 

24 ‘‘(2) as between an entity’s qualifying shipping 

25 activities and other activities carried on by it. 
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1 ‘‘SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING AS2 SETS. 

3 ‘‘(a) IN GENERAL.—If an electing entity sells or dis4 poses of qualifying shipping assets (as defined in subsection 

5 (c)) in an otherwise taxable transaction, at the election of 

6 the entity no gain shall be recognized if replacement quali7 fying shipping assets are acquired during the period speci8 fied in subsection (b), except to the extent that the amount 

9 realized upon such sale or disposition exceeds the cost of 

10 the replacement qualifying shipping assets. 

11 ‘‘(b) PERIOD WITHIN WHICH PROPERTY MUST BE

12 REPLACED.—The period referred to in subsection (a) shall 

13 be the period beginning one year prior to the disposition 

14 of the qualifying shipping assets and ending— 

15 ‘‘(1) 3 years after the close of the first taxable 

16 year in which the gain is realized, or 

17 ‘‘(2) subject to such terms and conditions as may 

18 be specified by the Secretary, on such later date as the 

19 Secretary may designate on application by the tax20 payer. Such application shall be made at such time 

21 and in such manner as the Secretary may by regula22 tions prescribe. 

23 ‘‘(c) TIME FOR ASSESSMENT OF DEFICIENCY ATTRIB24 UTABLE TO GAIN.—If an electing entity has made the elec25 tion provided in subsection (a), then— 
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1 ‘‘(1) the statutory period for the assessment of 

2 any deficiency, for any taxable year in which any 

3 part of the gain is realized, attributable to such gain 

4 shall not expire prior to the expiration of 3 years 

5 from the date the Secretary is notified by the entity 

6 (in such manner as the Secretary may by regulations 

7 prescribe) of the replacement tonnage tax property or 

8 of an intention not to replace, and 

9 ‘‘(2) such deficiency may be assessed before the 

10 expiration of such 3-year period notwithstanding the 

11 provisions of section 6212(c) or the provisions of any 

12 other law or rule of law which would otherwise pre13 vent such assessment. 

14 ‘‘(d) BASIS OF REPLACEMENT QUALIFYING SHIPPING

15 ASSETS.—In the case of replacement qualifying shipping 

16 assets purchased by an electing entity which resulted in the 

17 nonrecognition of any part of the gain realized as the result 

18 of a sale or other disposition of qualifying shipping assets, 

19 the basis shall be the cost of such property decreased in the 

20 amount of the gain not so recognized; and if the property 

21 purchased consists of more than one piece of property, the 

22 basis determined under this sentence shall be allocated to 

23 the purchased properties in proportion to their respective 

24 costs. 
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1 ‘‘(e) REPLACEMENT QUALIFYING SHIPPING ASSETS

2 MUST BE ACQUIRED FROM UNRELATED PERSON IN CER3 TAIN CASES.— 

4 ‘‘(1) IN GENERAL.—Subsection (a) shall not 

5 apply if the replacement qualifying shipping assets 

6 are acquired from a related person except to the ex7 tent that the related person acquired the replacement 

8 qualifying shipping assets from an unrelated person 

9 during the period applicable under subsection (b). 

10 ‘‘(2) RELATED PERSON.—For purposes of this 

11 subsection, a person is related to another person if the 

12 person bears a relationship to the other person de13 scribed in section 267(b) or 707(b)(1).’’ 

14 (b) TECHNICAL AND CONFORMING AMENDMENT.—The 

15 second sentence of section 56(g)(4)(B)(i), as amended by 

16 this Act, is further amended by inserting ‘‘or 1357’’ after 

17 ‘‘section 139A’’. 

18 (c) EFFECTIVE DATE.—The amendments made by this 

19 section shall apply to taxable years beginning after the date 

20 of the enactment of this Act. 

21 SEC. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR 

22 CERTAIN EXPENSES INCURRED IN SUPPORT 

23 OF NATIVE ALASKAN SUBSISTENCE WHALING. 

24 (a) IN GENERAL.—Section 170 (relating to charitable, 

25 etc., contributions and gifts), as amended by this Act, is 
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1 amended by redesignating subsection (n) as subsection (o) 

2 and by inserting after subsection (m) the following new sub3 section: 

4 ‘‘(n) EXPENSES PAID BY CERTAIN WHALING CAPTAINS

5 IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE WHAL6 ING.— 

7 ‘‘(1) IN GENERAL.—In the case of an individual 

8 who is recognized by the Alaska Eskimo Whaling 

9 Commission as a whaling captain charged with the 

10 responsibility of maintaining and carrying out sanc11 tioned whaling activities and who engages in such ac12 tivities during the taxable year, the amount described 

13 in paragraph (2) (to the extent such amount does not 

14 exceed $10,000 for the taxable year) shall be treated 

15 for purposes of this section as a charitable contribu16 tion. 

17 ‘‘(2) AMOUNT DESCRIBED.— 

18 ‘‘(A) IN GENERAL.—The amount described 

19 in this paragraph is the aggregate of the reason20 able and necessary whaling expenses paid by the 

21 taxpayer during the taxable year in carrying out 

22 sanctioned whaling activities. 

23 ‘‘(B) WHALING EXPENSES.—For purposes of 

24 subparagraph (A), the term ‘whaling expenses’ 

25 includes expenses for— 
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1 ‘‘(i) the acquisition and maintenance 

2 of whaling boats, weapons, and gear used in 

3 sanctioned whaling activities, 

4 ‘‘(ii) the supplying of food for the crew 

5 and other provisions for carrying out such 

6 activities, and 

7 ‘‘(iii) storage and distribution of the 

8 catch from such activities. 

9 ‘‘(3) SANCTIONED WHALING ACTIVITIES.—For 

10 purposes of this subsection, the term ‘sanctioned whal11 ing activities’ means subsistence bowhead whale hunt12 ing activities conducted pursuant to the management 

13 plan of the Alaska Eskimo Whaling Commission.’’. 

14 (b) EFFECTIVE DATE.—The amendments made by sub15 section (a) shall apply to contributions made after Decem16 ber 31, 2004. 

17 TITLE III—TAX REFORM AND 

18 SIMPLIFICATION FOR UNITED 

19 STATES BUSINESSES 

20 SEC. 301. INTEREST EXPENSE ALLOCATION RULES. 

21 (a) ELECTION TO ALLOCATE ON WORLDWIDE

22 BASIS.—Section 864 is amended by redesignating sub23 section (f) as subsection (g) and by inserting after sub24 section (e) the following new subsection: 
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1 ‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON

2 WORLDWIDE BASIS.—For purposes of this subchapter, at 

3 the election of the worldwide affiliated group— 

4 ‘‘(1) ALLOCATION AND APPORTIONMENT OF IN5 TEREST EXPENSE.— 

6 ‘‘(A) IN GENERAL.—The taxable income of 

7 each domestic corporation which is a member of 

8 a worldwide affiliated group shall be determined 

9 by allocating and apportioning interest expense 

10 of each member as if all members of such group 

11 were a single corporation. 

12 ‘‘(B) TREATMENT OF WORLDWIDE AFFILI13 ATED GROUP.—The taxable income of the domes14 tic members of a worldwide affiliated group from 

15 sources outside the United States shall be deter16 mined by allocating and apportioning the inter17 est expense of such domestic members to such in18 come in an amount equal to the excess (if any) 

19 of— 

20 ‘‘(i) the total interest expense of the 

21 worldwide affiliated group multiplied by 

22 the ratio which the foreign assets of the 

23 worldwide affiliated group bears to all the 

24 assets of the worldwide affiliated group, 

25 over 
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1 ‘‘(ii) the interest expense of all foreign 

2 corporations which are members of the 

3 worldwide affiliated group to the extent 

4 such interest expense of such foreign cor5 porations would have been allocated and 

6 apportioned to foreign source income if this 

7 subsection were applied to a group con8 sisting of all the foreign corporations in 

9 such worldwide affiliated group. 

10 ‘‘(C) WORLDWIDE AFFILIATED GROUP.—For 

11 purposes of this paragraph, the term ‘worldwide 

12 affiliated group’ means a group consisting of— 

13 ‘‘(i) the includible members of an af14 filiated group (as defined in section 

15 1504(a), determined without regard to 

16 paragraphs (2) and (4) of section 1504(b)), 

17 and 

18 ‘‘(ii) all controlled foreign corporations 

19 in which such members in the aggregate 

20 meet the ownership requirements of section 

21 1504(a)(2) either directly or indirectly 

22 through applying paragraph (2) of section 

23 958(a) or through applying rules similar to 

24 the rules of such paragraph to stock owned 
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1 directly or indirectly by domestic partner2 ships, trusts, or estates. 

3 ‘‘(2) ALLOCATION AND APPORTIONMENT OF

4 OTHER EXPENSES.—Expenses other than interest 

5 which are not directly allocable or apportioned to any 

6 specific income producing activity shall be allocated 

7 and apportioned as if all members of the affiliated 

8 group were a single corporation. For purposes of the 

9 preceding sentence, the term ‘affiliated group’ has the 

10 meaning given such term by section 1504 (determined 

11 without regard to paragraph (4) of section 1504(b)). 

12 ‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; BASIS

13 OF STOCK IN NONAFFILIATED 10-PERCENT OWNED

14 CORPORATIONS.—The rules of paragraphs (3) and (4) 

15 of subsection (e) shall apply for purposes of this sub16 section, except that paragraph (4) shall be applied on 

17 a worldwide affiliated group basis. 

18 ‘‘(4) TREATMENT OF CERTAIN FINANCIAL INSTI19 TUTIONS.— 

20 ‘‘(A) IN GENERAL.—For purposes of para21 graph (1), any corporation described in subpara22 graph (B) shall be treated as an includible cor23 poration for purposes of section 1504 only for 

24 purposes of applying this subsection separately 

25 to corporations so described. 
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1 ‘‘(B) DESCRIPTION.—A corporation is de2 scribed in this subparagraph if— 

3 ‘‘(i) such corporation is a financial in4 stitution described in section 581 or 591, 

5 ‘‘(ii) the business of such financial in6 stitution is predominantly with persons 

7 other than related persons (within the 

8 meaning of subsection (d)(4)) or their cus9 tomers, and 

10 ‘‘(iii) such financial institution is re11 quired by State or Federal law to be oper12 ated separately from any other entity which 

13 is not such an institution. 

14 ‘‘(C) TREATMENT OF BANK AND FINANCIAL

15 HOLDING COMPANIES.—To the extent provided in 

16 regulations— 

17 ‘‘(i) a bank holding company (within 

18 the meaning of section 2(a) of the Bank 

19 Holding Company Act of 1956 (12 U.S.C. 

20 1841(a)), 

21 ‘‘(ii) a financial holding company 

22 (within the meaning of section 2(p) of the 

23 Bank Holding Company Act of 1956 (12 

24 U.S.C. 1841(p)), and 
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1 ‘‘(iii) any subsidiary of a financial in2 stitution described in section 581 or 591, or 

3 of any such bank or financial holding com4 pany, if such subsidiary is predominantly 

5 engaged (directly or indirectly) in the active 

6 conduct of a banking, financing, or similar 

7 business, 

8 shall be treated as a corporation described in 

9 subparagraph (B). 

10 ‘‘(5) ELECTION TO EXPAND FINANCIAL INSTITU11 TION GROUP OF WORLDWIDE GROUP.— 

12 ‘‘(A) IN GENERAL.—If a worldwide affili13 ated group elects the application of this sub14 section, all financial corporations which— 

15 ‘‘(i) are members of such worldwide af16 filiated group, but 

17 ‘‘(ii) are not corporations described in 

18 paragraph (4)(B), 

19 shall be treated as described in paragraph (4)(B) 

20 for purposes of applying paragraph (4)(A). This 

21 subsection (other than this paragraph) shall 

22 apply to any such group in the same manner as 

23 this subsection (other than this paragraph) ap24 plies to the pre-election worldwide affiliated 

25 group of which such group is a part. 
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1 ‘‘(B) FINANCIAL CORPORATION.—For pur2 poses of this paragraph, the term ‘financial cor3 poration’ means any corporation if at least 80 

4 percent of its gross income is income described in 

5 section 904(d)(2)(C)(ii) and the regulations 

6 thereunder which is derived from transactions 

7 with persons who are not related (within the 

8 meaning of section 267(b) or 707(b)(1)) to the 

9 corporation. For purposes of the preceding sen10 tence, there shall be disregarded any item of in11 come or gain from a transaction or series of 

12 transactions a principal purpose of which is the 

13 qualification of any corporation as a financial 

14 corporation. 

15 ‘‘(C) ANTIABUSE RULES.—In the case of a 

16 corporation which is a member of an electing fi17 nancial institution group, to the extent that such 

18 corporation— 

19 ‘‘(i) distributes dividends or makes 

20 other distributions with respect to its stock 

21 after the date of the enactment of this para22 graph to any member of the pre-election 

23 worldwide affiliated group (other than to a 

24 member of the electing financial institution 

25 group) in excess of the greater of— 
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1 ‘‘(I) its average annual dividend 

2 (expressed as a percentage of current 

3 earnings and profits) during the 5-tax4 able-year period ending with the tax5 able year preceding the taxable year, or 

6 ‘‘(II) 25 percent of its average an7 nual earnings and profits for such 5- 

8 taxable-year period, or 

9 ‘‘(ii) deals with any person in any 

10 manner not clearly reflecting the income of 

11 the corporation (as determined under prin12 ciples similar to the principles of section 

13 482), 

14 an amount of indebtedness of the electing finan15 cial institution group equal to the excess dis16 tribution or the understatement or overstatement 

17 of income, as the case may be, shall be re18 characterized (for the taxable year and subse19 quent taxable years) for purposes of this para20 graph as indebtedness of the worldwide affiliated 

21 group (excluding the electing financial institu22 tion group). If a corporation has not been in ex23 istence for 5 taxable years, this subparagraph 

24 shall be applied with respect to the period it was 

25 in existence. 
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1 ‘‘(D) ELECTION.—An election under this 

2 paragraph with respect to any financial institu3 tion group may be made only by the common 

4 parent of the pre-election worldwide affiliated 

5 group and may be made only for the first taxable 

6 year beginning after December 31, 2008, in 

7 which such affiliated group includes 1 or more 

8 financial corporations. Such an election, once 

9 made, shall apply to all financial corporations 

10 which are members of the electing financial in11 stitution group for such taxable year and all 

12 subsequent years unless revoked with the consent 

13 of the Secretary. 

14 ‘‘(E) DEFINITIONS RELATING TO GROUPS.— 

15 For purposes of this paragraph— 

16 ‘‘(i) PRE-ELECTION WORLDWIDE AF17 FILIATED GROUP.—The term ‘pre-election 

18 worldwide affiliated group’ means, with re19 spect to a corporation, the worldwide affili20 ated group of which such corporation would 

21 (but for an election under this paragraph) 

22 be a member for purposes of applying para23 graph (1). 

24 ‘‘(ii) ELECTING FINANCIAL INSTITU25 TION GROUP.—The term ‘electing financial 
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1 institution group’ means the group of cor2 porations to which this subsection applies 

3 separately by reason of the application of 

4 paragraph (4)(A) and which includes finan5 cial corporations by reason of an election 

6 under subparagraph (A). 

7 ‘‘(F) REGULATIONS.—The Secretary shall 

8 prescribe such regulations as may be appropriate 

9 to carry out this subsection, including regula10 tions— 

11 ‘‘(i) providing for the direct allocation 

12 of interest expense in other circumstances 

13 where such allocation would be appropriate 

14 to carry out the purposes of this subsection, 

15 ‘‘(ii) preventing assets or interest ex16 pense from being taken into account more 

17 than once, and 

18 ‘‘(iii) dealing with changes in members 

19 of any group (through acquisitions or other20 wise) treated under this paragraph as an 

21 affiliated group for purposes of this sub22 section. 

23 ‘‘(6) ELECTION.—An election to have this sub24 section apply with respect to any worldwide affiliated 

25 group may be made only by the common parent of the 
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1 domestic affiliated group referred to in paragraph 

2 (1)(C) and may be made only for the first taxable 

3 year beginning after December 31, 2008, in which a 

4 worldwide affiliated group exists which includes such 

5 affiliated group and at least 1 foreign corporation. 

6 Such an election, once made, shall apply to such com7 mon parent and all other corporations which are 

8 members of such worldwide affiliated group for such 

9 taxable year and all subsequent years unless revoked 

10 with the consent of the Secretary.’’. 

11 (b) EXPANSION OF REGULATORY AUTHORITY.—Para12 graph (7) of section 864(e) is amended— 

13 (1) by inserting before the comma at the end of 

14 subparagraph (B) ‘‘and in other circumstances where 

15 such allocation would be appropriate to carry out the 

16 purposes of this subsection’’, and 

17 (2) by striking ‘‘and’’ at the end of subpara18 graph (E), by redesignating subparagraph (F) as sub19 paragraph (G), and by inserting after subparagraph 

20 (E) the following new subparagraph: 

21 ‘‘(F) preventing assets or interest expense 

22 from being taken into account more than once, 

23 and’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to taxable years beginning after Decem3 ber 31, 2008. 

4 SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC 

5 LOSS. 

6 (a) GENERAL RULE.—Section 904 is amended by re7 designating subsections (g), (h), (i), (j), and (k) as sub8 sections (h), (i), (j), (k), and (l) respectively, and by insert9 ing after subsection (f) the following new subsection: 

10 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

11 LOSS.— 

12 ‘‘(1) GENERAL RULE.—For purposes of this sub13 part and section 936, in the case of any taxpayer who 

14 sustains an overall domestic loss for any taxable year 

15 beginning after December 31, 2006, that portion of 

16 the taxpayer’s taxable income from sources within the 

17 United States for each succeeding taxable year which 

18 is equal to the lesser of— 

19 ‘‘(A) the amount of such loss (to the extent 

20 not used under this paragraph in prior taxable 

21 years), or 

22 ‘‘(B) 50 percent of the taxpayer’s taxable 

23 income from sources within the United States for 

24 such succeeding taxable year, 
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1 shall be treated as income from sources without the 

2 United States (and not as income from sources within 

3 the United States). 

4 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 

5 purposes of this subsection— 

6 ‘‘(A) IN GENERAL.—The term ‘overall do7 mestic loss’ means any domestic loss to the extent 

8 such loss offsets taxable income from sources 

9 without the United States for the taxable year or 

10 for any preceding taxable year by reason of a 

11 carryback. For purposes of the preceding sen12 tence, the term ‘domestic loss’ means the amount 

13 by which the gross income for the taxable year 

14 from sources within the United States is exceeded 

15 by the sum of the deductions properly appor16 tioned or allocated thereto (determined without 

17 regard to any carryback from a subsequent tax18 able year). 

19 ‘‘(B) TAXPAYER MUST HAVE ELECTED FOR20 EIGN TAX CREDIT FOR YEAR OF LOSS.—The term 

21 ‘overall domestic loss’ shall not include any loss 

22 for any taxable year unless the taxpayer chose 

23 the benefits of this subpart for such taxable year. 

24 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN25 COME.— 
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1 ‘‘(A) IN GENERAL.—Any income from 

2 sources within the United States that is treated 

3 as income from sources without the United 

4 States under paragraph (1) shall be allocated 

5 among and increase the income categories in 

6 proportion to the loss from sources within the 

7 United States previously allocated to those in8 come categories. 

9 ‘‘(B) INCOME CATEGORY.—For purposes of 

10 this paragraph, the term ‘income category’ has 

11 the meaning given such term by subsection 

12 (f)(5)(E)(i). 

13 ‘‘(4) COORDINATION WITH SUBSECTION (f).—The 

14 Secretary shall prescribe such regulations as may be 

15 necessary to coordinate the provisions of this sub16 section with the provisions of subsection (f).’’. 

17 (b) CONFORMING AMENDMENTS.— 

18 (1) Section 535(d)(2) is amended by striking 

19 ‘‘section 904(g)(6)’’ and inserting ‘‘section 904(h)(6)’’. 

20 (2) Subparagraph (A) of section 936(a)(2) is 

21 amended by striking ‘‘section 904(f)’’ and inserting 

22 ‘‘subsections (f) and (g) of section 904’’. 

23 (c) EFFECTIVE DATE.—The amendments made by this 

24 section shall apply to losses for taxable years beginning 

25 after December 31, 2006. 
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1 SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS. 

2 (a) IN GENERAL.—Paragraph (1) of section 904(d) 

3 (relating to separate application of section with respect to 

4 certain categories of income) is amended to read as follows: 

5 ‘‘(1) IN GENERAL.—The provisions of subsections 

6 (a), (b), and (c) and sections 902, 907, and 960 shall 

7 be applied separately with respect to— 

8 ‘‘(A) passive category income, and 

9 ‘‘(B) general category income.’’ 

10 (b) CATEGORIES.—Paragraph (2) of section 904(d) is 

11 amended by striking subparagraph (B), by redesignating 

12 subparagraph (A) as subparagraph (B), and by inserting 

13 before subparagraph (B) (as so redesignated) the following 

14 new subparagraph: 

15 ‘‘(A) CATEGORIES.— 

16 ‘‘(i) PASSIVE CATEGORY INCOME.—The 

17 term ‘passive category income’ means pas18 sive income and specified passive category 

19 income. 

20 ‘‘(ii) GENERAL CATEGORY INCOME.— 

21 The term ‘general category income’ means 

22 income other than passive category income.’’ 

23 (c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub24 paragraph (B) of section 904(d)(2), as so redesignated, is 

25 amended by adding at the end the following new clause: 
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1 ‘‘(v) SPECIFIED PASSIVE CATEGORY IN2 COME.—The term ‘specified passive category 

3 income’ means— 

4 ‘‘(I) dividends from a DISC or 

5 former DISC (as defined in section 

6 992(a)) to the extent such dividends 

7 are treated as income from sources 

8 without the United States, 

9 ‘‘(II) taxable income attributable 

10 to foreign trade income (within the 

11 meaning of section 923(b)), and 

12 ‘‘(III) distributions from a FSC 

13 (or a former FSC) out of earnings and 

14 profits attributable to foreign trade in15 come (within the meaning of section 

16 923(b)) or interest or carrying charges 

17 (as defined in section 927(d)(1)) de18 rived from a transaction which results 

19 in foreign trade income (as defined in 

20 section 923(b)).’’ 

21 (d) TREATMENT OF FINANCIAL SERVICES.—Para22 graph (2) of section 904(d) is amended by striking subpara23 graph (D), by redesignating subparagraph (C) as subpara24 graph (D), and by inserting before subparagraph (D) (as 

25 so redesignated) the following new subparagraph: 
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1 ‘‘(C) TREATMENT OF FINANCIAL SERVICES

2 INCOME AND COMPANIES.— 

3 ‘‘(i) IN GENERAL.—Financial services 

4 income shall be treated as general category 

5 income in the case of— 

6 ‘‘(I) a member of a financial serv7 ices group, and 

8 ‘‘(II) any other person if such per9 son is predominantly engaged in the 

10 active conduct of a banking, insurance, 

11 financing, or similar business. 

12 ‘‘(ii) FINANCIAL SERVICES GROUP.— 

13 The term ‘financial services group’ means 

14 any affiliated group (as defined in section 

15 1504(a) without regard to paragraphs (2) 

16 and (3) of section 1504(b)) which is pre17 dominantly engaged in the active conduct of 

18 a banking, insurance, financing, or similar 

19 business. In determining whether such a 

20 group is so engaged, there shall be taken 

21 into account only the income of members of 

22 the group that are— 

23 ‘‘(I) United States corporations, 

24 or 
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1 ‘‘(II) controlled foreign corpora2 tions in which such United States cor3 porations own, directly or indirectly, 

4 at least 80 percent of the total voting 

5 power and value of the stock. 

6 ‘‘(iii) PASS-THRU ENTITIES.—The Sec7 retary shall by regulation specify for pur8 poses of this subparagraph the treatment of 

9 financial services income received or ac10 crued by partnerships and by other pass11 thru entities which are not members of a fi12 nancial services group.’’ 

13 (e) CONFORMING AMENDMENTS.— 

14 (1) Clause (iii) of section 904(d)(2)(B) (relating 

15 to exceptions from passive income), as so redesig16 nated, is amended by striking subclause (I) and by 

17 redesignating subclauses (II) and (III) as subclauses 

18 (I) and (II), respectively. 

19 (2) Clause (i) of section 904(d)(2)(D) (defining 

20 financial services income), as so redesignated, is 

21 amended by adding ‘‘or’’ at the end of subclause (I) 

22 and by striking subclauses (II) and (III) and insert23 ing the following new subclause: 
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1 ‘‘(II) passive income (determined 

2 without regard to subparagraph 

3 (B)(iii)(II)).’’ 

4 (3) Section 904(d)(2)(D) (defining financial 

5 services income), as so redesignated, is amended by 

6 striking clause (iii). 

7 (4) Paragraph (3) of section 904(d) is amended 

8 to read as follows: 

9 ‘‘(3) LOOK-THRU IN CASE OF CONTROLLED FOR10 EIGN CORPORATIONS.— 

11 ‘‘(A) IN GENERAL.—Except as otherwise 

12 provided in this paragraph, dividends, interest, 

13 rents, and royalties received or accrued by the 

14 taxpayer from a controlled foreign corporation 

15 in which the taxpayer is a United States share16 holder shall not be treated as passive category in17 come. 

18 ‘‘(B) SUBPART F INCLUSIONS.—Any 

19 amount included in gross income under section 

20 951(a)(1)(A) shall be treated as passive category 

21 income to the extent the amount so included is 

22 attributable to passive category income. 

23 ‘‘(C) INTEREST, RENTS, AND ROYALTIES.— 

24 Any interest, rent, or royalty which is received 

25 or accrued from a controlled foreign corporation 
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1 in which the taxpayer is a United States share2 holder shall be treated as passive category in3 come to the extent it is properly allocable (under 

4 regulations prescribed by the Secretary) to pas5 sive category income of the controlled foreign cor6 poration. 

7 ‘‘(D) DIVIDENDS.—Any dividend paid out 

8 of the earnings and profits of any controlled for9 eign corporation in which the taxpayer is a 

10 United States shareholder shall be treated as pas11 sive category income in proportion to the ratio 

12 of— 

13 ‘‘(i) the portion of the earnings and 

14 profits attributable to passive category in15 come, to 

16 ‘‘(ii) the total amount of earnings and 

17 profits. 

18 ‘‘(E) LOOK-THRU APPLIES ONLY WHERE

19 SUBPART F APPLIES.—If a controlled foreign cor20 poration meets the requirements of section 

21 954(b)(3)(A) (relating to de minimis rule) for 

22 any taxable year, for purposes of this paragraph, 

23 none of its foreign base company income (as de24 fined in section 954(a) without regard to section 

25 954(b)(5)) and none of its gross insurance in-
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1 come (as defined in section 954(b)(3)(C)) for 

2 such taxable year shall be treated as passive cat3 egory income, except that this sentence shall not 

4 apply to any income which (without regard to 

5 this sentence) would be treated as financial serv6 ices income. Solely for purposes of applying sub7 paragraph (D), passive income of a controlled 

8 foreign corporation shall not be treated as pas9 sive category income if the requirements of sec10 tion 954(b)(4) are met with respect to such in11 come. 

12 ‘‘(F) COORDINATION WITH HIGH-TAXED IN13 COME PROVISIONS.— 

14 ‘‘(i) In determining whether any in15 come of a controlled foreign corporation is 

16 passive category income, subclause (II) of 

17 paragraph (2)(B)(iii) shall not apply. 

18 ‘‘(ii) Any income of the taxpayer 

19 which is treated as passive category income 

20 under this paragraph shall be so treated 

21 notwithstanding any provision of para22 graph (2); except that the determination of 

23 whether any amount is high-taxed income 

24 shall be made after the application of this 

25 paragraph. 
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1 ‘‘(G) DIVIDEND.—For purposes of this 

2 paragraph, the term ‘dividend’ includes any 

3 amount included in gross income in section 

4 951(a)(1)(B). Any amount included in gross in5 come under section 78 to the extent attributable 

6 to amounts included in gross income in section 

7 951(a)(1)(A) shall not be treated as a dividend 

8 but shall be treated as included in gross income 

9 under section 951(a)(1)(A). 

10 ‘‘(H) LOOK-THRU APPLIES TO PASSIVE FOR11 EIGN INVESTMENT COMPANY INCLUSION.—If— 

12 ‘‘(i) a passive foreign investment com13 pany is a controlled foreign corporation, 

14 and 

15 ‘‘(ii) the taxpayer is a United States 

16 shareholder in such controlled foreign cor17 poration, 

18 any amount included in gross income under sec19 tion 1293 shall be treated as income in a sepa20 rate category to the extent such amount is attrib21 utable to income in such category.’’ 

22 (5) TREATMENT OF INCOME TAX BASE DIF23 FERENCES.—Paragraph (2) of section 904(d) is 

24 amended by redesignating subparagraphs (H) and (I) 

25 as subparagraphs (I) and (J), respectively, and by in-
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1 serting after subparagraph (G) the following new sub2 paragraph: 

3 ‘‘(H) TREATMENT OF INCOME TAX BASE

4 DIFFERENCES.—Tax imposed under the law of a 

5 foreign country or possession of the United 

6 States on an amount which does not constitute 

7 income under United States tax principles shall 

8 be treated as imposed on income described in 

9 paragraph (1)(B).’’ 

10 (6) Paragraph (2) of section 904(d) is amended 

11 by adding at the end the following new subparagraph: 

12 ‘‘(K) TRANSITIONAL RULES FOR 2007

13 CHANGES.—For purposes of paragraph (1)— 

14 ‘‘(i) taxes carried from any taxable 

15 year beginning before January 1, 2007, to 

16 any taxable year beginning on or after such 

17 date, with respect to any item of income, 

18 shall be treated as described in the subpara19 graph of paragraph (1) in which such in20 come would be described were such taxes 

21 paid or accrued in a taxable year beginning 

22 on or after such date, and 

23 ‘‘(ii) the Secretary may by regulations 

24 provide for the allocation of any carryback 

25 of taxes with respect to income to such a 
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1 taxable year for purposes of allocating such 

2 income among the separate categories in ef3 fect for such taxable year.’’. 

4 (7) Section 904(j)(3)(A)(i) is amended by strik5 ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 

6 (d)(2)(B)’’. 

7 (f) EFFECTIVE DATE.—The amendments made by this 

8 section shall apply to taxable years beginning after Decem9 ber 31, 2006. 

10 SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS 

11 FROM NONCONTROLLED SECTION 902 COR12 PORATIONS. 

13 (a) IN GENERAL.—Section 904(d)(4) (relating to look14 thru rules apply to dividends from noncontrolled section 

15 902 corporations) is amended to read as follows: 

16 ‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM

17 NONCONTROLLED SECTION 902 CORPORATIONS.— 

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

19 subsection, any dividend from a noncontrolled 

20 section 902 corporation with respect to the tax21 payer shall be treated as income described in a 

22 subparagraph of paragraph (1) in proportion to 

23 the ratio of— 
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1 ‘‘(i) the portion of earnings and profits 

2 attributable to income described in such 

3 subparagraph, to 

4 ‘‘(ii) the total amount of earnings and 

5 profits. 

6 ‘‘(B) EARNINGS AND PROFITS OF CON7 TROLLED FOREIGN CORPORATIONS.—In the case 

8 of any distribution from a controlled foreign cor9 poration to a United States shareholder, rules 

10 similar to the rules of subparagraph (A) shall 

11 apply in determining the extent to which earn12 ings and profits of the controlled foreign corpora13 tion which are attributable to dividends received 

14 from a noncontrolled section 902 corporation 

15 may be treated as income in a separate category. 

16 ‘‘(C) SPECIAL RULES.—For purposes of this 

17 paragraph— 

18 ‘‘(i) EARNINGS AND PROFITS.— 

19 ‘‘(I) IN GENERAL.—The rules of 

20 section 316 shall apply. 

21 ‘‘(II) REGULATIONS.—The Sec22 retary may prescribe regulations re23 garding the treatment of distributions 

24 out of earnings and profits for periods 
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1 before the taxpayer’s acquisition of the 

2 stock to which the distributions relate. 

3 ‘‘(ii) INADEQUATE SUBSTANTIATION.— 

4 If the Secretary determines that the proper 

5 subparagraph of paragraph (1) in which a 

6 dividend is described has not been substan7 tiated, such dividend shall be treated as in8 come described in paragraph (1)(A). 

9 ‘‘(iii) COORDINATION WITH HIGH10 TAXED INCOME PROVISIONS.—Rules similar 

11 to the rules of paragraph (3)(F) shall apply 

12 for purposes of this paragraph. 

13 ‘‘(iv) LOOK-THRU WITH RESPECT TO

14 CARRYOVER OF CREDIT.—Rules similar to 

15 subparagraph (A) also shall apply to any 

16 carryforward under subsection (c) from a 

17 taxable year beginning before January 1, 

18 2003, of tax allocable to a dividend from a 

19 noncontrolled section 902 corporation with 

20 respect to the taxpayer. The Secretary may 

21 by regulations provide for the allocation of 

22 any carryback of tax allocable to a dividend 

23 from a noncontrolled section 902 corpora24 tion to such a taxable year for purposes of 
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1 allocating such dividend among the separate 

2 categories in effect for such taxable year.’’. 

3 (b) CONFORMING AMENDMENTS.— 

4 (1) Subparagraph (E) of section 904(d)(1) is 

5 hereby repealed. 

6 (2) Section 904(d)(2)(C)(iii) is amended by add7 ing ‘‘and’’ at the end of subclause (I), by striking sub8 clause (II), and by redesignating subclause (III) as 

9 subclause (II). 

10 (3) The last sentence of section 904(d)(2)(D) is 

11 amended to read as follows: ‘‘Such term does not in12 clude any financial services income.’’. 

13 (4) Section 904(d)(2)(E) is amended— 

14 (A) by inserting ‘‘or (4)’’ after ‘‘paragraph 

15 (3)’’ in clause (i), and 

16 (B) by striking clauses (ii) and (iv) and by 

17 redesignating clause (iii) as clause (ii). 

18 (5) Section 904(d)(3)(F) is amended by striking 

19 ‘‘(D), or (E)’’ and inserting ‘‘or (D)’’. 

20 (6) Section 864(d)(5)(A)(i) is amended by strik21 ing ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’. 

22 (c) EFFECTIVE DATE.—The amendments made by this 

23 section shall apply to taxable years beginning after Decem24 ber 31, 2002. 
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1 SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 

2 PARTNERSHIPS TO APPLY IN DETERMINING 

3 SECTION 902 AND 960 CREDITS. 

4 (a) IN GENERAL.—Subsection (c) of section 902 is 

5 amended by redesignating paragraph (7) as paragraph (8) 

6 and by inserting after paragraph (6) the following new 

7 paragraph: 

8 ‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH

9 PARTNERSHIPS.—Stock owned, directly or indirectly, 

10 by or for a partnership shall be considered as being 

11 owned proportionately by its partners. Stock consid12 ered to be owned by a person by reason of the pre13 ceding sentence shall, for purposes of applying such 

14 sentence, be treated as actually owned by such person. 

15 The Secretary may prescribe such regulations as may 

16 be necessary to carry out the purposes of this para17 graph, including rules to account for special partner18 ship allocations of dividends, credits, and other inci19 dents of ownership of stock in determining propor20 tionate ownership.’’. 

21 (b) CLARIFICATION OF COMPARABLE ATTRIBUTION

22 UNDER SECTION 901(b)(5).—Paragraph (5) of section 

23 901(b) is amended by striking ‘‘any individual’’ and insert24 ing ‘‘any person’’. 

25 (c) EFFECTIVE DATE.—The amendments made by this 

26 section shall apply to taxes of foreign corporations for tax-
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1 able years of such corporations beginning after the date of 

2 the enactment of this Act. 

3 SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN 

4 TRANSFERS OF INTANGIBLE PROPERTY. 

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

6 367(d)(2) is amended by adding at the end the following 

7 new sentence: ‘‘For purposes of applying section 904(d), 

8 any such amount shall be treated in the same manner as 

9 if such amount were a royalty.’’. 

10 (b) EFFECTIVE DATE.—The amendment made by this 

11 section shall apply to amounts treated as received pursuant 

12 to section 367(d)(2) of the Internal Revenue Code of 1986 

13 on or after August 5, 1997. 

14 SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE 

15 CERTAIN ASSETS OF CONTROLLED FOREIGN 

16 CORPORATION. 

17 (a) IN GENERAL.—Section 956(c)(2) (relating to ex18 ceptions from property treated as United States property) 

19 is amended by striking ‘‘and’’ at the end of subparagraph 

20 (J), by striking the period at the end of subparagraph (K) 

21 and inserting a semicolon, and by adding at the end the 

22 following new subparagraphs: 

23 ‘‘(L) securities acquired and held by a con24 trolled foreign corporation in the ordinary course 

25 of its business as a dealer in securities if— 
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1 ‘‘(i) the dealer accounts for the securi2 ties as securities held primarily for sale to 

3 customers in the ordinary course of busi4 ness, and 

5 ‘‘(ii) the dealer disposes of the securi6 ties (or such securities mature while held by 

7 the dealer) within a period consistent with 

8 the holding of securities for sale to cus9 tomers in the ordinary course of business; 

10 and 

11 ‘‘(M) an obligation of a United States per12 son which— 

13 ‘‘(i) is not a domestic corporation, and 

14 ‘‘(ii) is not— 

15 ‘‘(I) a United States shareholder 

16 (as defined in section 951(b)) of the 

17 controlled foreign corporation, or 

18 ‘‘(II) a partnership, estate, or 

19 trust in which the controlled foreign 

20 corporation, or any related person (as 

21 defined in section 954(d)(3)), is a 

22 partner, beneficiary, or trustee imme23 diately after the acquisition of any ob24 ligation of such partnership, estate, or 
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1 trust by the controlled foreign corpora2 tion.’’. 

3 (b) CONFORMING AMENDMENT.—Section 956(c)(2) is 

4 amended by striking ‘‘and (K)’’ in the last sentence and 

5 inserting ‘‘, (K), and (L)’’. 

6 (c) EFFECTIVE DATE.—The amendments made by this 

7 section shall apply to taxable years of foreign corporations 

8 beginning after December 31, 2004, and to taxable years 

9 of United States shareholders with or within which such 

10 taxable years of foreign corporations end. 

11 SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE 

12 RATE FOR FOREIGN TAX PAID OTHER THAN 

13 IN FUNCTIONAL CURRENCY. 

14 (a) IN GENERAL.—Paragraph (1) of section 986(a) 

15 (relating to determination of foreign taxes and foreign cor16 poration’s earnings and profits) is amended by redesig17 nating subparagraph (D) as subparagraph (E) and by in18 serting after subparagraph (C) the following new subpara19 graph: 

20 ‘‘(D) ELECTIVE EXCEPTION FOR TAXES

21 PAID OTHER THAN IN FUNCTIONAL CURRENCY.— 

22 ‘‘(i) IN GENERAL.—At the election of 

23 the taxpayer, subparagraph (A) shall not 

24 apply to any foreign income taxes the li25 ability for which is denominated in any 
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1 currency other than in the taxpayer’s func2 tional currency. 

3 ‘‘(ii) APPLICATION TO QUALIFIED

4 BUSINESS UNITS.—An election under this 

5 subparagraph may apply to foreign income 

6 taxes attributable to a qualified business 

7 unit in accordance with regulations pre8 scribed by the Secretary. 

9 ‘‘(iii) ELECTION.—Any such election 

10 shall apply to the taxable year for which 

11 made and all subsequent taxable years un12 less revoked with the consent of the Sec13 retary.’’. 

14 (b) EFFECTIVE DATE.—The amendments made by this 

15 section shall apply to taxable years beginning after Decem16 ber 31, 2004. 

17 SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 

18 FROM CERTAIN FOREIGN CORPORATIONS. 

19 (a) IN GENERAL.—Paragraph (2) of section 871(i) (re20 lating to tax not to apply to certain interest and dividends) 

21 is amended by adding at the end the following new subpara22 graph: 

23 ‘‘(D) Dividends paid by a foreign corpora24 tion which are treated under section 
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1 861(a)(2)(B) as income from sources within the 

2 United States.’’. 

3 (b) EFFECTIVE DATE.—The amendment made by this 

4 section shall apply to payments made after December 31, 

5 2004. 

6 SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST PAID 

7 BY FOREIGN PARTNERSHIPS AND FOREIGN 

8 CORPORATIONS. 

9 (a) IN GENERAL.—Paragraph (1) of section 861(a) is 

10 amended by striking ‘‘and’’ at the end of subparagraph (A), 

11 by striking the period at the end of subparagraph (B) and 

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

13 new subparagraph: 

14 ‘‘(C) in the case of a foreign partnership, 

15 which is predominantly engaged in the active 

16 conduct of a trade or business outside the United 

17 States, any interest not paid by a trade or busi18 ness engaged in by the partnership in the United 

19 States and not allocable to income which is effec20 tively connected (or treated as effectively con21 nected) with the conduct of a trade or business 

22 in the United States.’’. 

