I 

★

108TH CONGRESS 

2D SESSION H. R. 4520

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 

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,
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1 SECTION 1. SHORT TITLE; ETC. 

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

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

4 (b) AMENDMENT OF 1986 CODE.—Except as other5 wise expressly provided, whenever in this Act an amend6 ment or repeal is expressed in terms of an amendment 

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

8 shall be considered to be made to a section or other provi9 sion of the Internal Revenue Code of 1986. 

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

11 this 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. 

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. 
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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. 

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. 

TITLE III—TAX REFORM AND SIMPLIFICATION FOR UNITED 

STATES BUSINESSES 
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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. 

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. 
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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. 

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. 
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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. 

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. 
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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. 

Sec. 692. Safe harbor for churches. 

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.

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

2 amended by striking the item relating to subpart E. 

3 (3) The table of sections for part III of sub4 chapter B of chapter 1 is amended by striking the 

5 item relating to section 114. 

6 (4) The second sentence of section 

7 56(g)(4)(B)(i) is amended by striking ‘‘114 or’’. 

8 (5) Section 275(a) is amended—

9 (A) by inserting ‘‘or’’ at the end of para10 graph (4)(A), by striking ‘‘or’’ at the end of 

11 paragraph (4)(B) and inserting a period, and 

12 by striking subparagraph (C), and 

13 (B) by striking the last sentence. 

14 (6) Paragraph (3) of section 864(e) is amend15 ed—

16 (A) by striking: 

17 ‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO

18 ACCOUNT.—

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

20 inserting: 

21 ‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO

22 ACCOUNT.—For purposes of’’, and 

23 (B) by striking subparagraph (B). 

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

25 164(a),’’ and inserting ‘‘164(a)’’. 
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1 (8) Section 999(c)(1) is amended by striking 

2 ‘‘941(a)(5),’’. 

3 (c) EFFECTIVE DATE.—Except as provided in sub4 section (d), the amendments made by this section shall 

5 apply to transactions after December 31, 2004. 

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

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

8 during 2005 or 2006, the amount includible in gross 

9 income by reason of the amendments made by this 

10 section shall not exceed the applicable percentage of 

11 the amount which would have been so included but 

12 for this subsection. 

13 (2) APPLICABLE PERCENTAGE.—For purposes 

14 of paragraph (1), the applicable percentage shall be 

15 as follows: 

16 (A) For 2005, the applicable percentage 

17 shall be 20 percent. 

18 (B) For 2006, the applicable percentage 

19 shall be 40 percent. 

20 (e) REVOCATION OF ELECTION TO BE TREATED AS

21 DOMESTIC CORPORATION.—If, during the 1-year period 

22 beginning on the date of the enactment of this Act, a cor23 poration for which an election is in effect under section 

24 943(e) of the Internal Revenue Code of 1986 revokes such 

25 election, no gain or loss shall be recognized with respect 
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1 to property treated as transferred under clause (ii) of sec2 tion 943(e)(4)(B) of such Code to the extent such prop3 erty—

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

5 thereof, or 

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

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

8 ordinary course of its trade or business. 

9 The Secretary of the Treasury (or such Secretary’s dele10 gate) may prescribe such regulations as may be necessary 

11 to prevent the abuse of the purposes of this subsection. 

12 (f) BINDING CONTRACTS.—The amendments made 

13 by this section shall not apply to any transaction in the 

14 ordinary course of a trade or business which occurs pursu15 ant to a binding contract—

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

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

18 943(b)(3) of such Code, as in effect on the day be19 fore the date of the enactment of this Act), and 

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

21 at all times thereafter. 

22 For purposes of this subsection, a binding contract shall 

23 include a purchase option, renewal option, or replacement 

24 option which is included in such contract and which is en25 forceable against the seller or lessor. 
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1 SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR 

2 DOMESTIC PRODUCTION ACTIVITIES IN3 COME. 

4 (a) LIMITATION ON TAX ON QUALIFIED PRODUCTION

5 ACTIVITIES INCOME.—Section 11 is amended by redesig6 nating subsections (c) and (d) as subsections (d) and (e), 

7 respectively, and by inserting after subsection (b) the fol8 lowing new subsection: 

9 ‘‘(c) LIMITATION ON TAX ON QUALIFIED PRODUC10 TION ACTIVITIES INCOME.—

11 ‘‘(1) IN GENERAL.—If a corporation has quali12 fied production activities income for any taxable 

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

14 the sum of—

15 ‘‘(A) a tax computed at the rates and in 

16 the manner as if this subsection had not been 

17 enacted on the taxable income reduced by the 

18 amount of qualified production activities in19 come, plus 

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

21 in the case of taxable years beginning before 

22 January 1, 2007) of the qualified production 

23 activities income (or, if less, taxable income). 

24 ‘‘(2) QUALIFIED PRODUCTION ACTIVITIES IN25 COME.—
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1 ‘‘(A) IN GENERAL.—The term ‘qualified 

2 production activities income’ for any taxable 

3 year means an amount equal to the excess (if 

4 any) of—

5 ‘‘(i) the taxpayer’s domestic produc6 tion gross receipts for such taxable year, 

7 over 

8 ‘‘(ii) the sum of— 

9 ‘‘(I) the cost of goods sold that 

10 are allocable to such receipts, 

11 ‘‘(II) other deductions, expenses, 

12 or losses directly allocable to such re13 ceipts, and 

14 ‘‘(III) a ratable portion of other 

15 deductions, expenses, and losses that 

16 are not directly allocable to such re17 ceipts or another class of income. 

18 ‘‘(B) ALLOCATION METHOD.—The Sec19 retary shall prescribe rules for the proper allo20 cation of items of income, deduction, expense, 

21 and loss for purposes of determining income at22 tributable to domestic production activities. 

23 ‘‘(3) DOMESTIC PRODUCTION GROSS RE24 CEIPTS.—For purposes of this subsection, the term 
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1 ‘domestic production gross receipts’ means the gross 

2 receipts of the taxpayer which are derived from—

3 ‘‘(A) any lease, rental, license, sale, ex4 change, or other disposition of—

5 ‘‘(i) qualifying production property 

6 which was manufactured, produced, grown, 

7 or extracted in whole or in significant part 

8 by the taxpayer within the United States, 

9 or 

10 ‘‘(ii) any qualified film produced by 

11 the taxpayer, or 

12 ‘‘(B) construction, engineering, or architec13 tural services performed in the United States 

14 for construction projects in the United States. 

15 ‘‘(4) QUALIFYING PRODUCTION PROPERTY.—

16 For purposes of this subsection, the term ‘qualifying 

17 production property’ means—

18 ‘‘(A) tangible personal property, 

19 ‘‘(B) any computer software, and 

20 ‘‘(C) any property described in section 

21 168(f)(4). 

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

23 subsection—

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

25 film’ means any property described in section 
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1 168(f)(3) if not less than 50 percent of the 

2 total compensation relating to the production of 

3 such property is compensation for services per4 formed in the United States by actors, produc5 tion personnel, directors, and producers. 

6 ‘‘(B) EXCEPTION.—Such term does not in7 clude property with respect to which records are 

8 required to be maintained under section 2257 

9 of title 18, United States Code. 

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

11 subsection—

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

13 production gross receipts’ shall not include any 

14 gross receipts of the taxpayer derived from 

15 property leased, licensed, or rented by the tax16 payer for use by any related person. 

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

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

19 related to another person if such persons are 

20 treated as a single employer under subsection 

21 (a) or (b) of section 52 or subsection (m) or (o) 

22 of section 414, except that determinations 

23 under subsections (a) and (b) of section 52 

24 shall be made without regard to section 

25 1563(b).’’. 
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1 (b) SPECIAL RULE RELATING TO ELECTION TO

2 TREAT CUTTING OF TIMBER AS A SALE OR EXCHANGE.—

3 In the case of a corporation, any election under section 

4 631(a) of the Internal Revenue Code of 1986 made for 

5 a taxable year ending on or before the date of the enact6 ment of this Act may be revoked by the taxpayer for any 

7 taxable year ending after such date. For purposes of deter8 mining whether such taxpayer may make a further elec9 tion under such section, such election (and any revocation 

10 under this section) shall not be taken into account. 

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

12 this section shall apply to taxable years beginning after 

13 December 31, 2004. 

14 SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR 

15 SMALL CORPORATIONS. 

16 (a) IN GENERAL.—Subsection (b) of section 11 (re17 lating to tax imposed on corporations) is amended by re18 designating paragraph (2) as paragraph (6) and by strik19 ing paragraph (1) and inserting the following new para20 graphs: 

21 ‘‘(1) FOR TAXABLE YEARS BEGINNING AFTER

22 2012.—In the case of taxable years beginning after 

23 2012, the amount of the tax imposed by subsection 

24 (a) shall be determined in accordance with the fol25 lowing table:
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‘‘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.

1 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN 2011

2 OR 2012.—In the case of taxable years beginning in 

3 2011 or 2012, the amount of the tax imposed by 

4 subsection (a) shall be determined in accordance 

5 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 

$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.

6 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN 2008, 

7 2009, OR 2010.—In the case of taxable years begin8 ning in 2008, 2009, or 2010, the amount of the tax 

9 imposed by subsection (a) shall be determined in ac10 cordance 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.
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1 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN 2005, 

2 2006, OR 2007.—In the case of taxable years begin3 ning in 2005, 2006, or 2007, the amount of the tax 

4 imposed by subsection (a) shall be determined in ac5 cordance 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.

6 ‘‘(5) PHASEOUT OF LOWER RATES FOR CER7 TAIN TAXPAYERS.—

8 ‘‘(A) GENERAL RULE FOR YEARS BEFORE

9 2013.—

10 ‘‘(i) IN GENERAL.—In the case of tax11 able years beginning before 2013 with re12 spect to a corporation which has taxable 

13 income in excess of the applicable amount 

14 for any taxable year, the amount of tax de15 termined under paragraph (1), (2), (3) or 

16 (4) for such taxable year shall be increased 

17 by the lesser of (I) 5 percent of such ex18 cess, or (II) the maximum increase 

19 amount. 
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1 ‘‘(ii) MAXIMUM INCREASE AMOUNT.—

2 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. 

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

4 the case of a corporation which has taxable in5 come in excess of $20,000,000 ($15,000,000 in 

6 the case of taxable years beginning before 

7 2013), the amount of the tax determined under 

8 the foregoing provisions of this subsection shall 

9 be increased by an additional amount equal to 

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

11 $610,250 ($100,000 in the case of taxable 

12 years beginning before 2013).’’. 

13 (b) CONFORMING AMENDMENTS.—

14 (1) Section 904(b)(3)(D)(ii) is amended to read 

15 as follows: 

16 ‘‘(ii) in the case of a corporation, sec17 tion 1201(a) applies to such taxable 

18 year.’’. 

19 (2) Section 1201(a) is amended by striking 

20 ‘‘the last 2 sentences of section 11(b)(1)’’ and in21 serting ‘‘section 11(b)(5)’’. 

22 (3) Section 1561(a) is amended—
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1 (A) by striking ‘‘the last 2 sentences of 

2 section 11(b)(1)’’ and inserting ‘‘section 

3 11(b)(5)’’, and 

4 (B) by striking ‘‘such last 2 sentences’’ 

5 and inserting ‘‘section 11(b)(5)’’. 

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

7 this section shall apply to taxable years beginning after 

8 December 31, 2004. 

9 TITLE II—JOB CREATION TAX IN10 CENTIVES FOR MANUFAC11 TURERS, SMALL BUSINESSES, 

12 AND FARMERS 

13 Subtitle A—Small Business 

14 Expensing 

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

16 FOR SMALL BUSINESS. 

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

18 amended by striking ‘‘2006’’ each place it appears and 

19 inserting ‘‘2008’’. 

20 Subtitle B—Depreciation 

21 SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CER22 TAIN LEASEHOLD IMPROVEMENTS AND RES23 TAURANT PROPERTY. 

24 (a) 15-YEAR RECOVERY PERIOD.—Subparagraph 

25 (E) of section 168(e)(3) (relating to classification of cer-
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•HR 4520 IH1S 

1 tain property) is amended by striking ‘‘and’’ at the end 

2 of clause (ii), by striking the period at the end of clause 

3 (iii) and inserting a comma, and by adding at the end the 

4 following new clauses: 

5 ‘‘(iv) any qualified leasehold improve6 ment property placed in service before Jan7 uary 1, 2006, and 

8 ‘‘(v) any qualified restaurant property 

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

10 (b) QUALIFIED LEASEHOLD IMPROVEMENT PROP11 ERTY.—Subsection (e) of section 168 is amended by add12 ing at the end the following new paragraph: 

13 ‘‘(6) QUALIFIED LEASEHOLD IMPROVEMENT

14 PROPERTY.—The term ‘qualified leasehold improve15 ment property’ has the meaning given such term in 

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

17 rules shall apply: 

18 ‘‘(A) IMPROVEMENTS MADE BY LESSOR.—

19 In the case of an improvement made by the per20 son who was the lessor of such improvement 

21 when such improvement was placed in service, 

22 such improvement shall be qualified leasehold 

23 improvement property (if at all) only so long as 

24 such improvement is held by such person. 
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1 ‘‘(B) EXCEPTION FOR CHANGES IN FORM

2 OF BUSINESS.—Property shall not cease to be 

3 qualified leasehold improvement property under 

4 subparagraph (A) by reason of—

5 ‘‘(i) death, 

6 ‘‘(ii) a transaction to which section 

7 381(a) applies, 

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

9 conducting the trade or business so long as 

10 the property is retained in such trade or 

11 business as qualified leasehold improve12 ment property and the taxpayer retains a 

13 substantial interest in such trade or busi14 ness, 

15 ‘‘(iv) the acquisition of such property 

16 in an exchange described in section 1031, 

17 1033, or 1038 to the extent that the basis 

18 of such property includes an amount rep19 resenting the adjusted basis of other prop20 erty owned by the taxpayer or a related 

21 person, or 

22 ‘‘(v) the acquisition of such property 

23 by the taxpayer in a transaction described 

24 in section 332, 351, 361, 721, or 731 (or 

25 the acquisition of such property by the tax-
22

•HR 4520 IH1S 

1 payer from the transferee or acquiring cor2 poration in a transaction described in such 

3 section), to the extent that the basis of the 

4 property in the hands of the taxpayer is 

5 determined by reference to its basis in the 

6 hands of the transferor or distributor.’’. 

7 (c) QUALIFIED RESTAURANT PROPERTY.—Sub8 section (e) of section 168 (as amended by subsection (b)) 

9 is further amended by adding at the end the following new 

10 paragraph: 

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

12 term ‘qualified restaurant property’ means any sec13 tion 1250 property which is an improvement to a 

14 building if—

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

16 more than 3 years after the date such building 

17 was first placed in service, and 

18 ‘‘(B) more than 50 percent of the build19 ing’s square footage is devoted to preparation 

20 of, and seating for on-premises consumption of, 

21 prepared meals.’’. 

22 (d) REQUIREMENT TO USE STRAIGHT LINE METH23 OD.—
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•HR 4520 IH1S 

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

2 by adding at the end the following new subpara3 graphs: 

4 ‘‘(G) Qualified leasehold improvement 

5 property described in subsection (e)(6). 

6 ‘‘(H) Qualified restaurant property de7 scribed in subsection (e)(7).’’. 

8 (2) Subparagraph (A) of section 168(b)(2) is 

9 amended by inserting before the comma ‘‘not re10 ferred to in paragraph (3)’’. 

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

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

13 following new items:

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

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

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

15 this section shall apply to property placed in service after 

16 the date of the enactment of this Act. 

17 SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE 

18 FOR AIRCRAFT. 

19 (a) AIRCRAFT TREATED AS QUALIFIED PROP20 ERTY.—

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

22 168(k) is amended by redesignating subparagraphs 

23 (C) through (F) as subparagraphs (D) through (G), 
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•HR 4520 IH1S 

1 respectively, and by inserting after subparagraph 

2 (B) the following new subparagraph: 

3 ‘‘(C) CERTAIN AIRCRAFT.—The term 

4 ‘qualified property’ includes property—

5 ‘‘(i) which meets the requirements of 

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

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

8 a transportation property (as defined in 

9 subparagraph (B)(iii)) other than for agri10 cultural or firefighting purposes, 

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

12 such purchaser, at the time of the contract 

13 for purchase, has made a nonrefundable 

14 deposit of the lesser of—

15 ‘‘(I) 10 percent of the cost, or 

16 ‘‘(II) $100,000, and 

17 ‘‘(iv) which has—

18 ‘‘(I) an estimated production pe19 riod exceeding 4 months, and 

20 ‘‘(II) a cost exceeding 

21 $200,000.’’. 

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

23 section 168(k)(2)(A) is amended by striking ‘‘sub24 paragraph (B)’’ and inserting ‘‘subparagraphs (B) 

25 and (C)’’. 
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1 (b) CONFORMING AMENDMENTS.—

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

3 at the end the following new clause: 

4 ‘‘(iv) APPLICATION OF SUBPARA5 GRAPH.—This subparagraph shall not 

6 apply to any property which is described in 

7 subparagraph (C).’’. 

8 (2) Section 168(k)(4)(A)(ii) is amended by 

9 striking ‘‘paragraph (2)(C)’’ and inserting ‘‘para10 graph (2)(D)’’. 

11 (3) Section 168(k)(4)(B)(iii) is amended by in12 serting ‘‘and paragraph (2)(C)’’ after ‘‘of this para13 graph)’’. 

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

15 ‘‘subparagraphs (B) and (D)’’ and inserting ‘‘sub16 paragraphs (B), (C), and (E)’’. 

17 (5) Section 168(k)(4)(D) is amended by strik18 ing ‘‘Paragraph (2)(E)’’ and inserting ‘‘Paragraph 

19 (2)(F)’’. 

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

21 this section shall take effect as if included in the amend22 ments made by section 101 of the Job Creation and Work23 er Assistance Act of 2002. 
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1 SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE 

2 FOR BONUS DEPRECIATION PROPERTY. 

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

4 special rules) is amended by adding at the end the fol5 lowing new clause: 

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

7 subparagraph (A)(ii), if—

8 ‘‘(I) property is originally placed 

9 in service after September 10, 2001, 

10 by the lessor of such property, 

11 ‘‘(II) such property is sold by 

12 such lessor or any subsequent pur13 chaser within 3 months after the date 

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

15 multiple units of property subject to 

16 the same lease, within 3 months after 

17 the date the final unit is placed in 

18 service, so long as the period between 

19 the time the first unit is placed in 

20 service and the time the last unit is 

21 placed in service does not exceed 12 

22 months), and 

23 ‘‘(III) the user of such property 

24 after the last sale during such 3-

25 month period remains the same as 
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•HR 4520 IH1S 

1 when such property was originally 

2 placed in service, 

3 such property shall be treated as originally 

4 placed in service not earlier than the date 

5 of such last sale, so long as no previous 

6 owner of such property elects the applica7 tion of this subsection with respect to such 

8 property.’’. 

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

10 this section shall take effect as if included in the amend11 ments made by section 101 of the Job Creation and Work12 er Assistance Act of 2002; except that the parenthetical 

13 material in section 168(k)(2)(D)(iii)(II) of the Internal 

14 Revenue Code of 1986, as added by this section, shall 

15 apply to property sold after June 4, 2004. 

16 Subtitle C—S Corporation Reform 

17 and Simplification 

18 SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHARE19 HOLDER. 

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

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

22 amended to read as follows: 

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

24 SHAREHOLDER.—
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1 ‘‘(A) IN GENERAL.—For purpose of sub2 section (b)(1)(A)—

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

4 a husband and wife (and their estates) 

5 shall be treated as 1 shareholder, and 

6 ‘‘(ii) in the case of a family with re7 spect to which an election is in effect 

8 under subparagraph (D), all members of 

9 the family shall be treated as 1 share10 holder. 

11 ‘‘(B) MEMBERS OF THE FAMILY.—For 

12 purpose of subparagraph (A)(ii)—

13 ‘‘(i) IN GENERAL.—The term ‘mem14 bers of the family’ means the common an15 cestor, lineal descendants of the common 

16 ancestor, and the spouses (or former 

17 spouses) of such lineal descendants or com18 mon ancestor. 

19 ‘‘(ii) COMMON ANCESTOR.—For pur20 poses of this paragraph, an individual shall 

21 not be considered a common ancestor if, as 

22 of the later of the effective date of this 

23 paragraph or the time the election under 

24 section 1362(a) is made, the individual is 

25 more than 3 generations removed from the 
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•HR 4520 IH1S 

1 youngest generation of shareholders who 

2 would (but for this clause) be members of 

3 the family. For purposes of the preceding 

4 sentence, a spouse (or former spouse) shall 

5 be treated as being of the same generation 

6 as the individual to which such spouse is 

7 (or was) married. 

8 ‘‘(C) EFFECT OF ADOPTION, ETC.—In de9 termining whether any relationship specified in 

10 subparagraph (B) exists, the rules of section 

11 152(b)(2) shall apply. 

12 ‘‘(D) ELECTION.—An election under sub13 paragraph (A)(ii)—

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

15 in regulations prescribed by the Secretary, 

16 be made by any member of the family, and 

17 ‘‘(ii) shall remain in effect until termi18 nated as provided in regulations prescribed 

19 by the Secretary.’’. 

20 (b) RELIEF FROM INADVERTENT INVALID ELECTION

21 OR TERMINATION.—Section 1362(f) (relating to inad22 vertent invalid elections or terminations), as amended by 

23 section 229, is amended—
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•HR 4520 IH1S 

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

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

3 and 

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

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

6 (c) EFFECTIVE DATES.—

7 (1) SUBSECTION (a).—The amendment made 

8 by subsection (a) shall apply to taxable years begin9 ning after December 31, 2004. 

10 (2) SUBSECTION (b).—The amendments made 

11 by subsection (b) shall apply to elections and termi12 nations made after December 31, 2004. 

13 SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHARE14 HOLDERS TO 100. 

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

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

17 and inserting ‘‘100’’. 

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

19 this section shall apply to taxable years beginning after 

20 December 31, 2004. 

21 SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 

22 SHAREHOLDERS TO INCLUDE IRAS. 

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

24 certain trusts permitted as shareholders) is amended by 

25 inserting after clause (v) the following new clause: 
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•HR 4520 IH1S 

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

2 which is a bank (as defined in section 

3 581), a trust which constitutes an indi4 vidual retirement account under section 

5 408(a), including one designated as a Roth 

6 IRA under section 408A, but only to the 

7 extent of the stock held by such trust in 

8 such bank as of the date of the enactment 

9 of this clause.’’. 

10 (b) TREATMENT AS SHAREHOLDER.—Section 

11 1361(c)(2)(B) (relating to treatment as shareholders) is 

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

13 ‘‘(vi) In the case of a trust described 

14 in clause (vi) of subparagraph (A), the in15 dividual for whose benefit the trust was 

16 created shall be treated as a shareholder.’’. 

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

18 CORPORATION ELECTION EXEMPT FROM PROHIBITED

19 TRANSACTION RULES.—Section 4975(d) (relating to ex20 emptions) is amended by striking ‘‘or’’ at the end of para21 graph (14), by striking the period at the end of paragraph 

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

23 following new paragraph: 

24 ‘‘(16) a sale of stock held by a trust which con25 stitutes an individual retirement account under sec-
32

•HR 4520 IH1S 

1 tion 408(a) to the individual for whose benefit such 

2 account is established if—

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

4 section 581), 

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

6 the date of the enactment of this paragraph, 

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

8 under section 1362(a) by such bank, 

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

10 the time of sale (as established by an inde11 pendent appraiser) and the terms of the sale 

12 are otherwise at least as favorable to such trust 

13 as the terms that would apply on a sale to an 

14 unrelated party, 

15 ‘‘(E) such trust does not pay any commis16 sions, costs, or other expenses in connection 

17 with the sale, and 

18 ‘‘(F) the stock is sold in a single trans19 action for cash not later than 120 days after 

20 the S corporation election is made.’’. 

21 (d) CONFORMING AMENDMENT.—Section 512(e)(1) 

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

23 ‘‘1361(c)(6)’’. 
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•HR 4520 IH1S 

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

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

3 of this Act. 

4 SEC. 224. DISREGARD OF UNEXERCISED POWERS OF AP5 POINTMENT IN DETERMINING POTENTIAL 

6 CURRENT BENEFICIARIES OF ESBT. 

7 (a) IN GENERAL.—Section 1361(e)(2) (defining po8 tential current beneficiary) is amended—

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

10 any power of appointment to the extent such power 

11 remains unexercised at the end of such period)’’ 

12 after ‘‘of the trust’’ in the first sentence, and 

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

14 and inserting ‘‘1-year’’. 

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

16 this section shall apply to taxable years beginning after 

17 December 31, 2004. 

18 SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 

19 DIVORCE, ETC. 

20 (a) IN GENERAL.—Section 1366(d)(2) (relating to 

21 indefinite carryover of disallowed losses and deductions) 

22 is amended to read as follows: 

23 ‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED

24 LOSSES AND DEDUCTIONS.—
34

•HR 4520 IH1S 

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

2 subparagraph (B), any loss or deduction which 

3 is disallowed for any taxable year by reason of 

4 paragraph (1) shall be treated as incurred by 

5 the corporation in the succeeding taxable year 

6 with respect to that shareholder. 

7 ‘‘(B) TRANSFERS OF STOCK BETWEEN

8 SPOUSES OR INCIDENT TO DIVORCE.—In the 

9 case of any transfer described in section 

10 1041(a) of stock of an S corporation, any loss 

11 or deduction described in subparagraph (A) 

12 with respect such stock shall be treated as in13 curred by the corporation in the succeeding tax14 able year with respect to the transferee.’’

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

16 this section shall apply to taxable years beginning after 

17 December 31, 2004. 

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

19 AMOUNTS BY QUALIFIED SUBCHAPTER S 

20 TRUST INCOME BENEFICIARIES. 

21 (a) IN GENERAL.—Section 1361(d)(1) (relating to 

22 special rule for qualified subchapter S trust) is amended—

23 (1) by striking ‘‘and’’ at the end of subpara24 graph (A), 
35

•HR 4520 IH1S 

1 (2) by striking the period at the end of sub2 paragraph (B) and inserting ‘‘, and’’, and 

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

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

6 and 469 to the beneficiary of the trust, the dis7 position of the S corporation stock by the trust 

8 shall be treated as a disposition by such bene9 ficiary.’’. 

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

11 this section shall apply to transfers made after December 

12 31, 2004. 

13 SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME 

14 FROM PASSIVE INCOME TEST FOR BANK S 

15 CORPORATIONS. 

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

17 where passive investment income exceeds 25 percent of 

18 gross receipts for 3 consecutive taxable years and corpora19 tion has accumulated earnings and profits) is amended by 

20 adding at the end the following new subparagraph: 

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

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

23 a bank holding company (within the meaning of 

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

25 of 1956 (12 U.S.C. 1841(a))), or a financial 
36

•HR 4520 IH1S 

1 holding company (within the meaning of section 

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

3 income’ shall not include—

4 ‘‘(i) interest income earned by such 

5 bank or company, or 

6 ‘‘(ii) dividends on assets required to 

7 be held by such bank or company, includ8 ing stock in the Federal Reserve Bank, the 

9 Federal Home Loan Bank, or the Federal 

10 Agricultural Mortgage Bank or participa11 tion certificates issued by a Federal Inter12 mediate Credit Bank.’’. 

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

14 this section shall apply to taxable years beginning after 

15 December 31, 2004. 

16 SEC. 228. TREATMENT OF BANK DIRECTOR SHARES. 

17 (a) IN GENERAL.—Section 1361 (defining S corpora18 tion) is amended by adding at the end the following new 

19 subsection: 

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

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

22 stock shall not be taken into account as outstanding 

23 stock of the S corporation in applying this sub24 chapter (other than section 1368(f)). 
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1 ‘‘(2) RESTRICTED BANK DIRECTOR STOCK.—

2 For purposes of this subsection, the term ‘restricted 

3 bank director stock’ means stock in a bank (as de4 fined in section 581), a bank holding company (with5 in the meaning of section 2(a) of the Bank Holding 

6 Company Act of 1956 (12 U.S.C. 1841(a))), or a fi7 nancial holding company (within the meaning of sec8 tion 2(p) of such Act), registered with the Federal 

9 Reserve System if such stock—

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

11 under applicable Federal or State law in order 

12 to permit such individual to serve as a director, 

13 and 

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

15 bank or company (or a corporation which con16 trols (within the meaning of section 368(c)) 

17 such bank or company) pursuant to which the 

18 holder is required to sell back such stock (at 

19 the same price as the individual acquired such 

20 stock) upon ceasing to hold the office of direc21 tor. 
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1 ‘‘(3) CROSS REFERENCE.—

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

1368(f).’’.

2 (b) DISTRIBUTIONS.—Section 1368 (relating to dis3 tributions) is amended by adding at the end the following 

4 new subsection: 

5 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di6 rector receives a distribution (not in part or full payment 

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

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

9 1361(f)), the amount of such distribution—

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

11 director, and 

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

13 the taxable year of such corporation in which or with 

14 which ends the taxable year in which such amount 

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

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

17 this section shall apply to taxable years beginning after 

18 December 31, 2004. 

19 SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALI20 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 

21 AND TERMINATIONS. 

22 (a) IN GENERAL.—Section 1362(f) (relating to inad23 vertent invalid elections or terminations) is amended—
39

•HR 4520 IH1S 

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

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

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

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

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

6 follows: 

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

8 election was made is a small business corpora9 tion or a qualified subchapter S subsidiary, as 

10 the case may be, or’’, 

11 (4) by amending paragraph (4) to read as fol12 lows: 

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

14 made, and each person who was a shareholder in 

15 such corporation at any time during the period spec16 ified pursuant to this subsection, agrees to make 

17 such adjustments (consistent with the treatment of 

18 such corporation as an S corporation or a qualified 

19 subchapter S subsidiary, as the case may be) as may 

20 be required by the Secretary with respect to such pe21 riod,’’, and 

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

23 subsidiary, as the case may be’’ after ‘‘S corpora24 tion’’ in the matter following paragraph (4). 
40

•HR 4520 IH1S 

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

2 this section shall apply to taxable years beginning after 

3 December 31, 2004. 

4 SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUB5 CHAPTER S SUBSIDIARIES. 

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

7 to treatment of certain wholly owned subsidiaries) is 

8 amended by inserting ‘‘and in the case of information re9 turns required under part III of subchapter A of chapter 

10 61’’ after ‘‘Secretary’’. 

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

12 this section shall apply to taxable years beginning after 

13 December 31, 2004. 

14 SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EM15 PLOYER SECURITIES. 

16 (a) IN GENERAL.—Subsection (f) of section 4975 (re17 lating to other definitions and special rules) is amended 

18 by adding at the end the following new paragraph: 

19 ‘‘(7) S CORPORATION REPAYMENT OF LOANS

20 FOR QUALIFYING EMPLOYER SECURITIES.—A plan 

21 shall not be treated as violating the requirements of 

22 section 401 or 409 or subsection (e)(7), or as engag23 ing in a prohibited transaction for purposes of sub24 section (d)(3), merely by reason of any distribution 

25 (as described in section 1368(a)) with respect to S 
41

•HR 4520 IH1S 

1 corporation stock that constitutes qualifying em2 ployer securities, which in accordance with the plan 

3 provisions is used to make payments on a loan de4 scribed in subsection (d)(3) the proceeds of which 

5 were used to acquire such qualifying employer secu6 rities (whether or not allocated to participants). The 

7 preceding sentence shall not apply in the case of a 

8 distribution which is paid with respect to any em9 ployer security which is allocated to a participant 

10 unless the plan provides that employer securities 

11 with a fair market value of not less than the amount 

12 of such distribution are allocated to such participant 

13 for the year which (but for the preceding sentence) 

14 such distribution would have been allocated to such 

15 participant.’’. 

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

17 this section shall apply to distributions with respect to S 

18 corporation stock made after December 31, 2004. 

19 Subtitle D—Alternative Minimum 

20 Tax Relief 

21 SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MIN22 IMUM TAX. 

23 (a) IN GENERAL.—

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

25 striking paragraph (2) and by redesignating para-
42

•HR 4520 IH1S 

1 graphs (3) and (4) as paragraphs (2) and (3), re2 spectively. 

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

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

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

6 this section shall apply to taxable years beginning after 

7 December 31, 2004. 

8 SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE 

9 MINIMUM TAX FOR SMALL CORPORATIONS. 

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

11 section 55(e)(1) are each amended by striking 

12 ‘‘$7,500,000’’ each place it appears and inserting 

13 ‘‘$20,000,000’’. 

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

15 this section shall apply to taxable years beginning after 

16 December 31, 2005. 

17 SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO IN18 CREASE ALTERNATIVE MINIMUM TAX. 

19 (a) IN GENERAL.—Subsection (c) of section 55 (de20 fining regular tax) is amended by redesignating paragraph 

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

22 the following new paragraph: 

23 ‘‘(2) COORDINATION WITH INCOME AVERAGING

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

25 section 1301 (relating to averaging of farm income) 
43

•HR 4520 IH1S 

1 shall not apply in computing the regular tax liabil2 ity.’’. 

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

4 subsection (a) shall apply to taxable years beginning after 

5 December 31, 2003. 

6 Subtitle E—Restructuring of 

7 Incentives for Alcohol Fuels, Etc. 

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

9 WITH EXCISE TAX CREDIT; REPEAL OF 

10 OTHER ALCOHOL-BASED FUEL INCENTIVES; 

11 ETC. 

12 (a) EXCISE TAX CREDIT FOR ALCOHOL FUEL MIX13 TURES.—

14 (1) IN GENERAL.—Subsection (f) of section 

15 6427 is amended to read as follows: 

16 ‘‘(f) ALCOHOL FUEL MIXTURES.—

17 ‘‘(1) IN GENERAL.—The amount of credit 

18 which would (but for section 40(c)) be determined 

19 under section 40(a)(1) for any period—

20 ‘‘(A) shall, with respect to taxable events 

21 occurring during such period, be treated—

22 ‘‘(i) as a payment of the taxpayer’s li23 ability for tax imposed by section 4081, 

24 and 
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1 ‘‘(ii) as received at the time of the 

2 taxable event, and 

3 ‘‘(B) to the extent such amount of credit 

4 exceeds such liability for such period, shall (ex5 cept as provided in subsection (k)) be paid sub6 ject to subsection (i)(3) by the Secretary with7 out interest. 

8 ‘‘(2) SPECIAL RULES.—

9 ‘‘(A) ONLY CERTAIN ALCOHOL TAKEN

10 INTO ACCOUNT.—For purposes of paragraph 

11 (1), section 40 shall be applied—

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

13 with a proof of less than 190, and 

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

15 gallon equivalent of ethyl tertiary butyl 

16 ether or other ethers produced from such 

17 alcohol. 

18 ‘‘(B) TREATMENT OF REFINERS.—For 

19 purposes of paragraph (1), in the case of a mix20 ture—

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

22 in subparagraph (A)(ii), and 

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

24 at a refinery prior to any taxable event, 
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•HR 4520 IH1S 

1 section 40 shall be applied by treating such per2 son as having sold such mixture at the time of 

3 its removal from the refinery (and only at such 

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

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

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

7 of section 40(d)(3) shall apply for purposes of this 

8 subsection. 

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

10 only to periods to which section 40 applies, deter11 mined by substituting in section 40(e)—

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

13 31, 2007’, and 

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

15 2008’.’’

16 (2) REVISION OF RULES FOR PAYMENT OF

17 CREDIT.—Paragraph (3) of section 6427(i) is 

18 amended to read as follows: 

19 ‘‘(3) SPECIAL RULE FOR ALCOHOL MIXTURE

20 CREDIT.—

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

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

23 any period—

24 ‘‘(i) for which $200 or more is pay25 able under such subsection (f)(1)(B), and 
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•HR 4520 IH1S 

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

2 In the case of an electronic claim, this subpara3 graph shall be applied without regard to clause 

4 (i). 

5 ‘‘(B) PAYMENT OF CLAIM.—Notwith6 standing subsection (f)(1)(B), if the Secretary 

7 has not paid pursuant to a claim filed under 

8 this section within 45 days of the date of the 

9 filing of such claim (20 days in the case of an 

10 electronic claim), the claim shall be paid with 

11 interest from such date determined by using the 

12 overpayment rate and method under section 

13 6621. 

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

15 filed under this paragraph shall be allowed un16 less filed on or before the last day of the first 

17 quarter following the earliest quarter included 

18 in the claim.’’

19 (b) REPEAL OF OTHER INCENTIVES FOR FUEL MIX20 TURES.—

21 (1) Subsection (b) of section 4041 is amended 

22 to read as follows: 

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

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

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

3 used in an off-highway business use. 

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

5 which no tax was imposed by reason of paragraph 

6 (1) is used otherwise than in an off-highway busi7 ness use, a tax shall be imposed by paragraph 

8 (1)(B), (2)(B), or (3)(A)(ii) of subsection (a) 

9 (whichever is appropriate) and by the corresponding 

10 provision of subsection (d)(1) (if any). 

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

12 For purposes of this subsection, the term ‘off-high13 way business use’ has the meaning given to such 

14 term by section 6421(e)(2); except that such term 

15 shall not, for purposes of subsection (a)(1), include 

16 use in a diesel-powered train.’’

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

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

19 (4) Section 4091(c) is hereby repealed. 

20 (c) TRANSFERS TO HIGHWAY TRUST FUND.—Para21 graph (4) of section 9503(b) is amended by adding ‘‘or’’ 

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

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

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

25 (d) CONFORMING AMENDMENTS.—
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1 (1) Subsection (c) of section 40 is amended to 

2 read as follows: 

3 ‘‘(c) COORDINATION WITH EXCISE TAX BENE4 FITS.—The amount of the credit determined under this 

5 section with respect to any alcohol shall, under regulations 

6 prescribed by the Secretary, be properly reduced to take 

7 into account the benefit provided with respect to such alco8 hol under section 6427(f).’’

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

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

11 4081(c)’’ and inserting ‘‘under section 6427(f)’’. 

12 (e) EFFECTIVE DATES.—

13 (1) IN GENERAL.—Except as provided by para14 graph (2), the amendments made by this section 

15 shall apply to fuel sold or used after September 30, 

16 2004. 

17 (2) SUBSECTION (c).—The amendments made 

18 by subsection (c) shall apply to taxes imposed after 

19 September 30, 2003. 

20 SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL 

21 FUND. 

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

23 amended by adding at the end the following new flush sen24 tence: 
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•HR 4520 IH1S 

1 ‘‘For purposes of this paragraph, the amount of 

2 taxes received under section 4081 shall include any 

3 amount treated as a payment under section 

4 6427(f)(1)(A) and shall not be reduced by the 

5 amount paid under section 6427(f)(1)(B).’’. 

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

7 section 9503(c)(2) is amended by adding at the end the 

8 following new sentence: ‘‘Clauses (i)(III) and (ii) shall not 

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

10 (c) EFFECTIVE DATE.—

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

12 subsection (a) shall apply to taxes received after 

13 September 30, 2004. 

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

15 subsection (b) shall apply to amounts paid after 

16 September 30, 2004, and (to the extent related to 

17 section 34 of the Internal Revenue Code of 1986) to 

18 fuel used after such date. 

19 Subtitle F—Stock Options and Em20 ployee Stock Purchase Plan 

21 Stock Options 

22 SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 

23 EMPLOYEE STOCK PURCHASE PLAN STOCK 

24 OPTIONS FROM WAGES. 

25 (a) EXCLUSION FROM EMPLOYMENT TAXES.—
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1 (1) SOCIAL SECURITY TAXES.—

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

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

4 end of paragraph (20), by striking the period at 

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

6 and by inserting after paragraph (21) the fol7 lowing new paragraph: 

8 ‘‘(22) remuneration on account of—

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

10 individual pursuant to an exercise of an incen11 tive stock option (as defined in section 422(b)) 

12 or under an employee stock purchase plan (as 

13 defined in section 423(b)), or 

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

15 such stock.’’. 

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

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

18 paragraph (17), by striking the period at the 

19 end of paragraph (18) and inserting ‘‘; or’’, and 

20 by inserting after paragraph (18) the following 

21 new paragraph: 

22 ‘‘(19) Remuneration on account of—

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

24 individual pursuant to an exercise of an incen25 tive stock option (as defined in section 422(b) 
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1 of the Internal Revenue Code of 1986) or under 

2 an employee stock purchase plan (as defined in 

3 section 423(b) of such Code), or 

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

5 such stock.’’. 

6 (2) RAILROAD RETIREMENT TAXES.—Sub7 section (e) of section 3231 is amended by adding at 

8 the end the following new paragraph: 

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

10 ‘compensation’ shall not include any remuneration 

11 on account of—

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

13 individual pursuant to an exercise of an incen14 tive stock option (as defined in section 422(b)) 

15 or under an employee stock purchase plan (as 

16 defined in section 423(b)), or 

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

18 such stock.’’. 

19 (3) UNEMPLOYMENT TAXES.—Section 3306(b) 

20 (relating to definition of wages) is amended by strik21 ing ‘‘or’’ at the end of paragraph (17), by striking 

22 the period at the end of paragraph (18) and insert23 ing ‘‘; or’’, and by inserting after paragraph (18) the 

24 following new paragraph: 

25 ‘‘(19) remuneration on account of—
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•HR 4520 IH1S 

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

2 individual pursuant to an exercise of an incen3 tive stock option (as defined in section 422(b)) 

4 or under an employee stock purchase plan (as 

5 defined in section 423(b)), or 

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

7 such stock.’’. 

8 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS9 QUALIFYING DISPOSITIONS.—Section 421(b) (relating to 

10 effect of disqualifying dispositions) is amended by adding 

11 at the end the following new sentence: ‘‘No amount shall 

12 be required to be deducted and withheld under chapter 

13 24 with respect to any increase in income attributable to 

14 a disposition described in the preceding sentence.’’. 

15 (c) WAGE WITHHOLDING NOT REQUIRED ON COM16 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER17 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

18 423(c) (relating to special rule where option price is be19 tween 85 percent and 100 percent of value of stock) is 

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

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

22 under chapter 24 with respect to any amount treated as 

23 compensation under this subsection.’’. 
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1 (d) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to stock acquired pursuant to op3 tions exercised after the date of the enactment of this Act. 

4 Subtitle G—Incentives to Reinvest 

5 Foreign Earnings in United States 

6 SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN 

7 UNITED STATES. 

8 (a) IN GENERAL.—Subpart F of part III of sub9 chapter N of chapter 1 (relating to controlled foreign cor10 porations) is amended by adding at the end the following 

11 new section: 

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

13 ‘‘(a) DEDUCTION.—

14 ‘‘(1) IN GENERAL.—In the case of a corpora15 tion which is a United States shareholder, there 

16 shall be allowed as a deduction an amount equal to 

17 85 percent of the dividends which are received by 

18 such shareholder from controlled foreign corpora19 tions during the election period. 

20 ‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON21 TROLLED FOREIGN CORPORATIONS.—If, within the 

22 election period, a United States shareholder receives 

23 a distribution from a controlled foreign corporation 

24 which is excluded from gross income under section 

25 959(a), such distribution shall be treated for pur-
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•HR 4520 IH1S 

1 poses of this section as a dividend to the extent of 

2 any amount included in income by such United 

3 States shareholder under section 951(a)(1)(A) as a 

4 result of any dividend paid during the election period 

5 to—

6 ‘‘(A) such controlled foreign corporation 

7 from another controlled foreign corporation that 

8 is in a chain of ownership described in section 

9 958(a), or 

10 ‘‘(B) any other controlled foreign corpora11 tion in such chain of ownership, but only to the 

12 extent of distributions described in section 

13 959(b) which are made during the election pe14 riod to the controlled foreign corporation from 

15 which such United States shareholder received 

16 such distribution. 

17 ‘‘(b) LIMITATIONS.—

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

19 taken into account under subsection (a) shall not ex20 ceed the greater of—

21 ‘‘(A) $500,000,000, 

22 ‘‘(B) the amount shown on the applicable 

23 financial statement as earnings permanently re24 invested outside the United States, or 
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•HR 4520 IH1S 

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

2 statement which fails to show a specific amount 

3 of earnings permanently reinvested outside the 

4 United States and which shows a specific 

5 amount of tax liability attributable to such 

6 earnings, the amount of such earnings deter7 mined in such manner as the Secretary may 

8 prescribe. 

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

10 no statement or such statement fails to show a spe11 cific amount of such earnings or liability, such 

12 amount shall be treated as being zero for purposes 

13 of this paragraph. 

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

15 The amount of dividends taken into account under 

16 subsection (a) shall not exceed the excess (if any) 

17 of—

18 ‘‘(A) the dividends received during the tax19 able year by such shareholder from controlled 

20 foreign corporations, over 

21 ‘‘(B) the annual average for the base pe22 riod years of—

23 ‘‘(i) the dividends received during 

24 each base period year by such shareholder 

25 from such corporations, 
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•HR 4520 IH1S 

1 ‘‘(ii) the amounts includible in such 

2 shareholder’s gross income for each base 

3 period year under section 951(a)(1)(B) 

4 with respect to such corporations, and 

5 ‘‘(iii) the amounts that would have 

6 been included for each base period year 

7 but for section 959(a) with respect to such 

8 corporations. 

9 The amount taken into account under clause 

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

11 any amount which is not includible in gross in12 come by reason of an amount described in 

13 clause (ii) with respect to a prior taxable year. 

14 ‘‘(3) REQUIREMENT TO INVEST IN UNITED

15 STATES.—Subsection (a) shall not apply to any divi16 dend received by a United States shareholder unless 

17 the amount of the dividend is invested in the United 

18 States pursuant to a plan describing the expendi19 tures to be made with such amount—

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

21 is approved by the president or chief executive 

22 officer of such shareholder, and 

23 ‘‘(B) which is approved by the Board of 

24 Directors (or management committee) of such 
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1 shareholder no later than its first meeting on or 

2 after the date the dividend is received. 

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

5 ‘‘(1) ELECTION PERIOD.—The term ‘election 

6 period’ means—

7 ‘‘(A) if this section applies to the tax8 payer’s last taxable year beginning before the 

9 date of the enactment of this section, any 6-

10 month or shorter period during such year which 

11 is after the date of the enactment of this sec12 tion and which is selected by the taxpayer, and 

13 ‘‘(B) if this section applies to the tax14 payer’s first taxable year beginning on or after 

15 such date, the 1st 6 months of such taxable 

16 year. 

17 ‘‘(2) APPLICABLE FINANCIAL STATEMENT.—

18 The term ‘applicable financial statement’ means the 

19 most recently audited financial statement (including 

20 notes and other documents which accompany such 

21 statement)—

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

23 31, 2003, as being prepared in accordance with 

24 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), 

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

21 largest, 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 

3 this paragraph. 

4 ‘‘(4) COORDINATION WITH DIVIDENDS RE5 CEIVED DEDUCTION.—No deduction shall be allowed 

6 under section 243 or 245 for any dividend for which 

7 a deduction 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 de12 ductible portion of any dividend or of any amount 

13 described in subsection (a)(2). No deduction shall be 

14 allowed under this chapter for any tax for which 

15 credit is not allowable by reason of the preceding 

16 sentence. 

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

18 paragraph (1), unless the taxpayer otherwise speci19 fies, the deductible portion of any dividend is the 

20 amount which bears the same ratio to the amount 

21 of such dividend as the amount allowed as a deduc22 tion under subsection (a) for the taxable year bears 

23 to the amount described in subsection (b)(2)(A) for 

24 such year. 
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1 ‘‘(e) INCREASE IN TAX ON INCLUDED AMOUNTS NOT

2 REDUCED BY CREDITS, ETC.—

3 ‘‘(1) IN GENERAL.—Any tax under this chapter 

4 by reason of nondeductible CFC dividends shall not 

5 be treated as tax imposed by this chapter for pur6 poses of determining—

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

8 under this chapter, or 

9 ‘‘(B) the amount of the tax imposed by 

10 section 55. 

11 Subparagraph (A) shall not apply to the credit 

12 under section 53 or to the credit under section 27(a) 

13 with respect to taxes attributable to such dividends. 

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

15 OPERATING LOSSES.—

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

17 any United States shareholder for any taxable 

18 year shall in no event be less than the amount 

19 of nondeductible CFC dividends received during 

20 such year. 

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

22 The nondeductible CFC dividends for any tax23 able year shall not be taken into account—
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1 ‘‘(i) in determining under section 172 

2 the amount of any net operating loss for 

3 such taxable year, and 

4 ‘‘(ii) in determining taxable income 

5 for such taxable year for purposes of the 

6 2nd sentence of section 172(b)(2). 

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

8 purposes of this subsection, the term ‘nondeductible 

9 CFC dividends’ means the excess of the amount of 

10 dividends taken into account under subsection (a) 

11 over the deduction allowed under subsection (a) for 

12 such dividends. 

13 ‘‘(f) ELECTION.—This section shall apply for the tax14 payer’s first taxable year beginning on or after the date 

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

16 application for such taxable year. The taxpayer may elect 

17 to apply this section to the taxpayer’s last taxable year 

18 beginning before the date of the enactment of this section 

19 in lieu of such first taxable year.’’

20 (b) ALTERNATIVE MINIMUM TAX.—Subparagraph 

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

22 the following new clause: 

23 ‘‘(v) SPECIAL RULE FOR CERTAIN DIS24 TRIBUTIONS FROM CONTROLLED FOREIGN

25 CORPORATIONS.—Clause (i) shall not apply 
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1 to any deduction allowable under section 

2 965.’’. 

