108TH CONGRESS 

2D SESSION H. R. 4520 

AN ACT 

To amend the Internal Revenue Code of 1986 to 

tive both at home and abroad. nesses and workers more competitive and producmanufacturing, service, and high-technology busiremove impediments in such Code and make our 

108TH CONGRESS 

2D SESSION H. R. 4520 

AN ACT 

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. 

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

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

Sec. 296. Charitable contribution deduction for certain expenses incurred in 

support of Native Alaskan subsistence whaling. 

TITLE III—TAX REFORM AND SIMPLIFICATION FOR UNITED 

STATES BUSINESSES 

Sec. 301. Interest expense allocation rules. 

Sec. 302. Recharacterization of overall domestic loss. 

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

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

corporations. 

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

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

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

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

than in functional currency. 

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

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

foreign corporations. 

Sec. 311. Look-thru treatment of payments between related controlled foreign 

corporations under foreign personal holding company income 

rules. 

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

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

Sec. 314. Determination of foreign personal holding company income with respect to transactions in commodities. 

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

Sec. 316. Modification of exceptions under subpart F for active financing. 

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

Sec. 416. Disclosures relating to terrorist activities. 

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

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

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

Service. 

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

Sec. 421. Combined employment tax reporting project. 

Sec. 422. Clean-fuel vehicles. 

TITLE V—DEDUCTION OF STATE AND LOCAL GENERAL SALES 

TAXES 

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

local income taxes. 

TITLE VI—REVENUE PROVISIONS 

Subtitle A—Provisions to Reduce Tax Avoidance Through Individual and 

Corporate Expatriation 

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

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

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

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

Sec. 605. Reporting of taxable mergers and acquisitions. 

Sec. 606. Studies. 

Subtitle B—Provisions Relating to Tax Shelters 

PART I—TAXPAYER-RELATED PROVISIONS

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

Sec. 612. Accuracy-related penalty for listed transactions, other reportable 

transactions having a significant tax avoidance purpose, etc. 

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

on income other than dividends. 

Sec. 633. Disallowance of certain partnership loss transfers. 

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

in corporate partner. 

Sec. 635. Repeal of special rules for FASITs. 

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

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

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

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

nondisclosed reportable transactions. 

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

asset sales. 

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

in a like-kind exchange within 5 years of sale. 

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

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

tax by individuals. 

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

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

Sec. 646. Affirmation of consolidated return regulation authority. 

PART III—LEASING

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

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

or other tax-exempt entities. 

Sec. 649. Effective date. 

Subtitle C—Reduction of Fuel Tax Evasion 

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

Sec. 652. Taxation of aviation-grade kerosene. 

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. 
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Subtitle E—Other Revenue Provisions 

Sec. 681. Qualified tax collection contracts. 

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

Sec. 683. Increased reporting for noncash charitable contributions. 

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

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

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

Sec. 687. Modification of straddle rules. 

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

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

Sec. 690. Extension of IRS user fees. 

Sec. 691. COBRA fees. 

TITLE VII—MARKET REFORM FOR TOBACCO GROWERS 

Sec. 701. Short title. 

Sec. 702. Effective date. 

Subtitle A—Termination of Federal Tobacco Quota and Price Support 

Programs 

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

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

Sec. 713. Continuation of liability and no net loss assessments to prevent losses 

on price support loans. 

Subtitle B—Transitional Payments to Tobacco Quota Holders and Active 

Producers of Tobacco 

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

Sec. 722. Payments to tobacco quota holders. 

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

Sec. 724. Resolution of disputes. 

Sec. 725. Source of funds for payments. 

TITLE VIII—TRADE PROVISIONS 

Sec. 801. Ceiling fans. 

Sec. 802. Certain steam generators, and certain reactor vessel heads, used in 

nuclear facilities. 
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1 TITLE I—END SANCTIONS AND 

2 REDUCE CORPORATE TAX 

3 RATES FOR DOMESTIC MANU4 FACTURING AND SMALL COR5 PORATIONS 

6 SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL 

7 INCOME. 

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

9 (b) CONFORMING AMENDMENTS.— 

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

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

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

14 amended by striking the item relating to subpart E. 

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

17 item relating to section 114. 

18 (4) The second sentence of section 

19 56(g)(4)(B)(i) is amended by striking ‘‘114 or’’. 