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

24 section shall apply to taxable years beginning after Decem25 ber 31, 2003. 
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1 SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN 

2 RELATED CONTROLLED FOREIGN CORPORA3 TIONS UNDER FOREIGN PERSONAL HOLDING 

4 COMPANY INCOME RULES. 

5 (a) IN GENERAL.—Subsection (c) of section 954, as 

6 amended by this Act, is amended by adding after para7 graph (4) the following new paragraph: 

8 ‘‘(5) LOOK-THRU IN THE CASE OF RELATED CON9 TROLLED FOREIGN CORPORATIONS.—For purposes of 

10 this subsection, dividends, interest, rents, and royal11 ties received or accrued from a controlled foreign cor12 poration which is a related person (as defined in sub13 section (b)(9)) shall not be treated as foreign personal 

14 holding company income to the extent attributable or 

15 properly allocable (determined under rules similar to 

16 the rules of subparagraphs (C) and (D) of section 

17 904(d)(3)) to income of the related person which is 

18 not subpart F income (as defined in section 952). For 

19 purposes of this paragraph, interest shall include fac20 toring income which is treated as income equivalent 

21 to interest for purposes of paragraph (1)(E). The Sec22 retary shall prescribe such regulations as may be ap23 propriate to prevent the abuse of the purposes of this 

24 paragraph.’’. 

25 (b) EFFECTIVE DATE.—The amendment made by this 

26 section shall apply to taxable years of foreign corporations 
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1 beginning after December 31, 2004, and to taxable years 

2 of United States shareholders with or within which such 

3 taxable years of foreign corporations end. 

4 SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PART5 NERSHIP INTERESTS. 

6 (a) IN GENERAL.—Section 954(c) (defining foreign 

7 personal holding company income), as amended by this Act, 

8 is amended by adding after paragraph (5) the following 

9 new paragraph: 

10 ‘‘(6) LOOK-THRU RULE FOR CERTAIN PARTNER11 SHIP SALES.— 

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

13 by a controlled foreign corporation of an interest 

14 in a partnership with respect to which such cor15 poration is a 25-percent owner, such corporation 

16 shall be treated for purposes of this subsection as 

17 selling the proportionate share of the assets of the 

18 partnership attributable to such interest. The 

19 Secretary shall prescribe such regulations as 

20 may be appropriate to prevent abuse of the pur21 poses of this paragraph, including regulations 

22 providing for coordination of this paragraph 

23 with the provisions of subchapter K. 

24 ‘‘(B) 25-PERCENT OWNER.—For purposes of 

25 this paragraph, the term ‘25-percent owner’ 
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1 means a controlled foreign corporation which 

2 owns directly 25 percent or more of the capital 

3 or profits interest in a partnership. For purposes 

4 of the preceding sentence, if a controlled foreign 

5 corporation is a shareholder or partner of a cor6 poration or partnership, the controlled foreign 

7 corporation shall be treated as owning directly 

8 its proportionate share of any such capital or 

9 profits interest held directly or indirectly by such 

10 corporation or partnership.’’. 

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

12 section shall apply to taxable years of foreign corporations 

13 beginning after December 31, 2004, and to taxable years 

14 of United States shareholders with or within which such 

15 taxable years of foreign corporations end. 

16 SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COM17 PANY RULES AND FOREIGN INVESTMENT 

18 COMPANY RULES. 

19 (a) GENERAL RULE.—The following provisions are 

20 hereby repealed: 

21 (1) Part III of subchapter G of chapter 1 (relat22 ing to foreign personal holding companies). 

23 (2) Section 1246 (relating to gain on foreign in24 vestment company stock). 
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1 (3) Section 1247 (relating to election by foreign 

2 investment companies to distribute income currently). 

3 (b) EXEMPTION OF FOREIGN CORPORATIONS FROM

4 PERSONAL HOLDING COMPANY RULES.— 

5 (1) IN GENERAL.—Subsection (c) of section 542 

6 (relating to exceptions) is amended— 

7 (A) by striking paragraph (5) and inserting 

8 the following: 

9 ‘‘(5) a foreign corporation,’’, 

10 (B) by striking paragraphs (7) and (10) 

11 and by redesignating paragraphs (8) and (9) as 

12 paragraphs (7) and (8), respectively, 

13 (C) by inserting ‘‘and’’ at the end of para14 graph (7) (as so redesignated), and 

15 (D) by striking ‘‘; and’’ at the end of para16 graph (8) (as so redesignated) and inserting a 

17 period. 

18 (2) TREATMENT OF INCOME FROM PERSONAL

19 SERVICE CONTRACTS.—Paragraph (1) of section 

20 954(c) is amended by adding at the end the following 

21 new subparagraph: 

22 ‘‘(I) PERSONAL SERVICE CONTRACTS.— 

23 ‘‘(i) Amounts received under a contract 

24 under which the corporation is to furnish 

25 personal services if— 
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1 ‘‘(I) some person other than the 

2 corporation has the right to designate 

3 (by name or by description) the indi4 vidual who is to perform the services, 

5 or 

6 ‘‘(II) the individual who is to per7 form the services is designated (by 

8 name or by description) in the con9 tract, and 

10 ‘‘(ii) amounts received from the sale or 

11 other disposition of such a contract. 

12 This subparagraph shall apply with respect to 

13 amounts received for services under a particular 

14 contract only if at some time during the taxable 

15 year 25 percent or more in value of the out16 standing stock of the corporation is owned, di17 rectly or indirectly, by or for the individual who 

18 has performed, is to perform, or may be des19 ignated (by name or by description) as the one 

20 to perform, such services.’’. 

21 (c) CONFORMING AMENDMENTS.— 

22 (1) Section 1(h) is amended— 

23 (A) in paragraph (10), by inserting ‘‘and’’ 

24 at the end of subparagraph (F), by striking sub-
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1 paragraph (G), and by redesignating subpara2 graph (H) as subparagraph (G), and 

3 (B) by striking ‘‘a foreign personal holding 

4 company (as defined in section 552), a foreign 

5 investment company (as defined in section 

6 1246(b)), or’’ in paragraph (11)(C)(iii). 

7 (2) Section 163(e)(3)(B), as amended by section 

8 642(a) of this Act, is amended by striking ‘‘which is 

9 a foreign personal holding company (as defined in 

10 section 552), a controlled foreign corporation (as de11 fined in section 957), or’’ and inserting ‘‘which is a 

12 controlled foreign corporation (as defined in section 

13 957) or’’. 

14 (3) Paragraph (2) of section 171(c) is amend15 ed— 

16 (A) by striking ‘‘, or by a foreign personal 

17 holding company, as defined in section 552’’, 

18 and 

19 (B) by striking ‘‘, or foreign personal hold20 ing company’’. 

21 (4) Paragraph (2) of section 245(a) is amended 

22 by striking ‘‘foreign personal holding company or’’. 

23 (5) Section 267(a)(3)(B), as amended by section 

24 642(b) of this Act, is amended by striking ‘‘to a for25 eign personal holding company (as defined in section 
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1 552), a controlled foreign corporation (as defined in 

2 section 957), or’’ and inserting ‘‘to a controlled for3 eign corporation (as defined in section 957) or’’. 

4 (6) Section 312 is amended by striking sub5 section (j). 

6 (7) Subsection (m) of section 312 is amended by 

7 striking ‘‘, a foreign investment company (within the 

8 meaning of section 1246(b)), or a foreign personal 

9 holding company (within the meaning of section 

10 552)’’. 

11 (8) Subsection (e) of section 443 is amended by 

12 striking paragraph (3) and by redesignating para13 graphs (4) and (5) as paragraphs (3) and (4), respec14 tively. 

15 (9) Subparagraph (B) of section 465(c)(7) is 

16 amended by adding ‘‘or’’ at the end of clause (i), by 

17 striking clause (ii), and by redesignating clause (iii) 

18 as clause (ii). 

19 (10) Paragraph (1) of section 543(b) is amended 

20 by inserting ‘‘and’’ at the end of subparagraph (A), 

21 by striking ‘‘, and’’ at the end of subparagraph (B) 

22 and inserting a period, and by striking subparagraph 

23 (C). 
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1 (11) Paragraph (1) of section 562(b) is amended 

2 by striking ‘‘or a foreign personal holding company 

3 described in section 552’’. 

4 (12) Section 563 is amended— 

5 (A) by striking subsection (c), 

6 (B) by redesignating subsection (d) as sub7 section (c), and 

8 (C) by striking ‘‘subsection (a), (b), or (c)’’ 

9 in subsection (c) (as so redesignated) and insert10 ing ‘‘subsection (a) or (b)’’. 

11 (13) Subsection (d) of section 751 is amended by 

12 adding ‘‘and’’ at the end of paragraph (2), by strik13 ing paragraph (3), by redesignating paragraph (4) as 

14 paragraph (3), and by striking ‘‘paragraph (1), (2), 

15 or (3)’’ in paragraph (3) (as so redesignated) and in16 serting ‘‘paragraph (1) or (2)’’. 

17 (14) Paragraph (2) of section 864(d) is amended 

18 by striking subparagraph (A) and by redesignating 

19 subparagraphs (B) and (C) as subparagraphs (A) 

20 and (B), respectively. 

21 (15)(A) Subparagraph (A) of section 898(b)(1) is 

22 amended to read as follows: 

23 ‘‘(A) which is treated as a controlled foreign 

24 corporation for any purpose under subpart F of 

25 part III of this subchapter, and’’. 
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1 (B) Subparagraph (B) of section 898(b)(2) is 

2 amended by striking ‘‘and sections 551(f) and 554, 

3 whichever are applicable,’’. 

4 (C) Paragraph (3) of section 898(b) is amended 

5 to read as follows: 

6 ‘‘(3) UNITED STATES SHAREHOLDER.—The term 

7 ‘United States shareholder’ has the meaning given to 

8 such term by section 951(b), except that, in the case 

9 of a foreign corporation having related person insur10 ance income (as defined in section 953(c)(2)), the Sec11 retary may treat any person as a United States 

12 shareholder for purposes of this section if such person 

13 is treated as a United States shareholder under sec14 tion 953(c)(1).’’. 

15 (D) Subsection (c) of section 898 is amended to 

16 read as follows: 

17 ‘‘(c) DETERMINATION OF REQUIRED YEAR.— 

18 ‘‘(1) IN GENERAL.—The required year is— 

19 ‘‘(A) the majority U.S. shareholder year, or 

20 ‘‘(B) if there is no majority U.S. share21 holder year, the taxable year prescribed under 

22 regulations. 

23 ‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A specified 

24 foreign corporation may elect, in lieu of the taxable 

25 year under paragraph (1)(A), a taxable year begin-
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1 ning 1 month earlier than the majority U.S. share2 holder year. 

3 ‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.— 

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

5 subsection, the term ‘majority U.S. shareholder 

6 year’ means the taxable year (if any) which, on 

7 each testing day, constituted the taxable year 

8 of— 

9 ‘‘(i) each United States shareholder de10 scribed in subsection (b)(2)(A), and 

11 ‘‘(ii) each United States shareholder 

12 not described in clause (i) whose stock was 

13 treated as owned under subsection (b)(2)(B) 

14 by any shareholder described in such clause. 

15 ‘‘(B) TESTING DAY.—The testing days shall 

16 be— 

17 ‘‘(i) the first day of the corporation’s 

18 taxable year (determined without regard to 

19 this section), or 

20 ‘‘(ii) the days during such representa21 tive period as the Secretary may pre22 scribe.’’. 

23 (16) Clause (ii) of section 904(d)(2)(A) is 

24 amended to read as follows: 
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1 ‘‘(ii) CERTAIN AMOUNTS INCLUDED.— 

2 Except as provided in clause (iii), the term 

3 ‘passive income’ includes, except as pro4 vided in subparagraph (E)(iii) or para5 graph (3)(I), any amount includible in 

6 gross income under section 1293 (relating to 

7 certain passive foreign investment compa8 nies).’’. 

9 (17)(A) Subparagraph (A) of section 904(h)(1), 

10 as redesignated by section 302, is amended by adding 

11 ‘‘or’’ at the end of clause (i), by striking clause (ii), 

12 and by redesignating clause (iii) as clause (ii). 

13 (B) The paragraph heading of paragraph (2) of 

14 section 904(h), as so redesignated, is amended by 

15 striking ‘‘FOREIGN PERSONAL HOLDING OR’’. 

16 (18) Section 951 is amended by striking sub17 sections (c) and (d) and by redesignating subsections 

18 (e) and (f) as subsections (c) and (d), respectively. 

19 (19) Paragraph (3) of section 989(b) is amended 

20 by striking ‘‘, 551(a),’’. 

21 (20) Paragraph (5) of section 1014(b) is amend22 ed by inserting ‘‘and before January 1, 2005,’’ after 

23 ‘‘August 26, 1937,’’. 

24 (21) Subsection (a) of section 1016 is amended 

25 by striking paragraph (13). 
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1 (22)(A) Paragraph (3) of section 1212(a) is 

2 amended to read as follows: 

3 ‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net 

4 capital loss of a corporation shall not be carried back 

5 under paragraph (1)(A) to a taxable year— 

6 ‘‘(A) for which it is a regulated investment 

7 company (as defined in section 851), or 

8 ‘‘(B) for which it is a real estate investment 

9 trust (as defined in section 856).’’. 

10 (B) The amendment made by subparagraph (A) 

11 shall apply to taxable years beginning after December 

12 31, 2004. 

13 (23) Section 1223 is amended by striking para14 graph (10) and by redesignating the following para15 graphs accordingly. 

16 (24) Subsection (d) of section 1248 is amended 

17 by striking paragraph (5) and by redesignating para18 graphs (6) and (7) as paragraphs (5) and (6), respec19 tively. 

20 (25) Paragraph (2) of section 1260(c) is amend21 ed by striking subparagraphs (H) and (I) and by re22 designating subparagraph (J) as subparagraph (H). 

23 (26)(A) Subparagraph (F) of section 1291(b)(3) 

24 is amended by striking ‘‘551(d), 959(a),’’ and insert25 ing ‘‘959(a)’’. 
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1 (B) Subsection (e) of section 1291 is amended by 

2 inserting ‘‘(as in effect on the day before the date of 

3 the enactment of the American Jobs Creation Act of 

4 2004)’’ after ‘‘section 1246’’. 

5 (27) Paragraph (2) of section 1294(a) is amend6 ed to read as follows: 

7 ‘‘(2) ELECTION NOT PERMITTED WHERE

8 AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION

9 951.—The taxpayer may not make an election under 

10 paragraph (1) with respect to the undistributed PFIC 

11 earnings tax liability attributable to a qualified elect12 ing fund for the taxable year if any amount is in13 cludible in the gross income of the taxpayer under sec14 tion 951 with respect to such fund for such taxable 

15 year.’’. 

16 (28) Section 6035 is hereby repealed. 

17 (29) Subparagraph (D) of section 6103(e)(1) is 

18 amended by striking clause (iv) and redesignating 

19 clauses (v) and (vi) as clauses (iv) and (v), respec20 tively. 

21 (30) Subparagraph (B) of section 6501(e)(1) is 

22 amended to read as follows: 

23 ‘‘(B) CONSTRUCTIVE DIVIDENDS.—If the 

24 taxpayer omits from gross income an amount 

25 properly includible therein under section 951(a), 
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1 the tax may be assessed, or a proceeding in court 

2 for the collection of such tax may be done with3 out assessing, at any time within 6 years after 

4 the return was filed.’’. 

5 (31) Subsection (a) of section 6679 is amended— 

6 (A) by striking ‘‘6035, 6046, and 6046A’’ in 

7 paragraph (1) and inserting ‘‘6046 and 6046A’’, 

8 and 

9 (B) by striking paragraph (3). 

10 (32) Sections 170(f)(10)(A), 508(d), 4947, and 

11 4948(c)(4) are each amended by striking ‘‘556(b)(2),’’ 

12 each place it appears. 

13 (33) The table of parts for subchapter G of chap14 ter 1 is amended by striking the item relating to part 

15 III. 

16 (34) The table of sections for part IV of sub17 chapter P of chapter 1 is amended by striking the 

18 items relating to sections 1246 and 1247. 

19 (35) The table of sections for subpart A of part 

20 III of subchapter A of chapter 61 is amended by strik21 ing the item relating to section 6035. 

22 (d) EFFECTIVE DATES.— 

23 (1) IN GENERAL.—Except as provided in para24 graph (2), the amendments made by this section shall 

25 apply to taxable years of foreign corporations begin-
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1 ning after December 31, 2004, and to taxable years 

2 of United States shareholders with or within which 

3 such taxable years of foreign corporations end. 

4 (2) SUBSECTION (c)(29).—The amendments made 

5 by subsection (c)(29) shall apply to disclosures of re6 turn or return information with respect to taxable 

7 years beginning after December 31, 2004. 

8 SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLD9 ING COMPANY INCOME WITH RESPECT TO 

10 TRANSACTIONS IN COMMODITIES. 

11 (a) IN GENERAL.—Clauses (i) and (ii) of section 

12 954(c)(1)(C) (relating to commodity transactions) are 

13 amended to read as follows: 

14 ‘‘(i) arise out of commodity hedging 

15 transactions (as defined in paragraph 

16 (4)(A)), 

17 ‘‘(ii) are active business gains or losses 

18 from the sale of commodities, but only if 

19 substantially all of the controlled foreign 

20 corporation’s commodities are property de21 scribed in paragraph (1), (2), or (8) of sec22 tion 1221(a), or’’. 

23 (b) DEFINITION AND SPECIAL RULES.—Subsection (c) 

24 of section 954 is amended by adding after paragraph (3) 

25 the following new paragraph: 
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1 ‘‘(4) DEFINITION AND SPECIAL RULES RELATING

2 TO COMMODITY TRANSACTIONS.— 

3 ‘‘(A) COMMODITY HEDGING TRANS4 ACTIONS.—For purposes of paragraph (1)(C)(i), 

5 the term ‘commodity hedging transaction’ means 

6 any transaction with respect to a commodity if 

7 such transaction— 

8 ‘‘(i) is a hedging transaction as de9 fined in section 1221(b)(2), determined— 

10 ‘‘(I) without regard to subpara11 graph (A)(ii) thereof, 

12 ‘‘(II) by applying subparagraph 

13 (A)(i) thereof by substituting ‘ordinary 

14 property or property described in sec15 tion 1231(b)’ for ‘ordinary property’, 

16 and 

17 ‘‘(III) by substituting ‘controlled 

18 foreign corporation’ for ‘taxpayer’ each 

19 place it appears, and 

20 ‘‘(ii) is clearly identified as such in ac21 cordance with section 1221(a)(7). 

22 ‘‘(B) TREATMENT OF DEALER ACTIVITIES

23 UNDER PARAGRAPH (1)(C).—Commodities with 

24 respect to which gains and losses are not taken 

25 into account under paragraph (2)(C) in com-
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1 puting a controlled foreign corporation’s foreign 

2 personal holding company income shall not be 

3 taken into account in applying the substantially 

4 all test under paragraph (1)(C)(ii) to such cor5 poration. 

6 ‘‘(C) REGULATIONS.—The Secretary shall 

7 prescribe such regulations as are appropriate to 

8 carry out the purposes of paragraph (1)(C) in 

9 the case of transactions involving related par10 ties.’’. 

11 (c) MODIFICATION OF EXCEPTION FOR DEALERS.— 

12 Clause (i) of section 954(c)(2)(C) is amended by inserting 

13 ‘‘and transactions involving physical settlement’’ after ‘‘(in14 cluding hedging transactions’’. 

15 (d) EFFECTIVE DATE.—The amendments made by this 

16 section shall apply to transactions entered into after Decem17 ber 31, 2004. 

18 SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT 

19 LEASING AND SHIPPING INCOME. 

20 (a) ELIMINATION OF FOREIGN BASE COMPANY SHIP21 PING INCOME.—Section 954 (relating to foreign base com22 pany income) is amended— 

23 (1) by striking paragraph (4) of subsection (a) 

24 (relating to foreign base company shipping income), 

25 and 
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1 (2) by striking subsection (f) (relating to foreign 

2 base company shipping income). 

3 (b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI4 TIES.—Subparagraph (A) of section 954(c)(2) is amended 

5 by adding at the end the following new sentence: ‘‘For pur6 poses of the preceding sentence, rents derived from leasing 

7 an aircraft or vessel in foreign commerce shall not fail to 

8 be treated as derived in the active conduct of a trade or 

9 business if, as determined under regulations prescribed by 

10 the Secretary, the active leasing expenses are not less than 

11 10 percent of the profit on the lease.’’ 

12 (c) CONFORMING AMENDMENTS.— 

13 (1) Section 952(c)(1)(B)(iii) is amended by 

14 striking subclause (I) and redesignating subclauses 

15 (II) through (VI) as subclauses (I) through (V), re16 spectively. 

17 (2) Subsection (b) of section 954 is amended— 

18 (A) by striking ‘‘the foreign base company 

19 shipping income,’’ in paragraph (5), 

20 (B) by striking paragraphs (6) and (7), and 

21 (C) by redesignating paragraph (8) as 

22 paragraph (6). 

23 (d) EFFECTIVE DATE.—The amendments made by this 

24 section shall apply to taxable years of foreign corporations 

25 beginning after December 31, 2004, and to taxable years 
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1 of United States shareholders with or within which such 

2 taxable years of foreign corporations end. 

3 SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART 

4 F FOR ACTIVE FINANCING. 

5 (a) IN GENERAL.—Section 954(h)(3) is amended by 

6 adding at the end the following: 

7 ‘‘(E) DIRECT CONDUCT OF ACTIVITIES.— 

8 For purposes of subparagraph (A)(ii)(II), an ac9 tivity shall be treated as conducted directly by 

10 an eligible controlled foreign corporation or 

11 qualified business unit in its home country if the 

12 activity is performed by employees of a related 

13 person and— 

14 ‘‘(i) the related person is an eligible 

15 controlled foreign corporation the home 

16 country of which is the same as the home 

17 country of the corporation or unit to which 

18 subparagraph (A)(ii)(II) is being applied, 

19 ‘‘(ii) the activity is performed in the 

20 home country of the related person, and 

21 ‘‘(iii) the related person is compensated 

22 on an arm’s-length basis for the perform23 ance of the activity by its employees and 

24 such compensation is treated as earned by 
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1 such person in its home country for pur2 poses of the home country’s tax laws.’’. 

3 (b) EFFECTIVE DATE.—The amendment made by this 

4 section shall apply to taxable years of such foreign corpora5 tions beginning after December 31, 2004, and to taxable 

6 years of United States shareholders with or within which 

7 such taxable years of such foreign corporations end. 

8 TITLE IV—EXTENSION OF 

9 CERTAIN EXPIRING PROVISIONS 

10 SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL 

11 CREDITS AGAINST REGULAR AND MINIMUM 

12 TAX LIABILITY. 

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

14 amended— 

15 (1) by striking ‘‘RULE FOR 2000, 2001, 2002, AND

16 2003.—’’ and inserting ‘‘RULE FOR TAXABLE YEARS

17 2000 THROUGH 2005.—’’, and 

18 (2) by striking ‘‘or 2003,’’ and inserting ‘‘2003, 

19 2004, or 2005,’’. 

20 (b) CONFORMING PROVISIONS.— 

21 (1) Section 904(h) is amended by striking ‘‘or 

22 2003’’ and inserting ‘‘2003, 2004, or 2005’’. 

23 (2) The amendments made by sections 201(b), 

24 202(f), and 618(b) of the Economic Growth and Tax 
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1 Relief Reconciliation Act of 2001 shall not apply to 

2 taxable years beginning during 2004 or 2005. 

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

4 section shall apply to taxable years beginning after Decem5 ber 31, 2003. 

6 SEC. 402. EXTENSION OF RESEARCH CREDIT. 

7 (a) EXTENSION.— 

8 (1) IN GENERAL.—Section 41(h)(1)(B) (relating 

9 to termination) is amended by striking ‘‘June 30, 

10 2004’’ and inserting ‘‘December 31, 2005’’. 

11 (2) CONFORMING AMENDMENT.—Section 

12 45C(b)(1)(D) is amended by striking ‘‘June 30, 2004’’ 

13 and inserting ‘‘December 31, 2005’’. 

14 (b) EFFECTIVE DATE.—The amendments made by sub15 section (a) shall apply to amounts paid or incurred after 

16 June 30, 2004. 

17 SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRO18 DUCED FROM CERTAIN RENEWABLE RE19 SOURCES. 

20 (a) IN GENERAL.—Subparagraphs (A) and (B) of sec21 tion 45(c)(3) (defining qualified facility) are both amended 

22 by striking ‘‘2004’’ and inserting ‘‘2006’’. 

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

24 section shall apply to facilities placed in service after De25 cember 31, 2003. 
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1 SEC. 404. INDIAN EMPLOYMENT TAX CREDIT. 

2 Section 45A(f) (relating to termination) is amended 

3 by striking ‘‘December 31, 2004’’ and inserting ‘‘December 

4 31, 2005’’. 

5 SEC. 405. WORK OPPORTUNITY CREDIT. 

6 (a) IN GENERAL.—Subparagraph (B) of section 

7 51(c)(4) is amended by striking ‘‘December 31, 2003’’ and 

8 inserting ‘‘December 31, 2005’’. 

9 (b) EFFECTIVE DATE.—The amendment made by sub10 section (a) shall apply to individuals who begin work for 

11 the employer after December 31, 2003. 

12 SEC. 406. WELFARE-TO-WORK CREDIT. 

13 (a) IN GENERAL.—Subsection (f) of section 51A is 

14 amended by striking ‘‘December 31, 2003’’ and inserting 

15 ‘‘December 31, 2005’’. 

16 (b) EFFECTIVE DATE.—The amendment made by sub17 section (a) shall apply to individuals who begin work for 

18 the employer after December 31, 2003. 

19 SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SEC20 ONDARY SCHOOL TEACHERS. 

21 (a) IN GENERAL.—Subparagraph (D) of section 

22 62(a)(2) (relating to certain trade and business deductions 

23 of employees) is amended by striking ‘‘or 2003’’ and insert24 ing ‘‘, 2003, 2004, or 2005’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by sub2 section (a) shall apply to taxable years beginning after De3 cember 31, 2003. 

4 SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION 

5 BENEFIT FOR PROPERTY ON INDIAN RES6 ERVATIONS. 

7 Paragraph (8) of section 168(j) (relating to termi8 nation) is amended by striking ‘‘December 31, 2004’’ and 

9 inserting ‘‘December 31, 2005’’. 

10 SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER 

11 TECHNOLOGY AND EQUIPMENT USED FOR 

12 EDUCATIONAL PURPOSES. 

13 (a) IN GENERAL.—Subparagraph (G) of section 

14 170(e)(6) (relating to special rule for contributions of com15 puter technology and equipment for educational purposes) 

16 is amended by striking ‘‘December 31, 2003’’ and inserting 

17 ‘‘December 31, 2005’’. 

18 (b) EFFECTIVE DATE.—The amendment made by sub19 section (a) shall apply to taxable years beginning after De20 cember 31, 2003. 

21 SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION 

22 COSTS. 

23 (a) IN GENERAL.—Subsection (h) of section 198 (relat24 ing to termination) is amended by striking ‘‘December 31, 

25 2003’’ and inserting ‘‘December 31, 2005’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by sub2 section (a) shall apply to expenditures paid or incurred 

3 after December 31, 2003. 

4 SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 

5 (a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec6 tion 220(i) (defining cut-off year) are each amended by 

7 striking ‘‘2003’’ each place it appears in the text and head8 ings and inserting ‘‘2005’’. 

9 (b) CONFORMING AMENDMENTS.— 

10 (1) Paragraph (2) of section 220(j) is amend11 ed— 

12 (A) in the text by striking ‘‘or 2002’’ each 

13 place it appears and inserting ‘‘2002, or 2004’’, 

14 and 

15 (B) in the heading by striking ‘‘OR 2002’’ 

16 and inserting ‘‘2002, OR 2004’’. 

17 (2) Subparagraph (A) of section 220(j)(4) is 

18 amended by striking ‘‘and 2002’’ and inserting 

19 ‘‘2002, and 2004’’. 

20 (3) Subparagraph (C) of section 220(j)(2) is 

21 amended to read as follows: 

22 ‘‘(C) NO LIMITATION FOR 2000 OR 2003.— 

23 The numerical limitation shall not apply for 

24 2000 or 2003.’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall take effect on January 1, 2004. 

3 (d) TIME FOR FILING REPORTS, ETC.— 

4 (1) The report required by section 220(j)(4) of 

5 the Internal Revenue Code of 1986 to be made on Au6 gust 1, 2004, shall be treated as timely if made before 

7 the close of the 90-day period beginning on the date 

8 of the enactment of this Act. 

9 (2) The determination and publication required 

10 by section 220(j)(5) of such Code with respect to cal11 endar year 2004 shall be treated as timely if made be12 fore the close of the 120-day period beginning on the 

13 date of the enactment of this Act. If the determination 

14 under the preceding sentence is that 2004 is a cut-off 

15 year under section 220(i) of such Code, the cut-off 

16 date under such section 220(i) shall be the last day 

17 of such 120-day period. 

18 SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE19 TION FOR OIL AND NATURAL GAS PRODUCED 

20 FROM MARGINAL PROPERTIES. 

21 (a) IN GENERAL.—Subparagraph (H) of section 

22 613A(c)(6) is amended by striking ‘‘January 1, 2004’’ and 

23 inserting ‘‘January 1, 2006’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by sub2 section (a) shall apply to taxable years beginning after De3 cember 31, 2003. 

4 SEC. 413. QUALIFIED ZONE ACADEMY BONDS. 

5 (a) IN GENERAL.—Paragraph (1) of section 1397E(e) 

6 is amended by striking ‘‘and 2003’’ and inserting ‘‘2003, 

7 2004, and 2005’’. 

8 (b) EFFECTIVE DATE.—The amendment made by sub9 section (a) shall apply to obligations issued after the date 

10 of the enactment of this Act. 

11 SEC. 414. DISTRICT OF COLUMBIA. 

12 (a) DISTRICT OF COLUMBIA ENTERPRISE ZONE.— 

13 Subsection (f) of section 1400 is amended by striking ‘‘De14 cember 31, 2003’’ both places it appears and inserting ‘‘De15 cember 31, 2005’’. 

16 (b) TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.— 

17 Subsection (b) of section 1400A is amended by striking ‘‘De18 cember 31, 2003’’ and inserting ‘‘December 31, 2005’’. 

19 (c) ZERO PERCENT CAPITAL GAINS RATE.— 

20 (1) Section 1400B is amended by striking ‘‘Jan21 uary 1, 2004’’ each place it appears and inserting 

22 ‘‘January 1, 2006’’. 

23 (2) Subsections (e)(2) and (g)(2) of section 

24 1400B are each amended by striking ‘‘2008’’ each 
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1 place it appears in the headings and text and insert2 ing ‘‘2010’’. 

3 (3) Subsection (d) of section 1400F is amended 

4 by striking ‘‘December 31, 2008’’ and inserting ‘‘De5 cember 31, 2010’’. 

6 (d) FIRST-TIME HOMEBUYER CREDIT.—Subsection (i) 

7 of section 1400C is amended by striking ‘‘January 1, 2004’’ 

8 and inserting ‘‘January 1, 2006’’. 

9 (e) EFFECTIVE DATES.— 

10 (1) IN GENERAL.—Except as otherwise provided 

11 in this subsection, the amendments made by this sec12 tion shall take effect on the date of the enactment of 

13 this Act. 

14 (2) TAX-EXEMPT ECONOMIC DEVELOPMENT

15 BONDS.—The amendment made by subsection (b) 

16 shall apply to obligations issued after December 31, 

17 2003. 

18 SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY 

19 ZONE BOND FINANCING. 

20 Subparagraph (D) of section 1400L(d)(2) is amended 

21 by striking ‘‘2005’’ and inserting ‘‘2010’’. 

22 SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVI23 TIES. 

24 (a) IN GENERAL.—Clause (iv) of section 6103(i)(3)(C) 

25 and subparagraph (E) of section 6103(i)(7) are both 
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1 amended by striking ‘‘December 31, 2003’’ and inserting 

2 ‘‘December 31, 2005’’. 

3 (b) DISCLOSURE OF TAXPAYER IDENTITY TO LAW EN4 FORCEMENT AGENCIES INVESTIGATING TERRORISM.—Sub5 paragraph (A) of section 6103(i)(7) is amended by adding 

6 at the end the following new clause: 

7 ‘‘(v) TAXPAYER IDENTITY.—For pur8 poses of this subparagraph, a taxpayer’s 

9 identity shall not be treated as taxpayer re10 turn information.’’. 

11 (c) EFFECTIVE DATES.— 

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

13 subsection (a) shall apply to disclosures on or after 

14 the date of the enactment of this Act. 

15 (2) SUBSECTION (b).—The amendment made by 

16 subsection (b) shall take effect as if included in section 

17 201 of the Victims of Terrorism Tax Relief Act of 

18 2001. 

19 SEC. 417. DISCLOSURE OF RETURN INFORMATION RELAT20 ING TO STUDENT LOANS. 

21 Section 6103(l)(13)(D) (relating to termination) is 

22 amended by striking ‘‘December 31, 2004’’ and inserting 

23 ‘‘December 31, 2005’’. 
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1 SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS. 

2 (a) IN GENERAL.—Paragraph (1) of section 7652(f) is 

3 amended by striking ‘‘January 1, 2004’’ and inserting 

4 ‘‘January 1, 2006’’. 

5 (b) EFFECTIVE DATE.—The amendment made by sub6 section (a) shall apply to articles brought into the United 

7 States after December 31, 2003. 

8 SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDG9 ET FOR THE INTERNAL REVENUE SERVICE. 

10 (a) IN GENERAL.—Paragraph (2) of section 8021(f) 

11 (relating to joint reviews) is amended by striking ‘‘2004’’ 

12 and inserting ‘‘2005’’. 

13 (b) REPORT.—Subparagraph (C) of section 8022(3) 

14 (regarding reports) is amended— 

15 (1) by striking ‘‘2004’’ and inserting ‘‘2005’’, 

16 and 

17 (2) by striking ‘‘with respect to—’’ and all that 

18 follows and inserting ‘‘with respect to the matters ad19 dressed in the joint review referred to in section 

20 8021(f)(2).’’. 

21 (c) TIME FOR JOINT REVIEW.—The joint review re22 quired by section 8021(f)(2) of the Internal Revenue Code 

23 of 1986 to be made before June 1, 2004, shall be treated 

24 as timely if made before June 1, 2005. 
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1 SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS 

2 TO MENTAL HEALTH BENEFITS. 

3 (a) IN GENERAL.—Subsection (f) of section 9812 is 

4 amended by striking ‘‘and’’ at the end of paragraph (1), 

5 by striking paragraph (2), and by inserting after para6 graph (1) the following new paragraphs: 

7 ‘‘(2) on or after January 1, 2004, and before the 

8 date of the enactment of American Jobs Creation Act 

9 of 2004, and 

10 ‘‘(3) after December 31, 2005.’’. 

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

12 section shall apply to benefits for services furnished on or 

13 after December 31, 2003. 

14 SEC. 421. COMBINED EMPLOYMENT TAX REPORTING 

15 PROJECT. 

16 (a) IN GENERAL.—Paragraph (1) of section 976(b) of 

17 the Taxpayer Relief Act of 1997 (111 Stat. 898) is amended 

18 by striking ‘‘for a period ending with the date which is 5 

19 years after the date of the enactment of this Act’’ and insert20 ing ‘‘during the period ending on December 31, 2005’’. 

21 (b) EFFECTIVE DATE.—The amendment made by sub22 section (a) shall apply to disclosures on or after the date 

23 of the enactment of this Act. 
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1 SEC. 422. CLEAN-FUEL VEHICLES. 

2 (a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.— 

3 Paragraph (2) of section 30(b) (relating to phaseout) is 

4 amended to read as follows: 

5 ‘‘(2) PHASEOUT.—In the case of any qualified 

6 electric vehicle placed in service after December 31, 

7 2005, the credit otherwise allowable under subsection 

8 (a) (determined after the application of paragraph 

9 (1)) shall be reduced by 75 percent.’’. 

10 (b) DEDUCTION FOR QUALIFIED CLEAN-FUEL VEHI11 CLE PROPERTY.—Subparagraph (B) of section 179A(b)(1) 

12 (relating to phaseout) is amended to read as follows: 

13 ‘‘(B) PHASEOUT.—In the case of any quali14 fied clean-fuel vehicle property placed in service 

15 after December 31, 2005, the limit otherwise ap16 plicable under subparagraph (A) shall be reduced 

17 by 75 percent.’’. 

18 (c) EFFECTIVE DATE.—The amendments made by this 

19 section shall apply to property placed in service after De20 cember 31, 2003. 
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1 TITLE V—DEDUCTION OF STATE 

2 AND LOCAL GENERAL SALES 

3 TAXES 

4 SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL 

5 SALES TAXES IN LIEU OF STATE AND LOCAL 

6 INCOME TAXES. 

7 (a) IN GENERAL.—Subsection (b) of section 164 (relat8 ing to definitions and special rules) is amended by adding 

9 at the end the following: 

10 ‘‘(5) GENERAL SALES TAXES.—For purposes of 

11 subsection (a)— 

12 ‘‘(A) ELECTION TO DEDUCT STATE AND

13 LOCAL SALES TAXES IN LIEU OF STATE AND

14 LOCAL INCOME TAXES.— 

15 ‘‘(i) IN GENERAL.—At the election of 

16 the taxpayer for the taxable year, subsection 

17 (a) shall be applied— 

18 ‘‘(I) without regard to the ref19 erence to State and local income taxes, 

20 and 

21 ‘‘(II) as if State and local general 

22 sales taxes were referred to in a para23 graph thereof. 

24 ‘‘(B) DEFINITION OF GENERAL SALES

25 TAX.—The term ‘general sales tax’ means a tax 
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1 imposed at one rate with respect to the sale at 

2 retail of a broad range of classes of items. 

3 ‘‘(C) SPECIAL RULES FOR FOOD, ETC.—In 

4 the case of items of food, clothing, medical sup5 plies, and motor vehicles— 

6 ‘‘(i) the fact that the tax does not 

7 apply with respect to some or all of such 

8 items shall not be taken into account in de9 termining whether the tax applies with re10 spect to a broad range of classes of items, 

11 and 

12 ‘‘(ii) the fact that the rate of tax appli13 cable with respect to some or all of such 

14 items is lower than the general rate of tax 

15 shall not be taken into account in deter16 mining whether the tax is imposed at one 

17 rate. 

18 ‘‘(D) ITEMS TAXED AT DIFFERENT

19 RATES.—Except in the case of a lower rate of tax 

20 applicable with respect to an item described in 

21 subparagraph (C), no deduction shall be allowed 

22 under this paragraph for any general sales tax 

23 imposed with respect to an item at a rate other 

24 than the general rate of tax. 
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1 ‘‘(E) COMPENSATING USE TAXES.—A com2 pensating use tax with respect to an item shall 

3 be treated as a general sales tax. For purposes of 

4 the preceding sentence, the term ‘compensating 

5 use tax’ means, with respect to any item, a tax 

6 which— 

7 ‘‘(i) is imposed on the use, storage, or 

8 consumption of such item, and 

9 ‘‘(ii) is complementary to a general 

10 sales tax, but only if a deduction is allow11 able under this paragraph with respect to 

12 items sold at retail in the taxing jurisdic13 tion which are similar to such item. 

14 ‘‘(F) SPECIAL RULE FOR MOTOR VEHI15 CLES.—In the case of motor vehicles, if the rate 

16 of tax exceeds the general rate, such excess shall 

17 be disregarded and the general rate shall be 

18 treated as the rate of tax. 

19 ‘‘(G) SEPARATELY STATED GENERAL SALES

20 TAXES.—If the amount of any general sales tax 

21 is separately stated, then, to the extent that the 

22 amount so stated is paid by the consumer (other 

23 than in connection with the consumer’s trade or 

24 business) to the seller, such amount shall be 
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1 treated as a tax imposed on, and paid by, such 

2 consumer. 

3 ‘‘(H) AMOUNT OF DEDUCTION TO BE DE4 TERMINED UNDER TABLES.— 

5 ‘‘(i) IN GENERAL.—The amount of the 

6 deduction allowed under this paragraph 

7 shall be determined under tables prescribed 

8 by the Secretary. 

9 ‘‘(ii) REQUIREMENTS FOR TABLES.— 

10 The tables prescribed under clause (i)— 

11 ‘‘(I) shall reflect the provisions of 

12 this paragraph, 

13 ‘‘(II) shall be based on the average 

14 consumption by taxpayers on a State15 by-State basis, as determined by the 

16 Secretary, taking into account filing 

17 status, number of dependents, adjusted 

18 gross income, and rates of State and 

19 local general sales taxation, and 

20 ‘‘(III) need only be determined 

21 with respect to adjusted gross incomes 

22 up to the applicable amount (as deter23 mined under section 68(b)). 