3 (c) CLERICAL AMENDMENT.—The table of sections 

4 for subpart F of part III of subchapter N of chapter 1 

5 is amended by adding at the end the following new item:

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

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

7 this section shall apply to taxable years ending on or after 

8 the date of the enactment of this Act. 

9 Subtitle H—Other Incentive 

10 Provisions 

11 SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON AC12 COUNT OF WEATHER-RELATED CONDITIONS. 

13 (a) RULES FOR REPLACEMENT OF INVOLUNTARILY

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

15 (relating to involuntary conversions) is amended—

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

17 and inserting ‘‘CONDITIONS.—

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

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

20 paragraph: 

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

22 ‘‘(A) IN GENERAL.—In the case of 

23 drought, flood, or other weather-related condi24 tions described in paragraph (1) which result in 

25 the area being designated as eligible for assist-
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1 ance by the Federal Government, subsection 

2 (a)(2)(B) shall be applied with respect to any 

3 converted property by substituting ‘4 years’ for 

4 ‘2 years’. 

5 ‘‘(B) FURTHER EXTENSION BY SEC6 RETARY.—The Secretary may extend on a re7 gional basis the period for replacement under 

8 this section (after the application of subpara9 graph (A)) for such additional time as the Sec10 retary determines appropriate if the weather-re11 lated conditions which resulted in such applica12 tion continue for more than 3 years.’’. 

13 (b) INCOME INCLUSION RULES.—Subsection (e) of 

14 section 451 (relating to special rule for proceeds from live15 stock sold on account of drought, flood, or other weather16 related conditions) is amended by adding at the end the 

17 following new paragraph: 

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

19 1033(e)(2) applies to a sale or exchange of livestock 

20 described in paragraph (1), the election under para21 graph (1) shall be deemed valid if made during the 

22 replacement period described in such section.’’. 

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

24 this section shall apply to any taxable year with respect 
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1 to which the due date (without regard to extensions) for 

2 the return is after December 31, 2002. 

3 SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA4 TIVES WITHOUT REDUCING PATRONAGE 

5 DIVIDENDS. 

6 (a) IN GENERAL.—Subsection (a) of section 1388 

7 (relating to patronage dividend defined) is amended by 

8 adding at the end the following: ‘‘For purposes of para9 graph (3), net earnings shall not be reduced by amounts 

10 paid during the year as dividends on capital stock or other 

11 proprietary capital interests of the organization to the ex12 tent that the articles of incorporation or bylaws of such 

13 organization or other contract with patrons provide that 

14 such dividends are in addition to amounts otherwise pay15 able to patrons which are derived from business done with 

16 or for patrons during the taxable year.’’. 

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

18 this section shall apply to distributions in taxable years 

19 beginning after the date of the enactment of this Act. 

20 SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 

21 631(b) TO APPLY TO OUTRIGHT SALES BY 

22 LANDOWNERS. 

23 (a) IN GENERAL.—The first sentence of section 

24 631(b) (relating to disposal of timber with a retained eco25 nomic interest) is amended by striking ‘‘retains an eco-
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1 nomic interest in such timber’’ and inserting ‘‘either re2 tains an economic interest in such timber or makes an 

3 outright sale of such timber’’. 

4 (b) CONFORMING AMENDMENTS.—

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

6 amended by striking ‘‘The date of disposal’’ and in7 serting ‘‘In the case of disposal of timber with a re8 tained economic interest, the date of disposal’’. 

9 (2) The heading for section 631(b) is amended 

10 by striking ‘‘WITH A RETAINED ECONOMIC INTER11 EST’’. 

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

13 this section shall apply to sales after December 31, 2004. 

14 SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PART15 NERSHIPS TREATED AS QUALIFYING INCOME 

16 OF REGULATED INVESTMENT COMPANIES. 

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

18 (defining regulated investment company) is amended to 

19 read as follows: 

20 ‘‘(2) at least 90 percent of its gross income is 

21 derived from—

22 ‘‘(A) dividends, interest, payments with re23 spect to securities loans (as defined in section 

24 512(a)(5)), and gains from the sale or other 

25 disposition of stock or securities (as defined in 
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1 section 2(a)(36) of the Investment Company 

2 Act of 1940, as amended) or foreign currencies, 

3 or other income (including but not limited to 

4 gains from options, futures or forward con5 tracts) derived with respect to its business of 

6 investing in such stock, securities, or currencies, 

7 and 

8 ‘‘(B) distributions or other income derived 

9 from an interest in a qualified publicly traded 

10 partnership (as defined in subsection (h)); 

11 and’’. 

12 (b) SOURCE FLOW-THROUGH RULE NOT TO

13 APPLY.—The last sentence of section 851(b) is amended 

14 by inserting ‘‘(other than a qualified publicly traded part15 nership as defined in subsection (h))’’ after ‘‘derived from 

16 a partnership’’. 

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

18 section 851 is amended by redesignating paragraph (5) 

19 as paragraph (6) and inserting after paragraph (4) the 

20 following new paragraph: 

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

22 such issuer’ shall include the equity securities of a 

23 qualified publicly traded partnership (as defined in 

24 subsection (h)).’’. 
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1 (d) DEFINITION OF QUALIFIED PUBLICLY TRADED

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

3 end the following new subsection: 

4 ‘‘(h) QUALIFIED PUBLICLY TRADED PARTNER5 SHIP.—For purposes of this section, the term ‘qualified 

6 publicly traded partnership’ means a publicly traded part7 nership described in section 7704(b) other than a partner8 ship which would satisfy the gross income requirements 

9 of section 7704(c)(2) if qualifying income included only 

10 income described in subsection (b)(2)(A).’’. 

11 (e) DEFINITION OF QUALIFYING INCOME.—Section 

12 7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ 

13 and inserting ‘‘section 851(b)(2)(A)’’. 

14 (f) LIMITATION ON COMPOSITION OF ASSETS.—Sub15 paragraph (B) of section 851(b)(3) is amended to read 

16 as follows: 

17 ‘‘(B) not more than 25 percent of the 

18 value of its total assets is invested in—

19 ‘‘(i) the securities (other than Govern20 ment securities or the securities of other 

21 regulated investment companies) of any 

22 one issuer, 

23 ‘‘(ii) the securities (other than the se24 curities of other regulated investment com25 panies) of two or more issuers which the 
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1 taxpayer controls and which are deter2 mined, under regulations prescribed by the 

3 Secretary, to be engaged in the same or 

4 similar trades or businesses or related 

5 trades or businesses, or 

6 ‘‘(iii) the securities of one or more 

7 qualified publicly traded partnerships (as 

8 defined in subsection (h)).’’. 

9 (g) APPLICATION OF SPECIAL PASSIVE ACTIVITY

10 RULE TO REGULATED INVESTMENT COMPANIES.—Sub11 section (k) of section 469 (relating to separate application 

12 of section in case of publicly traded partnerships) is 

13 amended by adding at the end the following new para14 graph: 

15 ‘‘(4) APPLICATION TO REGULATED INVEST16 MENT COMPANIES.—For purposes of this section, a 

17 regulated investment company (as defined in section 

18 851) holding an interest in a qualified publicly trad19 ed partnership (as defined in section 851(h)) shall 

20 be treated as a taxpayer described in subsection 

21 (a)(2) with respect to items attributable to such in22 terest.’’. 

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

24 this section shall apply to taxable years beginning after 

25 the date of the enactment of this Act. 
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1 SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE IN2 VESTMENT TRUSTS. 

3 (a) EXPANSION OF STRAIGHT DEBT SAFE HAR4 BOR.—Section 856 (defining real estate investment trust) 

5 is amended—

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

7 and 

8 (2) by adding at the end the following new sub9 section: 

10 ‘‘(m) SAFE HARBOR IN APPLYING SUBSECTION

11 (c)(4).—

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

13 of subsection (c)(4)(B)(iii), except as otherwise de14 termined by the Secretary in regulations, the fol15 lowing shall not be considered securities held by the 

16 trust: 

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

18 which meet the requirements of paragraph (2). 

19 ‘‘(B) Any loan to an individual or an es20 tate. 

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

22 defined in section 467(d)), other than with a 

23 person described in subsection (d)(2)(B). 

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

25 property (as defined in subsection (d)(1)). 
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1 ‘‘(E) Any security issued by a State or any 

2 political subdivision thereof, the District of Co3 lumbia, a foreign government or any political 

4 subdivision thereof, or the Commonwealth of 

5 Puerto Rico, but only if the determination of 

6 any payment received or accrued under such se7 curity does not depend in whole or in part on 

8 the profits of any entity not described in this 

9 subparagraph or payments on any obligation 

10 issued by such an entity, 

11 ‘‘(F) Any security issued by a real estate 

12 investment trust. 

13 ‘‘(G) Any other arrangement as deter14 mined by the Secretary. 

15 ‘‘(2) SPECIAL RULES RELATING TO STRAIGHT

16 DEBT SECURITIES.—

17 ‘‘(A) IN GENERAL.—For purposes of para18 graph (1)(A), securities meet the requirements 

19 of this paragraph if such securities are straight 

20 debt, as defined in section 1361(c)(5) (without 

21 regard to subparagraph (B)(iii) thereof). 

22 ‘‘(B) SPECIAL RULES RELATING TO CER23 TAIN CONTINGENCIES.—For purposes of sub24 paragraph (A), any interest or principal shall 

25 not be treated as failing to satisfy section 
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•HR 4520 IH1S 

1 1361(c)(5)(B)(i) solely by reason of the fact 

2 that—

3 ‘‘(i) the time of payment of such in4 terest or principal is subject to a contin5 gency, but only if—

6 ‘‘(I) any such contingency does 

7 not have the effect of changing the ef8 fective yield to maturity, as deter9 mined under section 1272, other than 

10 a change in the annual yield to matu11 rity which does not exceed the greater 

of 1 12 ⁄4 of 1 percent or 5 percent of the 

13 annual yield to maturity, or 

14 ‘‘(II) neither the aggregate issue price 

15 nor the aggregate face amount of the 

16 issuer’s debt instruments held by the trust 

17 exceeds $1,000,000 and not more than 12 

18 months of unaccrued interest can be re19 quired to be prepaid thereunder, or 

20 ‘‘(ii) the time or amount of payment 

21 is subject to a contingency upon a default 

22 or the exercise of a prepayment right by 

23 the issuer of the debt, but only if such con24 tingency is consistent with customary com25 mercial practice. 
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1 ‘‘(C) SPECIAL RULES RELATING TO COR2 PORATE OR PARTNERSHIP ISSUERS.—In the 

3 case of an issuer which is a corporation or a 

4 partnership, securities that otherwise would be 

5 described in paragraph (1)(A) shall be consid6 ered not to be so described if the trust holding 

7 such securities and any of its controlled taxable 

8 REIT subsidiaries (as defined in subsection 

9 (d)(8)(A)(iv)) hold any securities of the issuer 

10 which—

11 ‘‘(i) are not described in paragraph 

12 (1) (prior to the application of this sub13 paragraph), and 

14 ‘‘(ii) have an aggregate value greater 

15 than 1 percent of the issuer’s outstanding 

16 securities determined without regard to 

17 paragraph (3)(A)(i). 

18 ‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP

19 SECURITIES.—

20 ‘‘(A) IN GENERAL.—For purposes of ap21 plying subclause (III) of subsection 

22 (c)(4)(B)(iii)—

23 ‘‘(i) a trust’s interest as a partner in 

24 a partnership (as defined in section 
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•HR 4520 IH1S 

1 7701(a)(2)) shall not be considered a secu2 rity, and 

3 ‘‘(ii) the trust shall be deemed to own 

4 its proportionate share of each of the as5 sets of the partnership. 

6 ‘‘(B) DETERMINATION OF TRUST’S INTER7 EST IN PARTNERSHIP ASSETS.—For purposes 

8 of subparagraph (A), with respect to any tax9 able year beginning after the date of the enact10 ment of this subparagraph—

11 ‘‘(i) the trust’s interest in the partner12 ship assets shall be the trust’s propor13 tionate interest in any securities issued by 

14 the partnership (determined without re15 gard to subparagraph (A)(i) and para16 graph (4), but not including securities de17 scribed in paragraph (1)), and 

18 ‘‘(ii) the value of any debt instrument 

19 shall be the adjusted issue price thereof, as 

20 defined in section 1272(a)(4). 

21 ‘‘(4) CERTAIN PARTNERSHIP DEBT INSTRU22 MENTS NOT TREATED AS A SECURITY.—For pur23 poses of applying subclause (III) of subsection 

24 (c)(4)(B)(iii)—
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1 ‘‘(A) any debt instrument issued by a part2 nership and not described in paragraph (1) 

3 shall not be considered a security to the extent 

4 of the trust’s interest as a partner in the part5 nership, and 

6 ‘‘(B) any debt instrument issued by a part7 nership and not described in paragraph (1) 

8 shall not be considered a security if at least 75 

9 percent of the partnership’s gross income (ex10 cluding gross income from prohibited trans11 actions) is derived from sources referred to in 

12 subsection (c)(3). 

13 ‘‘(5) SECRETARIAL GUIDANCE.—The Secretary 

14 is authorized to provide guidance (including through 

15 the issuance of a written determination, as defined 

16 in section 6110(b)) that an arrangement shall not be 

17 considered a security held by the trust for purposes 

18 of applying subclause (III) of subsection 

19 (c)(4)(B)(iii) notwithstanding that such arrangement 

20 otherwise could be considered a security under sub21 paragraph (F) of subsection (c)(5).’’. 

22 (b) CLARIFICATION OF APPLICATION OF LIMITED

23 RENTAL EXCEPTION.—Subparagraph (A) of section 

24 856(d)(8) (relating to special rules for taxable REIT sub25 sidiaries) is amended to read as follows: 
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1 ‘‘(A) LIMITED RENTAL EXCEPTION.—

2 ‘‘(i) IN GENERAL.—The requirements 

3 of this subparagraph are met with respect 

4 to any property if at least 90 percent of 

5 the leased space of the property is rented 

6 to persons other than taxable REIT sub7 sidiaries of such trust and other than per8 sons described in paragraph (2)(B). 

9 ‘‘(ii) RENTS MUST BE SUBSTANTIALLY

10 COMPARABLE.—Clause (i) shall apply only 

11 to the extent that the amounts paid to the 

12 trust as rents from real property (as de13 fined in paragraph (1) without regard to 

14 paragraph (2)(B)) from such property are 

15 substantially comparable to such rents paid 

16 by the other tenants of the trust’s property 

17 for comparable space. 

18 ‘‘(iii) TIMES FOR TESTING RENT COM19 PARABILITY.—The substantial com20 parability requirement of clause (ii) shall 

21 be treated as met with respect to a lease 

22 to a taxable REIT subsidiary of the trust 

23 if such requirement is met under the terms 

24 of the lease—
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•HR 4520 IH1S 

1 ‘‘(I) at the time such lease is en2 tered into, 

3 ‘‘(II) at the time of each exten4 sion of the lease, including a failure to 

5 exercise a right to terminate, and 

6 ‘‘(III) at the time of any modi7 fication of the lease between the trust 

8 and the taxable REIT subsidiary if 

9 the rent under such lease is effectively 

10 increased pursuant to such modifica11 tion. 

12 With respect to subclause (III), if the tax13 able REIT subsidiary of the trust is a con14 trolled taxable REIT subsidiary of the 

15 trust, the term ‘rents from real property’ 

16 shall not in any event include rent under 

17 such lease to the extent of the increase in 

18 such rent on account of such modification. 

19 ‘‘(iv) CONTROLLED TAXABLE REIT

20 SUBSIDIARY.—For purposes of clause (iii), 

21 the term ‘controlled taxable REIT sub22 sidiary’ means, with respect to any real es23 tate investment trust, any taxable REIT 

24 subsidiary of such trust if such trust owns 

25 directly or indirectly—
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•HR 4520 IH1S 

1 ‘‘(I) stock possessing more than 

2 50 percent of the total voting power 

3 of the outstanding stock of such sub4 sidiary, or 

5 ‘‘(II) stock having a value of 

6 more than 50 percent of the total 

7 value of the outstanding stock of such 

8 subsidiary. 

9 ‘‘(v) CONTINUING QUALIFICATION

10 BASED ON THIRD PARTY ACTIONS.—If the 

11 requirements of clause (i) are met at a 

12 time referred to in clause (iii), such re13 quirements shall continue to be treated as 

14 met so long as there is no increase in the 

15 space leased to any taxable REIT sub16 sidiary of such trust or to any person de17 scribed in paragraph (2)(B). 

18 ‘‘(vi) CORRECTION PERIOD.—If there 

19 is an increase referred to in clause (v) dur20 ing any calendar quarter with respect to 

21 any property, the requirements of clause 

22 (iii) shall be treated as met during the 

23 quarter and the succeeding quarter if such 

24 requirements are met at the close of such 

25 succeeding quarter.’’. 
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1 (c) DELETION OF CUSTOMARY SERVICES EXCEP2 TION.—Subparagraph (B) of section 857(b)(7) (relating 

3 to redetermined rents) is amended by striking clause (ii) 

4 and by redesignating clauses (iii), (iv), (v), (vi), and (vii) 

5 as clauses (ii), (iii), (iv), (v), and (vi), respectively. 

6 (d) CONFORMITY WITH GENERAL HEDGING DEFINI7 TION.—Subparagraph (G) of section 856(c)(5) (relating 

8 to treatment of certain hedging instruments) is amended 

9 to read as follows: 

10 ‘‘(G) TREATMENT OF CERTAIN HEDGING

11 INSTRUMENTS.—Except to the extent provided 

12 by regulations, any income of a real estate in13 vestment trust from a hedging transaction (as 

14 defined in clause (ii) or (iii) of section 

15 1221(b)(2)(A)) which is clearly identified pur16 suant to section 1221(a)(7), including gain 

17 from the sale or disposition of such a trans18 action, shall not constitute gross income under 

19 paragraph (2) to the extent that the transaction 

20 hedges any indebtedness incurred or to be in21 curred by the trust to acquire or carry real es22 tate assets.’’. 

23 (e) CONFORMITY WITH REGULATED INVESTMENT

24 COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re25 lating to imposition of tax in case of failure to meet certain 
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1 requirements) is amended by striking ‘‘90 percent’’ and 

2 inserting ‘‘95 percent’’. 

3 (f) SAVINGS PROVISIONS.—

4 (1) RULES OF APPLICATION FOR FAILURE TO

5 SATISFY SECTION 856(c)(4).—Section 856(c) (relat6 ing to definition of real estate investment trust) is 

7 amended by inserting after paragraph (6) the fol8 lowing new paragraph: 

9 ‘‘(7) RULES OF APPLICATION FOR FAILURE TO

10 SATISFY PARAGRAPH (4).—

11 ‘‘(A) DE MINIMIS FAILURE.—A corpora12 tion, trust, or association that fails to meet the 

13 requirements of paragraph (4)(B)(iii) for a par14 ticular quarter shall nevertheless be considered 

15 to have satisfied the requirements of such para16 graph for such quarter if—

17 ‘‘(i) such failure is due to the owner18 ship of assets the total value of which does 

19 not exceed the lesser of—

20 ‘‘(I) 1 percent of the total value 

21 of the trust’s assets at the end of the 

22 quarter for which such measurement 

23 is done, and 

24 ‘‘(II) $10,000,000, and 
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1 ‘‘(ii)(I) the corporation, trust, or asso2 ciation, following the identification of such 

3 failure, disposes of assets in order to meet 

4 the requirements of such paragraph within 

5 6 months after the last day of the quarter 

6 in which the corporation, trust or associa7 tion’s identification of the failure to satisfy 

8 the requirements of such paragraph oc9 curred or such other time period prescribed 

10 by the Secretary and in the manner pre11 scribed by the Secretary, or 

12 ‘‘(II) the requirements of such para13 graph are otherwise met within the time 

14 period specified in subclause (I). 

15 ‘‘(B) FAILURES EXCEEDING DE MINIMIS

16 AMOUNT.—A corporation, trust, or association 

17 that fails to meet the requirements of para18 graph (4) for a particular quarter shall never19 theless be considered to have satisfied the re20 quirements of such paragraph for such quarter 

21 if—

22 ‘‘(i) such failure involves the owner23 ship of assets the total value of which ex24 ceeds the de minimis standard described in 

25 subparagraph (A)(i) at the end of the 
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1 quarter for which such measurement is 

2 done, 

3 ‘‘(ii) following the corporation, trust, 

4 or association’s identification of the failure 

5 to satisfy the requirements of such para6 graph for a particular quarter, a descrip7 tion of each asset that causes the corpora8 tion, trust, or association to fail to satisfy 

9 the requirements of such paragraph at the 

10 close of such quarter of any taxable year is 

11 set forth in a schedule for such quarter 

12 filed in accordance with regulations pre13 scribed by the Secretary, 

14 ‘‘(iii) the failure to meet the require15 ments of such paragraph for a particular 

16 quarter is due to reasonable cause and not 

17 due to willful neglect,

18 ‘‘(iv) the corporation, trust, or asso19 ciation pays a tax computed under sub20 paragraph (C), and 

21 ‘‘(v)(I) the corporation, trust, or asso22 ciation disposes of the assets set forth on 

23 the schedule specified in clause (ii) within 

24 6 months after the last day of the quarter 

25 in which the corporation, trust or associa-
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1 tion’s identification of the failure to satisfy 

2 the requirements of such paragraph oc3 curred or such other time period prescribed 

4 by the Secretary and in the manner pre5 scribed by the Secretary, or 

6 ‘‘(II) the requirements of such para7 graph are otherwise met within the time 

8 period specified in subclause (I). 

9 ‘‘(C) TAX.—For purposes of subparagraph 

10 (B)(iv)—

11 ‘‘(i) TAX IMPOSED.—If a corporation, 

12 trust, or association elects the application 

13 of this subparagraph, there is hereby im14 posed a tax on the failure described in sub15 paragraph (B) of such corporation, trust, 

16 or association. Such tax shall be paid by 

17 the corporation, trust, or association. 

18 ‘‘(ii) TAX COMPUTED.—The amount 

19 of the tax imposed by clause (i) shall be 

20 the greater of—

21 ‘‘(I) $50,000, or 

22 ‘‘(II) the amount determined 

23 (pursuant to regulations promulgated 

24 by the Secretary) by multiplying the 

25 net income generated by the assets 
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1 described in the schedule specified in 

2 subparagraph (B)(ii) for the period 

3 specified in clause (iii) by the highest 

4 rate of tax specified in section 11. 

5 ‘‘(iii) PERIOD.—For purposes of 

6 clause (ii)(II), the period described in this 

7 clause is the period beginning on the first 

8 date that the failure to satisfy the require9 ments of such paragraph (4) occurs as a 

10 result of the ownership of such assets and 

11 ending on the earlier of the date on which 

12 the trust disposes of such assets or the end 

13 of the first quarter when there is no longer 

14 a failure to satisfy such paragraph (4). 

15 ‘‘(iv) ADMINISTRATIVE PROVISIONS.—

16 For purposes of subtitle F, the taxes im17 posed by this subparagraph shall be treat18 ed as excise taxes with respect to which the 

19 deficiency procedures of such subtitle 

20 apply.’’. 

21 (2) MODIFICATION OF RULES OF APPLICATION

22 FOR FAILURE TO SATISFY SECTIONS 856(c)(2) OR

23 856(c)(3).—Paragraph (6) of section 856(c) (relat24 ing to definition of real estate investment trust) is 

25 amended by striking subparagraphs (A) and (B), by 
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•HR 4520 IH1S 

1 redesignating subparagraph (C) as subparagraph 

2 (B), and by inserting before subparagraph (B) (as 

3 so redesignated) the following new subparagraph: 

4 ‘‘(A) following the corporation, trust, or 

5 association’s identification of the failure to meet 

6 the requirements of paragraph (2) or (3), or of 

7 both such paragraphs, for any taxable year, a 

8 description of each item of its gross income de9 scribed in such paragraphs is set forth in a 

10 schedule for such taxable year filed in accord11 ance with regulations prescribed by the Sec12 retary, and’’. 

13 (3) REASONABLE CAUSE EXCEPTION TO LOSS

14 OF REIT STATUS IF FAILURE TO SATISFY REQUIRE15 MENTS.—Subsection (g) of section 856 (relating to 

16 termination of election) is amended—

17 (A) in paragraph (1) by inserting before 

18 the period at the end of the first sentence the 

19 following: ‘‘unless paragraph (5) applies’’, and 

20 (B) by adding at the end the following new 

21 paragraph: 

22 ‘‘(5) ENTITIES TO WHICH PARAGRAPH AP23 PLIES.—This paragraph applies to a corporation, 

24 trust, or association—
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1 ‘‘(A) which is not a real estate investment 

2 trust to which the provisions of this part apply 

3 for the taxable year due to one or more failures 

4 to comply with one or more of the provisions of 

5 this part (other than subsection (c)(6) or (c)(7) 

6 of section 856), 

7 ‘‘(B) such failures are due to reasonable 

8 cause and not due to willful neglect, and 

9 ‘‘(C) if such corporation, trust, or associa10 tion pays (as prescribed by the Secretary in 

11 regulations and in the same manner as tax) a 

12 penalty of $50,000 for each failure to satisfy a 

13 provision of this part due to reasonable cause 

14 and not willful neglect.’’. 

15 (4) DEDUCTION OF TAX PAID FROM AMOUNT

16 REQUIRED TO BE DISTRIBUTED.—Subparagraph (E) 

17 of section 857(b)(2) is amended by striking ‘‘(7)’’ 

18 and inserting ‘‘(7) of this subsection, section 

19 856(c)(7)(B)(iii), and section 856(g)(1).’’. 

20 (5) EXPANSION OF DEFICIENCY DIVIDEND PRO21 CEDURE.—Subsection (e) of section 860 is amended 

22 by striking ‘‘or’’ at the end of paragraph (2), by 

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

24 inserting ‘‘; or’’, and by adding at the end the fol25 lowing new paragraph: 
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•HR 4520 IH1S 

1 ‘‘(4) a statement by the taxpayer attached to its 

2 amendment or supplement to a return of tax for the 

3 relevant tax year.’’. 

4 (g) EFFECTIVE DATES.—

5 (1) IN GENERAL.—Except as provided in para6 graph (2), the amendments made by this section 

7 shall apply to taxable years beginning after Decem8 ber 31, 2000. 

9 (2) SUBPARAGRAPHS (c) THROUGH (f).—The 

10 amendments made by subsections (c), (d), (e), and 

11 (f) shall apply to taxable years beginning after the 

12 date of the enactment of this Act. 

13 SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGU14 LATED INVESTMENT COMPANIES. 

15 (a) TREATMENT OF CERTAIN DIVIDENDS.—

16 (1) NONRESIDENT ALIEN INDIVIDUALS.—Sec17 tion 871 (relating to tax on nonresident alien indi18 viduals) is amended by redesignating subsection (k) 

19 as subsection (l) and by inserting after subsection (j) 

20 the following new subsection: 

21 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG22 ULATED INVESTMENT COMPANIES.—

23 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

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

25 subparagraph (B), no tax shall be imposed 
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1 under paragraph (1)(A) of subsection (a) on 

2 any interest-related dividend received from a 

3 regulated investment company. 

4 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

5 shall not apply—

6 ‘‘(i) to any interest-related dividend 

7 received from a regulated investment com8 pany by a person to the extent such divi9 dend is attributable to interest (other than 

10 interest described in subparagraph (E) (i) 

11 or (iii)) received by such company on in12 debtedness issued by such person or by any 

13 corporation or partnership with respect to 

14 which such person is a 10-percent share15 holder, 

16 ‘‘(ii) to any interest-related dividend 

17 with respect to stock of a regulated invest18 ment company unless the person who 

19 would otherwise be required to deduct and 

20 withhold tax from such dividend under 

21 chapter 3 receives a statement (which 

22 meets requirements similar to the require23 ments of subsection (h)(5)) that the bene24 ficial owner of such stock is not a United 

25 States person, and 
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•HR 4520 IH1S 

1 ‘‘(iii) to any interest-related dividend 

2 paid to any person within a foreign coun3 try (or any interest-related dividend pay4 ment addressed to, or for the account of, 

5 persons within such foreign country) dur6 ing any period described in subsection 

7 (h)(6) with respect to such country. 

8 Clause (iii) shall not apply to any dividend with 

9 respect to any stock which was acquired on or 

10 before the date of the publication of the Sec11 retary’s determination under subsection (h)(6). 

12 ‘‘(C) INTEREST-RELATED DIVIDEND.—For 

13 purposes of this paragraph, an interest-related 

14 dividend is any dividend (or part thereof) which 

15 is designated by the regulated investment com16 pany as an interest-related dividend in a writ17 ten notice mailed to its shareholders not later 

18 than 60 days after the close of its taxable year. 

19 If the aggregate amount so designated with re20 spect to a taxable year of the company (includ21 ing amounts so designated with respect to divi22 dends paid after the close of the taxable year 

23 described in section 855) is greater than the 

24 qualified net interest income of the company for 

25 such taxable year, the portion of each distribu-
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1 tion which shall be an interest-related dividend 

2 shall be only that portion of the amounts so 

3 designated which such qualified net interest in4 come bears to the aggregate amount so des5 ignated. 

6 ‘‘(D) QUALIFIED NET INTEREST IN7 COME.—For purposes of subparagraph (C), the 

8 term ‘qualified net interest income’ means the 

9 qualified interest income of the regulated in10 vestment company reduced by the deductions 

11 properly allocable to such income. 

12 ‘‘(E) QUALIFIED INTEREST INCOME.—For 

13 purposes of subparagraph (D), the term ‘quali14 fied interest income’ means the sum of the fol15 lowing amounts derived by the regulated invest16 ment company from sources within the United 

17 States: 

18 ‘‘(i) Any amount includible in gross 

19 income as original issue discount (within 

20 the meaning of section 1273) on an obliga21 tion payable 183 days or less from the date 

22 of original issue (without regard to the pe23 riod held by the company). 

24 ‘‘(ii) Any interest includible in gross 

25 income (including amounts recognized as 
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1 ordinary income in respect of original issue 

2 discount or market discount or acquisition 

3 discount under part V of subchapter P and 

4 such other amounts as regulations may 

5 provide) on an obligation which is in reg6 istered form; except that this clause shall 

7 not apply to—

8 ‘‘(I) any interest on an obligation 

9 issued by a corporation or partnership 

10 if the regulated investment company 

11 is a 10-percent shareholder in such 

12 corporation or partnership, and 

13 ‘‘(II) any interest which is treat14 ed as not being portfolio interest 

15 under the rules of subsection (h)(4). 

16 ‘‘(iii) Any interest referred to in sub17 section (i)(2)(A) (without regard to the 

18 trade or business of the regulated invest19 ment company). 

20 ‘‘(iv) Any interest-related dividend in21 cludable in gross income with respect to 

22 stock of another regulated investment com23 pany. 

24 ‘‘(F) 10-PERCENT SHAREHOLDER.—For 

25 purposes of this paragraph, the term ‘10-per-
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1 cent shareholder’ has the meaning given such 

2 term by subsection (h)(3)(B). 

3 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

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

5 subparagraph (B), no tax shall be imposed 

6 under paragraph (1)(A) of subsection (a) on 

7 any short-term capital gain dividend received 

8 from a regulated investment company. 

9 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

10 UNDER SUBSECTION (a)(2).—Subparagraph (A) 

11 shall not apply in the case of any nonresident 

12 alien individual subject to tax under subsection 

13 (a)(2). 

14 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI15 DEND.—For purposes of this paragraph, a 

16 short-term capital gain dividend is any dividend 

17 (or part thereof) which is designated by the reg18 ulated investment company as a short-term cap19 ital gain dividend in a written notice mailed to 

20 its shareholders not later than 60 days after the 

21 close of its taxable year. If the aggregate 

22 amount so designated with respect to a taxable 

23 year of the company (including amounts so des24 ignated with respect to dividends paid after the 

25 close of the taxable year described in section 
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1 855) is greater than the qualified short-term 

2 gain of the company for such taxable year, the 

3 portion of each distribution which shall be a 

4 short-term capital gain dividend shall be only 

5 that portion of the amounts so designated 

6 which such qualified short-term gain bears to 

7 the aggregate amount so designated. 

8 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 

9 purposes of subparagraph (C), the term ‘quali10 fied short-term gain’ means the excess of the 

11 net short-term capital gain of the regulated in12 vestment company for the taxable year over the 

13 net long-term capital loss (if any) of such com14 pany for such taxable year. For purposes of this 

15 subparagraph—

16 ‘‘(i) the net short-term capital gain of 

17 the regulated investment company shall be 

18 computed by treating any short-term cap19 ital gain dividend includible in gross in20 come with respect to stock of another regu21 lated investment company as a short-term 

22 capital gain, and 

23 ‘‘(ii) the excess of the net short-term 

24 capital gain for a taxable year over the net 

25 long-term capital loss for a taxable year (to 
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1 which an election under section 4982(e)(4) 

2 does not apply) shall be determined with3 out regard to any net capital loss or net 

4 short-term capital loss attributable to 

5 transactions after October 31 of such year, 

6 and any such net capital loss or net short7 term capital loss shall be treated as arising 

8 on the 1st day of the next taxable year. 

9 To the extent provided in regulations, clause 

10 (ii) shall apply also for purposes of computing 

11 the taxable income of the regulated investment 

12 company.’’

13 (2) FOREIGN CORPORATIONS.—Section 881 (re14 lating to tax on income of foreign corporations not 

15 connected with United States business) is amended 

16 by redesignating subsection (e) as subsection (f) and 

17 by inserting after subsection (d) the following new 

18 subsection: 

19 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS

20 OF REGULATED INVESTMENT COMPANIES.—

21 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

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

23 subparagraph (B), no tax shall be imposed 

24 under paragraph (1) of subsection (a) on any 

25 interest-related dividend (as defined in section 
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1 871(k)(1)) received from a regulated investment 

2 company. 

3 ‘‘(B) EXCEPTION.—Subparagraph (A) 

4 shall not apply—

5 ‘‘(i) to any dividend referred to in sec6 tion 871(k)(1)(B), and 

7 ‘‘(ii) to any interest-related dividend 

8 received by a controlled foreign corporation 

9 (within the meaning of section 957(a)) to 

10 the extent such dividend is attributable to 

11 interest received by the regulated invest12 ment company from a person who is a re13 lated person (within the meaning of section 

14 864(d)(4)) with respect to such controlled 

15 foreign corporation. 

16 ‘‘(C) TREATMENT OF DIVIDENDS RE17 CEIVED BY CONTROLLED FOREIGN CORPORA18 TIONS.—The rules of subsection (c)(5)(A) shall 

19 apply to any interest-related dividend received 

20 by a controlled foreign corporation (within the 

21 meaning of section 957(a)) to the extent such 

22 dividend is attributable to interest received by 

23 the regulated investment company which is de24 scribed in clause (ii) of section 871(k)(1)(E) 
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1 (and not described in clause (i) or (iii) of such 

2 section). 

3 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

4 No tax shall be imposed under paragraph (1) of sub5 section (a) on any short-term capital gain dividend 

6 (as defined in section 871(k)(2)) received from a 

7 regulated investment company.’’. 

8 (3) WITHHOLDING TAXES.—

9 (A) Section 1441(c) (relating to excep10 tions) is amended by adding at the end the fol11 lowing new paragraph: 

12 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

13 REGULATED INVESTMENT COMPANIES.—

14 ‘‘(A) IN GENERAL.—No tax shall be re15 quired to be deducted and withheld under sub16 section (a) from any amount exempt from the 

17 tax imposed by section 871(a)(1)(A) by reason 

18 of section 871(k). 

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

20 subparagraph (A), clause (i) of section 

21 871(k)(1)(B) shall not apply to any dividend 

22 unless the regulated investment company knows 

23 that such dividend is a dividend referred to in 

24 such clause. A similar rule shall apply with re-
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1 spect to the exception contained in section 

2 871(k)(2)(B).’’. 

3 (B) Section 1442(a) (relating to with4 holding of tax on foreign corporations) is 

5 amended—

6 (i) by striking ‘‘and the reference in 

7 section 1441(c)(10)’’ and inserting ‘‘the 

8 reference in section 1441(c)(10)’’, and 

9 (ii) by inserting before the period at 

10 the end the following: ‘‘, and the references 

11 in section 1441(c)(12) to sections 871(a) 

12 and 871(k) shall be treated as referring to 

13 sections 881(a) and 881(e) (except that for 

14 purposes of applying subparagraph (A) of 

15 section 1441(c)(12), as so modified, clause 

16 (ii) of section 881(e)(1)(B) shall not apply 

17 to any dividend unless the regulated invest18 ment company knows that such dividend is 

19 a dividend referred to in such clause)’’. 

20 (b) ESTATE TAX TREATMENT OF INTEREST IN CER21 TAIN REGULATED INVESTMENT COMPANIES.—Section 

22 2105 (relating to property without the United States for 

23 estate tax purposes) is amended by adding at the end the 

24 following new subsection: 

25 ‘‘(d) STOCK IN A RIC.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sub2 chapter, stock in a regulated investment company 

3 (as defined in section 851) owned by a nonresident 

4 not a citizen of the United States shall not be 

5 deemed property within the United States in the 

6 proportion that, at the end of the quarter of such in7 vestment company’s taxable year immediately pre8 ceding a decedent’s date of death (or at such other 

9 time as the Secretary may designate in regulations), 

10 the assets of the investment company that were 

11 qualifying assets with respect to the decedent bore 

12 to the total assets of the investment company. 

13 ‘‘(2) QUALIFYING ASSETS.—For purposes of 

14 this subsection, qualifying assets with respect to a 

15 decedent are assets that, if owned directly by the de16 cedent, would have been—

17 ‘‘(A) amounts, deposits, or debt obligations 

18 described in subsection (b) of this section, 

19 ‘‘(B) debt obligations described in the last 

20 sentence of section 2104(c), or 

21 ‘‘(C) other property not within the United 

22 States.’’

23 (c) TREATMENT OF REGULATED INVESTMENT COM24 PANIES UNDER SECTION 897.—
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1 (1) Paragraph (1) of section 897(h) is amended 

2 by striking ‘‘REIT’’ each place it appears and in3 serting ‘‘qualified investment entity’’. 

4 (2) Paragraphs (2) and (3) of section 897(h) 

5 are amended to read as follows: 

6 ‘‘(2) SALE OF STOCK IN DOMESTICALLY CON7 TROLLED ENTITY NOT TAXED.—The term ‘United 

8 States real property interest’ does not include any 

9 interest in a domestically controlled qualified invest10 ment entity. 

11 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON12 TROLLED QUALIFIED INVESTMENT ENTITIES.—In 

13 the case of a domestically controlled qualified invest14 ment entity, rules similar to the rules of subsection 

15 (d) shall apply to the foreign ownership percentage 

16 of any gain.’’

17 (3) Subparagraphs (A) and (B) of section 

18 897(h)(4) are amended to read as follows: 

19 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—

20 The term ‘qualified investment entity’ means 

21 any real estate investment trust and any regu22 lated investment company. 

23 ‘‘(B) DOMESTICALLY CONTROLLED.—The 

24 term ‘domestically controlled qualified invest25 ment entity’ means any qualified investment en-
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1 tity in which at all times during the testing pe2 riod less than 50 percent in value of the stock 

3 was held directly or indirectly by foreign per4 sons.’’

5 (4) Subparagraphs (C) and (D) of section 

6 897(h)(4) are each amended by striking ‘‘REIT’’ 

7 and inserting ‘‘qualified investment entity’’. 

8 (5) The subsection heading for subsection (h) of 

9 section 897 is amended by striking ‘‘REITS’’ and 

10 inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 

11 (d) EFFECTIVE DATE.—

12 (1) IN GENERAL.—Except as otherwise pro13 vided in this subsection, the amendments made by 

14 this section shall apply to dividends with respect to 

15 taxable years of regulated investment companies be16 ginning after December 31, 2004. 

17 (2) ESTATE TAX TREATMENT.—The amend18 ment made by subsection (b) shall apply to estates 

19 of decedents dying after December 31, 2004. 

20 (3) CERTAIN OTHER PROVISIONS.—The amend21 ments made by subsection (c) (other than paragraph 

22 (1) thereof) shall take effect after December 31, 

23 2004. 
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1 SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS. 

2 (a) IN GENERAL.—Subsection (g) of section 468B 

3 (relating to clarification of taxation of certain funds) is 

4 amended to read as follows: 

5 ‘‘(g) CLARIFICATION OF TAXATION OF CERTAIN

6 FUNDS.—

7 ‘‘(1) IN GENERAL.—Except as provided in para8 graph (2), nothing in any provision of law shall be 

9 construed as providing that an escrow account, set10 tlement fund, or similar fund is not subject to cur11 rent income tax. The Secretary shall prescribe regu12 lations providing for the taxation of any such ac13 count or fund whether as a grantor trust or other14 wise. 

15 ‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET16 TLEMENT FUNDS.—An escrow account, settlement 

17 fund, or similar fund shall be treated as beneficially 

18 owned by the United States and shall be exempt 

19 from taxation under this subtitle if—

20 ‘‘(A) it is established pursuant to a con21 sent decree entered by a judge of a United 

22 States District Court, 

23 ‘‘(B) it is created for the receipt of settle24 ment payments as directed by a government en25 tity for the sole purpose of resolving or satis26 fying one or more claims asserting liability 
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1 under the Comprehensive Environmental Re2 sponse, Compensation, and Liability Act of 

3 1980, 

4 ‘‘(C) the authority and control over the ex5 penditure of funds therein (including the ex6 penditure of contributions thereto and any net 

7 earnings thereon) is with such government enti8 ty, and 

9 ‘‘(D) upon termination, any remaining 

10 funds will be disbursed upon instructions by 

11 such government entity in accordance with ap12 plicable law. 

13 For purposes of this paragraph, the term ‘govern14 ment entity’ means the United States, any State or 

15 political subdivision thereof, the District of Colum16 bia, any possession of the United States, and any 

17 agency or instrumentality of any of the foregoing.’’. 

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

19 this section shall apply to taxable years beginning after 

20 December 31, 2004. 

21 SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALI22 FYING FOR ORPHAN DRUG CREDIT. 

23 (a) IN GENERAL.—Paragraph (2) of section 45C(b) 

24 (relating to qualified clinical testing expenses) is amended 

25 by adding at the end the following new subparagraph: 
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•HR 4520 IH1S 

1 ‘‘(C) TREATMENT OF CERTAIN EXPENSES

2 INCURRED BEFORE DESIGNATION.—For pur3 poses of subparagraph (A)(ii)(I), if a drug is 

4 designated under section 526 of the Federal 

5 Food, Drug, and Cosmetic Act not later than 

6 the due date (including extensions) for filing 

7 the return of tax under this subtitle for the tax8 able year in which the application for such des9 ignation of such drug was filed, such drug shall 

10 be treated as having been designated on the 

11 date that such application was filed.’’. 

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

13 subsection (a) shall apply to expenses incurred after the 

14 date of the enactment of this Act. 

15 SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 

16 BOWS AND ARROWS. 

17 (a) BOWS.—Paragraph (1) of section 4161(b) (relat18 ing to bows) is amended to read as follows: 

19 ‘‘(1) BOWS.—

20 ‘‘(A) IN GENERAL.—There is hereby im21 posed on the sale by the manufacturer, pro22 ducer, or importer of any bow which has a peak 

23 draw weight of 30 pounds or more, a tax equal 

24 to 11 percent of the price for which so sold. 
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1 ‘‘(B) ARCHERY EQUIPMENT.—There is 

2 hereby imposed on the sale by the manufac3 turer, producer, or importer—

4 ‘‘(i) of any part or accessory suitable 

5 for inclusion in or attachment to a bow de6 scribed in subparagraph (A), and 

7 ‘‘(ii) of any quiver or broadhead suit8 able for use with an arrow described in 

9 paragraph (2), 

10 a tax equal to 11 percent of the price for which 

11 so sold.’’. 

12 (b) ARROWS.—Subsection (b) of section 4161 (relat13 ing to bows and arrows, etc.) is amended by redesignating 

14 paragraph (3) as paragraph (4) and inserting after para15 graph (2) the following: 

16 ‘‘(3) ARROWS.—

17 ‘‘(A) IN GENERAL.—There is hereby im18 posed on the sale by the manufacturer, pro19 ducer, or importer of any arrow, a tax equal to 

20 12 percent of the price for which so sold. 

21 ‘‘(B) EXCEPTION.—In the case of any 

22 arrow of which the shaft or any other compo23 nent has been previously taxed under paragraph 

24 (1) or (2)—
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1 ‘‘(i) section 6416(b)(3) shall not 

2 apply, and 

3 ‘‘(ii) the tax imposed by subparagraph 

4 (A) shall be an amount equal to the excess 

5 (if any) of—

6 ‘‘(I) the amount of tax imposed 

7 by this paragraph (determined with8 out regard to this subparagraph), over 

9 ‘‘(II) the amount of tax paid with 

10 respect to the tax imposed under 

11 paragraph (1) or (2) on such shaft or 

12 component. 

13 ‘‘(C) ARROW.—For purposes of this para14 graph, the term ‘arrow’ means any shaft de15 scribed in paragraph (2) to which additional 

16 components are attached.’’. 

17 (c) CONFORMING AMENDMENTS.—Section 

18 4161(b)(2) is amended—

19 (1) by inserting ‘‘(other than broadheads)’’ 

20 after ‘‘point’’, and 

21 (2) by striking ‘‘ARROWS.—’’ in the heading 

22 and inserting ‘‘ARROW COMPONENTS.—’’. 

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

24 this section shall apply to articles sold by the manufac25 turer, producer, or importer after December 31, 2004. 
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1 SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE 

2 BOXES. 

3 (a) REPEAL.—Paragraph (6) of section 4162(a) (de4 fining sport fishing equipment) is amended by striking 

5 subparagraph (C) and by redesignating subparagraphs 

6 (D) through (J) as subparagraphs (C) through (I), respec7 tively. 

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

9 section shall apply to articles sold by the manufacturer, 

10 producer, or importer after December 31, 2004. 

11 SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH. 

12 (a) NOT TREATED AS SPORT FISHING EQUIP13 MENT.—Subsection (a) of section 4162 (relating to sport 

14 fishing equipment defined) is amended by inserting ‘‘and’’ 

15 at the end of paragraph (8), by striking ‘‘, and’’ at the 

16 end of paragraph (9) and inserting a period, and by strik17 ing paragraph (10). 

18 (b) CONFORMING AMENDMENT.—Section 4162 is 

19 amended by striking subsection (b) and by redesignating 

20 subsection (c) as subsection (b). 

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

22 section shall apply to articles sold by the manufacturer, 

23 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 AV10 ERAGE COST OF CARRYING EXCISE TAX. 

11 ‘‘(a) IN GENERAL.—For purposes of section 38, in 

12 the case of an eligible wholesaler, the amount of the dis13 tilled spirits wholesalers credit for any taxable year is the 

14 amount equal to the product of—

15 ‘‘(1) the number of cases of bottled distilled 

16 spirits—

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 be24 ginning of such taxable year. 

25 ‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 

26 section, the term ‘eligible wholesaler’ means any person 
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1 who holds a permit under the Federal Alcohol Administra2 tion Act as a wholesaler of distilled spirits. 

3 ‘‘(c) AVERAGE TAX-FINANCING COST.—

4 ‘‘(1) IN GENERAL.—For purposes of this sec5 tion, the average tax-financing cost per case for any 

6 calendar year is the amount of interest which would 

7 accrue at the deemed financing rate during a 60-day 

8 period on an amount equal to the deemed Federal 

9 excise 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 over13 payment rates under paragraph (1) of section 

14 6621(a) (determined without regard to the last sen15 tence of such paragraph) for calendar quarters of 

16 such year. 

17 ‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON

18 CASE.—For purposes of paragraph (1), the deemed 

19 Federal excise tax per case of 12 80-proof 750ml 

20 bottles is $22.83. 

21 ‘‘(4) NUMBER OF CASES IN LOT.—For purposes 

22 of this section, the number of cases in any lot of dis23 tilled spirits shall be determined by dividing the 

24 number of liters in such lot by 9.’’

25 (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 

7 defined in section 5011(b)), the distilled spirits 

8 wholesalers credit determined under section 

9 5011(a).’’

10 (2) Subsection (d) of section 39 (relating to 

11 carryback and carryforward of unused credits) is 

12 amended by adding at the end the following new 

13 paragraph: 

14 ‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT

15 BEFORE JANUARY 1, 2005.—No portion of the un16 used business credit for any taxable year which is 

17 attributable to the credit determined under section 

18 5011(a) may be carried back to a taxable year be19 ginning before January 1, 2005.’’. 

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

21 I of subchapter A of chapter 51 is amended by add22 ing at the end the following new item:

‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of carrying excise tax.’’.
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2004. 

4 SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELAT5 ING TO DISTILLED SPIRITS, WINE, AND BEER. 

6 (a) IN GENERAL.—Subpart G of part II of sub7 chapter A of chapter 51 is amended by redesignating sec8 tion 5148 as section 5149 and by inserting after section 

9 5147 the following new section: 

10 ‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 

11 ‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 

12 5091, 5111, 5121, and 5131, the rate of tax imposed 

13 under such sections for the suspension period shall be 

14 zero. During such period, persons engaged in or carrying 

15 on a trade or business covered by such sections shall reg16 ister under section 5141 and shall comply with the record17 keeping requirements under this part. 