20 (5) Section 275(a) is amended— 

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

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

24 by striking subparagraph (C), and 

25 (B) by striking the last sentence. 
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1 (6) Paragraph (3) of section 864(e) is amend2 ed— 

3 (A) by striking: 

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

5 ACCOUNT.— 

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

7 inserting: 

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

9 ACCOUNT.—For purposes of’’, and 

10 (B) by striking subparagraph (B). 

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

12 164(a),’’ and inserting ‘‘164(a)’’. 

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

14 ‘‘941(a)(5),’’. 

15 (c) EFFECTIVE DATE.—Except as provided in sub16 section (d), the amendments made by this section shall 

17 apply to transactions after December 31, 2004. 

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

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

20 during 2005 or 2006, the amount includible in gross 

21 income by reason of the amendments made by this 

22 section shall not exceed the applicable percentage of 

23 the amount which would have been so included but 

24 for this subsection. 
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1 (2) APPLICABLE PERCENTAGE.—For purposes 

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

3 as follows: 

4 (A) For 2005, the applicable percentage 

5 shall be 20 percent. 

6 (B) For 2006, the applicable percentage 

7 shall be 40 percent. 

8 (e) REVOCATION OF ELECTION TO BE TREATED AS

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

10 beginning on the date of the enactment of this Act, a cor11 poration for which an election is in effect under section 

12 943(e) of the Internal Revenue Code of 1986 revokes such 

13 election, no gain or loss shall be recognized with respect 

14 to property treated as transferred under clause (ii) of sec15 tion 943(e)(4)(B) of such Code to the extent such prop16 erty— 

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

18 thereof, or 

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

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

21 ordinary course of its trade or business. 

22 The Secretary of the Treasury (or such Secretary’s dele23 gate) may prescribe such regulations as may be necessary 

24 to prevent the abuse of the purposes of this subsection. 
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1 (f) BINDING CONTRACTS.—The amendments made 

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

3 ordinary course of a trade or business which occurs pursu4 ant to a binding contract— 

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

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

7 943(b)(3) of such Code, as in effect on the day be8 fore the date of the enactment of this Act), and 

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

10 at all times thereafter. 

11 For purposes of this subsection, a binding contract shall 

12 include a purchase option, renewal option, or replacement 

13 option which is included in such contract and which is en14 forceable against the seller or lessor. 

15 SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR 

16 DOMESTIC PRODUCTION ACTIVITIES IN17 COME. 

18 (a) LIMITATION ON TAX ON QUALIFIED PRODUCTION

19 ACTIVITIES INCOME.—Section 11 is amended by redesig20 nating subsections (c) and (d) as subsections (d) and (e), 

21 respectively, and by inserting after subsection (b) the fol22 lowing new subsection: 

23 ‘‘(c) LIMITATION ON TAX ON QUALIFIED PRODUC24 TION ACTIVITIES INCOME.— 
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1 ‘‘(1) IN GENERAL.—If a corporation has quali2 fied production activities income for any taxable 

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

4 the sum of— 

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

6 the manner as if this subsection had not been 

7 enacted on the taxable income reduced by the 

8 amount of qualified production activities in9 come, plus 

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

11 in the case of taxable years beginning before 

12 January 1, 2007) of the qualified production 

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

14 ‘‘(2) QUALIFIED PRODUCTION ACTIVITIES IN15 COME.— 

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

17 production activities income’ for any taxable 

18 year means an amount equal to the excess (if 

19 any) of— 

20 ‘‘(i) the taxpayer’s domestic produc21 tion gross receipts for such taxable year, 

22 over 

23 ‘‘(ii) the sum of— 

24 ‘‘(I) the cost of goods sold that 

25 are allocable to such receipts, 
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1 ‘‘(II) other deductions, expenses, 

2 or losses directly allocable to such re3 ceipts, and 

4 ‘‘(III) a ratable portion of other 

5 deductions, expenses, and losses that 

6 are not directly allocable to such re7 ceipts or another class of income. 

8 ‘‘(B) ALLOCATION METHOD.—The Sec9 retary shall prescribe rules for the proper allo10 cation of items of income, deduction, expense, 

11 and loss for purposes of determining income at12 tributable to domestic production activities. 