24 ‘‘(I) APPLICATION OF PARAGRAPH.—This 

25 paragraph shall apply to taxable years begin-
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1 ning after December 31, 2003, and before Janu2 ary 1, 2006.’’. 

3 (b) EFFECTIVE DATE.—The amendments made by this 

4 section shall apply to taxable years beginning after Decem5 ber 31, 2003. 

6 TITLE VI—REVENUE 

7 PROVISIONS 

8 Subtitle A—Provisions to Reduce 

9 Tax Avoidance Through Indi10 vidual and Corporate Expatria11 tion 

12 SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND 

13 THEIR FOREIGN PARENTS. 

14 (a) IN GENERAL.—Subchapter C of chapter 80 (relat15 ing to provisions affecting more than one subtitle) is 

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

17 ‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 

18 AND THEIR FOREIGN PARENTS. 

19 ‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED ENTI20 TIES.— 

21 ‘‘(1) IN GENERAL.—The taxable income of an ex22 patriated entity for any taxable year which includes 

23 any portion of the applicable period shall in no event 

24 be less than the inversion gain of the entity for the 

25 taxable year. 
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1 ‘‘(2) EXPATRIATED ENTITY.—For purposes of 

2 this subsection— 

3 ‘‘(A) IN GENERAL.—The term ‘expatriated 

4 entity’ means— 

5 ‘‘(i) the domestic corporation or part6 nership referred to in subparagraph (B)(i) 

7 with respect to which a foreign corporation 

8 is a surrogate foreign corporation, and 

9 ‘‘(ii) any United States person who is 

10 related (within the meaning of section 

11 267(b) or 707(b)(1)) to a domestic corpora12 tion or partnership described in clause (i). 

13 ‘‘(B) SURROGATE FOREIGN CORPORATION.— 

14 A foreign corporation shall be treated as a surro15 gate foreign corporation if, pursuant to a plan 

16 (or a series of related transactions)— 

17 ‘‘(i) the entity completes after March 4, 

18 2003, the direct or indirect acquisition of 

19 substantially all of the properties held di20 rectly or indirectly by a domestic corpora21 tion or substantially all of the properties 

22 constituting a trade or business of a domes23 tic partnership, 
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1 ‘‘(ii) after the acquisition at least 60 

2 percent of the stock (by vote or value) of the 

3 entity is held— 

4 ‘‘(I) in the case of an acquisition 

5 with respect to a domestic corporation, 

6 by former shareholders of the domestic 

7 corporation by reason of holding stock 

8 in the domestic corporation, or 

9 ‘‘(II) in the case of an acquisition 

10 with respect to a domestic partnership, 

11 by former partners of the domestic 

12 partnership by reason of holding a 

13 capital or profits interest in the domes14 tic partnership, and 

15 ‘‘(iii) after the acquisition the ex16 panded affiliated group which includes the 

17 entity does not have substantial business ac18 tivities in the foreign country in which, or 

19 under the law of which, the entity is created 

20 or organized, when compared to the total 

21 business activities of such expanded affili22 ated group. 

23 An entity otherwise described in clause (i) with 

24 respect to any domestic corporation or partner25 ship trade or business shall be treated as not so 
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1 described if, on or before March 4, 2003, such en2 tity acquired directly or indirectly more than 

3 half of the properties held directly or indirectly 

4 by such corporation or more than half of the 

5 properties constituting such partnership trade or 

6 business, as the case may be. 

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

8 ‘‘(1) EXPANDED AFFILIATED GROUP.—The term 

9 ‘expanded affiliated group’ means an affiliated group 

10 as defined in section 1504(a) but without regard to 

11 section 1504(b)(3), except that section 1504(a) shall 

12 be applied by substituting ‘more than 50 percent’ for 

13 ‘at least 80 percent’ each place it appears. 

14 ‘‘(2) CERTAIN STOCK DISREGARDED.—There 

15 shall not be taken into account in determining owner16 ship under subsection (a)(2)(B)(ii)— 

17 ‘‘(A) stock held by members of the expanded 

18 affiliated group which includes the foreign cor19 poration, or 

20 ‘‘(B) stock of such foreign corporation which 

21 is sold in a public offering related to the acquisi22 tion described in subsection (a)(2)(B)(i). 

23 ‘‘(3) PLAN DEEMED IN CERTAIN CASES.—If a 

24 foreign corporation acquires directly or indirectly 

25 substantially all of the properties of a domestic cor-
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1 poration or partnership during the 4-year period be2 ginning on the date which is 2 years before the owner3 ship requirements of subsection (a)(2)(B)(ii) are met, 

4 such actions shall be treated as pursuant to a plan. 

5 ‘‘(4) CERTAIN TRANSFERS DISREGARDED.—The 

6 transfer of properties or liabilities (including by con7 tribution or distribution) shall be disregarded if such 

8 transfers are part of a plan a principal purpose of 

9 which is to avoid the purposes of this section. 

10 ‘‘(5) SPECIAL RULE FOR RELATED PARTNER11 SHIPS.—For purposes of applying subsection 

12 (a)(2)(B)(ii) to the acquisition of a trade or business 

13 of a domestic partnership, except as provided in regu14 lations, all partnerships which are under common 

15 control (within the meaning of section 482) shall be 

16 treated as 1 partnership. 

17 ‘‘(6) REGULATIONS.—The Secretary shall pre18 scribe such regulations as may be appropriate to de19 termine whether a corporation is a surrogate foreign 

20 corporation, including regulations— 

21 ‘‘(A) to treat warrants, options, contracts to 

22 acquire stock, convertible debt interests, and 

23 other similar interests as stock, and 

24 ‘‘(B) to treat stock as not stock. 
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1 ‘‘(c) OTHER DEFINITIONS.—For purposes of this sec2 tion— 

3 ‘‘(1) APPLICABLE PERIOD.—The term ‘applicable 

4 period’ means the period— 

5 ‘‘(A) beginning on the first date properties 

6 are acquired as part of the acquisition described 

7 in subsection (a)(2)(B)(i), and 

8 ‘‘(B) ending on the date which is 10 years 

9 after the last date properties are acquired as 

10 part of such acquisition. 

11 ‘‘(2) INVERSION GAIN.—The term ‘inversion 

12 gain’ means the income or gain recognized by reason 

13 of the transfer during the applicable period of stock 

14 or other properties by an expatriated entity, and any 

15 income received or accrued during the applicable pe16 riod by reason of a license of any property by an ex17 patriated entity— 

18 ‘‘(A) as part of the acquisition described in 

19 subsection (a)(2)(B)(i), or 

20 ‘‘(B) after such acquisition if the transfer or 

21 license is to a foreign related person. 

22 Subparagraph (B) shall not apply to property de23 scribed in section 1221(a)(1) in the hands of the expa24 triated entity. 
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1 ‘‘(3) FOREIGN RELATED PERSON.—The term ‘for2 eign related person’ means, with respect to any expa3 triated entity, a foreign person which— 

4 ‘‘(A) is related (within the meaning of sec5 tion 267(b) or 707(b)(1)) to such entity, or 

6 ‘‘(B) is under the same common control 

7 (within the meaning of section 482) as such enti8 ty. 

9 ‘‘(d) SPECIAL RULES.— 

10 ‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON IN11 VERSION GAIN.—Credits (other than the credit allowed 

12 by section 901) shall be allowed against the tax im13 posed by this chapter on an expatriated entity for 

14 any taxable year described in subsection (a) only to 

15 the extent such tax exceeds the product of— 

16 ‘‘(A) the amount of the inversion gain for 

17 the taxable year, and 

18 ‘‘(B) the highest rate of tax specified in sec19 tion 11(b)(1). 

20 For purposes of determining the credit allowed by sec21 tion 901, inversion gain shall be treated as from 

22 sources within the United States. 

23 ‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 

24 the case of an expatriated entity which is a partner25 ship— 
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1 ‘‘(A) subsection (a)(1) shall apply at the 

2 partner rather than the partnership level, 

3 ‘‘(B) the inversion gain of any partner for 

4 any taxable year shall be equal to the sum of— 

5 ‘‘(i) the partner’s distributive share of 

6 inversion gain of the partnership for such 

7 taxable year, plus 

8 ‘‘(ii) gain recognized for the taxable 

9 year by the partner by reason of the trans10 fer during the applicable period of any 

11 partnership interest of the partner in such 

12 partnership to the surrogate foreign cor13 poration, and 

14 ‘‘(C) the highest rate of tax specified in the 

15 rate schedule applicable to the partner under this 

16 chapter shall be substituted for the rate of tax re17 ferred to in paragraph (1). 

18 ‘‘(3) COORDINATION WITH SECTION 172 AND MIN19 IMUM TAX.—Rules similar to the rules of paragraphs 

20 (3) and (4) of section 860E(a) shall apply for pur21 poses of subsection (a). 

22 ‘‘(4) STATUTE OF LIMITATIONS.— 

23 ‘‘(A) IN GENERAL.—The statutory period 

24 for the assessment of any deficiency attributable 

25 to the inversion gain of any taxpayer for any 
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1 pre-inversion year shall not expire before the ex2 piration of 3 years from the date the Secretary 

3 is notified by the taxpayer (in such manner as 

4 the Secretary may prescribe) of the acquisition 

5 described in subsection (a)(2)(B)(i) to which 

6 such gain relates and such deficiency may be as7 sessed before the expiration of such 3-year period 

8 notwithstanding the provisions of any other law 

9 or rule of law which would otherwise prevent 

10 such assessment. 

11 ‘‘(B) PRE-INVERSION YEAR.—For purposes 

12 of subparagraph (A), the term ‘pre-inversion 

13 year’ means any taxable year if— 

14 ‘‘(i) any portion of the applicable pe15 riod is included in such taxable year, and 

16 ‘‘(ii) such year ends before the taxable 

17 year in which the acquisition described in 

18 subsection (a)(2)(B)(i) is completed. 

19 ‘‘(e) SPECIAL RULE FOR TREATIES.—Nothing in sec20 tion 894 or 7852(d) or in any other provision of law shall 

21 be construed as permitting an exemption, by reason of any 

22 treaty obligation of the United States heretofore or hereafter 

23 entered into, from the provisions of this section. 

24 ‘‘(f) REGULATIONS.—The Secretary shall provide such 

25 regulations as are necessary to carry out this section, in-
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1 cluding regulations providing for such adjustments to the 

2 application of this section as are necessary to prevent the 

3 avoidance of the purposes of this section, including the 

4 avoidance of such purposes through— 

5 ‘‘(1) the use of related persons, pass-through or 

6 other noncorporate entities, or other intermediaries, 

7 or 

8 ‘‘(2) transactions designed to have persons cease 

9 to be (or not become) members of expanded affiliated 

10 groups or related persons.’’. 

11 (b) CONFORMING AMENDMENT.—The table of sections 

12 for subchapter C of chapter 80 is amended by adding at 

13 the end the following new item: 

‘‘Sec. 7874. Rules relating to expatriated entities and their foreign 

parents.’’ 

14 (c) EFFECTIVE DATE.—The amendments made by this 

15 section shall apply to taxable years ending after March 4, 

16 2003. 

17 SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSID18 ERS IN EXPATRIATED CORPORATIONS. 

19 (a) IN GENERAL.—Subtitle D is amended by inserting 

20 after chapter 44 end the following new chapter: 

21 ‘‘CHAPTER 45—PROVISIONS RELATING TO 

22 EXPATRIATED ENTITIES 

‘‘Sec. 4985. Stock compensation of insiders in expatriated corporations. 
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1 ‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA2 TRIATED CORPORATIONS. 

3 ‘‘(a) IMPOSITION OF TAX.—In the case of an indi4 vidual who is a disqualified individual with respect to any 

5 expatriated corporation, there is hereby imposed on such 

6 person a tax equal to 15 percent of the value (determined 

7 under subsection (b)) of the specified stock compensation 

8 held (directly or indirectly) by or for the benefit of such 

9 individual or a member of such individual’s family (as de10 fined in section 267) at any time during the 12-month pe11 riod beginning on the date which is 6 months before the 

12 expatriation date. 

13 ‘‘(b) VALUE.—For purposes of subsection (a)— 

14 ‘‘(1) IN GENERAL.—The value of specified stock 

15 compensation shall be— 

16 ‘‘(A) in the case of a stock option (or other 

17 similar right) or a stock appreciation right, the 

18 fair value of such option or right, and 

19 ‘‘(B) in any other case, the fair market 

20 value of such compensation. 

21 ‘‘(2) DATE FOR DETERMINING VALUE.—The de22 termination of value shall be made— 

23 ‘‘(A) in the case of specified stock compensa24 tion held on the expatriation date, on such date, 

25 ‘‘(B) in the case of such compensation which 

26 is canceled during the 6 months before the expa-
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1 triation date, on the day before such cancella2 tion, and 

3 ‘‘(C) in the case of such compensation which 

4 is granted after the expatriation date, on the 

5 date such compensation is granted. 

6 ‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN

7 RECOGNIZED.—Subsection (a) shall apply to any disquali8 fied individual with respect to an expatriated corporation 

9 only if gain (if any) on any stock in such corporation is 

10 recognized in whole or part by any shareholder by reason 

11 of the acquisition referred to in section 7874(a)(2)(B)(i) 

12 with respect to such corporation. 

13 ‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON COM14 PENSATION.—Subsection (a) shall not apply to— 

15 ‘‘(1) any stock option which is exercised on the 

16 expatriation date or during the 6-month period before 

17 such date and to the stock acquired in such exercise, 

18 if income is recognized under section 83 on or before 

19 the expatriation date with respect to the stock ac20 quired pursuant to such exercise, and 

21 ‘‘(2) any other specified stock compensation 

22 which is exercised, sold, exchanged, distributed, 

23 cashed-out, or otherwise paid during such period in 

24 a transaction in which income, gain, or loss is recog25 nized in full. 
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1 ‘‘(e) DEFINITIONS.—For purposes of this section— 

2 ‘‘(1) DISQUALIFIED INDIVIDUAL.—The term ‘dis3 qualified individual’ means, with respect to a cor4 poration, any individual who, at any time during the 

5 12-month period beginning on the date which is 6 

6 months before the expatriation date— 

7 ‘‘(A) is subject to the requirements of section 

8 16(a) of the Securities Exchange Act of 1934 

9 with respect to such corporation or any member 

10 of the expanded affiliated group which includes 

11 such corporation, or 

12 ‘‘(B) would be subject to such requirements 

13 if such corporation or member were an issuer of 

14 equity securities referred to in such section. 

15 ‘‘(2) EXPATRIATED CORPORATION; EXPATRIATION

16 DATE.— 

17 ‘‘(A) EXPATRIATED CORPORATION.—The 

18 term ‘expatriated corporation’ means any cor19 poration which is an expatriated entity (as de20 fined in section 7874(a)(2)). Such term includes 

21 any predecessor or successor of such a corpora22 tion. 

23 ‘‘(B) EXPATRIATION DATE.—The term ‘ex24 patriation date’ means, with respect to a cor-
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1 poration, the date on which the corporation first 

2 becomes an expatriated corporation. 

3 ‘‘(3) SPECIFIED STOCK COMPENSATION.— 

4 ‘‘(A) IN GENERAL.—The term ‘specified 

5 stock compensation’ means payment (or right to 

6 payment) granted by the expatriated corporation 

7 (or by any member of the expanded affiliated 

8 group which includes such corporation) to any 

9 person in connection with the performance of 

10 services by a disqualified individual for such cor11 poration or member if the value of such payment 

12 or right is based on (or determined by reference 

13 to) the value (or change in value) of stock in 

14 such corporation (or any such member). 

15 ‘‘(B) EXCEPTIONS.—Such term shall not in16 clude— 

17 ‘‘(i) any option to which part II of 

18 subchapter D of chapter 1 applies, or 

19 ‘‘(ii) any payment or right to payment 

20 from a plan referred to in section 

21 280G(b)(6). 

22 ‘‘(4) EXPANDED AFFILIATED GROUP.—The term 

23 ‘expanded affiliated group’ means an affiliated group 

24 (as defined in section 1504(a) without regard to sec25 tion 1504(b)(3)); except that section 1504(a) shall be 
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1 applied by substituting ‘more than 50 percent’ for ‘at 

2 least 80 percent’ each place it appears. 

3 ‘‘(f) SPECIAL RULES.—For purposes of this section— 

4 ‘‘(1) CANCELLATION OF RESTRICTION.—The can5 cellation of a restriction which by its terms will never 

6 lapse shall be treated as a grant. 

7 ‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY

8 CORPORATION TREATED AS SPECIFIED STOCK COM9 PENSATION.—Any payment of the tax imposed by this 

10 section directly or indirectly by the expatriated cor11 poration or by any member of the expanded affiliated 

12 group which includes such corporation— 

13 ‘‘(A) shall be treated as specified stock com14 pensation, and 

15 ‘‘(B) shall not be allowed as a deduction 

16 under any provision of chapter 1. 

17 ‘‘(3) CERTAIN RESTRICTIONS IGNORED.—Wheth18 er there is specified stock compensation, and the value 

19 thereof, shall be determined without regard to any re20 striction other than a restriction which by its terms 

21 will never lapse. 

22 ‘‘(4) PROPERTY TRANSFERS.—Any transfer of 

23 property shall be treated as a payment and any right 

24 to a transfer of property shall be treated as a right 

25 to a payment. 
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1 ‘‘(5) OTHER ADMINISTRATIVE PROVISIONS.—For 

2 purposes of subtitle F, any tax imposed by this sec3 tion shall be treated as a tax imposed by subtitle A. 

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

5 such regulations as may be necessary or appropriate to 

6 carry out the purposes of this section.’’ 

7 (b) DENIAL OF DEDUCTION.— 

8 (1) IN GENERAL.—Paragraph (6) of section 

9 275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 

10 (2) $1,000,000 LIMIT ON DEDUCTIBLE COM11 PENSATION REDUCED BY PAYMENT OF EXCISE TAX ON

12 SPECIFIED STOCK COMPENSATION.—Paragraph (4) of 

13 section 162(m) is amended by adding at the end the 

14 following new subparagraph: 

15 ‘‘(G) COORDINATION WITH EXCISE TAX ON

16 SPECIFIED STOCK COMPENSATION.—The dollar 

17 limitation contained in paragraph (1) with re18 spect to any covered employee shall be reduced 

19 (but not below zero) by the amount of any pay20 ment (with respect to such employee) of the tax 

21 imposed by section 4985 directly or indirectly by 

22 the expatriated corporation (as defined in such 

23 section) or by any member of the expanded affili24 ated group (as defined in such section) which in25 cludes such corporation.’’ 
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1 (c) CONFORMING AMENDMENTS.— 

2 (1) The last sentence of section 3121(v)(2)(A) is 

3 amended by inserting before the period ‘‘or to any 

4 specified stock compensation (as defined in section 

5 4985) on which tax is imposed by section 4985’’. 

6 (2) The table of chapters for subtitle D is amend7 ed by inserting after the item relating to chapter 44 

8 the following new item: 

‘‘Chapter 45. Provisions relating to expatriated entities.’’ 

9 (d) EFFECTIVE DATE.—The amendments made by this 

10 section shall take effect on March 4, 2003; except that peri11 ods before such date shall not be taken into account in ap12 plying the periods in subsections (a) and (e)(1) of section 

13 4985 of the Internal Revenue Code of 1986, as added by 

14 this section. 

15 SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOR16 EIGN JURISDICTIONS. 

17 (a) IN GENERAL.—Section 845(a) (relating to alloca18 tion in case of reinsurance agreement involving tax avoid19 ance or evasion) is amended by striking ‘‘source and char20 acter’’ and inserting ‘‘amount, source, or character’’. 

21 (b) EFFECTIVE DATE.—The amendments made by this 

22 section shall apply to any risk reinsured after the date of 

23 the enactment of this Act. 
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1 SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 

2 INDIVIDUALS. 

3 (a) EXPATRIATION TO AVOID TAX.— 

4 (1) IN GENERAL.—Subsection (a) of section 877 

5 (relating to treatment of expatriates) is amended to 

6 read as follows: 

7 ‘‘(a) TREATMENT OF EXPATRIATES.— 

8 ‘‘(1) IN GENERAL.—Every nonresident alien in9 dividual to whom this section applies and who, with10 in the 10-year period immediately preceding the close 

11 of the taxable year, lost United States citizenship 

12 shall be taxable for such taxable year in the manner 

13 provided in subsection (b) if the tax imposed pursu14 ant to such subsection (after any reduction in such 

15 tax under the last sentence of such subsection) exceeds 

16 the tax which, without regard to this section, is im17 posed pursuant to section 871. 

18 ‘‘(2) INDIVIDUALS SUBJECT TO THIS SECTION.— 

19 This section shall apply to any individual if— 

20 ‘‘(A) the average annual net income tax (as 

21 defined in section 38(c)(1)) of such individual 

22 for the period of 5 taxable years ending before 

23 the date of the loss of United States citizenship 

24 is greater than $124,000, 

25 ‘‘(B) the net worth of the individual as of 

26 such date is $2,000,000 or more, or 
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1 ‘‘(C) such individual fails to certify under 

2 penalty of perjury that he has met the require3 ments of this title for the 5 preceding taxable 

4 years or fails to submit such evidence of such 

5 compliance as the Secretary may require. 

6 In the case of the loss of United States citizenship in 

7 any calendar year after 2004, such $124,000 amount 

8 shall be increased by an amount equal to such dollar 

9 amount multiplied by the cost-of-living adjustment 

10 determined under section 1(f)(3) for such calendar 

11 year by substituting ‘2003’ for ‘1992’ in subpara12 graph (B) thereof. Any increase under the preceding 

13 sentence shall be rounded to the nearest multiple of 

14 $1,000.’’. 

15 (2) REVISION OF EXCEPTIONS FROM ALTER16 NATIVE TAX.—Subsection (c) of section 877 (relating 

17 to tax avoidance not presumed in certain cases) is 

18 amended to read as follows: 

19 ‘‘(c) EXCEPTIONS.— 

20 ‘‘(1) IN GENERAL.—Subparagraphs (A) and (B) 

21 of subsection (a)(2) shall not apply to an individual 

22 described in paragraph (2) or (3). 

23 ‘‘(2) DUAL CITIZENS.— 

24 ‘‘(A) IN GENERAL.—An individual is de25 scribed in this paragraph if— 
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1 ‘‘(i) the individual became at birth a 

2 citizen of the United States and a citizen of 

3 another country and continues to be a cit4 izen of such other country, and 

5 ‘‘(ii) the individual has had no sub6 stantial contacts with the United States. 

7 ‘‘(B) SUBSTANTIAL CONTACTS.—An indi8 vidual shall be treated as having no substantial 

9 contacts with the United States only if the indi10 vidual— 

11 ‘‘(i) was never a resident of the United 

12 States (as defined in section 7701(b)), 

13 ‘‘(ii) has never held a United States 

14 passport, and 

15 ‘‘(iii) was not present in the United 

16 States for more than 30 days during any 

17 calendar year which is 1 of the 10 calendar 

18 years preceding the individual’s loss of 

19 United States citizenship. 

20 ‘‘(3) CERTAIN MINORS.—An individual is de21 scribed in this paragraph if— 

22 ‘‘(A) the individual became at birth a cit23 izen of the United States, 
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1 ‘‘(B) neither parent of such individual was 

2 a citizen of the United States at the time of such 

3 birth, 

4 ‘‘(C) the individual’s loss of United States 

5 citizenship occurs before such individual attains 

age 181 6 ⁄2, and 

7 ‘‘(D) the individual was not present in the 

8 United States for more than 30 days during any 

9 calendar year which is 1 of the 10 calendar 

10 years preceding the individual’s loss of United 

11 States citizenship.’’. 

12 (3) CONFORMING AMENDMENT.—Section 2107(a) 

13 is amended to read as follows: 

14 ‘‘(a) TREATMENT OF EXPATRIATES.—A tax computed 

15 in accordance with the table contained in section 2001 is 

16 hereby imposed on the transfer of the taxable estate, deter17 mined as provided in section 2106, of every decedent non18 resident not a citizen of the United States if the date of 

19 death occurs during a taxable year with respect to which 

20 the decedent is subject to tax under section 877(b).’’. 

21 (b) SPECIAL RULES FOR DETERMINING WHEN AN IN22 DIVIDUAL IS NO LONGER A UNITED STATES CITIZEN OR

23 LONG-TERM RESIDENT.—Section 7701 (relating to defini24 tions) is amended by redesignating subsection (n) as sub-
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1 section (o) and by inserting after subsection (m) the fol2 lowing new subsection: 

3 ‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN IN4 DIVIDUAL IS NO LONGER A UNITED STATES CITIZEN OR

5 LONG-TERM RESIDENT.—An individual who would (but 

6 for this subsection) cease to be treated as a citizen or resi7 dent of the United States shall continue to be treated as 

8 a citizen or resident of the United States, as the case may 

9 be, until such individual— 

10 ‘‘(1) gives notice of an expatriating act or termi11 nation of residency (with the requisite intent to relin12 quish citizenship or terminate residency) to the Sec13 retary of State or the Secretary of Homeland Secu14 rity, and 

15 ‘‘(2) provides a statement in accordance with 

16 section 6039G.’’. 

17 (c) PHYSICAL PRESENCE IN THE UNITED STATES FOR

18 MORE THAN 30 DAYS.—Section 877 (relating to expatria19 tion to avoid tax) is amended by adding at the end the 

20 following new subsection: 

21 ‘‘(g) PHYSICAL PRESENCE.— 

22 ‘‘(1) IN GENERAL.—This section shall not apply 

23 to any individual to whom this section would other24 wise apply for any taxable year during the 10-year 

25 period referred to in subsection (a) in which such in-
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1 dividual is physically present in the United States at 

2 any time on more than 30 days in the calendar year 

3 ending in such taxable year, and such individual 

4 shall be treated for purposes of this title as a citizen 

5 or resident of the United States, as the case may be, 

6 for such taxable year. 

7 ‘‘(2) EXCEPTION.— 

8 ‘‘(A) IN GENERAL.—In the case of an indi9 vidual described in any of the following subpara10 graphs of this paragraph, a day of physical pres11 ence in the United States shall be disregarded if 

12 the individual is performing services in the 

13 United States on such day for an employer. The 

14 preceding sentence shall not apply if— 

15 ‘‘(i) such employer is related (within 

16 the meaning of section 267 and 707) to such 

17 individual, or 

18 ‘‘(ii) such employer fails to meet such 

19 requirements as the Secretary may prescribe 

20 by regulations to prevent the avoidance of 

21 the purposes of this paragraph. 

22 Not more than 30 days during any calendar 

23 year may be disregarded under this subpara24 graph. 
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1 ‘‘(B) INDIVIDUALS WITH TIES TO OTHER

2 COUNTRIES.—An individual is described in this 

3 subparagraph if— 

4 ‘‘(i) the individual becomes (not later 

5 than the close of a reasonable period after 

6 loss of United States citizenship or termi7 nation of residency) a citizen or resident of 

8 the country in which— 

9 ‘‘(I) such individual was born, 

10 ‘‘(II) if such individual is mar11 ried, such individual’s spouse was 

12 born, or 

13 ‘‘(III) either of such individual’s 

14 parents were born, and 

15 ‘‘(ii) the individual becomes fully liable 

16 for income tax in such country. 

17 ‘‘(C) MINIMAL PRIOR PHYSICAL PRESENCE

18 IN THE UNITED STATES.—An individual is de19 scribed in this subparagraph if, for each year in 

20 the 10-year period ending on the date of loss of 

21 United States citizenship or termination of resi22 dency, the individual was physically present in 

23 the United States for 30 days or less. The rule 

24 of section 7701(b)(3)(D)(ii) shall apply for pur25 poses of this subparagraph.’’. 
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1 (d) TRANSFERS SUBJECT TO GIFT TAX.— 

2 (1) IN GENERAL.—Subsection (a) of section 2501 

3 (relating to taxable transfers) is amended by striking 

4 paragraph (4), by redesignating paragraph (5) as 

5 paragraph (4), and by striking paragraph (3) and 

6 inserting the following new paragraph: 

7 ‘‘(3) EXCEPTION.— 

8 ‘‘(A) CERTAIN INDIVIDUALS.—Paragraph 

9 (2) shall not apply in the case of a donor to 

10 whom section 877(b) applies for the taxable year 

11 which includes the date of the transfer. 

12 ‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.— 

13 The tax imposed by this section solely by reason 

14 of this paragraph shall be credited with the 

15 amount of any gift tax actually paid to any for16 eign country in respect of any gift which is tax17 able under this section solely by reason of this 

18 paragraph.’’ 

19 (2) TRANSFERS OF CERTAIN STOCK.—Subsection 

20 (a) of section 2501 is amended by adding at the end 

21 the following new paragraph: 

22 ‘‘(5) TRANSFERS OF CERTAIN STOCK.— 

23 ‘‘(A) IN GENERAL.—In the case of a trans24 fer of stock in a foreign corporation described in 

25 subparagraph (B) by a donor to whom section 
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1 877(b) applies for the taxable year which in2 cludes the date of the transfer— 

3 ‘‘(i) section 2511(a) shall be applied 

4 without regard to whether such stock is situ5 ated within the United States, and 

6 ‘‘(ii) the value of such stock for pur7 poses of this chapter shall be its U.S.-asset 

8 value determined under subparagraph (C). 

9 ‘‘(B) FOREIGN CORPORATION DESCRIBED.— 

10 A foreign corporation is described in this sub11 paragraph with respect to a donor if— 

12 ‘‘(i) the donor owned (within the 

13 meaning of section 958(a)) at the time of 

14 such transfer 10 percent or more of the total 

15 combined voting power of all classes of stock 

16 entitled to vote of the foreign corporation, 

17 and 

18 ‘‘(ii) such donor owned (within the 

19 meaning of section 958(a)), or is considered 

20 to have owned (by applying the ownership 

21 rules of section 958(b)), at the time of such 

22 transfer, more than 50 percent of— 

23 ‘‘(I) the total combined voting 

24 power of all classes of stock entitled to 

25 vote of such corporation, or 
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1 ‘‘(II) the total value of the stock of 

2 such corporation. 

3 ‘‘(C) U.S.-ASSET VALUE.—For purposes of 

4 subparagraph (A), the U.S.-asset value of stock 

5 shall be the amount which bears the same ratio 

6 to the fair market value of such stock at the time 

7 of transfer as— 

8 ‘‘(i) the fair market value (at such 

9 time) of the assets owned by such foreign 

10 corporation and situated in the United 

11 States, bears to 

12 ‘‘(ii) the total fair market value (at 

13 such time) of all assets owned by such for14 eign corporation.’’ 

15 (e) ENHANCED INFORMATION REPORTING FROM INDI16 VIDUALS LOSING UNITED STATES CITIZENSHIP.— 

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

18 6039G is amended to read as follows: 

19 ‘‘(a) IN GENERAL.—Notwithstanding any other provi20 sion of law, any individual to whom section 877(b) applies 

21 for any taxable year shall provide a statement for such tax22 able year which includes the information described in sub23 section (b).’’. 

24 (2) INFORMATION TO BE PROVIDED.—Subsection 

25 (b) of section 6039G is amended to read as follows: 
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1 ‘‘(b) INFORMATION TO BE PROVIDED.—Information 

2 required under subsection (a) shall include— 

3 ‘‘(1) the taxpayer’s TIN, 

4 ‘‘(2) the mailing address of such individual’s 

5 principal foreign residence, 

6 ‘‘(3) the foreign country in which such indi7 vidual is residing, 

8 ‘‘(4) the foreign country of which such individual 

9 is a citizen, 

10 ‘‘(5) information detailing the income, assets, 

11 and liabilities of such individual, 

12 ‘‘(6) the number of days during any portion of 

13 which that the individual was physically present in 

14 the United States during the taxable year, and 

15 ‘‘(7) such other information as the Secretary 

16 may prescribe.’’. 

17 (3) INCREASE IN PENALTY.—Subsection (d) of 

18 section 6039G is amended to read as follows: 

19 ‘‘(d) PENALTY.—If— 

20 ‘‘(1) an individual is required to file a statement 

21 under subsection (a) for any taxable year, and 

22 ‘‘(2) fails to file such a statement with the Sec23 retary on or before the date such statement is required 

24 to be filed or fails to include all the information re-
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1 quired to be shown on the statement or includes incor2 rect information, 

3 such individual shall pay a penalty of $10,000 unless it 

4 is shown that such failure is due to reasonable cause and 

5 not to willful neglect.’’. 

6 (4) CONFORMING AMENDMENT.—Section 6039G 

7 is amended by striking subsections (c), (f), and (g) 

8 and by redesignating subsections (d) and (e) as sub9 section (c) and (d), respectively. 

10 (f) EFFECTIVE DATE.—The amendments made by this 

11 section shall apply to individuals who expatriate after June 

12 3, 2004. 

13 SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISI14 TIONS. 

15 (a) IN GENERAL.—Subpart B of part III of subchapter 

16 A of chapter 61 is amended by inserting after section 6043 

17 the following new section: 

18 ‘‘SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS 

19 AND ACQUISITIONS. 

20 ‘‘(a) IN GENERAL.—According to the forms or regula21 tions prescribed by the Secretary, the acquiring corporation 

22 in any taxable acquisition shall make a return setting 

23 forth— 

24 ‘‘(1) a description of the acquisition, 
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1 ‘‘(2) the name and address of each shareholder of 

2 the acquired corporation who is required to recognize 

3 gain (if any) as a result of the acquisition, 

4 ‘‘(3) the amount of money and the fair market 

5 value of other property transferred to each such share6 holder as part of such acquisition, and 

7 ‘‘(4) such other information as the Secretary 

8 may prescribe. 

9 To the extent provided by the Secretary, the requirements 

10 of this section applicable to the acquiring corporation shall 

11 be applicable to the acquired corporation and not to the 

12 acquiring corporation. 

13 ‘‘(b) NOMINEES.—According to the forms or regula14 tions prescribed by the Secretary— 

15 ‘‘(1) REPORTING.—Any person who holds stock 

16 as a nominee for another person shall furnish in the 

17 manner prescribed by the Secretary to such other per18 son the information provided by the corporation 

19 under subsection (d). 

20 ‘‘(2) REPORTING TO NOMINEES.—In the case of 

21 stock held by any person as a nominee, references in 

22 this section (other than in subsection (c)) to a share23 holder shall be treated as a reference to the nominee. 

24 ‘‘(c) TAXABLE ACQUISITION.—For purposes of this sec25 tion, the term ‘taxable acquisition’ means any acquisition 
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1 by a corporation of stock in or property of another corpora2 tion if any shareholder of the acquired corporation is re3 quired to recognize gain (if any) as a result of such acquisi4 tion. 

5 ‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE6 HOLDERS.—According to the forms or regulations pre7 scribed by the Secretary, every person required to make a 

8 return under subsection (a) shall furnish to each share9 holder whose name is required to be set forth in such return 

10 a written statement showing— 

11 ‘‘(1) the name, address, and phone number of the 

12 information contact of the person required to make 

13 such return, 

14 ‘‘(2) the information required to be shown on 

15 such return with respect to such shareholder, and 

16 ‘‘(3) such other information as the Secretary 

17 may prescribe. 

18 The written statement required under the preceding sen19 tence shall be furnished to the shareholder on or before Jan20 uary 31 of the year following the calendar year during 

21 which the taxable acquisition occurred.’’ 

22 (b) ASSESSABLE PENALTIES.— 

23 (1) Subparagraph (B) of section 6724(d)(1) (re24 lating to definitions) is amended by redesignating 

25 clauses (ii) through (xviii) as clauses (iii) through 
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1 (xix), respectively, and by inserting after clause (i) 

2 the following new clause: 

3 ‘‘(ii) section 6043A(a) (relating to re4 turns relating to taxable mergers and acqui5 sitions),’’. 

6 (2) Paragraph (2) of section 6724(d) is amended 

7 by redesignating subparagraphs (F) through (BB) as 

8 subparagraphs (G) through (CC), respectively, and by 

9 inserting after subparagraph (E) the following new 

10 subparagraph: 

11 ‘‘(F) subsections (b) and (d) of section 

12 6043A (relating to returns relating to taxable 

13 mergers and acquisitions).’’. 

14 (c) CLERICAL AMENDMENT.—The table of sections for 

15 subpart B of part III of subchapter A of chapter 61 is 

16 amended by inserting after the item relating to section 6043 

17 the following new item: 

‘‘Sec. 6043A. Returns relating to taxable mergers and acquisitions.’’. 

18 (d) EFFECTIVE DATE.—The amendments made by this 

19 section shall apply to acquisitions after the date of the en20 actment of this Act. 

21 SEC. 606. STUDIES. 

22 (a) TRANSFER PRICING RULES.—The Secretary of the 

23 Treasury or the Secretary’s delegate shall conduct a study 

24 regarding the effectiveness of current transfer pricing rules 
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1 and compliance efforts in ensuring that cross-border trans2 fers and other related-party transactions, particularly 

3 transactions involving intangible assets, service contracts, 

4 or leases cannot be used improperly to shift income out of 

5 the United States. The study shall include a review of the 

6 contemporaneous documentation and penalty rules under 

7 section 6662 of the Internal Revenue Code of 1986, a review 

8 of the regulatory and administrative guidance imple9 menting the principles of section 482 of such Code to trans10 actions involving intangible property and services and to 

11 cost-sharing arrangements, and an examination of whether 

12 increased disclosure of cross-border transactions should be 

13 required. The study shall set forth specific recommendations 

14 to address all abuses identified in the study. Not later than 

15 June 30, 2005, such Secretary or delegate shall submit to 

16 the Congress a report of such study. 

17 (b) INCOME TAX TREATIES.—The Secretary of the 

18 Treasury or the Secretary’s delegate shall conduct a study 

19 of United States income tax treaties to identify any inap20 propriate reductions in United States withholding tax that 

21 provide opportunities for shifting income out of the United 

22 States, and to evaluate whether existing anti-abuse mecha23 nisms are operating properly. The study shall include spe24 cific recommendations to address all inappropriate uses of 

25 tax treaties. Not later than June 30, 2005, such Secretary 
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1 or delegate shall submit to the Congress a report of such 

2 study. 

3 (c) IMPACT OF CORPORATE EXPATRIATION PROVI4 SIONS.—The Secretary of the Treasury or the Secretary’s 

5 delegate shall conduct a study of the impact of the provi6 sions of this title on corporate expatriation. The study shall 

7 include such recommendations as such Secretary or delegate 

8 may have to improve the impact of such provisions in car9 rying out the purposes of this title. Not later than December 

10 31, 2005, such Secretary or delegate shall submit to the Con11 gress a report of such study. 

12 Subtitle B—Provisions Relating to 

13 Tax Shelters 

14 PART I—TAXPAYER-RELATED PROVISIONS 

15 SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORT16 ABLE TRANSACTIONS. 

17 (a) IN GENERAL.—Part I of subchapter B of chapter 

18 68 (relating to assessable penalties) is amended by inserting 

19 after section 6707 the following new section: 

20 ‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT21 ABLE TRANSACTION INFORMATION WITH RE22 TURN. 

23 ‘‘(a) IMPOSITION OF PENALTY.—Any person who fails 

24 to include on any return or statement any information with 

25 respect to a reportable transaction which is required under 
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1 section 6011 to be included with such return or statement 

2 shall pay a penalty in the amount determined under sub3 section (b). 

4 ‘‘(b) AMOUNT OF PENALTY.— 

5 ‘‘(1) IN GENERAL.—Except as provided in para6 graph (2), the amount of the penalty under subsection 

7 (a) shall be— 

8 ‘‘(A) $10,000 in the case of a natural per9 son, and 

10 ‘‘(B) $50,000 in any other case. 

11 ‘‘(2) LISTED TRANSACTION.—The amount of the 

12 penalty under subsection (a) with respect to a listed 

13 transaction shall be— 

14 ‘‘(A) $100,000 in the case of a natural per15 son, and 

16 ‘‘(B) $200,000 in any other case. 

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

18 ‘‘(1) REPORTABLE TRANSACTION.—The term ‘re19 portable transaction’ means any transaction with re20 spect to which information is required to be included 

21 with a return or statement because, as determined 

22 under regulations prescribed under section 6011, such 

23 transaction is of a type which the Secretary deter24 mines as having a potential for tax avoidance or eva25 sion. 
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1 ‘‘(2) LISTED TRANSACTION.—The term ‘listed 

2 transaction’ means a reportable transaction which is 

3 the same as, or substantially similar to, a transaction 

4 specifically identified by the Secretary as a tax avoid5 ance transaction for purposes of section 6011. 

6 ‘‘(d) AUTHORITY TO RESCIND PENALTY.— 

7 ‘‘(1) IN GENERAL.—The Commissioner of Inter8 nal Revenue may rescind all or any portion of any 

9 penalty imposed by this section with respect to any 

10 violation if— 

11 ‘‘(A) the violation is with respect to a re12 portable transaction other than a listed trans13 action, and 

14 ‘‘(B) rescinding the penalty would promote 

15 compliance with the requirements of this title 

16 and effective tax administration. 