18 ‘‘(b) SUSPENSION PERIOD.—For purposes of sub19 section (a), the suspension period is the period beginning 

20 on July 1, 2004, and ending on June 30, 2007.’’. 

21 (b) CONFORMING AMENDMENT.—Section 5117 is 

22 amended by adding at the end the following new sub23 section: 

24 ‘‘(d) SPECIAL RULE DURING SUSPENSION PE25 RIOD.—Except as provided by the Secretary, during the 
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1 suspension period (as defined in section 5148) it shall be 

2 unlawful for any dealer to purchase distilled spirits for re3 sale from any person other than a wholesale dealer in liq4 uors who is required to keep records under section 5114.’’. 

5 (c) CLERICAL AMENDMENT.—The table of sections 

6 for subpart G of part II of subchapter A of chapter 51 

7 is amended by striking the last item and inserting the fol8 lowing new items:

‘‘Sec. 5148. Suspension of occupational tax. 

‘‘Sec. 5149. Cross references.’’.

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

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

11 of this Act. 

12 TITLE III—TAX REFORM AND 

13 SIMPLIFICATION FOR UNITED 

14 STATES BUSINESSES 

15 SEC. 301. INTEREST EXPENSE ALLOCATION RULES. 

16 (a) ELECTION TO ALLOCATE ON WORLDWIDE

17 BASIS.—Section 864 is amended by redesignating sub18 section (f) as subsection (g) and by inserting after sub19 section (e) the following new subsection: 

20 ‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON

21 WORLDWIDE BASIS.—For purposes of this subchapter, at 

22 the election of the worldwide affiliated group—

23 ‘‘(1) ALLOCATION AND APPORTIONMENT OF IN24 TEREST EXPENSE.—
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1 ‘‘(A) IN GENERAL.—The taxable income of 

2 each domestic corporation which is a member of 

3 a worldwide affiliated group shall be determined 

4 by allocating and apportioning interest expense 

5 of each member as if all members of such group 

6 were a single corporation. 

7 ‘‘(B) TREATMENT OF WORLDWIDE AFFILI8 ATED GROUP.—The taxable income of the do9 mestic members of a worldwide affiliated group 

10 from sources outside the United States shall be 

11 determined by allocating and apportioning the 

12 interest expense of such domestic members to 

13 such income in an amount equal to the excess 

14 (if any) of—

15 ‘‘(i) the total interest expense of the 

16 worldwide affiliated group multiplied by 

17 the ratio which the foreign assets of the 

18 worldwide affiliated group bears to all the 

19 assets of the worldwide affiliated group, 

20 over 

21 ‘‘(ii) the interest expense of all foreign 

22 corporations which are members of the 

23 worldwide affiliated group to the extent 

24 such interest expense of such foreign cor25 porations would have been allocated and 
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1 apportioned to foreign source income if 

2 this subsection were applied to a group 

3 consisting of all the foreign corporations in 

4 such worldwide affiliated group. 

5 ‘‘(C) WORLDWIDE AFFILIATED GROUP.—

6 For purposes of this paragraph, the term 

7 ‘worldwide affiliated group’ means a group con8 sisting of—

9 ‘‘(i) the includible members of an af10 filiated group (as defined in section 

11 1504(a), determined without regard to 

12 paragraphs (2) and (4) of section 

13 1504(b)), and 

14 ‘‘(ii) all controlled foreign corpora15 tions in which such members in the aggre16 gate meet the ownership requirements of 

17 section 1504(a)(2) either directly or indi18 rectly through applying paragraph (2) of 

19 section 958(a) or through applying rules 

20 similar to the rules of such paragraph to 

21 stock owned directly or indirectly by do22 mestic partnerships, trusts, or estates. 

23 ‘‘(2) ALLOCATION AND APPORTIONMENT OF

24 OTHER EXPENSES.—Expenses other than interest 

25 which are not directly allocable or apportioned to 
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1 any specific income producing activity shall be allo2 cated and apportioned as if all members of the affili3 ated group were a single corporation. For purposes 

4 of the preceding sentence, the term ‘affiliated group’ 

5 has the meaning given such term by section 1504 

6 (determined without regard to paragraph (4) of sec7 tion 1504(b)). 

8 ‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; 

9 BASIS OF STOCK IN NONAFFILIATED 10-PERCENT

10 OWNED CORPORATIONS.—The rules of paragraphs 

11 (3) and (4) of subsection (e) shall apply for purposes 

12 of this subsection, except that paragraph (4) shall be 

13 applied on a worldwide affiliated group basis. 

14 ‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN15 STITUTIONS.—

16 ‘‘(A) IN GENERAL.—For purposes of para17 graph (1), any corporation described in sub18 paragraph (B) shall be treated as an includible 

19 corporation for purposes of section 1504 only 

20 for purposes of applying this subsection sepa21 rately to corporations so described. 

22 ‘‘(B) DESCRIPTION.—A corporation is de23 scribed in this subparagraph if—

24 ‘‘(i) such corporation is a financial in25 stitution described in section 581 or 591, 
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1 ‘‘(ii) the business of such financial in2 stitution is predominantly with persons 

3 other than related persons (within the 

4 meaning of subsection (d)(4)) or their cus5 tomers, and 

6 ‘‘(iii) such financial institution is re7 quired by State or Federal law to be oper8 ated separately from any other entity 

9 which is not such an institution. 

10 ‘‘(C) TREATMENT OF BANK AND FINAN11 CIAL HOLDING COMPANIES.—To the extent pro12 vided in regulations—

13 ‘‘(i) a bank holding company (within 

14 the meaning of section 2(a) of the Bank 

15 Holding Company Act of 1956 (12 U.S.C. 

16 1841(a)), 

17 ‘‘(ii) a financial holding company 

18 (within the meaning of section 2(p) of the 

19 Bank Holding Company Act of 1956 (12 

20 U.S.C. 1841(p)), and 

21 ‘‘(iii) any subsidiary of a financial in22 stitution described in section 581 or 591, 

23 or of any such bank or financial holding 

24 company, if such subsidiary is predomi25 nantly engaged (directly or indirectly) in 
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1 the active conduct of a banking, financing, 

2 or similar business, 

3 shall be treated as a corporation described in 

4 subparagraph (B). 

5 ‘‘(5) ELECTION TO EXPAND FINANCIAL INSTI6 TUTION GROUP OF WORLDWIDE GROUP.—

7 ‘‘(A) IN GENERAL.—If a worldwide affili8 ated group elects the application of this sub9 section, all financial corporations which—

10 ‘‘(i) are members of such worldwide 

11 affiliated group, but 

12 ‘‘(ii) are not corporations described in 

13 paragraph (4)(B), 

14 shall be treated as described in paragraph 

15 (4)(B) for purposes of applying paragraph 

16 (4)(A). This subsection (other than this para17 graph) shall apply to any such group in the 

18 same manner as this subsection (other than this 

19 paragraph) applies to the pre-election worldwide 

20 affiliated group of which such group is a part. 

21 ‘‘(B) FINANCIAL CORPORATION.—For pur22 poses of this paragraph, the term ‘financial cor23 poration’ means any corporation if at least 80 

24 percent of its gross income is income described 

25 in section 904(d)(2)(C)(ii) and the regulations 
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1 thereunder which is derived from transactions 

2 with persons who are not related (within the 

3 meaning of section 267(b) or 707(b)(1)) to the 

4 corporation. For purposes of the preceding sen5 tence, there shall be disregarded any item of in6 come or gain from a transaction or series of 

7 transactions a principal purpose of which is the 

8 qualification of any corporation as a financial 

9 corporation. 

10 ‘‘(C) ANTIABUSE RULES.—In the case of a 

11 corporation which is a member of an electing fi12 nancial institution group, to the extent that 

13 such corporation—

14 ‘‘(i) distributes dividends or makes 

15 other distributions with respect to its stock 

16 after the date of the enactment of this 

17 paragraph to any member of the pre-elec18 tion worldwide affiliated group (other than 

19 to a member of the electing financial insti20 tution group) in excess of the greater of—

21 ‘‘(I) its average annual dividend 

22 (expressed as a percentage of current 

23 earnings and profits) during the 5-

24 taxable-year period ending with the 
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1 taxable year preceding the taxable 

2 year, or 

3 ‘‘(II) 25 percent of its average 

4 annual earnings and profits for such 

5 5-taxable-year period, or 

6 ‘‘(ii) deals with any person in any 

7 manner not clearly reflecting the income of 

8 the corporation (as determined under prin9 ciples similar to the principles of section 

10 482), 

11 an amount of indebtedness of the electing fi12 nancial institution group equal to the excess 

13 distribution or the understatement or overstate14 ment of income, as the case may be, shall be re15 characterized (for the taxable year and subse16 quent taxable years) for purposes of this para17 graph as indebtedness of the worldwide affili18 ated group (excluding the electing financial in19 stitution group). If a corporation has not been 

20 in existence for 5 taxable years, this subpara21 graph shall be applied with respect to the pe22 riod it was in existence. 

23 ‘‘(D) ELECTION.—An election under this 

24 paragraph with respect to any financial institu25 tion group may be made only by the common 
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1 parent of the pre-election worldwide affiliated 

2 group and may be made only for the first tax3 able year beginning after December 31, 2008, 

4 in which such affiliated group includes 1 or 

5 more financial corporations. Such an election, 

6 once made, shall apply to all financial corpora7 tions which are members of the electing finan8 cial institution group for such taxable year and 

9 all subsequent years unless revoked with the 

10 consent of the Secretary. 

11 ‘‘(E) DEFINITIONS RELATING TO

12 GROUPS.—For purposes of this paragraph—

13 ‘‘(i) PRE-ELECTION WORLDWIDE AF14 FILIATED GROUP.—The term ‘pre-election 

15 worldwide affiliated group’ means, with re16 spect to a corporation, the worldwide affili17 ated group of which such corporation 

18 would (but for an election under this para19 graph) be a member for purposes of apply20 ing paragraph (1). 

21 ‘‘(ii) ELECTING FINANCIAL INSTITU22 TION GROUP.—The term ‘electing financial 

23 institution group’ means the group of cor24 porations to which this subsection applies 

25 separately by reason of the application of 
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1 paragraph (4)(A) and which includes fi2 nancial corporations by reason of an elec3 tion under subparagraph (A). 

4 ‘‘(F) REGULATIONS.—The Secretary shall 

5 prescribe such regulations as may be appro6 priate to carry out this subsection, including 

7 regulations—

8 ‘‘(i) providing for the direct allocation 

9 of interest expense in other circumstances 

10 where such allocation would be appropriate 

11 to carry out the purposes of this sub12 section, 

13 ‘‘(ii) preventing assets or interest ex14 pense from being taken into account more 

15 than once, and 

16 ‘‘(iii) dealing with changes in mem17 bers of any group (through acquisitions or 

18 otherwise) treated under this paragraph as 

19 an affiliated group for purposes of this 

20 subsection. 

21 ‘‘(6) ELECTION.—An election to have this sub22 section apply with respect to any worldwide affiliated 

23 group may be made only by the common parent of 

24 the domestic affiliated group referred to in para25 graph (1)(C) and may be made only for the first 
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1 taxable year beginning after December 31, 2008, in 

2 which a worldwide affiliated group exists which in3 cludes such affiliated group and at least 1 foreign 

4 corporation. Such an election, once made, shall apply 

5 to such common parent and all other corporations 

6 which are members of such worldwide affiliated 

7 group for such taxable year and all subsequent years 

8 unless revoked with the consent of the Secretary.’’. 

9 (b) EXPANSION OF REGULATORY AUTHORITY.—

10 Paragraph (7) of section 864(e) is amended—

11 (1) by inserting before the comma at the end of 

12 subparagraph (B) ‘‘and in other circumstances 

13 where such allocation would be appropriate to carry 

14 out the purposes of this subsection’’, and 

15 (2) by striking ‘‘and’’ at the end of subpara16 graph (E), by redesignating subparagraph (F) as 

17 subparagraph (G), and by inserting after subpara18 graph (E) the following new subparagraph: 

19 ‘‘(F) preventing assets or interest expense 

20 from being taken into account more than once, 

21 and’’. 

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

23 this section shall apply to taxable years beginning after 

24 December 31, 2008. 
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1 SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC 

2 LOSS. 

3 (a) GENERAL RULE.—Section 904 is amended by re4 designating subsections (g), (h), (i), (j), and (k) as sub5 sections (h), (i), (j), (k), and (l) respectively, and by in6 serting after subsection (f) the following new subsection: 

7 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

8 LOSS.—

9 ‘‘(1) GENERAL RULE.—For purposes of this 

10 subpart and section 936, in the case of any taxpayer 

11 who sustains an overall domestic loss for any taxable 

12 year beginning after December 31, 2006, that por13 tion of the taxpayer’s taxable income from sources 

14 within the United States for each succeeding taxable 

15 year which is equal to the lesser of—

16 ‘‘(A) the amount of such loss (to the extent 

17 not used under this paragraph in prior taxable 

18 years), or 

19 ‘‘(B) 50 percent of the taxpayer’s taxable 

20 income from sources within the United States 

21 for such succeeding taxable year, 

22 shall be treated as income from sources without the 

23 United States (and not as income from sources with24 in the United States). 

25 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 

26 purposes of this subsection—
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1 ‘‘(A) IN GENERAL.—The term ‘overall do2 mestic loss’ means any domestic loss to the ex3 tent such loss offsets taxable income from 

4 sources without the United States for the tax5 able year or for any preceding taxable year by 

6 reason of a carryback. For purposes of the pre7 ceding sentence, the term ‘domestic loss’ means 

8 the amount by which the gross income for the 

9 taxable year from sources within the United 

10 States is exceeded by the sum of the deductions 

11 properly apportioned or allocated thereto (deter12 mined without regard to any carryback from a 

13 subsequent taxable year). 

14 ‘‘(B) TAXPAYER MUST HAVE ELECTED

15 FOREIGN TAX CREDIT FOR YEAR OF LOSS.—

16 The term ‘overall domestic loss’ shall not in17 clude any loss for any taxable year unless the 

18 taxpayer chose the benefits of this subpart for 

19 such taxable year. 

20 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN21 COME.—

22 ‘‘(A) IN GENERAL.—Any income from 

23 sources within the United States that is treated 

24 as income from sources without the United 

25 States under paragraph (1) shall be allocated 
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1 among and increase the income categories in 

2 proportion to the loss from sources within the 

3 United States previously allocated to those in4 come categories. 

5 ‘‘(B) INCOME CATEGORY.—For purposes of 

6 this paragraph, the term ‘income category’ has 

7 the meaning given such term by subsection 

8 (f)(5)(E)(i). 

9 ‘‘(4) COORDINATION WITH SUBSECTION (f).—

10 The Secretary shall prescribe such regulations as 

11 may be necessary to coordinate the provisions of this 

12 subsection with the provisions of subsection (f).’’. 

13 (b) CONFORMING AMENDMENTS.—

14 (1) Section 535(d)(2) is amended by striking 

15 ‘‘section 904(g)(6)’’ and inserting ‘‘section 

16 904(h)(6)’’. 

17 (2) Subparagraph (A) of section 936(a)(2) is 

18 amended by striking ‘‘section 904(f)’’ and inserting 

19 ‘‘subsections (f) and (g) of section 904’’. 

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

21 this section shall apply to losses for taxable years begin22 ning after December 31, 2006. 

23 SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS. 

24 (a) IN GENERAL.—Paragraph (1) of section 904(d) 

25 (relating to separate application of section with respect to 
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1 certain categories of income) is amended to read as fol2 lows: 

3 ‘‘(1) IN GENERAL.—The provisions of sub4 sections (a), (b), and (c) and sections 902, 907, and 

5 960 shall be applied separately with respect to—

6 ‘‘(A) passive category income, and 

7 ‘‘(B) general category income.’’

8 (b) CATEGORIES.—Paragraph (2) of section 904(d) 

9 is amended by striking subparagraph (B), by redesig10 nating subparagraph (A) as subparagraph (B), and by in11 serting before subparagraph (B) (as so redesignated) the 

12 following new subparagraph: 

13 ‘‘(A) CATEGORIES.—

14 ‘‘(i) PASSIVE CATEGORY INCOME.—

15 The term ‘passive category income’ means 

16 passive income and specified passive cat17 egory income. 

18 ‘‘(ii) GENERAL CATEGORY INCOME.—

19 The term ‘general category income’ means 

20 income other than passive category in21 come.’’

22 (c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub23 paragraph (B) of section 904(d)(2), as so redesignated, 

24 is amended by adding at the end the following new clause: 
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1 ‘‘(v) SPECIFIED PASSIVE CATEGORY

2 INCOME.—The term ‘specified passive cat3 egory 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 

14 and profits attributable to foreign 

15 trade income (within the meaning of 

16 section 923(b)) or interest or carrying 

17 charges (as defined in section 

18 927(d)(1)) derived from a transaction 

19 which results in foreign trade income 

20 (as defined in section 923(b)).’’

21 (d) TREATMENT OF FINANCIAL SERVICES.—Para22 graph (2) of section 904(d) is amended by striking sub23 paragraph (D), by redesignating subparagraph (C) as sub24 paragraph (D), and by inserting before subparagraph (D) 

25 (as 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 

7 services group, and 

8 ‘‘(II) any other person if such 

9 person is predominantly engaged in 

10 the active conduct of a banking, insur11 ance, 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 

18 of a banking, insurance, financing, or simi19 lar business. In determining whether such 

20 a group is so engaged, there shall be taken 

21 into account only the income of members 

22 of 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 

7 Secretary shall by regulation specify for 

8 purposes of this subparagraph the treat9 ment of financial services income received 

10 or accrued by partnerships and by other 

11 pass-thru entities which are not members 

12 of a financial 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

10 FOREIGN 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 

17 income. 

18 ‘‘(B) SUBPART F INCLUSIONS.—Any 

19 amount included in gross income under section 

20 951(a)(1)(A) shall be treated as passive cat21 egory income to the extent the amount so in22 cluded is attributable to passive category in23 come. 

24 ‘‘(C) INTEREST, RENTS, AND ROYAL25 TIES.—Any interest, rent, or royalty which is 
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1 received or accrued from a controlled foreign 

2 corporation in which the taxpayer is a United 

3 States shareholder shall be treated as passive 

4 category income to the extent it is properly allo5 cable (under regulations prescribed by the Sec6 retary) to passive category income of the con7 trolled foreign corporation. 

8 ‘‘(D) DIVIDENDS.—Any dividend paid out 

9 of the earnings and profits of any controlled 

10 foreign corporation in which the taxpayer is a 

11 United States shareholder shall be treated as 

12 passive category income in proportion to the 

13 ratio of—

14 ‘‘(i) the portion of the earnings and 

15 profits attributable to passive category in16 come, to 

17 ‘‘(ii) the total amount of earnings and 

18 profits. 

19 ‘‘(E) LOOK-THRU APPLIES ONLY WHERE

20 SUBPART F APPLIES.—If a controlled foreign 

21 corporation meets the requirements of section 

22 954(b)(3)(A) (relating to de minimis rule) for 

23 any taxable year, for purposes of this para24 graph, none of its foreign base company income 

25 (as defined in section 954(a) without regard to 
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1 section 954(b)(5)) and none of its gross insur2 ance income (as defined in section 

3 954(b)(3)(C)) for such taxable year shall be 

4 treated as passive category income, except that 

5 this sentence shall not apply to any income 

6 which (without regard to this sentence) would 

7 be treated as financial services income. Solely 

8 for purposes of applying subparagraph (D), 

9 passive income of a controlled foreign corpora10 tion shall not be treated as passive category in11 come if the requirements of section 954(b)(4) 

12 are met with respect to such income. 

13 ‘‘(F) COORDINATION WITH HIGH-TAXED

14 INCOME PROVISIONS.—

15 ‘‘(i) In determining whether any in16 come of a controlled foreign corporation is 

17 passive category income, subclause (II) of 

18 paragraph (2)(B)(iii) shall not apply. 

19 ‘‘(ii) Any income of the taxpayer 

20 which is treated as passive category income 

21 under this paragraph shall be so treated 

22 notwithstanding any provision of para23 graph (2); except that the determination of 

24 whether any amount is high-taxed income 
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1 shall be made after the application of this 

2 paragraph. 

3 ‘‘(G) DIVIDEND.—For purposes of this 

4 paragraph, the term ‘dividend’ includes any 

5 amount included in gross income in section 

6 951(a)(1)(B). Any amount included in gross in7 come under section 78 to the extent attrib8 utable to amounts included in gross income in 

9 section 951(a)(1)(A) shall not be treated as a 

10 dividend but shall be treated as included in 

11 gross income under section 951(a)(1)(A). 

12 ‘‘(H) LOOK-THRU APPLIES TO PASSIVE

13 FOREIGN INVESTMENT COMPANY INCLUSION.—

14 If—

15 ‘‘(i) a passive foreign investment com16 pany is a controlled foreign corporation, 

17 and 

18 ‘‘(ii) the taxpayer is a United States 

19 shareholder in such controlled foreign cor20 poration, 

21 any amount included in gross income under sec22 tion 1293 shall be treated as income in a sepa23 rate category to the extent such amount is at24 tributable to income in such category.’’
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1 (5) TREATMENT OF INCOME TAX BASE DIF2 FERENCES.—Paragraph (2) of section 904(d) is 

3 amended by redesignating subparagraphs (H) and 

4 (I) as subparagraphs (I) and (J), respectively, and 

5 by inserting after subparagraph (G) the following 

6 new subparagraph: 

7 ‘‘(H) TREATMENT OF INCOME TAX BASE

8 DIFFERENCES.—Tax imposed under the law of 

9 a foreign country or possession of the United 

10 States on an amount which does not constitute 

11 income under United States tax principles shall 

12 be treated as imposed on income described in 

13 paragraph (1)(B).’’

14 (6) Paragraph (2) of section 904(d) is amended 

15 by adding at the end the following new subpara16 graph: 

17 ‘‘(K) TRANSITIONAL RULES FOR 2007

18 CHANGES.—For purposes of paragraph (1)—

19 ‘‘(i) taxes carried from any taxable 

20 year beginning before January 1, 2007, to 

21 any taxable year beginning on or after 

22 such date, with respect to any item of in23 come, shall be treated as described in the 

24 subparagraph of paragraph (1) in which 

25 such income would be described were such 
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1 taxes paid or accrued in a taxable year be2 ginning on or after such date, and 

3 ‘‘(ii) the Secretary may by regulations 

4 provide for the allocation of any carryback 

5 of taxes with respect to income to such a 

6 taxable year for purposes of allocating such 

7 income among the separate categories in 

8 effect for such taxable year.’’. 

9 (7) Section 904(j)(3)(A)(i) is amended by strik10 ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 

11 (d)(2)(B)’’. 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2006. 

15 SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS 

16 FROM NONCONTROLLED SECTION 902 COR17 PORATIONS. 

18 (a) IN GENERAL.—Section 904(d)(4) (relating to 

19 look-thru rules apply to dividends from noncontrolled sec20 tion 902 corporations) is amended to read as follows: 

21 ‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM

22 NONCONTROLLED SECTION 902 CORPORATIONS.—

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

24 subsection, any dividend from a noncontrolled 

25 section 902 corporation with respect to the tax-
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1 payer shall be treated as income described in a 

2 subparagraph of paragraph (1) in proportion to 

3 the ratio of—

4 ‘‘(i) the portion of earnings and prof5 its attributable to income described in such 

6 subparagraph, to 

7 ‘‘(ii) the total amount of earnings and 

8 profits. 

9 ‘‘(B) EARNINGS AND PROFITS OF CON10 TROLLED FOREIGN CORPORATIONS.—In the 

11 case of any distribution from a controlled for12 eign corporation to a United States share13 holder, rules similar to the rules of subpara14 graph (A) shall apply in determining the extent 

15 to which earnings and profits of the controlled 

16 foreign corporation which are attributable to 

17 dividends received from a noncontrolled section 

18 902 corporation may be treated as income in a 

19 separate category. 

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

21 this paragraph—

22 ‘‘(i) EARNINGS AND PROFITS.—

23 ‘‘(I) IN GENERAL.—The rules of 

24 section 316 shall apply. 
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1 ‘‘(II) REGULATIONS.—The Sec2 retary may prescribe regulations re3 garding the treatment of distributions 

4 out of earnings and profits for periods 

5 before the taxpayer’s acquisition of 

6 the stock to which the distributions 

7 relate. 

8 ‘‘(ii) INADEQUATE SUBSTAN9 TIATION.—If the Secretary determines that 

10 the proper subparagraph of paragraph (1) 

11 in which a dividend is described has not 

12 been substantiated, such dividend shall be 

13 treated as income described in paragraph 

14 (1)(A). 

15 ‘‘(iii) COORDINATION WITH HIGH16 TAXED INCOME PROVISIONS.—Rules simi17 lar to the rules of paragraph (3)(F) shall 

18 apply for purposes of this paragraph. 

19 ‘‘(iv) LOOK-THRU WITH RESPECT TO

20 CARRYOVER OF CREDIT.—Rules similar to 

21 subparagraph (A) also shall apply to any 

22 carryforward under subsection (c) from a 

23 taxable year beginning before January 1, 

24 2003, of tax allocable to a dividend from a 

25 noncontrolled section 902 corporation with 
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1 respect to the taxpayer. The Secretary may 

2 by regulations provide for the allocation of 

3 any carryback of tax allocable to a divi4 dend from a noncontrolled section 902 cor5 poration to such a taxable year for pur6 poses of allocating such dividend among 

7 the separate categories in effect for such 

8 taxable year.’’. 

9 (b) CONFORMING AMENDMENTS.—

10 (1) Subparagraph (E) of section 904(d)(1) is 

11 hereby repealed. 

12 (2) Section 904(d)(2)(C)(iii) is amended by 

13 adding ‘‘and’’ at the end of subclause (I), by striking 

14 subclause (II), and by redesignating subclause (III) 

15 as subclause (II). 

16 (3) The last sentence of section 904(d)(2)(D) is 

17 amended to read as follows: ‘‘Such term does not in18 clude any financial services income.’’. 

19 (4) Section 904(d)(2)(E) is amended—

20 (A) by inserting ‘‘or (4)’’ after ‘‘paragraph 

21 (3)’’ in clause (i), and 

22 (B) by striking clauses (ii) and (iv) and by 

23 redesignating clause (iii) as clause (ii). 

24 (5) Section 904(d)(3)(F) is amended by strik25 ing ‘‘(D), or (E)’’ and inserting ‘‘or (D)’’. 
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1 (6) Section 864(d)(5)(A)(i) is amended by 

2 striking ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’. 

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

4 this section shall apply to taxable years beginning after 

5 December 31, 2002. 

6 SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 

7 PARTNERSHIPS TO APPLY IN DETERMINING 

8 SECTION 902 AND 960 CREDITS. 

9 (a) IN GENERAL.—Subsection (c) of section 902 is 

10 amended by redesignating paragraph (7) as paragraph (8) 

11 and by inserting after paragraph (6) the following new 

12 paragraph: 

13 ‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH

14 PARTNERSHIPS.—Stock owned, directly or indirectly, 

15 by or for a partnership shall be considered as being 

16 owned proportionately by its partners. Stock consid17 ered to be owned by a person by reason of the pre18 ceding sentence shall, for purposes of applying such 

19 sentence, be treated as actually owned by such per20 son. The Secretary may prescribe such regulations 

21 as may be necessary to carry out the purposes of 

22 this paragraph, including rules to account for special 

23 partnership allocations of dividends, credits, and 

24 other incidents of ownership of stock in determining 

25 proportionate ownership.’’. 
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1 (b) CLARIFICATION OF COMPARABLE ATTRIBUTION

2 UNDER SECTION 901(b)(5).—Paragraph (5) of section 

3 901(b) is amended by striking ‘‘any individual’’ and in4 serting ‘‘any person’’. 

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

6 this section shall apply to taxes of foreign corporations 

7 for taxable years of such corporations beginning after the 

8 date of the enactment of this Act. 

9 SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN 

10 TRANSFERS OF INTANGIBLE PROPERTY. 

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

12 367(d)(2) is amended by adding at the end the following 

13 new sentence: ‘‘For purposes of applying section 904(d), 

14 any such amount shall be treated in the same manner as 

15 if such amount were a royalty.’’. 

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

17 this section shall apply to amounts treated as received pur18 suant to section 367(d)(2) of the Internal Revenue Code 

19 of 1986 on or after August 5, 1997. 

20 SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE 

21 CERTAIN ASSETS OF CONTROLLED FOREIGN 

22 CORPORATION. 

23 (a) IN GENERAL.—Section 956(c)(2) (relating to ex24 ceptions from property treated as United States property) 

25 is amended by striking ‘‘and’’ at the end of subparagraph 
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1 (J), by striking the period at the end of subparagraph (K) 

2 and inserting a semicolon, and by adding at the end the 

3 following new subparagraphs: 

4 ‘‘(L) securities acquired and held by a con5 trolled foreign corporation in the ordinary 

6 course of its business as a dealer in securities 

7 if—

8 ‘‘(i) the dealer accounts for the securi9 ties as securities held primarily for sale to 

10 customers in the ordinary course of busi11 ness, and 

12 ‘‘(ii) the dealer disposes of the securi13 ties (or such securities mature while held 

14 by the dealer) within a period consistent 

15 with the holding of securities for sale to 

16 customers in the ordinary course of busi17 ness; and 

18 ‘‘(M) an obligation of a United States per19 son which—

20 ‘‘(i) is not a domestic corporation, and 

21 ‘‘(ii) is not—

22 ‘‘(I) a United States shareholder 

23 (as defined in section 951(b)) of the 

24 controlled foreign corporation, or 
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1 ‘‘(II) a partnership, estate, or 

2 trust in which the controlled foreign 

3 corporation, or any related person (as 

4 defined in section 954(d)(3)), is a 

5 partner, beneficiary, or trustee imme6 diately after the acquisition of any ob7 ligation of such partnership, estate, or 

8 trust by the controlled foreign cor9 poration.’’. 

10 (b) CONFORMING AMENDMENT.—Section 956(c)(2) 

11 is amended by striking ‘‘and (K)’’ in the last sentence and 

12 inserting ‘‘, (K), and (L)’’. 

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

14 this section shall apply to taxable years of foreign corpora15 tions beginning after December 31, 2004, and to taxable 

16 years of United States shareholders with or within which 

17 such taxable years of foreign corporations end. 

18 SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE 

19 RATE FOR FOREIGN TAX PAID OTHER THAN 

20 IN FUNCTIONAL CURRENCY. 

21 (a) IN GENERAL.—Paragraph (1) of section 986(a) 

22 (relating to determination of foreign taxes and foreign cor23 poration’s earnings and profits) is amended by redesig24 nating subparagraph (D) as subparagraph (E) and by in-
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1 serting after subparagraph (C) the following new subpara2 graph: 

3 ‘‘(D) ELECTIVE EXCEPTION FOR TAXES

4 PAID OTHER THAN IN FUNCTIONAL CUR5 RENCY.—

6 ‘‘(i) IN GENERAL.—At the election of 

7 the taxpayer, subparagraph (A) shall not 

8 apply to any foreign income taxes the li9 ability for which is denominated in any 

10 currency other than in the taxpayer’s func11 tional currency. 

12 ‘‘(ii) APPLICATION TO QUALIFIED

13 BUSINESS UNITS.—An election under this 

14 subparagraph may apply to foreign income 

15 taxes attributable to a qualified business 

16 unit in accordance with regulations pre17 scribed by the Secretary. 

18 ‘‘(iii) ELECTION.—Any such election 

19 shall apply to the taxable year for which 

20 made and all subsequent taxable years un21 less revoked with the consent of the Sec22 retary.’’. 

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

24 this section shall apply to taxable years beginning after 

25 December 31, 2004. 
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1 SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 

2 FROM CERTAIN FOREIGN CORPORATIONS. 

3 (a) IN GENERAL.—Paragraph (2) of section 871(i) 

4 (relating to tax not to apply to certain interest and divi5 dends) is amended by adding at the end the following new 

6 subparagraph: 

7 ‘‘(D) Dividends paid by a foreign corpora8 tion which are treated under section 

9 861(a)(2)(B) as income from sources within the 

10 United States.’’. 

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

12 this section shall apply to payments made after December 

13 31, 2004. 

14 SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST 

15 PAID BY FOREIGN PARTNERSHIPS AND FOR16 EIGN CORPORATIONS. 

17 (a) IN GENERAL.—Paragraph (1) of section 861(a) 

18 is amended by striking ‘‘and’’ at the end of subparagraph 

19 (A), by striking the period at the end of subparagraph 

20 (B) and inserting ‘‘, and’’, and by adding at the end the 

21 following new subparagraph: 

22 ‘‘(C) in the case of a foreign partnership, 

23 which is predominantly engaged in the active 

24 conduct of a trade or business outside the 

25 United States, any interest not paid by a trade 

26 or business engaged in by the partnership in 
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1 the United States and not allocable to income 

2 which is effectively connected (or treated as ef3 fectively connected) with the conduct of a trade 

4 or business in the United States.’’. 

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

6 this section shall apply to taxable years beginning after 

7 December 31, 2003. 

8 SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BE9 TWEEN RELATED CONTROLLED FOREIGN 

10 CORPORATIONS UNDER FOREIGN PERSONAL 

11 HOLDING COMPANY INCOME RULES. 

12 (a) IN GENERAL.—Subsection (c) of section 954, as 

13 amended by this Act, is amended by adding after para14 graph (4) the following new paragraph: 

15 ‘‘(5) LOOK-THRU IN THE CASE OF RELATED

16 CONTROLLED FOREIGN CORPORATIONS.—For pur17 poses of this subsection, dividends, interest, rents, 

18 and royalties received or accrued from a controlled 

19 foreign corporation which is a related person (as de20 fined in subsection (b)(9)) shall not be treated as 

21 foreign personal holding company income to the ex22 tent attributable or properly allocable (determined 

23 under rules similar to the rules of subparagraphs 

24 (C) and (D) of section 904(d)(3)) to income of the 

25 related person which is not subpart F income (as de-
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1 fined in section 952). For purposes of this para2 graph, interest shall include factoring income which 

3 is treated as income equivalent to interest for pur4 poses of paragraph (1)(E). The Secretary shall pre5 scribe such regulations as may be appropriate to 

6 prevent the abuse of the purposes of this para7 graph.’’. 

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

9 this section shall apply to taxable years of foreign corpora10 tions beginning after December 31, 2004, and to taxable 

11 years of United States shareholders with or within which 

12 such taxable years of foreign corporations end. 

13 SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PART14 NERSHIP INTERESTS. 

15 (a) IN GENERAL.—Section 954(c) (defining foreign 

16 personal holding company income), as amended by this 

17 Act, is amended by adding after paragraph (5) the fol18 lowing new paragraph: 

19 ‘‘(6) LOOK-THRU RULE FOR CERTAIN PARTNER20 SHIP SALES.—

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

22 sale by a controlled foreign corporation of an 

23 interest in a partnership with respect to which 

24 such corporation is a 25-percent owner, such 

25 corporation shall be treated for purposes of this 
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1 subsection as selling the proportionate share of 

2 the assets of the partnership attributable to 

3 such interest. The Secretary shall prescribe 

4 such regulations as may be appropriate to pre5 vent abuse of the purposes of this paragraph, 

6 including regulations providing for coordination 

7 of this paragraph with the provisions of sub8 chapter K. 

9 ‘‘(B) 25-PERCENT OWNER.—For purposes 

10 of this paragraph, the term ‘25-percent owner’ 

11 means a controlled foreign corporation which 

12 owns directly 25 percent or more of the capital 

13 or profits interest in a partnership. For pur14 poses of the preceding sentence, if a controlled 

15 foreign corporation is a shareholder or partner 

16 of a corporation or partnership, the controlled 

17 foreign corporation shall be treated as owning 

18 directly its proportionate share of any such cap19 ital or profits interest held directly or indirectly 

20 by such corporation or partnership’’. 

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

22 this section shall apply to taxable years of foreign corpora23 tions beginning after December 31, 2004, and to taxable 

24 years of United States shareholders with or within which 

25 such taxable years of foreign corporations end. 
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1 SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COM2 PANY RULES AND FOREIGN INVESTMENT 

3 COMPANY RULES. 

4 (a) GENERAL RULE.—The following provisions are 

5 hereby repealed: 

6 (1) Part III of subchapter G of chapter 1 (re7 lating to foreign personal holding companies). 

8 (2) Section 1246 (relating to gain on foreign in9 vestment company stock). 

10 (3) Section 1247 (relating to election by foreign 

11 investment companies to distribute income cur12 rently). 

13 (b) EXEMPTION OF FOREIGN CORPORATIONS FROM

14 PERSONAL HOLDING COMPANY RULES.—

15 (1) IN GENERAL.—Subsection (c) of section 

16 542 (relating to exceptions) is amended—

17 (A) by striking paragraph (5) and insert18 ing the following: 

19 ‘‘(5) a foreign corporation,’’, 

20 (B) by striking paragraphs (7) and (10) 

21 and by redesignating paragraphs (8) and (9) as 

22 paragraphs (7) and (8), respectively, 

23 (C) by inserting ‘‘and’’ at the end of para24 graph (7) (as so redesignated), and 
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1 (D) by striking ‘‘; and’’ at the end of para2 graph (8) (as so redesignated) and inserting a 

3 period. 

4 (2) TREATMENT OF INCOME FROM PERSONAL

5 SERVICE CONTRACTS.—Paragraph (1) of section 

6 954(c) is amended by adding at the end the fol7 lowing new subparagraph: 

8 ‘‘(I) PERSONAL SERVICE CONTRACTS.—

9 ‘‘(i) Amounts received under a con10 tract under which the corporation is to fur11 nish personal services if—

12 ‘‘(I) some person other than the 

13 corporation has the right to designate 

14 (by name or by description) the indi15 vidual who is to perform the services, 

16 or 

17 ‘‘(II) the individual who is to per18 form the services is designated (by 

19 name or by description) in the con20 tract, and 

21 ‘‘(ii) amounts received from the sale 

22 or other disposition of such a contract. 

23 This subparagraph shall apply with respect to 

24 amounts received for services under a particular 

25 contract only if at some time during the taxable 
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1 year 25 percent or more in value of the out2 standing stock of the corporation is owned, di3 rectly or indirectly, by or for the individual who 

4 has performed, is to perform, or may be des5 ignated (by name or by description) as the one 

6 to perform, such services.’’. 

7 (c) CONFORMING AMENDMENTS.—

8 (1) Section 1(h) is amended—

9 (A) in paragraph (10), by inserting ‘‘and’’ 

10 at the end of subparagraph (F), by striking 

11 subparagraph (G), and by redesignating sub12 paragraph (H) as subparagraph (G), and 

13 (B) by striking ‘‘a foreign personal holding 

14 company (as defined in section 552), a foreign 

15 investment company (as defined in section 

16 1246(b)), or’’ in paragraph (11)(C)(iii). 

17 (2) Section 163(e)(3)(B), as amended by sec18 tion 642(a) of this Act, is amended by striking 

19 ‘‘which is a foreign personal holding company (as 

20 defined in section 552), a controlled foreign corpora21 tion (as defined in section 957), or’’ and inserting 

22 ‘‘which is a controlled foreign corporation (as de23 fined in section 957) or’’. 

24 (3) Paragraph (2) of section 171(c) is amend25 ed—
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1 (A) by striking ‘‘, or by a foreign personal 

2 holding company, as defined in section 552’’, 

3 and 

4 (B) by striking ‘‘, or foreign personal hold5 ing company’’. 

6 (4) Paragraph (2) of section 245(a) is amended 

7 by striking ‘‘foreign personal holding company or’’. 

8 (5) Section 267(a)(3)(B), as amended by sec9 tion 642(b) of this Act, is amended by striking ‘‘to 

10 a foreign personal holding company (as defined in 

11 section 552), a controlled foreign corporation (as de12 fined in section 957), or’’ and inserting ‘‘to a con13 trolled foreign corporation (as defined in section 

14 957) or’’. 

15 (6) Section 312 is amended by striking sub16 section (j). 

17 (7) Subsection (m) of section 312 is amended 

18 by striking ‘‘, a foreign investment company (within 

19 the meaning of section 1246(b)), or a foreign per20 sonal holding company (within the meaning of sec21 tion 552)’’. 

22 (8) Subsection (e) of section 443 is amended by 

23 striking paragraph (3) and by redesignating para24 graphs (4) and (5) as paragraphs (3) and (4), re25 spectively. 
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1 (9) Subparagraph (B) of section 465(c)(7) is 

2 amended by adding ‘‘or’’ at the end of clause (i), by 

3 striking clause (ii), and by redesignating clause (iii) 

4 as clause (ii). 

5 (10) Paragraph (1) of section 543(b) is amend6 ed by inserting ‘‘and’’ at the end of subparagraph 

7 (A), by striking ‘‘, and’’ at the end of subparagraph 

8 (B) and inserting a period, and by striking subpara9 graph (C). 

10 (11) Paragraph (1) of section 562(b) is amend11 ed by striking ‘‘or a foreign personal holding com12 pany described in section 552’’. 

13 (12) Section 563 is amended—

14 (A) by striking subsection (c), 

15 (B) by redesignating subsection (d) as sub16 section (c), and 

17 (C) by striking ‘‘subsection (a), (b), or (c)’’ 

18 in subsection (c) (as so redesignated) and in19 serting ‘‘subsection (a) or (b)’’. 

20 (13) Subsection (d) of section 751 is amended 

21 by adding ‘‘and’’ at the end of paragraph (2), by 

22 striking paragraph (3), by redesignating paragraph 

23 (4) as paragraph (3), and by striking ‘‘paragraph 

24 (1), (2), or (3)’’ in paragraph (3) (as so redesig25 nated) and inserting ‘‘paragraph (1) or (2)’’. 
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1 (14) Paragraph (2) of section 864(d) is amend2 ed by striking subparagraph (A) and by redesig3 nating subparagraphs (B) and (C) as subparagraphs 

4 (A) and (B), respectively. 

5 (15)(A) Subparagraph (A) of section 898(b)(1) 

6 is amended to read as follows: 

7 ‘‘(A) which is treated as a controlled for8 eign corporation for any purpose under subpart 

9 F of part III of this subchapter, and’’. 

10 (B) Subparagraph (B) of section 898(b)(2) is 

11 amended by striking ‘‘and sections 551(f) and 554, 

12 whichever are applicable,’’. 

13 (C) Paragraph (3) of section 898(b) is amended 

14 to read as follows: 

15 ‘‘(3) UNITED STATES SHAREHOLDER.—The 

16 term ‘United States shareholder’ has the meaning 

17 given to such term by section 951(b), except that, in 

18 the case of a foreign corporation having related per19 son insurance income (as defined in section 

20 953(c)(2)), the Secretary may treat any person as a 

21 United States shareholder for purposes of this sec22 tion if such person is treated as a United States 

23 shareholder under section 953(c)(1).’’. 

24 (D) Subsection (c) of section 898 is amended to 

25 read as follows: 
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1 ‘‘(c) DETERMINATION OF REQUIRED YEAR.—

2 ‘‘(1) IN GENERAL.—The required year is—

3 ‘‘(A) the majority U.S. shareholder year, 

4 or 

5 ‘‘(B) if there is no majority U.S. share6 holder year, the taxable year prescribed under 

7 regulations. 

8 ‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci9 fied foreign corporation may elect, in lieu of the tax10 able year under paragraph (1)(A), a taxable year be11 ginning 1 month earlier than the majority U.S. 

12 shareholder year. 

13 ‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—

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

15 subsection, the term ‘majority U.S. shareholder 

16 year’ means the taxable year (if any) which, on 

17 each testing day, constituted the taxable year 

18 of—

19 ‘‘(i) each United States shareholder 

20 described in subsection (b)(2)(A), and 

21 ‘‘(ii) each United States shareholder 

22 not described in clause (i) whose stock was 

23 treated as owned under subsection 

24 (b)(2)(B) by any shareholder described in 

25 such clause. 
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1 ‘‘(B) TESTING DAY.—The testing days 

2 shall be—

3 ‘‘(i) the first day of the corporation’s 

4 taxable year (determined without regard to 

5 this section), or 

6 ‘‘(ii) the days during such representa7 tive period as the Secretary may pre8 scribe.’’. 

9 (16) Clause (ii) of section 904(d)(2)(A) is 

10 amended to read as follows: 

11 ‘‘(ii) CERTAIN AMOUNTS INCLUDED.—

12 Except as provided in clause (iii), the term 

13 ‘passive income’ includes, except as pro14 vided in subparagraph (E)(iii) or para15 graph (3)(I), any amount includible in 

16 gross income under section 1293 (relating 

17 to certain passive foreign investment com18 panies).’’. 

19 (17)(A) Subparagraph (A) of section 904(h)(1), 

20 as redesignated by section 302, is amended by add21 ing ‘‘or’’ at the end of clause (i), by striking clause 

22 (ii), and by redesignating clause (iii) as clause (ii). 

23 (B) The paragraph heading of paragraph (2) of 

24 section 904(h), as so redesignated, is amended by 

25 striking ‘‘FOREIGN PERSONAL HOLDING OR’’. 
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1 (18) Section 951 is amended by striking sub2 sections (c) and (d) and by redesignating subsections 

3 (e) and (f) as subsections (c) and (d), respectively. 

4 (19) Paragraph (3) of section 989(b) is amend5 ed by striking ‘‘, 551(a),’’. 

6 (20) Paragraph (5) of section 1014(b) is 

7 amended by inserting ‘‘and before January 1, 

8 2005,’’ after ‘‘August 26, 1937,’’. 

9 (21) Subsection (a) of section 1016 is amended 

10 by striking paragraph (13). 

11 (22)(A) Paragraph (3) of section 1212(a) is 

12 amended to read as follows: 

13 ‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net 

14 capital loss of a corporation shall not be carried 

15 back under paragraph (1)(A) to a taxable year—

16 ‘‘(A) for which it is a regulated investment 

17 company (as defined in section 851), or 

18 ‘‘(B) for which it is a real estate invest19 ment trust (as defined in section 856).’’. 

20 (B) The amendment made by subparagraph (A) 

21 shall apply to taxable years beginning after Decem22 ber 31, 2004. 

23 (23) Section 1223 is amended by striking para24 graph (10) and by redesignating the following para25 graphs accordingly. 
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1 (24) Subsection (d) of section 1248 is amended 

2 by striking paragraph (5) and by redesignating 

3 paragraphs (6) and (7) as paragraphs (5) and (6), 

4 respectively. 

5 (25) Paragraph (2) of section 1260(c) is 

6 amended by striking subparagraphs (H) and (I) and 

7 by redesignating subparagraph (J) as subparagraph 

8 (H). 

9 (26)(A) Subparagraph (F) of section 

10 1291(b)(3) is amended by striking ‘‘551(d), 959(a),’’ 

11 and inserting ‘‘959(a)’’. 

12 (B) Subsection (e) of section 1291 is amended 

13 by inserting ‘‘(as in effect on the day before the date 

14 of the enactment of the American Jobs Creation Act 

15 of 2004)’’ after ‘‘section 1246’’. 

16 (27) Paragraph (2) of section 1294(a) is 

17 amended to read as follows: 

18 ‘‘(2) ELECTION NOT PERMITTED WHERE

19 AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION

20 951.—The taxpayer may not make an election under 

21 paragraph (1) with respect to the undistributed 

22 PFIC earnings tax liability attributable to a quali23 fied electing fund for the taxable year if any amount 

24 is includible in the gross income of the taxpayer 
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1 under section 951 with respect to such fund for such 

2 taxable year.’’. 

3 (28) Section 6035 is hereby repealed. 

4 (29) Subparagraph (D) of section 6103(e)(1) is 

5 amended by striking clause (iv) and redesignating 

6 clauses (v) and (vi) as clauses (iv) and (v), respec7 tively. 

8 (30) Subparagraph (B) of section 6501(e)(1) is 

9 amended to read as follows: 

10 ‘‘(B) CONSTRUCTIVE DIVIDENDS.—If the 

11 taxpayer omits from gross income an amount 

12 properly includible therein under section 

13 951(a), the tax may be assessed, or a pro14 ceeding in court for the collection of such tax 

15 may be done without assessing, at any time 

16 within 6 years after the return was filed.’’. 

17 (31) Subsection (a) of section 6679 is amend18 ed—

19 (A) by striking ‘‘6035, 6046, and 6046A’’ 

20 in paragraph (1) and inserting ‘‘6046 and 

21 6046A’’, and 

22 (B) by striking paragraph (3). 

23 (32) Sections 170(f)(10)(A), 508(d), 4947, and 

24 4948(c)(4) are each amended by striking 

25 ‘‘556(b)(2),’’ each place it appears. 
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1 (33) The table of parts for subchapter G of 

2 chapter 1 is amended by striking the item relating 

3 to part III. 

4 (34) The table of sections for part IV of sub5 chapter P of chapter 1 is amended by striking the 

6 items relating to sections 1246 and 1247. 

7 (35) The table of sections for subpart A of part 

8 III of subchapter A of chapter 61 is amended by 

9 striking the item relating to section 6035. 

10 (d) EFFECTIVE DATES.—

11 (1) IN GENERAL.—Except as provided in para12 graph (2), the amendments made by this section 

13 shall apply to taxable years of foreign corporations 

14 beginning after December 31, 2004, and to taxable 

15 years of United States shareholders with or within 

16 which such taxable years of foreign corporations 

17 end. 