13 ‘‘(3) DOMESTIC PRODUCTION GROSS RE14 CEIPTS.—For purposes of this subsection, the term 

15 ‘domestic production gross receipts’ means the gross 

16 receipts of the taxpayer which are derived from— 

17 ‘‘(A) any lease, rental, license, sale, ex18 change, or other disposition of— 

19 ‘‘(i) qualifying production property 

20 which was manufactured, produced, grown, 

21 or extracted in whole or in significant part 

22 by the taxpayer within the United States, 

23 or 

24 ‘‘(ii) any qualified film produced by 

25 the taxpayer, or 
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1 ‘‘(B) construction, engineering, or architec2 tural services performed in the United States 

3 for construction projects in the United States. 

4 ‘‘(4) QUALIFYING PRODUCTION PROPERTY.— 

5 For purposes of this subsection, the term ‘qualifying 

6 production property’ means— 

7 ‘‘(A) tangible personal property, 

8 ‘‘(B) any computer software, and 

9 ‘‘(C) any property described in section 

10 168(f)(4). 

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

12 subsection— 

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

14 film’ means any property described in section 

15 168(f)(3) if not less than 50 percent of the 

16 total compensation relating to the production of 

17 such property is compensation for services per18 formed in the United States by actors, produc19 tion personnel, directors, and producers. 

20 ‘‘(B) EXCEPTION.—Such term does not in21 clude property with respect to which records are 

22 required to be maintained under section 2257 

23 of title 18, United States Code. 

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

25 subsection— 
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1 ‘‘(A) IN GENERAL.—The term ‘domestic 

2 production gross receipts’ shall not include any 

3 gross receipts of the taxpayer derived from 

4 property leased, licensed, or rented by the tax5 payer for use by any related person. 

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

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

8 related to another person if such persons are 

9 treated as a single employer under subsection 

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

11 of section 414, except that determinations 

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

13 shall be made without regard to section 

14 1563(b).’’. 

15 (b) SPECIAL RULE RELATING TO ELECTION TO

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

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

18 631(a) of the Internal Revenue Code of 1986 made for 

19 a taxable year ending on or before the date of the enact20 ment of this Act may be revoked by the taxpayer for any 

21 taxable year ending after such date. For purposes of deter22 mining whether such taxpayer may make a further elec23 tion under such section, such election (and any revocation 

24 under this section) shall not be taken into account. 
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1 (c) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2004. 

4 SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR 

5 SMALL CORPORATIONS. 

6 (a) IN GENERAL.—Subsection (b) of section 11 (re7 lating to tax imposed on corporations) is amended by re8 designating paragraph (2) as paragraph (6) and by strik9 ing paragraph (1) and inserting the following new para10 graphs: 

11 ‘‘(1) FOR TAXABLE YEARS BEGINNING AFTER

12 2012.—In the case of taxable years beginning after 

13 2012, the amount of the tax imposed by subsection 

14 (a) shall be determined in accordance with the fol15 lowing table: 

‘‘If taxable income is: The tax is: 

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

Over $50,000 but not over 

$75,000.

$7,500, plus 25% of the excess over 

$50,000. 

Over $75,000 but not over 

$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. 

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

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

18 2011 or 2012, the amount of the tax imposed by 

19 subsection (a) shall be determined in accordance 

20 with the following table: 

‘‘If taxable income is: The tax is: 

Not over $50,000 .......................... 15% of taxable income. 
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‘‘If taxable income is: The tax is: 

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. 

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

2 2009, OR 2010.—In the case of taxable years begin3 ning in 2008, 2009, or 2010, 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 32% of the excess over 

$75,000. 

Over $1,000,000 but not over 

$10,000,000.

$309,750, plus 34% of the excess 

over $1,000,000. 

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

over $10,000,000. 

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

7 2006, OR 2007.—In the case of taxable years begin8 ning in 2005, 2006, or 2007, 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 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. 
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1 ‘‘(5) PHASEOUT OF LOWER RATES FOR CER2 TAIN TAXPAYERS.— 

3 ‘‘(A) GENERAL RULE FOR YEARS BEFORE

4 2013.— 

5 ‘‘(i) IN GENERAL.—In the case of tax6 able years beginning before 2013 with re7 spect to a corporation which has taxable 

8 income in excess of the applicable amount 

9 for any taxable year, the amount of tax de10 termined under paragraph (1), (2), (3) or 

11 (4) for such taxable year shall be increased 

12 by the lesser of (I) 5 percent of such ex13 cess, or (II) the maximum increase 

14 amount. 

15 ‘‘(ii) MAXIMUM INCREASE AMOUNT.— 

16 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. 