17 ‘‘(2) NO JUDICIAL APPEAL.—Notwithstanding 

18 any other provision of law, any determination under 

19 this subsection may not be reviewed in any judicial 

20 proceeding. 

21 ‘‘(3) RECORDS.—If a penalty is rescinded under 

22 paragraph (1), the Commissioner shall place in the 

23 file in the Office of the Commissioner the opinion of 

24 the Commissioner or the head of the Office of Tax 
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1 Shelter Analysis with respect to the determination, 

2 including— 

3 ‘‘(A) a statement of the facts and cir4 cumstances relating to the violation, 

5 ‘‘(B) the reasons for the rescission, and 

6 ‘‘(C) the amount of the penalty rescinded. 

7 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 

8 penalty imposed by this section shall be in addition to any 

9 other penalty imposed by this title.’’ 

10 (b) CONFORMING AMENDMENT.—The table of sections 

11 for part I of subchapter B of chapter 68 is amended by 

12 inserting after the item relating to section 6707 the fol13 lowing: 

‘‘Sec. 6707A. Penalty for failure to include reportable transaction 

information with return.’’ 

14 (c) EFFECTIVE DATE.—The amendments made by this 

15 section shall apply to returns and statements the due date 

16 for which is after the date of the enactment of this Act. 

17 (d) REPORT.—The Commissioner of Internal Revenue 

18 shall annually report to the Committee on Ways and Means 

19 of the House of Representatives and the Committee on Fi20 nance of the Senate— 

21 (1) a summary of the total number and aggre22 gate amount of penalties imposed, and rescinded, 

23 under section 6707A of the Internal Revenue Code of 

24 1986, and 
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1 (2) a description of each penalty rescinded under 

2 section 6707(c) of such Code and the reasons therefor. 

3 SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED 

4 TRANSACTIONS, OTHER REPORTABLE TRANS5 ACTIONS HAVING A SIGNIFICANT TAX AVOID6 ANCE PURPOSE, ETC. 

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

8 amended by inserting after section 6662 the following new 

9 section: 

10 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY 

11 ON UNDERSTATEMENTS WITH RESPECT TO 

12 REPORTABLE TRANSACTIONS. 

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

14 reportable transaction understatement for any taxable year, 

15 there shall be added to the tax an amount equal to 20 per16 cent of the amount of such understatement. 

17 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE18 MENT.—For purposes of this section— 

19 ‘‘(1) IN GENERAL.—The term ‘reportable trans20 action understatement’ means the sum of— 

21 ‘‘(A) the product of— 

22 ‘‘(i) the amount of the increase (if any) 

23 in taxable income which results from a dif24 ference between the proper tax treatment of 

25 an item to which this section applies and 
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1 the taxpayer’s treatment of such item (as 

2 shown on the taxpayer’s return of tax), and 

3 ‘‘(ii) the highest rate of tax imposed by 

4 section 1 (section 11 in the case of a tax5 payer which is a corporation), and 

6 ‘‘(B) the amount of the decrease (if any) in 

7 the aggregate amount of credits determined 

8 under subtitle A which results from a difference 

9 between the taxpayer’s treatment of an item to 

10 which this section applies (as shown on the tax11 payer’s return of tax) and the proper tax treat12 ment of such item. 

13 For purposes of subparagraph (A), any reduction of 

14 the excess of deductions allowed for the taxable year 

15 over gross income for such year, and any reduction 

16 in the amount of capital losses which would (without 

17 regard to section 1211) be allowed for such year, shall 

18 be treated as an increase in taxable income. 

19 ‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 

20 section shall apply to any item which is attributable 

21 to— 

22 ‘‘(A) any listed transaction, and 

23 ‘‘(B) any reportable transaction (other than 

24 a listed transaction) if a significant purpose of 
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1 such transaction is the avoidance or evasion of 

2 Federal income tax. 

3 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS4 ACTIONS.—Subsection (a) shall be applied by substituting 

5 ‘30 percent’ for ‘20 percent’ with respect to the portion of 

6 any reportable transaction understatement with respect to 

7 which the requirement of section 6664(d)(2)(A) is not met. 

8 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

9 TRANSACTIONS.—For purposes of this section, the terms ‘re10 portable transaction’ and ‘listed transaction’ have the re11 spective meanings given to such terms by section 6707A(c). 

12 ‘‘(e) SPECIAL RULES.— 

13 ‘‘(1) COORDINATION WITH PENALTIES, ETC., ON

14 OTHER UNDERSTATEMENTS.—In the case of an under15 statement (as defined in section 6662(d)(2))— 

16 ‘‘(A) the amount of such understatement 

17 (determined without regard to this paragraph) 

18 shall be increased by the aggregate amount of re19 portable transaction understatements for pur20 poses of determining whether such understate21 ment is a substantial understatement under sec22 tion 6662(d)(1), and 

23 ‘‘(B) the addition to tax under section 

24 6662(a) shall apply only to the excess of the 

25 amount of the substantial understatement (if 
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1 any) after the application of subparagraph (A) 

2 over the aggregate amount of reportable trans3 action understatements. 

4 ‘‘(2) COORDINATION WITH OTHER PENALTIES.— 

5 ‘‘(A) APPLICATION OF FRAUD PENALTY.— 

6 References to an underpayment in section 6663 

7 shall be treated as including references to a re8 portable transaction understatement. 

9 ‘‘(B) NO DOUBLE PENALTY.—This section 

10 shall not apply to any portion of an understate11 ment on which a penalty is imposed under sec12 tion 6663. 

13 ‘‘(3) SPECIAL RULE FOR AMENDED RETURNS.— 

14 Except as provided in regulations, in no event shall 

15 any tax treatment included with an amendment or 

16 supplement to a return of tax be taken into account 

17 in determining the amount of any reportable trans18 action understatement if the amendment or supple19 ment is filed after the earlier of the date the taxpayer 

20 is first contacted by the Secretary regarding the ex21 amination of the return or such other date as is speci22 fied by the Secretary.’’ 

23 (b) DETERMINATION OF OTHER UNDERSTATE24 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

25 amended by adding at the end the following flush sentence: 
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1 ‘‘The excess under the preceding sentence shall be 

2 determined without regard to items to which sec3 tion 6662A applies.’’ 

4 (c) REASONABLE CAUSE EXCEPTION.— 

5 (1) IN GENERAL.—Section 6664 is amended by 

6 adding at the end the following new subsection: 

7 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT8 ABLE TRANSACTION UNDERSTATEMENTS.— 

9 ‘‘(1) IN GENERAL.—No penalty shall be imposed 

10 under section 6662A with respect to any portion of a 

11 reportable transaction understatement if it is shown 

12 that there was a reasonable cause for such portion 

13 and that the taxpayer acted in good faith with respect 

14 to such portion. 

15 ‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 

16 apply to any reportable transaction understatement 

17 unless— 

18 ‘‘(A) the relevant facts affecting the tax 

19 treatment of the item are adequately disclosed in 

20 accordance with the regulations prescribed under 

21 section 6011, 

22 ‘‘(B) there is or was substantial authority 

23 for such treatment, and 
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1 ‘‘(C) the taxpayer reasonably believed that 

2 such treatment was more likely than not the 

3 proper treatment. 

4 A taxpayer failing to adequately disclose in accord5 ance with section 6011 shall be treated as meeting the 

6 requirements of subparagraph (A) if the penalty for 

7 such failure was rescinded under section 6707A(d). 

8 ‘‘(3) RULES RELATING TO REASONABLE BE9 LIEF.—For purposes of paragraph (2)(C)— 

10 ‘‘(A) IN GENERAL.—A taxpayer shall be 

11 treated as having a reasonable belief with respect 

12 to the tax treatment of an item only if such be13 lief— 

14 ‘‘(i) is based on the facts and law that 

15 exist at the time the return of tax which in16 cludes such tax treatment is filed, and 

17 ‘‘(ii) relates solely to the taxpayer’s 

18 chances of success on the merits of such 

19 treatment and does not take into account 

20 the possibility that a return will not be au21 dited, such treatment will not be raised on 

22 audit, or such treatment will be resolved 

23 through settlement if it is raised. 

24 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE25 LIED UPON.— 
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1 ‘‘(i) IN GENERAL.—An opinion of a 

2 tax advisor may not be relied upon to estab3 lish the reasonable belief of a taxpayer if— 

4 ‘‘(I) the tax advisor is described 

5 in clause (ii), or 

6 ‘‘(II) the opinion is described in 

7 clause (iii). 

8 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—A 

9 tax advisor is described in this clause if the 

10 tax advisor— 

11 ‘‘(I) is a material advisor (within 

12 the meaning of section 6111(b)(1)) and 

13 participates in the organization, man14 agement, promotion, or sale of the 

15 transaction or is related (within the 

16 meaning of section 267(b) or 

17 707(b)(1)) to any person who so par18 ticipates, 

19 ‘‘(II) is compensated directly or 

20 indirectly by a material advisor with 

21 respect to the transaction, 

22 ‘‘(III) has a fee arrangement with 

23 respect to the transaction which is con24 tingent on all or part of the intended 
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1 tax benefits from the transaction being 

2 sustained, or 

3 ‘‘(IV) as determined under regula4 tions prescribed by the Secretary, has a 

5 disqualifying financial interest with 

6 respect to the transaction. 

7 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

8 purposes of clause (i), an opinion is dis9 qualified if the opinion— 

10 ‘‘(I) is based on unreasonable fac11 tual or legal assumptions (including 

12 assumptions as to future events), 

13 ‘‘(II) unreasonably relies on rep14 resentations, statements, findings, or 

15 agreements of the taxpayer or any 

16 other person, 

17 ‘‘(III) does not identify and con18 sider all relevant facts, or 

19 ‘‘(IV) fails to meet any other re20 quirement as the Secretary may pre21 scribe.’’ 

22 (2) CONFORMING AMENDMENTS.— 

23 (A) Paragraph (1) of section 6664(c) is 

24 amended by striking ‘‘this part’’ and inserting 

25 ‘‘section 6662 or 6663’’. 
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1 (B) The heading for subsection (c) of section 

2 6664 is amended by inserting ‘‘FOR UNDERPAY3 MENTS’’ after ‘‘EXCEPTION’’. 

4 (d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN5 DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX

6 SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re7 lating to substantial understatement of income tax) is 

8 amended to read as follows: 

9 ‘‘(C) REDUCTION NOT TO APPLY TO TAX

10 SHELTERS.— 

11 ‘‘(i) IN GENERAL.—Subparagraph (B) 

12 shall not apply to any item attributable to 

13 a tax shelter. 

14 ‘‘(ii) TAX SHELTER.—For purposes of 

15 clause (i), the term ‘tax shelter’ means— 

16 ‘‘(I) a partnership or other entity, 

17 ‘‘(II) any investment plan or ar18 rangement, or 

19 ‘‘(III) any other plan or arrange20 ment, 

21 if a significant purpose of such partnership, 

22 entity, plan, or arrangement is the avoid23 ance or evasion of Federal income tax.’’ 

24 (e) CONFORMING AMENDMENTS.— 
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1 (1) Sections 461(i)(3)(C), 1274(b)(3), and 

2 7525(b) are each amended by striking ‘‘section 

3 6662(d)(2)(C)(iii)’’ and inserting ‘‘section 

4 6662(d)(2)(C)(ii)’’. 

5 (2) The heading for section 6662 is amended to 

6 read as follows: 

7 ‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 

8 ON UNDERPAYMENTS.’’

9 (3) The table of sections for part II of subchapter 

10 A of chapter 68 is amended by striking the item relat11 ing to section 6662 and inserting the following new 

12 items: 

‘‘Sec. 6662. Imposition of accuracy-related penalty on underpayments. 

‘‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions.’’ 

13 (f) EFFECTIVE DATE.—The amendments made by this 

14 section shall apply to taxable years ending after the date 

15 of the enactment of this Act. 

16 SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

17 PRIVILEGES RELATING TO TAXPAYER COM18 MUNICATIONS. 

19 (a) IN GENERAL.—Section 7525(b) (relating to section 

20 not to apply to communications regarding corporate tax 

21 shelters) is amended to read as follows: 

22 ‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS

23 REGARDING TAX SHELTERS.—The privilege under sub-
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1 section (a) shall not apply to any written communication 

2 which is— 

3 ‘‘(1) between a federally authorized tax practi4 tioner and— 

5 ‘‘(A) any person, 

6 ‘‘(B) any director, officer, employee, agent, 

7 or representative of the person, or 

8 ‘‘(C) any other person holding a capital or 

9 profits interest in the person, and 

10 ‘‘(2) in connection with the promotion of the di11 rect or indirect participation of the person in any tax 

12 shelter (as defined in section 6662(d)(2)(C)(ii)).’’ 

13 (b) EFFECTIVE DATE.—The amendment made by this 

14 section shall apply to communications made on or after the 

15 date of the enactment of this Act. 

16 SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

17 FOR WHICH REQUIRED LISTED TRANS18 ACTIONS NOT REPORTED. 

19 (a) IN GENERAL.—Section 6501(c) (relating to excep20 tions) is amended by adding at the end the following new 

21 paragraph: 

22 ‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 

23 fails to include on any return or statement for any 

24 taxable year any information with respect to a listed 

25 transaction (as defined in section 6707A(c)(2)) which 
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1 is required under section 6011 to be included with 

2 such return or statement, the time for assessment of 

3 any tax imposed by this title with respect to such 

4 transaction shall not expire before the date which is 

5 1 year after the earlier of— 

6 ‘‘(A) the date on which the Secretary is fur7 nished the information so required, or 

8 ‘‘(B) the date that a material advisor (as 

9 defined in section 6111) meets the requirements 

10 of section 6112 with respect to a request by the 

11 Secretary under section 6112(b) relating to such 

12 transaction with respect to such taxpayer.’’ 

13 (b) EFFECTIVE DATE.—The amendment made by this 

14 section shall apply to taxable years with respect to which 

15 the period for assessing a deficiency did not expire before 

16 the date of the enactment of this Act. 

17 SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

18 (a) IN GENERAL.—Section 6111 (relating to registra19 tion of tax shelters) is amended to read as follows: 

20 ‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

21 ‘‘(a) IN GENERAL.—Each material advisor with re22 spect to any reportable transaction shall make a return (in 

23 such form as the Secretary may prescribe) setting forth— 

24 ‘‘(1) information identifying and describing the 

25 transaction, 
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1 ‘‘(2) information describing any potential tax 

2 benefits expected to result from the transaction, and 

3 ‘‘(3) such other information as the Secretary 

4 may prescribe. 

5 Such return shall be filed not later than the date specified 

6 by the Secretary. 

7 ‘‘(b) DEFINITIONS.—For purposes of this section— 

8 ‘‘(1) MATERIAL ADVISOR.— 

9 ‘‘(A) IN GENERAL.—The term ‘material ad10 visor’ means any person— 

11 ‘‘(i) who provides any material aid, 

12 assistance, or advice with respect to orga13 nizing, managing, promoting, selling, im14 plementing, or carrying out any reportable 

15 transaction, and 

16 ‘‘(ii) who directly or indirectly derives 

17 gross income in excess of the threshold 

18 amount (or such other amount as may be 

19 prescribed by the Secretary) for such advice 

20 or assistance. 

21 ‘‘(B) THRESHOLD AMOUNT.—For purposes 

22 of subparagraph (A), the threshold amount is— 

23 ‘‘(i) $50,000 in the case of a reportable 

24 transaction substantially all of the tax bene-
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1 fits from which are provided to natural per2 sons, and 

3 ‘‘(ii) $250,000 in any other case. 

4 ‘‘(2) REPORTABLE TRANSACTION.—The term ‘re5 portable transaction’ has the meaning given to such 

6 term by section 6707A(c). 

7 ‘‘(c) REGULATIONS.—The Secretary may prescribe reg8 ulations which provide— 

9 ‘‘(1) that only 1 person shall be required to meet 

10 the requirements of subsection (a) in cases in which 

11 2 or more persons would otherwise be required to meet 

12 such requirements, 

13 ‘‘(2) exemptions from the requirements of this 

14 section, and 

15 ‘‘(3) such rules as may be necessary or appro16 priate to carry out the purposes of this section.’’ 

17 (b) CONFORMING AMENDMENTS.— 

18 (1) The item relating to section 6111 in the table 

19 of sections for subchapter B of chapter 61 is amended 

20 to read as follows: 

‘‘Sec. 6111. Disclosure of reportable transactions.’’ 

21 (2) So much of section 6112 as precedes sub22 section (c) thereof is amended to read as follows: 
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1 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS2 ACTIONS MUST KEEP LISTS OF ADVISEES, 

3 ETC. 

4 ‘‘(a) IN GENERAL.—Each material advisor (as defined 

5 in section 6111) with respect to any reportable transaction 

6 (as defined in section 6707A(c)) shall (whether or not re7 quired to file a return under section 6111 with respect to 

8 such transaction) maintain (in such manner as the Sec9 retary may by regulations prescribe) a list— 

10 ‘‘(1) identifying each person with respect to 

11 whom such advisor acted as a material advisor with 

12 respect to such transaction, and 

13 ‘‘(2) containing such other information as the 

14 Secretary may by regulations require.’’ 

15 (3) Section 6112 is amended— 

16 (A) by redesignating subsection (c) as sub17 section (b), 

18 (B) by inserting ‘‘written’’ before ‘‘request’’ 

19 in subsection (b)(1) (as so redesignated), and 

20 (C) by striking ‘‘shall prescribe’’ in sub21 section (b)(2) (as so redesignated) and inserting 

22 ‘‘may prescribe’’. 

23 (4) The item relating to section 6112 in the table 

24 of sections for subchapter B of chapter 61 is amended 

25 to read as follows: 
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‘‘Sec. 6112. Material advisors of reportable transactions must keep 

lists of advisees, etc.’’ 

1 (5)(A) The heading for section 6708 is amended 

2 to read as follows: 

3 ‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 

4 WITH RESPECT TO REPORTABLE TRANS5 ACTIONS.’’

6 (B) The item relating to section 6708 in the 

7 table of sections for part I of subchapter B of chapter 

8 68 is amended to read as follows: 

‘‘Sec. 6708. Failure to maintain lists of advisees with respect to reportable transactions.’’ 

9 (c) REQUIRED DISCLOSURE NOT SUBJECT TO CLAIM

10 OF CONFIDENTIALITY.—Paragraph (1) of section 6112(b), 

11 as redesignated by subsection (b), is amended by adding 

12 at the end the following new flush sentence: 

13 ‘‘For purposes of this section, the identity of any per14 son on such list shall not be privileged.’’. 

15 (d) EFFECTIVE DATE.— 

16 (1) IN GENERAL.—Except as provided in para17 graph (2), the amendments made by this section shall 

18 apply to transactions with respect to which material 

19 aid, assistance, or advice referred to in section 

20 6111(b)(1)(A)(i) of the Internal Revenue Code of 1986 

21 (as added by this section) is provided after the date 

22 of the enactment of this Act. 
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1 (2) NO CLAIM OF CONFIDENTIALITY AGAINST DIS2 CLOSURE.—The amendment made by subsection (c) 

3 shall take effect as if included in the amendments 

4 made by section 142 of the Deficit Reduction Act of 

5 1984. 

6 SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING 

7 REPORTABLE TRANSACTIONS. 

8 (a) IN GENERAL.—Section 6707 (relating to failure to 

9 furnish information regarding tax shelters) is amended to 

10 read as follows: 

11 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD12 ING REPORTABLE TRANSACTIONS. 

13 ‘‘(a) IN GENERAL.—If a person who is required to file 

14 a return under section 6111(a) with respect to any report15 able transaction— 

16 ‘‘(1) fails to file such return on or before the date 

17 prescribed therefor, or 

18 ‘‘(2) files false or incomplete information with 

19 the Secretary with respect to such transaction, 

20 such person shall pay a penalty with respect to such return 

21 in the amount determined under subsection (b). 

22 ‘‘(b) AMOUNT OF PENALTY.— 

23 ‘‘(1) IN GENERAL.—Except as provided in para24 graph (2), the penalty imposed under subsection (a) 

25 with respect to any failure shall be $50,000. 
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1 ‘‘(2) LISTED TRANSACTIONS.—The penalty im2 posed under subsection (a) with respect to any listed 

3 transaction shall be an amount equal to the greater 

4 of— 

5 ‘‘(A) $200,000, or 

6 ‘‘(B) 50 percent of the gross income derived 

7 by such person with respect to aid, assistance, or 

8 advice which is provided with respect to the list9 ed transaction before the date the return is filed 

10 under section 6111. 

11 Subparagraph (B) shall be applied by substituting 

12 ‘75 percent’ for ‘50 percent’ in the case of an inten13 tional failure or act described in subsection (a). 

14 ‘‘(c) RESCISSION AUTHORITY.—The provisions of sec15 tion 6707A(d) (relating to authority of Commissioner to re16 scind penalty) shall apply to any penalty imposed under 

17 this section. 

18 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—For 

19 purposes of this section, the terms ‘reportable transaction’ 

20 and ‘listed transaction’ have the respective meanings given 

21 to such terms by section 6707A(c).’’ 

22 (b) CLERICAL AMENDMENT.—The item relating to sec23 tion 6707 in the table of sections for part I of subchapter 

24 B of chapter 68 is amended by striking ‘‘tax shelters’’ and 

25 inserting ‘‘reportable transactions’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to returns the due date for which is after 

3 the date of the enactment of this Act. 

4 SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO 

5 MAINTAIN LISTS OF INVESTORS. 

6 (a) IN GENERAL.—Subsection (a) of section 6708 is 

7 amended to read as follows: 

8 ‘‘(a) IMPOSITION OF PENALTY.— 

9 ‘‘(1) IN GENERAL.—If any person who is re10 quired to maintain a list under section 6112(a) fails 

11 to make such list available upon written request to 

12 the Secretary in accordance with section 6112(b) 

13 within 20 business days after the date of such request, 

14 such person shall pay a penalty of $10,000 for each 

15 day of such failure after such 20th day. 

16 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No pen17 alty shall be imposed by paragraph (1) with respect 

18 to the failure on any day if such failure is due to rea19 sonable cause.’’. 

20 (b) EFFECTIVE DATE.—The amendment made by this 

21 section shall apply to requests made after the date of the 

22 enactment of this Act. 

23 SEC. 618. PENALTY ON PROMOTERS OF TAX SHELTERS. 

24 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL25 TERS.—Section 6700(a) is amended by adding at the end 
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1 the following new sentence: ‘‘Notwithstanding the first sen2 tence, if an activity with respect to which a penalty im3 posed under this subsection involves a statement described 

4 in paragraph (2)(A), the amount of the penalty shall be 

5 equal to 50 percent of the gross income derived (or to be 

6 derived) from such activity by the person on which the pen7 alty is imposed.’’ 

8 (b) EFFECTIVE DATE.—The amendment made by this 

9 section shall apply to activities after the date of the enact10 ment of this Act. 

11 SEC. 619. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE12 MENT PENALTY FOR NONREPORTABLE 

13 TRANSACTIONS. 

14 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA15 TIONS.—Section 6662(d)(1)(B) (relating to special rule for 

16 corporations) is amended to read as follows: 

17 ‘‘(B) SPECIAL RULE FOR CORPORATIONS.— 

18 In the case of a corporation other than an S cor19 poration or a personal holding company (as de20 fined in section 542), there is a substantial un21 derstatement of income tax for any taxable year 

22 if the amount of the understatement for the tax23 able year exceeds the lesser of— 
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1 ‘‘(i) 10 percent of the tax required to 

2 be shown on the return for the taxable year 

3 (or, if greater, $10,000), or 

4 ‘‘(ii) $10,000,000.’’ 

5 (b) EFFECTIVE DATE.—The amendment made by this 

6 section shall apply to taxable years beginning after the date 

7 of the enactment of this Act. 

8 SEC. 620. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

9 CONDUCT RELATED TO TAX SHELTERS AND 

10 REPORTABLE TRANSACTIONS. 

11 (a) IN GENERAL.—Section 7408 (relating to action to 

12 enjoin promoters of abusive tax shelters, etc.) is amended 

13 by redesignating subsection (c) as subsection (d) and by 

14 striking subsections (a) and (b) and inserting the following 

15 new subsections: 

16 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac17 tion in the name of the United States to enjoin any person 

18 from further engaging in specified conduct may be com19 menced at the request of the Secretary. Any action under 

20 this section shall be brought in the district court of the 

21 United States for the district in which such person resides, 

22 has his principal place of business, or has engaged in speci23 fied conduct. The court may exercise its jurisdiction over 

24 such action (as provided in section 7402(a)) separate and 
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1 apart from any other action brought by the United States 

2 against such person. 

3 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

4 under subsection (a), if the court finds— 

5 ‘‘(1) that the person has engaged in any specified 

6 conduct, and 

7 ‘‘(2) that injunctive relief is appropriate to pre8 vent recurrence of such conduct, 

9 the court may enjoin such person from engaging in such 

10 conduct or in any other activity subject to penalty under 

11 this title. 

12 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this sec13 tion, the term ‘specified conduct’ means any action, or fail14 ure to take action, subject to penalty under section 6700, 

15 6701, 6707, or 6708.’’ 

16 (b) CONFORMING AMENDMENTS.— 

17 (1) The heading for section 7408 is amended to 

18 read as follows: 

19 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE20 LATED TO TAX SHELTERS AND REPORTABLE 

21 TRANSACTIONS.’’

22 (2) The table of sections for subchapter A of 

23 chapter 76 is amended by striking the item relating 

24 to section 7408 and inserting the following new item: 

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and reportable transactions.’’ 
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1 (c) EFFECTIVE DATE.—The amendment made by this 

2 section shall take effect on the day after the date of the en3 actment of this Act. 

4 SEC. 621. PENALTY ON FAILURE TO REPORT INTERESTS IN 

5 FOREIGN FINANCIAL ACCOUNTS. 

6 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

7 United States Code, is amended to read as follows: 

8 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANSACTION

9 VIOLATION.— 

10 ‘‘(A) PENALTY AUTHORIZED.—The Sec11 retary of the Treasury may impose a civil money 

12 penalty on any person who violates, or causes 

13 any violation of, any provision of section 5314. 

14 ‘‘(B) AMOUNT OF PENALTY.— 

15 ‘‘(i) IN GENERAL.—Except as provided 

16 in subparagraph (C), the amount of any 

17 civil penalty imposed under subparagraph 

18 (A) shall not exceed $5,000. 

19 ‘‘(ii) REASONABLE CAUSE EXCEP20 TION.—No penalty shall be imposed under 

21 subparagraph (A) with respect to any viola22 tion if— 

23 ‘‘(I) such violation was due to 

24 reasonable cause, and 
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1 ‘‘(II) the amount of the trans2 action or the balance in the account at 

3 the time of the transaction was prop4 erly reported. 

5 ‘‘(C) WILLFUL VIOLATIONS.—In the case of 

6 any person willfully violating, or willfully caus7 ing any violation of, any provision of section 

8 5314— 

9 ‘‘(i) the maximum penalty under sub10 paragraph (B)(i) shall be increased to the 

11 greater of— 

12 ‘‘(I) $25,000, or 

13 ‘‘(II) the amount (not exceeding 

14 $100,000) determined under subpara15 graph (D), and 

16 ‘‘(ii) subparagraph (B)(ii) shall not 

17 apply. 

18 ‘‘(D) AMOUNT.—The amount determined 

19 under this subparagraph is— 

20 ‘‘(i) in the case of a violation involving 

21 a transaction, the amount of the trans22 action, or 

23 ‘‘(ii) in the case of a violation involv24 ing a failure to report the existence of an 

25 account or any identifying information re-
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1 quired to be provided with respect to an ac2 count, the balance in the account at the 

3 time of the violation.’’ 

4 (b) EFFECTIVE DATE.—The amendment made by this 

5 section shall apply to violations occurring after the date of 

6 the enactment of this Act. 

7 SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BE8 FORE THE DEPARTMENT OF THE TREASURY. 

9 (a) CENSURE; IMPOSITION OF PENALTY.— 

10 (1) IN GENERAL.—Section 330(b) of title 31, 

11 United States Code, is amended— 

12 (A) by inserting ‘‘, or censure,’’ after ‘‘De13 partment’’, and 

14 (B) by adding at the end the following new 

15 flush sentence: 

16 ‘‘The Secretary may impose a monetary penalty on any 

17 representative described in the preceding sentence. If the 

18 representative was acting on behalf of an employer or any 

19 firm or other entity in connection with the conduct giving 

20 rise to such penalty, the Secretary may impose a monetary 

21 penalty on such employer, firm, or entity if it knew, or 

22 reasonably should have known, of such conduct. Such pen23 alty shall not exceed the gross income derived (or to be de24 rived) from the conduct giving rise to the penalty. Any such 

25 penalty imposed on an individual may be in addition to, 
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1 or in lieu of, any suspension, disbarment, or censure of such 

2 individual.’’ 

3 (2) EFFECTIVE DATE.—The amendments made 

4 by this subsection shall apply to actions taken after 

5 the date of the enactment of this Act. 

6 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

7 such title 31 is amended by adding at the end the following 

8 new subsection: 

9 ‘‘(d) Nothing in this section or in any other provision 

10 of law shall be construed to limit the authority of the Sec11 retary of the Treasury to impose standards applicable to 

12 the rendering of written advice with respect to any entity, 

13 transaction plan or arrangement, or other plan or arrange14 ment, which is of a type which the Secretary determines 

15 as having a potential for tax avoidance or evasion.’’ 

16 PART II—OTHER PROVISIONS 

17 SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND 

18 AND PREFERRED STOCK FUNDS, ETC. 

19 (a) IN GENERAL.—Section 1286 (relating to tax treat20 ment of stripped bonds) is amended by redesignating sub21 section (f) as subsection (g) and by inserting after sub22 section (e) the following new subsection: 

23 ‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND

24 AND PREFERRED STOCK FUNDS, ETC.—In the case of an 

25 account or entity substantially all of the assets of which 
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1 consist of bonds, preferred stock, or a combination thereof, 

2 the Secretary may by regulations provide that rules similar 

3 to the rules of this section and 305(e), as appropriate, shall 

4 apply to interests in such account or entity to which (but 

5 for this subsection) this section or section 305(e), as the case 

6 may be, would not apply.’’ 

7 (b) CROSS REFERENCE.—Subsection (e) of section 305 

8 is amended by adding at the end the following new para9 graph: 

10 ‘‘(7) CROSS REFERENCE.— 

‘‘For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 

1286(f).’’

11 (c) EFFECTIVE DATE.—The amendments made by this 

12 section shall apply to purchases and dispositions after the 

13 date of the enactment of this Act. 

14 SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 

15 CREDIT ON WITHHOLDING TAXES ON INCOME 

16 OTHER THAN DIVIDENDS. 

17 (a) IN GENERAL.—Section 901 is amended by redesig18 nating subsection (l) as subsection (m) and by inserting 

19 after subsection (k) the following new subsection: 

20 ‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING

21 TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS

22 ETC.— 

23 ‘‘(1) IN GENERAL.—In no event shall a credit be 

24 allowed under subsection (a) for any withholding tax 
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1 (as defined in subsection (k)) on any item of income 

2 or gain with respect to any property if— 

3 ‘‘(A) such property is held by the recipient 

4 of the item for 15 days or less during the 30-day 

5 period beginning on the date which is 15 days 

6 before the date on which the right to receive pay7 ment of such item arises, or 

8 ‘‘(B) to the extent that the recipient of the 

9 item is under an obligation (whether pursuant to 

10 a short sale or otherwise) to make related pay11 ments with respect to positions in substantially 

12 similar or related property. 

13 This paragraph shall not apply to any dividend to 

14 which subsection (k) applies. 

15 ‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL16 ERS.— 

17 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

18 not apply to any qualified tax with respect to 

19 any property held in the active conduct in a for20 eign country of a business as a dealer in such 

21 property. 

22 ‘‘(B) QUALIFIED TAX.—For purposes of sub23 paragraph (A), the term ‘qualified tax’ means a 

24 tax paid to a foreign country (other than the for-
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1 eign country referred to in subparagraph (A)) 

2 if— 

3 ‘‘(i) the item to which such tax is at4 tributable is subject to taxation on a net 

5 basis by the country referred to in subpara6 graph (A), and 

7 ‘‘(ii) such country allows a credit 

8 against its net basis tax for the full amount 

9 of the tax paid to such other foreign coun10 try. 

11 ‘‘(C) DEALER.—For purposes of subpara12 graph (A), the term ‘dealer’ means— 

13 ‘‘(i) with respect to a security, any 

14 person to whom paragraphs (1) and (2) of 

15 subsection (k) would not apply by reason of 

16 paragraph (4) thereof if such security were 

17 stock, and 

18 ‘‘(ii) with respect to any other prop19 erty, any person with respect to whom such 

20 property is described in section 1221(a)(1). 

21 ‘‘(D) REGULATIONS.—The Secretary may 

22 prescribe such regulations as may be appropriate 

23 to carry out this paragraph, including regula24 tions to prevent the abuse of the exception pro-
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1 vided by this paragraph and to treat other taxes 

2 as qualified taxes. 

3 ‘‘(3) EXCEPTIONS.—The Secretary may by regu4 lation provide that paragraph (1) shall not apply to 

5 property where the Secretary determines that the ap6 plication of paragraph (1) to such property is not 

7 necessary to carry out the purposes of this subsection. 

8 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 

9 to the rules of paragraphs (5), (6), and (7) of sub10 section (k) shall apply for purposes of this subsection. 

11 ‘‘(5) DETERMINATION OF HOLDING PERIOD.— 

12 Holding periods shall be determined for purposes of 

13 this subsection without regard to section 1235 or any 

14 similar rule.’’ 

15 (b) CONFORMING AMENDMENT.—The heading of sub16 section (k) of section 901 is amended by inserting ‘‘ON DIVI17 DENDS’’ after ‘‘TAXES’’. 

18 (c) EFFECTIVE DATE.—The amendments made by this 

19 section shall apply to amounts paid or accrued more than 

20 30 days after the date of the enactment of this Act. 

21 SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 

22 TRANSFERS. 

23 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

24 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

25 amended by striking ‘‘and’’ at the end of subparagraph (A), 
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1 by striking the period at the end of subparagraph (B) and 

2 inserting ‘‘, and’’, and by adding at the end the following: 

3 ‘‘(C) if any property so contributed has a 

4 built-in loss— 

5 ‘‘(i) such built-in loss shall be taken 

6 into account only in determining the 

7 amount of items allocated to the contrib8 uting partner, and 

9 ‘‘(ii) except as provided in regulations, 

10 in determining the amount of items allo11 cated to other partners, the basis of the con12 tributed property in the hands of the part13 nership shall be treated as being equal to its 

14 fair market value at the time of contribu15 tion. 

16 For purposes of subparagraph (C), the term ‘built-in 

17 loss’ means the excess of the adjusted basis of the 

18 property (determined without regard to subparagraph 

19 (C)(ii)) over its fair market value at the time of con20 tribution.’’ 

21 (b) SPECIAL RULES FOR TRANSFERS OF PARTNER22 SHIP INTEREST IF THERE IS SUBSTANTIAL BUILT-IN

23 LOSS.— 

24 (1) ADJUSTMENT OF PARTNERSHIP BASIS RE25 QUIRED.—Subsection (a) of section 743 (relating to 
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1 optional adjustment to basis of partnership property) 

2 is amended by inserting before the period ‘‘or unless 

3 the partnership has a substantial built-in loss imme4 diately after such transfer’’. 

5 (2) ADJUSTMENT.—Subsection (b) of section 743 

6 is amended by inserting ‘‘or which has a substantial 

7 built-in loss immediately after such transfer’’ after 

8 ‘‘section 754 is in effect’’. 

9 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

10 is amended by adding at the end the following new 

11 subsection: 

12 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.— 

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

14 a partnership has a substantial built-in loss with re15 spect to a transfer of an interest in a partnership if 

16 the partnership’s adjusted basis in the partnership 

17 property exceeds by more than $250,000 the fair mar18 ket value of such property. 

19 ‘‘(2) REGULATIONS.—The Secretary shall pre20 scribe such regulations as may be appropriate to 

21 carry out the purposes of paragraph (1) and section 

22 734(d), including regulations aggregating related 

23 partnerships and disregarding property acquired by 

24 the partnership in an attempt to avoid such pur25 poses.’’ 
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1 (4) ALTERNATIVE RULES FOR ELECTING INVEST2 MENT PARTNERSHIPS.— 

3 (A) IN GENERAL.—Section 743 is amended 

4 by adding at the end the following new sub5 section: 

6 ‘‘(e) ALTERNATIVE RULES FOR ELECTING INVEST7 MENT PARTNERSHIPS.— 

8 ‘‘(1) NO ADJUSTMENT OF PARTNERSHIP BASIS.— 

9 For purposes of this section, an electing investment 

10 partnership shall not be treated as having a substan11 tial built-in loss with respect to any transfer occur12 ring while the election under paragraph (6)(A) is in 

13 effect. 

14 ‘‘(2) LOSS DEFERRAL FOR TRANSFEREE PART15 NER.—In the case of a transfer of an interest in an 

16 electing investment partnership, the transferee part17 ner’s distributive share of losses (without regard to 

18 gains) from the sale or exchange of partnership prop19 erty shall not be allowed except to the extent that it 

20 is established that such losses exceed the loss (if any) 

21 recognized by the transferor (or any prior transferor 

22 to the extent not fully offset by a prior disallowance 

23 under this paragraph) on the transfer of the partner24 ship interest. 
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1 ‘‘(3) NO REDUCTION IN PARTNERSHIP BASIS.— 

2 Losses disallowed under paragraph (2) shall not de3 crease the transferee partner’s basis in the partner4 ship interest. 

5 ‘‘(4) EFFECT OF TERMINATION OF PARTNER6 SHIP.—This subsection shall be applied without re7 gard to any termination of a partnership under sec8 tion 708(b)(1)(B). 

9 ‘‘(5) CERTAIN BASIS REDUCTIONS TREATED AS

10 LOSSES.—In the case of a transferee partner whose 

11 basis in property distributed by the partnership is re12 duced under section 732(a)(2), the amount of the loss 

13 recognized by the transferor on the transfer of the 

14 partnership interest which is taken into account 

15 under paragraph (2) shall be reduced by the amount 

16 of such basis reduction. 

17 ‘‘(6) ELECTING INVESTMENT PARTNERSHIP.— 

18 For purposes of this subsection, the term ‘electing in19 vestment partnership’ means any partnership if— 

20 ‘‘(A) the partnership makes an election to 

21 have this subsection apply, 

22 ‘‘(B) the partnership would be an invest23 ment company under section 3(a)(1)(A) of the 

24 Investment Company Act of 1940 but for an ex-
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1 emption under paragraph (1) or (7) of section 

2 3(c) of such Act, 

3 ‘‘(C) such partnership has never been en4 gaged in a trade or business, 

5 ‘‘(D) substantially all of the assets of such 

6 partnership are held for investment, 

7 ‘‘(E) at least 95 percent of the assets con8 tributed to such partnership consist of money, 

9 ‘‘(F) no assets contributed to such partner10 ship had an adjusted basis in excess of fair mar11 ket value at the time of contribution, 

12 ‘‘(G) all partnership interests of such part13 nership are issued by such partnership pursuant 

14 to a private offering and during the 24-month 

15 period beginning on the date of the first capital 

16 contribution to such partnership, 

17 ‘‘(H) the partnership agreement of such 

18 partnership has substantive restrictions on each 

19 partner’s ability to cause a redemption of the 

20 partner’s interest, and 

21 ‘‘(I) the partnership agreement of such part22 nership provides for a term that is not in excess 

23 of 15 years. 
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1 The election described in subparagraph (A), once 

2 made, shall be irrevocable except with the consent of 

3 the Secretary. 

4 ‘‘(7) REGULATIONS.—The Secretary shall pre5 scribe such regulations as may be appropriate to 

6 carry out the purposes of this subsection, including 

7 regulations for applying this subsection to tiered 

8 partnerships.’’. 

9 (B) INFORMATION REPORTING.—Section 

10 6031 is amended by adding at the end the fol11 lowing new subsection: 

12 ‘‘(f) ELECTING INVESTMENT PARTNERSHIPS.—In the 

13 case of any electing investment partnership (as defined in 

14 section 743(e)(6)), the information required under sub15 section (b) to be furnished to any partner to whom section 

16 743(e)(2) applies shall include such information as is nec17 essary to enable the partner to compute the amount of losses 

18 disallowed under section 743(e).’’. 

19 (5) CLERICAL AMENDMENTS.— 

20 (A) The section heading for section 743 is 

21 amended to read as follows: 

22 ‘‘SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION 

23 OR SUBSTANTIAL BUILT-IN LOSS.’’

24 (B) The table of sections for subpart C of 

25 part II of subchapter K of chapter 1 is amended 
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1 by striking the item relating to section 743 and 

2 inserting the following new item: 

‘‘Sec. 743. Special rules where section 754 election or substantial 

built-in loss.’’ 