18 (2) SUBSECTION (c)(29).—The amendments 

19 made by subsection (c)(29) shall apply to disclosures 

20 of return or return information with respect to tax21 able years beginning after December 31, 2004. 
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1 SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLD2 ING COMPANY INCOME WITH RESPECT TO 

3 TRANSACTIONS IN COMMODITIES. 

4 (a) IN GENERAL.—Clauses (i) and (ii) of section 

5 954(c)(1)(C) (relating to commodity transactions) are 

6 amended to read as follows: 

7 ‘‘(i) arise out of commodity hedging 

8 transactions (as defined in paragraph 

9 (4)(A)), 

10 ‘‘(ii) are active business gains or 

11 losses from the sale of commodities, but 

12 only if substantially all of the controlled 

13 foreign corporation’s commodities are 

14 property described in paragraph (1), (2), 

15 or (8) of section 1221(a), or’’. 

16 (b) DEFINITION AND SPECIAL RULES.—Subsection 

17 (c) of section 954 is amended by adding after paragraph 

18 (3) the following new paragraph: 

19 ‘‘(4) DEFINITION AND SPECIAL RULES RELAT20 ING TO COMMODITY TRANSACTIONS.—

21 ‘‘(A) COMMODITY HEDGING TRANS22 ACTIONS.—For purposes of paragraph 

23 (1)(C)(i), the term ‘commodity hedging trans24 action’ means any transaction with respect to a 

25 commodity if such transaction—
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1 ‘‘(i) is a hedging transaction as de2 fined in section 1221(b)(2), determined—

3 ‘‘(I) without regard to subpara4 graph (A)(ii) thereof, 

5 ‘‘(II) by applying subparagraph 

6 (A)(i) thereof by substituting ‘ordi7 nary property or property described in 

8 section 1231(b)’ for ‘ordinary prop9 erty’, and 

10 ‘‘(III) by substituting ‘controlled 

11 foreign corporation’ for ‘taxpayer’ 

12 each place it appears, and 

13 ‘‘(ii) is clearly identified as such in ac14 cordance with section 1221(a)(7). 

15 ‘‘(B) TREATMENT OF DEALER ACTIVITIES

16 UNDER PARAGRAPH (1)(C).—Commodities with 

17 respect to which gains and losses are not taken 

18 into account under paragraph (2)(C) in com19 puting a controlled foreign corporation’s foreign 

20 personal holding company income shall not be 

21 taken into account in applying the substantially 

22 all test under paragraph (1)(C)(ii) to such cor23 poration. 

24 ‘‘(C) REGULATIONS.—The Secretary shall 

25 prescribe such regulations as are appropriate to 
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1 carry out the purposes of paragraph (1)(C) in 

2 the case of transactions involving related par3 ties.’’. 

4 (c) MODIFICATION OF EXCEPTION FOR DEALERS.—

5 Clause (i) of section 954(c)(2)(C) is amended by inserting 

6 ‘‘and transactions involving physical settlement’’ after 

7 ‘‘(including hedging transactions’’. 

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

9 this section shall apply to transactions entered into after 

10 December 31, 2004. 

11 SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT 

12 LEASING AND SHIPPING INCOME. 

13 (a) ELIMINATION OF FOREIGN BASE COMPANY SHIP14 PING INCOME.—Section 954 (relating to foreign base com15 pany income) is amended—

16 (1) by striking paragraph (4) of subsection (a) 

17 (relating to foreign base company shipping income), 

18 and 

19 (2) by striking subsection (f) (relating to for20 eign base company shipping income). 

21 (b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI22 TIES.—Subparagraph (A) of section 954(c)(2) is amended 

23 by adding at the end the following new sentence: ‘‘For 

24 purposes of the preceding sentence, rents derived from 

25 leasing an aircraft or vessel in foreign commerce shall not 
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1 fail to be treated as derived in the active conduct of a 

2 trade or business if, as determined under regulations pre3 scribed by the Secretary, the active leasing expenses are 

4 not less than 10 percent of the profit on the lease.’’

5 (c) CONFORMING AMENDMENTS.—

6 (1) Section 952(c)(1)(B)(iii) is amended by 

7 striking subclause (I) and redesignating subclauses 

8 (II) through (VI) as subclauses (I) through (V), re9 spectively. 

10 (2) Subsection (b) of section 954 is amended—

11 (A) by striking ‘‘the foreign base company 

12 shipping income,’’ in paragraph (5), 

13 (B) by striking paragraphs (6) and (7), 

14 and 

15 (C) by redesignating paragraph (8) as 

16 paragraph (6). 

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

18 this section shall apply to taxable years of foreign corpora19 tions beginning after December 31, 2004, and to taxable 

20 years of United States shareholders with or within which 

21 such taxable years of foreign corporations end. 

22 SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART 

23 F FOR ACTIVE FINANCING. 

24 (a) IN GENERAL.—Section 954(h)(3) is amended by 

25 adding at the end the following: 
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1 ‘‘(E) DIRECT CONDUCT OF ACTIVITIES.—

2 For purposes of subparagraph (A)(ii)(II), an 

3 activity shall be treated as conducted directly by 

4 an eligible controlled foreign corporation or 

5 qualified business unit in its home country if 

6 the activity is performed by employees of a re7 lated person and—

8 ‘‘(i) the related person is an eligible 

9 controlled foreign corporation the home 

10 country of which is the same as the home 

11 country of the corporation or unit to which 

12 subparagraph (A)(ii)(II) is being applied, 

13 ‘‘(ii) the activity is performed in the 

14 home country of the related person, and 

15 ‘‘(iii) the related person is com16 pensated on an arm’s-length basis for the 

17 performance of the activity by its employ18 ees and such compensation is treated as 

19 earned by such person in its home country 

20 for purposes of the home country’s tax 

21 laws.’’. 

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

23 this section shall apply to taxable years of such foreign 

24 corporations beginning after December 31, 2004, and to 
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1 taxable years of United States shareholders with or within 

2 which such taxable years of such foreign corporations end. 

3 TITLE IV—EXTENSION OF 

4 CERTAIN EXPIRING PROVISIONS 

5 SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL 

6 CREDITS AGAINST REGULAR AND MINIMUM 

7 TAX LIABILITY. 

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

9 amended—

10 (1) by striking ‘‘RULE FOR 2000, 2001, 2002, AND

11 2003.—’’ and inserting ‘‘RULE FOR TAXABLE YEARS

12 2000 THROUGH 2005.—’’, and 

13 (2) by striking ‘‘or 2003,’’ and inserting ‘‘2003, 

14 2004, or 2005,’’. 

15 (b) CONFORMING PROVISIONS.—

16 (1) Section 904(h) is amended by striking ‘‘or 

17 2003’’ and inserting ‘‘2003, 2004, or 2005’’. 

18 (2) The amendments made by sections 201(b), 

19 202(f), and 618(b) of the Economic Growth and Tax 

20 Relief Reconciliation Act of 2001 shall not apply to 

21 taxable years beginning during 2004 or 2005. 

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

23 this section shall apply to taxable years beginning after 

24 December 31, 2003. 
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1 SEC. 402. EXTENSION OF RESEARCH CREDIT. 

2 (a) EXTENSION.—

3 (1) IN GENERAL.—Section 41(h)(1)(B) (relat4 ing to termination) is amended by striking ‘‘June 

5 30, 2004’’ and inserting ‘‘December 31, 2005’’. 

6 (2) CONFORMING AMENDMENT.—Section 

7 45C(b)(1)(D) is amended by striking ‘‘June 30, 

8 2004’’ and inserting ‘‘December 31, 2005’’. 

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

10 subsection (a) shall apply to amounts paid or incurred 

11 after the date of the enactment of this Act. 

12 SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRO13 DUCED FROM CERTAIN RENEWABLE RE14 SOURCES. 

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

16 section 45(c)(3) (defining qualified facility) are both 

17 amended by striking ‘‘2004’’ and inserting ‘‘2006’’. 

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

19 this section shall apply to electricity produced and sold 

20 after December 31, 2003. 

21 SEC. 404. INDIAN EMPLOYMENT TAX CREDIT. 

22 Section 45A(f) (relating to termination) is amended 

23 by striking ‘‘December 31, 2004’’ and inserting ‘‘Decem24 ber 31, 2005’’. 
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1 SEC. 405. WORK OPPORTUNITY CREDIT. 

2 (a) IN GENERAL.—Subparagraph (B) of section 

3 51(c)(4) is amended by striking ‘‘December 31, 2003’’ and 

4 inserting ‘‘December 31, 2005’’. 

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

6 subsection (a) shall apply to individuals who begin work 

7 for the employer after December 31, 2003. 

8 SEC. 406. WELFARE-TO-WORK CREDIT. 

9 (a) IN GENERAL.—Subsection (f) of section 51A is 

10 amended by striking ‘‘December 31, 2003’’ and inserting 

11 ‘‘December 31, 2005’’. 

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

13 subsection (a) shall apply to individuals who begin work 

14 for the employer after December 31, 2003. 

15 SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SEC16 ONDARY SCHOOL TEACHERS. 

17 (a) IN GENERAL.—Subparagraph (D) of section 

18 62(a)(2) (relating to certain trade and business deductions 

19 of employees) is amended by striking ‘‘or 2003’’ and in20 serting ‘‘, 2003, 2004, or 2005’’. 

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

22 subsection (a) shall apply to taxable years beginning after 

23 December 31, 2003. 
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1 SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION 

2 BENEFIT FOR PROPERTY ON INDIAN RES3 ERVATIONS. 

4 Paragraph (8) of section 168(j) (relating to termi5 nation) is amended by striking ‘‘December 31, 2004’’ and 

6 inserting ‘‘December 31, 2005’’. 

7 SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER 

8 TECHNOLOGY AND EQUIPMENT USED FOR 

9 EDUCATIONAL PURPOSES. 

10 (a) IN GENERAL.—Subparagraph (G) of section 

11 170(e)(6) (relating to special rule for contributions of 

12 computer technology and equipment for educational pur13 poses) is amended by striking ‘‘December 31, 2003’’ and 

14 inserting ‘‘December 31, 2005’’. 

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

16 subsection (a) shall apply to taxable years beginning after 

17 December 31, 2003. 

18 SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION 

19 COSTS. 

20 (a) IN GENERAL.—Subsection (h) of section 198 (re21 lating to termination) is amended by striking ‘‘December 

22 31, 2003’’ and inserting ‘‘December 31, 2005’’. 

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

24 subsection (a) shall apply to expenditures paid or incurred 

25 after December 31, 2003.
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1 SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 

2 (a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec3 tion 220(i) (defining cut-off year) are each amended by 

4 striking ‘‘2003’’ each place it appears in the text and 

5 headings and inserting ‘‘2004’’. 

6 (b) CONFORMING AMENDMENTS.—

7 (1) Subparagraph (A) of section 220(j)(4) is 

8 amended by striking ‘‘and 2002’’ and inserting 

9 ‘‘2002, and 2004’’. 

10 (2) Subparagraph (C) of section 220(j)(2) is 

11 amended to read as follows: 

12 ‘‘(C) NO LIMITATION FOR 2000 OR 2003.—

13 The numerical limitation shall not apply for 

14 2000 or 2003.’’. 

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

16 this section shall take effect on January 1, 2004. 

17 (d) TIME FOR FILING REPORTS.—The report re18 quired by section 220(j)(4) of the Internal Revenue Code 

19 of 1986 to be made on August 1, 2004, shall be treated 

20 as timely if made before the close of the 90-day period 

21 beginning on the date of the enactment of this Act. 
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1 SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE2 TION FOR OIL AND NATURAL GAS PRODUCED 

3 FROM MARGINAL PROPERTIES. 

4 (a) IN GENERAL.—Subparagraph (H) of section 

5 613A(c)(6) is amended by striking ‘‘January 1, 2004’’ and 

6 inserting ‘‘January 1, 2006’’. 

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

8 subsection (a) shall apply to taxable years beginning after 

9 December 31, 2003. 

10 SEC. 413. QUALIFIED ZONE ACADEMY BONDS. 

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

12 1397E(e) is amended by striking ‘‘and 2003’’ and insert13 ing ‘‘2003, 2004, and 2005’’. 

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

15 subsection (a) shall apply to obligations issued after the 

16 date of the enactment of this Act. 

17 SEC. 414. DISTRICT OF COLUMBIA. 

18 (a) DISTRICT OF COLUMBIA ENTERPRISE ZONE.—

19 Subsection (f) of section 1400 is amended by striking 

20 ‘‘December 31, 2003’’ both places it appears and inserting 

21 ‘‘December 31, 2005’’. 

22 (b) TAX-EXEMPT ECONOMIC DEVELOPMENT

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

24 striking ‘‘December 31, 2003’’ and inserting ‘‘December 

25 31, 2005’’. 

26 (c) ZERO PERCENT CAPITAL GAINS RATE.—
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1 (1) Section 1400B is amended by striking 

2 ‘‘January 1, 2004’’ each place it appears and insert3 ing ‘‘January 1, 2006’’. 

4 (2) Subsections (e)(2) and (g)(2) of section 

5 1400B are each amended by striking ‘‘2008’’ each 

6 place it appears in the headings and text and insert7 ing ‘‘2010’’. 

8 (3) Subsection (d) of section 1400F is amended 

9 by striking ‘‘December 31, 2008’’ and inserting 

10 ‘‘December 31, 2010’’. 

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

12 (i) of section 1400C is amended by striking ‘‘January 1, 

13 2004’’ and inserting ‘‘January 1, 2006’’. 

14 (e) EFFECTIVE DATES.—

15 (1) IN GENERAL.—Except as otherwise pro16 vided in this subsection, the amendments made by 

17 this section shall take effect on the date of the en18 actment of this Act. 

19 (2) TAX-EXEMPT ECONOMIC DEVELOPMENT

20 BONDS.—The amendment made by subsection (b) 

21 shall apply to obligations issued after December 31, 

22 2003. 
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1 SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY 

2 ZONE BOND FINANCING. 

3 Subparagraph (D) of section 1400L(d)(2) is amend4 ed by striking ‘‘2005’’ and inserting ‘‘2009’’. 

5 SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVI6 TIES. 

7 (a) IN GENERAL.—Clause (iv) of section 

8 6103(i)(3)(C) and subparagraph (E) of section 6103(i)(7) 

9 are both amended by striking ‘‘December 31, 2003’’ and 

10 inserting ‘‘December 31, 2005’’. 

11 (b) DISCLOSURE OF TAXPAYER IDENTITY TO LAW

12 ENFORCEMENT AGENCIES INVESTIGATING TERRORISM.—

13 Subparagraph (A) of section 6103(i)(7) is amended by 

14 adding at the end the following new clause: 

15 ‘‘(v) TAXPAYER IDENTITY.—For pur16 poses of this subparagraph, a taxpayer’s 

17 identity shall not be treated as taxpayer 

18 return information.’’. 

19 (c) EFFECTIVE DATES.—

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

21 subsection (a) shall apply to disclosures on or after 

22 the date of the enactment of this Act. 

23 (2) SUBSECTION (b).—The amendment made 

24 by subsection (b) shall take effect as if included in 

25 section 201 of the Victims of Terrorism Tax Relief 

26 Act of 2001. 
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1 SEC. 417. DISCLOSURE OF RETURN INFORMATION RELAT2 ING TO STUDENT LOANS. 

3 Section 6103(l)(13)(D) (relating to termination) is 

4 amended by striking ‘‘December 31, 2004’’ and inserting 

5 ‘‘December 31, 2005’’. 

6 SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS. 

7 (a) IN GENERAL.—Paragraph (1) of section 7652(f) 

8 is amended by striking ‘‘January 1, 2004’’ and inserting 

9 ‘‘January 1, 2006’’. 

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

11 subsection (a) shall apply to articles brought into the 

12 United States after December 31, 2003. 

13 SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDG14 ET FOR THE INTERNAL REVENUE SERVICE. 

15 (a) IN GENERAL.—Paragraph (2) of section 8021(f) 

16 (relating to joint reviews) is amended by striking ‘‘2004’’ 

17 and inserting ‘‘2005’’. 

18 (b) REPORT.—Subparagraph (C) of section 8022(3) 

19 (regarding reports) is amended—

20 (1) by striking ‘‘2004’’ and inserting ‘‘2005’’, 

21 and 

22 (2) by striking ‘‘with respect to—’’ and all that 

23 follows and inserting ‘‘with respect to the matters 

24 addressed in the joint review referred to in section 

25 8021(f)(2).’’. 
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1 (c) TIME FOR JOINT REVIEW.—The joint review re2 quired by section 8021(f)(2) of the Internal Revenue Code 

3 of 1986 to be made before June 1, 2004, shall be treated 

4 as timely if made before June 1, 2005. 

5 SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS 

6 TO MENTAL HEALTH BENEFITS. 

7 (a) IN GENERAL.—Subsection (f) of section 9812 is 

8 amended by striking ‘‘and’’ at the end of paragraph (1), 

9 by striking paragraph (2), and by inserting after para10 graph (1) the following new paragraphs: 

11 ‘‘(2) on or after January 1, 2004, and before 

12 the date of the enactment of American Jobs Cre13 ation Act of 2004, and 

14 ‘‘(3) after December 31, 2005.’’. 

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

16 this section shall apply to benefits for services furnished 

17 on or after December 31, 2003. 

18 SEC. 421. COMBINED EMPLOYMENT TAX REPORTING 

19 PROJECT. 

20 (a) IN GENERAL.—Paragraph (1) of section 976(b) 

21 of the Taxpayer Relief Act of 1997 (111 Stat. 898) is 

22 amended by striking ‘‘for a period ending with the date 

23 which is 5 years after the date of the enactment of this 

24 Act’’ and inserting ‘‘during the period ending on Decem25 ber 31, 2005’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 subsection (a) shall apply to disclosures on or after the 

3 date of the enactment of this Act. 

4 SEC. 422. CLEAN-FUEL VEHICLES. 

5 (a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.—

6 Paragraph (2) of section 30(b) (relating to phaseout) is 

7 amended to read as follows: 

8 ‘‘(2) PHASEOUT.—In the case of any qualified 

9 electric vehicle placed in service after December 31, 

10 2005, the credit otherwise allowable under sub11 section (a) (determined after the application of para12 graph (1)) shall be reduced by 75 percent.’’. 

13 (b) DEDUCTION FOR QUALIFIED CLEAN-FUEL VEHI14 CLE PROPERTY.—Subparagraph (B) of section 

15 179A(b)(1) (relating to phaseout) is amended to read as 

16 follows: 

17 ‘‘(B) PHASEOUT.—In the case of any 

18 qualified clean-fuel vehicle property placed in 

19 service after December 31, 2005, the limit oth20 erwise applicable under subparagraph (A) shall 

21 be reduced by 75 percent.’’. 

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

23 this section shall apply to property placed in service after 

24 December 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 (re8 lating to definitions and special rules) is amended by add9 ing 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, sub17 section (a) shall be applied—

18 ‘‘(I) without regard to the ref19 erence to State and local income 

20 taxes, 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 

9 determining whether the tax applies with 

10 respect to a broad range of classes of 

11 items, and 

12 ‘‘(ii) the fact that the rate of tax ap13 plicable 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 

20 tax applicable with respect to an item described 

21 in subparagraph (C), no deduction shall be al22 lowed under this paragraph for any general 

23 sales tax imposed with respect to an item at a 

24 rate other 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 

4 of the preceding sentence, the term ‘compen5 sating use tax’ means, with respect to any item, 

6 a tax 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 

17 shall be disregarded and the general rate shall 

18 be treated as the rate of tax. 

19 ‘‘(G) SEPARATELY STATED GENERAL

20 SALES TAXES.—If the amount of any general 

21 sales tax is separately stated, then, to the ex22 tent that the amount so stated is paid by the 

23 consumer (other than in connection with the 

24 consumer’s trade or business) to the seller, such 
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1 amount shall be treated as a tax imposed on, 

2 and paid by, such consumer. 

3 ‘‘(H) AMOUNT OF DEDUCTION TO BE DE4 TERMINED UNDER TABLES.—

5 ‘‘(i) IN GENERAL.—The amount of 

6 the deduction allowed under this para7 graph shall be determined under tables 

8 prescribed 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 aver14 age consumption by taxpayers on a 

15 State-by-State basis, as determined by 

16 the Secretary, taking into account fil17 ing status, number of dependents, ad18 justed gross income, and rates of 

19 State and local general sales taxation, 

20 and 

21 ‘‘(III) need only be determined 

22 with respect to adjusted gross incomes 

23 up to the applicable amount (as deter24 mined under section 68(b)). 
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1 ‘‘(I) APPLICATION OF PARAGRAPH.—This 

2 paragraph shall apply to taxable years begin3 ning after December 31, 2003, and before Jan4 uary 1, 2006.’’. 

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

6 this section shall apply to taxable years beginning after 

7 December 31, 2003. 

8 TITLE VI—REVENUE 

9 PROVISIONS 

10 Subtitle A—Provisions to Reduce 

11 Tax Avoidance Through Indi12 vidual and Corporate Expatria13 tion 

14 SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND 

15 THEIR FOREIGN PARENTS. 

16 (a) IN GENERAL.—Subchapter C of chapter 80 (re17 lating to provisions affecting more than one subtitle) is 

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

19 ‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 

20 AND THEIR FOREIGN PARENTS. 

21 ‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED EN22 TITIES.—

23 ‘‘(1) IN GENERAL.—The taxable income of an 

24 expatriated entity for any taxable year which in25 cludes any portion of the applicable period shall in 
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1 no event be less than the inversion gain of the entity 

2 for the taxable year. 

3 ‘‘(2) EXPATRIATED ENTITY.—For purposes of 

4 this subsection—

5 ‘‘(A) IN GENERAL.—The term ‘expatriated 

6 entity’ means—

7 ‘‘(i) the domestic corporation or part8 nership referred to in subparagraph (B)(i) 

9 with respect to which a foreign corporation 

10 is a surrogate foreign corporation, and 

11 ‘‘(ii) any United States person who is 

12 related (within the meaning of section 

13 267(b) or 707(b)(1)) to a domestic cor14 poration or partnership described in clause 

15 (i). 

16 ‘‘(B) SURROGATE FOREIGN CORPORA17 TION.—A foreign corporation shall be treated 

18 as a surrogate foreign corporation if, pursuant 

19 to a plan (or a series of related transactions)—

20 ‘‘(i) the entity completes after March 

21 4, 2003, the direct or indirect acquisition 

22 of substantially all of the properties held 

23 directly or indirectly by a domestic cor24 poration or substantially all of the prop-
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1 erties constituting a trade or business of a 

2 domestic partnership, 

3 ‘‘(ii) after the acquisition at least 60 

4 percent of the stock (by vote or value) of 

5 the entity is held—

6 ‘‘(I) in the case of an acquisition 

7 with respect to a domestic corpora8 tion, by former shareholders of the 

9 domestic corporation by reason of 

10 holding stock in the domestic corpora11 tion, or 

12 ‘‘(II) in the case of an acquisition 

13 with respect to a domestic partner14 ship, by former partners of the do15 mestic partnership by reason of hold16 ing a capital or profits interest in the 

17 domestic partnership, and 

18 ‘‘(iii) after the acquisition the ex19 panded affiliated group which includes the 

20 entity does not have substantial business 

21 activities in the foreign country in which, 

22 or under the law of which, the entity is 

23 created or organized, when compared to 

24 the total business activities of such ex25 panded affiliated group. 
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1 An entity otherwise described in clause (i) with 

2 respect to any domestic corporation or partner3 ship trade or business shall be treated as not so 

4 described if, on or before March 4, 2003, such 

5 entity acquired directly or indirectly more than 

6 half of the properties held directly or indirectly 

7 by such corporation or more than half of the 

8 properties constituting such partnership trade 

9 or business, as the case may be. 

10 ‘‘(b) DEFINITIONS AND SPECIAL RULES.—

11 ‘‘(1) EXPANDED AFFILIATED GROUP.—The 

12 term ‘expanded affiliated group’ means an affiliated 

13 group as defined in section 1504(a) but without re14 gard to section 1504(b)(3), except that section 

15 1504(a) shall be applied by substituting ‘more than 

16 50 percent’ for ‘at least 80 percent’ each place it ap17 pears. 

18 ‘‘(2) CERTAIN STOCK DISREGARDED.—There 

19 shall not be taken into account in determining own20 ership under subsection (a)(2)(B)(ii)—

21 ‘‘(A) stock held by members of the ex22 panded affiliated group which includes the for23 eign corporation, or 
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1 ‘‘(B) stock of such foreign corporation 

2 which is sold in a public offering related to the 

3 acquisition described in subsection (a)(2)(B)(i). 

4 ‘‘(3) PLAN DEEMED IN CERTAIN CASES.—If a 

5 foreign corporation acquires directly or indirectly 

6 substantially all of the properties of a domestic cor7 poration or partnership during the 4-year period be8 ginning on the date which is 2 years before the own9 ership requirements of subsection (a)(2)(B)(ii) are 

10 met, such actions shall be treated as pursuant to a 

11 plan. 

12 ‘‘(4) CERTAIN TRANSFERS DISREGARDED.—The 

13 transfer of properties or liabilities (including by con14 tribution or distribution) shall be disregarded if such 

15 transfers are part of a plan a principal purpose of 

16 which is to avoid the purposes of this section. 

17 ‘‘(5) SPECIAL RULE FOR RELATED PARTNER18 SHIPS.—For purposes of applying subsection 

19 (a)(2)(B)(ii) to the acquisition of a trade or business 

20 of a domestic partnership, except as provided in reg21 ulations, all partnerships which are under common 

22 control (within the meaning of section 482) shall be 

23 treated as 1 partnership. 

24 ‘‘(6) REGULATIONS.—The Secretary shall pre25 scribe such regulations as may be appropriate to de-
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1 termine whether a corporation is a surrogate foreign 

2 corporation, including regulations—

3 ‘‘(A) to treat warrants, options, contracts 

4 to acquire stock, convertible debt interests, and 

5 other similar interests as stock, and 

6 ‘‘(B) to treat stock as not stock. 

7 ‘‘(c) OTHER DEFINITIONS.—For purposes of this 

8 section—

9 ‘‘(1) APPLICABLE PERIOD.—The term ‘applica10 ble period’ means the period—

11 ‘‘(A) beginning on the first date properties 

12 are acquired as part of the acquisition described 

13 in subsection (a)(2)(B)(i), and 

14 ‘‘(B) ending on the date which is 10 years 

15 after the last date properties are acquired as 

16 part of such acquisition. 

17 ‘‘(2) INVERSION GAIN.—The term ‘inversion 

18 gain’ means the income or gain recognized by reason 

19 of the transfer during the applicable period of stock 

20 or other properties by an expatriated entity, and any 

21 income received or accrued during the applicable pe22 riod by reason of a license of any property by an ex23 patriated entity—

24 ‘‘(A) as part of the acquisition described in 

25 subsection (a)(2)(B)(i), or 
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1 ‘‘(B) after such acquisition if the transfer 

2 or license is to a foreign related person. 

3 Subparagraph (B) shall not apply to property de4 scribed in section 1221(a)(1) in the hands of the ex5 patriated entity. 

6 ‘‘(3) FOREIGN RELATED PERSON.—The term 

7 ‘foreign related person’ means, with respect to any 

8 expatriated entity, a foreign person which—

9 ‘‘(A) is related (within the meaning of sec10 tion 267(b) or 707(b)(1)) to such entity, or 

11 ‘‘(B) is under the same common control 

12 (within the meaning of section 482) as such en13 tity. 

14 ‘‘(d) SPECIAL RULES.—

15 ‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON

16 INVERSION GAIN.—Credits (other than the credit al17 lowed by section 901) shall be allowed against the 

18 tax imposed by this chapter on an expatriated entity 

19 for any taxable year described in subsection (a) only 

20 to the extent such tax exceeds the product of—

21 ‘‘(A) the amount of the inversion gain for 

22 the taxable year, and 

23 ‘‘(B) the highest rate of tax specified in 

24 section 11(b)(1). 
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1 For purposes of determining the credit allowed by 

2 section 901, inversion gain shall be treated as from 

3 sources within the United States. 

4 ‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 

5 the case of an expatriated entity which is a partner6 ship—

7 ‘‘(A) subsection (a)(1) shall apply at the 

8 partner rather than the partnership level, 

9 ‘‘(B) the inversion gain of any partner for 

10 any taxable year shall be equal to the sum of—

11 ‘‘(i) the partner’s distributive share of 

12 inversion gain of the partnership for such 

13 taxable year, plus 

14 ‘‘(ii) gain recognized for the taxable 

15 year by the partner by reason of the trans16 fer during the applicable period of any 

17 partnership interest of the partner in such 

18 partnership to the surrogate foreign cor19 poration, and 

20 ‘‘(C) the highest rate of tax specified in 

21 the rate schedule applicable to the partner 

22 under this chapter shall be substituted for the 

23 rate of tax referred to in paragraph (1). 

24 ‘‘(3) COORDINATION WITH SECTION 172 AND

25 MINIMUM TAX.—Rules similar to the rules of para-
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1 graphs (3) and (4) of section 860E(a) shall apply 

2 for purposes of subsection (a). 

3 ‘‘(4) STATUTE OF LIMITATIONS.—

4 ‘‘(A) IN GENERAL.—The statutory period 

5 for the assessment of any deficiency attrib6 utable to the inversion gain of any taxpayer for 

7 any pre-inversion year shall not expire before 

8 the expiration of 3 years from the date the Sec9 retary is notified by the taxpayer (in such man10 ner as the Secretary may prescribe) of the ac11 quisition described in subsection (a)(2)(B)(i) to 

12 which such gain relates and such deficiency 

13 may be assessed before the expiration of such 

14 3-year period notwithstanding the provisions of 

15 any other law or rule of law which would other16 wise prevent such assessment. 

17 ‘‘(B) PRE-INVERSION YEAR.—For purposes 

18 of subparagraph (A), the term ‘pre-inversion 

19 year’ means any taxable year if—

20 ‘‘(i) any portion of the applicable pe21 riod is included in such taxable year, and 

22 ‘‘(ii) such year ends before the taxable 

23 year in which the acquisition described in 

24 subsection (a)(2)(B)(i) is completed. 
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1 ‘‘(e) SPECIAL RULE FOR TREATIES.—Nothing in sec2 tion 894 or 7852(d) or in any other provision of law shall 

3 be construed as permitting an exemption, by reason of any 

4 treaty obligation of the United States heretofore or here5 after entered into, from the provisions of this section. 

6 ‘‘(f) REGULATIONS.—The Secretary shall provide 

7 such regulations as are necessary to carry out this section, 

8 including regulations providing for such adjustments to 

9 the application of this section as are necessary to prevent 

10 the avoidance of the purposes of this section, including the 

11 avoidance of such purposes through—

12 ‘‘(1) the use of related persons, pass-through or 

13 other noncorporate entities, or other intermediaries, 

14 or 

15 ‘‘(2) transactions designed to have persons 

16 cease to be (or not become) members of expanded 

17 affiliated groups or related persons.’’. 

18 (b) CONFORMING AMENDMENT.—The table of sec19 tions for subchapter C of chapter 80 is amended by adding 

20 at the end the following new item:

‘‘Sec. 7874. Rules relating to expatriated entities and their foreign parents.’’

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

22 this section shall apply to taxable years ending after 

23 March 4, 2003. 
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1 SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSID2 ERS IN EXPATRIATED CORPORATIONS. 

3 (a) IN GENERAL.—Subtitle D is amended by insert4 ing after chapter 44 end the following new chapter: 

5 ‘‘CHAPTER 45—PROVISIONS RELATING TO 

6 EXPATRIATED ENTITIES

‘‘Sec. 4985. Stock compensation of insiders in expatriated corporations.

7 ‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA8 TRIATED CORPORATIONS. 

9 ‘‘(a) IMPOSITION OF TAX.—In the case of an indi10 vidual who is a disqualified individual with respect to any 

11 expatriated corporation, there is hereby imposed on such 

12 person a tax equal to 15 percent of the value (determined 

13 under subsection (b)) of the specified stock compensation 

14 held (directly or indirectly) by or for the benefit of such 

15 individual or a member of such individual’s family (as de16 fined in section 267) at any time during the 12-month 

17 period beginning on the date which is 6 months before 

18 the expatriation date. 

19 ‘‘(b) VALUE.—For purposes of subsection (a)—

20 ‘‘(1) IN GENERAL.—The value of specified stock 

21 compensation shall be—

22 ‘‘(A) in the case of a stock option (or other 

23 similar right) or a stock appreciation right, the 

24 fair value of such option or right, and 
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1 ‘‘(B) in any other case, the fair market 

2 value of such compensation. 

3 ‘‘(2) DATE FOR DETERMINING VALUE.—The 

4 determination of value shall be made—

5 ‘‘(A) in the case of specified stock com6 pensation held on the expatriation date, on such 

7 date, 

8 ‘‘(B) in the case of such compensation 

9 which is canceled during the 6 months before 

10 the expatriation date, on the day before such 

11 cancellation, and 

12 ‘‘(C) in the case of such compensation 

13 which is granted after the expatriation date, on 

14 the date such compensation is granted. 

15 ‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN

16 RECOGNIZED.—Subsection (a) shall apply to any disquali17 fied individual with respect to an expatriated corporation 

18 only if gain (if any) on any stock in such corporation is 

19 recognized in whole or part by any shareholder by reason 

20 of the acquisition referred to in section 7874(a)(2)(B)(i) 

21 with respect to such corporation. 

22 ‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON

23 COMPENSATION.—Subsection (a) shall not apply to—

24 ‘‘(1) any stock option which is exercised on the 

25 expatriation date or during the 6-month period be-
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1 fore such date and to the stock acquired in such ex2 ercise, if income is recognized under section 83 on 

3 or before the expatriation date with respect to the 

4 stock acquired pursuant to such exercise, and 

5 ‘‘(2) any other specified stock compensation 

6 which is exercised, sold, exchanged, distributed, 

7 cashed-out, or otherwise paid during such period in 

8 a transaction in which income, gain, or loss is recog9 nized in full. 

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

11 ‘‘(1) DISQUALIFIED INDIVIDUAL.—The term 

12 ‘disqualified individual’ means, with respect to a cor13 poration, any individual who, at any time during the 

14 12-month period beginning on the date which is 6 

15 months before the expatriation date—

16 ‘‘(A) is subject to the requirements of sec17 tion 16(a) of the Securities Exchange Act of 

18 1934 with respect to such corporation or any 

19 member of the expanded affiliated group which 

20 includes such corporation, or 

21 ‘‘(B) would be subject to such require22 ments if such corporation or member were an 

23 issuer of equity securities referred to in such 

24 section. 
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1 ‘‘(2) EXPATRIATED CORPORATION; EXPATRIA2 TION DATE.—

3 ‘‘(A) EXPATRIATED CORPORATION.—The 

4 term ‘expatriated corporation’ means any cor5 poration which is an expatriated entity (as de6 fined in section 7874(a)(2)). Such term in7 cludes any predecessor or successor of such a 

8 corporation. 

9 ‘‘(B) EXPATRIATION DATE.—The term ‘ex10 patriation date’ means, with respect to a cor11 poration, the date on which the corporation 

12 first becomes an expatriated corporation. 

13 ‘‘(3) SPECIFIED STOCK COMPENSATION.—

14 ‘‘(A) IN GENERAL.—The term ‘specified 

15 stock compensation’ means payment (or right 

16 to payment) granted by the expatriated cor17 poration (or by any member of the expanded af18 filiated group which includes such corporation) 

19 to any person in connection with the perform20 ance of services by a disqualified individual for 

21 such corporation or member if the value of such 

22 payment or right is based on (or determined by 

23 reference to) the value (or change in value) of 

24 stock in such corporation (or any such mem25 ber). 
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1 ‘‘(B) EXCEPTIONS.—Such term shall not 

2 include—

3 ‘‘(i) any option to which part II of 

4 subchapter D of chapter 1 applies, or 

5 ‘‘(ii) any payment or right to payment 

6 from a plan referred to in section 

7 280G(b)(6). 

8 ‘‘(4) EXPANDED AFFILIATED GROUP.—The 

9 term ‘expanded affiliated group’ means an affiliated 

10 group (as defined in section 1504(a) without regard 

11 to section 1504(b)(3)); except that section 1504(a) 

12 shall be applied by substituting ‘more than 50 per13 cent’ for ‘at least 80 percent’ each place it appears. 

14 ‘‘(f) SPECIAL RULES.—For purposes of this sec15 tion—

16 ‘‘(1) CANCELLATION OF RESTRICTION.—The 

17 cancellation of a restriction which by its terms will 

18 never lapse shall be treated as a grant. 

19 ‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY

20 CORPORATION TREATED AS SPECIFIED STOCK COM21 PENSATION.—Any payment of the tax imposed by 

22 this section directly or indirectly by the expatriated 

23 corporation or by any member of the expanded affili24 ated group which includes such corporation—
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1 ‘‘(A) shall be treated as specified stock 

2 compensation, and 

3 ‘‘(B) shall not be allowed as a deduction 

4 under any provision of chapter 1. 

5 ‘‘(3) CERTAIN RESTRICTIONS IGNORED.—

6 Whether there is specified stock compensation, and 

7 the value thereof, shall be determined without regard 

8 to any restriction other than a restriction which by 

9 its terms will never lapse. 

10 ‘‘(4) PROPERTY TRANSFERS.—Any transfer of 

11 property shall be treated as a payment and any right 

12 to a transfer of property shall be treated as a right 

13 to a payment. 

14 ‘‘(5) OTHER ADMINISTRATIVE PROVISIONS.—

15 For purposes of subtitle F, any tax imposed by this 

16 section shall be treated as a tax imposed by subtitle 

17 A. 

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

19 such regulations as may be necessary or appropriate to 

20 carry out the purposes of this section.’’

21 (b) DENIAL OF DEDUCTION.—

22 (1) IN GENERAL.—Paragraph (6) of section 

23 275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 

24 (2) $1,000,000 LIMIT ON DEDUCTIBLE COM25 PENSATION REDUCED BY PAYMENT OF EXCISE TAX
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1 ON SPECIFIED STOCK COMPENSATION.—Paragraph 

2 (4) of section 162(m) is amended by adding at the 

3 end the following new subparagraph: 

4 ‘‘(G) COORDINATION WITH EXCISE TAX ON

5 SPECIFIED STOCK COMPENSATION.—The dollar 

6 limitation contained in paragraph (1) with re7 spect to any covered employee shall be reduced 

8 (but not below zero) by the amount of any pay9 ment (with respect to such employee) of the tax 

10 imposed by section 4985 directly or indirectly 

11 by the expatriated corporation (as defined in 

12 such section) or by any member of the ex13 panded affiliated group (as defined in such sec14 tion) which includes such corporation.’’

15 (c) CONFORMING AMENDMENTS.—

16 (1) The last sentence of section 3121(v)(2)(A) 

17 is amended by inserting before the period ‘‘or to any 

18 specified stock compensation (as defined in section 

19 4985) on which tax is imposed by section 4985’’. 

20 (2) The table of chapters for subtitle D is 

21 amended by inserting after the item relating to 

22 chapter 44 the following new item:

‘‘Chapter 45. Provisions relating to expatriated entities.’’

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

24 this section shall take effect on March 4, 2003; except that 

25 periods before such date shall not be taken into account 
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1 in applying the periods in subsections (a) and (e)(1) of 

2 section 4985 of the Internal Revenue Code of 1986, as 

3 added by this section. 

4 SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOR5 EIGN JURISDICTIONS. 

6 (a) IN GENERAL.—Section 845(a) (relating to alloca7 tion in case of reinsurance agreement involving tax avoid8 ance or evasion) is amended by striking ‘‘source and char9 acter’’ and inserting ‘‘amount, source, or character’’. 

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

11 this section shall apply to any risk reinsured after the date 

12 of the enactment of this Act. 

13 SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 

14 INDIVIDUALS. 

15 (a) EXPATRIATION TO AVOID TAX.—

16 (1) IN GENERAL.—Subsection (a) of section 

17 877 (relating to treatment of expatriates) is amend18 ed to read as follows: 

19 ‘‘(a) TREATMENT OF EXPATRIATES.—

20 ‘‘(1) IN GENERAL.—Every nonresident alien in21 dividual to whom this section applies and who, with22 in the 10-year period immediately preceding the 

23 close of the taxable year, lost United States citizen24 ship shall be taxable for such taxable year in the 

25 manner provided in subsection (b) if the tax imposed 
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1 pursuant to such subsection (after any reduction in 

2 such tax under the last sentence of such subsection) 

3 exceeds the tax which, without regard to this section, 

4 is imposed pursuant to section 871. 

5 ‘‘(2) INDIVIDUALS SUBJECT TO THIS SEC6 TION.—This section shall apply to any individual 

7 if—

8 ‘‘(A) the average annual net income tax 

9 (as defined in section 38(c)(1)) of such indi10 vidual for the period of 5 taxable years ending 

11 before the date of the loss of United States citi12 zenship is greater than $124,000, 

13 ‘‘(B) the net worth of the individual as of 

14 such date is $2,000,000 or more, or 

15 ‘‘(C) such individual fails to certify under 

16 penalty of perjury that he has met the require17 ments of this title for the 5 preceding taxable 

18 years or fails to submit such evidence of such 

19 compliance as the Secretary may require. 

20 In the case of the loss of United States citizenship 

21 in any calendar year after 2004, such $124,000 

22 amount shall be increased by an amount equal to 

23 such dollar amount multiplied by the cost-of-living 

24 adjustment determined under section 1(f)(3) for 

25 such calendar year by substituting ‘2003’ for ‘1992’ 
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1 in subparagraph (B) thereof. Any increase under the 

2 preceding sentence shall be rounded to the nearest 

3 multiple of $1,000.’’. 

4 (2) REVISION OF EXCEPTIONS FROM ALTER5 NATIVE TAX.—Subsection (c) of section 877 (relat6 ing to tax avoidance not presumed in certain cases) 

7 is amended to read as follows: 

8 ‘‘(c) EXCEPTIONS.—

9 ‘‘(1) IN GENERAL.—Subparagraphs (A) and 

10 (B) of subsection (a)(2) shall not apply to an indi11 vidual described in paragraph (2) or (3). 

12 ‘‘(2) DUAL CITIZENS.—

13 ‘‘(A) IN GENERAL.—An individual is de14 scribed in this paragraph if—

15 ‘‘(i) the individual became at birth a 

16 citizen of the United States and a citizen 

17 of another country and continues to be a 

18 citizen of such other country, and 

19 ‘‘(ii) the individual has had no sub20 stantial contacts with the United States. 

21 ‘‘(B) SUBSTANTIAL CONTACTS.—An indi22 vidual shall be treated as having no substantial 

23 contacts with the United States only if the indi24 vidual—
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1 ‘‘(i) was never a resident of the 

2 United States (as defined in section 

3 7701(b)), 

4 ‘‘(ii) has never held a United States 

5 passport, and 

6 ‘‘(iii) was not present in the United 

7 States for more than 30 days during any 

8 calendar year which is 1 of the 10 calendar 

9 years preceding the individual’s loss of 

10 United States citizenship. 

11 ‘‘(3) CERTAIN MINORS.—An individual is de12 scribed in this paragraph if—

13 ‘‘(A) the individual became at birth a cit14 izen of the United States, 

15 ‘‘(B) neither parent of such individual was 

16 a citizen of the United States at the time of 

17 such birth, 

18 ‘‘(C) the individual’s loss of United States 

19 citizenship occurs before such individual attains 

age 181 20 ⁄2, and 

21 ‘‘(D) the individual was not present in the 

22 United States for more than 30 days during 

23 any calendar year which is 1 of the 10 calendar 

24 years preceding the individual’s loss of United 

25 States citizenship.’’. 
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1 (3) CONFORMING AMENDMENT.—Section 

2 2107(a) is amended to read as follows: 

3 ‘‘(a) TREATMENT OF EXPATRIATES.—A tax com4 puted in accordance with the table contained in section 

5 2001 is hereby imposed on the transfer of the taxable es6 tate, determined as provided in section 2106, of every de7 cedent nonresident not a citizen of the United States if 

8 the date of death occurs during a taxable year with respect 

9 to which the decedent is subject to tax under section 

10 877(b).’’. 

11 (b) SPECIAL RULES FOR DETERMINING WHEN AN

12 INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN

13 OR LONG-TERM RESIDENT.—Section 7701 (relating to 

14 definitions) is amended by redesignating subsection (n) as 

15 subsection (o) and by inserting after subsection (m) the 

16 following new subsection: 

17 ‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN

18 INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN

19 OR LONG-TERM RESIDENT.—An individual who would 

20 (but for this subsection) cease to be treated as a citizen 

21 or resident of the United States shall continue to be treat22 ed as a citizen or resident of the United States, as the 

23 case may be, until such individual—

24 ‘‘(1) gives notice of an expatriating act or ter25 mination of residency (with the requisite intent to 
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1 relinquish citizenship or terminate residency) to the 

2 Secretary of State or the Secretary of Homeland Se3 curity, and 

4 ‘‘(2) provides a statement in accordance with 

5 section 6039G.’’. 

6 (c) PHYSICAL PRESENCE IN THE UNITED STATES

7 FOR MORE THAN 30 DAYS.—Section 877 (relating to ex8 patriation to avoid tax) is amended by adding at the end 

9 the following new subsection: 

10 ‘‘(g) PHYSICAL PRESENCE.—

11 ‘‘(1) IN GENERAL.—This section shall not apply 

12 to any individual to whom this section would other13 wise apply for any taxable year during the 10-year 

14 period referred to in subsection (a) in which such in15 dividual is physically present in the United States at 

16 any time on more than 30 days in the calendar year 

17 ending in such taxable year, and such individual 

18 shall be treated for purposes of this title as a citizen 

19 or resident of the United States, as the case may be, 

20 for such taxable year. 

21 ‘‘(2) EXCEPTION.—

22 ‘‘(A) IN GENERAL.—In the case of an indi23 vidual described in any of the following sub24 paragraphs of this paragraph, a day of physical 

25 presence in the United States shall be dis-
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1 regarded if the individual is performing services 

2 in the United States on such day for an em3 ployer. The preceding sentence shall not apply 

4 if—

5 ‘‘(i) such employer is related (within 

6 the meaning of section 267 and 707) to 

7 such individual, or 

8 ‘‘(ii) such employer fails to meet such 

9 requirements as the Secretary may pre10 scribe by regulations to prevent the avoid11 ance of the purposes of this paragraph. 

12 Not more than 30 days during any calendar 

13 year may be disregarded under this subpara14 graph. 

15 ‘‘(B) INDIVIDUALS WITH TIES TO OTHER

16 COUNTRIES.—An individual is described in this 

17 subparagraph if—

18 ‘‘(i) the individual becomes (not later 

19 than the close of a reasonable period after 

20 loss of United States citizenship or termi21 nation of residency) a citizen or resident of 

22 the country in which—

23 ‘‘(I) such individual was born, 
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1 ‘‘(II) if such individual is mar2 ried, such individual’s spouse was 

3 born, or 

4 ‘‘(III) either of such individual’s 

5 parents were born, and 

6 ‘‘(ii) the individual becomes fully lia7 ble for income tax in such country. 

8 ‘‘(C) MINIMAL PRIOR PHYSICAL PRESENCE

9 IN THE UNITED STATES.—An individual is de10 scribed in this subparagraph if, for each year in 

11 the 10-year period ending on the date of loss of 

12 United States citizenship or termination of resi13 dency, the individual was physically present in 

14 the United States for 30 days or less. The rule 

15 of section 7701(b)(3)(D)(ii) shall apply for pur16 poses of this subparagraph.’’. 

17 (d) TRANSFERS SUBJECT TO GIFT TAX.—

18 (1) IN GENERAL.—Subsection (a) of section 

19 2501 (relating to taxable transfers) is amended by 

20 striking paragraph (4), by redesignating paragraph 

21 (5) as paragraph (4), and by striking paragraph (3) 

22 and inserting the following new paragraph: 

23 ‘‘(3) EXCEPTION.—

24 ‘‘(A) CERTAIN INDIVIDUALS.—Paragraph 

25 (2) shall not apply in the case of a donor to 
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1 whom section 877(b) applies for the taxable 

2 year which includes the date of the transfer. 

3 ‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.—

4 The tax imposed by this section solely by reason 

5 of this paragraph shall be credited with the 

6 amount of any gift tax actually paid to any for7 eign country in respect of any gift which is tax8 able under this section solely by reason of this 

9 paragraph.’’

10 (2) TRANSFERS OF CERTAIN STOCK.—Sub11 section (a) of section 2501 is amended by adding at 

12 the end the following new paragraph: 

13 ‘‘(5) TRANSFERS OF CERTAIN STOCK.—

14 ‘‘(A) IN GENERAL.—In the case of a trans15 fer of stock in a foreign corporation described 

16 in subparagraph (B) by a donor to whom sec17 tion 877(b) applies for the taxable year which 

18 includes the date of the transfer—

19 ‘‘(i) section 2511(a) shall be applied 

20 without regard to whether such stock is 

21 situated within the United States, and 

22 ‘‘(ii) the value of such stock for pur23 poses of this chapter shall be its U.S.-asset 

24 value determined under subparagraph (C). 
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1 ‘‘(B) FOREIGN CORPORATION DE2 SCRIBED.—A foreign corporation is described in 

3 this subparagraph with respect to a donor if—

4 ‘‘(i) the donor owned (within the 

5 meaning of section 958(a)) at the time of 

6 such transfer 10 percent or more of the 

7 total combined voting power of all classes 

8 of stock entitled to vote of the foreign cor9 poration, and 

10 ‘‘(ii) such donor owned (within the 

11 meaning of section 958(a)), or is consid12 ered to have owned (by applying the own13 ership rules of section 958(b)), at the time 

14 of such transfer, more than 50 percent 

15 of—

16 ‘‘(I) the total combined voting 

17 power of all classes of stock entitled 

18 to vote of such corporation, or 

19 ‘‘(II) the total value of the stock 

20 of such corporation. 