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

18 the case of a corporation which has taxable in19 come in excess of $20,000,000 ($15,000,000 in 

20 the case of taxable years beginning before 

21 2013), the amount of the tax determined under 

22 the foregoing provisions of this subsection shall 
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1 be increased by an additional amount equal to 

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

3 $610,250 ($100,000 in the case of taxable 

4 years beginning before 2013).’’. 

5 (b) CONFORMING AMENDMENTS.— 

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

7 as follows: 

8 ‘‘(ii) in the case of a corporation, sec9 tion 1201(a) applies to such taxable 

10 year.’’. 

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

12 ‘‘the last 2 sentences of section 11(b)(1)’’ and in13 serting ‘‘section 11(b)(5)’’. 

14 (3) Section 1561(a) is amended— 

15 (A) by striking ‘‘the last 2 sentences of 

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

17 11(b)(5)’’, and 

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

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

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

21 this section shall apply to taxable years beginning after 

22 December 31, 2004. 
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1 TITLE II—JOB CREATION TAX IN2 CENTIVES FOR MANUFAC3 TURERS, SMALL BUSINESSES, 

4 AND FARMERS 

5 Subtitle A—Small Business 

6 Expensing 

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

8 FOR SMALL BUSINESS. 

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

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

11 inserting ‘‘2008’’. 

12 Subtitle B—Depreciation 

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

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

17 (E) of section 168(e)(3) (relating to classification of cer18 tain property) is amended by striking ‘‘and’’ at the end 

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

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

21 following new clauses: 

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

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

3 (b) QUALIFIED LEASEHOLD IMPROVEMENT PROP4 ERTY.—Subsection (e) of section 168 is amended by add5 ing at the end the following new paragraph: 

6 ‘‘(6) QUALIFIED LEASEHOLD IMPROVEMENT

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

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

10 rules shall apply: 

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

12 In the case of an improvement made by the per13 son who was the lessor of such improvement 

14 when such improvement was placed in service, 

15 such improvement shall be qualified leasehold 

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

17 such improvement is held by such person. 

18 ‘‘(B) EXCEPTION FOR CHANGES IN FORM

19 OF BUSINESS.—Property shall not cease to be 

20 qualified leasehold improvement property under 

21 subparagraph (A) by reason of— 

22 ‘‘(i) death, 

23 ‘‘(ii) a transaction to which section 

24 381(a) applies, 
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1 ‘‘(iii) a mere change in the form of 

2 conducting the trade or business so long as 

3 the property is retained in such trade or 

4 business as qualified leasehold improve5 ment property and the taxpayer retains a 

6 substantial interest in such trade or busi7 ness, 

8 ‘‘(iv) the acquisition of such property 

9 in an exchange described in section 1031, 

10 1033, or 1038 to the extent that the basis 

11 of such property includes an amount rep12 resenting the adjusted basis of other prop13 erty owned by the taxpayer or a related 

14 person, or 

15 ‘‘(v) the acquisition of such property 

16 by the taxpayer in a transaction described 

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

18 the acquisition of such property by the tax19 payer from the transferee or acquiring cor20 poration in a transaction described in such 

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

22 property in the hands of the taxpayer is 

23 determined by reference to its basis in the 

24 hands of the transferor or distributor.’’. 
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1 (c) QUALIFIED RESTAURANT PROPERTY.—Sub2 section (e) of section 168 (as amended by subsection (b)) 

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

4 paragraph: 

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

6 term ‘qualified restaurant property’ means any sec7 tion 1250 property which is an improvement to a 

8 building if— 

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

10 more than 3 years after the date such building 

11 was first placed in service, and 

12 ‘‘(B) more than 50 percent of the build13 ing’s square footage is devoted to preparation 

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

15 prepared meals.’’. 

16 (d) REQUIREMENT TO USE STRAIGHT LINE METH17 OD.— 

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

19 by adding at the end the following new subpara20 graphs: 

21 ‘‘(G) Qualified leasehold improvement 

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

23 ‘‘(H) Qualified restaurant property de24 scribed in subsection (e)(7).’’. 
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1 (2) Subparagraph (A) of section 168(b)(2) is 

2 amended by inserting before the comma ‘‘not re3 ferred to in paragraph (3)’’. 

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

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

6 following new items: 

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

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

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

8 this section shall apply to property placed in service after 

9 the date of the enactment of this Act. 