3 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED PART4 NERSHIP PROPERTY IF THERE IS SUBSTANTIAL BASIS RE5 DUCTION.— 

6 (1) ADJUSTMENT REQUIRED.—Subsection (a) of 

7 section 734 (relating to optional adjustment to basis 

8 of undistributed partnership property) is amended by 

9 inserting before the period ‘‘or unless there is a sub10 stantial basis reduction’’. 

11 (2) ADJUSTMENT.—Subsection (b) of section 734 

12 is amended by inserting ‘‘or unless there is a substan13 tial basis reduction’’ after ‘‘section 754 is in effect’’. 

14 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

15 734 is amended by adding at the end the following 

16 new subsection: 

17 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.— 

18 ‘‘(1) IN GENERAL.—For purposes of this section, 

19 there is a substantial basis reduction with respect to 

20 a distribution if the sum of the amounts described in 

21 subparagraphs (A) and (B) of subsection (b)(2) ex22 ceeds $250,000. 
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1 ‘‘(2) REGULATIONS.— 

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’

2 (4) CLERICAL AMENDMENTS.— 

3 (A) The section heading for section 734 is 

4 amended to read as follows: 

5 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

6 PARTNERSHIP PROPERTY WHERE SECTION 

7 754 ELECTION OR SUBSTANTIAL BASIS RE8 DUCTION.’’

9 (B) The table of sections for subpart B of 

10 part II of subchapter K of chapter 1 is amended 

11 by striking the item relating to section 734 and 

12 inserting the following new item: 

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’ 

13 (d) EFFECTIVE DATES.— 

14 (1) SUBSECTION (a).—The amendment made by 

15 subsection (a) shall apply to contributions made after 

16 the date of the enactment of this Act. 

17 (2) SUBSECTION (b).— 

18 (A) IN GENERAL.—Except as provided in 

19 subparagraph (B), the amendments made by 

20 subsection (b) shall apply to transfers after the 

21 date of the enactment of this Act. 
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1 (B) TRANSITION RULE.—In the case of an 

2 electing investment partnership which is in ex3 istence on June 4, 2004, section 743(e)(6)(H) of 

4 the Internal Revenue Code of 1986, as added by 

5 this section, shall not apply to such partnership 

6 and section 743(e)(6)(I) of such Code, as so 

7 added, shall be applied by substituting ‘‘20 

8 years’’ for ‘‘15 years’’. 

9 (3) SUBSECTION (c).—The amendments made by 

10 subsection (c) shall apply to distributions after the 

11 date of the enactment of this Act. 

12 SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

13 STOCK HELD BY PARTNERSHIP IN COR14 PORATE PARTNER. 

15 (a) IN GENERAL.—Section 755 is amended by adding 

16 at the end the following new subsection: 

17 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO STOCK

18 OF CORPORATE PARTNER.—In making an allocation under 

19 subsection (a) of any decrease in the adjusted basis of part20 nership property under section 734(b)— 

21 ‘‘(1) no allocation may be made to stock in a 

22 corporation (or any person related (within the mean23 ing of sections 267(b) and 707(b)(1)) to such corpora24 tion) which is a partner in the partnership, and 
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1 ‘‘(2) any amount not allocable to stock by reason 

2 of paragraph (1) shall be allocated under subsection 

3 (a) to other partnership property. 

4 Gain shall be recognized to the partnership to the extent 

5 that the amount required to be allocated under paragraph 

6 (2) to other partnership property exceeds the aggregate ad7 justed basis of such other property immediately before the 

8 allocation required by paragraph (2).’’ 

9 (b) EFFECTIVE DATE.—The amendment made by this 

10 section shall apply to distributions after the date of the en11 actment of this Act. 

12 SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS. 

13 (a) IN GENERAL.—Part V of subchapter M of chapter 

14 1 (relating to financial asset securitization investment 

15 trusts) is hereby repealed. 

16 (b) CONFORMING AMENDMENTS.— 

17 (1) Paragraph (6) of section 56(g) is amended by 

18 striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

19 REMIC’’. 

20 (2) Clause (ii) of section 382(l)(4)(B) is amended 

21 by striking ‘‘a REMIC to which part IV of subchapter 

22 M applies, or a FASIT to which part V of subchapter 

23 M applies,’’ and inserting ‘‘or a REMIC to which 

24 part IV of subchapter M applies,’’. 
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1 (3) Paragraph (1) of section 582(c) is amended 

2 by striking ‘‘, and any regular interest in a FASIT,’’. 

3 (4) Subparagraph (E) of section 856(c)(5) is 

4 amended by striking the last sentence. 

5 (5)(A) Section 860G(a)(1) is amended by adding 

6 at the end the following new sentence: ‘‘An interest 

7 shall not fail to qualify as a regular interest solely be8 cause the specified principal amount of the regular 

9 interest (or the amount of interest accrued on the reg10 ular interest) can be reduced as a result of the non11 occurrence of 1 or more contingent payments with re12 spect to any reverse mortgage loan held by the 

13 REMIC if, on the startup day for the REMIC, the 

14 sponsor reasonably believes that all principal and in15 terest due under the regular interest will be paid at 

16 or prior to the liquidation of the REMIC.’’. 

17 (B) The last sentence of section 860G(a)(3) is 

18 amended by inserting ‘‘, and any reverse mortgage 

19 loan (and each balance increase on such loan meeting 

20 the requirements of subparagraph (A)(iii)) shall be 

21 treated as an obligation secured by an interest in real 

22 property’’ before the period at the end. 

23 (6) Paragraph (3) of section 860G(a) is amended 

24 by adding ‘‘and’’ at the end of subparagraph (B), by 
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1 striking ‘‘, and’’ at the end of subparagraph (C) and 

2 inserting a period, and by striking subparagraph (D). 

3 (7) Section 860G(a)(3), as amended by para4 graph (6), is amended by adding at the end the fol5 lowing new sentence: ‘‘For purposes of subparagraph 

6 (A), if more than 50 percent of the obligations trans7 ferred to, or purchased by, the REMIC are originated 

8 by the United States or any State (or any political 

9 subdivision, agency, or instrumentality of the United 

10 States or any State) and are principally secured by 

11 an interest in real property, then each obligation 

12 transferred to, or purchased by, the REMIC shall be 

13 treated as secured by an interest in real property.’’. 

14 (8)(A) Section 860G(a)(3)(A) is amended by 

15 striking ‘‘or’’ at the end of clause (i), by inserting 

16 ‘‘or’’ at the end of clause (ii), and by inserting after 

17 clause (ii) the following new clause: 

18 ‘‘(iii) represents an increase in the 

19 principal amount under the original terms 

20 of an obligation described in clause (i) or 

21 (ii) if such increase— 

22 ‘‘(I) is attributable to an advance 

23 made to the obligor pursuant to the 

24 original terms of the obligation, 
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1 ‘‘(II) occurs after the startup day, 

2 and 

3 ‘‘(III) is purchased by the REMIC 

4 pursuant to a fixed price contract in 

5 effect on the startup day.’’. 

6 (B) Section 860G(a)(7)(B) is amended to read as 

7 follows: 

8 ‘‘(B) QUALIFIED RESERVE FUND.—For pur9 poses of subparagraph (A), the term ‘qualified 

10 reserve fund’ means any reasonably required re11 serve to— 

12 ‘‘(i) provide for full payment of ex13 penses of the REMIC or amounts due on 

14 regular interests in the event of defaults on 

15 qualified mortgages or lower than expected 

16 returns on cash flow investments, or 

17 ‘‘(ii) provide a source of funds for the 

18 purchase of obligations described in clause 

19 (ii) or (iii) of paragraph (3)(A). 

20 The aggregate fair market value of the assets held 

21 in any such reserve shall not exceed 50 percent 

22 of the aggregate fair market value of all of the 

23 assets of the REMIC on the startup day, and the 

24 amount of any such reserve shall be promptly 

25 and appropriately reduced to the extent the 
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1 amount held in such reserve is no longer reason2 ably required for purposes specified in clause (i) 

3 or (ii) of this subparagraph.’’. 

4 (9) Subparagraph (C) of section 1202(e)(4) is 

5 amended by striking ‘‘REMIC, or FASIT’’ and in6 serting ‘‘or REMIC’’. 

7 (10) Clause (xi) of section 7701(a)(19)(C) is 

8 amended— 

9 (A) by striking ‘‘and any regular interest in 

10 a FASIT,’’, and 

11 (B) by striking ‘‘or FASIT’’ each place it 

12 appears. 

13 (11) Subparagraph (A) of section 7701(i)(2) is 

14 amended by striking ‘‘or a FASIT’’. 

15 (12) The table of parts for subchapter M of chap16 ter 1 is amended by striking the item relating to part 

17 V. 

18 (c) EFFECTIVE DATE.— 

19 (1) IN GENERAL.—Except as provided in para20 graph (2), the amendments made by this section shall 

21 take effect on January 1, 2005. 

22 (2) EXCEPTION FOR EXISTING FASITS.—Para23 graph (1) shall not apply to any FASIT in existence 

24 on the date of the enactment of this Act to the extent 

25 that regular interests issued by the FASIT before such 
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1 date continue to remain outstanding in accordance 

2 with the original terms of issuance. 

3 SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 

4 ON REMIC RESIDUALS. 

5 (a) IN GENERAL.—Section 362 (relating to basis to 

6 corporations) is amended by adding at the end the following 

7 new subsection: 

8 ‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN LOSSES

9 ON REMIC RESIDUALS IN SECTION 351 TRANSACTIONS.— 

10 If— 

11 ‘‘(1) a residual interest (as defined in section 

12 860G(a)(2)) in a REMIC is transferred in any trans13 action which is described in subsection (a), and 

14 ‘‘(2) the transferee’s adjusted basis in such resid15 ual interest would (but for this paragraph) exceed its 

16 fair market value immediately after such transaction, 

17 then, notwithstanding subsection (a), the transferee’s ad18 justed basis in such residual interest shall not exceed its 

19 fair market value (whether or not greater than zero) imme20 diately after such transaction.’’ 

21 (b) EFFECTIVE DATE.—The amendment made by this 

22 section shall apply to transactions after the date of the en23 actment of this Act. 
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1 SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PUR2 POSES OF DETERMINING INVESTMENT OF 

3 EARNINGS IN UNITED STATES PROPERTY. 

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

5 956(c)(2) is amended to read as follows: 

6 ‘‘(A) obligations of the United States, 

7 money, or deposits with persons described in 

8 paragraph (4);’’. 

9 (b) ELIGIBLE PERSONS.—Section 956(c) (relating to 

10 exceptions to definition of United States property) is 

11 amended by adding at the end the following new paragraph: 

12 ‘‘(4) FINANCIAL SERVICES PROVIDERS.— 

13 ‘‘(A) IN GENERAL.—For purposes of para14 graph (2)(A), a person is described in this para15 graph if at least 80 percent of the person’s in16 come is from the active conduct of a banking 

17 business which is derived from persons who are 

18 not related persons. 

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

20 subparagraph (A) all related persons shall be 

21 treated as 1 person in applying the 80-percent 

22 test. 

23 ‘‘(C) RELATED PERSON.—For purposes of 

24 this paragraph, a person is a related person to 

25 another person if— 
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1 ‘‘(i) the related person bears a relation2 ship to such person specified in section 

3 267(b) or 707(b)(1), or 

4 ‘‘(ii) such persons are members of the 

5 same controlled group of corporations (as 

6 defined in section 1563(a), except that ‘more 

7 than 50 percent’ shall be substituted for ‘at 

8 least 80 percent’ each place it appears 

9 therein).’’. 

10 (c) EFFECTIVE DATE.—The amendment made by this 

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

12 Act. 

13 SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSUR14 ANCE COMPANIES. 

15 (a) IN GENERAL.—Clause (i) of section 831(b)(2)(A) 

16 is amended by striking ‘‘$1,200,000’’ and inserting 

17 ‘‘$1,890,000’’. 

18 (b) INFLATION ADJUSTMENT.—Paragraph (2) of sec19 tion 831(b) is amended by adding at the end the following 

20 new subparagraph: 

21 ‘‘(C) INFLATION ADJUSTMENT.—In the case 

22 of any taxable year beginning in a calendar year 

23 after 2004, the $1,890,000 amount in subpara24 graph (A) shall be increased by an amount equal 

25 to— 
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1 ‘‘(i) $1,890,000, multiplied by 

2 ‘‘(ii) the cost-of-living adjustment de3 termined under section 1(f)(3) for such cal4 endar year by substituting ‘calendar year 

5 2003’ for ‘calendar year 1992’ in subpara6 graph (B) thereof. 

7 If the amount as adjusted under the preceding 

8 sentence is not a multiple of $1,000, such 

9 amount shall be rounded to the next lowest mul10 tiple of $1,000.’’. 

11 (c) EFFECTIVE DATE.—The amendments made by this 

12 section shall apply to taxable years beginning after Decem13 ber 31, 2003. 

14 SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UN15 DERPAYMENTS ATTRIBUTABLE TO NONDIS16 CLOSED REPORTABLE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 163 (relating to deduction 

18 for interest) is amended by redesignating subsection (m) as 

19 subsection (n) and by inserting after subsection (l) the fol20 lowing new subsection: 

21 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO

22 NONDISCLOSED REPORTABLE TRANSACTIONS.—No deduc23 tion shall be allowed under this chapter for any interest 

24 paid or accrued under section 6601 on any underpayment 

25 of tax which is attributable to the portion of any reportable 
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1 transaction understatement (as defined in section 

2 6662A(b)) with respect to which the requirement of section 

3 6664(d)(2)(A) is not met.’’. 

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

5 section shall apply to transactions in taxable years begin6 ning after the date of the enactment of this Act. 

7 SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ESTI8 MATED TAX FOR CERTAIN DEEMED ASSET 

9 SALES. 

10 (a) IN GENERAL.—Paragraph (13) of section 338(h) 

11 (relating to tax on deemed sale not taken into account for 

12 estimated tax purposes) is amended by adding at the end 

13 the following: ‘‘The preceding sentence shall not apply with 

14 respect to a qualified stock purchase for which an election 

15 is made under paragraph (10).’’. 

16 (b) EFFECTIVE DATE.—The amendment made by sub17 section (a) shall apply to transactions occurring after the 

18 date of the enactment of this Act. 

19 SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A 

20 PRINCIPAL RESIDENCE ACQUIRED IN A LIKE21 KIND EXCHANGE WITHIN 5 YEARS OF SALE. 

22 (a) IN GENERAL.—Section 121(d) (relating to special 

23 rules for exclusion of gain from sale of principal residence) 

24 is amended by adding at the end the following new para25 graph: 
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1 ‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX2 CHANGE.—If a taxpayer acquired property in an ex3 change to which section 1031 applied, subsection (a) 

4 shall not apply to the sale or exchange of such prop5 erty if it occurs during the 5-year period beginning 

6 with the date of the acquisition of such property.’’. 

7 (b) EFFECTIVE DATE.—The amendment made by this 

8 section shall apply to sales or exchanges after the date of 

9 the enactment of this Act. 

10 SEC. 642. PREVENTION OF MISMATCHING OF INTEREST 

11 AND ORIGINAL ISSUE DISCOUNT DEDUC12 TIONS AND INCOME INCLUSIONS IN TRANS13 ACTIONS WITH RELATED FOREIGN PERSONS. 

14 (a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 

15 (relating to special rule for original issue discount on obli16 gation held by related foreign person) is amended by redes17 ignating subparagraph (B) as subparagraph (C) and by in18 serting after subparagraph (A) the following new subpara19 graph: 

20 ‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN

21 ENTITIES.— 

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

23 debt instrument having original issue dis24 count which is held by a related foreign per25 son which is a foreign personal holding 
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1 company (as defined in section 552), a con2 trolled foreign corporation (as defined in 

3 section 957), or a passive foreign investment 

4 company (as defined in section 1297), a de5 duction shall be allowable to the issuer with 

6 respect to such original issue discount for 

7 any taxable year before the taxable year in 

8 which paid only to the extent such original 

9 issue discount (reduced by properly allow10 able deductions and qualified deficits under 

11 section 952(c)(1)(B)) is includible during 

12 such prior taxable year in the gross income 

13 of a United States person who owns (within 

14 the meaning of section 958(a)) stock in such 

15 corporation. 

16 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

17 Secretary may by regulation exempt trans18 actions from the application of clause (i), 

19 including any transaction which is entered 

20 into by a payor in the ordinary course of 

21 a trade or business in which the payor is 

22 predominantly engaged.’’. 

23 (b) INTEREST AND OTHER DEDUCTIBLE AMOUNTS.— 

24 Section 267(a)(3) is amended— 

25 (1) by striking ‘‘The Secretary’’ and inserting: 
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1 ‘‘(A) IN GENERAL.—The Secretary’’, and 

2 (2) by adding at the end the following new sub3 paragraph: 

4 ‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN

5 ENTITIES.— 

6 ‘‘(i) IN GENERAL.—Notwithstanding 

7 subparagraph (A), in the case of any item 

8 payable to a foreign personal holding com9 pany (as defined in section 552), a con10 trolled foreign corporation (as defined in 

11 section 957), or a passive foreign investment 

12 company (as defined in section 1297), a de13 duction shall be allowable to the payor with 

14 respect to such amount for any taxable year 

15 before the taxable year in which paid only 

16 to the extent that an amount attributable to 

17 such item (reduced by properly allowable 

18 deductions and qualified deficits under sec19 tion 952(c)(1)(B)) is includible during such 

20 prior taxable year in the gross income of a 

21 United States person who owns (within the 

22 meaning of section 958(a)) stock in such 

23 corporation. 

24 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

25 Secretary may by regulation exempt trans-
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1 actions from the application of clause (i), 

2 including any transaction which is entered 

3 into by a payor in the ordinary course of 

4 a trade or business in which the payor is 

5 predominantly engaged and in which the 

6 payment of the accrued amounts occurs 

within 81 7 ⁄2 months after accrual or within 

8 such other period as the Secretary may pre9 scribe.’’. 

10 (c) EFFECTIVE DATE.—The amendments made by this 

11 section shall apply to payments accrued on or after the date 

12 of the enactment of this Act. 

13 SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST 

14 ON OVERPAYMENTS OF INCOME TAX BY INDI15 VIDUALS. 

16 (a) IN GENERAL.—Part III of subchapter B of chapter 

17 1 (relating to items specifically excluded from gross income) 

18 is amended by inserting after section 139A the following 

19 new section: 

20 ‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER21 EST ON OVERPAYMENTS OF INCOME TAX BY 

22 INDIVIDUALS. 

23 ‘‘(a) IN GENERAL.—In the case of an individual, gross 

24 income shall not include interest paid under section 6611 

25 on any overpayment of tax imposed by this subtitle. 
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1 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 

2 the case of a failure to claim items resulting in the overpay3 ment on the original return if the Secretary determines that 

4 the principal purpose of such failure is to take advantage 

5 of subsection (a). 

6 ‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED AD7 JUSTED GROSS INCOME.—For purposes of this title, interest 

8 not included in gross income under subsection (a) shall not 

9 be treated as interest which is exempt from tax for purposes 

10 of sections 32(i)(2)(B) and 6012(d) or any computation in 

11 which interest exempt from tax under this title is added 

12 to adjusted gross income.’’. 

13 (b) CLERICAL AMENDMENT.—The table of sections for 

14 part III of subchapter B of chapter 1 is amended by insert15 ing after the item relating to section 139A the following 

16 new item: 

‘‘Sec. 139B. Exclusion from gross income for interest on overpayments of income tax by individuals.’’. 

17 (c) EFFECTIVE DATE.—The amendments made by this 

18 section shall apply to interest received in calendar years 

19 beginning after the date of the enactment of this Act. 

20 SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF IN21 TEREST ON POTENTIAL UNDERPAYMENTS. 

22 (a) IN GENERAL.—Subchapter A of chapter 67 (relat23 ing to interest on underpayments) is amended by adding 

24 at the end the following new section: 
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1 ‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN2 TEREST ON POTENTIAL UNDERPAYMENTS, 

3 ETC. 

4 ‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN

5 AS PAYMENT OF TAX.—A taxpayer may make a cash de6 posit with the Secretary which may be used by the Sec7 retary to pay any tax imposed under subtitle A or B or 

8 chapter 41, 42, 43, or 44 which has not been assessed at 

9 the time of the deposit. Such a deposit shall be made in 

10 such manner as the Secretary shall prescribe. 

11 ‘‘(b) NO INTEREST IMPOSED.—To the extent that such 

12 deposit is used by the Secretary to pay tax, for purposes 

13 of section 6601 (relating to interest on underpayments), the 

14 tax shall be treated as paid when the deposit is made. 

15 ‘‘(c) RETURN OF DEPOSIT.—Except in a case where 

16 the Secretary determines that collection of tax is in jeop17 ardy, the Secretary shall return to the taxpayer any 

18 amount of the deposit (to the extent not used for a payment 

19 of tax) which the taxpayer requests in writing. 

20 ‘‘(d) PAYMENT OF INTEREST.— 

21 ‘‘(1) IN GENERAL.—For purposes of section 6611 

22 (relating to interest on overpayments), a deposit 

23 which is returned to a taxpayer shall be treated as a 

24 payment of tax for any period to the extent (and only 

25 to the extent) attributable to a disputable tax for such 

26 period. Under regulations prescribed by the Secretary, 
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1 rules similar to the rules of section 6611(b)(2) shall 

2 apply. 

3 ‘‘(2) DISPUTABLE TAX.— 

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

5 section, the term ‘disputable tax’ means the 

6 amount of tax specified at the time of the deposit 

7 as the taxpayer’s reasonable estimate of the max8 imum amount of any tax attributable to disput9 able items. 

10 ‘‘(B) SAFE HARBOR BASED ON 30-DAY LET11 TER.—In the case of a taxpayer who has been 

12 issued a 30-day letter, the maximum amount of 

13 tax under subparagraph (A) shall not be less 

14 than the amount of the proposed deficiency speci15 fied in such letter. 

16 ‘‘(3) OTHER DEFINITIONS.—For purposes of 

17 paragraph (2)— 

18 ‘‘(A) DISPUTABLE ITEM.—The term ‘disput19 able item’ means any item of income, gain, loss, 

20 deduction, or credit if the taxpayer— 

21 ‘‘(i) has a reasonable basis for its 

22 treatment of such item, and 

23 ‘‘(ii) reasonably believes that the Sec24 retary also has a reasonable basis for dis-
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1 allowing the taxpayer’s treatment of such 

2 item. 

3 ‘‘(B) 30-DAY LETTER.—The term ‘30-day 

4 letter’ means the first letter of proposed defi5 ciency which allows the taxpayer an opportunity 

6 for administrative review in the Internal Rev7 enue Service Office of Appeals. 

8 ‘‘(4) RATE OF INTEREST.—The rate of interest 

9 allowable under this subsection shall be the Federal 

10 short-term rate determined under section 6621(b), 

11 compounded daily. 

12 ‘‘(e) USE OF DEPOSITS.— 

13 ‘‘(1) PAYMENT OF TAX.—Except as otherwise 

14 provided by the taxpayer, deposits shall be treated as 

15 used for the payment of tax in the order deposited. 

16 ‘‘(2) RETURNS OF DEPOSITS.—Deposits shall be 

17 treated as returned to the taxpayer on a last-in, first18 out basis.’’. 

19 (b) CLERICAL AMENDMENT.—The table of sections for 

20 subchapter A of chapter 67 is amended by adding at the 

21 end the following new item: 

‘‘Sec. 6603. Deposits made to suspend running of interest on potential underpayments, etc.’’. 

22 (c) EFFECTIVE DATE.— 
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1 (1) IN GENERAL.—The amendments made by 

2 this section shall apply to deposits made after the 

3 date of the enactment of this Act. 

4 (2) COORDINATION WITH DEPOSITS MADE UNDER

5 REVENUE PROCEDURE 84–58.—In the case of an 

6 amount held by the Secretary of the Treasury or his 

7 delegate on the date of the enactment of this Act as 

8 a deposit in the nature of a cash bond deposit pursu9 ant to Revenue Procedure 84–58, the date that the 

10 taxpayer identifies such amount as a deposit made 

11 pursuant to section 6603 of the Internal Revenue 

12 Code (as added by this Act) shall be treated as the 

13 date such amount is deposited for purposes of such 

14 section 6603. 

15 SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALL16 MENT AGREEMENTS. 

17 (a) IN GENERAL.— 

18 (1) Section 6159(a) (relating to authorization of 

19 agreements) is amended— 

20 (A) by striking ‘‘satisfy liability for pay21 ment of’’ and inserting ‘‘make payment on’’, and 

22 (B) by inserting ‘‘full or partial’’ after ‘‘fa23 cilitate’’. 

24 (2) Section 6159(c) (relating to Secretary re25 quired to enter into installment agreements in certain 
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1 cases) is amended in the matter preceding paragraph 

2 (1) by inserting ‘‘full’’ before ‘‘payment’’. 

3 (b) REQUIREMENT TO REVIEW PARTIAL PAYMENT

4 AGREEMENTS EVERY TWO YEARS.—Section 6159 is 

5 amended by redesignating subsections (d) and (e) as sub6 sections (e) and (f), respectively, and inserting after sub7 section (c) the following new subsection: 

8 ‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL9 MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY TWO

10 YEARS.—In the case of an agreement entered into by the 

11 Secretary under subsection (a) for partial collection of a 

12 tax liability, the Secretary shall review the agreement at 

13 least once every 2 years.’’. 

14 (c) EFFECTIVE DATE.—The amendments made by this 

15 section shall apply to agreements entered into on or after 

16 the date of the enactment of this Act. 

17 SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGU18 LATION AUTHORITY. 

19 (a) IN GENERAL.—Section 1502 is amended by adding 

20 at the end the following new sentence: ‘‘In carrying out the 

21 preceding sentence, the Secretary may prescribe rules that 

22 are different from the provisions of chapter 1 that would 

23 apply if such corporations filed separate returns.’’. 

24 (b) RESULT NOT OVERTURNED.—Notwithstanding the 

25 amendment made by subsection (a), the Internal Revenue 
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1 Code of 1986 shall be construed by treating Treasury Regu2 lation § 1.1502-20(c)(1)(iii) (as in effect on January 1, 

3 2001) as being inapplicable to the factual situation in Rite 

4 Aid Corporation and Subsidiary Corporations v. United 

5 States, 255 F.3d 1357 (Fed. Cir. 2001). 

6 (c) EFFECTIVE DATE.—This section, and the amend7 ment made by this section, shall apply to taxable years be8 ginning before, on, or after the date of the enactment of this 

9 Act. 

10 PART III—LEASING 

11 SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEAS12 ING ARRANGEMENTS. 

13 (a) CLARIFICATION OF RECOVERY PERIOD FOR TAX14 EXEMPT USE PROPERTY SUBJECT TO LEASE.—Subpara15 graph (A) of section 168(g)(3) (relating to special rules for 

16 determining class life) is amended by inserting ‘‘(notwith17 standing any other subparagraph of this paragraph)’’ after 

18 ‘‘shall’’. 

19 (b) LIMITATION ON DEPRECIATION PERIOD FOR SOFT20 WARE LEASED TO TAX-EXEMPT ENTITY.—Paragraph (1) 

21 of section 167(f) is amended by adding at the end the fol22 lowing new subparagraph: 

23 ‘‘(C) TAX-EXEMPT USE PROPERTY SUBJECT

24 TO LEASE.—In the case of computer software 

25 which would be tax-exempt use property as de-
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1 fined in subsection (h) of section 168 if such sec2 tion applied to computer software, the useful life 

3 under subparagraph (A) shall not be less than 

4 125 percent of the lease term (within the mean5 ing of section 168(i)(3)).’’. 

6 (c) LEASE TERM TO INCLUDE RELATED SERVICE

7 CONTRACTS.—Subparagraph (A) of section 168(i)(3) (relat8 ing to lease term) is amended by striking ‘‘and’’ at the end 

9 of clause (i), by redesignating clause (ii) as clause (iii), and 

10 by inserting after clause (i) the following new clause: 

11 ‘‘(ii) the term of a lease shall include 

12 the term of any service contract or similar 

13 arrangement (whether or not treated as a 

14 lease under section 7701(e))— 

15 ‘‘(I) which is part of the same 

16 transaction (or series of related trans17 actions) which includes the lease, and 

18 ‘‘(II) which is with respect to the 

19 property subject to the lease or substan20 tially similar property, and’’. 

21 (d) EXPANSION OF SHORT-TERM LEASE EXEMPTION

22 FOR QUALIFIED TECHNOLOGICAL EQUIPMENT.—Subpara23 graph (A) of section 168(h)(3) is amended by adding at 

24 the end the following new sentence: ‘‘Notwithstanding sub25 section (i)(3)(A)(i), in determining a lease term for pur-
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1 poses of the preceding sentence, there shall not be taken into 

2 account any option of the lessee to renew at the fair market 

3 value rent determined at the time of renewal; except that 

4 the aggregate period not taken into account by reason of 

5 this sentence shall not exceed 24 months.’’ 

6 SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO 

7 PROPERTY USED BY GOVERNMENTS OR 

8 OTHER TAX-EXEMPT ENTITIES. 

9 (a) IN GENERAL.—Subpart C of part II of subchapter 

10 E of chapter 1 (relating to taxable year for which deduc11 tions taken) is amended by adding at the end the following 

12 new section: 

13 ‘‘SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO 

14 PROPERTY USED BY GOVERNMENTS OR 

15 OTHER TAX-EXEMPT ENTITIES. 

16 ‘‘(a) LIMITATION ON LOSSES.—Except as otherwise 

17 provided in this section, a tax-exempt use loss for any tax18 able year shall not be allowed. 

19 ‘‘(b) DISALLOWED LOSS CARRIED TO NEXT YEAR.— 

20 Any tax-exempt use loss with respect to any tax-exempt use 

21 property which is disallowed under subsection (a) for any 

22 taxable year shall be treated as a deduction with respect 

23 to such property in the next taxable year. 

24 ‘‘(c) DEFINITIONS.—For purposes of this section— 
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1 ‘‘(1) TAX-EXEMPT USE LOSS.—The term ‘tax-ex2 empt use loss’ means, with respect to any taxable 

3 year, the amount (if any) by which— 

4 ‘‘(A) the sum of— 

5 ‘‘(i) the aggregate deductions (other 

6 than interest) directly allocable to a tax-ex7 empt use property, plus 

8 ‘‘(ii) the aggregate deductions for inter9 est properly allocable to such property, ex10 ceed 

11 ‘‘(B) the aggregate income from such prop12 erty. 

13 ‘‘(2) TAX-EXEMPT USE PROPERTY.—The term 

14 ‘tax-exempt use property’ has the meaning given to 

15 such term by section 168(h) (without regard to para16 graphs (1)(C) and (3) thereof and determined as if 

17 property described in section 167(f)(1)(B) were tan18 gible property). Such term shall not include property 

19 which would (but for this sentence) be tax-exempt use 

20 property solely by reason of section 168(h)(6) if any 

21 credit is allowable under section 42 or 47 with respect 

22 to such property. 

23 ‘‘(d) EXCEPTION FOR CERTAIN LEASES.—This section 

24 shall not apply to any lease of property which meets the 

25 requirements of all of the following paragraphs: 
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1 ‘‘(1) AVAILABILITY OF FUNDS.— 

2 ‘‘(A) IN GENERAL.—A lease of property 

3 meets the requirements of this paragraph if (at 

4 any time during the lease term) not more than 

5 an allowable amount of funds are— 

6 ‘‘(i) subject to any arrangement re7 ferred to in subparagraph (B), or 

8 ‘‘(ii) set aside or expected to be set 

9 aside, 

10 to or for the benefit of the lessor or any lender, 

11 or to or for the benefit of the lessee to satisfy the 

12 lessee’s obligations or options under the lease. 

13 For purposes of clause (ii), funds shall be treated 

14 as set aside or expected to be set aside only if a 

15 reasonable person would conclude, based on the 

16 facts and circumstances, that such funds are set 

17 aside or expected to be set aside. 

18 ‘‘(B) ARRANGEMENTS.—The arrangements 

19 referred to in this subparagraph include a defea20 sance arrangement, a loan by the lessee to the 

21 lessor or any lender, a deposit arrangement, a 

22 letter of credit collateralized with cash or cash 

23 equivalents, a payment undertaking agreement, 

24 prepaid rent (within the meaning of the regula25 tions under section 467), a sinking fund ar-
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1 rangement, a guaranteed investment contract, fi2 nancial guaranty insurance, and any similar 

3 arrangement (whether or not such arrangement 

4 provides credit support). 

5 ‘‘(C) ALLOWABLE AMOUNT.— 

6 ‘‘(i) IN GENERAL.—Except as otherwise 

7 provided in this subparagraph, the term ‘al8 lowable amount’ means an amount equal to 

9 20 percent of the lessor’s adjusted basis in 

10 the property at the time the lease is entered 

11 into. 

12 ‘‘(ii) HIGHER AMOUNT PERMITTED IN

13 CERTAIN CASES.—To the extent provided in 

14 regulations, a higher percentage shall be 

15 permitted under clause (i) where necessary 

16 because of the credit-worthiness of the lessee. 

17 In no event may such regulations permit a 

18 percentage of more than 50 percent. 

19 ‘‘(iii) OPTION TO PURCHASE OTHER

20 THAN AT FAIR MARKET VALUE.—If under 

21 the lease the lessee has the option to pur22 chase the property for a fixed price or for 

23 other than the fair market value of the 

24 property (determined at the time of exer25 cise), the allowable amount at the time such 
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1 option may be exercised may not exceed 50 

2 percent of the price at which such option 

3 may be exercised. 

4 ‘‘(iv) NO ALLOWABLE AMOUNT FOR

5 CERTAIN ARRANGEMENTS.—The allowable 

6 amount shall be zero with respect to any ar7 rangement which involves— 

8 ‘‘(I) a loan from the lessee to the 

9 lessor or a lender, 

10 ‘‘(II) any deposit received, letter 

11 of credit issued, or payment under12 taking agreement entered into by a 

13 lender otherwise involved in the trans14 action, or 

15 ‘‘(III) in the case of a transaction 

16 which involves a lender, any credit 

17 support made available to the lessor in 

18 which any such lender does not have a 

19 claim that is senior to the lessor. 

20 For purposes of subclause (I), the term 

21 ‘loan’ shall not include any amount treated 

22 as a loan under section 467 with respect to 

23 a section 467 rental agreement. 

24 ‘‘(2) LESSOR MUST MAKE SUBSTANTIAL EQUITY

25 INVESTMENT.— 
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1 ‘‘(A) IN GENERAL.—A lease of property 

2 meets the requirements of this paragraph if— 

3 ‘‘(i) the lessor— 

4 ‘‘(I) has at the time the lease is 

5 entered into an unconditional at-risk 

6 equity investment (as determined by 

7 the Secretary) in the property of at 

8 least 20 percent of the lessor’s adjusted 

9 basis in the property as of that time, 

10 and 

11 ‘‘(II) maintains such investment 

12 throughout the term of the lease, and 

13 ‘‘(ii) the fair market value of the prop14 erty at the end of the lease term is reason15 ably expected to be equal to at least 20 per16 cent of such basis. 

17 ‘‘(B) RISK OF LOSS.—For purposes of 

18 clause (ii), the fair market value at the end of 

19 the lease term shall be reduced to the extent that 

20 a person other than the lessor bears a risk of loss 

21 in the value of the property. 

22 ‘‘(C) PARAGRAPH NOT TO APPLY TO SHORT23 TERM LEASES.—This paragraph shall not apply 

24 to any lease with a lease term of 5 years or less. 
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1 ‘‘(3) LESSEE MAY NOT BEAR MORE THAN MINI2 MAL RISK OF LOSS.— 

3 ‘‘(A) IN GENERAL.—A lease of property 

4 meets the requirements of this paragraph if there 

5 is no arrangement under which the lessee 

6 bears— 

7 ‘‘(i) any portion of the loss that would 

8 occur if the fair market value of the leased 

9 property were 25 percent less than its rea10 sonably expected fair market value at the 

11 time the lease is terminated, or 

12 ‘‘(ii) more than 50 percent of the loss 

13 that would occur if the fair market value of 

14 the leased property at the time the lease is 

15 terminated were zero. 

16 ‘‘(B) EXCEPTION.—The Secretary may by 

17 regulations provide that the requirements of this 

18 paragraph are not met where the lessee bears 

19 more than a minimal risk of loss. 

20 ‘‘(C) PARAGRAPH NOT TO APPLY TO SHORT21 TERM LEASES.—This paragraph shall not apply 

22 to any lease with a lease term of 5 years or less. 

23 ‘‘(e) SPECIAL RULES.— 

24 ‘‘(1) TREATMENT OF FORMER TAX-EXEMPT USE

25 PROPERTY.— 
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1 ‘‘(A) IN GENERAL.—In the case of any 

2 former tax-exempt use property— 

3 ‘‘(i) any deduction allowable under 

4 subsection (b) with respect to such property 

5 for any taxable year shall be allowed only 

6 to the extent of any net income (without re7 gard to such deduction) from such property 

8 for such taxable year, and 

9 ‘‘(ii) any portion of such unused de10 duction remaining after application of 

11 clause (i) shall be treated as a deduction al12 lowable under subsection (b) with respect to 

13 such property in the next taxable year. 

14 ‘‘(B) FORMER TAX-EXEMPT USE PROP15 ERTY.—For purposes of this subsection, the term 

16 ‘former tax-exempt use property’ means any 

17 property which— 

18 ‘‘(i) is not tax-exempt use property for 

19 the taxable year, but 

20 ‘‘(ii) was tax-exempt use property for 

21 any prior taxable year. 

22 ‘‘(2) DISPOSITION OF ENTIRE INTEREST IN

23 PROPERTY.—If during the taxable year a taxpayer 

24 disposes of the taxpayer’s entire interest in tax-ex25 empt use property (or former tax-exempt use prop-
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1 erty), rules similar to the rules of section 469(g) shall 

2 apply for purposes of this section. 

3 ‘‘(3) COORDINATION WITH SECTION 469.—This 

4 section shall be applied before the application of sec5 tion 469. 

6 ‘‘(4) COORDINATION WITH SECTIONS 1031 AND

7 1033.— 

8 ‘‘(A) IN GENERAL.—Sections 1031(a) and 

9 1033(a) shall not apply if— 

10 ‘‘(i) the exchanged or converted prop11 erty is tax-exempt use property subject to a 

12 lease which was entered into before March 

13 13, 2004, and which would not have met the 

14 requirements of subsection (d) had such re15 quirements been in effect when the lease was 

16 entered into, or 

17 ‘‘(ii) the replacement property is tax18 exempt use property subject to a lease which 

19 does not meet the requirements of subsection 

20 (d). 

21 ‘‘(B) ADJUSTED BASIS.—In the case of 

22 property acquired by the lessor in a transaction 

23 to which section 1031 or 1033 applies, the ad24 justed basis of such property for purposes of this 

25 section shall be equal to the lesser of— 
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1 ‘‘(i) the fair market value of the prop2 erty as of the beginning of the lease term, 

3 or 

4 ‘‘(ii) the amount which would be the 

5 lessor’s adjusted basis if such sections did 

6 not apply to such transaction. 

7 ‘‘(f) OTHER DEFINITIONS.—For purposes of this sec8 tion— 

9 ‘‘(1) RELATED PARTIES.—The terms ‘lessor’, ‘les10 see’, and ‘lender’ each include any related party 

11 (within the meaning of section 197(f)(9)(C)(i)). 

12 ‘‘(2) LEASE TERM.—The term ‘lease term’ has 

13 the meaning given to such term by section 168(i)(3). 

14 ‘‘(3) LENDER.—The term ‘lender’ means, with 

15 respect to any lease, a person that makes a loan to 

16 the lessor which is secured (or economically similar to 

17 being secured) by the lease or the leased property. 

18 ‘‘(4) LOAN.—The term ‘loan’ includes any simi19 lar arrangement. 

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

21 such regulations as may be necessary or appropriate to 

22 carry out the provisions of this section, including regula23 tions which— 

24 ‘‘(1) allow in appropriate cases the aggregation 

25 of property subject to the same lease, and 
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1 ‘‘(2) provide for the determination of the alloca2 tion of interest expense for purposes of this section.’’. 

3 (b) CONFORMING AMENDMENT.—The table of sections 

4 for subpart C of part II of subchapter E of chapter 1 is 

5 amended by adding at the end the following new item: 

‘‘Sec. 470. Limitation on deductions allocable to property used by 

governments or other tax-exempt entities.’’. 

6 SEC. 649. EFFECTIVE DATE. 

7 (a) IN GENERAL.—Except as provided in this section, 

8 the amendments made by this part shall apply to leases 

9 entered into after March 12, 2004. 

10 (b) EXCEPTION.— 

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

12 this part shall not apply to qualified transportation 

13 property. 

14 (2) QUALIFIED TRANSPORTATION PROPERTY.— 

15 For purposes of paragraph (1), the term ‘‘qualified 

16 transportation property’’ means domestic property 

17 subject to a lease with respect to which a formal ap18 plication— 

19 (A) was submitted for approval to the Fed20 eral Transit Administration (an agency of the 

21 Department of Transportation) after June 30, 

22 2003, and before March 13, 2004, 

23 (B) is approved by the Federal Transit Ad24 ministration before January 1, 2005, and 
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1 (C) includes a description of such property 

2 and the value of such property. 