21 ‘‘(C) U.S.-ASSET VALUE.—For purposes of 

22 subparagraph (A), the U.S.-asset value of stock 

23 shall be the amount which bears the same ratio 

24 to the fair market value of such stock at the 

25 time of transfer as—
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1 ‘‘(i) the fair market value (at such 

2 time) of the assets owned by such foreign 

3 corporation and situated in the United 

4 States, bears to 

5 ‘‘(ii) the total fair market value (at 

6 such time) of all assets owned by such for7 eign corporation.’’

8 (e) ENHANCED INFORMATION REPORTING FROM IN9 DIVIDUALS LOSING UNITED STATES CITIZENSHIP.—

10 (1) IN GENERAL.—Subsection (a) of section 

11 6039G is amended to read as follows: 

12 ‘‘(a) IN GENERAL.—Notwithstanding any other pro13 vision of law, any individual to whom section 877(b) ap14 plies for any taxable year shall provide a statement for 

15 such taxable year which includes the information described 

16 in subsection (b).’’. 

17 (2) INFORMATION TO BE PROVIDED.—Sub18 section (b) of section 6039G is amended to read as 

19 follows: 

20 ‘‘(b) INFORMATION TO BE PROVIDED.—Information 

21 required under subsection (a) shall include—

22 ‘‘(1) the taxpayer’s TIN, 

23 ‘‘(2) the mailing address of such individual’s 

24 principal foreign residence, 
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1 ‘‘(3) the foreign country in which such indi2 vidual is residing, 

3 ‘‘(4) the foreign country of which such indi4 vidual is a citizen, 

5 ‘‘(5) information detailing the income, assets, 

6 and liabilities of such individual, 

7 ‘‘(6) the number of days during any portion of 

8 which that the individual was physically present in 

9 the United States during the taxable year, and 

10 ‘‘(7) such other information as the Secretary 

11 may prescribe.’’. 

12 (3) INCREASE IN PENALTY.—Subsection (d) of 

13 section 6039G is amended to read as follows: 

14 ‘‘(d) PENALTY.—If—

15 ‘‘(1) an individual is required to file a state16 ment under subsection (a) for any taxable year, and 

17 ‘‘(2) fails to file such a statement with the Sec18 retary on or before the date such statement is re19 quired to be filed or fails to include all the informa20 tion required to be shown on the statement or in21 cludes incorrect information, 

22 such individual shall pay a penalty of $10,000 unless it 

23 is shown that such failure is due to reasonable cause and 

24 not to willful neglect.’’. 
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1 (4) CONFORMING AMENDMENT.—Section 

2 6039G is amended by striking subsections (c), (f), 

3 and (g) and by redesignating subsections (d) and (e) 

4 as subsection (c) and (d), respectively. 

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

6 this section shall apply to individuals who expatriate after 

7 June 3, 2004. 

8 SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISI9 TIONS. 

10 (a) IN GENERAL.—Subpart B of part III of sub11 chapter A of chapter 61 is amended by inserting after sec12 tion 6043 the following new section: 

13 ‘‘SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS 

14 AND ACQUISITIONS. 

15 ‘‘(a) IN GENERAL.—According to the forms or regu16 lations prescribed by the Secretary, the acquiring corpora17 tion in any taxable acquisition shall make a return setting 

18 forth—

19 ‘‘(1) a description of the acquisition, 

20 ‘‘(2) the name and address of each shareholder 

21 of the acquired corporation who is required to recog22 nize gain (if any) as a result of the acquisition, 

23 ‘‘(3) the amount of money and the fair market 

24 value of other property transferred to each such 

25 shareholder as part of such acquisition, and 
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1 ‘‘(4) such other information as the Secretary 

2 may prescribe. 

3 To the extent provided by the Secretary, the requirements 

4 of this section applicable to the acquiring corporation shall 

5 be applicable to the acquired corporation and not to the 

6 acquiring corporation. 

7 ‘‘(b) NOMINEES.—According to the forms or regula8 tions prescribed by the Secretary—

9 ‘‘(1) REPORTING.—Any person who holds stock 

10 as a nominee for another person shall furnish in the 

11 manner prescribed by the Secretary to such other 

12 person the information provided by the corporation 

13 under subsection (d). 

14 ‘‘(2) REPORTING TO NOMINEES.—In the case of 

15 stock held by any person as a nominee, references in 

16 this section (other than in subsection (c)) to a share17 holder shall be treated as a reference to the nomi18 nee. 

19 ‘‘(c) TAXABLE ACQUISITION.—For purposes of this 

20 section, the term ‘taxable acquisition’ means any acquisi21 tion by a corporation of stock in or property of another 

22 corporation if any shareholder of the acquired corporation 

23 is required to recognize gain (if any) as a result of such 

24 acquisition. 
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1 ‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE2 HOLDERS.—According to the forms or regulations pre3 scribed by the Secretary, every person required to make 

4 a return under subsection (a) shall furnish to each share5 holder whose name is required to be set forth in such re6 turn a written statement showing—

7 ‘‘(1) the name, address, and phone number of 

8 the information contact of the person required to 

9 make such return, 

10 ‘‘(2) the information required to be shown on 

11 such return with respect to such shareholder, and 

12 ‘‘(3) such other information as the Secretary 

13 may prescribe. 

14 The written statement required under the preceding sen15 tence shall be furnished to the shareholder on or before 

16 January 31 of the year following the calendar year during 

17 which the taxable acquisition occurred.’’

18 (b) ASSESSABLE PENALTIES.—

19 (1) Subparagraph (B) of section 6724(d)(1) 

20 (relating to definitions) is amended by redesignating 

21 clauses (ii) through (xviii) as clauses (iii) through 

22 (xix), respectively, and by inserting after clause (i) 

23 the following new clause: 
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1 ‘‘(ii) section 6043A(a) (relating to re2 turns relating to taxable mergers and ac3 quisitions),’’. 

4 (2) Paragraph (2) of section 6724(d) is amend5 ed by redesignating subparagraphs (F) through 

6 (BB) as subparagraphs (G) through (CC), respec7 tively, and by inserting after subparagraph (E) the 

8 following new subparagraph: 

9 ‘‘(F) subsections (b) and (d) of section 

10 6043A (relating to returns relating to taxable 

11 mergers and acquisitions).’’. 

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

13 for subpart B of part III of subchapter A of chapter 61 

14 is amended by inserting after the item relating to section 

15 6043 the following new item:

‘‘Sec. 6043A. Returns relating to taxable mergers and acquisitions.’’.

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

17 this section shall apply to acquisitions after the date of 

18 the enactment of this Act. 

19 SEC. 606. STUDIES. 

20 (a) TRANSFER PRICING RULES.—The Secretary of 

21 the Treasury or the Secretary’s delegate shall conduct a 

22 study regarding the effectiveness of current transfer pric23 ing rules and compliance efforts in ensuring that cross24 border transfers and other related-party transactions, par-
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1 ticularly transactions involving intangible assets, service 

2 contracts, or leases cannot be used improperly to shift in3 come out of the United States. The study shall include 

4 a review of the contemporaneous documentation and pen5 alty rules under section 6662 of the Internal Revenue 

6 Code of 1986, a review of the regulatory and administra7 tive guidance implementing the principles of section 482 

8 of such Code to transactions involving intangible property 

9 and services and to cost-sharing arrangements, and an ex10 amination of whether increased disclosure of cross-border 

11 transactions should be required. The study shall set forth 

12 specific recommendations to address all abuses identified 

13 in the study. Not later than June 30, 2005, such Sec14 retary or delegate shall submit to the Congress a report 

15 of such study. 

16 (b) INCOME TAX TREATIES.—The Secretary of the 

17 Treasury or the Secretary’s delegate shall conduct a study 

18 of United States income tax treaties to identify any inap19 propriate reductions in United States withholding tax that 

20 provide opportunities for shifting income out of the United 

21 States, and to evaluate whether existing anti-abuse mecha22 nisms are operating properly. The study shall include spe23 cific recommendations to address all inappropriate uses of 

24 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 

7 shall include such recommendations as such Secretary or 

8 delegate may have to improve the impact of such provi9 sions in carrying out the purposes of this title. Not later 

10 than December 31, 2005, such Secretary or delegate shall 

11 submit to the Congress 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 insert19 ing 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 

24 fails to include on any return or statement any informa25 tion with respect to a reportable transaction which is re-
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1 quired under section 6011 to be included with such return 

2 or statement shall pay a penalty in the amount determined 

3 under subsection (b). 

4 ‘‘(b) AMOUNT OF PENALTY.—

5 ‘‘(1) IN GENERAL.—Except as provided in para6 graph (2), the amount of the penalty under sub7 section (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 

12 the penalty under subsection (a) with respect to a 

13 listed transaction shall be—

14 ‘‘(A) $100,000 in the case of a natural 

15 person, and 

16 ‘‘(B) $200,000 in any other case. 

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

18 ‘‘(1) REPORTABLE TRANSACTION.—The term 

19 ‘reportable transaction’ means any transaction with 

20 respect to which information is required to be in21 cluded with a return or statement because, as deter22 mined under regulations prescribed under section 

23 6011, such transaction is of a type which the Sec24 retary determines as having a potential for tax 

25 avoidance or evasion. 
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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 trans4 action specifically identified by the Secretary as a 

5 tax avoidance transaction for purposes of section 

6 6011. 

7 ‘‘(d) AUTHORITY TO RESCIND PENALTY.—

8 ‘‘(1) IN GENERAL.—The Commissioner of In9 ternal Revenue may rescind all or any portion of any 

10 penalty imposed by this section with respect to any 

11 violation if—

12 ‘‘(A) the violation is with respect to a re13 portable transaction other than a listed trans14 action, and 

15 ‘‘(B) rescinding the penalty would promote 

16 compliance with the requirements of this title 

17 and effective tax administration. 

18 ‘‘(2) NO JUDICIAL APPEAL.—Notwithstanding 

19 any other provision of law, any determination under 

20 this subsection may not be reviewed in any judicial 

21 proceeding. 

22 ‘‘(3) RECORDS.—If a penalty is rescinded under 

23 paragraph (1), the Commissioner shall place in the 

24 file in the Office of the Commissioner the opinion of 

25 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 sec11 tions for part I of subchapter B of chapter 68 is amended 

12 by inserting after the item relating to section 6707 the 

13 following:

‘‘Sec. 6707A. Penalty for failure to include reportable transaction 

information with return.’’

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

15 this section shall apply to returns and statements the due 

16 date for which is after the date of the enactment of this 

17 Act. 

18 (d) REPORT.—The Commissioner of Internal Rev19 enue shall annually report to the Committee on Ways and 

20 Means of the House of Representatives and the Committee 

21 on Finance of the Senate—

22 (1) a summary of the total number and aggre23 gate amount of penalties imposed, and rescinded, 
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1 under section 6707A of the Internal Revenue Code 

2 of 1986, and 

3 (2) a description of each penalty rescinded 

4 under section 6707(c) of such Code and the reasons 

5 therefor. 

6 SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED 

7 TRANSACTIONS, OTHER REPORTABLE TRANS8 ACTIONS HAVING A SIGNIFICANT TAX AVOID9 ANCE PURPOSE, ETC. 

10 (a) IN GENERAL.—Subchapter A of chapter 68 is 

11 amended by inserting after section 6662 the following new 

12 section: 

13 ‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN14 ALTY ON UNDERSTATEMENTS WITH RESPECT 

15 TO REPORTABLE TRANSACTIONS. 

16 ‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 

17 reportable transaction understatement for any taxable 

18 year, there shall be added to the tax an amount equal to 

19 20 percent of the amount of such understatement. 

20 ‘‘(b) REPORTABLE TRANSACTION UNDERSTATE21 MENT.—For purposes of this section—

22 ‘‘(1) IN GENERAL.—The term ‘reportable trans23 action understatement’ means the sum of—

24 ‘‘(A) the product of—
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1 ‘‘(i) the amount of the increase (if 

2 any) in taxable income which results from 

3 a difference between the proper tax treat4 ment of an item to which this section ap5 plies and the taxpayer’s treatment of such 

6 item (as shown on the taxpayer’s return of 

7 tax), and 

8 ‘‘(ii) the highest rate of tax imposed 

9 by section 1 (section 11 in the case of a 

10 taxpayer which is a corporation), and 

11 ‘‘(B) the amount of the decrease (if any) 

12 in the aggregate amount of credits determined 

13 under subtitle A which results from a difference 

14 between the taxpayer’s treatment of an item to 

15 which this section applies (as shown on the tax16 payer’s return of tax) and the proper tax treat17 ment of such item. 

18 For purposes of subparagraph (A), any reduction of 

19 the excess of deductions allowed for the taxable year 

20 over gross income for such year, and any reduction 

21 in the amount of capital losses which would (without 

22 regard to section 1211) be allowed for such year, 

23 shall be treated as an increase in taxable income. 
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1 ‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 

2 section shall apply to any item which is attributable 

3 to—

4 ‘‘(A) any listed transaction, and 

5 ‘‘(B) any reportable transaction (other 

6 than a listed transaction) if a significant pur7 pose of such transaction is the avoidance or 

8 evasion of Federal income tax. 

9 ‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS10 ACTIONS.—Subsection (a) shall be applied by substituting 

11 ‘30 percent’ for ‘20 percent’ with respect to the portion 

12 of any reportable transaction understatement with respect 

13 to which the requirement of section 6664(d)(2)(A) is not 

14 met. 

15 ‘‘(d) DEFINITIONS OF REPORTABLE AND LISTED

16 TRANSACTIONS.—For purposes of this section, the terms 

17 ‘reportable transaction’ and ‘listed transaction’ have the 

18 respective meanings given to such terms by section 

19 6707A(c). 

20 ‘‘(e) SPECIAL RULES.—

21 ‘‘(1) COORDINATION WITH PENALTIES, ETC., 

22 ON OTHER UNDERSTATEMENTS.—In the case of an 

23 understatement (as defined in section 6662(d)(2))—

24 ‘‘(A) the amount of such understatement 

25 (determined without regard to this paragraph) 
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1 shall be increased by the aggregate amount of 

2 reportable transaction understatements for pur3 poses of determining whether such understate4 ment is a substantial understatement under 

5 section 6662(d)(1), and 

6 ‘‘(B) the addition to tax under section 

7 6662(a) shall apply only to the excess of the 

8 amount of the substantial understatement (if 

9 any) after the application of subparagraph (A) 

10 over the aggregate amount of reportable trans11 action understatements. 

12 ‘‘(2) COORDINATION WITH OTHER PEN13 ALTIES.—

14 ‘‘(A) APPLICATION OF FRAUD PENALTY.—

15 References to an underpayment in section 6663 

16 shall be treated as including references to a re17 portable transaction understatement. 

18 ‘‘(B) NO DOUBLE PENALTY.—This section 

19 shall not apply to any portion of an understate20 ment on which a penalty is imposed under sec21 tion 6663. 

22 ‘‘(3) SPECIAL RULE FOR AMENDED RE23 TURNS.—Except as provided in regulations, in no 

24 event shall any tax treatment included with an 

25 amendment or supplement to a return of tax be 
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1 taken into account in determining the amount of any 

2 reportable transaction understatement if the amend3 ment or supplement is filed after the earlier of the 

4 date the taxpayer is first contacted by the Secretary 

5 regarding the examination of the return or such 

6 other date as is specified by the Secretary.’’

7 (b) DETERMINATION OF OTHER UNDERSTATE8 MENTS.—Subparagraph (A) of section 6662(d)(2) is 

9 amended by adding at the end the following flush sen10 tence: 

11 ‘‘The excess under the preceding sentence shall 

12 be determined without regard to items to which 

13 section 6662A applies.’’

14 (c) REASONABLE CAUSE EXCEPTION.—

15 (1) IN GENERAL.—Section 6664 is amended by 

16 adding at the end the following new subsection: 

17 ‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT18 ABLE TRANSACTION UNDERSTATEMENTS.— 

19 ‘‘(1) IN GENERAL.—No penalty shall be im20 posed under section 6662A with respect to any por21 tion of a reportable transaction understatement if it 

22 is shown that there was a reasonable cause for such 

23 portion and that the taxpayer acted in good faith 

24 with respect to such portion. 
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1 ‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 

2 apply to any reportable transaction understatement 

3 unless—

4 ‘‘(A) the relevant facts affecting the tax 

5 treatment of the item are adequately disclosed 

6 in accordance with the regulations prescribed 

7 under section 6011, 

8 ‘‘(B) there is or was substantial authority 

9 for such treatment, and 

10 ‘‘(C) the taxpayer reasonably believed that 

11 such treatment was more likely than not the 

12 proper treatment. 

13 A taxpayer failing to adequately disclose in accord14 ance with section 6011 shall be treated as meeting 

15 the requirements of subparagraph (A) if the penalty 

16 for such failure was rescinded under section 

17 6707A(d). 

18 ‘‘(3) RULES RELATING TO REASONABLE BE19 LIEF.—For purposes of paragraph (2)(C)—

20 ‘‘(A) IN GENERAL.—A taxpayer shall be 

21 treated as having a reasonable belief with re22 spect to the tax treatment of an item only if 

23 such belief—
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1 ‘‘(i) is based on the facts and law that 

2 exist at the time the return of tax which 

3 includes such tax treatment is filed, and 

4 ‘‘(ii) relates solely to the taxpayer’s 

5 chances of success on the merits of such 

6 treatment and does not take into account 

7 the possibility that a return will not be au8 dited, such treatment will not be raised on 

9 audit, or such treatment will be resolved 

10 through settlement if it is raised. 

11 ‘‘(B) CERTAIN OPINIONS MAY NOT BE RE12 LIED UPON.—

13 ‘‘(i) IN GENERAL.—An opinion of a 

14 tax advisor may not be relied upon to es15 tablish the reasonable belief of a taxpayer 

16 if—

17 ‘‘(I) the tax advisor is described 

18 in clause (ii), or 

19 ‘‘(II) the opinion is described in 

20 clause (iii). 

21 ‘‘(ii) DISQUALIFIED TAX ADVISORS.—

22 A tax advisor is described in this clause if 

23 the tax advisor— 

24 ‘‘(I) is a material advisor (within 

25 the meaning of section 6111(b)(1)) 
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1 and participates in the organization, 

2 management, promotion, or sale of 

3 the transaction or is related (within 

4 the meaning of section 267(b) or 

5 707(b)(1)) to any person who so par6 ticipates, 

7 ‘‘(II) is compensated directly or 

8 indirectly by a material advisor with 

9 respect to the transaction, 

10 ‘‘(III) has a fee arrangement 

11 with respect to the transaction which 

12 is contingent on all or part of the in13 tended tax benefits from the trans14 action being sustained, or 

15 ‘‘(IV) as determined under regu16 lations prescribed by the Secretary, 

17 has a disqualifying financial interest 

18 with respect to the transaction. 

19 ‘‘(iii) DISQUALIFIED OPINIONS.—For 

20 purposes of clause (i), an opinion is dis21 qualified if the opinion—

22 ‘‘(I) is based on unreasonable 

23 factual or legal assumptions (includ24 ing assumptions as to future events), 
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1 ‘‘(II) unreasonably relies on rep2 resentations, statements, findings, or 

3 agreements of the taxpayer or any 

4 other person, 

5 ‘‘(III) does not identify and con6 sider all relevant facts, or 

7 ‘‘(IV) fails to meet any other re8 quirement as the Secretary may pre9 scribe.’’

10 (2) CONFORMING AMENDMENTS.—

11 (A) Paragraph (1) of section 6664(c) is 

12 amended by striking ‘‘this part’’ and inserting 

13 ‘‘section 6662 or 6663’’. 

14 (B) The heading for subsection (c) of sec15 tion 6664 is amended by inserting ‘‘FOR UN16 DERPAYMENTS’’ after ‘‘EXCEPTION’’. 

17 (d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN18 DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX

19 SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re20 lating to substantial understatement of income tax) is 

21 amended to read as follows: 

22 ‘‘(C) REDUCTION NOT TO APPLY TO TAX

23 SHELTERS.—
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1 ‘‘(i) IN GENERAL.—Subparagraph (B) 

2 shall not apply to any item attributable to 

3 a tax shelter. 

4 ‘‘(ii) TAX SHELTER.—For purposes of 

5 clause (i), the term ‘tax shelter’ means—

6 ‘‘(I) a partnership or other enti7 ty, 

8 ‘‘(II) any investment plan or ar9 rangement, or 

10 ‘‘(III) any other plan or arrange11 ment, 

12 if a significant purpose of such partner13 ship, entity, plan, or arrangement is the 

14 avoidance or evasion of Federal income 

15 tax.’’

16 (e) CONFORMING AMENDMENTS.—

17 (1) Sections 461(i)(3)(C), 1274(b)(3), and 

18 7525(b) are each amended by striking ‘‘section 

19 6662(d)(2)(C)(iii)’’ and inserting ‘‘section 

20 6662(d)(2)(C)(ii)’’. 

21 (2) The heading for section 6662 is amended to 

22 read as follows: 
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1 ‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 

2 ON UNDERPAYMENTS.’’

3 (3) The table of sections for part II of sub4 chapter A of chapter 68 is amended by striking the 

5 item relating to section 6662 and inserting the fol6 lowing new items:

‘‘Sec. 6662. Imposition of accuracy-related penalty on underpayments. 

‘‘Sec. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions.’’

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

8 this section shall apply to taxable years ending after the 

9 date of the enactment of this Act. 

10 SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 

11 PRIVILEGES RELATING TO TAXPAYER COM12 MUNICATIONS. 

13 (a) IN GENERAL.—Section 7525(b) (relating to sec14 tion not to apply to communications regarding corporate 

15 tax shelters) is amended to read as follows: 

16 ‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS

17 REGARDING TAX SHELTERS.—The privilege under sub18 section (a) shall not apply to any written communication 

19 which is—

20 ‘‘(1) between a federally authorized tax practi21 tioner and—

22 ‘‘(A) any person, 
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1 ‘‘(B) any director, officer, employee, agent, 

2 or representative of the person, or 

3 ‘‘(C) any other person holding a capital or 

4 profits interest in the person, and 

5 ‘‘(2) in connection with the promotion of the di6 rect or indirect participation of the person in any 

7 tax shelter (as defined in section 

8 6662(d)(2)(C)(ii)).’’

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

10 this section shall apply to communications made on or 

11 after the date of the enactment of this Act. 

12 SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 

13 FOR WHICH REQUIRED LISTED TRANS14 ACTIONS NOT REPORTED. 

15 (a) IN GENERAL.—Section 6501(c) (relating to ex16 ceptions) is amended by adding at the end the following 

17 new paragraph: 

18 ‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 

19 fails to include on any return or statement for any 

20 taxable year any information with respect to a listed 

21 transaction (as defined in section 6707A(c)(2)) 

22 which is required under section 6011 to be included 

23 with such return or statement, the time for assess24 ment of any tax imposed by this title with respect 
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•HR 4520 IH1S 

1 to such transaction shall not expire before the date 

2 which is 1 year after the earlier of—

3 ‘‘(A) the date on which the Secretary is 

4 furnished the information so required, or 

5 ‘‘(B) the date that a material advisor (as 

6 defined in section 6111) meets the requirements 

7 of section 6112 with respect to a request by the 

8 Secretary under section 6112(b) relating to 

9 such transaction with respect to such tax10 payer.’’

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

12 this section shall apply to taxable years with respect to 

13 which the period for assessing a deficiency did not expire 

14 before the date of the enactment of this Act. 

15 SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

16 (a) IN GENERAL.—Section 6111 (relating to registra17 tion of tax shelters) is amended to read as follows: 

18 ‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 

19 ‘‘(a) IN GENERAL.—Each material advisor with re20 spect to any reportable transaction shall make a return 

21 (in such form as the Secretary may prescribe) setting 

22 forth—

23 ‘‘(1) information identifying and describing the 

24 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 

10 advisor’ 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 ad20 vice 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 report24 able transaction substantially all of the tax 
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1 benefits from which are provided to nat2 ural persons, and 

3 ‘‘(ii) $250,000 in any other case. 

4 ‘‘(2) REPORTABLE TRANSACTION.—The term 

5 ‘reportable transaction’ has the meaning given to 

6 such term by section 6707A(c). 

7 ‘‘(c) REGULATIONS.—The Secretary may prescribe 

8 regulations which provide—

9 ‘‘(1) that only 1 person shall be required to 

10 meet the requirements of subsection (a) in cases in 

11 which 2 or more persons would otherwise be re12 quired to meet 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 

19 table of sections for subchapter B of chapter 61 is 

20 amended 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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•HR 4520 IH1S 

1 ‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS2 ACTIONS MUST KEEP LISTS OF ADVISEES, 

3 ETC. 

4 ‘‘(a) IN GENERAL.—Each material advisor (as de5 fined in section 6111) with respect to any reportable 

6 transaction (as defined in section 6707A(c)) shall (wheth7 er or not required to file a return under section 6111 with 

8 respect to such transaction) maintain (in such manner as 

9 the Secretary 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 ‘‘re19 quest’’ in subsection (b)(1) (as so redesig20 nated), and 

21 (C) by striking ‘‘shall prescribe’’ in sub22 section (b)(2) (as so redesignated) and inserting 

23 ‘‘may prescribe’’. 

24 (4) The item relating to section 6112 in the 

25 table of sections for subchapter B of chapter 61 is 

26 amended to read as follows:
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•HR 4520 IH1S 

‘‘Sec. 6112. Material advisors of reportable transactions must 

keep lists of advisees, etc.’’

1 (5)(A) The heading for section 6708 is amend2 ed 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 chap8 ter 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 

11 6112(b), as redesignated by subsection (b), is amended by 

12 adding at the end the following new flush sentence: 

13 ‘‘For purposes of this section, the identity of any 

14 person 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 

18 shall apply to transactions with respect to which ma19 terial aid, assistance, or advice referred to in section 

20 6111(b)(1)(A)(i) of the Internal Revenue Code of 

21 1986 (as added by this section) is provided after the 

22 date of the enactment of this Act. 
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1 (2) NO CLAIM OF CONFIDENTIALITY AGAINST

2 DISCLOSURE.—The amendment made by subsection 

3 (c) shall take effect as if included in the amend4 ments made by section 142 of the Deficit Reduction 

5 Act of 1984. 

6 SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING 

7 REPORTABLE TRANSACTIONS. 

8 (a) IN GENERAL.—Section 6707 (relating to failure 

9 to furnish information regarding tax shelters) is amended 

10 to 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 

14 file a return under section 6111(a) with respect to any 

15 reportable transaction—

16 ‘‘(1) fails to file such return on or before the 

17 date 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 de7 rived by such person with respect to aid, assist8 ance, or advice which is provided with respect 

9 to the listed transaction before the date the re10 turn is filed 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 

15 section 6707A(d) (relating to authority of Commissioner 

16 to rescind penalty) shall apply to any penalty imposed 

17 under this section. 

18 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.—

19 For purposes of this section, the terms ‘reportable trans20 action’ and ‘listed transaction’ have the respective mean21 ings given to such terms by section 6707A(c).’’

22 (b) CLERICAL AMENDMENT.—The item relating to 

23 section 6707 in the table of sections for part I of sub24 chapter B of chapter 68 is amended by striking ‘‘tax shel25 ters’’ and inserting ‘‘reportable transactions’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to returns the due date for which 

3 is after 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 re14 quest, such person shall pay a penalty of $10,000 

15 for each day of such failure after such 20th day. 

16 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No 

17 penalty shall be imposed by paragraph (1) with re18 spect to the failure on any day if such failure is due 

19 to reasonable cause.’’. 

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

21 this section shall apply to requests made after the date 

22 of the 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 

2 sentence, if an activity with respect to which a penalty 

3 imposed under this subsection involves a statement de4 scribed in paragraph (2)(A), the amount of the penalty 

5 shall be equal to 50 percent of the gross income derived 

6 (or to be derived) from such activity by the person on 

7 which the penalty is imposed.’’

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

9 this section shall apply to activities after the date of the 

10 enactment 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 

16 for corporations) is amended to read as follows: 

17 ‘‘(B) SPECIAL RULE FOR CORPORA18 TIONS.—In the case of a corporation other than 

19 an S corporation or a personal holding company 

20 (as defined in section 542), there is a substan21 tial understatement of income tax for any tax22 able year if the amount of the understatement 

23 for the taxable 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 

3 year (or, if greater, $10,000), or 

4 ‘‘(ii) $10,000,000.’’

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

6 this section shall apply to taxable years beginning after 

7 the date 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 

12 to enjoin promoters of abusive tax shelters, etc.) is amend13 ed by redesignating subsection (c) as subsection (d) and 

14 by striking subsections (a) and (b) and inserting the fol15 lowing 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 spec23 ified 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 speci6 fied 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 

13 section, the term ‘specified conduct’ means any action, or 

14 failure to take action, subject to penalty under section 

15 6700, 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 

25 item:
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‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 

reportable transactions.’’

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

2 this section shall take effect on the day after the date of 

3 the enactment 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 TRANS9 ACTION VIOLATION.—

10 ‘‘(A) PENALTY AUTHORIZED.—The Sec11 retary of the Treasury may impose a civil 

12 money penalty on any person who violates, or 

13 causes any violation of, any provision of section 

14 5314. 

15 ‘‘(B) AMOUNT OF PENALTY.—

16 ‘‘(i) IN GENERAL.—Except as pro17 vided in subparagraph (C), the amount of 

18 any civil penalty imposed under subpara19 graph (A) shall not exceed $5,000. 

20 ‘‘(ii) REASONABLE CAUSE EXCEP21 TION.—No penalty shall be imposed under 

22 subparagraph (A) with respect to any vio23 lation if—
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1 ‘‘(I) such violation was due to 

2 reasonable cause, and 

3 ‘‘(II) the amount of the trans4 action or the balance in the account 

5 at the time of the transaction was 

6 properly reported. 

7 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

8 of any person willfully violating, or willfully 

9 causing any violation of, any provision of sec10 tion 5314—

11 ‘‘(i) the maximum penalty under sub12 paragraph (B)(i) shall be increased to the 

13 greater of—

14 ‘‘(I) $25,000, or 

15 ‘‘(II) the amount (not exceeding 

16 $100,000) determined under subpara17 graph (D), and 

18 ‘‘(ii) subparagraph (B)(ii) shall not 

19 apply. 

20 ‘‘(D) AMOUNT.—The amount determined 

21 under this subparagraph is—

22 ‘‘(i) in the case of a violation involving 

23 a transaction, the amount of the trans24 action, or 
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1 ‘‘(ii) in the case of a violation involv2 ing a failure to report the existence of an 

3 account or any identifying information re4 quired to be provided with respect to an 

5 account, the balance in the account at the 

6 time of the violation.’’

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

8 this section shall apply to violations occurring after the 

9 date of the enactment of this Act. 

10 SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BE11 FORE THE DEPARTMENT OF THE TREASURY. 

12 (a) CENSURE; IMPOSITION OF PENALTY.—

13 (1) IN GENERAL.—Section 330(b) of title 31, 

14 United States Code, is amended—

15 (A) by inserting ‘‘, or censure,’’ after ‘‘De16 partment’’, and 

17 (B) by adding at the end the following new 

18 flush sentence: 

19 ‘‘The Secretary may impose a monetary penalty on any 

20 representative described in the preceding sentence. If the 

21 representative was acting on behalf of an employer or any 

22 firm or other entity in connection with the conduct giving 

23 rise to such penalty, the Secretary may impose a monetary 

24 penalty on such employer, firm, or entity if it knew, or 

25 reasonably should have known, of such conduct. Such pen-
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1 alty shall not exceed the gross income derived (or to be 

2 derived) from the conduct giving rise to the penalty. Any 

3 such penalty imposed on an individual may be in addition 

4 to, or in lieu of, any suspension, disbarment, or censure 

5 of such individual.’’

6 (2) EFFECTIVE DATE.—The amendments made 

7 by this subsection shall apply to actions taken after 

8 the date of the enactment of this Act. 

9 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

10 such title 31 is amended by adding at the end the fol11 lowing new subsection: 

12 ‘‘(d) Nothing in this section or in any other provision 

13 of law shall be construed to limit the authority of the Sec14 retary of the Treasury to impose standards applicable to 

15 the rendering of written advice with respect to any entity, 

16 transaction plan or arrangement, or other plan or arrange17 ment, which is of a type which the Secretary determines 

18 as having a potential for tax avoidance or evasion.’’

19 Part II—Other Provisions 

20 SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND 

21 AND PREFERRED STOCK FUNDS, ETC. 

22 (a) IN GENERAL.—Section 1286 (relating to tax 

23 treatment of stripped bonds) is amended by redesignating 

24 subsection (f) as subsection (g) and by inserting after sub25 section (e) the following new subsection: 
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1 ‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND

2 AND PREFERRED STOCK FUNDS, ETC.—In the case of an 

3 account or entity substantially all of the assets of which 

4 consist of bonds, preferred stock, or a combination thereof, 

5 the Secretary may by regulations provide that rules simi6 lar to the rules of this section and 305(e), as appropriate, 

7 shall apply to interests in such account or entity to which 

8 (but for this subsection) this section or section 305(e), as 

9 the case may be, would not apply.’’

10 (b) CROSS REFERENCE.—Subsection (e) of section 

11 305 is amended by adding at the end the following new 

12 paragraph: 

13 ‘‘(7) CROSS REFERENCE.—

‘‘For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(f).’’

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

15 this section shall apply to purchases and dispositions after 

16 the date of the enactment of this Act. 

17 SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 

18 CREDIT ON WITHHOLDING TAXES ON INCOME 

19 OTHER THAN DIVIDENDS. 

20 (a) IN GENERAL.—Section 901 is amended by redes21 ignating subsection (l) as subsection (m) and by inserting 

22 after subsection (k) the following new subsection: 
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1 ‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING

2 TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS

3 ETC.—

4 ‘‘(1) IN GENERAL.—In no event shall a credit 

5 be allowed under subsection (a) for any withholding 

6 tax (as defined in subsection (k)) on any item of in7 come or gain with respect to any property if—

8 ‘‘(A) such property is held by the recipient 

9 of the item for 15 days or less during the 30-

10 day period beginning on the date which is 15 

11 days before the date on which the right to re12 ceive payment of such item arises, or 

13 ‘‘(B) to the extent that the recipient of the 

14 item is under an obligation (whether pursuant 

15 to a short sale or otherwise) to make related 

16 payments with respect to positions in substan17 tially similar or related property. 

18 This paragraph shall not apply to any dividend to 

19 which subsection (k) applies. 

20 ‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL21 ERS.—

22 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

23 not apply to any qualified tax with respect to 

24 any property held in the active conduct in a for-
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1 eign country of a business as a dealer in such 

2 property. 

3 ‘‘(B) QUALIFIED TAX.—For purposes of 

4 subparagraph (A), the term ‘qualified tax’ 

5 means a tax paid to a foreign country (other 

6 than the foreign country referred to in subpara7 graph (A)) if— 

8 ‘‘(i) the item to which such tax is at9 tributable is subject to taxation on a net 

10 basis by the country referred to in sub11 paragraph (A), and 

12 ‘‘(ii) such country allows a credit 

13 against its net basis tax for the full 

14 amount of the tax paid to such other for15 eign country. 

16 ‘‘(C) DEALER.—For purposes of subpara17 graph (A), the term ‘dealer’ means—

18 ‘‘(i) with respect to a security, any 

19 person to whom paragraphs (1) and (2) of 

20 subsection (k) would not apply by reason 

21 of paragraph (4) thereof if such security 

22 were stock, and 

23 ‘‘(ii) with respect to any other prop24 erty, any person with respect to whom 
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•HR 4520 IH1S 

1 such property is described in section 

2 1221(a)(1). 

3 ‘‘(D) REGULATIONS.—The Secretary may 

4 prescribe such regulations as may be appro5 priate to carry out this paragraph, including 

6 regulations to prevent the abuse of the excep7 tion provided by this paragraph and to treat 

8 other taxes as qualified taxes. 

9 ‘‘(3) EXCEPTIONS.—The Secretary may by reg10 ulation provide that paragraph (1) shall not apply to 

11 property where the Secretary determines that the 

12 application of paragraph (1) to such property is not 

13 necessary to carry out the purposes of this sub14 section. 

15 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 

16 to the rules of paragraphs (5), (6), and (7) of sub17 section (k) shall apply for purposes of this sub18 section. 

19 ‘‘(5) DETERMINATION OF HOLDING PERIOD.—

20 Holding periods shall be determined for purposes of 

21 this subsection without regard to section 1235 or 

22 any similar rule.’’

23 (b) CONFORMING AMENDMENT.—The heading of 

24 subsection (k) of section 901 is amended by inserting ‘‘ON

25 DIVIDENDS’’ after ‘‘TAXES’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to amounts paid or accrued more 

3 than 30 days after the date of the enactment of this Act. 

4 SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 

5 TRANSFERS. 

6 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

7 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

8 amended by striking ‘‘and’’ at the end of subparagraph 

9 (A), by striking the period at the end of subparagraph 

10 (B) and inserting ‘‘, and’’, and by adding at the end the 

11 following: 

12 ‘‘(C) if any property so contributed has a 

13 built-in loss—

14 ‘‘(i) such built-in loss shall be taken 

15 into account only in determining the 

16 amount of items allocated to the contrib17 uting partner, and 

18 ‘‘(ii) except as provided in regulations, 

19 in determining the amount of items allo20 cated to other partners, the basis of the 

21 contributed property in the hands of the 

22 partnership shall be treated as being equal 

23 to its fair market value at the time of con24 tribution. 
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1 For purposes of subparagraph (C), the term ‘built2 in loss’ means the excess of the adjusted basis of the 

3 property (determined without regard to subpara4 graph (C)(ii)) over its fair market value at the time 

5 of contribution.’’

6 (b) SPECIAL RULES FOR TRANSFERS OF PARTNER7 SHIP INTEREST IF THERE IS SUBSTANTIAL BUILT-IN

8 LOSS.—

9 (1) ADJUSTMENT OF PARTNERSHIP BASIS RE10 QUIRED.—Subsection (a) of section 743 (relating to 

11 optional adjustment to basis of partnership prop12 erty) is amended by inserting before the period ‘‘or 

13 unless the partnership has a substantial built-in loss 

14 immediately after such transfer’’. 

15 (2) ADJUSTMENT.—Subsection (b) of section 

16 743 is amended by inserting ‘‘or with respect to 

17 which there is a substantial built-in loss immediately 

18 after such transfer’’ after ‘‘section 754 is in effect’’. 

19 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

20 is amended by adding at the end the following new 

21 subsection: 

22 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—

23 ‘‘(1) IN GENERAL.—For purposes of this sec24 tion, a partnership has a substantial built-in loss 

25 with respect to a transfer of an interest in a part-
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1 nership if the partnership’s adjusted basis in the 

2 partnership property exceeds by more than $250,000 

3 the fair market value of such property. 

4 ‘‘(2) REGULATIONS.—The Secretary shall pre5 scribe such regulations as may be appropriate to 

6 carry out the purposes of paragraph (1) and section 

7 734(d), including regulations aggregating related 

8 partnerships and disregarding property acquired by 

9 the partnership in an attempt to avoid such pur10 poses.’’

11 (4) ALTERNATIVE RULES FOR ELECTING IN12 VESTMENT PARTNERSHIPS.—

13 (A) IN GENERAL.—Section 743 is amended 

14 by adding at the end the following new sub15 section: 

16 ‘‘(e) ALTERNATIVE RULES FOR ELECTING INVEST17 MENT PARTNERSHIPS.—

18 ‘‘(1) NO ADJUSTMENT OF PARTNERSHIP

19 BASIS.—For purposes of this section, an electing in20 vestment partnership shall not be treated as having 

21 a substantial built-in loss with respect to any trans22 fer occurring while the election under paragraph 

23 (6)(A) is in effect. 

24 ‘‘(2) LOSS DEFERRAL FOR TRANSFEREE PART25 NER.—In the case of a transfer of an interest in an 
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1 electing investment partnership, the transferee part2 ner’s distributive share of losses (without regard to 

3 gains) from the sale or exchange of partnership 

4 property shall not be allowed except to the extent 

5 that it is established that such losses exceed the loss 

6 (if any) recognized by the transferor (or any prior 

7 transferor to the extent not fully offset by a prior 

8 disallowance under this paragraph) on the transfer 

9 of the partnership interest. 

10 ‘‘(3) NO REDUCTION IN PARTNERSHIP BASIS.—

11 Losses disallowed under paragraph (2) shall not de12 crease the transferee partner’s basis in the partner13 ship interest. 

14 ‘‘(4) EFFECT OF TERMINATION OF PARTNER15 SHIP.—This subsection shall be applied without re16 gard to any termination of a partnership under sec17 tion 708(b)(1)(B). 

18 ‘‘(5) CERTAIN BASIS REDUCTIONS TREATED AS

19 LOSSES.—In the case of a transferee partner whose 

20 basis in property distributed by the partnership is 

21 reduced under section 732(a)(2), the amount of the 

22 loss recognized by the transferor on the transfer of 

23 the partnership interest which is taken into account 

24 under paragraph (2) shall be reduced by the amount 

25 of such basis reduction. 
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1 ‘‘(6) ELECTING INVESTMENT PARTNERSHIP.—

2 For purposes of this subsection, the term ‘electing 

3 investment partnership’ means any partnership if—

4 ‘‘(A) the partnership makes an election to 

5 have this subsection apply, 

6 ‘‘(B) the partnership would be an invest7 ment company under section 3(a)(1)(A) of the 

8 Investment Company Act of 1940 but for an 

9 exemption under paragraph (1) or (7) of section 

10 3(c) of such Act, 

11 ‘‘(C) such partnership has never been en12 gaged in a trade or business, 

13 ‘‘(D) substantially all of the assets of such 

14 partnership are held for investment, 

15 ‘‘(E) at least 95 percent of the assets con16 tributed to such partnership consist of money, 

17 ‘‘(F) no assets contributed to such part18 nership had an adjusted basis in excess of fair 

19 market value at the time of contribution, 

20 ‘‘(G) all partnership interests of such part21 nership are issued by such partnership pursu22 ant to a private offering and during the 24-

23 month period beginning on the date of the first 

24 capital contribution to such partnership, 
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1 ‘‘(H) the partnership agreement of such 

2 partnership has substantive restrictions on each 

3 partner’s ability to cause a redemption of the 

4 partner’s interest, and 

5 ‘‘(I) the partnership agreement of such 

6 partnership provides for a term that is not in 

7 excess of 15 years. 

8 The election described in subparagraph (A), once 

9 made, shall be irrevocable except with the consent of 

10 the Secretary. 

11 ‘‘(7) REGULATIONS.—The Secretary shall pre12 scribe such regulations as may be appropriate to 

13 carry out the purposes of this subsection, including 

14 regulations for applying this subsection to tiered 

15 partnerships.’’. 

16 (B) INFORMATION REPORTING.—Section 

17 6031 is amended by adding at the end the fol18 lowing new subsection: 

19 ‘‘(f) ELECTING INVESTMENT PARTNERSHIPS.—In 

20 the case of any electing investment partnership (as defined 

21 in section 743(e)(6)), the information required under sub22 section (b) to be furnished to any partner to whom section 

23 743(e)(2) applies shall include such information as is nec24 essary to enable the partner to compute the amount of 

25 losses disallowed under section 743(e).’’. 
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1 (5) CLERICAL AMENDMENTS.—

2 (A) The section heading for section 743 is 

3 amended to read as follows: 

4 ‘‘SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION 

5 OR SUBSTANTIAL BUILT-IN LOSS.’’

6 (B) The table of sections for subpart C of 

7 part II of subchapter K of chapter 1 is amend8 ed by striking the item relating to section 743 

9 and inserting the following new item:

‘‘Sec. 743. Special rules where section 754 election or substantial 

built-in loss.’’

10 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED

11 PARTNERSHIP PROPERTY IF THERE IS SUBSTANTIAL

12 BASIS REDUCTION.—

13 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

14 of section 734 (relating to optional adjustment to 

15 basis of undistributed partnership property) is 

16 amended by inserting before the period ‘‘or unless 

17 there is a substantial basis reduction’’. 

18 (2) ADJUSTMENT.—Subsection (b) of section 

19 734 is amended by inserting ‘‘or unless there is a 

20 substantial basis reduction’’ after ‘‘section 754 is in 

21 effect’’. 

22 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

23 734 is amended by adding at the end the following 

24 new subsection: 
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•HR 4520 IH1S 

1 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.—

2 ‘‘(1) IN GENERAL.—For purposes of this sec3 tion, there is a substantial basis reduction with re4 spect to a distribution if the sum of the amounts de5 scribed in subparagraphs (A) and (B) of subsection 

6 (b)(2) exceeds $250,000. 

7 ‘‘(2) REGULATIONS.—

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’

8 (4) CLERICAL AMENDMENTS.—

9 (A) The section heading for section 734 is 

10 amended to read as follows: 

11 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

12 PARTNERSHIP PROPERTY WHERE SECTION 

13 754 ELECTION OR SUBSTANTIAL BASIS RE14 DUCTION.’’

15 (B) The table of sections for subpart B of 

16 part II of subchapter K of chapter 1 is amend17 ed by striking the item relating to section 734 

18 and inserting the following new item:

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’

19 (d) EFFECTIVE DATES.—

20 (1) SUBSECTION (a).—The amendment made 

21 by subsection (a) shall apply to contributions made 

22 after the date of the enactment of this Act. 
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1 (2) SUBSECTION (b).—

2 (A) IN GENERAL.—Except as provided in 

3 subparagraph (B), the amendments made by 

4 subsection (b) shall apply to transfers after the 

5 date of the enactment of this Act. 

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

7 electing investment partnership which is in ex8 istence on June 4, 2004, section 743(e)(6)(H) 

9 of the Internal Revenue Code of 1986, as added 

10 by this section, shall not apply to such partner11 ship and section 743(e)(6)(I) of such Code, as 

12 so added, shall be applied by substituting ‘‘20 

13 years’’ for ‘‘15 years’’. 

14 (3) SUBSECTION (c).—The amendments made 

15 by subsection (c) shall apply to distributions after 

16 the date of the enactment of this Act. 

17 SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

18 STOCK HELD BY PARTNERSHIP IN COR19 PORATE PARTNER. 

20 (a) IN GENERAL.—Section 755 is amended by adding 

21 at the end the following new subsection: 

22 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO

23 STOCK OF CORPORATE PARTNER.—In making an alloca24 tion under subsection (a) of any decrease in the adjusted 

25 basis of partnership property under section 734(b)—
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1 ‘‘(1) no allocation may be made to stock in a 

2 corporation (or any person related (within the mean3 ing of sections 267(b) and 707(b)(1)) to such cor4 poration) which is a partner in the partnership, and 

5 ‘‘(2) any amount not allocable to stock by rea6 son of paragraph (1) shall be allocated under sub7 section (a) to other partnership property. 

8 Gain shall be recognized to the partnership to the extent 

9 that the amount required to be allocated under paragraph 

10 (2) to other partnership property exceeds the aggregate 

11 adjusted basis of such other property immediately before 

12 the allocation required by paragraph (2).’’

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

14 this section shall apply to distributions after the date of 

15 the enactment of this Act. 

16 SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS. 

17 (a) IN GENERAL.—Part V of subchapter M of chap18 ter 1 (relating to financial asset securitization investment 

19 trusts) is hereby repealed. 

20 (b) CONFORMING AMENDMENTS.—

21 (1) Paragraph (6) of section 56(g) is amended 

22 by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

23 REMIC’’. 

24 (2) Clause (ii) of section 382(l)(4)(B) is amend25 ed by striking ‘‘a REMIC to which part IV of sub-
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1 chapter M applies, or a FASIT to which part V of 

2 subchapter M applies,’’ and inserting ‘‘or a REMIC 

3 to which part IV of subchapter M applies,’’. 

4 (3) Paragraph (1) of section 582(c) is amended 

5 by striking ‘‘, and any regular interest in a 

6 FASIT,’’. 

7 (4) Subparagraph (E) of section 856(c)(5) is 

8 amended by striking the last sentence. 

9 (5)(A) Section 860G(a)(1) is amended by add10 ing at the end the following new sentence: ‘‘An inter11 est shall not fail to qualify as a regular interest sole12 ly because the specified principal amount of the reg13 ular interest (or the amount of interest accrued on 

14 the regular interest) can be reduced as a result of 

15 the nonoccurrence of 1 or more contingent payments 

16 with respect to any reverse mortgage loan held by 

17 the REMIC if, on the startup day for the REMIC, 

18 the sponsor reasonably believes that all principal and 

19 interest due under the regular interest will be paid 

20 at or prior to the liquidation of the REMIC.’’. 

21 (B) The last sentence of section 860G(a)(3) is 

22 amended by inserting ‘‘, and any reverse mortgage 

23 loan (and each balance increase on such loan meet24 ing the requirements of subparagraph (A)(iii)) shall 
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1 be treated as an obligation secured by an interest in 

2 real property’’ before the period at the end. 

3 (6) Paragraph (3) of section 860G(a) is amend4 ed by adding ‘‘and’’ at the end of subparagraph (B), 

5 by striking ‘‘, and’’ at the end of subparagraph (C) 

6 and inserting a period, and by striking subparagraph 

7 (D). 