10 SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE 

11 FOR AIRCRAFT. 

12 (a) AIRCRAFT TREATED AS QUALIFIED PROP13 ERTY.— 

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

15 168(k) is amended by redesignating subparagraphs 

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

17 respectively, and by inserting after subparagraph 

18 (B) the following new subparagraph: 

19 ‘‘(C) CERTAIN AIRCRAFT.—The term 

20 ‘qualified property’ includes property— 

21 ‘‘(i) which meets the requirements of 

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

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

24 a transportation property (as defined in 
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1 subparagraph (B)(iii)) other than for agri2 cultural or firefighting purposes, 

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

4 such purchaser, at the time of the contract 

5 for purchase, has made a nonrefundable 

6 deposit of the lesser of— 

7 ‘‘(I) 10 percent of the cost, or 

8 ‘‘(II) $100,000, and 

9 ‘‘(iv) which has— 

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

12 ‘‘(II) a cost exceeding 

13 $200,000.’’. 

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

15 section 168(k)(2)(A) is amended by striking ‘‘sub16 paragraph (B)’’ and inserting ‘‘subparagraphs (B) 

17 and (C)’’. 

18 (b) CONFORMING AMENDMENTS.— 

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

20 at the end the following new clause: 

21 ‘‘(iv) APPLICATION OF SUBPARA22 GRAPH.—This subparagraph shall not 

23 apply to any property which is described in 

24 subparagraph (C).’’. 
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1 (2) Section 168(k)(4)(A)(ii) is amended by 

2 striking ‘‘paragraph (2)(C)’’ and inserting ‘‘para3 graph (2)(D)’’. 

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

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

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

10 (5) Section 168(k)(4)(D) is amended by strik11 ing ‘‘Paragraph (2)(E)’’ and inserting ‘‘Paragraph 

12 (2)(F)’’. 

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

14 this section shall take effect as if included in the amend15 ments made by section 101 of the Job Creation and Work16 er Assistance Act of 2002. 

17 SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE 

18 FOR BONUS DEPRECIATION PROPERTY. 

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

20 special rules) is amended by adding at the end the fol21 lowing new clause: 

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

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

2 in service after September 10, 2001, 

3 by the lessor of such property, 

4 ‘‘(II) such property is sold by 

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

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

8 multiple units of property subject to 

9 the same lease, within 3 months after 

10 the date the final unit is placed in 

11 service, so long as the period between 

12 the time the first unit is placed in 

13 service and the time the last unit is 

14 placed in service does not exceed 12 

15 months), and 

16 ‘‘(III) the user of such property 

17 after the last sale during such 3- 

18 month period remains the same as 

19 when such property was originally 

20 placed in service, 

21 such property shall be treated as originally 

22 placed in service not earlier than the date 

23 of such last sale, so long as no previous 

24 owner of such property elects the applica-
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1 tion of this subsection with respect to such 

2 property.’’. 

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

4 this section shall take effect as if included in the amend5 ments made by section 101 of the Job Creation and Work6 er Assistance Act of 2002; except that the parenthetical 

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

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

9 apply to property sold after June 4, 2004. 

10 Subtitle C—S Corporation Reform 

11 and Simplification 

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

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

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

16 amended to read as follows: 

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

18 SHAREHOLDER.— 

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

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

22 a husband and wife (and their estates) 

23 shall be treated as 1 shareholder, and 

24 ‘‘(ii) in the case of a family with re25 spect to which an election is in effect 
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1 under subparagraph (D), all members of 

2 the family shall be treated as 1 share3 holder. 

4 ‘‘(B) MEMBERS OF THE FAMILY.—For 

5 purpose of subparagraph (A)(ii)— 

6 ‘‘(i) IN GENERAL.—The term ‘mem7 bers of the family’ means the common an8 cestor, lineal descendants of the common 

9 ancestor, and the spouses (or former 

10 spouses) of such lineal descendants or com11 mon ancestor. 

12 ‘‘(ii) COMMON ANCESTOR.—For pur13 poses of this paragraph, an individual shall 

14 not be considered a common ancestor if, as 

15 of the later of the effective date of this 

16 paragraph or the time the election under 

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

18 more than 3 generations removed from the 

19 youngest generation of shareholders who 

20 would (but for this clause) be members of 

21 the family. For purposes of the preceding 

22 sentence, a spouse (or former spouse) shall 

23 be treated as being of the same generation 

24 as the individual to which such spouse is 

25 (or was) married. 
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1 ‘‘(C) EFFECT OF ADOPTION, ETC.—In de2 termining whether any relationship specified in 

3 subparagraph (B) exists, the rules of section 

4 152(b)(2) shall apply. 