3 (3) EXCHANGES AND CONVERSION OF TAX-EX4 EMPT USE PROPERTY.—Section 470(e)(4) of the Inter5 nal Revenue Code of 1986, as added by this section, 

6 shall apply to property exchanged or converted after 

7 the date of the enactment of this Act. 

8 Subtitle C—Reduction of Fuel Tax 

9 Evasion 

10 SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR 

11 MOBILE MACHINERY. 

12 (a) EXEMPTION FROM TAX ON HEAVY TRUCKS AND

13 TRAILERS SOLD AT RETAIL.— 

14 (1) IN GENERAL.—Section 4053 (relating to ex15 emptions) is amended by adding at the end the fol16 lowing new paragraph: 

17 ‘‘(8) MOBILE MACHINERY.—Any vehicle which 

18 consists of a chassis— 

19 ‘‘(A) to which there has been permanently 

20 mounted (by welding, bolting, riveting, or other 

21 means) machinery or equipment to perform a 

22 construction, manufacturing, processing, farm23 ing, mining, drilling, timbering, or similar oper24 ation if the operation of the machinery or equip-
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1 ment is unrelated to transportation on or off the 

2 public highways, 

3 ‘‘(B) which has been specially designed to 

4 serve only as a mobile carriage and mount (and 

5 a power source, where applicable) for the par6 ticular machinery or equipment involved, wheth7 er or not such machinery or equipment is in op8 eration, and 

9 ‘‘(C) which, by reason of such special de10 sign, could not, without substantial structural 

11 modification, be used as a component of a vehicle 

12 designed to perform a function of transporting 

13 any load other than that particular machinery 

14 or equipment or similar machinery or equipment 

15 requiring such a specially designed chassis.’’. 

16 (2) EFFECTIVE DATE.—The amendment made by 

17 this subsection shall take effect on the day after the 

18 date of the enactment of this Act. 

19 (b) EXEMPTION FROM TAX ON USE OF CERTAIN VEHI20 CLES.— 

21 (1) IN GENERAL.—Section 4483 (relating to ex22 emptions) is amended by redesignating subsection (g) 

23 as subsection (h) and by inserting after subsection (f) 

24 the following new subsection: 
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1 ‘‘(g) EXEMPTION FOR MOBILE MACHINERY.—No tax 

2 shall be imposed by section 4481 on the use of any vehicle 

3 described in section 4053(8).’’. 

4 (2) EFFECTIVE DATE.—The amendments made 

5 by this subsection shall take effect on the day after the 

6 date of the enactment of this Act. 

7 (c) EXEMPTION FROM TAX ON TIRES.— 

8 (1) IN GENERAL.—Section 4072(b)(2) is amend9 ed by adding at the end the following flush sentence: 

10 ‘‘Such term shall not include tires of a type used ex11 clusively on vehicles described in section 4053(8).’’. 

12 (2) EFFECTIVE DATE.—The amendment made by 

13 this subsection shall take effect on the day after the 

14 date of the enactment of this Act. 

15 (d) REFUND OF FUEL TAXES.— 

16 (1) IN GENERAL.—Section 6421(e)(2) (defining 

17 off-highway business use) is amended by adding at 

18 the end the following new subparagraph: 

19 ‘‘(C) USES IN MOBILE MACHINERY.— 

20 ‘‘(i) IN GENERAL.—The term ‘off-high21 way business use’ shall include any use in 

22 a vehicle which meets the requirements de23 scribed in clause (ii). 
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1 ‘‘(ii) REQUIREMENTS FOR MOBILE MA2 CHINERY.—The requirements described in 

3 this clause are— 

4 ‘‘(I) the design-based test, and 

5 ‘‘(II) the use-based test. 

6 ‘‘(iii) DESIGN-BASED TEST.—For pur7 poses of clause (ii)(I), the design-based test 

8 is met if the vehicle consists of a chassis— 

9 ‘‘(I) to which there has been per10 manently mounted (by welding, bolt11 ing, riveting, or other means) machin12 ery or equipment to perform a con13 struction, manufacturing, processing, 

14 farming, mining, drilling, timbering, 

15 or similar operation if the operation of 

16 the machinery or equipment is unre17 lated to transportation on or off the 

18 public highways, 

19 ‘‘(II) which has been specially de20 signed to serve only as a mobile car21 riage and mount (and a power source, 

22 where applicable) for the particular 

23 machinery or equipment involved, 

24 whether or not such machinery or 

25 equipment is in operation, and 
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1 ‘‘(III) which, by reason of such 

2 special design, could not, without sub3 stantial structural modification, be 

4 used as a component of a vehicle de5 signed to perform a function of trans6 porting any load other than that par7 ticular machinery or equipment or 

8 similar machinery or equipment re9 quiring such a specially designed chas10 sis. 

11 ‘‘(iv) USE-BASED TEST.—For purposes 

12 of clause (ii)(II), the use-based test is met if 

13 the use of the vehicle on public highways 

14 was less than 7,500 miles during the tax15 payer’s taxable year.’’. 

16 (2) NO TAX-FREE SALES.—Subsection (b) of sec17 tion 4082, as amended by section 652, is amended by 

18 inserting before the period at the end ‘‘and such term 

19 shall not include any use described in section 

20 6421(e)(2)(C)’’. 

21 (3) ANNUAL REFUND OF TAX PAID.—Section 

22 6427(i)(2) (relating to exceptions) is amended by add23 ing at the end the following new subparagraph: 

24 ‘‘(C) NONAPPLICATION OF PARAGRAPH.— 

25 This paragraph shall not apply to any fuel used 
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1 solely in any off-highway business use described 

2 in section 6421(e)(2)(C).’’. 

3 (4) EFFECTIVE DATE.—The amendments made 

4 by this subsection shall apply to taxable years begin5 ning after the date of the enactment of this Act. 

6 SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE. 

7 (a) RATE OF TAX.— 

8 (1) IN GENERAL.—Subparagraph (A) of section 

9 4081(a)(2) is amended by striking ‘‘and’’ at the end 

10 of clause (ii), by striking the period at the end of 

11 clause (iii) and inserting ‘‘, and’’, and by adding at 

12 the end the following new clause: 

13 ‘‘(iv) in the case of aviation-grade ker14 osene, 21.8 cents per gallon.’’. 

15 (2) COMMERCIAL AVIATION.—Paragraph (2) of 

16 section 4081(a) is amended by adding at the end the 

17 following new subparagraph: 

18 ‘‘(C) TAXES IMPOSED ON FUEL USED IN

19 COMMERCIAL AVIATION.—In the case of aviation20 grade kerosene which is removed from any refin21 ery or terminal directly into the fuel tank of an 

22 aircraft for use in commercial aviation, the rate 

23 of tax under subparagraph (A)(iv) shall be 4.3 

24 cents per gallon.’’. 
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1 (3) CERTAIN REFUELER TRUCKS, TANKERS, AND

2 TANK WAGONS TREATED AS TERMINAL.—Subsection 

3 (a) of section 4081 is amended by adding at the end 

4 the following new paragraph: 

5 ‘‘(3) CERTAIN REFUELER TRUCKS, TANKERS, 

6 AND TANK WAGONS TREATED AS TERMINAL.— 

7 ‘‘(A) IN GENERAL.—In the case of aviation8 grade kerosene which is removed from any ter9 minal directly into the fuel tank of an aircraft 

10 (determined without regard to any refueler truck, 

11 tanker, or tank wagon which meets the require12 ments of subparagraph (B)), a refueler truck, 

13 tanker, or tank wagon shall be treated as part of 

14 such terminal if— 

15 ‘‘(i) such truck, tanker, or wagon meets 

16 the requirements of subparagraph (B) with 

17 respect to an airport, and 

18 ‘‘(ii) except in the case of exigent cir19 cumstances identified by the Secretary in 

20 regulations, no vehicle registered for high21 way use is loaded with aviation-grade ker22 osene at such terminal. 

23 ‘‘(B) REQUIREMENTS.—A refueler truck, 

24 tanker, or tank wagon meets the requirements of 
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1 this subparagraph with respect to an airport if 

2 such truck, tanker, or wagon— 

3 ‘‘(i) is loaded with aviation-grade ker4 osene at such terminal located within such 

5 airport and delivers such kerosene only into 

6 aircraft at such airport, 

7 ‘‘(ii) has storage tanks, hose, and cou8 pling equipment designed and used for the 

9 purposes of fueling aircraft, 

10 ‘‘(iii) is not registered for highway use, 

11 and 

12 ‘‘(iv) is operated by— 

13 ‘‘(I) the terminal operator of such 

14 terminal, or 

15 ‘‘(II) a person that makes a daily 

16 accounting to such terminal operator 

17 of each delivery of fuel from such truck, 

18 tanker, or wagon. 

19 ‘‘(C) REPORTING.—The Secretary shall re20 quire under section 4101(d) reporting by such 

21 terminal operator of— 

22 ‘‘(i) any information obtained under 

23 subparagraph (B)(iv)(II), and 

24 ‘‘(ii) any similar information main25 tained by such terminal operator with re-
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1 spect to deliveries of fuel made by trucks, 

2 tankers, or wagons operated by such ter3 minal operator.’’. 

4 (4) LIABILITY FOR TAX ON AVIATION-GRADE

5 KEROSENE USED IN COMMERCIAL AVIATION.—Sub6 section (a) of section 4081 is amended by adding at 

7 the end the following new paragraph: 

8 ‘‘(4) LIABILITY FOR TAX ON AVIATION-GRADE

9 KEROSENE USED IN COMMERCIAL AVIATION.—For 

10 purposes of paragraph (2)(C), the person who uses the 

11 fuel for commercial aviation shall pay the tax im12 posed under such paragraph. For purposes of the pre13 ceding sentence, fuel shall be treated as used when 

14 such fuel is removed into the fuel tank.’’. 

15 (5) NONTAXABLE USES.— 

16 (A) IN GENERAL.—Section 4082 is amended 

17 by redesignating subsections (e) and (f) as sub18 sections (f) and (g), respectively, and by insert19 ing after subsection (d) the following new sub20 section: 

21 ‘‘(e) AVIATION-GRADE KEROSENE.—In the case of 

22 aviation-grade kerosene which is exempt from the tax im23 posed by section 4041(c) (other than by reason of a prior 

24 imposition of tax) and which is removed from any refinery 
320 

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1 or terminal directly into the fuel tank of an aircraft, the 

2 rate of tax under section 4081(a)(2)(A)(iv) shall be zero.’’. 

3 (B) CONFORMING AMENDMENTS.— 

4 (i) Subsection (b) of section 4082 is 

5 amended by adding at the end the following 

6 new flush sentence: 

7 ‘‘The term ‘nontaxable use’ does not include the use of avia8 tion-grade kerosene in an aircraft.’’. 

9 (ii) Section 4082(d) is amended by 

10 striking paragraph (1) and by redesig11 nating paragraphs (2) and (3) as para12 graphs (1) and (2), respectively. 

13 (6) NONAIRCRAFT USE OF AVIATION-GRADE KER14 OSENE.— 

15 (A) IN GENERAL.—Subparagraph (B) of 

16 section 4041(a)(1) is amended by adding at the 

17 end the following new sentence: ‘‘This subpara18 graph shall not apply to aviation-grade ker19 osene.’’. 

20 (B) CONFORMING AMENDMENT.—The head21 ing for paragraph (1) of section 4041(a) is 

22 amended by inserting ‘‘AND KEROSENE’’ after 

23 ‘‘DIESEL FUEL’’. 

24 (b) COMMERCIAL AVIATION.—Section 4083 is amended 

25 by redesignating subsections (b) and (c) as subsections (c) 
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1 and (d), respectively, and by inserting after subsection (a) 

2 the following new subsection: 

3 ‘‘(b) COMMERCIAL AVIATION.—For purposes of this 

4 subpart, the term ‘commercial aviation’ means any use of 

5 an aircraft in a business of transporting persons or prop6 erty for compensation or hire by air, unless properly allo7 cable to any transportation exempt from the taxes imposed 

8 by sections 4261 and 4271 by reason of section 4281 or 4282 

9 or by reason of section 4261(h).’’. 

10 (c) REFUNDS.— 

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

12 6427(l) is amended to read as follows: 

13 ‘‘(4) REFUNDS FOR AVIATION-GRADE KER14 OSENE.— 

15 ‘‘(A) NO REFUND OF CERTAIN TAXES ON

16 FUEL USED IN COMMERCIAL AVIATION.—In the 

17 case of aviation-grade kerosene used in commer18 cial aviation (as defined in section 4083(b)) 

19 (other than supplies for vessels or aircraft within 

20 the meaning of section 4221(d)(3)), paragraph 

21 (1) shall not apply to so much of the tax imposed 

22 by section 4081 as is attributable to— 

23 ‘‘(i) the Leaking Underground Storage 

24 Tank Trust Fund financing rate imposed 

25 by such section, and 
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1 ‘‘(ii) so much of the rate of tax speci2 fied in section 4081(a)(2)(A)(iv) as does not 

3 exceed 4.3 cents per gallon. 

4 ‘‘(B) PAYMENT TO ULTIMATE, REGISTERED

5 VENDOR.—With respect to aviation-grade ker6 osene, if the ultimate purchaser of such kerosene 

7 waives (at such time and in such form and man8 ner as the Secretary shall prescribe) the right to 

9 payment under paragraph (1) and assigns such 

10 right to the ultimate vendor, then the Secretary 

11 shall pay the amount which would be paid under 

12 paragraph (1) to such ultimate vendor, but only 

13 if such ultimate vendor— 

14 ‘‘(i) is registered under section 4101, 

15 and 

16 ‘‘(ii) meets the requirements of sub17 paragraph (A), (B), or (D) of section 

18 6416(a)(1).’’. 

19 (2) TIME FOR FILING CLAIMS.—Subparagraph 

20 (A) of section 6427(i)(4) is amended— 

21 (A) by striking ‘‘subsection (l)(5)’’ both 

22 places it appears and inserting ‘‘paragraph 

23 (4)(B) or (5) of subsection (l)’’, and 

24 (B) by striking ‘‘the preceding sentence’’ 

25 and inserting ‘‘subsection (l)(5)’’. 
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1 (3) CONFORMING AMENDMENT.—Subparagraph 

2 (B) of section 6427(l)(2) is amended to read as fol3 lows: 

4 ‘‘(B) in the case of aviation-grade ker5 osene— 

6 ‘‘(i) any use which is exempt from the 

7 tax imposed by section 4041(c) other than 

8 by reason of a prior imposition of tax, or 

9 ‘‘(ii) any use in commercial aviation 

10 (within the meaning of section 4083(b)).’’. 

11 (d) REPEAL OF PRIOR TAXATION OF AVIATION

12 FUEL.— 

13 (1) IN GENERAL.—Part III of subchapter A of 

14 chapter 32 is amended by striking subpart B and by 

15 redesignating subpart C as subpart B. 

16 (2) CONFORMING AMENDMENTS.— 

17 (A) Section 4041(c) is amended to read as 

18 follows: 

19 ‘‘(c) AVIATION-GRADE KEROSENE.— 

20 ‘‘(1) IN GENERAL.—There is hereby imposed a 

21 tax upon aviation-grade kerosene— 

22 ‘‘(A) sold by any person to an owner, lessee, 

23 or other operator of an aircraft for use in such 

24 aircraft, or 
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1 ‘‘(B) used by any person in an aircraft un2 less there was a taxable sale of such fuel under 

3 subparagraph (A). 

4 ‘‘(2) EXEMPTION FOR PREVIOUSLY TAXED

5 FUEL.—No tax shall be imposed by this subsection on 

6 the sale or use of any aviation-grade kerosene if tax 

7 was imposed on such liquid under section 4081 and 

8 the tax thereon was not credited or refunded. 

9 ‘‘(3) RATE OF TAX.—The rate of tax imposed by 

10 this subsection shall be the rate of tax specified in sec11 tion 4081(a)(2)(A)(iv) which is in effect at the time 

12 of such sale or use.’’. 

13 (B) Section 4041(d)(2) is amended by strik14 ing ‘‘section 4091’’ and inserting ‘‘section 4081’’. 

15 (C) Section 4041 is amended by striking 

16 subsection (e). 

17 (D) Section 4041 is amended by striking 

18 subsection (i). 

19 (E) Sections 4101(a), 4103, 4221(a), and 

20 6206 are each amended by striking ‘‘, 4081, or 

21 4091’’ and inserting ‘‘or 4081’’. 

22 (F) Section 6416(b)(2) is amended by strik23 ing ‘‘4091 or’’. 

24 (G) Section 6416(b)(3) is amended by strik25 ing ‘‘or 4091’’ each place it appears. 
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1 (H) Section 6416(d) is amended by striking 

2 ‘‘or to the tax imposed by section 4091 in the 

3 case of refunds described in section 4091(d)’’. 

4 (I) Section 6427(j)(1) is amended by strik5 ing ‘‘, 4081, and 4091’’ and inserting ‘‘and 

6 4081’’. 

7 (J)(i) Section 6427(l)(1) is amended to read 

8 as follows: 

9 ‘‘(1) IN GENERAL.—Except as otherwise provided 

10 in this subsection and in subsection (k), if any diesel 

11 fuel or kerosene on which tax has been imposed by 

12 section 4041 or 4081 is used by any person in a non13 taxable use, the Secretary shall pay (without interest) 

14 to the ultimate purchaser of such fuel an amount 

15 equal to the aggregate amount of tax imposed on such 

16 fuel under section 4041 or 4081, as the case may be, 

17 reduced by any payment made to the ultimate vendor 

18 under paragraph (4)(B).’’. 

19 (ii) Paragraph (5)(B) of section 6427(l) is 

20 amended by striking ‘‘Paragraph (1)(A) shall 

21 not apply to kerosene’’ and inserting ‘‘Para22 graph (1) shall not apply to kerosene (other than 

23 aviation-grade kerosene)’’. 
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1 (K) Subparagraph (B) of section 6724(d)(1) 

2 is amended by striking clause (xv) and by redes3 ignating the succeeding clauses accordingly. 

4 (L) Paragraph (2) of section 6724(d) is 

5 amended by striking subparagraph (W) and by 

6 redesignating the succeeding subparagraphs ac7 cordingly. 

8 (M) Paragraph (1) of section 9502(b) is 

9 amended by adding ‘‘and’’ at the end of subpara10 graph (B) and by striking subparagraphs (C) 

11 and (D) and inserting the following new sub12 paragraph: 

13 ‘‘(C) section 4081 with respect to aviation 

14 gasoline and aviation-grade kerosene, and’’. 

15 (N) The last sentence of section 9502(b) is 

16 amended to read as follows: 

17 ‘‘There shall not be taken into account under paragraph 

18 (1) so much of the taxes imposed by section 4081 as are 

19 determined at the rate specified in section 4081(a)(2)(B).’’. 

20 (O) Subsection (b) of section 9508 is 

21 amended by striking paragraph (3) and by re22 designating paragraphs (4) and (5) as para23 graphs (3) and (4), respectively. 
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1 (P) Section 9508(c)(2)(A) is amended by 

2 striking ‘‘sections 4081 and 4091’’ and inserting 

3 ‘‘section 4081’’. 

4 (Q) The table of subparts for part III of 

5 subchapter A of chapter 32 is amended to read 

6 as follows: 

‘‘Subpart A. Motor and aviation fuels. 

‘‘Subpart B. Special provisions applicable to fuels tax.’’. 

7 (R) The heading for subpart A of part III 

8 of subchapter A of chapter 32 is amended to read 

9 as follows: 

10 ‘‘Subpart A—Motor and Aviation Fuels’’. 

11 (S) The heading for subpart B of part III 

12 of subchapter A of chapter 32, as redesignated by 

13 paragraph (1), is amended to read as follows: 

14 ‘‘Subpart B—Special Provisions Applicable to Fuels 

15 Tax’’. 

16 (e) EFFECTIVE DATE.—The amendments made by this 

17 section shall apply to aviation-grade kerosene removed, en18 tered, or sold after September 30, 2004. 

19 (f) FLOOR STOCKS TAX.— 

20 (1) IN GENERAL.—There is hereby imposed on 

21 aviation-grade kerosene held on October 1, 2004, by 

22 any person a tax equal to— 

23 (A) the tax which would have been imposed 

24 before such date on such kerosene had the amend-
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1 ments made by this section been in effect at all 

2 times before such date, reduced by 

3 (B) the tax imposed before such date under 

4 section 4091 of the Internal Revenue Code of 

5 1986, as in effect on the day before the date of 

6 the enactment of this Act. 

7 (2) LIABILITY FOR TAX AND METHOD OF PAY8 MENT.— 

9 (A) LIABILITY FOR TAX.—The person hold10 ing the kerosene on October 1, 2004, to which the 

11 tax imposed by paragraph (1) applies shall be 

12 liable for such tax. 

13 (B) METHOD AND TIME FOR PAYMENT.— 

14 The tax imposed by paragraph (1) shall be paid 

15 at such time and in such manner as the Sec16 retary of the Treasury (or the Secretary’s dele17 gate) shall prescribe, including the nonapplica18 tion of such tax on de minimis amounts of ker19 osene. 

20 (3) TRANSFER OF FLOOR STOCK TAX REVENUES

21 TO TRUST FUNDS.—For purposes of determining the 

22 amount transferred to any trust fund, the tax im23 posed by this subsection shall be treated as imposed 

24 by section 4081 of the Internal Revenue Code of 

25 1986— 
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1 (A) at the Leaking Underground Storage 

2 Tank Trust Fund financing rate under such sec3 tion to the extent of 0.1 cents per gallon, and 

4 (B) at the rate under section 

5 4081(a)(2)(A)(iv) to the extent of the remainder. 

6 (4) HELD BY A PERSON.—For purposes of this 

7 section, kerosene shall be considered as held by a per8 son if title thereto has passed to such person (whether 

9 or not delivery to the person has been made). 

10 (5) OTHER LAWS APPLICABLE.—All provisions of 

11 law, including penalties, applicable with respect to 

12 the tax imposed by section 4081 of such Code shall, 

13 insofar as applicable and not inconsistent with the 

14 provisions of this subsection, apply with respect to the 

15 floor stock tax imposed by paragraph (1) to the same 

16 extent as if such tax were imposed by such section. 

17 SEC. 653. DYE INJECTION EQUIPMENT. 

18 (a) IN GENERAL.—Section 4082(a)(2) (relating to ex19 emptions for diesel fuel and kerosene) is amended by insert20 ing ‘‘by mechanical injection’’ after ‘‘indelibly dyed’’. 

21 (b) DYE INJECTOR SECURITY.—Not later than 180 

22 days after the date of the enactment of this Act, the Sec23 retary of the Treasury shall issue regulations regarding me24 chanical dye injection systems described in the amendment 
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1 made by subsection (a), and such regulations shall include 

2 standards for making such systems tamper resistant. 

3 (c) PENALTY FOR TAMPERING WITH OR FAILING TO

4 MAINTAIN SECURITY REQUIREMENTS FOR MECHANICAL

5 DYE INJECTION SYSTEMS.— 

6 (1) IN GENERAL.—Part I of subchapter B of 

7 chapter 68 (relating to assessable penalties) is amend8 ed by adding after section 6715 the following new sec9 tion: 

10 ‘‘SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN 

11 SECURITY REQUIREMENTS FOR MECHANICAL 

12 DYE INJECTION SYSTEMS. 

13 ‘‘(a) IMPOSITION OF PENALTY— 

14 ‘‘(1) TAMPERING.—If any person tampers with a 

15 mechanical dye injection system used to indelibly dye 

16 fuel for purposes of section 4082, such person shall 

17 pay a penalty in addition to the tax (if any). 

18 ‘‘(2) FAILURE TO MAINTAIN SECURITY REQUIRE19 MENTS.—If any operator of a mechanical dye injec20 tion system used to indelibly dye fuel for purposes of 

21 section 4082 fails to maintain the security standards 

22 for such system as established by the Secretary, then 

23 such operator shall pay a penalty in addition to the 

24 tax (if any). 
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1 ‘‘(b) AMOUNT OF PENALTY.—The amount of the pen2 alty under subsection (a) shall be— 

3 ‘‘(1) for each violation described in paragraph 

4 (1), the greater of— 

5 ‘‘(A) $25,000, or 

6 ‘‘(B) $10 for each gallon of fuel involved, 

7 and 

8 ‘‘(2) for each— 

9 ‘‘(A) failure to maintain security standards 

10 described in paragraph (2), $1,000, and 

11 ‘‘(B) failure to correct a violation described 

12 in paragraph (2), $1,000 per day for each day 

13 after which such violation was discovered or such 

14 person should have reasonably known of such 

15 violation. 

16 ‘‘(c) JOINT AND SEVERAL LIABILITY.— 

17 ‘‘(1) IN GENERAL.—If a penalty is imposed 

18 under this section on any business entity, each officer, 

19 employee, or agent of such entity or other contracting 

20 party who willfully participated in any act giving 

21 rise to such penalty shall be jointly and severally lia22 ble with such entity for such penalty. 

23 ‘‘(2) AFFILIATED GROUPS.—If a business entity 

24 described in paragraph (1) is part of an affiliated 

25 group (as defined in section 1504(a)), the parent cor-
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1 poration of such entity shall be jointly and severally 

2 liable with such entity for the penalty imposed under 

3 this section.’’. 

4 (2) CLERICAL AMENDMENT.—The table of sec5 tions for part I of subchapter B of chapter 68 is 

6 amended by adding after the item related to section 

7 6715 the following new item: 

‘‘Sec. 6715A. Tampering with or failing to maintain security requirements for mechanical dye injection systems.’’. 

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

9 subsections (a) and (c) shall take effect on the 180th day 

10 after the date on which the Secretary issues the regulations 

11 described in subsection (b). 

12 SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS. 

13 (a) IN GENERAL.—Section 4083(d)(1)(A) (relating to 

14 administrative authority), as previously amended by this 

15 Act, is amended by striking ‘‘and’’ at the end of clause (i) 

16 and by inserting after clause (ii) the following new clause: 

17 ‘‘(iii) inspecting any books and records 

18 and any shipping papers pertaining to such 

19 fuel, and’’. 

20 (b) EFFECTIVE DATE.—The amendments made by this 

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

22 Act. 
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1 SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERA2 TORS REQUIRED FOR EXEMPTION OF BULK 

3 TRANSFERS TO REGISTERED TERMINALS OR 

4 REFINERIES. 

5 (a) IN GENERAL.—Section 4081(a)(1)(B) (relating to 

6 exemption for bulk transfers to registered terminals or refin7 eries) is amended— 

8 (1) by inserting ‘‘by pipeline or vessel’’ after 

9 ‘‘transferred in bulk’’, and 

10 (2) by inserting ‘‘, the operator of such pipeline 

11 or vessel,’’ after ‘‘the taxable fuel’’. 

12 (b) EFFECTIVE DATE.—The amendments made by this 

13 section shall take effect on October 1, 2004. 

14 (c) PUBLICATION OF REGISTERED PERSONS.—Begin15 ning on July 1, 2004, the Secretary of the Treasury (or 

16 the Secretary’s delegate) shall periodically publish a current 

17 list of persons registered under section 4101 of the Internal 

18 Revenue Code of 1986 who are required to register under 

19 such section. 

20 SEC. 656. DISPLAY OF REGISTRATION. 

21 (a) IN GENERAL.—Subsection (a) of section 4101 (re22 lating to registration) is amended— 

23 (1) by striking ‘‘Every’’ and inserting the fol24 lowing: 

25 ‘‘(1) IN GENERAL.—Every’’, and 
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1 (2) by adding at the end the following new para2 graph: 

3 ‘‘(2) DISPLAY OF REGISTRATION.—Every oper4 ator of a vessel required by the Secretary to register 

5 under this section shall display proof of registration 

6 through an electronic identification device prescribed 

7 by the Secretary on each vessel used by such operator 

8 to transport any taxable fuel.’’. 

9 (b) CIVIL PENALTY FOR FAILURE TO DISPLAY REG10 ISTRATION.— 

11 (1) IN GENERAL.—Part I of subchapter B of 

12 chapter 68 (relating to assessable penalties) is amend13 ed by inserting after section 6716 the following new 

14 section: 

15 ‘‘SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON 

16 VESSELS. 

17 ‘‘(a) FAILURE TO DISPLAY REGISTRATION.—Every 

18 operator of a vessel who fails to display proof of registration 

19 pursuant to section 4101(a)(2) shall pay a penalty of $500 

20 for each such failure. With respect to any vessel, only one 

21 penalty shall be imposed by this section during any cal22 endar month. 

23 ‘‘(b) MULTIPLE VIOLATIONS.—In determining the pen24 alty under subsection (a) on any person, subsection (a) shall 

25 be applied by increasing the amount in subsection (a) by 
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1 the product of such amount and the aggregate number of 

2 penalties (if any) imposed with respect to prior months by 

3 this section on such person (or a related person or any pred4 ecessor of such person or related person). 

5 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

6 shall be imposed under this section with respect to any fail7 ure if it is shown that such failure is due to reasonable 

8 cause.’’. 

9 (2) CLERICAL AMENDMENT.—The table of sec10 tions for part I of subchapter B of chapter 68 is 

11 amended by inserting after the item relating to sec12 tion 6716 the following new item: 

‘‘Sec. 6717. Failure to display tax registration on vessels.’’. 

13 (c) EFFECTIVE DATES.— 

14 (1) SUBSECTION (a).—The amendments made by 

15 subsection (a) shall take effect on October 1, 2004. 

16 (2) SUBSECTION (b).—The amendments made by 

17 subsection (b) shall apply to penalties imposed after 

18 September 30, 2004. 

19 SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND FAIL20 URE TO REPORT. 

21 (a) INCREASED PENALTY.—Subsection (a) of section 

22 7272 (relating to penalty for failure to register) is amended 

23 by inserting ‘‘($10,000 in the case of a failure to register 

24 under section 4101)’’ after ‘‘$50’’. 
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1 (b) INCREASED CRIMINAL PENALTY.—Section 7232 

2 (relating to failure to register under section 4101, false rep3 resentations of registration status, etc.) is amended by strik4 ing ‘‘$5,000’’ and inserting ‘‘$10,000’’. 

5 (c) ASSESSABLE PENALTY FOR FAILURE TO REG6 ISTER.— 

7 (1) IN GENERAL.—Part I of subchapter B of 

8 chapter 68 (relating to assessable penalties) is amend9 ed by inserting after section 6717 the following new 

10 section: 

11 ‘‘SEC. 6718. FAILURE TO REGISTER. 

12 ‘‘(a) FAILURE TO REGISTER.—Every person who is 

13 required to register under section 4101 and fails to do so 

14 shall pay a penalty in addition to the tax (if any). 

15 ‘‘(b) AMOUNT OF PENALTY.—The amount of the pen16 alty under subsection (a) shall be— 

17 ‘‘(1) $10,000 for each initial failure to register, 

18 and 

19 ‘‘(2) $1,000 for each day thereafter such person 

20 fails to register. 

21 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

22 shall be imposed under this section with respect to any fail23 ure if it is shown that such failure is due to reasonable 

24 cause.’’. 
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1 (2) CLERICAL AMENDMENT.—The table of sec2 tions for part I of subchapter B of chapter 68 is 

3 amended by inserting after the item relating to sec4 tion 6717 the following new item: 

‘‘Sec. 6718. Failure to register.’’. 

5 (d) ASSESSABLE PENALTY FOR FAILURE TO RE6 PORT.— 

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

8 chapter 68 (relating to assessable penalties) is amend9 ed by adding at the end the following new section: 

10 ‘‘SEC. 6725. FAILURE TO REPORT INFORMATION UNDER 

11 SECTION 4101. 

12 ‘‘(a) IN GENERAL.—In the case of each failure de13 scribed in subsection (b) by any person with respect to a 

14 vessel or facility, such person shall pay a penalty of $10,000 

15 in addition to the tax (if any). 

16 ‘‘(b) FAILURES SUBJECT TO PENALTY.—For purposes 

17 of subsection (a), the failures described in this subsection 

18 are— 

19 ‘‘(1) any failure to make a report under section 

20 4101(d) on or before the date prescribed therefor, and 

21 ‘‘(2) any failure to include all of the information 

22 required to be shown on such report or the inclusion 

23 of incorrect information. 

24 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

25 shall be imposed under this section with respect to any fail-
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1 ure if it is shown that such failure is due to reasonable 

2 cause.’’. 

3 (2) CLERICAL AMENDMENT.—The table of sec4 tions for part II of subchapter B of chapter 68 is 

5 amended by adding at the end the following new item: 

‘‘Sec. 6725. Failure to report information under section 4101.’’. 

6 (e) EFFECTIVE DATE.—The amendments made by this 

7 section shall apply to penalties imposed after September 30, 

8 2004. 

9 SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IM10 PORTER NOT REGISTERED. 

11 (a) TAX AT POINT OF ENTRY WHERE IMPORTER NOT

12 REGISTERED.—Subpart B of part III of subchapter A of 

13 chapter 32, as redesignated by section 652(d), is amended 

14 by adding after section 4103 the following new section: 

15 ‘‘SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IM16 PORTER NOT REGISTERED. 

17 ‘‘(a) IN GENERAL.—The importer of record shall be 

18 jointly and severally liable for the tax imposed by section 

19 4081(a)(1)(A)(iii) if, under regulations prescribed by the 

20 Secretary, any other person that is not a person who is 

21 registered under section 4101 is liable for such tax. 

22 ‘‘(b) COLLECTION FROM CUSTOMS BOND.—If any tax 

23 for which any importer of record is liable under subsection 

24 (a), or for which any importer of record that is not a person 

25 registered under section 4101 is otherwise liable, is not paid 
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1 on or before the last date prescribed for payment, the Sec2 retary may collect such tax from the Customs bond posted 

3 with respect to the importation of the taxable fuel to which 

4 the tax relates. For purposes of determining the jurisdiction 

5 of any court of the United States or any agency of the 

6 United States, any action by the Secretary described in the 

7 preceding sentence shall be treated as an action to collect 

8 the tax from a bond described in section 4101(b)(1) and 

9 not as an action to collect from a bond relating to the im10 portation of merchandise.’’. 

11 (b) CONFORMING AMENDMENT.—The table of sections 

12 for subpart B of part III of subchapter A of chapter 32, 

13 as redesignated by section 652(d), is amended by adding 

14 after the item related to section 4103 the following new 

15 item: 

‘‘Sec. 4104. Collection from Customs bond where importer not registered.’’. 

16 (c) EFFECTIVE DATE.—The amendments made by this 

17 section shall apply with respect to fuel entered after Sep18 tember 30, 2004. 

19 SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VE20 HICLES. 

21 (a) PRORATION OF TAX WHERE VEHICLE SOLD.— 

22 (1) IN GENERAL.—Subparagraph (A) of section 

23 4481(c)(2) (relating to where vehicle destroyed or sto24 len) is amended by striking ‘‘destroyed or stolen’’ both 
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1 places it appears and inserting ‘‘sold, destroyed, or 

2 stolen’’. 

3 (2) CONFORMING AMENDMENT.—The heading for 

4 section 4481(c)(2) is amended by striking ‘‘DE5 STROYED OR STOLEN’’ and inserting ‘‘SOLD, DE6 STROYED, OR STOLEN’’. 

7 (b) REPEAL OF INSTALLMENT PAYMENT.— 

8 (1) Section 6156 (relating to installment pay9 ment of tax on use of highway motor vehicles) is re10 pealed. 

11 (2) The table of sections for subchapter A of 

12 chapter 62 is amended by striking the item relating 

13 to section 6156. 

14 (c) ELECTRONIC FILING.—Section 4481 is amended by 

15 redesignating subsection (e) as subsection (f) and by insert16 ing after subsection (d) the following new subsection: 

17 ‘‘(e) ELECTRONIC FILING.—Any taxpayer who files a 

18 return under this section with respect to 25 or more vehicles 

19 for any taxable period shall file such return electronically.’’. 

20 (d) REPEAL OF REDUCTION IN TAX FOR CERTAIN

21 TRUCKS.—Section 4483 is amended by striking subsection 

22 (f). 

23 (e) EFFECTIVE DATE.—The amendments made by this 

24 section shall apply to taxable periods beginning after the 

25 date of the enactment of this Act. 
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1 SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND 

2 CLAIMS WITH RESPECT TO FARMING. 

3 (a) IN GENERAL.— 

4 (1) REFUNDS.—Section 6427(l) is amended by 

5 adding at the end the following new paragraph: 

6 ‘‘(6) REGISTERED VENDORS PERMITTED TO AD7 MINISTER CERTAIN CLAIMS FOR REFUND OF DIESEL

8 FUEL AND KEROSENE SOLD TO FARMERS.— 

9 ‘‘(A) IN GENERAL.—In the case of diesel fuel 

10 or kerosene used on a farm for farming purposes 

11 (within the meaning of section 6420(c)), para12 graph (1) shall not apply to the aggregate 

13 amount of such diesel fuel or kerosene if such 

14 amount does not exceed 250 gallons (as deter15 mined under subsection (i)(5)(A)(iii)). 

16 ‘‘(B) PAYMENT TO ULTIMATE VENDOR.—The 

17 amount which would (but for subparagraph (A)) 

18 have been paid under paragraph (1) with respect 

19 to any fuel shall be paid to the ultimate vendor 

20 of such fuel, if such vendor— 

21 ‘‘(i) is registered under section 4101, 

22 and 

23 ‘‘(ii) meets the requirements of sub24 paragraph (A), (B), or (D) of section 

25 6416(a)(1).’’. 
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1 (2) FILING OF CLAIMS.—Section 6427(i) is 

2 amended by inserting at the end the following new 

3 paragraph: 

4 ‘‘(5) SPECIAL RULE FOR VENDOR REFUNDS WITH

5 RESPECT TO FARMERS.— 

6 ‘‘(A) IN GENERAL.—A claim may be filed 

7 under subsection (l)(6) by any person with re8 spect to fuel sold by such person for any pe9 riod— 

10 ‘‘(i) for which $200 or more ($100 or 

11 more in the case of kerosene) is payable 

12 under subsection (l)(6), 

13 ‘‘(ii) which is not less than 1 week, 

14 and 

15 ‘‘(iii) which is for not more than 250 

16 gallons for each farmer for which there is a 

17 claim. 

18 Notwithstanding subsection (l)(1), paragraph 

19 (3)(B) shall apply to claims filed under the pre20 ceding sentence. 

21 ‘‘(B) TIME FOR FILING CLAIM.—No claim 

22 filed under this paragraph shall be allowed un23 less filed on or before the last day of the first 

24 quarter following the earliest quarter included in 

25 the claim.’’. 
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1 (3) CONFORMING AMENDMENTS.— 

2 (A) Section 6427(l)(5)(A) is amended to 

3 read as follows: 

4 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

5 not apply to diesel fuel or kerosene used by a 

6 State or local government.’’. 

7 (B) The heading for section 6427(l)(5) is 

8 amended by striking ‘‘FARMERS AND’’. 

9 (b) EFFECTIVE DATE.—The amendment made by this 

10 section shall apply to fuels sold for nontaxable use after the 

11 date of the enactment of this Act. 

12 SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PEN13 ALTIES TO THE HIGHWAY TRUST FUND. 

14 (a) IN GENERAL.—Subsection (b) of section 9503 (re15 lating to transfer to Highway Trust Fund of amounts 

16 equivalent to certain taxes) is amended by redesignating 

17 paragraph (5) as paragraph (6) and inserting after para18 graph (4) the following new paragraph: 

19 ‘‘(5) CERTAIN PENALTIES.—There are hereby ap20 propriated to the Highway Trust Fund amounts 

21 equivalent to the penalties paid under sections 6715, 

22 6715A, 6717, 6718, 6725, 7232, and 7272 (but only 

23 with regard to penalties under such section related to 

24 failure to register under section 4101).’’. 

25 (b) CONFORMING AMENDMENTS.— 
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1 (1) The heading of subsection (b) of section 9503 

2 is amended by inserting ‘‘AND PENALTIES’’ after 

3 ‘‘TAXES’’. 

4 (2) The heading of paragraph (1) of section 

5 9503(b) is amended by striking ‘‘IN GENERAL’’ and 

6 inserting ‘‘CERTAIN TAXES’’. 

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

8 section shall apply to penalties assessed after October 1, 

9 2004. 

10 SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE 

11 VENDORS. 

12 (a) IN GENERAL.—Paragraph (4) of section 6416(a) 

13 (relating to abatements, credits, and refunds) is amended 

14 to read as follows: 

15 ‘‘(4) REGISTERED ULTIMATE VENDOR TO ADMIN16 ISTER CREDITS AND REFUNDS OF GASOLINE TAX.— 

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

18 subsection, if an ultimate vendor purchases any 

19 gasoline on which tax imposed by section 4081 

20 has been paid and sells such gasoline to an ulti21 mate purchaser described in subparagraph (C) 

22 or (D) of subsection (b)(2) (and such gasoline is 

23 for a use described in such subparagraph), such 

24 ultimate vendor shall be treated as the person 

25 (and the only person) who paid such tax, but 
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1 only if such ultimate vendor is registered under 

2 section 4101. For purposes of this subparagraph, 

3 if the sale of gasoline is made by means of a 

4 credit card, the person extending the credit to the 

5 ultimate purchaser shall be deemed to be the ulti6 mate vendor. 