8 (7) Section 860G(a)(3), as amended by para9 graph (6), is amended by adding at the end the fol10 lowing new sentence: ‘‘For purposes of subparagraph 

11 (A), if more than 50 percent of the obligations 

12 transferred to, or purchased by, the REMIC are 

13 originated by the United States or any State (or any 

14 political subdivision, agency, or instrumentality of 

15 the United States or any State) and are principally 

16 secured by an interest in real property, then each 

17 obligation transferred to, or purchased by, the 

18 REMIC shall be treated as secured by an interest in 

19 real property.’’. 

20 (8)(A) Section 860G(a)(3)(A) is amended by 

21 striking ‘‘or’’ at the end of clause (i), by inserting 

22 ‘‘or’’ at the end of clause (ii), and by inserting after 

23 clause (ii) the following new clause: 

24 ‘‘(iii) represents an increase in the 

25 principal amount under the original terms 
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1 of an obligation described in clause (i) or 

2 (ii) if such increase— 

3 ‘‘(I) is attributable to an advance 

4 made to the obligor pursuant to the 

5 original terms of the obligation, 

6 ‘‘(II) occurs after the startup 

7 day, and 

8 ‘‘(III) is purchased by the 

9 REMIC pursuant to a fixed price con10 tract in effect on the startup day.’’. 

11 (B) Section 860G(a)(7)(B) is amended to read 

12 as follows: 

13 ‘‘(B) QUALIFIED RESERVE FUND.—For 

14 purposes of subparagraph (A), the term ‘quali15 fied reserve fund’ means any reasonably re16 quired reserve to—

17 ‘‘(i) provide for full payment of ex18 penses of the REMIC or amounts due on 

19 regular interests in the event of defaults on 

20 qualified mortgages or lower than expected 

21 returns on cash flow investments, or 

22 ‘‘(ii) provide a source of funds for the 

23 purchase of obligations described in clause 

24 (ii) or (iii) of paragraph (3)(A). 
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1 The aggregate fair market value of the assets 

2 held in any such reserve shall not exceed 50 

3 percent of the aggregate fair market value of all 

4 of the assets of the REMIC on the startup day, 

5 and the amount of any such reserve shall be 

6 promptly and appropriately reduced to the ex7 tent the amount held in such reserve is no 

8 longer reasonably required for purposes speci9 fied in clause (i) or (ii) of this subparagraph.’’. 

10 (9) Subparagraph (C) of section 1202(e)(4) is 

11 amended by striking ‘‘REMIC, or FASIT’’ and in12 serting ‘‘or REMIC’’. 

13 (10) Clause (xi) of section 7701(a)(19)(C) is 

14 amended—

15 (A) by striking ‘‘and any regular interest 

16 in a FASIT,’’, and 

17 (B) by striking ‘‘or FASIT’’ each place it 

18 appears. 

19 (11) Subparagraph (A) of section 7701(i)(2) is 

20 amended by striking ‘‘or a FASIT’’. 

21 (12) The table of parts for subchapter M of 

22 chapter 1 is amended by striking the item relating 

23 to part V. 

24 (c) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—Except as provided in para2 graph (2), the amendments made by this section 

3 shall take effect on January 1, 2005. 

4 (2) EXCEPTION FOR EXISTING FASITS.—Para5 graph (1) shall not apply to any FASIT in existence 

6 on the date of the enactment of this Act to the ex7 tent that regular interests issued by the FASIT be8 fore such date continue to remain outstanding in ac9 cordance with the original terms of issuance. 

10 SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 

11 ON REMIC RESIDUALS. 

12 (a) IN GENERAL.—Section 362 (relating to basis to 

13 corporations) is amended by adding at the end the fol14 lowing new subsection: 

15 ‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN

16 LOSSES ON REMIC RESIDUALS IN SECTION 351 TRANS17 ACTIONS.—If—

18 ‘‘(1) a residual interest (as defined in section 

19 860G(a)(2)) in a REMIC is transferred in any 

20 transaction which is described in subsection (a), and 

21 ‘‘(2) the transferee’s adjusted basis in such re22 sidual interest would (but for this paragraph) exceed 

23 its fair market value immediately after such trans24 action, 
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•HR 4520 IH1S 

1 then, notwithstanding subsection (a), the transferee’s ad2 justed basis in such residual interest shall not exceed its 

3 fair market value (whether or not greater than zero) im4 mediately after such transaction.’’ 

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

6 this section shall apply to transactions after the date of 

7 the enactment of this Act. 

8 SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PUR9 POSES OF DETERMINING INVESTMENT OF 

10 EARNINGS IN UNITED STATES PROPERTY. 

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

12 956(c)(2) is amended to read as follows: 

13 ‘‘(A) obligations of the United States, 

14 money, or deposits with persons described in 

15 paragraph (4);’’. 

16 (b) ELIGIBLE PERSONS.—Section 956(c) (relating to 

17 exceptions to definition of United States property) is 

18 amended by adding at the end the following new para19 graph: 

20 ‘‘(4) FINANCIAL SERVICES PROVIDERS.—

21 ‘‘(A) IN GENERAL.—For purposes of para22 graph (2)(A), a person is described in this para23 graph if at least 80 percent of the person’s in24 come is from the active conduct of a banking 
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1 business which is derived from persons who are 

2 not related persons. 

3 ‘‘(B) SPECIAL RULES.—For purposes of 

4 subparagraph (A) all related persons shall be 

5 treated as 1 person in applying the 80-percent 

6 test. 

7 ‘‘(C) RELATED PERSON.—For purposes of 

8 this paragraph, a person is a related person to 

9 another person if—

10 ‘‘(i) the related person bears a rela11 tionship to such person specified in section 

12 267(b) or 707(b)(1), or 

13 ‘‘(ii) such persons are members of the 

14 same controlled group of corporations (as 

15 defined in section 1563(a), except that 

16 ‘more than 50 percent’ shall be substituted 

17 for ‘at least 80 percent’ each place it ap18 pears therein).’’. 

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

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

21 of this Act. 
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1 SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSUR2 ANCE COMPANIES. 

3 (a) IN GENERAL.—Clause (i) of section 831(b)(2)(A) 

4 is amended by striking ‘‘$1,200,000’’ and inserting 

5 ‘‘$1,890,000’’. 

6 (b) INFLATION ADJUSTMENT.—Paragraph (2) of sec7 tion 831(b) is amended by adding at the end the following 

8 new subparagraph: 

9 ‘‘(C) INFLATION ADJUSTMENT.—In the 

10 case of any taxable year beginning in a calendar 

11 year after 2004, the $1,890,000 amount in sub12 paragraph (A) shall be increased by an amount 

13 equal to—

14 ‘‘(i) $1,890,000, multiplied by 

15 ‘‘(ii) the cost-of-living adjustment de16 termined under section 1(f)(3) for such 

17 calendar year by substituting ‘calendar 

18 year 2003’ for ‘calendar year 1992’ in sub19 paragraph (B) thereof. 

20 If the amount as adjusted under the preceding 

21 sentence is not a multiple of $1,000, such 

22 amount shall be rounded to the next lowest 

23 multiple of $1,000.’’. 

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

25 this section shall apply to taxable years beginning after 

26 December 31, 2003. 
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1 SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UN2 DERPAYMENTS ATTRIBUTABLE TO NONDIS3 CLOSED REPORTABLE TRANSACTIONS. 

4 (a) IN GENERAL.—Section 163 (relating to deduction 

5 for interest) is amended by redesignating subsection (m) 

6 as subsection (n) and by inserting after subsection (l) the 

7 following new subsection: 

8 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

9 TO NONDISCLOSED REPORTABLE TRANSACTIONS.—No 

10 deduction shall be allowed under this chapter for any in11 terest paid or accrued under section 6601 on any under12 payment of tax which is attributable to the portion of any 

13 reportable transaction understatement (as defined in sec14 tion 6662A(b)) with respect to which the requirement of 

15 section 6664(d)(2)(A) is not met.’’. 

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

17 this section shall apply to transactions in taxable years 

18 beginning after the date of the enactment of this Act. 

19 SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ES20 TIMATED TAX FOR CERTAIN DEEMED ASSET 

21 SALES. 

22 (a) IN GENERAL.—Paragraph (13) of section 338(h) 

23 (relating to tax on deemed sale not taken into account for 

24 estimated tax purposes) is amended by adding at the end 

25 the following: ‘‘The preceding sentence shall not apply 
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1 with respect to a qualified stock purchase for which an 

2 election is made under paragraph (10).’’. 

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

4 subsection (a) shall apply to transactions occurring after 

5 the date of the enactment of this Act. 

6 SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A 

7 PRINCIPAL RESIDENCE ACQUIRED IN A LIKE8 KIND EXCHANGE WITHIN 5 YEARS OF SALE. 

9 (a) IN GENERAL.—Section 121(d) (relating to special 

10 rules for exclusion of gain from sale of principal residence) 

11 is amended by adding at the end the following new para12 graph: 

13 ‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX14 CHANGE.—If a taxpayer acquired property in an ex15 change to which section 1031 applied, subsection (a) 

16 shall not apply to the sale or exchange of such prop17 erty if it occurs during the 5-year period beginning 

18 with the date of the acquisition of such property.’’. 

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

20 this section shall apply to sales or exchanges after the date 

21 of the enactment of this Act. 
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1 SEC. 642. PREVENTION OF MISMATCHING OF INTEREST 

2 AND ORIGINAL ISSUE DISCOUNT DEDUC3 TIONS AND INCOME INCLUSIONS IN TRANS4 ACTIONS WITH RELATED FOREIGN PERSONS. 

5 (a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 

6 (relating to special rule for original issue discount on obli7 gation held by related foreign person) is amended by re8 designating subparagraph (B) as subparagraph (C) and 

9 by inserting after subparagraph (A) the following new sub10 paragraph: 

11 ‘‘(B) SPECIAL RULE FOR CERTAIN FOR12 EIGN ENTITIES.—

13 ‘‘(i) IN GENERAL.—In the case of any 

14 debt instrument having original issue dis15 count which is held by a related foreign 

16 person which is a foreign personal holding 

17 company (as defined in section 552), a 

18 controlled foreign corporation (as defined 

19 in section 957), or a passive foreign invest20 ment company (as defined in section 

21 1297), a deduction shall be allowable to 

22 the issuer with respect to such original 

23 issue discount for any taxable year before 

24 the taxable year in which paid only to the 

25 extent such original issue discount (re26 duced by properly allowable deductions and 
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1 qualified deficits under section 

2 952(c)(1)(B)) is includible during such 

3 prior taxable year in the gross income of a 

4 United States person who owns (within the 

5 meaning of section 958(a)) stock in such 

6 corporation. 

7 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

8 Secretary may by regulation exempt trans9 actions from the application of clause (i), 

10 including any transaction which is entered 

11 into by a payor in the ordinary course of 

12 a trade or business in which the payor is 

13 predominantly engaged.’’. 

14 (b) INTEREST AND OTHER DEDUCTIBLE

15 AMOUNTS.—Section 267(a)(3) is amended—

16 (1) by striking ‘‘The Secretary’’ and inserting: 

17 ‘‘(A) IN GENERAL.—The Secretary’’, and 

18 (2) by adding at the end the following new sub19 paragraph: 

20 ‘‘(B) SPECIAL RULE FOR CERTAIN FOR21 EIGN ENTITIES.—

22 ‘‘(i) IN GENERAL.—Notwithstanding 

23 subparagraph (A), in the case of any item 

24 payable to a foreign personal holding com25 pany (as defined in section 552), a con-
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1 trolled foreign corporation (as defined in 

2 section 957), or a passive foreign invest3 ment company (as defined in section 

4 1297), a deduction shall be allowable to 

5 the payor with respect to such amount for 

6 any taxable year before the taxable year in 

7 which paid only to the extent that an 

8 amount attributable to such item (reduced 

9 by properly allowable deductions and quali10 fied deficits under section 952(c)(1)(B)) is 

11 includible during such prior taxable year in 

12 the gross income of a United States person 

13 who owns (within the meaning of section 

14 958(a)) stock in such corporation. 

15 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

16 Secretary may by regulation exempt trans17 actions from the application of clause (i), 

18 including any transaction which is entered 

19 into by a payor in the ordinary course of 

20 a trade or business in which the payor is 

21 predominantly engaged and in which the 

22 payment of the accrued amounts occurs 

within 81 23 ⁄2 months after accrual or within 

24 such other period as the Secretary may 

25 prescribe.’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to payments accrued on or after 

3 the date of the enactment of this Act. 

4 SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST 

5 ON OVERPAYMENTS OF INCOME TAX BY INDI6 VIDUALS. 

7 (a) IN GENERAL.—Part III of subchapter B of chap8 ter 1 (relating to items specifically excluded from gross 

9 income) is amended by inserting after section 139A the 

10 following new section: 

11 ‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER12 EST ON OVERPAYMENTS OF INCOME TAX BY 

13 INDIVIDUALS. 

14 ‘‘(a) IN GENERAL.—In the case of an individual, 

15 gross income shall not include interest paid under section 

16 6611 on any overpayment of tax imposed by this subtitle. 

17 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 

18 the case of a failure to claim items resulting in the over19 payment on the original return if the Secretary determines 

20 that the principal purpose of such failure is to take advan21 tage of subsection (a). 

22 ‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED

23 ADJUSTED GROSS INCOME.—For purposes of this title, 

24 interest not included in gross income under subsection (a) 

25 shall not be treated as interest which is exempt from tax 
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•HR 4520 IH1S 

1 for purposes of sections 32(i)(2)(B) and 6012(d) or any 

2 computation in which interest exempt from tax under this 

3 title is added to adjusted gross income.’’. 

4 (b) CLERICAL AMENDMENT.—The table of sections 

5 for part III of subchapter B of chapter 1 is amended by 

6 inserting after the item relating to section 139A the fol7 lowing new item:

‘‘Sec. 139B. Exclusion from gross income for interest on overpayments of income tax by individuals.’’.

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

9 this section shall apply to interest received in calendar 

10 years beginning after the date of the enactment of this 

11 Act. 

12 SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF IN13 TEREST ON POTENTIAL UNDERPAYMENTS. 

14 (a) IN GENERAL.—Subchapter A of chapter 67 (re15 lating to interest on underpayments) is amended by add16 ing at the end the following new section: 

17 ‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN18 TEREST ON POTENTIAL UNDERPAYMENTS, 

19 ETC. 

20 ‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN

21 AS PAYMENT OF TAX.—A taxpayer may make a cash de22 posit with the Secretary which may be used by the Sec23 retary to pay any tax imposed under subtitle A or B or 

24 chapter 41, 42, 43, or 44 which has not been assessed 
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1 at the time of the deposit. Such a deposit shall be made 

2 in such manner as the Secretary shall prescribe. 

3 ‘‘(b) NO INTEREST IMPOSED.—To the extent that 

4 such deposit is used by the Secretary to pay tax, for pur5 poses of section 6601 (relating to interest on underpay6 ments), the tax shall be treated as paid when the deposit 

7 is made. 

8 ‘‘(c) RETURN OF DEPOSIT.—Except in a case where 

9 the Secretary determines that collection of tax is in jeop10 ardy, the Secretary shall return to the taxpayer any 

11 amount of the deposit (to the extent not used for a pay12 ment of tax) which the taxpayer requests in writing. 

13 ‘‘(d) PAYMENT OF INTEREST.—

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

15 6611 (relating to interest on overpayments), a de16 posit which is returned to a taxpayer shall be treated 

17 as a payment of tax for any period to the extent 

18 (and only to the extent) attributable to a disputable 

19 tax for such period. Under regulations prescribed by 

20 the Secretary, rules similar to the rules of section 

21 6611(b)(2) shall apply. 

22 ‘‘(2) DISPUTABLE TAX.—

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

24 section, the term ‘disputable tax’ means the 

25 amount of tax specified at the time of the de-
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•HR 4520 IH1S 

1 posit as the taxpayer’s reasonable estimate of 

2 the maximum amount of any tax attributable to 

3 disputable items. 

4 ‘‘(B) SAFE HARBOR BASED ON 30-DAY

5 LETTER.—In the case of a taxpayer who has 

6 been issued a 30-day letter, the maximum 

7 amount of tax under subparagraph (A) shall 

8 not be less than the amount of the proposed de9 ficiency specified in such letter. 

10 ‘‘(3) OTHER DEFINITIONS.—For purposes of 

11 paragraph (2)—

12 ‘‘(A) DISPUTABLE ITEM.—The term ‘dis13 putable item’ means any item of income, gain, 

14 loss, deduction, or credit if the taxpayer—

15 ‘‘(i) has a reasonable basis for its 

16 treatment of such item, and 

17 ‘‘(ii) reasonably believes that the Sec18 retary also has a reasonable basis for dis19 allowing the taxpayer’s treatment of such 

20 item. 

21 ‘‘(B) 30-DAY LETTER.—The term ‘30-day 

22 letter’ means the first letter of proposed defi23 ciency which allows the taxpayer an opportunity 

24 for administrative review in the Internal Rev25 enue Service Office of Appeals. 
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1 ‘‘(4) RATE OF INTEREST.—The rate of interest 

2 allowable under this subsection shall be the Federal 

3 short-term rate determined under section 6621(b), 

4 compounded daily. 

5 ‘‘(e) USE OF DEPOSITS.—

6 ‘‘(1) PAYMENT OF TAX.—Except as otherwise 

7 provided by the taxpayer, deposits shall be treated 

8 as used for the payment of tax in the order depos9 ited. 

10 ‘‘(2) RETURNS OF DEPOSITS.—Deposits shall 

11 be treated as returned to the taxpayer on a last-in, 

12 first-out basis.’’. 

13 (b) CLERICAL AMENDMENT.—The table of sections 

14 for subchapter A of chapter 67 is amended by adding at 

15 the end the following new item:

‘‘Sec. 6603. Deposits made to suspend running of interest on potential underpayments, etc.’’.

16 (c) EFFECTIVE DATE.—

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

18 this section shall apply to deposits made after the 

19 date of the enactment of this Act. 

20 (2) COORDINATION WITH DEPOSITS MADE

21 UNDER REVENUE PROCEDURE 84–58.—In the case of 

22 an amount held by the Secretary of the Treasury or 

23 his delegate on the date of the enactment of this Act 

24 as a deposit in the nature of a cash bond deposit 
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•HR 4520 IH1S 

1 pursuant to Revenue Procedure 84–58, the date that 

2 the taxpayer identifies such amount as a deposit 

3 made pursuant to section 6603 of the Internal Rev4 enue Code (as added by this Act) shall be treated as 

5 the date such amount is deposited for purposes of 

6 such section 6603. 

7 SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN IN8 STALLMENT AGREEMENTS. 

9 (a) IN GENERAL.—

10 (1) Section 6159(a) (relating to authorization 

11 of agreements) is amended—

12 (A) by striking ‘‘satisfy liability for pay13 ment of’’ and inserting ‘‘make payment on’’, 

14 and 

15 (B) by inserting ‘‘full or partial’’ after ‘‘fa16 cilitate’’. 

17 (2) Section 6159(c) (relating to Secretary re18 quired to enter into installment agreements in cer19 tain cases) is amended in the matter preceding para20 graph (1) by inserting ‘‘full’’ before ‘‘payment’’. 

21 (b) REQUIREMENT TO REVIEW PARTIAL PAYMENT

22 AGREEMENTS EVERY TWO YEARS.—Section 6159 is 

23 amended by redesignating subsections (d) and (e) as sub24 sections (e) and (f), respectively, and inserting after sub25 section (c) the following new subsection: 
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•HR 4520 IH1S 

1 ‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL2 MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY

3 TWO YEARS.—In the case of an agreement entered into 

4 by the Secretary under subsection (a) for partial collection 

5 of a tax liability, the Secretary shall review the agreement 

6 at least once every 2 years.’’. 

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

8 this section shall apply to agreements entered into on or 

9 after the date of the enactment of this Act. 

10 SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGU11 LATION AUTHORITY. 

12 (a) IN GENERAL.—Section 1502 is amended by add13 ing at the end the following new sentence: ‘‘In carrying 

14 out the preceding sentence, the Secretary may prescribe 

15 rules that are different from the provisions of chapter 1 

16 that would apply if such corporations filed separate re17 turns.’’. 

18 (b) RESULT NOT OVERTURNED.—Notwithstanding 

19 the amendment made by subsection (a), the Internal Rev20 enue Code of 1986 shall be construed by treating Treasury 

21 Regulation § 1.1502-20(c)(1)(iii) (as in effect on January 

22 1, 2001) as being inapplicable to the factual situation in 

23 Rite Aid Corporation and Subsidiary Corporations v. 

24 United States, 255 F.3d 1357 (Fed. Cir. 2001). 
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•HR 4520 IH1S 

1 (c) EFFECTIVE DATE.—This section, and the amend2 ment made by this section, shall apply to taxable years 

3 beginning before, on, or after the date of the enactment 

4 of this Act. 

5 Part III—Leasing 

6 SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEAS7 ING ARRANGEMENTS. 

8 (a) CLARIFICATION OF RECOVERY PERIOD FOR TAX9 EXEMPT USE PROPERTY SUBJECT TO LEASE.—Subpara10 graph (A) of section 168(g)(3) (relating to special rules 

11 for determining class life) is amended by inserting ‘‘(not12 withstanding any other subparagraph of this paragraph)’’ 

13 after ‘‘shall’’. 

14 (b) LIMITATION ON DEPRECIATION PERIOD FOR

15 SOFTWARE LEASED TO TAX-EXEMPT ENTITY.—Para16 graph (1) of section 167(f) is amended by adding at the 

17 end the following new subparagraph:

18 ‘‘(C) TAX-EXEMPT USE PROPERTY SUB19 JECT TO LEASE.—In the case of computer soft20 ware which would be tax-exempt use property 

21 as defined in subsection (h) of section 168 if 

22 such section applied to computer software, the 

23 useful life under subparagraph (A) shall not be 

24 less than 125 percent of the lease term (within 

25 the meaning of section 168(i)(3)).’’. 
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1 (c) LEASE TERM TO INCLUDE RELATED SERVICE

2 CONTRACTS.—Subparagraph (A) of section 168(i)(3) (re3 lating to lease term) is amended by striking ‘‘and’’ at the 

4 end of clause (i), by redesignating clause (ii) as clause 

5 (iii), and by inserting after clause (i) the following new 

6 clause: 

7 ‘‘(ii) the term of a lease shall include 

8 the term of any service contract or similar 

9 arrangement (whether or not treated as a 

10 lease under section 7701(e))—

11 ‘‘(I) which is part of the same 

12 transaction (or series of related trans13 actions) which includes the lease, and 

14 ‘‘(II) which is with respect to the 

15 property subject to the lease or sub16 stantially similar property, and’’. 

17 (d) EXPANSION OF SHORT-TERM LEASE EXEMPTION

18 FOR QUALIFIED TECHNOLOGICAL EQUIPMENT.—Sub19 paragraph (A) of section 168(h)(3) is amended by adding 

20 at the end the following new sentence: ‘‘Notwithstanding 

21 subsection (i)(3)(A)(i), in determining a lease term for 

22 purposes of the preceding sentence, there shall not be 

23 taken into account any option of the lessee to renew at 

24 the fair market value rent determined at the time of re25 newal; except that the aggregate period not taken into ac-
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•HR 4520 IH1S 

1 count by reason of this sentence shall not exceed 24 

2 months.’’

3 SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO 

4 PROPERTY USED BY GOVERNMENTS OR 

5 OTHER TAX-EXEMPT ENTITIES. 

6 (a) IN GENERAL.—Subpart C of part II of sub7 chapter E of chapter 1 (relating to taxable year for which 

8 deductions taken) is amended by adding at the end the 

9 following new section: 

10 ‘‘SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO 

11 PROPERTY USED BY GOVERNMENTS OR 

12 OTHER TAX-EXEMPT ENTITIES. 

13 ‘‘(a) LIMITATION ON LOSSES.—Except as otherwise 

14 provided in this section, a tax-exempt use loss for any tax15 able year shall not be allowed. 

16 ‘‘(b) DISALLOWED LOSS CARRIED TO NEXT YEAR.—

17 Any tax-exempt use loss with respect to any tax-exempt 

18 use property which is disallowed under subsection (a) for 

19 any taxable year shall be treated as a deduction with re20 spect to such property in the next taxable year. 

21 ‘‘(c) DEFINITIONS.—For purposes of this section— 

22 ‘‘(1) TAX-EXEMPT USE LOSS.—The term ‘tax23 exempt use loss’ means, with respect to any taxable 

24 year, the amount (if any) by which— 

25 ‘‘(A) the sum of— 
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•HR 4520 IH1S 

1 ‘‘(i) the aggregate deductions (other 

2 than interest) directly allocable to a tax-ex3 empt use property, plus 

4 ‘‘(ii) the aggregate deductions for in5 terest properly allocable to such property, 

6 exceed 

7 ‘‘(B) the aggregate income from such 

8 property. 

9 ‘‘(2) TAX-EXEMPT USE PROPERTY.—The term 

10 ‘tax-exempt use property’ has the meaning given to 

11 such term by section 168(h) (without regard to 

12 paragraphs (1)(C) and (3) thereof and determined 

13 as if property described in section 167(f)(1)(B) were 

14 tangible property). Such term shall not include prop15 erty which would (but for this sentence) be tax-ex16 empt use property solely by reason of section 

17 168(h)(6) if any credit is allowable under section 42 

18 or 47 with respect to such property. 

19 ‘‘(d) EXCEPTION FOR CERTAIN LEASES.—This sec20 tion shall not apply to any lease of property which meets 

21 the requirements of all of the following paragraphs: 

22 ‘‘(1) AVAILABILITY OF FUNDS.— 

23 ‘‘(A) IN GENERAL.—A lease of property 

24 meets the requirements of this paragraph if (at 
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•HR 4520 IH1S 

1 all times during the lease term) not more than 

2 an allowable amount of funds are— 

3 ‘‘(i) subject to any arrangement re4 ferred to in subparagraph (B), or 

5 ‘‘(ii) set aside or expected to be set 

6 aside, 

7 to or for the benefit of the lessor or any lender, 

8 or to or for the benefit of the lessee to satisfy 

9 the lessee’s obligations or options under the 

10 lease. For purposes of clause (ii), funds shall be 

11 treated as set aside or expected to be set aside 

12 only if a reasonable person would conclude, 

13 based on the facts and circumstances, that such 

14 funds are set aside or expected to be set aside. 

15 ‘‘(B) ARRANGEMENTS.—The arrangements 

16 referred to in this subparagraph include a de17 feasance arrangement, a loan by the lessee to 

18 the lessor or any lender, a deposit arrangement, 

19 a letter of credit collateralized with cash or cash 

20 equivalents, a payment undertaking agreement, 

21 prepaid rent (within the meaning of the regula22 tions under section 467), a sinking fund ar23 rangement, a guaranteed investment contract, 

24 financial guaranty insurance, and any similar 
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1 arrangement (whether or not such arrangement 

2 provides credit support). 

3 ‘‘(C) ALLOWABLE AMOUNT.— 

4 ‘‘(i) IN GENERAL.—Except as other5 wise provided in this subparagraph, the 

6 term ‘allowable amount’ means an amount 

7 equal to 20 percent of the lessor’s adjusted 

8 basis in the property at the time the lease 

9 is entered into. 

10 ‘‘(ii) HIGHER AMOUNT PERMITTED IN

11 CERTAIN CASES.—To the extent provided 

12 in regulations, a higher percentage shall be 

13 permitted under clause (i) where necessary 

14 because of the credit-worthiness of the les15 see. In no event may such regulations per16 mit a percentage of more than 50 percent. 

17 ‘‘(iii) OPTION TO PURCHASE OTHER

18 THAN AT FAIR MARKET VALUE.—If under 

19 the lease the lessee has the option to pur20 chase the property for a fixed price or for 

21 other than the fair market value of the 

22 property (determined at the time of exer23 cise), the allowable amount at the time 

24 such option may be exercised may not ex-
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1 ceed 50 percent of the price at which such 

2 option may be exercised. 

3 ‘‘(iv) NO ALLOWABLE AMOUNT FOR

4 CERTAIN ARRANGEMENTS.—The allowable 

5 amount shall be zero with respect to any 

6 arrangement which involves— 

7 ‘‘(I) a loan from the lessee to the 

8 lessor or a lender, 

9 ‘‘(II) any deposit received, letter 

10 of credit issued, or payment under11 taking agreement entered into by a 

12 lender otherwise involved in the trans13 action, or 

14 ‘‘(III) in the case of a trans15 action which involves a lender, any 

16 credit support made available to the 

17 lessor in which any such lender does 

18 not have a claim that is senior to the 

19 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. 
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1 ‘‘(2) LESSOR MUST MAKE SUBSTANTIAL EQUITY

2 INVESTMENT.—A lease of property meets the re3 quirements of this paragraph if— 

4 ‘‘(A) the lessor— 

5 ‘‘(i) has at the time the lease is en6 tered into an unconditional at-risk equity 

7 investment (as determined by the Sec8 retary) in the property of at least 20 per9 cent of the lessor’s adjusted basis in the 

10 property as of that time, and 

11 ‘‘(ii) maintains such investment 

12 throughout the term of the lease, and 

13 ‘‘(B) the fair market value of the property 

14 at the end of the lease term is reasonably ex15 pected to be equal to at least 20 percent of such 

16 basis. 

17 Subparagraphs (A)(ii) and (B) shall not apply to 

18 any lease with a lease term of 5 years or less. For 

19 purposes of subparagraph (B), the fair market value 

20 at the end of the lease term shall be reduced to the 

21 extent that a person other than the lessor bears a 

22 risk of loss in the value of the property. 

23 ‘‘(3) LESSEE MAY NOT BEAR MORE THAN MINI24 MAL RISK OF LOSS.— 
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1 ‘‘(A) IN GENERAL.—A lease of property 

2 meets the requirements of this paragraph if 

3 there is no arrangement under which the lessee 

4 bears— 

5 ‘‘(i) any portion of the loss that would 

6 occur if the fair market value of the leased 

7 property were 25 percent less than its rea8 sonably expected fair market value at the 

9 time the lease is terminated, or 

10 ‘‘(ii) more than 50 percent of the loss 

11 that would occur if the fair market value 

12 of the leased property at the time the lease 

13 is terminated were zero. 

14 ‘‘(B) EXCEPTION.—The Secretary may by 

15 regulations provide that the requirements of 

16 this paragraph are not met where the lessee 

17 bears more than a minimal risk of loss. 

18 ‘‘(C) PARAGRAPH NOT TO APPLY TO

19 SHORT-TERM LEASES.—This paragraph shall 

20 not apply to any lease with a lease term of 5 

21 years or less. 

22 ‘‘(e) SPECIAL RULES.— 

23 ‘‘(1) TREATMENT OF FORMER TAX-EXEMPT

24 USE 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 prop5 erty for any taxable year shall be allowed 

6 only to the extent of any net income (with7 out regard to such deduction) from such 

8 property 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 

12 allowable under subsection (b) with respect 

13 to such property in the next taxable year. 

14 ‘‘(B) FORMER TAX-EXEMPT USE PROP15 ERTY.—For purposes of this subsection, the 

16 term ‘former tax-exempt use property’ means 

17 any 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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•HR 4520 IH1S 

1 erty), rules similar to the rules of section 469(g) 

2 shall 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 

12 a lease which was entered into before 

13 March 13, 2004, and which would not have 

14 met the requirements of subsection (d) had 

15 such requirements been in effect when the 

16 lease was entered into, or 

17 ‘‘(ii) the replacement property is tax18 exempt use property subject to a lease 

19 which does not meet the requirements of 

20 subsection (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 

25 this section shall not exceed 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’, 

10 ‘lessee’, 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 

17 to 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 sec3 tion.’’. 

4 (b) CONFORMING AMENDMENT.—The table of sec5 tions for subpart C of part II of subchapter E of chapter 

6 1 is 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.’’.

7 SEC. 649. EFFECTIVE DATE. 

8 (a) IN GENERAL.—Except as provided in this section, 

9 the amendments made by this part shall apply to leases 

10 entered into after March 12, 2004. 

11 (b) EXCEPTION.—

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

13 this part shall not apply to qualified transportation 

14 property. 

15 (2) QUALIFIED TRANSPORTATION PROPERTY.—

16 For purposes of paragraph (1), the term ‘‘qualified 

17 transportation property’’ means domestic property 

18 subject to a lease with respect to which a formal ap19 plication—

20 (A) was submitted for approval to the Fed21 eral Transit Administration (an agency of the 

22 Department of Transportation) after June 30, 

23 2003, and before March 13, 2004, 
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1 (B) is approved by the Federal Transit Ad2 ministration before January 1, 2005, and 

3 (C) includes a description of such property 

4 and the value of such property. 

5 (3) EXCHANGES AND CONVERSION OF TAX-EX6 EMPT USE PROPERTY.—Section 470(e)(4) of the In7 ternal Revenue Code of 1986, as added by this sec8 tion, shall apply to property exchanged or converted 

9 after the date of the enactment of this Act. 

10 Subtitle C—Reduction of Fuel Tax 

11 Evasion 

12 SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR 

13 MOBILE MACHINERY. 

14 (a) EXEMPTION FROM TAX ON HEAVY TRUCKS AND

15 TRAILERS SOLD AT RETAIL.—

16 (1) IN GENERAL.—Section 4053 (relating to ex17 emptions) is amended by adding at the end the fol18 lowing new paragraph: 

19 ‘‘(8) MOBILE MACHINERY.—Any vehicle which 

20 consists of a chassis—

21 ‘‘(A) to which there has been permanently 

22 mounted (by welding, bolting, riveting, or other 

23 means) machinery or equipment to perform a 

24 construction, manufacturing, processing, farm25 ing, mining, drilling, timbering, or similar oper-
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1 ation if the operation of the machinery or 

2 equipment is unrelated to transportation on or 

3 off the public highways, 

4 ‘‘(B) which has been specially designed to 

5 serve only as a mobile carriage and mount (and 

6 a power source, where applicable) for the par7 ticular machinery or equipment involved, wheth8 er or not such machinery or equipment is in op9 eration, and 

10 ‘‘(C) which, by reason of such special de11 sign, could not, without substantial structural 

12 modification, be used as a component of a vehi13 cle designed to perform a function of trans14 porting any load other than that particular ma15 chinery or equipment or similar machinery or 

16 equipment requiring such a specially designed 

17 chassis.’’. 

18 (2) EFFECTIVE DATE.—The amendment made 

19 by this subsection shall take effect on the day after 

20 the date of the enactment of this Act. 

21 (b) EXEMPTION FROM TAX ON USE OF CERTAIN VE22 HICLES.—

23 (1) IN GENERAL.—Section 4483 (relating to ex24 emptions) is amended by redesignating subsection 
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1 (g) as subsection (h) and by inserting after sub2 section (f) the following new subsection: 

3 ‘‘(g) EXEMPTION FOR MOBILE MACHINERY.—No tax 

4 shall be imposed by section 4481 on the use of any vehicle 

5 described in section 4053(8).’’. 

6 (2) EFFECTIVE DATE.—The amendments made 

7 by this subsection shall take effect on the day after 

8 the date of the enactment of this Act. 

9 (c) EXEMPTION FROM TAX ON TIRES.—

10 (1) IN GENERAL.—Section 4072(b)(2) is 

11 amended by adding at the end the following flush 

12 sentence: ‘‘Such term shall not include tires of a 

13 type used exclusively on vehicles described in section 

14 4053(8).’’. 

15 (2) EFFECTIVE DATE.—The amendment made 

16 by this subsection shall take effect on the day after 

17 the date of the enactment of this Act. 

18 (d) REFUND OF FUEL TAXES.—

19 (1) IN GENERAL.—Section 6421(e)(2) (defining 

20 off-highway business use) is amended by adding at 

21 the end the following new subparagraph: 

22 ‘‘(C) USES IN MOBILE MACHINERY.—

23 ‘‘(i) IN GENERAL.—The term ‘off24 highway business use’ shall include any use 
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1 in a vehicle which meets the requirements 

2 described in clause (ii). 

3 ‘‘(ii) REQUIREMENTS FOR MOBILE

4 MACHINERY.—The requirements described 

5 in this clause are—

6 ‘‘(I) the design-based test, and 

7 ‘‘(II) the use-based test. 

8 ‘‘(iii) DESIGN-BASED TEST.—For pur9 poses of clause (ii)(I), the design-based 

10 test is met if the vehicle consists of a chas11 sis—

12 ‘‘(I) to which there has been per13 manently mounted (by welding, bolt14 ing, riveting, or other means) machin15 ery or equipment to perform a con16 struction, manufacturing, processing, 

17 farming, mining, drilling, timbering, 

18 or similar operation if the operation of 

19 the machinery or equipment is unre20 lated to transportation on or off the 

21 public highways, 

22 ‘‘(II) which has been specially de23 signed to serve only as a mobile car24 riage and mount (and a power source, 

25 where applicable) for the particular 
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1 machinery or equipment involved, 

2 whether or not such machinery or 

3 equipment is in operation, and 

4 ‘‘(III) which, by reason of such 

5 special design, could not, without sub6 stantial structural modification, be 

7 used as a component of a vehicle de8 signed to perform a function of trans9 porting any load other than that par10 ticular machinery or equipment or 

11 similar machinery or equipment re12 quiring such a specially designed chas13 sis. 

14 ‘‘(iv) USE-BASED TEST.—For pur15 poses of clause (ii)(II), the use-based test 

16 is met if the use of the vehicle on public 

17 highways was less than 7,500 miles during 

18 the taxpayer’s taxable year.’’. 

19 (2) NO TAX-FREE SALES.—Subsection (b) of 

20 section 4082, as amended by section 652, is amend21 ed by inserting before the period at the end ‘‘and 

22 such term shall not include any use described in sec23 tion 6421(e)(2)(C)’’. 
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1 (3) ANNUAL REFUND OF TAX PAID.—Section 

2 6427(i)(2) (relating to exceptions) is amended by 

3 adding at the end the following new subparagraph: 

4 ‘‘(C) NONAPPLICATION OF PARAGRAPH.—

5 This paragraph shall not apply to any fuel used 

6 solely in any off-highway business use described 

7 in section 6421(e)(2)(C).’’. 

8 (4) EFFECTIVE DATE.—The amendments made 

9 by this subsection shall apply to taxable years begin10 ning after the date of the enactment of this Act. 

11 SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE. 

12 (a) RATE OF TAX.—

13 (1) IN GENERAL.—Subparagraph (A) of section 

14 4081(a)(2) is amended by striking ‘‘and’’ at the end 

15 of clause (ii), by striking the period at the end of 

16 clause (iii) and inserting ‘‘, and’’, and by adding at 

17 the end the following new clause: 

18 ‘‘(iv) in the case of aviation-grade ker19 osene, 21.8 cents per gallon.’’. 

20 (2) COMMERCIAL AVIATION.—Paragraph (2) of 

21 section 4081(a) is amended by adding at the end the 

22 following new subparagraph: 

23 ‘‘(C) TAXES IMPOSED ON FUEL USED IN

24 COMMERCIAL AVIATION.—In the case of avia25 tion-grade kerosene which is removed from any 
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1 refinery or terminal directly into the fuel tank 

2 of an aircraft for use in commercial aviation, 

3 the rate of tax under subparagraph (A)(iv) shall 

4 be 4.3 cents per gallon.’’. 

5 (3) CERTAIN REFUELER TRUCKS, TANKERS, 

6 AND TANK WAGONS TREATED AS TERMINAL.—Sub7 section (a) of section 4081 is amended by adding at 

8 the end the following new paragraph: 

9 ‘‘(3) CERTAIN REFUELER TRUCKS, TANKERS, 

10 AND TANK WAGONS TREATED AS TERMINAL.—

11 ‘‘(A) IN GENERAL.—In the case of avia12 tion-grade kerosene which is removed from any 

13 terminal directly into the fuel tank of an air14 craft (determined without regard to any re15 fueler truck, tanker, or tank wagon which meets 

16 the requirements of subparagraph (B)), a re17 fueler truck, tanker, or tank wagon shall be 

18 treated as part of such terminal if—

19 ‘‘(i) such truck, tanker, or wagon 

20 meets the requirements of subparagraph 

21 (B) with respect to an airport, and 

22 ‘‘(ii) except in the case of exigent cir23 cumstances identified by the Secretary in 

24 regulations, no vehicle registered for high-
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1 way use is loaded with aviation-grade ker2 osene at such terminal. 

3 ‘‘(B) REQUIREMENTS.—A refueler truck, 

4 tanker, or tank wagon meets the requirements 

5 of this subparagraph with respect to an airport 

6 if such truck, tanker, or wagon—

7 ‘‘(i) is loaded with aviation-grade ker8 osene at such terminal located within such 

9 airport and delivers such kerosene only 

10 into aircraft at such airport, 

11 ‘‘(ii) has storage tanks, hose, and cou12 pling equipment designed and used for the 

13 purposes of fueling aircraft, 

14 ‘‘(iii) is not registered for highway 

15 use, and 

16 ‘‘(iv) is operated by—

17 ‘‘(I) the terminal operator of 

18 such terminal, or 

19 ‘‘(II) a person that makes a daily 

20 accounting to such terminal operator 

21 of each delivery of fuel from such 

22 truck, tanker, or wagon. 

23 ‘‘(C) REPORTING.—The Secretary shall re24 quire under section 4101(d) reporting by such 

25 terminal operator of—
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1 ‘‘(i) any information obtained under 

2 subparagraph (B)(iv)(II), and 

3 ‘‘(ii) any similar information main4 tained by such terminal operator with re5 spect to deliveries of fuel made by trucks, 

6 tankers, or wagons operated by such ter7 minal operator.’’.

8 (4) LIABILITY FOR TAX ON AVIATION-GRADE

9 KEROSENE USED IN COMMERCIAL AVIATION.—Sub10 section (a) of section 4081 is amended by adding at 

11 the end the following new paragraph: 

12 ‘‘(4) LIABILITY FOR TAX ON AVIATION-GRADE

13 KEROSENE USED IN COMMERCIAL AVIATION.—For 

14 purposes of paragraph (2)(C), the person who uses 

15 the fuel for commercial aviation shall pay the tax 

16 imposed under such paragraph. For purposes of the 

17 preceding sentence, fuel shall be treated as used 

18 when such fuel is removed into the fuel tank.’’. 

19 (5) NONTAXABLE USES.—

20 (A) IN GENERAL.—Section 4082 is amend21 ed by redesignating subsections (e) and (f) as 

22 subsections (f) and (g), respectively, and by in23 serting after subsection (d) the following new 

24 subsection: 
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1 ‘‘(e) AVIATION-GRADE KEROSENE.—In the case of 

2 aviation-grade kerosene which is exempt from the tax im3 posed by section 4041(c) (other than by reason of a prior 

4 imposition of tax) and which is removed from any refinery 

5 or terminal directly into the fuel tank of an aircraft, the 

6 rate of tax under section 4081(a)(2)(A)(iv) shall be zero.’’. 

7 (B) CONFORMING AMENDMENTS.—

8 (i) Subsection (b) of section 4082 is 

9 amended by adding at the end the fol10 lowing new flush sentence: 

11 ‘‘The term ‘nontaxable use’ does not include the use of 

12 aviation-grade kerosene in an aircraft.’’. 

13 (ii) Section 4082(d) is amended by 

14 striking paragraph (1) and by redesig15 nating paragraphs (2) and (3) as para16 graphs (1) and (2), respectively. 

17 (6) NONAIRCRAFT USE OF AVIATION-GRADE

18 KEROSENE.—

19 (A) IN GENERAL.—Subparagraph (B) of 

20 section 4041(a)(1) is amended by adding at the 

21 end the following new sentence: ‘‘This subpara22 graph shall not apply to aviation-grade ker23 osene.’’. 

24 (B) CONFORMING AMENDMENT.—The 

25 heading for paragraph (1) of section 4041(a) is 
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1 amended by inserting ‘‘AND KEROSENE’’ after 

2 ‘‘DIESEL FUEL’’. 

3 (b) COMMERCIAL AVIATION.—Section 4083 is 

4 amended by redesignating subsections (b) and (c) as sub5 sections (c) and (d), respectively, and by inserting after 

6 subsection (a) the following new subsection: 

7 ‘‘(b) COMMERCIAL AVIATION.—For purposes of this 

8 subpart, the term ‘commercial aviation’ means any use of 

9 an aircraft in a business of transporting persons or prop10 erty for compensation or hire by air, unless properly allo11 cable to any transportation exempt from the taxes imposed 

12 by sections 4261 and 4271 by reason of section 4281 or 

13 4282 or by reason of section 4261(h).’’. 

14 (c) REFUNDS.—

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

16 6427(l) is amended to read as follows: 

17 ‘‘(4) REFUNDS FOR AVIATION-GRADE KER18 OSENE.—

19 ‘‘(A) NO REFUND OF CERTAIN TAXES ON

20 FUEL USED IN COMMERCIAL AVIATION.—In the 

21 case of aviation-grade kerosene used in com22 mercial aviation (as defined in section 4083(b)) 

23 (other than supplies for vessels or aircraft with24 in the meaning of section 4221(d)(3)), para-
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1 graph (1) shall not apply to so much of the tax 

2 imposed by section 4081 as is attributable to—

3 ‘‘(i) the Leaking Underground Stor4 age Tank Trust Fund financing rate im5 posed by such section, and 

6 ‘‘(ii) so much of the rate of tax speci7 fied in section 4081(a)(2)(A)(iv) as does 

8 not exceed 4.3 cents per gallon. 

9 ‘‘(B) PAYMENT TO ULTIMATE, REG10 ISTERED VENDOR.—With respect to aviation11 grade kerosene, if the ultimate purchaser of 

12 such kerosene waives (at such time and in such 

13 form and manner as the Secretary shall pre14 scribe) the right to payment under paragraph 

15 (1) and assigns such right to the ultimate ven16 dor, then the Secretary shall pay the amount 

17 which would be paid under paragraph (1) to 

18 such ultimate vendor, but only if such ultimate 

19 vendor—

20 ‘‘(i) is registered under section 4101, 

21 and 

22 ‘‘(ii) meets the requirements of sub23 paragraph (A), (B), or (D) of section 

24 6416(a)(1).’’. 
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1 (2) TIME FOR FILING CLAIMS.—Subparagraph 

2 (A) of section 6427(i)(4) is amended—

3 (A) by striking ‘‘subsection (l)(5)’’ both 

4 places it appears and inserting ‘‘paragraph 

5 (4)(B) or (5) of subsection (l)’’, and 

6 (B) by striking ‘‘the preceding sentence’’ 

7 and inserting ‘‘subsection (l)(5)’’. 

8 (3) CONFORMING AMENDMENT.—Subparagraph 

9 (B) of section 6427(l)(2) is amended to read as fol10 lows: 

11 ‘‘(B) in the case of aviation-grade ker12 osene—

13 ‘‘(i) any use which is exempt from the 

14 tax imposed by section 4041(c) other than 

15 by reason of a prior imposition of tax, or 

16 ‘‘(ii) any use in commercial aviation 

17 (within the meaning of section 4083(b)).’’. 

18 (d) REPEAL OF PRIOR TAXATION OF AVIATION

19 FUEL.—

20 (1) IN GENERAL.—Part III of subchapter A of 

21 chapter 32 is amended by striking subpart B and by 

22 redesignating subpart C as subpart B. 

23 (2) CONFORMING AMENDMENTS.—

24 (A) Section 4041(c) is amended to read as 

25 follows: 
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1 ‘‘(c) AVIATION-GRADE KEROSENE.—

2 ‘‘(1) IN GENERAL.—There is hereby imposed a 

3 tax upon aviation-grade kerosene—

4 ‘‘(A) sold by any person to an owner, les5 see, or other operator of an aircraft for use in 

6 such aircraft, or 

7 ‘‘(B) used by any person in an aircraft un8 less there was a taxable sale of such fuel under 

9 subparagraph (A). 

10 ‘‘(2) EXEMPTION FOR PREVIOUSLY TAXED

11 FUEL.—No tax shall be imposed by this subsection 

12 on the sale or use of any aviation-grade kerosene if 

13 tax was imposed on such liquid under section 4081 

14 and the tax thereon was not credited or refunded. 

15 ‘‘(3) RATE OF TAX.—The rate of tax imposed 

16 by this subsection shall be the rate of tax specified 

17 in section 4081(a)(2)(A)(iv) which is in effect at the 

18 time of such sale or use.’’. 

19 (B) Section 4041(d)(2) is amended by 

20 striking ‘‘section 4091’’ and inserting ‘‘section 

21 4081’’. 

22 (C) Section 4041 is amended by striking 

23 subsection (e). 

24 (D) Section 4041 is amended by striking 

25 subsection (i). 
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1 (E) Sections 4101(a), 4103, 4221(a), and 

2 6206 are each amended by striking ‘‘, 4081, or 

3 4091’’ and inserting ‘‘or 4081’’. 

4 (F) Section 6416(b)(2) is amended by 

5 striking ‘‘4091 or’’. 

6 (G) Section 6416(b)(3) is amended by 

7 striking ‘‘or 4091’’ each place it appears. 

8 (H) Section 6416(d) is amended by strik9 ing ‘‘or to the tax imposed by section 4091 in 

10 the case of refunds described in section 

11 4091(d)’’. 

12 (I) Section 6427(j)(1) is amended by strik13 ing ‘‘, 4081, and 4091’’ and inserting ‘‘and 

14 4081’’. 