7 ‘‘(B) TIMING OF CLAIMS.—The procedure 

8 and timing of any claim under subparagraph 

9 (A) shall be the same as for claims under section 

10 6427(i)(4), except that the rules of section 

11 6427(i)(3)(B) regarding electronic claims shall 

12 not apply unless the ultimate vendor has cer13 tified to the Secretary for the most recent quarter 

14 of the taxable year that all ultimate purchasers 

15 of the vendor covered by such claim are certified 

16 and entitled to a refund under subparagraph (C) 

17 or (D) of subsection (b)(2).’’. 

18 (b) CREDIT CARD PURCHASES OF DIESEL FUEL OR

19 KEROSENE BY STATE AND LOCAL GOVERNMENTS.—Section 

20 6427(l)(5)(C) (relating to nontaxable uses of diesel fuel, ker21 osene, and aviation fuel) is amended by adding at the end 

22 the following new flush sentence: ‘‘For purposes of this sub23 paragraph, if the sale of diesel fuel or kerosene is made by 

24 means of a credit card, the person extending the credit to 
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1 the ultimate purchaser shall be deemed to be the ultimate 

2 vendor.’’. 

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

4 section shall take effect on October 1, 2004. 

5 SEC. 663. TWO-PARTY EXCHANGES. 

6 (a) IN GENERAL.—Subpart B of part III of subchapter 

7 A of chapter 32, as amended by this Act, is amended by 

8 adding after section 4104 the following new section: 

9 ‘‘SEC. 4105. TWO-PARTY EXCHANGES. 

10 ‘‘(a) IN GENERAL.—In a two-party exchange, the de11 livering person shall not be liable for the tax imposed under 

12 section 4081(a)(1)(A)(ii). 

13 ‘‘(b) TWO-PARTY EXCHANGE.—The term ‘two-party 

14 exchange’ means a transaction, other than a sale, in which 

15 taxable fuel is transferred from a delivering person reg16 istered under section 4101 as a taxable fuel registrant fuel 

17 to a receiving person who is so registered where all of the 

18 following occur: 

19 ‘‘(1) The transaction includes a transfer from the 

20 delivering person, who holds the inventory position 

21 for taxable fuel in the terminal as reflected in the 

22 records of the terminal operator. 

23 ‘‘(2) The exchange transaction occurs before or 

24 contemporaneous with completion of removal across 

25 the rack from the terminal by the receiving person. 
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1 ‘‘(3) The terminal operator in its books and 

2 records treats the receiving person as the person that 

3 removes the taxable fuel across the terminal rack for 

4 purposes of reporting the transaction to the Secretary. 

5 ‘‘(4) The transaction is the subject of a written 

6 contract.’’. 

7 (b) CONFORMING AMENDMENT.—The table of sections 

8 for subpart B of part III of subchapter A of chapter 32, 

9 as amended by this Act, is amended by adding after the 

10 item relating to section 4104 the following new item: 

‘‘Sec. 4105. Two-party exchanges.’’. 

11 (c) EFFECTIVE DATE.—The amendment made by this 

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

13 Act. 

14 SEC. 664. SIMPLIFICATION OF TAX ON TIRES. 

15 (a) IN GENERAL.—Subsection (a) of section 4071 is 

16 amended to read as follows: 

17 ‘‘(a) IMPOSITION AND RATE OF TAX.—There is hereby 

18 imposed on taxable tires sold by the manufacturer, pro19 ducer, or importer thereof a tax at the rate of 9.4 cents (4.7 

20 cents in the case of a biasply tire) for each 10 pounds so 

21 much of the maximum rated load capacity thereof as ex22 ceeds 3,500 pounds.’’ 

23 (b) TAXABLE TIRE.—Section 4072 is amended by re24 designating subsections (a) and (b) as subsections (b) and 
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1 (c), respectively, and by inserting before subsection (b) (as 

2 so redesignated) the following new subsection: 

3 ‘‘(a) TAXABLE TIRE.—For purposes of this chapter, 

4 the term ‘taxable tire’ means any tire of the type used on 

5 highway vehicles if wholly or in part made of rubber and 

6 if marked pursuant to Federal regulations for highway 

7 use.’’ 

8 (c) EXEMPTION FOR TIRES SOLD TO DEPARTMENT OF

9 DEFENSE.—Section 4073 is amended to read as follows: 

10 ‘‘SEC. 4073. EXEMPTIONS. 

11 ‘‘The tax imposed by section 4071 shall not apply to 

12 tires sold for the exclusive use of the Department of Defense 

13 or the Coast Guard.’’ 

14 (d) CONFORMING AMENDMENTS.— 

15 (1) Section 4071 is amended by striking sub16 section (c) and by moving subsection (e) after sub17 section (b) and redesignating subsection (e) as sub18 section (c). 

19 (2) The item relating to section 4073 in the table 

20 of sections for part II of subchapter A of chapter 32 

21 is amended to read as follows: 

‘‘Sec. 4073. Exemptions.’’ 

22 (e) EFFECTIVE DATE.—The amendments made by this 

23 section shall apply to sales in calendar years beginning 

24 more than 30 days after the date of the enactment of this 

25 Act. 
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1 Subtitle D—Nonqualified Deferred 

2 Compensation Plans 

3 SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COM4 PENSATION PLANS. 

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

6 D of chapter 1 is amended by adding at the end the fol7 lowing new section: 

8 ‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 

9 COMPENSATION UNDER NONQUALIFIED DE10 FERRED COMPENSATION PLANS. 

11 ‘‘(a) RULES RELATING TO CONSTRUCTIVE RECEIPT.— 

12 ‘‘(1) IN GENERAL.— 

13 ‘‘(A) GROSS INCOME INCLUSION.—In the 

14 case of a nonqualified deferred compensation 

15 plan, all compensation deferred under the plan 

16 for all taxable years (to the extent not subject to 

17 a substantial risk of forfeiture and not pre18 viously included in gross income) shall be in19 cludible in gross income for the taxable year un20 less at all times during the taxable year the plan 

21 meets the requirements of paragraphs (2), (3), 

22 and (4) and is operated in accordance with such 

23 requirements. 
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1 ‘‘(B) INTEREST ON TAX LIABILITY PAYABLE

2 WITH RESPECT TO PREVIOUSLY DEFERRED COM3 PENSATION.— 

4 ‘‘(i) IN GENERAL.—If compensation is 

5 required to be included in gross income 

6 under subparagraph (A) for a taxable year, 

7 the tax imposed by this chapter for such 

8 taxable year shall be increased by the 

9 amount of interest determined under clause 

10 (ii). 

11 ‘‘(ii) INTEREST.—For purposes of 

12 clause (i), the interest determined under 

13 this clause for any taxable year is the 

14 amount of interest at the underpayment 

15 rate plus 1 percentage point on the under16 payments that would have occurred had the 

17 deferred compensation been includible in 

18 gross income for the taxable year in which 

19 first deferred or, if later, the first taxable 

20 year in which such deferred compensation is 

21 not subject to a substantial risk of for22 feiture. 

23 ‘‘(2) DISTRIBUTIONS.— 

24 ‘‘(A) IN GENERAL.—The requirements of 

25 this paragraph are met if the plan provides that 
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1 compensation deferred under the plan may not 

2 be distributed earlier than— 

3 ‘‘(i) separation from service as deter4 mined by the Secretary (except as provided 

5 in subparagraph (B)(i)), 

6 ‘‘(ii) the date the participant becomes 

7 disabled (within the meaning of subpara8 graph (C)), 

9 ‘‘(iii) death, 

10 ‘‘(iv) a specified time (or pursuant to 

11 a fixed schedule) specified under the plan at 

12 the date of the deferral of such compensa13 tion, 

14 ‘‘(v) to the extent provided by the Sec15 retary, a change in the ownership or effec16 tive control of the corporation, or in the 

17 ownership of a substantial portion of the as18 sets of the corporation, or 

19 ‘‘(vi) the occurrence of an unforeseeable 

20 emergency. 

21 ‘‘(B) SPECIAL RULES.— 

22 ‘‘(i) SPECIFIED EMPLOYEES.—In the 

23 case of specified employees, the requirement 

24 of subparagraph (A)(i) is met only if dis25 tributions may not be made earlier than 6 
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1 months after the date of separation from 

2 service. For purposes of the preceding sen3 tence, a specified employee is a key em4 ployee (as defined in section 416(i)) of a 

5 corporation the stock in which is publicly 

6 traded on an established securities market 

7 or otherwise. 

8 ‘‘(ii) UNFORESEEABLE EMERGENCY.— 

9 For purposes of subparagraph (A)(vi)— 

10 ‘‘(I) IN GENERAL.—The term ‘un11 foreseeable emergency’ means a severe 

12 financial hardship to the participant 

13 resulting from a sudden and unex14 pected illness or accident of the partici15 pant, the participant’s spouse, or a de16 pendent (as defined in section 152(a)) 

17 of the participant, loss of the partici18 pant’s property due to casualty, or 

19 other similar extraordinary and un20 foreseeable circumstances arising as a 

21 result of events beyond the control of 

22 the participant. 

23 ‘‘(II) LIMITATION ON DISTRIBU24 TIONS.—The requirement of subpara25 graph (A)(vi) is met only if, as deter-
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1 mined under regulations of the Sec2 retary, the amounts distributed with 

3 respect to an emergency do not exceed 

4 the amounts necessary to satisfy such 

5 emergency plus amounts necessary to 

6 pay taxes reasonably anticipated as a 

7 result of the distribution, after taking 

8 into account the extent to which such 

9 hardship is or may be relieved through 

10 reimbursement or compensation by in11 surance or otherwise or by liquidation 

12 of the participant’s assets (to the extent 

13 the liquidation of such assets would not 

14 itself cause severe financial hardship). 

15 ‘‘(C) DISABLED.—For purposes of subpara16 graph (A)(ii), a participant shall be considered 

17 disabled if the participant— 

18 ‘‘(i) is unable to engage in any sub19 stantial gainful activity by reason of any 

20 medically determinable physical or mental 

21 impairment which can be expected to result 

22 in death or can be expected to last for a 

23 continuous period of not less than 12 

24 months, or 
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1 ‘‘(ii) is, by reason of any medically de2 terminable physical or mental impairment 

3 which can be expected to result in death or 

4 can be expected to last for a continuous pe5 riod of not less than 12 months, receiving 

6 income replacement benefits for a period of 

7 not less than 3 months under an accident 

8 and health plan covering employees of the 

9 participant’s employer. 

10 ‘‘(3) ACCELERATION OF BENEFITS.—The require11 ments of this paragraph are met if the plan does not 

12 permit the acceleration of the time or schedule of any 

13 payment under the plan, except as provided in regu14 lations by the Secretary. 

15 ‘‘(4) ELECTIONS.— 

16 ‘‘(A) IN GENERAL.—The requirements of 

17 this paragraph are met if the requirements of 

18 subparagraphs (B) and (C) are met. 

19 ‘‘(B) INITIAL DEFERRAL DECISION.—The 

20 requirements of this subparagraph are met if the 

21 plan provides that compensation for services per22 formed during a taxable year may be deferred at 

23 the participant’s election only if the election to 

24 defer such compensation is made not later than 

25 the close of the preceding taxable year or at such 
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1 other time as provided in regulations. In the case 

2 of the first year in which a participant becomes 

3 eligible to participate in the plan, such election 

4 may be made with respect to services to be per5 formed subsequent to the election within 30 days 

6 after the date the participant becomes eligible to 

7 participate in such plan. 

8 ‘‘(C) CHANGES IN TIME AND FORM OF DIS9 TRIBUTION.—The requirements of this subpara10 graph are met if, in the case of a plan which 

11 permits under a subsequent election a delay in 

12 a payment or a change in the form of pay13 ment— 

14 ‘‘(i) the plan requires that such election 

15 may not take effect until at least 12 months 

16 after the date on which the election is made, 

17 ‘‘(ii) in the case an election related to 

18 a payment not described in clause (ii), (iii), 

19 or (vi) of paragraph (2)(A), the plan re20 quires that the first payment with respect to 

21 which such election is made be deferred for 

22 a period of not less than 5 years from the 

23 date such payment would otherwise have 

24 been made, and 
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1 ‘‘(iii) the plan requires that any elec2 tion related to a payment described in 

3 paragraph (2)(A)(iv) may not be made less 

4 than 12 months prior to the date of the first 

5 scheduled payment under such paragraph. 

6 ‘‘(b) RULES RELATING TO FUNDING.— 

7 ‘‘(1) OFFSHORE PROPERTY IN A TRUST.—In the 

8 case of assets set aside (directly or indirectly) in a 

9 trust (or other arrangement determined by the Sec10 retary) for purposes of paying deferred compensation 

11 under a nonqualified deferred compensation plan, for 

12 purposes of section 83 such assets shall be treated as 

13 property transferred in connection with the perform14 ance of services whether or not such assets are avail15 able to satisfy claims of general creditors— 

16 ‘‘(A) at the time set aside if such assets are 

17 located outside of the United States, or 

18 ‘‘(B) at the time transferred if such assets 

19 are subsequently transferred outside of the 

20 United States. 

21 ‘‘(2) EMPLOYER’S FINANCIAL HEALTH.—In the 

22 case of compensation deferred under a nonqualified 

23 deferred compensation plan, there is a transfer of 

24 property within the meaning of section 83 with re25 spect to such compensation as of the earlier of— 
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1 ‘‘(A) the date on which the plan first pro2 vides that assets will become restricted to the 

3 provision of benefits under the plan in connec4 tion with a change in the employer’s financial 

5 health, or 

6 ‘‘(B) the date on which assets are so re7 stricted. 

8 ‘‘(3) INCOME INCLUSION FOR OFFSHORE TRUSTS

9 AND EMPLOYER’S FINANCIAL HEALTH.—For each tax10 able year that assets treated as transferred under this 

11 subsection remain set aside in a trust or other ar12 rangement subject to paragraph (1) or (2), any in13 crease in value in, or earnings with respect to, such 

14 assets shall be treated as an additional transfer of 

15 property under this subsection (to the extent not pre16 viously included in income). 

17 ‘‘(4) INTEREST ON TAX LIABILITY PAYABLE WITH

18 RESPECT TO TRANSFERRED PROPERTY.— 

19 ‘‘(A) IN GENERAL.—If amounts are re20 quired to be included in gross income by reason 

21 of paragraph (1) or (2) for a taxable year, the 

22 tax imposed by this chapter for such taxable year 

23 shall be increased by the amount of interest de24 termined under subparagraph (B). 
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1 ‘‘(B) INTEREST.—The interest determined 

2 under this subparagraph for any taxable year is 

3 the amount of interest at the underpayment rate 

4 plus 1 percentage point on the underpayments 

5 that would have occurred had the amounts so re6 quired to be included in gross income by para7 graph (1) or (2) been includible in gross income 

8 for the taxable year in which first deferred or, if 

9 later, the first taxable year in which such de10 ferred compensation is not subject to a substan11 tial risk of forfeiture. 

12 ‘‘(c) NO INFERENCE ON EARLIER INCOME INCLUSION

13 OR REQUIREMENT OF LATER INCLUSION.—Nothing in this 

14 section shall be construed to prevent the inclusion of 

15 amounts in gross income under any other provision of this 

16 chapter or any other rule of law earlier than the time pro17 vided in this section. Any amount included in gross income 

18 under this section shall not be required to be included in 

19 gross income under any other provision of this chapter or 

20 any other rule of law later than the time provided in this 

21 section. 

22 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—For 

23 purposes of this section— 

24 ‘‘(1) NONQUALIFIED DEFERRED COMPENSATION

25 PLAN.—The term ‘nonqualified deferred compensation 
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1 plan’ means any plan that provides for the deferral 

2 of compensation, other than— 

3 ‘‘(A) a qualified employer plan, and 

4 ‘‘(B) any bona fide vacation leave, sick 

5 leave, compensatory time, disability pay, or 

6 death benefit plan. 

7 ‘‘(2) QUALIFIED EMPLOYER PLAN.—The term 

8 ‘qualified employer plan’ means— 

9 ‘‘(A) any plan, contract, pension, account, 

10 or trust described in subparagraph (A) or (B) of 

11 section 219(g)(5), and 

12 ‘‘(B) any eligible deferred compensation 

13 plan (within the meaning of section 457(b)) of 

14 an employer described in section 457(e)(1)(A). 

15 ‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.—The 

16 term ‘plan’ includes any agreement or arrangement, 

17 including an agreement or arrangement that includes 

18 one person. 

19 ‘‘(4) SUBSTANTIAL RISK OF FORFEITURE.—The 

20 rights of a person to compensation are subject to a 

21 substantial risk of forfeiture if such person’s rights to 

22 such compensation are conditioned upon the future 

23 performance of substantial services by any individual. 

24 ‘‘(5) TREATMENT OF EARNINGS.—References to 

25 deferred compensation shall be treated as including 
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1 references to income (whether actual or notional) at2 tributable to such compensation or such income. 

3 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

4 such regulations as may be necessary or appropriate to 

5 carry out the purposes of this section, including regula6 tions— 

7 ‘‘(1) providing for the determination of amounts 

8 of deferral in the case of a nonqualified deferred com9 pensation plan which is a defined benefit plan, 

10 ‘‘(2) relating to changes in the ownership and 

11 control of a corporation or assets of a corporation for 

12 purposes of subsection (a)(2)(A)(v), 

13 ‘‘(3) exempting arrangements from the applica14 tion of subsection (b) if such arrangements will not 

15 result in an improper deferral of United States tax 

16 and will not result in assets being effectively beyond 

17 the reach of creditors, 

18 ‘‘(4) defining financial health for purposes of 

19 subsection (b)(2), and 

20 ‘‘(5) disregarding a substantial risk of forfeiture 

21 in cases where necessary to carry out the purposes of 

22 this section.’’. 

23 (b) W–2 FORMS.— 

24 (1) IN GENERAL.—Subsection (a) of section 6051 

25 (relating to receipts for employees) is amended by 
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1 striking ‘‘and’’ at the end of paragraph (11), by strik2 ing the period at the end of paragraph (12) and in3 serting ‘‘, and’’, and by inserting after paragraph 

4 (12) the following new paragraph: 

5 ‘‘(13) the total amount of deferrals under a non6 qualified deferred compensation plan (within the 

7 meaning of section 409A(d)).’’. 

8 (2) THRESHOLD.—Subsection (a) of section 6051 

9 is amended by adding at the end the following: ‘‘In 

10 the case of the amounts required to be shown by para11 graph (13), the Secretary (by regulation) may estab12 lish a minimum amount of deferrals below which 

13 paragraph (13) does not apply and may provide that 

14 paragraph (13) does not apply with respect to 

15 amounts of deferrals which are not reasonably ascer16 tainable.’’. 

17 (c) CONFORMING AND CLERICAL AMENDMENTS.— 

18 (1) Section 414(b) is amended by inserting 

19 ‘‘409A,’’ after ‘‘408(p),’’. 

20 (2) Section 414(c) is amended by inserting 

21 ‘‘409A,’’ after ‘‘408(p),’’. 

22 (3) The table of sections for such subpart A of 

23 part I of subchapter D of chapter 1 is amended by 

24 adding at the end the following new item: 

‘‘Sec. 409A. Inclusion in gross income of deferred compensation 

under nonqualified deferred compensation plans.’’. 
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1 (d) EFFECTIVE DATE.— 

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

3 this section shall apply to amounts deferred after 

4 June 3, 2004. 

5 (2) CERTAIN AMOUNTS DEFERRED IN 2004 UNDER

6 CERTAIN IRREVOCABLE ELECTIONS AND BINDING AR7 RANGEMENTS.—The amendments made by this section 

8 shall not apply to amounts deferred after June 3, 

9 2004, and before January 1, 2005, pursuant to an ir10 revocable election or binding arrangement made before 

11 June 4, 2004. 

12 (3) EARNINGS ATTRIBUTABLE TO AMOUNT PRE13 VIOUSLY DEFERRED.—The amendments made by this 

14 section shall apply to earnings on deferred compensa15 tion only to the extent that such amendments apply 

16 to such compensation. 

17 (e) GUIDANCE RELATING TO CHANGE OF OWNERSHIP

18 OR CONTROL.—Not later than 90 days after the date of the 

19 enactment of this Act, the Secretary of the Treasury shall 

20 issue guidance on what constitutes a change in ownership 

21 or effective control for purposes of section 409A of the Inter22 nal Revenue Code of 1986, as added by this section. 

23 (f) GUIDANCE RELATING TO TERMINATION OF CER24 TAIN EXISTING ARRANGEMENTS.—Not later than 90 days 

25 after the date of the enactment of this Act, the Secretary 
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1 of the Treasury shall issue guidance providing a limited 

2 period during which an individual participating in a non3 qualified deferred compensation plan adopted before June 

4 4, 2004, may, without violating the requirements of para5 graphs (2), (3), and (4) of section 409A(a)(2) of the Internal 

6 Revenue Code of 1986 (as added by this section), terminate 

7 participation or cancel an outstanding deferral election 

8 with regard to amounts earned after June 3, 2004, if such 

9 amounts are includible in income as earned. 

10 Subtitle E—Other Revenue 

11 Provisions 

12 SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS. 

13 (a) CONTRACT REQUIREMENTS.— 

14 (1) IN GENERAL.—Subchapter A of chapter 64 

15 (relating to collection) is amended by adding at the 

16 end the following new section: 

17 ‘‘SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS. 

18 ‘‘(a) IN GENERAL.—Nothing in any provision of law 

19 shall be construed to prevent the Secretary from entering 

20 into a qualified tax collection contract. 

21 ‘‘(b) QUALIFIED TAX COLLECTION CONTRACT.—For 

22 purposes of this section, the term ‘qualified tax collection 

23 contract’ means any contract which— 

24 ‘‘(1) is for the services of any person (other than 

25 an officer or employee of the Treasury Department)— 
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1 ‘‘(A) to locate and contact any taxpayer 

2 specified by the Secretary, 

3 ‘‘(B) to request full payment from such tax4 payer of an amount of Federal tax specified by 

5 the Secretary and, if such request cannot be met 

6 by the taxpayer, to offer the taxpayer an install7 ment agreement providing for full payment of 

8 such amount during a period not to exceed 5 

9 years, and 

10 ‘‘(C) to obtain financial information speci11 fied by the Secretary with respect to such tax12 payer, 

13 ‘‘(2) prohibits each person providing such serv14 ices under such contract from committing any act or 

15 omission which employees of the Internal Revenue 

16 Service are prohibited from committing in the per17 formance of similar services, 

18 ‘‘(3) prohibits subcontractors from— 

19 ‘‘(A) having contacts with taxpayers, 

20 ‘‘(B) providing quality assurance services, 

21 and 

22 ‘‘(C) composing debt collection notices, and 

23 ‘‘(4) permits subcontractors to perform other 

24 services only with the approval of the Secretary. 
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1 ‘‘(c) FEES.—The Secretary may retain and use an 

2 amount not in excess of 25 percent of the amount collected 

3 under any qualified tax collection contract for the costs of 

4 services performed under such contract. The Secretary shall 

5 keep adequate records regarding amounts so retained and 

6 used. The amount credited as paid by any taxpayer shall 

7 be determined without regard to this subsection. 

8 ‘‘(d) NO FEDERAL LIABILITY.—The United States 

9 shall not be liable for any act or omission of any person 

10 performing services under a qualified tax collection con11 tract. 

12 ‘‘(e) APPLICATION OF FAIR DEBT COLLECTION PRAC13 TICES ACT.—The provisions of the Fair Debt Collection 

14 Practices Act (15 U.S.C. 1692 et seq.) shall apply to any 

15 qualified tax collection contract, except to the extent super16 seded by section 6304, section 7602(c), or by any other pro17 vision of this title. 

18 ‘‘(f) CROSS REFERENCES.— 

‘‘(1) For damages for certain unauthorized collection actions by persons performing services under a 

qualified tax collection contract, see section 7433A. 

‘‘(2) For application of Taxpayer Assistance Orders 

to persons performing services under a qualified tax 

collection contract, see section 7811(a)(4).’’. 

19 (2) CONFORMING AMENDMENTS.— 

20 (A) Section 7809(a) is amended by insert21 ing ‘‘6306,’’ before ‘‘7651’’. 
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1 (B) The table of sections for subchapter A of 

2 chapter 64 is amended by adding at the end the 

3 following new item: 

‘‘Sec. 6306. Qualified Tax Collection Contracts.’’. 

4 (b) CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED

5 COLLECTION ACTIONS BY PERSONS PERFORMING SERVICES

6 UNDER QUALIFIED TAX COLLECTION CONTRACTS.— 

7 (1) IN GENERAL.—Subchapter B of chapter 76 

8 (relating to proceedings by taxpayers and third par9 ties) is amended by inserting after section 7433 the 

10 following new section: 

11 ‘‘SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED 

12 COLLECTION ACTIONS BY PERSONS PER13 FORMING SERVICES UNDER QUALIFIED TAX 

14 COLLECTION CONTRACTS. 

15 ‘‘(a) IN GENERAL.—Subject to the modifications pro16 vided by subsection (b), section 7433 shall apply to the acts 

17 and omissions of any person performing services under a 

18 qualified tax collection contract (as defined in section 

19 6306(b)) to the same extent and in the same manner as 

20 if such person were an employee of the Internal Revenue 

21 Service. 

22 ‘‘(b) MODIFICATIONS.—For purposes of subsection 

23 (a)— 

24 ‘‘(1) Any civil action brought under section 7433 

25 by reason of this section shall be brought against the 
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1 person who entered into the qualified tax collection 

2 contract with the Secretary and shall not be brought 

3 against the United States. 

4 ‘‘(2) Such person and not the United States shall 

5 be liable for any damages and costs determined in 

6 such civil action. 

7 ‘‘(3) Such civil action shall not be an exclusive 

8 remedy with respect to such person. 

9 ‘‘(4) Subsections (c), (d)(1), and (e) of section 

10 7433 shall not apply.’’. 

11 (2) CLERICAL AMENDMENT.—The table of sec12 tions for subchapter B of chapter 76 is amended by 

13 inserting after the item relating to section 7433 the 

14 following new item: 

‘‘Sec. 7433A. Civil damages for certain unauthorized collection actions by persons performing services under qualified 

tax collection contracts.’’. 

15 (c) APPLICATION OF TAXPAYER ASSISTANCE ORDERS

16 TO PERSONS PERFORMING SERVICES UNDER A QUALIFIED

17 TAX COLLECTION CONTRACT.—Section 7811 (relating to 

18 taxpayer assistance orders) is amended by adding at the 

19 end the following new subsection: 

20 ‘‘(g) APPLICATION TO PERSONS PERFORMING SERV21 ICES UNDER A QUALIFIED TAX COLLECTION CONTRACT.— 

22 Any order issued or action taken by the National Taxpayer 

23 Advocate pursuant to this section shall apply to persons 

24 performing services under a qualified tax collection contract 
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1 (as defined in section 6306(b)) to the same extent and in 

2 the same manner as such order or action applies to the Sec3 retary.’’. 

4 (d) INELIGIBILITY OF INDIVIDUALS WHO COMMIT MIS5 CONDUCT TO PERFORM UNDER CONTRACT.—Section 1203 

6 of the Internal Revenue Service Restructuring Act of 1998 

7 (relating to termination of employment for misconduct) is 

8 amended by adding at the end the following new subsection: 

9 ‘‘(e) INDIVIDUALS PERFORMING SERVICES UNDER A

10 QUALIFIED TAX COLLECTION CONTRACT.—An individual 

11 shall cease to be permitted to perform any services under 

12 any qualified tax collection contract (as defined in section 

13 6306(b) of the Internal Revenue Code of 1986) if there is 

14 a final determination by the Secretary of the Treasury 

15 under such contract that such individual committed any 

16 act or omission described under subsection (b) in connection 

17 with the performance of such services.’’. 

18 (e) EFFECTIVE DATE.—The amendments made to this 

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

20 Act. 

21 SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF 

22 PATENTS AND SIMILAR PROPERTY. 

23 (a) IN GENERAL.—Subparagraph (B) of section 

24 170(e)(1) is amended by striking ‘‘or’’ at the end of clause 
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1 (i), by adding ‘‘or’’ at the end of clause (ii), and by insert2 ing after clause (ii) the following new clause: 

3 ‘‘(iii) of any patent, copyright (other 

4 than a copyright described in section 

5 1221(a)(3) or 1231(b)(1)(C)), trademark, 

6 trade name, trade secret, know-how, soft7 ware (other than software described in sec8 tion 197(e)(3)(A)(i)), or similar property, 

9 or applications or registrations of such 

10 property,’’. 

11 (b) CERTAIN DONEE INCOME FROM INTELLECTUAL

12 PROPERTY TREATED AS AN ADDITIONAL CHARITABLE CON13 TRIBUTION.—Section 170 is amended by redesignating sub14 section (m) as subsection (n) and by inserting after sub15 section (l) the following new subsection: 

16 ‘‘(m) CERTAIN DONEE INCOME FROM INTELLECTUAL

17 PROPERTY TREATED AS AN ADDITIONAL CHARITABLE CON18 TRIBUTION.— 

19 ‘‘(1) TREATMENT AS ADDITIONAL CONTRIBU20 TION.—In the case of a taxpayer who makes a quali21 fied intellectual property contribution, the deduction 

22 allowed under subsection (a) for each taxable year of 

23 the taxpayer ending on or after the date of such con24 tribution shall be increased (subject to the limitations 

25 under subsection (b)) by the applicable percentage of 
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1 qualified donee income with respect to such contribu2 tion which is properly allocable to such year under 

3 this subsection. 

4 ‘‘(2) REDUCTION IN ADDITIONAL DEDUCTIONS TO

5 EXTENT OF INITIAL DEDUCTION.—With respect to any 

6 qualified intellectual property contribution, the de7 duction allowed under subsection (a) shall be in8 creased under paragraph (1) only to the extent that 

9 the aggregate amount of such increases with respect to 

10 such contribution exceed the amount allowed as a de11 duction under subsection (a) with respect to such con12 tribution determined without regard to this sub13 section. 

14 ‘‘(3) QUALIFIED DONEE INCOME.—For purposes 

15 of this subsection, the term ‘qualified donee income’ 

16 means any net income received by or accrued to the 

17 donee which is properly allocable to the qualified in18 tellectual property. 

19 ‘‘(4) ALLOCATION OF QUALIFIED DONEE INCOME

20 TO TAXABLE YEARS OF DONOR.—For purposes of this 

21 subsection, qualified donee income shall be treated as 

22 properly allocable to a taxable year of the donor if 

23 such income is received by or accrued to the donee for 

24 the taxable year of the donee which ends within or 

25 with such taxable year of the donor. 
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1 ‘‘(5) 10-YEAR LIMITATION.—Income shall not be 

2 treated as properly allocable to qualified intellectual 

3 property for purposes of this subsection if such income 

4 is received by or accrued to the donee after the 10- 

5 year period beginning on the date of the contribution 

6 of such property. 

7 ‘‘(6) BENEFIT LIMITED TO LIFE OF INTELLEC8 TUAL PROPERTY.—Income shall not be treated as 

9 properly allocable to qualified intellectual property 

10 for purposes of this subsection if such income is re11 ceived by or accrued to the donee after the expiration 

12 of the legal life of such property. 

13 ‘‘(7) APPLICABLE PERCENTAGE.—For purposes 

14 of this subsection, the term ‘applicable percentage’ 

15 means the percentage determined under the following 

16 table which corresponds to a taxable year of the donor 

17 ending on or after the date of the qualified intellectual 

18 property contribution: 

‘‘Taxable Year of Donor 

Ending on or After Applicable 

Date of Contribution: Percentage: 

1st .............................................................................................................. 100

2nd ............................................................................................................. 100

3rd ............................................................................................................. 90

4th .............................................................................................................. 80

5th .............................................................................................................. 70

6th .............................................................................................................. 60

7th .............................................................................................................. 50

8th .............................................................................................................. 40

9th .............................................................................................................. 30

10th ............................................................................................................ 20

11th ............................................................................................................ 10

12th ............................................................................................................ 10. 
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1 ‘‘(8) QUALIFIED INTELLECTUAL PROPERTY CON2 TRIBUTION.—For purposes of this subsection, the term 

3 ‘qualified intellectual property contribution’ means 

4 any charitable contribution of qualified intellectual 

5 property— 

6 ‘‘(A) the amount of which taken into ac7 count under this section is reduced by reason of 

8 subsection (e)(1), and 

9 ‘‘(B) with respect to which the donor in10 forms the donee at the time of such contribution 

11 that the donor intends to treat such contribution 

12 as a qualified intellectual property contribution 

13 for purposes of this subsection and section 

14 6050L. 

15 ‘‘(9) QUALIFIED INTELLECTUAL PROPERTY.—For 

16 purposes of this subsection, the term ‘qualified intel17 lectual property’ means property described in sub18 section (e)(1)(B)(iii) (other than property contributed 

19 to or for the use of an organization described in sub20 section (e)(1)(B)(ii)). 

21 ‘‘(10) OTHER SPECIAL RULES.— 

22 ‘‘(A) APPLICATION OF LIMITATIONS ON

23 CHARITABLE CONTRIBUTIONS.—Any increase 

24 under this subsection of the deduction provided 

25 under subsection (a) shall be treated for purposes 
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1 of subsection (b) as a deduction which is attrib2 utable to a charitable contribution to the donee 

3 to which such increase relates. 

4 ‘‘(B) NET INCOME DETERMINED BY

5 DONEE.—The net income taken into account 

6 under paragraph (3) shall not exceed the amount 

7 of such income reported under section 

8 6050L(b)(1). 

9 ‘‘(C) DEDUCTION LIMITED TO 12 TAXABLE

10 YEARS.—Except as may be provided under sub11 paragraph (D)(i), this subsection shall not apply 

12 with respect to any qualified intellectual prop13 erty contribution for any taxable year of the 

14 donor after the 12th taxable year of the donor 

15 which ends on or after the date of such contribu16 tion. 

17 ‘‘(D) REGULATIONS.—The Secretary may 

18 issue regulations or other guidance to carry out 

19 the purposes of this subsection, including regula20 tions or guidance— 

21 ‘‘(i) modifying the application of this 

22 subsection in the case of a donor or donee 

23 with a short taxable year, and 

24 ‘‘(ii) providing for the determination 

25 of an amount to be treated as net income of 
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1 the donee which is properly allocable to 

2 qualified intellectual property in the case of 

3 a donee who uses such property to further 

4 a purpose or function constituting the basis 

5 of the donee’s exemption under section 501 

6 (or, in the case of a governmental unit, any 

7 purpose described in section 170(c)) and 

8 does not possess a right to receive any pay9 ment from a third party with respect to 

10 such property.’’. 

11 (c) REPORTING REQUIREMENTS.— 

12 (1) IN GENERAL.—Section 6050L (relating to re13 turns relating to certain dispositions of donated prop14 erty) is amended to read as follows: 

15 ‘‘SEC. 6050L. RETURNS RELATING TO CERTAIN DONATED 

16 PROPERTY. 

17 ‘‘(a) DISPOSITIONS OF DONATED PROPERTY.— 

18 ‘‘(1) IN GENERAL.—If the donee of any chari19 table deduction property sells, exchanges, or otherwise 

20 disposes of such property within 2 years after its re21 ceipt, the donee shall make a return (in accordance 

22 with forms and regulations prescribed by the Sec23 retary) showing— 

24 ‘‘(A) the name, address, and TIN of the 

25 donor, 
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1 ‘‘(B) a description of the property, 

2 ‘‘(C) the date of the contribution, 

3 ‘‘(D) the amount received on the disposi4 tion, and 

5 ‘‘(E) the date of such disposition. 

6 ‘‘(2) DEFINITIONS.—For purposes of this sub7 section— 

8 ‘‘(A) CHARITABLE DEDUCTION PROPERTY.— 

9 The term ‘charitable deduction property’ means 

10 any property (other than publicly traded securi11 ties) contributed in a contribution for which a 

12 deduction was claimed under section 170 if the 

13 claimed value of such property (plus the claimed 

14 value of all similar items of property donated by 

15 the donor to 1 or more donees) exceeds $5,000. 

16 ‘‘(B) PUBLICLY TRADED SECURITIES.—The 

17 term ‘publicly traded securities’ means securities 

18 for which (as of the date of the contribution) 

19 market quotations are readily available on an es20 tablished securities market. 

21 ‘‘(b) QUALIFIED INTELLECTUAL PROPERTY CONTRIBU22 TIONS.— 

23 ‘‘(1) IN GENERAL.—Each donee with respect to a 

24 qualified intellectual property contribution shall make 

25 a return (at such time and in such form and manner 
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1 as the Secretary may by regulations prescribe) with 

2 respect to each specified taxable year of the donee 

3 showing— 

4 ‘‘(A) the name, address, and TIN of the 

5 donor, 

6 ‘‘(B) a description of the qualified intellec7 tual property contributed, 

8 ‘‘(C) the date of the contribution, and 

9 ‘‘(D) the amount of net income of the donee 

10 for the taxable year which is properly allocable 

11 to the qualified intellectual property (determined 

12 without regard to paragraph (10)(B) of section 

13 170(m) and with the modifications described in 

14 paragraphs (5) and (6) of such section). 

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

17 ‘‘(A) IN GENERAL.—Terms used in this sub18 section which are also used in section 170(m) 

19 have the respective meanings given such terms in 

20 such section. 

21 ‘‘(B) SPECIFIED TAXABLE YEAR.—The term 

22 ‘specified taxable year’ means, with respect to 

23 any qualified intellectual property contribution, 

24 any taxable year of the donee any portion of 
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1 which is part of the 10-year period beginning on 

2 the date of such contribution. 

3 ‘‘(c) STATEMENT TO BE FURNISHED TO DONORS.— 

4 Every person making a return under subsection (a) or (b) 

5 shall furnish a copy of such return to the donor at such 

6 time and in such manner as the Secretary may by regula7 tions prescribe.’’. 

8 (2) CLERICAL AMENDMENT.—The table of sec9 tions for subpart A of part II of subchapter A of 

10 chapter 61 is amended by striking the item relating 

11 to section 6050L and inserting the following new 

12 item: 

‘‘Sec. 6050L. Returns relating to certain donated property.’’. 

13 (d) COORDINATION WITH APPRAISAL REQUIRE14 MENTS.—Subclause (I) of section 170(f)(11)(A)(ii), as 

15 added by section 683, is amended by inserting ‘‘subsection 

16 (e)(1)(B)(iii) or’’ before ‘‘section 1221(a)(1)’’. 

17 (e) ANTI-ABUSE RULES.—The Secretary of the Treas18 ury may prescribe such regulations or other guidance as 

19 may be necessary or appropriate to prevent the avoidance 

20 of the purposes of section 170(e)(1)(B)(iii) of the Internal 

21 Revenue Code of 1986 (as added by subsection (a)), includ22 ing preventing— 

23 (1) the circumvention of the reduction of the 

24 charitable deduction by embedding or bundling the 

25 patent or similar property as part of a charitable 
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1 contribution of property that includes the patent or 

2 similar property, 

3 (2) the manipulation of the basis of the property 

4 to increase the amount of the charitable deduction 

5 through the use of related persons, pass-thru entities, 

6 or other intermediaries, or through the use of any 

7 provision of law or regulation (including the consoli8 dated return regulations), and 

9 (3) a donor from changing the form of the patent 

10 or similar property to property of a form for which 

11 different deduction rules would apply. 

12 (f) EFFECTIVE DATE.—The amendments made by this 

13 section shall apply to contributions made after June 3, 

14 2004. 

15 SEC. 683. INCREASED REPORTING FOR NONCASH CHARI16 TABLE CONTRIBUTIONS. 

17 (a) IN GENERAL.—Subsection (f) of section 170 (relat18 ing to disallowance of deduction in certain cases and spe19 cial rules) is amended by adding after paragraph (10) the 

20 following new paragraph: 

21 ‘‘(11) QUALIFIED APPRAISAL AND OTHER DOCU22 MENTATION FOR CERTAIN CONTRIBUTIONS.— 

23 ‘‘(A) IN GENERAL.— 

24 ‘‘(i) DENIAL OF DEDUCTION.—In the 

25 case of an individual, partnership, or cor-
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1 poration, no deduction shall be allowed 

2 under subsection (a) for any contribution of 

3 property for which a deduction of more 

4 than $500 is claimed unless such person 

5 meets the requirements of subparagraphs 

6 (B), (C), and (D), as the case may be, with 

7 respect to such contribution. 

8 ‘‘(ii) EXCEPTIONS.— 

9 ‘‘(I) READILY VALUED PROP10 ERTY.—Subparagraphs (C) and (D) 

11 shall not apply to cash, property de12 scribed in section 1221(a)(1), and pub13 licly traded securities (as defined in 

14 section 6050L(a)(2)(B)). 