15 (J)(i) Section 6427(l)(1) is amended to 

16 read as follows: 

17 ‘‘(1) IN GENERAL.—Except as otherwise pro18 vided in this subsection and in subsection (k), if any 

19 diesel fuel or kerosene on which tax has been im20 posed by section 4041 or 4081 is used by any person 

21 in a nontaxable use, the Secretary shall pay (without 

22 interest) to the ultimate purchaser of such fuel an 

23 amount equal to the aggregate amount of tax im24 posed on such fuel under section 4041 or 4081, as 
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1 the case may be, reduced by any payment made to 

2 the ultimate vendor under paragraph (4)(B).’’. 

3 (ii) Paragraph (5)(B) of section 6427(l) is 

4 amended by striking ‘‘Paragraph (1)(A) shall 

5 not apply to kerosene’’ and inserting ‘‘Para6 graph (1) shall not apply to kerosene (other 

7 than aviation-grade kerosene)’’. 

8 (K) Subparagraph (B) of section 

9 6724(d)(1) is amended by striking clause (xv) 

10 and by redesignating the succeeding clauses ac11 cordingly. 

12 (L) Paragraph (2) of section 6724(d) is 

13 amended by striking subparagraph (W) and by 

14 redesignating the succeeding subparagraphs ac15 cordingly. 

16 (M) Paragraph (1) of section 9502(b) is 

17 amended by adding ‘‘and’’ at the end of sub18 paragraph (B) and by striking subparagraphs 

19 (C) and (D) and inserting the following new 

20 subparagraph: 

21 ‘‘(C) section 4081 with respect to aviation 

22 gasoline and aviation-grade kerosene, and’’. 

23 (N) The last sentence of section 9502(b) is 

24 amended to read as follows: 
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1 ‘‘There shall not be taken into account under paragraph 

2 (1) so much of the taxes imposed by section 4081 as are 

3 determined at the rate specified in section 

4 4081(a)(2)(B).’’. 

5 (O) Subsection (b) of section 9508 is 

6 amended by striking paragraph (3) and by re7 designating paragraphs (4) and (5) as para8 graphs (3) and (4), respectively. 

9 (P) Section 9508(c)(2)(A) is amended by 

10 striking ‘‘sections 4081 and 4091’’ and insert11 ing ‘‘section 4081’’. 

12 (Q) The table of subparts for part III of 

13 subchapter A of chapter 32 is amended to read 

14 as follows:

‘‘Subpart A. Motor and aviation fuels. 

‘‘Subpart B. Special provisions applicable to fuels tax.’’.

15 (R) The heading for subpart A of part III 

16 of subchapter A of chapter 32 is amended to 

17 read as follows: 

18 ‘‘Subpart A—Motor and Aviation Fuels’’. 

19 (S) The heading for subpart B of part III 

20 of subchapter A of chapter 32, as redesignated 

21 by paragraph (1), is amended to read as fol22 lows: 
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1 ‘‘Subpart B—Special Provisions Applicable to Fuels 

2 Tax’’. 

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

4 this section shall apply to aviation-grade kerosene re5 moved, entered, or sold after September 30, 2004. 

6 (f) FLOOR STOCKS TAX.—

7 (1) IN GENERAL.—There is hereby imposed on 

8 aviation-grade kerosene held on October 1, 2004, by 

9 any person a tax equal to—

10 (A) the tax which would have been imposed 

11 before such date on such kerosene had the 

12 amendments made by this section been in effect 

13 at all times before such date, reduced by 

14 (B) the tax imposed before such date 

15 under section 4091 of the Internal Revenue 

16 Code of 1986, as in effect on the day before the 

17 date of the enactment of this Act. 

18 (2) LIABILITY FOR TAX AND METHOD OF PAY19 MENT.—

20 (A) LIABILITY FOR TAX.—The person 

21 holding the kerosene on October 1, 2004, to 

22 which the tax imposed by paragraph (1) applies 

23 shall be liable for such tax. 

24 (B) METHOD AND TIME FOR PAYMENT.—

25 The tax imposed by paragraph (1) shall be paid 

26 at such time and in such manner as the Sec-
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1 retary of the Treasury (or the Secretary’s dele2 gate) shall prescribe, including the nonapplica3 tion of such tax on de minimis amounts of ker4 osene. 

5 (3) TRANSFER OF FLOOR STOCK TAX REVE6 NUES TO TRUST FUNDS.—For purposes of deter7 mining the amount transferred to any trust fund, 

8 the tax imposed by this subsection shall be treated 

9 as imposed by section 4081 of the Internal Revenue 

10 Code of 1986—

11 (A) at the Leaking Underground Storage 

12 Tank Trust Fund financing rate under such 

13 section to the extent of 0.1 cents per gallon, 

14 and 

15 (B) at the rate under section 

16 4081(a)(2)(A)(iv) to the extent of the remain17 der. 

18 (4) HELD BY A PERSON.—For purposes of this 

19 section, kerosene shall be considered as held by a 

20 person if title thereto has passed to such person 

21 (whether or not delivery to the person has been 

22 made). 

23 (5) OTHER LAWS APPLICABLE.—All provisions 

24 of law, including penalties, applicable with respect to 

25 the tax imposed by section 4081 of such Code shall, 
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1 insofar as applicable and not inconsistent with the 

2 provisions of this subsection, apply with respect to 

3 the floor stock tax imposed by paragraph (1) to the 

4 same extent as if such tax were imposed by such 

5 section. 

6 SEC. 653. DYE INJECTION EQUIPMENT. 

7 (a) IN GENERAL.—Section 4082(a)(2) (relating to 

8 exemptions for diesel fuel and kerosene) is amended by 

9 inserting ‘‘by mechanical injection’’ after ‘‘indelibly dyed’’. 

10 (b) DYE INJECTOR SECURITY.—Not later than 180 

11 days after the date of the enactment of this Act, the Sec12 retary of the Treasury shall issue regulations regarding 

13 mechanical dye injection systems described in the amend14 ment made by subsection (a), and such regulations shall 

15 include standards for making such systems tamper resist16 ant. 

17 (c) PENALTY FOR TAMPERING WITH OR FAILING TO

18 MAINTAIN SECURITY REQUIREMENTS FOR MECHANICAL

19 DYE INJECTION SYSTEMS.—

20 (1) IN GENERAL.—Part I of subchapter B of 

21 chapter 68 (relating to assessable penalties) is 

22 amended by adding after section 6715 the following 

23 new section: 
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1 ‘‘SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN 

2 SECURITY REQUIREMENTS FOR MECHAN3 ICAL DYE INJECTION SYSTEMS. 

4 ‘‘(a) IMPOSITION OF PENALTY—

5 ‘‘(1) TAMPERING.—If any person tampers with 

6 a mechanical dye injection system used to indelibly 

7 dye fuel for purposes of section 4082, such person 

8 shall pay a penalty in addition to the tax (if any). 

9 ‘‘(2) FAILURE TO MAINTAIN SECURITY RE10 QUIREMENTS.—If any operator of a mechanical dye 

11 injection system used to indelibly dye fuel for pur12 poses of section 4082 fails to maintain the security 

13 standards for such system as established by the Sec14 retary, then such operator shall pay a penalty in ad15 dition to the tax (if any). 

16 ‘‘(b) AMOUNT OF PENALTY.—The amount of the 

17 penalty under subsection (a) shall be—

18 ‘‘(1) for each violation described in paragraph 

19 (1), the greater of—

20 ‘‘(A) $25,000, or 

21 ‘‘(B) $10 for each gallon of fuel involved, 

22 and 

23 ‘‘(2) for each—

24 ‘‘(A) failure to maintain security standards 

25 described in paragraph (2), $1,000, and 
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1 ‘‘(B) failure to correct a violation described 

2 in paragraph (2), $1,000 per day for each day 

3 after which such violation was discovered or 

4 such person should have reasonably known of 

5 such violation. 

6 ‘‘(c) JOINT AND SEVERAL LIABILITY.—

7 ‘‘(1) IN GENERAL.—If a penalty is imposed 

8 under this section on any business entity, each offi9 cer, employee, or agent of such entity or other con10 tracting party who willfully participated in any act 

11 giving rise to such penalty shall be jointly and sever12 ally liable with such entity for such penalty. 

13 ‘‘(2) AFFILIATED GROUPS.—If a business entity 

14 described in paragraph (1) is part of an affiliated 

15 group (as defined in section 1504(a)), the parent 

16 corporation of such entity shall be jointly and sever17 ally liable with such entity for the penalty imposed 

18 under this section.’’. 

19 (2) CLERICAL AMENDMENT.—The table of sec20 tions for part I of subchapter B of chapter 68 is 

21 amended by adding after the item related to section 

22 6715 the following new item:

‘‘Sec. 6715A. Tampering with or failing to maintain security requirements for mechanical dye injection systems.’’.

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

24 subsections (a) and (c) shall take effect on the 180th day 
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1 after the date on which the Secretary issues the regula2 tions described in subsection (b). 

3 SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS. 

4 (a) IN GENERAL.—Section 4083(d)(1)(A) (relating 

5 to administrative authority), as previously amended by 

6 this Act, is amended by striking ‘‘and’’ at the end of clause 

7 (i) and by inserting after clause (ii) the following new 

8 clause: 

9 ‘‘(iii) inspecting any books and 

10 records and any shipping papers pertaining 

11 to such fuel, and’’. 

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

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

14 of this Act. 

15 SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERA16 TORS REQUIRED FOR EXEMPTION OF BULK 

17 TRANSFERS TO REGISTERED TERMINALS OR 

18 REFINERIES. 

19 (a) IN GENERAL.—Section 4081(a)(1)(B) (relating 

20 to exemption for bulk transfers to registered terminals or 

21 refineries) is amended—

22 (1) by inserting ‘‘by pipeline or vessel’’ after 

23 ‘‘transferred in bulk’’, and 

24 (2) by inserting ‘‘, the operator of such pipeline 

25 or vessel,’’ after ‘‘the taxable fuel’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall take effect on October 1, 2004. 

3 (c) PUBLICATION OF REGISTERED PERSONS.—Be4 ginning on July 1, 2004, the Secretary of the Treasury 

5 (or the Secretary’s delegate) shall periodically publish a 

6 current list of persons registered under section 4101 of 

7 the Internal Revenue Code of 1986 who are required to 

8 register under such section. 

9 SEC. 656. DISPLAY OF REGISTRATION. 

10 (a) IN GENERAL.—Subsection (a) of section 4101 

11 (relating to registration) is amended—

12 (1) by striking ‘‘Every’’ and inserting the fol13 lowing: 

14 ‘‘(1) IN GENERAL.—Every’’, and 

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

16 paragraph: 

17 ‘‘(2) DISPLAY OF REGISTRATION.—Every oper18 ator of a vessel required by the Secretary to register 

19 under this section shall display proof of registration 

20 through an electronic identification device prescribed 

21 by the Secretary on each vessel used by such oper22 ator to transport any taxable fuel.’’. 

23 (b) CIVIL PENALTY FOR FAILURE TO DISPLAY REG24 ISTRATION.—
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1 (1) IN GENERAL.—Part I of subchapter B of 

2 chapter 68 (relating to assessable penalties) is 

3 amended by inserting after section 6716 the fol4 lowing new section: 

5 ‘‘SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON 

6 VESSELS. 

7 ‘‘(a) FAILURE TO DISPLAY REGISTRATION.—Every 

8 operator of a vessel who fails to display proof of registra9 tion pursuant to section 4101(a)(2) shall pay a penalty 

10 of $500 for each such failure. With respect to any vessel, 

11 only one penalty shall be imposed by this section during 

12 any calendar month. 

13 ‘‘(b) MULTIPLE VIOLATIONS.—In determining the 

14 penalty under subsection (a) on any person, subsection (a) 

15 shall be applied by increasing the amount in subsection 

16 (a) by the product of such amount and the aggregate num17 ber of penalties (if any) imposed with respect to prior 

18 months by this section on such person (or a related person 

19 or any predecessor of such person or related person). 

20 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

21 shall be imposed under this section with respect to any 

22 failure if it is shown that such failure is due to reasonable 

23 cause.’’. 

24 (2) CLERICAL AMENDMENT.—The table of sec25 tions for part I of subchapter B of chapter 68 is 
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1 amended by inserting after the item relating to sec2 tion 6716 the following new item:

‘‘Sec. 6717. Failure to display tax registration on vessels.’’.

3 (c) EFFECTIVE DATES.—

4 (1) SUBSECTION (a).—The amendments made 

5 by subsection (a) shall take effect on October 1, 

6 2004. 

7 (2) SUBSECTION (b).—The amendments made 

8 by subsection (b) shall apply to penalties imposed 

9 after September 30, 2004. 

10 SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND 

11 FAILURE TO REPORT. 

12 (a) INCREASED PENALTY.—Subsection (a) of section 

13 7272 (relating to penalty for failure to register) is amend14 ed by inserting ‘‘($10,000 in the case of a failure to reg15 ister under section 4101)’’ after ‘‘$50’’. 

16 (b) INCREASED CRIMINAL PENALTY.—Section 7232 

17 (relating to failure to register under section 4101, false 

18 representations of registration status, etc.) is amended by 

19 striking ‘‘$5,000’’ and inserting ‘‘$10,000’’. 

20 (c) ASSESSABLE PENALTY FOR FAILURE TO REG21 ISTER.—

22 (1) IN GENERAL.—Part I of subchapter B of 

23 chapter 68 (relating to assessable penalties) is 

24 amended by inserting after section 6717 the fol25 lowing new section: 
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1 ‘‘SEC. 6718. FAILURE TO REGISTER. 

2 ‘‘(a) FAILURE TO REGISTER.—Every person who is 

3 required to register under section 4101 and fails to do 

4 so shall pay a penalty in addition to the tax (if any). 

5 ‘‘(b) AMOUNT OF PENALTY.—The amount of the 

6 penalty under subsection (a) shall be—

7 ‘‘(1) $10,000 for each initial failure to register, 

8 and 

9 ‘‘(2) $1,000 for each day thereafter such person 

10 fails to register. 

11 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

12 shall be imposed under this section with respect to any 

13 failure if it is shown that such failure is due to reasonable 

14 cause.’’. 

15 (2) CLERICAL AMENDMENT.—The table of sec16 tions for part I of subchapter B of chapter 68 is 

17 amended by inserting after the item relating to sec18 tion 6717 the following new item:

‘‘Sec. 6718. Failure to register.’’.

19 (d) ASSESSABLE PENALTY FOR FAILURE TO RE20 PORT.—

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

22 chapter 68 (relating to assessable penalties) is 

23 amended by adding at the end the following new sec24 tion: 
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1 ‘‘SEC. 6725. FAILURE TO REPORT INFORMATION UNDER 

2 SECTION 4101. 

3 ‘‘(a) IN GENERAL.—In the case of each failure de4 scribed in subsection (b) by any person with respect to 

5 a vessel or facility, such person shall pay a penalty of 

6 $10,000 in addition to the tax (if any). 

7 ‘‘(b) FAILURES SUBJECT TO PENALTY.—For pur8 poses of subsection (a), the failures described in this sub9 section are—

10 ‘‘(1) any failure to make a report under section 

11 4101(d) on or before the date prescribed therefor, 

12 and 

13 ‘‘(2) any failure to include all of the informa14 tion required to be shown on such report or the in15 clusion of incorrect information. 

16 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

17 shall be imposed under this section with respect to any 

18 failure if it is shown that such failure is due to reasonable 

19 cause.’’. 

20 (2) CLERICAL AMENDMENT.—The table of sec21 tions for part II of subchapter B of chapter 68 is 

22 amended by adding at the end the following new 

23 item:

‘‘Sec. 6725. Failure to report information under section 4101.’’.
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1 (e) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to penalties imposed after Sep3 tember 30, 2004. 

4 SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IM5 PORTER NOT REGISTERED. 

6 (a) TAX AT POINT OF ENTRY WHERE IMPORTER

7 NOT REGISTERED.—Subpart B of part III of subchapter 

8 A of chapter 32, as redesignated by section 652(d), is 

9 amended by adding after section 4103 the following new 

10 section: 

11 ‘‘SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IM12 PORTER NOT REGISTERED. 

13 ‘‘(a) IN GENERAL.—The importer of record shall be 

14 jointly and severally liable for the tax imposed by section 

15 4081(a)(1)(A)(iii) if, under regulations prescribed by the 

16 Secretary, any other person that is not a person who is 

17 registered under section 4101 is liable for such tax. 

18 ‘‘(b) COLLECTION FROM CUSTOMS BOND.—If any 

19 tax for which any importer of record is liable under sub20 section (a), or for which any importer of record that is 

21 not a person registered under section 4101 is otherwise 

22 liable, is not paid on or before the last date prescribed 

23 for payment, the Secretary may collect such tax from the 

24 Customs bond posted with respect to the importation of 

25 the taxable fuel to which the tax relates. For purposes of 
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1 determining the jurisdiction of any court of the United 

2 States or any agency of the United States, any action by 

3 the Secretary described in the preceding sentence shall be 

4 treated as an action to collect the tax from a bond de5 scribed in section 4101(b)(1) and not as an action to col6 lect from a bond relating to the importation of merchan7 dise.’’. 

8 (b) CONFORMING AMENDMENT.—The table of sec9 tions for subpart B of part III of subchapter A of chapter 

10 32, as redesignated by section 652(d), is amended by add11 ing after the item related to section 4103 the following 

12 new item:

‘‘Sec. 4104. Collection from Customs bond where importer not 

registered.’’.

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

14 this section shall apply with respect to fuel entered after 

15 September 30, 2004. 

16 SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VE17 HICLES. 

18 (a) PRORATION OF TAX WHERE VEHICLE SOLD.—

19 (1) IN GENERAL.—Subparagraph (A) of section 

20 4481(c)(2) (relating to where vehicle destroyed or 

21 stolen) is amended by striking ‘‘destroyed or stolen’’ 

22 both places it appears and inserting ‘‘sold, de23 stroyed, or stolen’’. 
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1 (2) CONFORMING AMENDMENT.—The heading 

2 for section 4481(c)(2) is amended by striking ‘‘DE3 STROYED OR STOLEN’’ and inserting ‘‘SOLD, DE4 STROYED, OR STOLEN’’. 

5 (b) REPEAL OF INSTALLMENT PAYMENT.—

6 (1) Section 6156 (relating to installment pay7 ment of tax on use of highway motor vehicles) is re8 pealed. 

9 (2) The table of sections for subchapter A of 

10 chapter 62 is amended by striking the item relating 

11 to section 6156. 

12 (c) ELECTRONIC FILING.—Section 4481 is amended 

13 by redesignating subsection (e) as subsection (f) and by 

14 inserting after subsection (d) the following new subsection: 

15 ‘‘(e) ELECTRONIC FILING.—Any taxpayer who files 

16 a return under this section with respect to 25 or more 

17 vehicles for any taxable period shall file such return elec18 tronically.’’. 

19 (d) REPEAL OF REDUCTION IN TAX FOR CERTAIN

20 TRUCKS.—Section 4483 is amended by striking subsection 

21 (f). 

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

23 this section shall apply to taxable periods beginning after 

24 the 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 

10 fuel or kerosene used on a farm for farming 

11 purposes (within the meaning of section 

12 6420(c)), paragraph (1) shall not apply to the 

13 aggregate amount of such diesel fuel or ker14 osene if such amount does not exceed 250 gal15 lons (as determined under subsection 

16 (i)(5)(A)(iii)). 

17 ‘‘(B) PAYMENT TO ULTIMATE VENDOR.—

18 The amount which would (but for subparagraph 

19 (A)) have been paid under paragraph (1) with 

20 respect to any fuel shall be paid to the ultimate 

21 vendor of such fuel, if such vendor—

22 ‘‘(i) is registered under section 4101, 

23 and 

24 ‘‘(ii) meets the requirements of sub25 paragraph (A), (B), or (D) of section 

26 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

5 WITH 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 

17 a 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 

25 in 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 

10 this section shall apply to fuels sold for nontaxable use 

11 after the 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 

15 (relating 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 

20 appropriated 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 

24 to failure to register under section 4101).’’. 

25 (b) CONFORMING AMENDMENTS.—
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1 (1) The heading of subsection (b) of section 

2 9503 is amended by inserting ‘‘AND PENALTIES’’ 

3 after ‘‘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 

8 this section shall apply to penalties assessed after October 

9 1, 2004. 

10 SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTI11 MATE 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 AD16 MINISTER CREDITS AND REFUNDS OF GASOLINE

17 TAX.—

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

19 subsection, if an ultimate vendor purchases any 

20 gasoline on which tax imposed by section 4081 

21 has been paid and sells such gasoline to an ulti22 mate purchaser described in subparagraph (C) 

23 or (D) of subsection (b)(2) (and such gasoline 

24 is for a use described in such subparagraph), 

25 such ultimate vendor shall be treated as the 
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1 person (and the only person) who paid such tax, 

2 but only if such ultimate vendor is registered 

3 under section 4101. For purposes of this sub4 paragraph, if the sale of gasoline is made by 

5 means of a credit card, the person extending 

6 the credit to the ultimate purchaser shall be 

7 deemed to be the ultimate vendor. 

8 ‘‘(B) TIMING OF CLAIMS.—The procedure 

9 and timing of any claim under subparagraph 

10 (A) shall be the same as for claims under sec11 tion 6427(i)(4), except that the rules of section 

12 6427(i)(3)(B) regarding electronic claims shall 

13 not apply unless the ultimate vendor has cer14 tified to the Secretary for the most recent quar15 ter of the taxable year that all ultimate pur16 chasers of the vendor covered by such claim are 

17 certified and entitled to a refund under sub18 paragraph (C) or (D) of subsection (b)(2).’’. 

19 (b) CREDIT CARD PURCHASES OF DIESEL FUEL OR

20 KEROSENE BY STATE AND LOCAL GOVERNMENTS.—Sec21 tion 6427(l)(5)(C) (relating to nontaxable uses of diesel 

22 fuel, kerosene, and aviation fuel) is amended by adding 

23 at the end the following new flush sentence: ‘‘For purposes 

24 of this subparagraph, if the sale of diesel fuel or kerosene 

25 is made by means of a credit card, the person extending 
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1 the credit to the ultimate purchaser shall be deemed to 

2 be the ultimate vendor.’’. 

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

4 this section shall take effect on October 1, 2004. 

5 SEC. 663. TWO-PARTY EXCHANGES. 

6 (a) IN GENERAL.—Subpart B of part III of sub7 chapter A of chapter 32, as amended by this Act, is 

8 amended by adding after section 4104 the following new 

9 section: 

10 ‘‘SEC. 4105. TWO-PARTY EXCHANGES. 

11 ‘‘(a) IN GENERAL.—In a two-party exchange, the de12 livering person shall not be liable for the tax imposed 

13 under section 4081(a)(1)(A)(ii). 

14 ‘‘(b) TWO-PARTY EXCHANGE.—The term ‘two-party 

15 exchange’ means a transaction, other than a sale, in which 

16 taxable fuel is transferred from a delivering person reg17 istered under section 4101 as a taxable fuel registrant fuel 

18 to a receiving person who is so registered where all of the 

19 following occur: 

20 ‘‘(1) The transaction includes a transfer from 

21 the delivering person, who holds the inventory posi22 tion for taxable fuel in the terminal as reflected in 

23 the records of the terminal operator. 
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1 ‘‘(2) The exchange transaction occurs before or 

2 contemporaneous with completion of removal across 

3 the rack from the terminal by the receiving person. 

4 ‘‘(3) The terminal operator in its books and 

5 records treats the receiving person as the person 

6 that removes the taxable fuel across the terminal 

7 rack for purposes of reporting the transaction to the 

8 Secretary. 

9 ‘‘(4) The transaction is the subject of a written 

10 contract.’’. 

11 (b) CONFORMING AMENDMENT.—The table of sec12 tions for subpart B of part III of subchapter A of chapter 

13 32, as amended by this Act, is amended by adding after 

14 the item relating to section 4104 the following new item:

‘‘Sec. 4105. Two-party exchanges.’’.

15 (c) EFFECTIVE DATE.—The amendment made by 

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

17 of this Act. 

18 SEC. 664. SIMPLIFICATION OF TAX ON TIRES. 

19 (a) IN GENERAL.—Subsection (a) of section 4071 is 

20 amended to read as follows: 

21 ‘‘(a) IMPOSITION AND RATE OF TAX.—There is here22 by imposed on taxable tires sold by the manufacturer, pro23 ducer, or importer thereof a tax at the rate of 9.4 cents 

24 (4.7 cents in the case of a biasply tire) for each 10 pounds 
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1 so much of the maximum rated load capacity thereof as 

2 exceeds 3,500 pounds.’’

3 (b) TAXABLE TIRE.—Section 4072 is amended by re4 designating subsections (a) and (b) as subsections (b) and 

5 (c), respectively, and by inserting before subsection (b) (as 

6 so redesignated) the following new subsection: 

7 ‘‘(a) TAXABLE TIRE.—For purposes of this chapter, 

8 the term ‘taxable tire’ means any tire of the type used 

9 on highway vehicles if wholly or in part made of rubber 

10 and if marked pursuant to Federal regulations for high11 way use.’’

12 (c) EXEMPTION FOR TIRES SOLD TO DEPARTMENT

13 OF DEFENSE.—Section 4073 is amended to read as fol14 lows: 

15 ‘‘SEC. 4073. EXEMPTIONS. 

16 ‘‘The tax imposed by section 4071 shall not apply to 

17 tires sold for the exclusive use of the Department of De18 fense or the Coast Guard.’’ 

19 (d) CONFORMING AMENDMENTS.—

20 (1) Section 4071 is amended by striking sub21 section (c) and by moving subsection (e) after sub22 section (b) and redesignating subsection (e) as sub23 section (c). 
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1 (2) The item relating to section 4073 in the 

2 table of sections for part II of subchapter A of chap3 ter 32 is amended to read as follows:

‘‘Sec. 4073. Exemptions.’’

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

5 this section shall apply to sales in calendar years begin6 ning more than 30 days after the date of the enactment 

7 of this Act. 

8 Subtitle D—Nonqualified Deferred 

9 Compensation Plans 

10 SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COM11 PENSATION PLANS. 

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

13 D of chapter 1 is amended by adding at the end the fol14 lowing new section: 

15 ‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 

16 COMPENSATION UNDER NONQUALIFIED DE17 FERRED COMPENSATION PLANS. 

18 ‘‘(a) RULES RELATING TO CONSTRUCTIVE RE19 CEIPT.—

20 ‘‘(1) IN GENERAL.—

21 ‘‘(A) GROSS INCOME INCLUSION.—In the 

22 case of a nonqualified deferred compensation 

23 plan, all compensation deferred under the plan 

24 for all taxable years (to the extent not subject 

25 to a substantial risk of forfeiture and not pre-
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1 viously included in gross income) shall be in2 cludible in gross income for the taxable year 

3 unless at all times during the taxable year the 

4 plan meets the requirements of paragraphs (2), 

5 (3), and (4) and is operated in accordance with 

6 such requirements. 

7 ‘‘(B) INTEREST ON TAX LIABILITY PAY8 ABLE WITH RESPECT TO PREVIOUSLY DE9 FERRED COMPENSATION.—

10 ‘‘(i) IN GENERAL.—If compensation is 

11 required to be included in gross income 

12 under subparagraph (A) for a taxable year, 

13 the tax imposed by this chapter for such 

14 taxable year shall be increased by the 

15 amount of interest determined under 

16 clause (ii). 

17 ‘‘(ii) INTEREST.—For purposes of 

18 clause (i), the interest determined under 

19 this clause for any taxable year is the 

20 amount of interest at the underpayment 

21 rate plus 1 percentage point on the under22 payments that would have occurred had 

23 the deferred compensation been includible 

24 in gross income for the taxable year in 

25 which first deferred or, if later, the first 
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1 taxable year in which such deferred com2 pensation is not subject to a substantial 

3 risk of forfeiture. 

4 ‘‘(2) DISTRIBUTIONS.—

5 ‘‘(A) IN GENERAL.—The requirements of 

6 this paragraph are met if the plan provides that 

7 compensation deferred under the plan may not 

8 be distributed earlier than—

9 ‘‘(i) separation from service as deter10 mined by the Secretary (except as provided 

11 in subparagraph (B)(i)), 

12 ‘‘(ii) the date the participant becomes 

13 disabled (within the meaning of subpara14 graph (C)), 

15 ‘‘(iii) death, 

16 ‘‘(iv) a specified time (or pursuant to 

17 a fixed schedule) specified under the plan 

18 at the date of the deferral of such com19 pensation, 

20 ‘‘(v) to the extent provided by the 

21 Secretary, a change in the ownership or ef22 fective control of the corporation, or in the 

23 ownership of a substantial portion of the 

24 assets of the corporation, or 
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1 ‘‘(vi) the occurrence of an unforesee2 able emergency. 

3 ‘‘(B) SPECIAL RULES.—

4 ‘‘(i) SPECIFIED EMPLOYEES.—In the 

5 case of specified employees, the require6 ment of subparagraph (A)(i) is met only if 

7 distributions may not be made earlier than 

8 6 months after the date of separation from 

9 service. For purposes of the preceding sen10 tence, a specified employee is a key em11 ployee (as defined in section 416(i)) of a 

12 corporation the stock in which is publicly 

13 traded on an established securities market 

14 or otherwise. 

15 ‘‘(ii) UNFORESEEABLE EMER16 GENCY.—For purposes of subparagraph 

17 (A)(vi)—

18 ‘‘(I) IN GENERAL.—The term 

19 ‘unforeseeable emergency’ means a se20 vere financial hardship to the partici21 pant resulting from a sudden and un22 expected illness or accident of the par23 ticipant, the participant’s spouse, or a 

24 dependent (as defined in section 

25 152(a)) of the participant, loss of the 
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1 participant’s property due to casualty, 

2 or other similar extraordinary and un3 foreseeable circumstances arising as a 

4 result of events beyond the control of 

5 the participant. 

6 ‘‘(II) LIMITATION ON DISTRIBU7 TIONS.—The requirement of subpara8 graph (A)(vi) is met only if, as deter9 mined under regulations of the Sec10 retary, the amounts distributed with 

11 respect to an emergency do not exceed 

12 the amounts necessary to satisfy such 

13 emergency plus amounts necessary to 

14 pay taxes reasonably anticipated as a 

15 result of the distribution, after taking 

16 into account the extent to which such 

17 hardship is or may be relieved 

18 through reimbursement or compensa19 tion by insurance or otherwise or by 

20 liquidation of the participant’s assets 

21 (to the extent the liquidation of such 

22 assets would not itself cause severe fi23 nancial hardship). 
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1 ‘‘(C) DISABLED.—For purposes of sub2 paragraph (A)(ii), a participant shall be consid3 ered disabled if the participant—

4 ‘‘(i) is unable to engage in any sub5 stantial gainful activity by reason of any 

6 medically determinable physical or mental 

7 impairment which can be expected to result 

8 in death or can be expected to last for a 

9 continuous period of not less than 12 

10 months, or 

11 ‘‘(ii) is, by reason of any medically de12 terminable physical or mental impairment 

13 which can be expected to result in death or 

14 can be expected to last for a continuous 

15 period of not less than 12 months, receiv16 ing income replacement benefits for a pe17 riod of not less than 3 months under an 

18 accident and health plan covering employ19 ees of the participant’s employer. 

20 ‘‘(3) ACCELERATION OF BENEFITS.—The re21 quirements of this paragraph are met if the plan 

22 does not permit the acceleration of the time or 

23 schedule of any payment under the plan, except as 

24 provided in regulations by the Secretary. 

25 ‘‘(4) ELECTIONS.—
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1 ‘‘(A) IN GENERAL.—The requirements of 

2 this paragraph are met if the requirements of 

3 subparagraphs (B) and (C) are met. 

4 ‘‘(B) INITIAL DEFERRAL DECISION.—The 

5 requirements of this subparagraph are met if 

6 the plan provides that compensation for services 

7 performed during a taxable year may be de8 ferred at the participant’s election only if the 

9 election to defer such compensation is made not 

10 later than the close of the preceding taxable 

11 year or at such other time as provided in regu12 lations. In the case of the first year in which a 

13 participant becomes eligible to participate in the 

14 plan, such election may be made with respect to 

15 services to be performed subsequent to the elec16 tion within 30 days after the date the partici17 pant becomes eligible to participate in such 

18 plan. 

19 ‘‘(C) CHANGES IN TIME AND FORM OF DIS20 TRIBUTION.—The requirements of this subpara21 graph are met if, in the case of a plan which 

22 permits under a subsequent election a delay in 

23 a payment or a change in the form of pay24 ment—
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1 ‘‘(i) the plan requires that such elec2 tion may not take effect until at least 12 

3 months after the date on which the elec4 tion is made, 

5 ‘‘(ii) in the case an election related to 

6 a payment not described in clause (ii), (iii), 

7 or (vi) of paragraph (2)(A), the plan re8 quires that the first payment with respect 

9 to which such election is made be deferred 

10 for a period of not less than 5 years from 

11 the date such payment would otherwise 

12 have been made, and 

13 ‘‘(iii) the plan requires that any elec14 tion related to a payment described in 

15 paragraph (2)(A)(iv) may not be made less 

16 than 12 months prior to the date of the 

17 first scheduled payment under such para18 graph. 

19 ‘‘(b) RULES RELATING TO FUNDING.—

20 ‘‘(1) OFFSHORE PROPERTY IN A TRUST.—In 

21 the case of assets set aside (directly or indirectly) in 

22 a trust (or other arrangement determined by the 

23 Secretary) for purposes of paying deferred com24 pensation under a nonqualified deferred compensa25 tion plan, for purposes of section 83 such assets 
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1 shall be treated as property transferred in connec2 tion with the performance of services whether or not 

3 such assets are available to satisfy claims of general 

4 creditors—

5 ‘‘(A) at the time set aside if such assets 

6 are located outside of the United States, or 

7 ‘‘(B) at the time transferred if such assets 

8 are subsequently transferred outside of the 

9 United States. 

10 ‘‘(2) EMPLOYER’S FINANCIAL HEALTH.—In the 

11 case of compensation deferred under a nonqualified 

12 deferred compensation plan, there is a transfer of 

13 property within the meaning of section 83 with re14 spect to such compensation as of the earlier of—

15 ‘‘(A) the date on which the plan first pro16 vides that assets will become restricted to the 

17 provision of benefits under the plan in connec18 tion with a change in the employer’s financial 

19 health, or 

20 ‘‘(B) the date on which assets are so re21 stricted. 

22 ‘‘(3) INCOME INCLUSION FOR OFFSHORE

23 TRUSTS AND EMPLOYER’S FINANCIAL HEALTH.—For 

24 each taxable year that assets treated as transferred 

25 under this subsection remain set aside in a trust or 
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1 other arrangement subject to paragraph (1) or (2), 

2 any increase in value in, or earnings with respect to, 

3 such assets shall be treated as an additional transfer 

4 of property under this subsection (to the extent not 

5 previously included in income). 

6 ‘‘(4) INTEREST ON TAX LIABILITY PAYABLE

7 WITH RESPECT TO TRANSFERRED PROPERTY.—

8 ‘‘(A) IN GENERAL.—If amounts are re9 quired to be included in gross income by reason 

10 of paragraph (1) or (2) for a taxable year, the 

11 tax imposed by this chapter for such taxable 

12 year shall be increased by the amount of inter13 est determined under subparagraph (B). 

14 ‘‘(B) INTEREST.—The interest determined 

15 under this subparagraph for any taxable year is 

16 the amount of interest at the underpayment 

17 rate plus 1 percentage point on the underpay18 ments that would have occurred had the 

19 amounts so required to be included in gross in20 come by paragraph (1) or (2) been includible in 

21 gross income for the taxable year in which first 

22 deferred or, if later, the first taxable year in 

23 which such deferred compensation is not subject 

24 to a substantial risk of forfeiture. 
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1 ‘‘(c) NO INFERENCE ON EARLIER INCOME INCLU2 SION OR REQUIREMENT OF LATER INCLUSION.—Nothing 

3 in this section shall be construed to prevent the inclusion 

4 of amounts in gross income under any other provision of 

5 this chapter or any other rule of law earlier than the time 

6 provided in this section. Any amount included in gross in7 come under this section shall not be required to be in8 cluded in gross income under any other provision of this 

9 chapter or any other rule of law later than the time pro10 vided in this section. 

11 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—

12 For purposes of this section—

13 ‘‘(1) NONQUALIFIED DEFERRED COMPENSA14 TION PLAN.—The term ‘nonqualified deferred com15 pensation plan’ means any plan that provides for the 

16 deferral of compensation, other than—

17 ‘‘(A) a qualified employer plan, and 

18 ‘‘(B) any bona fide vacation leave, sick 

19 leave, compensatory time, disability pay, or 

20 death benefit plan. 

21 ‘‘(2) QUALIFIED EMPLOYER PLAN.—The term 

22 ‘qualified employer plan’ means—

23 ‘‘(A) any plan, contract, pension, account, 

24 or trust described in subparagraph (A) or (B) 

25 of section 219(g)(5), and 
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1 ‘‘(B) any eligible deferred compensation 

2 plan (within the meaning of section 457(b)) of 

3 an employer described in section 457(e)(1)(A). 

4 ‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.—

5 The term ‘plan’ includes any agreement or arrange6 ment, including an agreement or arrangement that 

7 includes one person. 

8 ‘‘(4) SUBSTANTIAL RISK OF FORFEITURE.—The 

9 rights of a person to compensation are subject to a 

10 substantial risk of forfeiture if such person’s rights 

11 to such compensation are conditioned upon the fu12 ture performance of substantial services by any indi13 vidual. 

14 ‘‘(5) TREATMENT OF EARNINGS.—References to 

15 deferred compensation shall be treated as including 

16 references to income (whether actual or notional) at17 tributable to such compensation or such income. 

18 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

19 such regulations as may be necessary or appropriate to 

20 carry out the purposes of this section, including regula21 tions—

22 ‘‘(1) providing for the determination of 

23 amounts of deferral in the case of a nonqualified de24 ferred compensation plan which is a defined benefit 

25 plan, 
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1 ‘‘(2) relating to changes in the ownership and 

2 control of a corporation or assets of a corporation 

3 for purposes of subsection (a)(2)(A)(v), 

4 ‘‘(3) exempting arrangements from the applica5 tion of subsection (b) if such arrangements will not 

6 result in an improper deferral of United States tax 

7 and will not result in assets being effectively beyond 

8 the reach of creditors, 

9 ‘‘(4) defining financial health for purposes of 

10 subsection (b)(2), and 

11 ‘‘(5) disregarding a substantial risk of for12 feiture in cases where necessary to carry out the 

13 purposes of this section.’’. 

14 (b) W–2 FORMS.—

15 (1) IN GENERAL.—Subsection (a) of section 

16 6051 (relating to receipts for employees) is amended 

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

18 striking the period at the end of paragraph (12) and 

19 inserting ‘‘, and’’, and by inserting after paragraph 

20 (12) the following new paragraph: 

21 ‘‘(13) the total amount of deferrals under a 

22 nonqualified deferred compensation plan (within the 

23 meaning of section 409A(d)).’’. 

24 (2) THRESHOLD.—Subsection (a) of section 

25 6051 is amended by adding at the end the following: 
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1 ‘‘In the case of the amounts required to be shown 

2 by paragraph (13), the Secretary (by regulation) 

3 may establish a minimum amount of deferrals below 

4 which paragraph (13) does not apply and may pro5 vide that paragraph (13) does not apply with respect 

6 to amounts of deferrals which are not reasonably as7 certainable.’’. 

8 (c) CONFORMING AND CLERICAL AMENDMENTS.—

9 (1) Section 414(b) is amended by inserting 

10 ‘‘409A,’’ after ‘‘408(p),’’. 

11 (2) Section 414(c) is amended by inserting 

12 ‘‘409A,’’ after ‘‘408(p),’’. 

13 (3) The table of sections for such subpart A of 

14 part I of subchapter D of chapter 1 is amended by 

15 adding at the end the following new item:

‘‘Sec. 409A. Inclusion in gross income of deferred compensation 

under nonqualified deferred compensation plans.’’.

16 (d) EFFECTIVE DATE.—

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

18 this section shall apply to amounts deferred after 

19 June 3, 2004. 

20 (2) CERTAIN AMOUNTS DEFERRED IN 2004

21 UNDER CERTAIN IRREVOCABLE ELECTIONS AND

22 BINDING ARRANGEMENTS.—The amendments made 

23 by this section shall not apply to amounts deferred 

24 after June 3, 2004, and before January 1, 2005, 
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1 pursuant to an irrevocable election or binding ar2 rangement made before June 4, 2004. 

3 (3) EARNINGS ATTRIBUTABLE TO AMOUNT PRE4 VIOUSLY DEFERRED.—The amendments made by 

5 this section shall apply to earnings on deferred com6 pensation only to the extent that such amendments 

7 apply to such compensation. 

8 (e) GUIDANCE RELATING TO CHANGE OF OWNER9 SHIP OR CONTROL.—Not later than 90 days after the date 

10 of the enactment of this Act, the Secretary of the Treasury 

11 shall issue guidance on what constitutes a change in own12 ership or effective control for purposes of section 409A 

13 of the Internal Revenue Code of 1986, as added by this 

14 section. 

15 (f) GUIDANCE RELATING TO TERMINATION OF CER16 TAIN EXISTING ARRANGEMENTS.—Not later than 90 days 

17 after the date of the enactment of this Act, the Secretary 

18 of the Treasury shall issue guidance providing a limited 

19 period during which an individual participating in a non20 qualified deferred compensation plan adopted before June 

21 4, 2004, may, without violating the requirements of para22 graphs (2), (3), and (4) of section 409A(a)(2) of the Inter23 nal Revenue Code of 1986 (as added by this section), ter24 minate participation or cancel an outstanding deferral 
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1 election with regard to amounts earned after June 3, 

2 2004, if such amounts are includible in income as earned. 

3 Subtitle E—Other Revenue 

4 Provisions 

5 SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS. 

6 (a) CONTRACT REQUIREMENTS.—

7 (1) IN GENERAL.—Subchapter A of chapter 64 

8 (relating to collection) is amended by adding at the 

9 end the following new section: 

10 ‘‘SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS. 

11 ‘‘(a) IN GENERAL.—Nothing in any provision of law 

12 shall be construed to prevent the Secretary from entering 

13 into a qualified tax collection contract. 

14 ‘‘(b) QUALIFIED TAX COLLECTION CONTRACT.—For 

15 purposes of this section, the term ‘qualified tax collection 

16 contract’ means any contract which—

17 ‘‘(1) is for the services of any person (other 

18 than an officer or employee of the Treasury Depart19 ment)—

20 ‘‘(A) to locate and contact any taxpayer 

21 specified by the Secretary, 

22 ‘‘(B) to request full payment from such 

23 taxpayer of an amount of Federal tax specified 

24 by the Secretary and, if such request cannot be 

25 met by the taxpayer, to offer the taxpayer an 
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•HR 4520 IH1S 

1 installment agreement providing for full pay2 ment of such amount during a period not to ex3 ceed 5 years, and 

4 ‘‘(C) to obtain financial information speci5 fied by the Secretary with respect to such tax6 payer, 

7 ‘‘(2) prohibits each person providing such serv8 ices under such contract from committing any act or 

9 omission which employees of the Internal Revenue 

10 Service are prohibited from committing in the per11 formance of similar services, 

12 ‘‘(3) prohibits subcontractors from—

13 ‘‘(A) having contacts with taxpayers, 

14 ‘‘(B) providing quality assurance services, 

15 and 

16 ‘‘(C) composing debt collection notices, and 

17 ‘‘(4) permits subcontractors to perform other 

18 services only with the approval of the Secretary. 

19 ‘‘(c) FEES.—The Secretary may retain and use an 

20 amount not in excess of 25 percent of the amount collected 

21 under any qualified tax collection contract for the costs 

22 of services performed under such contract. The Secretary 

23 shall keep adequate records regarding amounts so retained 

24 and used. The amount credited as paid by any taxpayer 

25 shall be determined without regard to this subsection. 
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1 ‘‘(d) NO FEDERAL LIABILITY.—The United States 

2 shall not be liable for any act or omission of any person 

3 performing services under a qualified tax collection con4 tract. 

5 ‘‘(e) APPLICATION OF FAIR DEBT COLLECTION

6 PRACTICES ACT.—The provisions of the Fair Debt Collec7 tion Practices Act (15 U.S.C. 1692 et seq.) shall apply 

8 to any qualified tax collection contract, except to the ex9 tent superseded by section 6304, section 7602(c), or by 

10 any other provision of this title. 

11 ‘‘(f) CROSS REFERENCES.—

12 ‘‘(1) For damages for certain unauthorized col13 lection actions by persons performing services under 

14 a qualified tax collection contract, see section 

15 7433A. 

16 ‘‘(2) For application of Taxpayer Assistance 

17 Orders to persons performing services under a quali18 fied 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’’. 

22 (B) The table of sections for subchapter A 

23 of chapter 64 is amended by adding at the end 

24 the following new item:

‘‘Sec. 6306. Qualified Tax Collection Contracts.’’.
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1 (b) CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED

2 COLLECTION ACTIONS BY PERSONS PERFORMING SERV3 ICES UNDER QUALIFIED TAX COLLECTION CON4 TRACTS.—

5 (1) In general.—Subchapter B of chapter 76 

6 (relating to proceedings by taxpayers and third par7 ties) is amended by inserting after section 7433 the 

8 following new section: 

9 ‘‘SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHOR10 IZED COLLECTION ACTIONS BY PERSONS 

11 PERFORMING SERVICES UNDER QUALIFIED 

12 TAX COLLECTION CONTRACTS. 

13 ‘‘(a) IN GENERAL.—Subject to the modifications pro14 vided by subsection (b), section 7433 shall apply to the 

15 acts and omissions of any person performing services 

16 under a qualified tax collection contract (as defined in sec17 tion 6306(b)) to the same extent and in the same manner 

18 as if such person were an employee of the Internal Rev19 enue Service. 

20 ‘‘(b) MODIFICATIONS.—For purposes of subsection 

21 (a)—

22 ‘‘(1) Any civil action brought under section 

23 7433 by reason of this section shall be brought 

24 against the person who entered into the qualified tax 
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•HR 4520 IH1S 

1 collection contract with the Secretary and shall not 

2 be brought against the United States. 

3 ‘‘(2) Such person and not the United States 

4 shall be liable for any damages and costs determined 

5 in such civil action. 

6 ‘‘(3) Such civil action shall not be an exclusive 

7 remedy with respect to such person. 

8 ‘‘(4) Subsections (c), (d)(1), and (e) of section 

9 7433 shall not apply.’’. 

10 (2) CLERICAL AMENDMENT.—The table of sec11 tions for subchapter B of chapter 76 is amended by 

12 inserting after the item relating to section 7433 the 

13 following new item:

‘‘Sec. 7433A. Civil damages for certain unauthorized collection actions by persons performing services under a qualified tax collection contract.’’.

14 (c) APPLICATION OF TAXPAYER ASSISTANCE OR15 DERS TO PERSONS PERFORMING SERVICES UNDER A

16 QUALIFIED TAX COLLECTION CONTRACT.—Section 7811 

17 (relating to taxpayer assistance orders) is amended by 

18 adding at the end the following new subsection: 

19 ‘‘(g) APPLICATION TO PERSONS PERFORMING SERV20 ICES UNDER A QUALIFIED TAX COLLECTION CON21 TRACT.—Any order issued or action taken by the National 

22 Taxpayer Advocate pursuant to this section shall apply to 

23 persons performing services under a qualified tax collec24 tion contract (as defined in section 6306(b)) to the same 
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•HR 4520 IH1S 

1 extent and in the same manner as such order or action 

2 applies to the Secretary.’’. 

3 (d) INELIGIBILITY OF INDIVIDUALS WHO COMMIT

4 MISCONDUCT TO PERFORM UNDER CONTRACT.—Section 

5 1203 of the Internal Revenue Service Restructuring Act 

6 of 1998 (relating to termination of employment for mis7 conduct) is amended by adding at the end the following 

8 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 

14 is 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 connec17 tion with the performance of such services.’’. 

18 (e) EFFECTIVE DATE.—The amendments made to 

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

20 of this 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

13 CONTRIBUTION.—Section 170 is amended by redesig14 nating subsection (m) as subsection (n) and by inserting 

15 after subsection (l) the following new subsection: 

16 ‘‘(m) CERTAIN DONEE INCOME FROM INTELLEC17 TUAL PROPERTY TREATED AS AN ADDITIONAL CHARI18 TABLE CONTRIBUTION.—

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 limita25 tions under subsection (b)) by the applicable per-
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1 centage of qualified donee income with respect to 

2 such contribution which is properly allocable to such 

3 year under this subsection. 

4 ‘‘(2) REDUCTION IN ADDITIONAL DEDUCTIONS

5 TO EXTENT OF INITIAL DEDUCTION.—With respect 

6 to any qualified intellectual property contribution, 

7 the deduction allowed under subsection (a) shall be 

8 increased under paragraph (1) only to the extent 

9 that the aggregate amount of such increases with re10 spect to such contribution exceed the amount al11 lowed as a deduction under subsection (a) with re12 spect to such contribution determined without re13 gard to this subsection. 

14 ‘‘(3) QUALIFIED DONEE INCOME.—For pur15 poses of this subsection, the term ‘qualified donee 

16 income’ means any net income received by or ac17 crued to the donee which is properly allocable to the 

18 qualified intellectual property. 

19 ‘‘(4) ALLOCATION OF QUALIFIED DONEE IN20 COME TO TAXABLE YEARS OF DONOR.—For pur21 poses of this subsection, qualified donee income shall 

22 be treated as properly allocable to a taxable year of 

23 the donor if such income is received by or accrued 

24 to the donee for the taxable year of the donee which 

25 ends within or with such taxable year of the donor. 
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1 ‘‘(5) 10-YEAR LIMITATION.—Income shall not 

2 be treated as properly allocable to qualified intellec3 tual property for purposes of this subsection if such 

4 income is received by or accrued to the donee after 

5 the 10-year period beginning on the date of the con6 tribution 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 expira12 tion 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 fol16 lowing table which corresponds to a taxable year of 

17 the donor ending on or after the date of the quali18 fied intellectual 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

2 CONTRIBUTION.—For purposes of this subsection, 

3 the term ‘qualified intellectual property contribution’ 

4 means any charitable contribution of qualified intel5 lectual 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 contribu11 tion that the donor intends to treat such con12 tribution as a qualified intellectual property 

13 contribution for purposes of this subsection and 

14 section 6050L. 

15 ‘‘(9) QUALIFIED INTELLECTUAL PROPERTY.—

16 For purposes of this subsection, the term ‘qualified 

17 intellectual property’ means property described in 

18 subsection (e)(1)(B)(iii) (other than property con19 tributed to or for the use of an organization de20 scribed in subsection (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 pur-
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•HR 4520 IH1S 

1 poses of subsection (b) as a deduction which is 

2 attributable to a charitable contribution to the 

3 donee 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 

7 amount 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 

12 apply with respect to any qualified intellectual 

13 property contribution for any taxable year of 

14 the donor after the 12th taxable year of the 

15 donor which ends on or after the date of such 

16 contribution. 

17 ‘‘(D) REGULATIONS.—The Secretary may 

18 issue regulations or other guidance to carry out 

19 the purposes of this subsection, including regu20 lations 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 
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•HR 4520 IH1S 

1 of the donee which is properly allocable to 

2 qualified intellectual property in the case 

3 of a donee who uses such property to fur4 ther a purpose or function constituting the 

5 basis of the donee’s exemption under sec6 tion 501 (or, in the case of a governmental 

7 unit, any purpose described in section 

8 170(c)) and does not possess a right to re9 ceive any payment from a third party with 

10 respect to such property.’’. 

11 (c) REPORTING REQUIREMENTS.—

12 (1) IN GENERAL.—Section 6050L (relating to 

13 returns relating to certain dispositions of donated 

14 property) 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 other20 wise disposes of such property within 2 years after 

21 its receipt, the donee shall make a return (in accord22 ance with forms and regulations prescribed by the 

23 Secretary) 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 PROP9 ERTY.—The term ‘charitable deduction prop10 erty’ means any property (other than publicly 

11 traded securities) contributed in a contribution 

12 for which a deduction was claimed under sec13 tion 170 if the claimed value of such property 

14 (plus the claimed value of all similar items of 

15 property donated by the donor to 1 or more 

16 donees) exceeds $5,000. 

17 ‘‘(B) PUBLICLY TRADED SECURITIES.—

18 The term ‘publicly traded securities’ means se19 curities for which (as of the date of the con20 tribution) market quotations are readily avail21 able on an established securities market. 

22 ‘‘(b) QUALIFIED INTELLECTUAL PROPERTY CON23 TRIBUTIONS.—

24 ‘‘(1) IN GENERAL.—Each donee with respect to 

25 a qualified intellectual property contribution shall 
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•HR 4520 IH1S 

1 make a return (at such time and in such form and 

2 manner as the Secretary may by regulations pre3 scribe) with respect to each specified taxable year of 

4 the donee showing—

5 ‘‘(A) the name, address, and TIN of the 

6 donor, 

7 ‘‘(B) a description of the qualified intellec8 tual property contributed, 

9 ‘‘(C) the date of the contribution, and 

10 ‘‘(D) the amount of net income of the 

11 donee for the taxable year which is properly al12 locable to the qualified intellectual property (de13 termined without regard to paragraph (10)(B) 

14 of section 170(m) and with the modifications 

15 described in paragraphs (5) and (6) of such 

16 section). 

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

19 ‘‘(A) IN GENERAL.—Terms used in this 

20 subsection which are also used in section 

21 170(m) have the respective meanings given 

22 such terms in such section. 

23 ‘‘(B) SPECIFIED TAXABLE YEAR.—The 

24 term ‘specified taxable year’ means, with re25 spect to any qualified intellectual property con-
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•HR 4520 IH1S 

1 tribution, any taxable year of the donee any 

2 portion of which is part of the 10-year period 

3 beginning on the date of such contribution. 

4 ‘‘(c) STATEMENT TO BE FURNISHED TO DONORS.—

5 Every person making a return under subsection (a) or (b) 

6 shall furnish a copy of such return to the donor at such 

7 time and in such manner as the Secretary may by regula8 tions prescribe.’’. 

9 (d) COORDINATION WITH APPRAISAL REQUIRE10 MENTS.—Subclause (I) of section 170(f)(11)(A)(ii), as 

11 added by section 683, is amended by inserting ‘‘subsection 

12 (e)(1)(B)(iii) or’’ before ‘‘section 1221(a)(1)’’. 

13 (e) ANTI-ABUSE RULES.—The Secretary of the 

14 Treasury may prescribe such regulations or other guid15 ance as may be necessary or appropriate to prevent the 

16 avoidance of the purposes of section 170(e)(1)(B)(iii) of 

17 the Internal Revenue Code of 1986 (as added by sub18 section (a)), including preventing—

19 (1) the circumvention of the reduction of the 

20 charitable deduction by embedding or bundling the 

21 patent or similar property as part of a charitable 

22 contribution of property that includes the patent or 

23 similar property, 

24 (2) the manipulation of the basis of the prop25 erty to increase the amount of the charitable deduc-
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1 tion through the use of related persons, pass-thru 

2 entities, or other intermediaries, or through the use 

3 of any provision of law or regulation (including the 

4 consolidated return regulations), and 

5 (3) a donor from changing the form of the pat6 ent or similar property to property of a form for 

7 which different deduction rules would apply. 

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

9 this section shall apply to contributions made after June 

10 3, 2004. 

11 SEC. 683. INCREASED REPORTING FOR NONCASH CHARI12 TABLE CONTRIBUTIONS. 

13 (a) IN GENERAL.—Subsection (f) of section 170 (re14 lating to disallowance of deduction in certain cases and 

15 special rules) is amended by adding after paragraph (10) 

16 the following new paragraph: 

17 ‘‘(11) QUALIFIED APPRAISAL AND OTHER DOC18 UMENTATION FOR CERTAIN CONTRIBUTIONS.—

19 ‘‘(A) IN GENERAL.—

20 ‘‘(i) DENIAL OF DEDUCTION.—In the 

21 case of an individual, partnership, or cor22 poration, no deduction shall be allowed 

23 under subsection (a) for any contribution 

24 of property for which a deduction of more 

25 than $500 is claimed unless such person 
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1 meets the requirements of subparagraphs 

2 (B), (C), and (D), as the case may be, 

3 with respect to such contribution. 

4 ‘‘(ii) EXCEPTIONS.—

5 ‘‘(I) READILY VALUED PROP6 ERTY.—Subparagraphs (C) and (D) 

7 shall not apply to cash, property de8 scribed in section 1221(a)(1), and 

9 publicly traded securities (as defined 

10 in section 6050L(a)(2)(B)). 

11 ‘‘(II) REASONABLE CAUSE.—

12 Clause (i) shall not apply if it is 

13 shown that the failure to meet such 

14 requirements is due to reasonable 

15 cause and not to willful neglect. 

16 ‘‘(B) PROPERTY DESCRIPTION FOR CON17 TRIBUTIONS OF MORE THAN $500.—In the case 

18 of contributions of property for which a deduc19 tion of more than $500 is claimed, the require20 ments of this subparagraph are met if the indi21 vidual, partnership or corporation includes with 

22 the return for the taxable year in which the 

23 contribution is made a description of such prop24 erty and such other information as the Sec25 retary may require. The requirements of this 
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1 subparagraph shall not apply to a C corporation 

2 which is not a personal service corporation or a 

3 closely held C corporation. 

4 ‘‘(C) QUALIFIED APPRAISAL FOR CON5 TRIBUTIONS OF MORE THAN $5,000.—In the 

6 case of contributions of property for which a 

7 deduction of more than $5,000 is claimed, the 

8 requirements of this subparagraph are met if 

9 the individual, partnership, or corporation ob10 tains a qualified appraisal of such property and 

11 attaches to the return for the taxable year in 

12 which such contribution is made such informa13 tion regarding such property and such appraisal 

14 as the Secretary may require. 

15 ‘‘(D) SUBSTANTIATION FOR CONTRIBU16 TIONS OF MORE THAN $500,000.—In the case of 

17 contributions of property for which a deduction 

18 of more than $500,000 is claimed, the require19 ments of this subparagraph are met if the indi20 vidual, partnership, or corporation attaches to 

21 the return for the taxable year a qualified ap22 praisal of such property. 

23 ‘‘(E) QUALIFIED APPRAISAL.—For pur24 poses of this paragraph, the term ‘qualified ap25 praisal’ means, with respect to any property, an 
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1 appraisal of such property which is treated for 

2 purposes of this paragraph as a qualified ap3 praisal under regulations or other guidance pre4 scribed by the Secretary. 

5 ‘‘(F) AGGREGATION OF SIMILAR ITEMS OF

6 PROPERTY.—For purposes of determining 

7 thresholds under this paragraph, property and 

8 all similar items of property donated to 1 or 

9 more donees shall be treated as 1 property. 

10 ‘‘(G) SPECIAL RULE FOR PASS-THRU ENTI11 TIES.—In the case of a partnership or S cor12 poration, this paragraph shall be applied at the 

13 entity level, except that the deduction shall be 

14 denied at the partner or shareholder level. 

15 ‘‘(H) REGULATIONS.—The Secretary may 

16 prescribe such regulations as may be necessary 

17 or appropriate to carry out the purposes of this 

18 paragraph, including regulations that may pro19 vide that some or all of the requirements of this 

20 paragraph do not apply in appropriate cases.’’. 

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

22 this section shall apply to contributions made after June 

23 3, 2004. 
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1 SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND 

2 AIRCRAFT. 

3 (a) IN GENERAL.—Subsection (f) of section 170 (re4 lating to disallowance of deduction in certain cases and 

5 special rules) is amended by adding after paragraph (11) 

6 the following new paragraph: 

7 ‘‘(12) CONTRIBUTIONS OF MOTOR VEHICLES, 

8 BOATS, AND AIRCRAFT.—

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

10 regulations or other guidance, in the case of a 

11 contribution of a specified vehicle to which 

12 paragraph (8) applies, no deduction shall be al13 lowed under subsection (a) for such contribu14 tion unless the taxpayer obtains a qualified ap15 praisal of the specified vehicle on or before the 

16 date of such contribution. 

17 ‘‘(B) EXCEPTION FOR INVENTORY PROP18 ERTY.—Subparagraph (A) shall not apply to 

19 property which is described in section 

20 1221(a)(1). 

21 ‘‘(C) SPECIFIED VEHICLE.—For purposes 

22 of this paragraph, the term ‘specified vehicle’ 

23 means any—

24 ‘‘(i) motor vehicle manufactured pri25 marily for use on public streets, roads, and 

26 highways, 
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1 ‘‘(ii) boat, or 

2 ‘‘(iii) aircraft. 

3 ‘‘(D) QUALIFIED APPRAISAL.—For pur4 poses of this paragraph, the term ‘qualified ap5 praisal’ means any appraisal which is treated 

6 for purposes of this paragraph as a qualified 

7 appraisal under regulations or other guidance 

8 prescribed by the Secretary. 

9 ‘‘(E) REGULATIONS OR OTHER GUID10 ANCE.—The Secretary shall prescribe such reg11 ulations or other guidance as may be necessary 

12 to carry out the purposes of this paragraph.’’. 

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

14 subsection (a) shall apply to contributions made after 

15 June 3, 2004. 

16 SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES 

17 TO SPORTS FRANCHISES. 

18 (a) IN GENERAL.—Section 197(e) (relating to excep19 tions to definition of section 197 intangible) is amended 

20 by striking paragraph (6) and by redesignating para21 graphs (7) and (8) as paragraphs (6) and (7), respectively. 

22 (b) CONFORMING AMENDMENTS.—

23 (1)(A) Section 1056 (relating to basis limitation 

24 for player contracts transferred in connection with 

25 the sale of a franchise) is repealed. 
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1 (B) The table of sections for part IV of sub2 chapter O of chapter 1 is amended by striking the 

3 item relating to section 1056. 

4 (2) Section 1245(a) (relating to gain from dis5 position of certain depreciable property) is amended 

6 by striking paragraph (4). 

7 (3) Section 1253 (relating to transfers of fran8 chises, trademarks, and trade names) is amended by 

9 striking subsection (e). 

10 (c) EFFECTIVE DATES.—

11 (1) IN GENERAL.—Except as provided in para12 graph (2), the amendments made by this section 

13 shall apply to property acquired after the date of the 

14 enactment of this Act. 

15 (2) SECTION 1245.—The amendment made by 

16 subsection (b)(2) shall apply to franchises acquired 

17 after the date of the enactment of this Act. 

18 SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAY19 MENTS TO FEDERAL VENDERS. 

20 (a) IN GENERAL.—Section 6331(h) (relating to con21 tinuing levy on certain payments) is amended by adding 

22 at the end the following new paragraph: 

23 ‘‘(3) INCREASE IN LEVY FOR CERTAIN PAY24 MENTS.—Paragraph (1) shall be applied by sub25 stituting ‘100 percent’ for ‘15 percent’ in the case 
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1 of any specified payment due to a vendor of goods 

2 or services sold or leased to the Federal Govern3 ment.’’. 

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

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

6 of this Act. 

7 SEC. 687. MODIFICATION OF STRADDLE RULES. 

8 (a) RULES RELATING TO IDENTIFIED STRADDLES.—

9 (1) IN GENERAL.—Subparagraph (A) of section 

10 1092(a)(2) (relating to special rule for identified 

11 straddles) is amended to read as follows: 

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

13 straddle which is an identified straddle—

14 ‘‘(i) paragraph (1) shall not apply 

15 with respect to identified positions com16 prising the identified straddle, 

17 ‘‘(ii) if there is any loss with respect 

18 to any identified position of the identified 

19 straddle, the basis of each of the identified 

20 offsetting positions in the identified strad21 dle shall be increased by an amount which 

22 bears the same ratio to the loss as the un23 recognized gain with respect to such offset24 ting position bears to the aggregate unrec-
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1 ognized gain with respect to all such off2 setting positions, and 

3 ‘‘(iii) any loss described in clause (ii) 

4 shall not otherwise be taken into account 

5 for purposes of this title.’’. 

6 (2) IDENTIFIED STRADDLE.—Section 

7 1092(a)(2)(B) (defining identified straddle) is 

8 amended—

9 (A) by striking clause (ii) and inserting the 

10 following: 

11 ‘‘(ii) to the extent provided by regula12 tions, the value of each position of which 

13 (in the hands of the taxpayer immediately 

14 before the creation of the straddle) is not 

15 less than the basis of such position in the 

16 hands of the taxpayer at the time the 

17 straddle is created, and’’, and 

18 (B) by adding at the end the following new 

19 flush sentence: 

20 ‘‘The Secretary shall prescribe regulations 

21 which specify the proper methods for clearly 

22 identifying a straddle as an identified straddle 

23 (and the positions comprising such straddle), 

24 which specify the rules for the application of 

25 this section for a taxpayer which fails to prop-
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1 erly identify the positions of an identified strad2 dle, and which specify the ordering rules in 

3 cases where a taxpayer disposes of less than an 

4 entire position which is part of an identified 

5 straddle.’’. 

6 (3) UNRECOGNIZED GAIN.—Section 1092(a)(3) 

7 (defining unrecognized gain) is amended by redesig8 nating subparagraph (B) as subparagraph (C) and 

9 by inserting after subparagraph (A) the following 

10 new subparagraph: 

11 ‘‘(B) SPECIAL RULE FOR IDENTIFIED

12 STRADDLES.—For purposes of paragraph 

13 (2)(A)(ii), the unrecognized gain with respect to 

14 any identified offsetting position shall be the ex15 cess of the fair market value of the position at 

16 the time of the determination over the fair mar17 ket value of the position at the time the tax18 payer identified the position as a position in an 

19 identified straddle.’’. 

20 (4) CONFORMING AMENDMENT.—Section 

21 1092(c)(2) is amended by striking subparagraph (B) 

22 and by redesignating subparagraph (C) as subpara23 graph (B). 

24 (b) PHYSICALLY SETTLED POSITIONS.—Section 

25 1092(d) (relating to definitions and special rules) is 
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1 amended by adding at the end the following new para2 graph: 

3 ‘‘(8) SPECIAL RULES FOR PHYSICALLY SET4 TLED POSITIONS.—For purposes of subsection (a), if 

5 a taxpayer settles a position which is part of a strad6 dle by delivering property to which the position re7 lates (and such position, if terminated, would result 

8 in a realization of a loss), then such taxpayer shall 

9 be treated as if such taxpayer—

10 ‘‘(A) terminated the position for its fair 

11 market value immediately before the settlement, 

12 and 

13 ‘‘(B) sold the property so delivered by the 

14 taxpayer at its fair market value.’’. 

15 (c) REPEAL OF STOCK EXCEPTION.—

16 (1) IN GENERAL.—Paragraph (3) of section 

17 1092(d) (relating to definitions and special rules) is 

18 amended to read as follows: 

19 ‘‘(3) SPECIAL RULES FOR STOCK.—For pur20 poses of paragraph (1)—

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

22 property’ includes—

23 ‘‘(i) any stock which is a part of a 

24 straddle at least 1 of the offsetting posi25 tions of which is a position with respect to 
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1 such stock or substantially similar or re2 lated property, or 

3 ‘‘(ii) any stock of a corporation 

4 formed or availed of to take positions in 

5 personal property which offset positions 

6 taken by any shareholder. 

7 ‘‘(B) RULE FOR APPLICATION.—For pur8 poses of determining whether subsection (e) ap9 plies to any transaction with respect to stock 

10 described in subparagraph (A)(ii), all includible 

11 corporations of an affiliated group (within the 

12 meaning of section 1504(a)) shall be treated as 

13 1 taxpayer.’’. 

14 (2) CONFORMING AMENDMENT.—Section 

15 1258(d)(1) is amended by striking ‘‘; except that the 

16 term ‘personal property’ shall include stock’’. 

17 (d) HOLDING PERIOD FOR DIVIDEND EXCLUSION.—

18 The last sentence of section 246(c) is amended by insert19 ing: ‘‘, other than a qualified covered call option to which 

20 section 1092(f) applies’’ before the period at the end. 

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

22 this section shall apply to positions established on or after 

23 the date of the enactment of this Act. 
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1 SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A 

2 TO LIST OF TAXABLE VACCINES. 

3 (a) IN GENERAL.—Paragraph (1) of section 4132(a) 

4 (defining taxable vaccine) is amended by redesignating 

5 subparagraphs (I), (J), (K), and (L) as subparagraphs 

6 (J), (K), (L), and (M), respectively, and by inserting after 

7 subparagraph (H) the following new subparagraph: 

8 ‘‘(I) Any vaccine against hepatitis A.’’

9 (b) EFFECTIVE DATE.—

10 (1) SALES, ETC.—The amendments made by 

11 subsection (a) shall apply to sales and uses on or 

12 after the first day of the first month which begins 

13 more than 4 weeks after the date of the enactment 

14 of this Act. 

15 (2) DELIVERIES.—For purposes of paragraph 

16 (1) and section 4131 of the Internal Revenue Code 

17 of 1986, in the case of sales on or before the effec18 tive date described in such paragraph for which de19 livery is made after such date, the delivery date shall 

20 be considered the sale date. 

21 SEC. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO 

22 LIST OF TAXABLE VACCINES. 

23 (a) IN GENERAL.—Section 4132(a)(1) (defining tax24 able vaccine), as amended by this Act, is amended by add25 ing at the end the following new subparagraph: 
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1 ‘‘(N) Any trivalent vaccine against influ2 enza.’’. 

3 (b) EFFECTIVE DATE.—

4 (1) SALES, ETC.—The amendment made by this 

5 section shall apply to sales and uses on or after the 

6 later of—

7 (A) the first day of the first month which 

8 begins more than 4 weeks after the date of the 

9 enactment of this Act, or 

10 (B) the date on which the Secretary of 

11 Health and Human Services lists any vaccine 

12 against influenza for purposes of compensation 

13 for any vaccine-related injury or death through 

14 the Vaccine Injury Compensation Trust Fund. 

15 (2) DELIVERIES.—For purposes of paragraph 

16 (1) and section 4131 of the Internal Revenue Code 

17 of 1986, in the case of sales on or before the effec18 tive date described in such paragraph for which de19 livery is made after such date, the delivery date shall 

20 be considered the sale date. 

21 SEC. 690. EXTENSION OF IRS USER FEES. 

22 (a) IN GENERAL.—Section 7528(c) (relating to ter23 mination) is amended by striking ‘‘December 31, 2004’’ 

24 and inserting ‘‘September 30, 2014’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to requests after the date of the 

3 enactment of this Act. 

4 SEC. 691. COBRA FEES. 

5 (a) USE OF MERCHANDISE PROCESSING FEE.—Sec6 tion 13031(f) of the Consolidated Omnibus Budget Rec7 onciliation Act of 1985 (19 U.S.C. 58c(f)) is amended—

8 (1) in paragraph (1), by aligning subparagraph 

9 (B) with subparagraph (A); and 

10 (2) in paragraph (2), by striking ‘‘commercial 

11 operations’’ and all that follows through ‘‘proc12 essing.’’ and inserting ‘‘customs revenue functions as 

13 defined in section 415 of the Homeland Security Act 

14 of 2002 (other than functions performed by the Of15 fice of International Affairs referred to in section 

16 415(8) of that Act), and for automation (including 

17 the Automation Commercial Environment computer 

18 system), and for no other purpose. To the extent 

19 that funds in the Customs User Fee Account are in20 sufficient to pay the costs of such customs revenue 

21 functions, customs duties in an amount equal to the 

22 amount of such insufficiency shall be available, to 

23 the extent provided for in appropriations Acts, to 

24 pay the costs of such customs revenue functions in 

25 the amount of such insufficiency, and shall be avail-
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1 able for no other purpose. The provisions of the first 

2 and second sentences of this paragraph specifying 

3 the purposes for which amounts in the Customs 

4 User Fee Account may be made available shall not 

5 be superseded except by a provision of law which 

6 specifically modifies or supersedes such provisions.’’. 

7 (b) REIMBURSEMENT OF APPROPRIATIONS FROM

8 COBRA FEES.—Section 13031(f)(3) of the Consolidated 

9 Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 

10 58c(f)(3)) is amended by adding at the end the following: 

11 ‘‘(E) Nothing in this paragraph shall be construed 

12 to preclude the use of appropriated funds, from sources 

13 other than the fees collected under subsection (a), to pay 

14 the costs set forth in clauses (i), (ii), and (iii) of subpara15 graph (A).’’. 

16 (c) SENSE OF CONGRESS; EFFECTIVE PERIOD FOR

17 COLLECTING FEES; STANDARD FOR SETTING FEES.—

18 (1) SENSE OF CONGRESS.—The Congress finds 

19 that—

20 (A) the fees set forth in paragraphs (1) 

21 through (8) of subsection (a) of section 13031 

22 of the Consolidated Omnibus Budget Reconcili23 ation Act of 1985 have been reasonably related 

24 to the costs of providing customs services in 

25 connection with the activities or items for which 
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1 the fees have been charged under such para2 graphs; and 

3 (B) the fees collected under such para4 graphs have not exceeded, in the aggregate, the 

5 amounts paid for the costs described in sub6 section (f)(3)(A) incurred in providing customs 

7 services in connection with the activities or 

8 items for which the fees were charged under 

9 such paragraphs. 

10 (2) EFFECTIVE PERIOD; STANDARD FOR SET11 TING FEES.—Section 13031(j)(3) of the Consoli12 dated Omnibus Budget Reconciliation Act of 1985 is 

13 amended to read as follows: 

14 ‘‘(3)(A) Fees may not be charged under paragraphs 

15 (9) and (10) of subsection (a) after September 30, 2014. 

16 ‘‘(B)(i) Subject to clause (ii), Fees may not be 

17 charged under paragraphs (1) through (8) of subsection 

18 (a) after September 30, 2014. 

19 ‘‘(ii) In fiscal year 2006 and in each succeeding fiscal 

20 year for which fees under paragraphs (1) through (8) of 

21 subsection (a) are authorized—

22 ‘‘(I) the Secretary of the Treasury shall charge 

23 fees under each such paragraph in amounts that are 

24 reasonably related to the costs of providing customs 

25 services in connection with the activity or item for 
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1 which the fee is charged under such paragraph, ex2 cept that in no case may the fee charged under any 

3 such paragraph exceed by more than 10 percent the 

4 amount otherwise prescribed by such paragraph; 

5 ‘‘(II) the amount of fees collected under such 

6 paragraphs may not exceed, in the aggregate, the 

7 amounts paid in that fiscal year for the costs de8 scribed in subsection (f)(3)(A) incurred in providing 

9 customs services in connection with the activity or 

10 item for which the fees are charged under such 

11 paragraphs; 

12 ‘‘(III) a fee may not be collected under any 

13 such paragraph except to the extent such fee will be 

14 expended to pay the costs described in subsection 

15 (f)(3)(A) incurred in providing customs services in 

16 connection with the activity or item for which the fee 

17 is charged under such paragraph; and 

18 ‘‘(IV) any fee collected under any such para19 graph shall be available for expenditure only to pay 

20 the costs described in subsection (f)(3)(A) incurred 

21 in providing customs services in connection with the 

22 activity or item for which the fee is charged under 

23 such 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 DEPART16 MENT OF HOMELAND SECURITY.—The Secretary of the 

17 Treasury shall conduct a study of all the fees collected 

18 by the Department of Homeland Security, and shall sub19 mit to the Congress, not later than September 30, 2005, 

20 a report containing the recommendations of the Secretary 

21 on—

22 (1) what fees should be eliminated; 

23 (2) what the rate of fees retained should be; 

24 and 
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1 (3) any other recommendations with respect to 

2 the fees that the Secretary considers appropriate.

3 SEC. 692. SAFE HARBOR FOR CHURCHES. 

4 (a) IN GENERAL.—Section 501 is amended by redes5 ignating subsection (q) as subsection (r) and by inserting 

6 after subsection (p) the following new subsection: 

7 ‘‘(q) SAFE HARBOR FOR CHURCHES.—

8 ‘‘(1) STATEMENTS BY RELIGIOUS LEADERS AS

9 PRIVATE CITIZENS.—An organization described in 

10 section 508(c)(1)(A) (relating to churches) shall not 

11 fail to be treated as organized and operated exclu12 sively for a religious purpose, or be treated as having 

13 participated in, or intervened in any political cam14 paign on behalf of (or in opposition to) any can15 didate for public office, for purposes of subsection 

16 (c)(3), or section 170(c)(2) (relating to charitable 

17 contributions), 4955, or 4956 solely by reason of a 

18 statement by a religious leader of such organization 

19 which is clearly identified as a statement made as a 

20 private citizen and not made on behalf of or in rep21 resentation of such organization. A statement shall 

22 not be treated as clearly identified for purposes of 

23 this paragraph if such statement is made in an offi24 cial publication of such organization, at an official 
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1 function of such organization, or if such statement 

2 is paid for in whole or part by such organization. 

3 ‘‘(2) UNINTENTIONAL VIOLATIONS.—An organi4 zation described in section 508(c)(1)(A) (relating to 

5 churches) shall not fail to be treated as organized 

6 and operated exclusively for a religious purpose, or 

7 be treated as having participated in, or intervened in 

8 any political campaign on behalf of (or in opposition 

9 to) any candidate for public office, for purposes of 

10 subsection (c)(3), or section 170(c)(2) (relating to 

11 charitable contributions) unless such organization or 

12 any of its religious leaders so participates or inter13 venes on more than 3 separate occasions during any 

14 calendar year. This paragraph shall not apply with 

15 respect to any such participation or intervention 

16 which constitutes an intentional disregard by such 

17 organization or any of its religious leaders of the 

18 prohibition of such activity under subsection (c)(3) 

19 or section 170(c)(2). 

20 ‘‘(3) CROSS REFERENCE.—

‘‘For tax imposed on churches for impermissible 

activities, see section 4956.’’.

21 (b) IMPOSITION OF TAX ON IMPERMISSIBLE ACTIVI22 TIES.—
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1 (1) IN GENERAL.—Subchapter C of chapter 42 

2 is amended by inserting after section 4955 the fol3 lowing new section: 

4 ‘‘SEC. 4956. TAX ON IMPERMISSIBLE ACTIVITIES BY 

5 CHURCHES. 

6 ‘‘(a) IMPOSITION OF TAX.—There is hereby imposed 

7 on each organization described in section 508(c)(1)(A) 

8 which is an organization exempt from tax under section 

9 501(a) by reason of section 501(q)(2), a tax equal to—

10 ‘‘(1) the highest rate of tax specified by section 

11 11(b), multiplied by 

12 ‘‘(2) the gross income of such organization for 

13 such calendar year. 

14 The tax imposed by this subsection shall be paid by the 

15 organization. 

16 ‘‘(b) REDUCTION FOR LESS THAN 3 VIOLATIONS.—

17 In the case of an organization described in subsection (a) 

18 which committed not more than 2 acts of participation in, 

19 or intervention in a political campaign on behalf of (or 

20 in opposition to) any candidate for public office during 

21 such calendar year, the amount taken into account under 

22 subsection (a)(2) shall be the amount which would have 

23 been taken into account under subsection (a)(2) (but for 

24 this subsection) divided by—
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1 ‘‘(1) 52 in the case of one such act during such 

2 calendar year, or 

3 ‘‘(2) 2 in the case of 2 such acts during such 

4 calendar year. 

5 ‘‘(c) COORDINATION WITH SECTION 4955.—The tax 

6 imposed under this section with respect to any act shall 

7 be reduced by the amount of any tax imposed under sec8 tion 4955 with respect to such act.’’. 

9 (2) CLERICAL AMENDMENTS.—

10 (A) The table of section for subchapter C 

11 of chapter 42 is amended by adding at the end 

12 the following new item:

‘‘Sec. 4956. Tax on impermissible activities by churches.’’. 

13 (B) The heading for subchapter C of chap14 ter 42 is amended by striking ‘‘EXPENDI15 TURES’’ and inserting ‘‘ACTIVITIES’’. 

16 (c) REPORTING.—

17 (1) REQUIREMENT.—Subsection (a) of section 

18 6012 is amended by adding at the end the following 

19 new paragraph: 

20 ‘‘(10) Every organization described in section 

21 508(c)(1)(A) with respect to which tax is imposed 

22 under section 4956.’’. 

23 (2) FORM AND MANNER.—Section 6033 is 

24 amended by redesignating subsection (h) as sub-
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1 section (i) and by inserting after subsection (g) the 

2 following new subsection: 

3 ‘‘(h) RETURNS REQUIRED BY CHURCHES PARTICI4 PATING IN CERTAIN ACTIVITIES.—Any organization on 

5 which tax is imposed under section 4956 shall file a return 

6 at such time, in such manner, and including such informa7 tion as the Secretary may prescribe.’’. 

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

9 this section shall apply to acts occurring after the date 

10 of the enactment of this Act.

11 TITLE VII—MARKET REFORM 

12 FOR TOBACCO GROWERS 

13 SEC. 701. SHORT TITLE. 

14 This title may be cited as the ‘‘Fair and Equitable 

15 Tobacco Reform Act of 2004’’. 

16 SEC. 702. EFFECTIVE DATE. 

17 This title and the amendments made by this title 

18 shall apply beginning with the 2005 marketing year of 

19 each kind of tobacco. 
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1 Subtitle A—Termination of Federal 

2 Tobacco Quota and Price Sup3 port Programs 

4 SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM 

5 AND RELATED PROVISIONS. 

6 (a) MARKETING QUOTAS.—Part I of subtitle B of 

7 title III of the Agricultural Adjustment Act of 1938 (7 

8 U.S.C. 1311 et seq.) is repealed. 

9 (b) PROCESSING.—Section 9(b) of the Agricultural 

10 Adjustment Act (7 U.S.C. 609(b)), reenacted with amend11 ments by the Agricultural Marketing Agreement Act of 

12 1937, is amended—

13 (1) in paragraph (2), by striking ‘‘tobacco,’’; 

14 and 

15 (2) in paragraph (6)(B)(i), by striking ‘‘, or, in 

16 the case of tobacco, is less than the fair exchange 

17 value by not more than 10 per centum,’’. 

18 (c) DECLARATION OF POLICY.—Section 2 of the Ag19 ricultural Adjustment Act of 1938 (7 U.S.C. 1282) is 

20 amended by striking ‘‘tobacco,’’. 

21 (d) DEFINITIONS.—Section 301(b) of the Agricul22 tural Adjustment Act of 1938 (7 U.S.C. 1301(b)) is 

23 amended—

24 (1) in paragraph (3)—

25 (A) by striking subparagraph (C); and 
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1 (B) by redesignating subparagraph (D) as 

2 subparagraph (C); 

3 (2) in paragraph (6)(A), by striking ‘‘tobacco,’’; 

4 (3) in paragraph (10)—

5 (A) by striking subparagraph (B); and 

6 (B) by redesignating subparagraph (C) as 

7 subparagraph (B); 

8 (4) in paragraph (11)(B), by striking ‘‘and to9 bacco’’; 

10 (5) in paragraph (12), by striking ‘‘tobacco,’’; 

11 (6) in paragraph (14)—

12 (A) in subparagraph (A), by striking 

13 ‘‘(A)’’; and 

14 (B) by striking subparagraphs (B), (C), 

15 and (D); 

16 (7) by striking paragraph (15); 

17 (8) in paragraph (16)—

18 (A) by striking subparagraph (B); and 

19 (B) by redesignating subparagraph (C) as 

20 subparagraph (B); 

21 (9) by striking paragraph (17); and 

22 (10) by redesignating paragraph (16) as para23 graph (15). 

24 (e) PARITY PAYMENTS.—Section 303 of the Agricul25 tural Adjustment Act of 1938 (7 U.S.C. 1303) is amended 
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1 in the first sentence by striking ‘‘rice, or tobacco,’’ and 

2 inserting ‘‘or rice,’’. 

3 (f) ADMINISTRATIVE PROVISIONS.—Section 361 of 

4 the Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) 

5 is amended by striking ‘‘tobacco,’’. 

6 (g) ADJUSTMENT OF QUOTAS.—Section 371 of the 

7 Agricultural Adjustment Act of 1938 (7 U.S.C. 1371) is 

8 amended—

9 (1) in the first sentence of subsection (a), by 

10 striking ‘‘rice, or tobacco’’ and inserting ‘‘or rice’’; 

11 and 

12 (2) in the first sentence of subsection (b), by 

13 striking ‘‘rice, or tobacco’’ and inserting ‘‘or rice’’. 

14 (h) REGULATIONS.—Section 375 of the Agricultural 

15 Adjustment Act of 1938 (7 U.S.C. 1375) is amended—

16 (1) in subsection (a), by striking ‘‘peanuts, or 

17 tobacco’’ and inserting ‘‘or peanuts’’; and 

18 (2) by striking subsection (c). 

19 (i) EMINENT DOMAIN.—Section 378 of the Agricul20 tural Adjustment Act of 1938 (7 U.S.C. 1378) is amend21 ed—

22 (1) in the first sentence of subsection (c), by 

23 striking ‘‘cotton, and tobacco’’ and inserting ‘‘and 

24 cotton’’; and 

25 (2) by striking subsections (d), (e), and (f). 
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1 (j) BURLEY TOBACCO FARM RECONSTITUTION.—

2 Section 379 of the Agricultural Adjustment Act of 1938 

3 (7 U.S.C. 1379) is amended—

4 (1) in subsection (a)—

5 (A) by striking ‘‘(a)’’; and 

6 (B) in paragraph (6), by striking ‘‘, but 

7 this clause (6) shall not be applicable in the 

8 case of burley tobacco’’; and 

9 (2) by striking subsections (b) and (c). 

10 (k) ACREAGE-POUNDAGE QUOTAS.—Section 4 of the 

11 Act of April 16, 1955 (Public Law 89–12; 7 U.S.C. 1314c 

12 note), is repealed. 

13 (l) BURLEY TOBACCO ACREAGE ALLOTMENTS.—The 

14 Act of July 12, 1952 (7 U.S.C. 1315), is repealed. 

15 (m) TRANSFER OF ALLOTMENTS.—Section 703 of 

16 the Food and Agriculture Act of 1965 (7 U.S.C. 1316) 

17 is repealed. 

18 (n) ADVANCE RECOURSE LOANS.—Section 

19 13(a)(2)(B) of the Food Security Improvements Act of 

20 1986 (7 U.S.C. 1433c–1(a)(2)(B)) is amended by striking 

21 ‘‘tobacco and’’. 

22 (o) TOBACCO FIELD MEASUREMENT.—Section 1112 

23 of the Omnibus Budget Reconciliation Act of 1987 (Public 

24 Law 100–203) is amended by striking subsection (c). 
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1 SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT 

2 PROGRAM AND RELATED PROVISIONS. 

3 (a) TERMINATION OF TOBACCO PRICE SUPPORT AND

4 NO NET COST PROVISIONS.—Sections 106, 106A, and 

5 106B of the Agricultural Act of 1949 (7 U.S.C. 1445, 

6 1445–1, 1445–2) are repealed. 

7 (b) PARITY PRICE SUPPORT.—Section 101 of the Ag8 ricultural Act of 1949 (7 U.S.C. 1441) is amended—

9 (1) in the first sentence of subsection (a), by 

10 striking ‘‘tobacco (except as otherwise provided here11 in), corn,’’ and inserting ‘‘corn’’; 

12 (2) by striking subsections (c), (g), (h), and (i); 

13 (3) in subsection (d)(3)—

14 (A) by striking ‘‘, except tobacco,’’; and 

15 (B) by striking ‘‘and no price support shall 

16 be made available for any crop of tobacco for 

17 which marketing quotas have been disapproved 

18 by producers;’’; and 

19 (4) by redesignating subsections (d) and (e) as 

20 subsections (c) and (d), respectively. 

21 (c) DEFINITION OF BASIC AGRICULTURAL COM22 MODITY.—Section 408(c) of the Agricultural Act of 1949 

23 (7 U.S.C. 1428(c)) is amended by striking ‘‘tobacco,’’. 

24 (d) POWERS OF COMMODITY CREDIT CORPORA25 TION.—Section 5 of the Commodity Credit Corporation 

26 Charter Act (15 U.S.C. 714c) is amended by inserting 
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1 ‘‘(other than tobacco)’’ after ‘‘agricultural commodities’’ 

2 each place it appears. 

3 SEC. 713. LIABILITY. 

4 The amendments made by this subtitle shall not af5 fect the liability of any person under any provision of law 

6 so amended with respect to any crop of tobacco planted 

7 before the effective date of this Act. 

8 Subtitle B—Transitional Payments 

9 to Tobacco Quota Holders and 

10 Active Producers of Tobacco 

11 SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER 

12 AND QUOTA HOLDER. 

13 In this subtitle: 

14 (1) ACTIVE TOBACCO PRODUCER.—The term 

15 ‘‘active tobacco producer’’ means an owner, oper16 ator, landlord, tenant, or sharecropper who—

17 (A) shared in the risk of producing tobacco 

18 on a farm where tobacco was produced or con19 sidered planted pursuant to a tobacco farm 

20 marketing quota or farm acreage allotment es21 tablished under part I of subtitle B of title III 

22 of the Agricultural Adjustment Act of 1938 (7 

23 U.S.C. 1311 et seq.) for the 2004 marketing 

24 year; and 

25 (B) was actively engaged on that farm. 
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1 (2) CONSIDERED PLANTED.—The term ‘‘con2 sidered planted’’ means tobacco that was planted, 

3 but failed to be produced as a result of a natural 

4 disaster, as determined by the Secretary. 

5 (3) TOBACCO QUOTA HOLDER.—The term ‘‘to6 bacco quota holder’’ means a person that was an 

7 owner of a farm, as of July 1, 2004, for which a 

8 basic tobacco farm marketing quota or farm acreage 

9 allotment for quota tobacco was established for the 

10 2004 tobacco marketing year.

11 (4) SECRETARY.—The term ‘‘Secretary’’ means 

12 the Secretary of Agriculture. 

13 SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS. 

14 (a) PAYMENT REQUIRED.—The Secretary shall make 

15 payments to each eligible tobacco quota holder for the ter16 mination of tobacco marketing quotas and related price 

17 support under subtitle A, which shall constitute full and 

18 fair compensation for any losses relating to such termi19 nation. 

20 (b) ELIGIBILITY.—To be eligible to receive a payment 

21 under this section, a person shall submit to the Secretary 

22 an application containing such information as the Sec23 retary may require to demonstrate to the satisfaction of 

24 the Secretary that the person satisfies the definition of 

25 tobacco quota holder. The application shall be submitted 
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1 within such time, in such form, and in such manner as 

2 the Secretary may require. 

3 (c) INDIVIDUAL BASE QUOTA LEVEL.—

4 (1) IN GENERAL.—The Secretary shall establish 

5 a base quota level applicable to each eligible tobacco 

6 quota holder identified under subsection (b). 

7 (2) POUNDAGE QUOTAS.—Subject to adjust8 ment under subsection (d), for each kind of tobacco 

9 for which the marketing quota is expressed in 

10 pounds, the base quota level for each tobacco quota 

11 holder shall be equal to the basic tobacco marketing 

12 quota under the Agriculture Adjustment Act of 1938 

13 for the marketing year in effect on the date of the 

14 enactment of this Act for quota tobacco on the farm 

15 owned by the tobacco quota holder. 

16 (3) MARKETING QUOTAS OTHER THAN POUND17 AGE QUOTAS.—Subject to adjustment under sub18 section (d), for each kind of tobacco for which there 

19 is marketing quota or allotment on an acreage basis, 

20 the base quota level for each tobacco quota holder 

21 shall be the amount equal to the product obtained 

22 by multiplying—

23 (A) the basic tobacco farm marketing 

24 quota or allotment for the marketing year in ef25 fect on the date of the enactment of this Act, 
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1 as established by the Secretary for quota to2 bacco on the farm owned by the tobacco quota 

3 holder; by 

4 (B) the average county production yield 

5 per acre for the county in which the farm is lo6 cated for the kind of tobacco for that marketing 

7 year. 

8 (d) TREATMENT OF CERTAIN CONTRACTS AND

9 AGREEMENTS.—

10 (1) EFFECT OF PURCHASE CONTRACT.—If 

11 there was an agreement for the purchase of all or 

12 part of a farm described in subsection (c) as of the 

13 date of the enactment of this Act, and the parties 

14 to the sale are unable to agree to the disposition of 

15 eligibility for payments under this section, the Sec16 retary, taking into account any transfer of quota 

17 that has been agreed to, shall provide for the equi18 table division of the payments among the parties by 

19 adjusting the determination of who is the tobacco 

20 quota holder with respect to particular pounds of the 

21 quota. 

22 (2) EFFECT OF AGREEMENT FOR PERMANENT

23 QUOTA TRANSFER.—If the Secretary determines 

24 that there was in existence, as of the day before the 

25 date of the enactment of this Act, an agreement for 
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1 the permanent transfer of quota, but that the trans2 fer was not completed by that date, the Secretary 

3 shall consider the tobacco quota holder to be the 

4 party to the agreement that, as of that date, was the 

5 owner of the farm to which the quota was to be 

6 transferred. 

7 (e) TOTAL PAYMENT AMOUNTS BASED ON 2002 

8 MARKETING YEAR.—

9 (1) CALCULATION OF ANNUAL PAYMENT

10 AMOUNT.—During fiscal years 2005 through 2009, 

11 the Secretary shall make payments to all eligible to12 bacco quota holders identified under subsection (b) 

13 in an annual amount equal to the product obtained 

14 by multiplying, for each kind of tobacco—

15 (A) $1.40 per pound; by 

16 (B) the total national basic marketing 

17 quota established under the Agriculture Adjust18 ment Act of 1938 for the 2002 marketing year 

19 for that kind of tobacco. 

20 (2) MARKETING QUOTAS OTHER THAN POUND21 AGE QUOTAS.—For each kind of tobacco for which 

22 there is a marketing quota or allotment on an acre23 age basis, the Secretary shall convert the tobacco 

24 farm marketing quotas or allotments established 

25 under the Agriculture Adjustment Act of 1938 for 
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1 the 2002 marketing year for that kind of tobacco as 

2 the Secretary considers appropriate. 

3 (f) INDIVIDUAL PAYMENT AMOUNTS.—The annual 

4 payment amount for each eligible tobacco quota holder 

5 with respect to a kind of tobacco under this section shall 

6 bear the same ratio to the amount determined by the Sec7 retary under subsection (e) with respect to that kind of 

8 tobacco as the individual base quota level of that eligible 

9 tobacco quota holder under subsection (c) with respect to 

10 that kind of tobacco bears to the total base quota levels 

11 of all eligible tobacco quota holders with respect to that 

12 kind of tobacco. 

13 (g) DEATH OF TOBACCO QUOTA HOLDER.—If a to14 bacco quota holder who is entitled to payments under this 

15 section dies and is survived by a spouse or one or more 

16 dependents, the right to receive the payments shall trans17 fer to the surviving spouse or, if there is no surviving 

18 spouse, to the estate of the tobacco quota holder. 

19 SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS 

20 OF QUOTA TOBACCO. 

21 (a) TRANSITION PAYMENTS REQUIRED.—The Sec22 retary shall make transition payments under this section 

23 to eligible active producers of quota tobacco. 

24 (b) ELIGIBILITY.—To be eligible to receive a transi25 tion payment under this section, a person shall submit to 
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1 the Secretary an application containing such information 

2 as the Secretary may require to demonstrate to the satis3 faction of the Secretary that the person satisfies the defi4 nition of active producer of quota tobacco. The application 

5 shall be submitted within such time, in such form, and 

6 in such manner as the Secretary may require. 

7 (c) CURRENT PRODUCTION BASE.—The Secretary 

8 shall establish a production base applicable to each eligible 

9 active producer of quota tobacco identified under sub10 section (b). A producer’s production base shall be equal 

11 to the quantity, in pounds, of quota tobacco subject to the 

12 basic marketing quota marketed or considered planted by 

13 the producer under the Agriculture Adjustment Act of 

14 1938 for the marketing year in effect on the date of the 

15 enactment of this Act. 

16 (d) TOTAL PAYMENT AMOUNTS BASED ON 2002 

17 MARKETING YEAR.—

18 (1) CALCULATION OF ANNUAL PAYMENT

19 AMOUNT.—During fiscal years 2005 through 2009, 

20 the Secretary shall make payments to all eligible ac21 tive producers of quota tobacco identified under sub22 section (b) in an annual amount equal to the prod23 uct obtained by multiplying, for each kind of to24 bacco—

25 (A) $0.60 per pound; by 
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1 (B) the total national effective marketing 

2 quota established under the Agriculture Adjust3 ment Act of 1938 for the 2002 marketing year 

4 for that kind of tobacco. 

5 (2) MARKETING QUOTAS OTHER THAN POUND6 AGE QUOTAS.—For each kind of tobacco for which 

7 there is a marketing quota or allotment on an acre8 age basis, the Secretary shall convert the tobacco 

9 farm marketing quotas or allotments established 

10 under the Agriculture Adjustment Act of 1938 for 

11 the 2002 marketing year for that kind of tobacco to 

12 a poundage basis before executing the mathematical 

13 equation specified in paragraph (1). 

14 (e) INDIVIDUAL PAYMENT AMOUNTS.—The annual 

15 payment amount for each eligible active producer of quota 

16 tobacco identified under subsection (b) with respect to a 

17 kind of tobacco under this section shall bear the same 

18 ratio to the amount determined by the Secretary under 

19 subsection (d) with respect to that kind of tobacco as the 

20 individual production base of that eligible active producer 

21 under subsection (c) with respect to that kind of tobacco 

22 bears to the total production bases determined under that 

23 subsection for all eligible active producers of that kind of 

24 tobacco. 
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1 (f) DEATH OF TOBACCO PRODUCER.—If a tobacco 

2 producer who is entitled to payments under this section 

3 dies and is survived by a spouse or one or more depend4 ents, the right to receive the payments shall transfer to 

5 the surviving spouse or, if there is no surviving spouse, 

6 to the estate of the tobacco producer. 

7 SEC. 724. RESOLUTION OF DISPUTES. 

8 Any dispute regarding the eligibility of a person to 

9 receive a payment under this subtitle, or the amount of 

10 the payment, shall be resolved by the county committee 

11 established under section 8 of the Soil Conservation and 

12 Domestic Allotment Act (16 U.S.C. 590h) for the county 

13 or other area in which the farming operation of the person 

14 is located. 

15 SEC. 725. SOURCE OF FUNDS FOR PAYMENTS. 

16 There is hereby appropriated to the Secretary, from 

17 amounts in the general fund of the Treasury, such 

18 amounts as the Secretary needs in order to make the pay19 ments required by sections 722 and 723, except that such 

20 amounts shall not exceed the lesser of—

21 (1) amounts received in the Treasury under 

22 chapter 52 of the Internal Revenue Code of 1986 

23 (relating to tobacco products and cigarette papers 

24 and tubes), or 
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1 (2) $9,600,000,000.

Æ