15 ‘‘(II) REASONABLE CAUSE.— 

16 Clause (i) shall not apply if it is 

17 shown that the failure to meet such re18 quirements is due to reasonable cause 

19 and not to willful neglect. 

20 ‘‘(B) PROPERTY DESCRIPTION FOR CON21 TRIBUTIONS OF MORE THAN $500.—In the case of 

22 contributions of property for which a deduction 

23 of more than $500 is claimed, the requirements 

24 of this subparagraph are met if the individual, 

25 partnership or corporation includes with the re-
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1 turn for the taxable year in which the contribu2 tion is made a description of such property and 

3 such other information as the Secretary may re4 quire. The requirements of this subparagraph 

5 shall not apply to a C corporation which is not 

6 a personal service corporation or a closely held 

7 C corporation. 

8 ‘‘(C) QUALIFIED APPRAISAL FOR CONTRIBU9 TIONS OF MORE THAN $5,000.—In the case of con10 tributions of property for which a deduction of 

11 more than $5,000 is claimed, the requirements of 

12 this subparagraph are met if the individual, 

13 partnership, or corporation obtains a qualified 

14 appraisal of such property and attaches to the 

15 return for the taxable year in which such con16 tribution is made such information regarding 

17 such property and such appraisal as the Sec18 retary may require. 

19 ‘‘(D) SUBSTANTIATION FOR CONTRIBUTIONS

20 OF MORE THAN $500,000.—In the case of contribu21 tions of property for which a deduction of more 

22 than $500,000 is claimed, the requirements of 

23 this subparagraph are met if the individual, 

24 partnership, or corporation attaches to the re-
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1 turn for the taxable year a qualified appraisal of 

2 such property. 

3 ‘‘(E) QUALIFIED APPRAISAL.—For purposes 

4 of this paragraph, the term ‘qualified appraisal’ 

5 means, with respect to any property, an ap6 praisal of such property which is treated for 

7 purposes of this paragraph as a qualified ap8 praisal under regulations or other guidance pre9 scribed by the Secretary. 

10 ‘‘(F) AGGREGATION OF SIMILAR ITEMS OF

11 PROPERTY.—For purposes of determining thresh12 olds under this paragraph, property and all 

13 similar items of property donated to 1 or more 

14 donees shall be treated as 1 property. 

15 ‘‘(G) SPECIAL RULE FOR PASS-THRU ENTI16 TIES.—In the case of a partnership or S cor17 poration, this paragraph shall be applied at the 

18 entity level, except that the deduction shall be de19 nied at the partner or shareholder level. 

20 ‘‘(H) REGULATIONS.—The Secretary may 

21 prescribe such regulations as may be necessary 

22 or appropriate to carry out the purposes of this 

23 paragraph, including regulations that may pro24 vide that some or all of the requirements of this 

25 paragraph do not apply in appropriate cases.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by this 

2 section shall apply to contributions made after June 3, 

3 2004. 

4 SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND 

5 AIRCRAFT. 

6 (a) IN GENERAL.—Subsection (f) of section 170 (relat7 ing to disallowance of deduction in certain cases and spe8 cial rules) is amended by adding after paragraph (11) the 

9 following new paragraph: 

10 ‘‘(12) CONTRIBUTIONS OF MOTOR VEHICLES, 

11 BOATS, AND AIRCRAFT.— 

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

13 regulations or other guidance, in the case of a 

14 contribution of a specified vehicle to which para15 graph (8) applies, no deduction shall be allowed 

16 under subsection (a) for such contribution unless 

17 the taxpayer obtains a qualified appraisal of the 

18 specified vehicle on or before the date of such 

19 contribution. 

20 ‘‘(B) EXCEPTION FOR INVENTORY PROP21 ERTY.—Subparagraph (A) shall not apply to 

22 property which is described in section 

23 1221(a)(1). 
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1 ‘‘(C) SPECIFIED VEHICLE.—For purposes of 

2 this paragraph, the term ‘specified vehicle’ 

3 means any— 

4 ‘‘(i) motor vehicle manufactured pri5 marily for use on public streets, roads, and 

6 highways, 

7 ‘‘(ii) boat, or 

8 ‘‘(iii) aircraft. 

9 ‘‘(D) QUALIFIED APPRAISAL.—For purposes 

10 of this paragraph, the term ‘qualified appraisal’ 

11 means any appraisal which is treated for pur12 poses of this paragraph as a qualified appraisal 

13 under regulations or other guidance prescribed 

14 by the Secretary. 

15 ‘‘(E) REGULATIONS OR OTHER GUID16 ANCE.—The Secretary shall prescribe such regu17 lations or other guidance as may be necessary to 

18 carry out the purposes of this paragraph.’’. 

19 (b) EFFECTIVE DATE.—The amendment made by sub20 section (a) shall apply to contributions made after June 

21 3, 2004. 

22 SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES 

23 TO SPORTS FRANCHISES. 

24 (a) IN GENERAL.—Section 197(e) (relating to excep25 tions to definition of section 197 intangible) is amended 
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1 by striking paragraph (6) and by redesignating paragraphs 

2 (7) and (8) as paragraphs (6) and (7), respectively. 

3 (b) CONFORMING AMENDMENTS.— 

4 (1)(A) Section 1056 (relating to basis limitation 

5 for player contracts transferred in connection with 

6 the sale of a franchise) is repealed. 

7 (B) The table of sections for part IV of sub8 chapter O of chapter 1 is amended by striking the 

9 item relating to section 1056. 

10 (2) Section 1245(a) (relating to gain from dis11 position of certain depreciable property) is amended 

12 by striking paragraph (4). 

13 (3) Section 1253 (relating to transfers of fran14 chises, trademarks, and trade names) is amended by 

15 striking subsection (e). 

16 (c) EFFECTIVE DATES.— 

17 (1) IN GENERAL.—Except as provided in para18 graph (2), the amendments made by this section shall 

19 apply to property acquired after the date of the enact20 ment of this Act. 

21 (2) SECTION 1245.—The amendment made by 

22 subsection (b)(2) shall apply to franchises acquired 

23 after the date of the enactment of this Act. 
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1 SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAY2 MENTS TO FEDERAL VENDERS. 

3 (a) IN GENERAL.—Section 6331(h) (relating to con4 tinuing levy on certain payments) is amended by adding 

5 at the end the following new paragraph: 

6 ‘‘(3) INCREASE IN LEVY FOR CERTAIN PAY7 MENTS.—Paragraph (1) shall be applied by sub8 stituting ‘100 percent’ for ‘15 percent’ in the case of 

9 any specified payment due to a vendor of goods or 

10 services sold or leased to the Federal Government.’’. 

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

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

13 Act. 

14 SEC. 687. MODIFICATION OF STRADDLE RULES. 

15 (a) RULES RELATING TO IDENTIFIED STRADDLES.— 

16 (1) IN GENERAL.—Subparagraph (A) of section 

17 1092(a)(2) (relating to special rule for identified 

18 straddles) is amended to read as follows: 

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

20 straddle which is an identified straddle— 

21 ‘‘(i) paragraph (1) shall not apply 

22 with respect to identified positions com23 prising the identified straddle, 

24 ‘‘(ii) if there is any loss with respect to 

25 any identified position of the identified 

26 straddle, the basis of each of the identified 
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1 offsetting positions in the identified straddle 

2 shall be increased by an amount which 

3 bears the same ratio to the loss as the unrec4 ognized gain with respect to such offsetting 

5 position bears to the aggregate unrecognized 

6 gain with respect to all such offsetting posi7 tions, and 

8 ‘‘(iii) any loss described in clause (ii) 

9 shall not otherwise be taken into account for 

10 purposes of this title.’’. 

11 (2) IDENTIFIED STRADDLE.—Section 

12 1092(a)(2)(B) (defining identified straddle) is amend13 ed— 

14 (A) by striking clause (ii) and inserting the 

15 following: 

16 ‘‘(ii) to the extent provided by regula17 tions, the value of each position of which (in 

18 the hands of the taxpayer immediately be19 fore the creation of the straddle) is not less 

20 than the basis of such position in the hands 

21 of the taxpayer at the time the straddle is 

22 created, and’’, and 

23 (B) by adding at the end the following new 

24 flush sentence: 
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1 ‘‘The Secretary shall prescribe regulations which 

2 specify the proper methods for clearly identifying 

3 a straddle as an identified straddle (and the po4 sitions comprising such straddle), which specify 

5 the rules for the application of this section for a 

6 taxpayer which fails to properly identify the po7 sitions of an identified straddle, and which 

8 specify the ordering rules in cases where a tax9 payer disposes of less than an entire position 

10 which is part of an identified straddle.’’. 

11 (3) UNRECOGNIZED GAIN.—Section 1092(a)(3) 

12 (defining unrecognized gain) is amended by redesig13 nating subparagraph (B) as subparagraph (C) and 

14 by inserting after subparagraph (A) the following new 

15 subparagraph: 

16 ‘‘(B) SPECIAL RULE FOR IDENTIFIED

17 STRADDLES.—For purposes of paragraph 

18 (2)(A)(ii), the unrecognized gain with respect to 

19 any identified offsetting position shall be the ex20 cess of the fair market value of the position at 

21 the time of the determination over the fair mar22 ket value of the position at the time the taxpayer 

23 identified the position as a position in an identi24 fied straddle.’’. 
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1 (4) CONFORMING AMENDMENT.—Section 

2 1092(c)(2) is amended by striking subparagraph (B) 

3 and by redesignating subparagraph (C) as subpara4 graph (B). 

5 (b) PHYSICALLY SETTLED POSITIONS.—Section 

6 1092(d) (relating to definitions and special rules) is amend7 ed by adding at the end the following new paragraph: 

8 ‘‘(8) SPECIAL RULES FOR PHYSICALLY SETTLED

9 POSITIONS.—For purposes of subsection (a), if a tax10 payer settles a position which is part of a straddle by 

11 delivering property to which the position relates (and 

12 such position, if terminated, would result in a real13 ization of a loss), then such taxpayer shall be treated 

14 as if such taxpayer— 

15 ‘‘(A) terminated the position for its fair 

16 market value immediately before the settlement, 

17 and 

18 ‘‘(B) sold the property so delivered by the 

19 taxpayer at its fair market value.’’. 

20 (c) REPEAL OF STOCK EXCEPTION.— 

21 (1) IN GENERAL.—Paragraph (3) of section 

22 1092(d) (relating to definitions and special rules) is 

23 amended to read as follows: 

24 ‘‘(3) SPECIAL RULES FOR STOCK.—For purposes 

25 of paragraph (1)— 
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1 ‘‘(A) IN GENERAL.—The term ‘personal 

2 property’ includes— 

3 ‘‘(i) any stock which is a part of a 

4 straddle at least 1 of the offsetting positions 

5 of which is a position with respect to such 

6 stock or substantially similar or related 

7 property, or 

8 ‘‘(ii) any stock of a corporation formed 

9 or availed of to take positions in personal 

10 property which offset positions taken by any 

11 shareholder. 

12 ‘‘(B) RULE FOR APPLICATION.—For pur13 poses of determining whether subsection (e) ap14 plies to any transaction with respect to stock de15 scribed in subparagraph (A)(ii), all includible 

16 corporations of an affiliated group (within the 

17 meaning of section 1504(a)) shall be treated as 

18 1 taxpayer.’’. 

19 (2) CONFORMING AMENDMENT.—Section 

20 1258(d)(1) is amended by striking ‘‘; except that the 

21 term ‘personal property’ shall include stock’’. 

22 (d) HOLDING PERIOD FOR DIVIDEND EXCLUSION.—The 

23 last sentence of section 246(c) is amended by inserting: ‘‘, 

24 other than a qualified covered call option to which section 

25 1092(f) applies’’ before the period at the end. 
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1 (e) EFFECTIVE DATE.—The amendments made by this 

2 section shall apply to positions established on or after the 

3 date of the enactment of this Act. 

4 SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A TO 

5 LIST OF TAXABLE VACCINES. 

6 (a) IN GENERAL.—Paragraph (1) of section 4132(a) 

7 (defining taxable vaccine) is amended by redesignating sub8 paragraphs (I), (J), (K), and (L) as subparagraphs (J), 

9 (K), (L), and (M), respectively, and by inserting after sub10 paragraph (H) the following new subparagraph: 

11 ‘‘(I) Any vaccine against hepatitis A.’’ 

12 (b) EFFECTIVE DATE.— 

13 (1) SALES, ETC.—The amendments made by sub14 section (a) shall apply to sales and uses on or after 

15 the first day of the first month which begins more 

16 than 4 weeks after the date of the enactment of this 

17 Act. 

18 (2) DELIVERIES.—For purposes of paragraph 

19 (1) and section 4131 of the Internal Revenue Code of 

20 1986, in the case of sales on or before the effective date 

21 described in such paragraph for which delivery is 

22 made after such date, the delivery date shall be con23 sidered the sale date. 
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1 SEC. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO 

2 LIST OF TAXABLE VACCINES. 

3 (a) IN GENERAL.—Section 4132(a)(1) (defining tax4 able vaccine), as amended by this Act, is amended by add5 ing at the end the following new subparagraph: 

6 ‘‘(N) Any trivalent vaccine against influ7 enza.’’. 

8 (b) EFFECTIVE DATE.— 

9 (1) SALES, ETC.—The amendment made by this 

10 section shall apply to sales and uses on or after the 

11 later of— 

12 (A) the first day of the first month which 

13 begins more than 4 weeks after the date of the en14 actment of this Act, or 

15 (B) the date on which the Secretary of 

16 Health and Human Services lists any vaccine 

17 against influenza for purposes of compensation 

18 for any vaccine-related injury or death through 

19 the Vaccine Injury Compensation Trust Fund. 

20 (2) DELIVERIES.—For purposes of paragraph 

21 (1) and section 4131 of the Internal Revenue Code of 

22 1986, in the case of sales on or before the effective date 

23 described in such paragraph for which delivery is 

24 made after such date, the delivery date shall be con25 sidered the sale date. 
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1 SEC. 690. EXTENSION OF IRS USER FEES. 

2 (a) IN GENERAL.—Section 7528(c) (relating to termi3 nation) is amended by striking ‘‘December 31, 2004’’ and 

4 inserting ‘‘September 30, 2014’’. 

5 (b) EFFECTIVE DATE.—The amendment made by this 

6 section shall apply to requests after the date of the enact7 ment of this Act. 

8 SEC. 691. COBRA FEES. 

9 (a) USE OF MERCHANDISE PROCESSING FEE.—Sec10 tion 13031(f) of the Consolidated Omnibus Budget Rec11 onciliation Act of 1985 (19 U.S.C. 58c(f)) is amended— 

12 (1) in paragraph (1), by aligning subparagraph 

13 (B) with subparagraph (A); and 

14 (2) in paragraph (2), by striking ‘‘commercial 

15 operations’’ and all that follows through ‘‘processing.’’ 

16 and inserting ‘‘customs revenue functions as defined 

17 in section 415 of the Homeland Security Act of 2002 

18 (other than functions performed by the Office of Inter19 national Affairs referred to in section 415(8) of that 

20 Act), and for automation (including the Automation 

21 Commercial Environment computer system), and for 

22 no other purpose. To the extent that funds in the Cus23 toms User Fee Account are insufficient to pay the 

24 costs of such customs revenue functions, customs du25 ties in an amount equal to the amount of such insuf26 ficiency shall be available, to the extent provided for 
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1 in appropriations Acts, to pay the costs of such cus2 toms revenue functions in the amount of such insuffi3 ciency, and shall be available for no other purpose. 

4 The provisions of the first and second sentences of this 

5 paragraph specifying the purposes for which amounts 

6 in the Customs User Fee Account may be made avail7 able shall not be superseded except by a provision of 

8 law which specifically modifies or supersedes such 

9 provisions.’’. 

10 (b) REIMBURSEMENT OF APPROPRIATIONS FROM

11 COBRA FEES.—Section 13031(f)(3) of the Consolidated 

12 Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 

13 58c(f)(3)) is amended by adding at the end the following: 

14 ‘‘(E) Nothing in this paragraph shall be construed to 

15 preclude the use of appropriated funds, from sources other 

16 than the fees collected under subsection (a), to pay the costs 

17 set forth in clauses (i), (ii), and (iii) of subparagraph (A).’’. 

18 (c) SENSE OF CONGRESS; EFFECTIVE PERIOD FOR

19 COLLECTING FEES; STANDARD FOR SETTING FEES.— 

20 (1) SENSE OF CONGRESS.—The Congress finds 

21 that— 

22 (A) the fees set forth in paragraphs (1) 

23 through (8) of subsection (a) of section 13031 of 

24 the Consolidated Omnibus Budget Reconciliation 

25 Act of 1985 have been reasonably related to the 
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1 costs of providing customs services in connection 

2 with the activities or items for which the fees 

3 have been charged under such paragraphs; and 

4 (B) the fees collected under such paragraphs 

5 have not exceeded, in the aggregate, the amounts 

6 paid for the costs described in subsection 

7 (f)(3)(A) incurred in providing customs services 

8 in connection with the activities or items for 

9 which the fees were charged under such para10 graphs. 

11 (2) EFFECTIVE PERIOD; STANDARD FOR SETTING

12 FEES.—Section 13031(j)(3) of the Consolidated Om13 nibus Budget Reconciliation Act of 1985 is amended 

14 to read as follows: 

15 ‘‘(3)(A) Fees may not be charged under paragraphs (9) 

16 and (10) of subsection (a) after September 30, 2014. 

17 ‘‘(B)(i) Subject to clause (ii), Fees may not be charged 

18 under paragraphs (1) through (8) of subsection (a) after 

19 September 30, 2014. 

20 ‘‘(ii) In fiscal year 2006 and in each succeeding fiscal 

21 year for which fees under paragraphs (1) through (8) of 

22 subsection (a) are authorized— 

23 ‘‘(I) the Secretary of the Treasury shall charge 

24 fees under each such paragraph in amounts that are 

25 reasonably related to the costs of providing customs 
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1 services in connection with the activity or item for 

2 which the fee is charged under such paragraph, except 

3 that in no case may the fee charged under any such 

4 paragraph exceed by more than 10 percent the 

5 amount otherwise prescribed by such paragraph; 

6 ‘‘(II) the amount of fees collected under such 

7 paragraphs may not exceed, in the aggregate, the 

8 amounts paid in that fiscal year for the costs de9 scribed in subsection (f)(3)(A) incurred in providing 

10 customs services in connection with the activity or 

11 item for which the fees are charged under such para12 graphs; 

13 ‘‘(III) a fee may not be collected under any such 

14 paragraph except to the extent such fee will be ex15 pended to pay the costs described in subsection 

16 (f)(3)(A) incurred in providing customs services in 

17 connection with the activity or item for which the fee 

18 is charged under such paragraph; and 

19 ‘‘(IV) any fee collected under any such para20 graph shall be available for expenditure only to pay 

21 the costs described in subsection (f)(3)(A) incurred in 

22 providing customs services in connection with the ac23 tivity or item for which the fee is charged under such 

24 paragraph.’’. 
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1 (d) CLERICAL AMENDMENTS.—Section 13031 of the 

2 Consolidated Omnibus Budget Reconciliation Act of 1985 

3 is amended— 

4 (1) in subsection (a)(5)(B), by striking ‘‘$1.75’’ 

5 and inserting ‘‘$1.75.’’; 

6 (2) in subsection (b)— 

7 (A) in paragraph (1)(A), by aligning clause 

8 (iii) with clause (ii); 

9 (B) in paragraph (7), by striking ‘‘para10 graphs’’ and inserting ‘‘paragraph’’; and 

11 (C) in paragraph (9), by aligning subpara12 graph (B) with subparagraph (A); and 

13 (3) in subsection (e)(2), by aligning subpara14 graph (B) with subparagraph (A). 

15 (e) STUDY OF ALL FEES COLLECTED BY DEPARTMENT

16 OF HOMELAND SECURITY.—The Secretary of the Treasury 

17 shall conduct a study of all the fees collected by the Depart18 ment of Homeland Security, and shall submit to the Con19 gress, not later than September 30, 2005, a report con20 taining the recommendations of the Secretary on— 

21 (1) what fees should be eliminated; 

22 (2) what the rate of fees retained should be; and 

23 (3) any other recommendations with respect to 

24 the fees that the Secretary considers appropriate. 
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1 TITLE VII—MARKET REFORM 

2 FOR TOBACCO GROWERS 

3 SEC. 701. SHORT TITLE. 

4 This title may be cited as the ‘‘Fair and Equitable 

5 Tobacco Reform Act of 2004’’. 

6 SEC. 702. EFFECTIVE DATE. 

7 This title and the amendments made by this title shall 

8 apply beginning with the 2005 marketing year of each kind 

9 of tobacco. 

10 Subtitle A—Termination of Federal 

11 Tobacco Quota and Price Sup12 port Programs 

13 SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM 

14 AND RELATED PROVISIONS. 

15 (a) MARKETING QUOTAS.—Part I of subtitle B of title 

16 III of the Agricultural Adjustment Act of 1938 (7 U.S.C. 

17 1311 et seq.) is repealed. 

18 (b) PROCESSING.—Section 9(b) of the Agricultural Ad19 justment Act (7 U.S.C. 609(b)), reenacted with amendments 

20 by the Agricultural Marketing Agreement Act of 1937, is 

21 amended— 

22 (1) in paragraph (2), by striking ‘‘tobacco,’’; and 

23 (2) in paragraph (6)(B)(i), by striking ‘‘, or, in 

24 the case of tobacco, is less than the fair exchange value 

25 by not more than 10 per centum,’’. 
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1 (c) DECLARATION OF POLICY.—Section 2 of the Agri2 cultural Adjustment Act of 1938 (7 U.S.C. 1282) is amend3 ed by striking ‘‘tobacco,’’. 

4 (d) DEFINITIONS.—Section 301(b) of the Agricultural 

5 Adjustment Act of 1938 (7 U.S.C. 1301(b)) is amended— 

6 (1) in paragraph (3)— 

7 (A) by striking subparagraph (C); and 

8 (B) by redesignating subparagraph (D) as 

9 subparagraph (C); 

10 (2) in paragraph (6)(A), by striking ‘‘tobacco,’’; 

11 (3) in paragraph (10)— 

12 (A) by striking subparagraph (B); and 

13 (B) by redesignating subparagraph (C) as 

14 subparagraph (B); 

15 (4) in paragraph (11)(B), by striking ‘‘and to16 bacco’’; 

17 (5) in paragraph (12), by striking ‘‘tobacco,’’; 

18 (6) in paragraph (14)— 

19 (A) in subparagraph (A), by striking ‘‘(A)’’; 

20 and 

21 (B) by striking subparagraphs (B), (C), and 

22 (D); 

23 (7) by striking paragraph (15); 

24 (8) in paragraph (16)— 

25 (A) by striking subparagraph (B); and 
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1 (B) by redesignating subparagraph (C) as 

2 subparagraph (B); 

3 (9) by striking paragraph (17); and 

4 (10) by redesignating paragraph (16) as para5 graph (15). 

6 (e) PARITY PAYMENTS.—Section 303 of the Agricul7 tural Adjustment Act of 1938 (7 U.S.C. 1303) is amended 

8 in the first sentence by striking ‘‘rice, or tobacco,’’ and in9 serting ‘‘or rice,’’. 

10 (f) ADMINISTRATIVE PROVISIONS.—Section 361 of the 

11 Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) is 

12 amended by striking ‘‘tobacco,’’. 

13 (g) ADJUSTMENT OF QUOTAS.—Section 371 of the Ag14 ricultural Adjustment Act of 1938 (7 U.S.C. 1371) is 

15 amended— 

16 (1) in the first sentence of subsection (a), by 

17 striking ‘‘rice, or tobacco’’ and inserting ‘‘or rice’’; 

18 and 

19 (2) in the first sentence of subsection (b), by 

20 striking ‘‘rice, or tobacco’’ and inserting ‘‘or rice’’. 

21 (h) REGULATIONS.—Section 375 of the Agricultural 

22 Adjustment Act of 1938 (7 U.S.C. 1375) is amended— 

23 (1) in subsection (a), by striking ‘‘peanuts, or to24 bacco’’ and inserting ‘‘or peanuts’’; and 

25 (2) by striking subsection (c). 
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1 (i) EMINENT DOMAIN.—Section 378 of the Agricul2 tural Adjustment Act of 1938 (7 U.S.C. 1378) is amended— 

3 (1) in the first sentence of subsection (c), by 

4 striking ‘‘cotton, and tobacco’’ and inserting ‘‘and 

5 cotton’’; and 

6 (2) by striking subsections (d), (e), and (f). 

7 (j) BURLEY TOBACCO FARM RECONSTITUTION.—Sec8 tion 379 of the Agricultural Adjustment Act of 1938 (7 

9 U.S.C. 1379) is amended— 

10 (1) in subsection (a)— 

11 (A) by striking ‘‘(a)’’; and 

12 (B) in paragraph (6), by striking ‘‘, but 

13 this clause (6) shall not be applicable in the case 

14 of burley tobacco’’; and 

15 (2) by striking subsections (b) and (c). 

16 (k) ACREAGE-POUNDAGE QUOTAS.—Section 4 of the 

17 Act of April 16, 1955 (Public Law 89–12; 7 U.S.C. 1314c 

18 note), is repealed. 

19 (l) BURLEY TOBACCO ACREAGE ALLOTMENTS.—The 

20 Act of July 12, 1952 (7 U.S.C. 1315), is repealed. 

21 (m) TRANSFER OF ALLOTMENTS.—Section 703 of the 

22 Food and Agriculture Act of 1965 (7 U.S.C. 1316) is re23 pealed. 
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1 (n) ADVANCE RECOURSE LOANS.—Section 13(a)(2)(B) 

2 of the Food Security Improvements Act of 1986 (7 U.S.C. 

3 1433c–1(a)(2)(B)) is amended by striking ‘‘tobacco and’’. 

4 (o) TOBACCO FIELD MEASUREMENT.—Section 1112 of 

5 the Omnibus Budget Reconciliation Act of 1987 (Public 

6 Law 100–203) is amended by striking subsection (c). 

7 SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT PRO8 GRAM AND RELATED PROVISIONS. 

9 (a) TERMINATION OF TOBACCO PRICE SUPPORT AND

10 NO NET COST PROVISIONS.—Sections 106, 106A, and 106B 

11 of the Agricultural Act of 1949 (7 U.S.C. 1445, 1445–1, 

12 1445–2) are repealed. 

13 (b) PARITY PRICE SUPPORT.—Section 101 of the Agri14 cultural Act of 1949 (7 U.S.C. 1441) is amended— 

15 (1) in the first sentence of subsection (a), by 

16 striking ‘‘tobacco (except as otherwise provided here17 in), corn,’’ and inserting ‘‘corn’’; 

18 (2) by striking subsections (c), (g), (h), and (i); 

19 (3) in subsection (d)(3)— 

20 (A) by striking ‘‘, except tobacco,’’; and 

21 (B) by striking ‘‘and no price support shall 

22 be made available for any crop of tobacco for 

23 which marketing quotas have been disapproved 

24 by producers;’’; and 
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1 (4) by redesignating subsections (d) and (e) as 

2 subsections (c) and (d), respectively. 

3 (c) DEFINITION OF BASIC AGRICULTURAL COM4 MODITY.—Section 408(c) of the Agricultural Act of 1949 (7 

5 U.S.C. 1428(c)) is amended by striking ‘‘tobacco,’’. 

6 (d) POWERS OF COMMODITY CREDIT CORPORATION.— 

7 Section 5 of the Commodity Credit Corporation Charter Act 

8 (15 U.S.C. 714c) is amended by inserting ‘‘(other than to9 bacco)’’ after ‘‘agricultural commodities’’ each place it ap10 pears. 

11 SEC. 713. LIABILITY. 

12 The amendments made by this subtitle shall not affect 

13 the liability of any person under any provision of law so 

14 amended with respect to any crop of tobacco planted before 

15 the effective date of this Act. 

16 Subtitle B—Transitional Payments 

17 to Tobacco Quota Holders and 

18 Active Producers of Tobacco 

19 SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER 

20 AND QUOTA HOLDER. 

21 In this subtitle: 

22 (1) ACTIVE TOBACCO PRODUCER.—The term ‘‘ac23 tive tobacco producer’’ means an owner, operator, 

24 landlord, tenant, or sharecropper who— 
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1 (A) shared in the risk of producing tobacco 

2 on a farm where tobacco was produced or consid3 ered planted pursuant to a tobacco farm mar4 keting quota or farm acreage allotment estab5 lished under part I of subtitle B of title III of 

6 the Agricultural Adjustment Act of 1938 (7 

7 U.S.C. 1311 et seq.) for the 2004 marketing year; 

8 and 

9 (B) was actively engaged on that farm. 

10 (2) CONSIDERED PLANTED.—The term ‘‘consid11 ered planted’’ means tobacco that was planted, but 

12 failed to be produced as a result of a natural disaster, 

13 as determined by the Secretary. 

14 (3) TOBACCO QUOTA HOLDER.—The term ‘‘to15 bacco quota holder’’ means a person that was an 

16 owner of a farm, as of July 1, 2004, for which a basic 

17 tobacco farm marketing quota or farm acreage allot18 ment for quota tobacco was established for the 2004 

19 tobacco marketing year. 

20 (4) SECRETARY.—The term ‘‘Secretary’’ means 

21 the Secretary of Agriculture. 

22 SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS. 

23 (a) PAYMENT REQUIRED.—The Secretary shall make 

24 payments to each eligible tobacco quota holder for the termi25 nation of tobacco marketing quotas and related price sup-
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1 port under subtitle A, which shall constitute full and fair 

2 compensation for any losses relating to such termination. 

3 (b) ELIGIBILITY.—To be eligible to receive a payment 

4 under this section, a person shall submit to the Secretary 

5 an application containing such information as the Sec6 retary may require to demonstrate to the satisfaction of the 

7 Secretary that the person satisfies the definition of tobacco 

8 quota holder. The application shall be submitted within 

9 such time, in such form, and in such manner as the Sec10 retary may require. 

11 (c) INDIVIDUAL BASE QUOTA LEVEL.— 

12 (1) IN GENERAL.—The Secretary shall establish 

13 a base quota level applicable to each eligible tobacco 

14 quota holder identified under subsection (b). 

15 (2) POUNDAGE QUOTAS.—Subject to adjustment 

16 under subsection (d), for each kind of tobacco for 

17 which the marketing quota is expressed in pounds, the 

18 base quota level for each tobacco quota holder shall be 

19 equal to the basic tobacco marketing quota under the 

20 Agriculture Adjustment Act of 1938 for the marketing 

21 year in effect on the date of the enactment of this Act 

22 for quota tobacco on the farm owned by the tobacco 

23 quota holder. 

24 (3) MARKETING QUOTAS OTHER THAN POUND25 AGE QUOTAS.—Subject to adjustment under sub-
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1 section (d), for each kind of tobacco for which there 

2 is marketing quota or allotment on an acreage basis, 

3 the base quota level for each tobacco quota holder shall 

4 be the amount equal to the product obtained by multi5 plying— 

6 (A) the basic tobacco farm marketing quota 

7 or allotment for the marketing year in effect on 

8 the date of the enactment of this Act, as estab9 lished by the Secretary for quota tobacco on the 

10 farm owned by the tobacco quota holder; by 

11 (B) the average county production yield per 

12 acre for the county in which the farm is located 

13 for the kind of tobacco for that marketing year. 

14 (d) TREATMENT OF CERTAIN CONTRACTS AND AGREE15 MENTS.— 

16 (1) EFFECT OF PURCHASE CONTRACT.—If there 

17 was an agreement for the purchase of all or part of 

18 a farm described in subsection (c) as of the date of 

19 the enactment of this Act, and the parties to the sale 

20 are unable to agree to the disposition of eligibility for 

21 payments under this section, the Secretary, taking 

22 into account any transfer of quota that has been 

23 agreed to, shall provide for the equitable division of 

24 the payments among the parties by adjusting the de-
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1 termination of who is the tobacco quota holder with 

2 respect to particular pounds of the quota. 

3 (2) EFFECT OF AGREEMENT FOR PERMANENT

4 QUOTA TRANSFER.—If the Secretary determines that 

5 there was in existence, as of the day before the date 

6 of the enactment of this Act, an agreement for the per7 manent transfer of quota, but that the transfer was 

8 not completed by that date, the Secretary shall con9 sider the tobacco quota holder to be the party to the 

10 agreement that, as of that date, was the owner of the 

11 farm to which the quota was to be transferred. 

12 (e) TOTAL PAYMENT AMOUNTS BASED ON 2002 MAR13 KETING YEAR.— 

14 (1) CALCULATION OF ANNUAL PAYMENT

15 AMOUNT.—During fiscal years 2005 through 2009, the 

16 Secretary shall make payments to all eligible tobacco 

17 quota holders identified under subsection (b) in an 

18 annual amount equal to the product obtained by mul19 tiplying, for each kind of tobacco— 

20 (A) $1.40 per pound; by 

21 (B) the total national basic marketing 

22 quota established under the Agriculture Adjust23 ment Act of 1938 for the 2002 marketing year 

24 for that kind of tobacco. 
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1 (2) MARKETING QUOTAS OTHER THAN POUND2 AGE QUOTAS.—For each kind of tobacco for which 

3 there is a marketing quota or allotment on an acreage 

4 basis, the Secretary shall convert the tobacco farm 

5 marketing quotas or allotments established under the 

6 Agriculture Adjustment Act of 1938 for the 2002 mar7 keting year for that kind of tobacco as the Secretary 

8 considers appropriate. 

9 (f) INDIVIDUAL PAYMENT AMOUNTS.—The annual 

10 payment amount for each eligible tobacco quota holder with 

11 respect to a kind of tobacco under this section shall bear 

12 the same ratio to the amount determined by the Secretary 

13 under subsection (e) with respect to that kind of tobacco 

14 as the individual base quota level of that eligible tobacco 

15 quota holder under subsection (c) with respect to that kind 

16 of tobacco bears to the total base quota levels of all eligible 

17 tobacco quota holders with respect to that kind of tobacco. 

18 (g) DEATH OF TOBACCO QUOTA HOLDER.—If a to19 bacco quota holder who is entitled to payments under this 

20 section dies and is survived by a spouse or one or more 

21 dependents, the right to receive the payments shall transfer 

22 to the surviving spouse or, if there is no surviving spouse, 

23 to the estate of the tobacco quota holder. 
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1 SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS 

2 OF QUOTA TOBACCO. 

3 (a) TRANSITION PAYMENTS REQUIRED.—The Sec4 retary shall make transition payments under this section 

5 to eligible active producers of quota tobacco. 

6 (b) ELIGIBILITY.—To be eligible to receive a transition 

7 payment under this section, a person shall submit to the 

8 Secretary an application containing such information as 

9 the Secretary may require to demonstrate to the satisfaction 

10 of the Secretary that the person satisfies the definition of 

11 active producer of quota tobacco. The application shall be 

12 submitted within such time, in such form, and in such man13 ner as the Secretary may require. 

14 (c) CURRENT PRODUCTION BASE.—The Secretary 

15 shall establish a production base applicable to each eligible 

16 active producer of quota tobacco identified under subsection 

17 (b). A producer’s production base shall be equal to the quan18 tity, in pounds, of quota tobacco subject to the basic mar19 keting quota marketed or considered planted by the pro20 ducer under the Agriculture Adjustment Act of 1938 for the 

21 marketing year in effect on the date of the enactment of 

22 this Act. 

23 (d) TOTAL PAYMENT AMOUNTS BASED ON 2002 MAR24 KETING YEAR.— 

25 (1) CALCULATION OF ANNUAL PAYMENT

26 AMOUNT.—During fiscal years 2005 through 2009, the 
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1 Secretary shall make payments to all eligible active 

2 producers of quota tobacco identified under subsection 

3 (b) in an annual amount equal to the product ob4 tained by multiplying, for each kind of tobacco— 

5 (A) $0.60 per pound; by 

6 (B) the total national effective marketing 

7 quota established under the Agriculture Adjust8 ment Act of 1938 for the 2002 marketing year 

9 for that kind of tobacco. 

10 (2) MARKETING QUOTAS OTHER THAN POUND11 AGE QUOTAS.—For each kind of tobacco for which 

12 there is a marketing quota or allotment on an acreage 

13 basis, the Secretary shall convert the tobacco farm 

14 marketing quotas or allotments established under the 

15 Agriculture Adjustment Act of 1938 for the 2002 mar16 keting year for that kind of tobacco to a poundage 

17 basis before executing the mathematical equation spec18 ified in paragraph (1). 

19 (e) INDIVIDUAL PAYMENT AMOUNTS.—The annual 

20 payment amount for each eligible active producer of quota 

21 tobacco identified under subsection (b) with respect to a 

22 kind of tobacco under this section shall bear the same ratio 

23 to the amount determined by the Secretary under subsection 

24 (d) with respect to that kind of tobacco as the individual 

25 production base of that eligible active producer under sub-
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1 section (c) with respect to that kind of tobacco bears to the 

2 total production bases determined under that subsection for 

3 all eligible active producers of that kind of tobacco. 

4 (f) DEATH OF TOBACCO PRODUCER.—If a tobacco pro5 ducer who is entitled to payments under this section dies 

6 and is survived by a spouse or one or more dependents, the 

7 right to receive the payments shall transfer to the surviving 

8 spouse or, if there is no surviving spouse, to the estate of 

9 the tobacco producer. 

10 SEC. 724. RESOLUTION OF DISPUTES. 

11 Any dispute regarding the eligibility of a person to 

12 receive a payment under this subtitle, or the amount of the 

13 payment, shall be resolved by the county committee estab14 lished under section 8 of the Soil Conservation and Domes15 tic Allotment Act (16 U.S.C. 590h) for the county or other 

16 area in which the farming operation of the person is lo17 cated. 

18 SEC. 725. SOURCE OF FUNDS FOR PAYMENTS. 

19 There is hereby appropriated to the Secretary, from 

20 amounts in the general fund of the Treasury, such amounts 

21 as the Secretary needs in order to make the payments re22 quired by sections 722 and 723, except that such amounts 

23 shall not exceed the lesser of— 

24 (1) amounts received in the Treasury under 

25 chapter 52 of the Internal Revenue Code of 1986 (re-
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1 lating to tobacco products and cigarette papers and 

2 tubes), or 

3 (2) $9,600,000,000. 

4 TITLE VIII—TRADE PROVISIONS 

5 SEC. 801. CEILING FANS. 

6 (a) IN GENERAL.—Subchapter II of chapter 99 of the 

7 Harmonized Tariff Schedule of the United States is amend8 ed by inserting in numerical sequence the following new 

9 heading: 

‘‘ 9902.84.14 Ceiling fans for permanent installation (provided for in subheading 

8414.51.00)............................................ Free No change No change On or before 

12/31/2006 ’’. 

10 (b) EFFECTIVE DATE.—The amendment made by this 

11 section applies to goods entered, or withdrawn from ware12 house, for consumption on or after the 15th day after the 

13 date of enactment of this Act. 

14 SEC. 802. CERTAIN STEAM GENERATORS, AND CERTAIN RE15 ACTOR VESSEL HEADS, USED IN NUCLEAR FA16 CILITIES. 

17 (a) CERTAIN STEAM GENERATORS.—Heading 

18 9902.84.02 of the Harmonized Tariff Schedule of the United 

19 States is amended by striking ‘‘12/31/2006’’ and inserting 

20 ‘‘12/31/2008’’. 

21 (b) CERTAIN REACTOR VESSEL HEADS.—Subchapter 

22 II of chapter 99 of the Harmonized Tariff Schedule of the 
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1 United States is amended by inserting in numerical se2 quence the following new heading: 

‘‘ 9902.84.03 Reactor vessel 

heads for nuclear 

reactors (provided 

for in subheading 

8401.40.00)......... Free No change No change On or before 

12/31/2008 ’’. 

3 (c) EFFECTIVE DATE.— 

4 (1) SUBSECTION (a).—The amendment made by 

5 subsection (a) shall take effect on the date of the en6 actment of this Act. 

7 (2) SUBSECTION (b).—The amendment made by 

8 subsection (b) shall apply to goods entered, or with9 drawn from warehouse, for consumption on or after 

10 the 15th day after the date of the enactment of this 

11 Act. 

Union Calendar No. 317 

108TH CONGRESS 

2D SESSION H. R. 4520 

[Report No. 108–548, Part I] 

A BILL 

To amend the Internal Revenue Code of 1986 to 

tive both at home and abroad. nesses and workers more competitive and producmanufacturing, service, and high-technology busiremove impediments in such Code and make our 

JUNE 16, 2004 

Reported from the Committee on Ways and Means with 

J

an amendment 

UNE 16, 2004 

Referral to the Committee on Agriculture extended for a 

period ending not later than June 16, 2004 

JUNE 16, 2004 

The Committee on Agriculture discharged; committed to 

Union and ordered to be printed the Committee of the Whole House on the State of the