5 ‘‘(D) ELECTION.—An election under sub6 paragraph (A)(ii)— 

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

8 in regulations prescribed by the Secretary, 

9 be made by any member of the family, and 

10 ‘‘(ii) shall remain in effect until termi11 nated as provided in regulations prescribed 

12 by the Secretary.’’. 

13 (b) RELIEF FROM INADVERTENT INVALID ELECTION

14 OR TERMINATION.—Section 1362(f) (relating to inad15 vertent invalid elections or terminations), as amended by 

16 section 229, is amended— 

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

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

19 and 

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

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

22 (c) EFFECTIVE DATES.— 

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

24 by subsection (a) shall apply to taxable years begin25 ning after December 31, 2004. 
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1 (2) SUBSECTION (b).—The amendments made 

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

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

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

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

8 and inserting ‘‘100’’. 

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

10 this section shall apply to taxable years beginning after 

11 December 31, 2004. 

12 SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 

13 SHAREHOLDERS TO INCLUDE IRAS. 

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

15 certain trusts permitted as shareholders) is amended by 

16 inserting after clause (v) the following new clause: 

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

18 which is a bank (as defined in section 

19 581), a trust which constitutes an indi20 vidual retirement account under section 

21 408(a), including one designated as a Roth 

22 IRA under section 408A, but only to the 

23 extent of the stock held by such trust in 

24 such bank as of the date of the enactment 

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

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

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

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

5 in clause (vi) of subparagraph (A), the in6 dividual for whose benefit the trust was 

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

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

9 CORPORATION ELECTION EXEMPT FROM PROHIBITED

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

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

14 following new paragraph: 

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

18 account is established if— 

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

20 section 581), 

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

22 the date of the enactment of this paragraph, 

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

24 under section 1362(a) by such bank, 
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1 ‘‘(D) such sale is for fair market value at 

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

4 are otherwise at least as favorable to such trust 

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

6 unrelated party, 

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

9 with the sale, and 

10 ‘‘(F) the stock is sold in a single trans11 action for cash not later than 120 days after 

12 the S corporation election is made.’’. 

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

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

15 ‘‘1361(c)(6)’’. 

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

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

18 of this Act. 

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

21 CURRENT BENEFICIARIES OF ESBT. 

22 (a) IN GENERAL.—Section 1361(e)(2) (defining po23 tential current beneficiary) is amended— 

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

25 any power of appointment to the extent such power 
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1 remains unexercised at the end of such period)’’ 

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

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

4 and inserting ‘‘1-year’’. 

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

6 this section shall apply to taxable years beginning after 

7 December 31, 2004. 

8 SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 

9 DIVORCE, ETC. 

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

11 indefinite carryover of disallowed losses and deductions) 

12 is amended to read as follows: 

13 ‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED

14 LOSSES AND DEDUCTIONS.— 

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

16 subparagraph (B), any loss or deduction which 

17 is disallowed for any taxable year by reason of 

18 paragraph (1) shall be treated as incurred by 

19 the corporation in the succeeding taxable year 

20 with respect to that shareholder. 

21 ‘‘(B) TRANSFERS OF STOCK BETWEEN

22 SPOUSES OR INCIDENT TO DIVORCE.—In the 

23 case of any transfer described in section 

24 1041(a) of stock of an S corporation, any loss 

25 or deduction described in subparagraph (A) 
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1 with respect such stock shall be treated as in2 curred by the corporation in the succeeding tax3 able year with respect to the transferee.’’ 

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

5 this section shall apply to taxable years beginning after 

6 December 31, 2004. 

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

8 AMOUNTS BY QUALIFIED SUBCHAPTER S 

9 TRUST INCOME BENEFICIARIES. 

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

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

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

14 (2) by striking the period at the end of sub15 paragraph (B) and inserting ‘‘, and’’, and 

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

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

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

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

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

24 this section shall apply to transfers made after December 

25 31, 2004. 
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1 SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME 

2 FROM PASSIVE INCOME TEST FOR BANK S 

3 CORPORATIONS. 

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

5 where passive investment income exceeds 25 percent of 

6 gross receipts for 3 consecutive taxable years and corpora7 tion has accumulated earnings and profits) is amended by 

8 adding at the end the following new subparagraph: 

9 ‘‘(F) EXCEPTION FOR BANKS; ETC.—In 

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

11 a bank holding company (within the meaning of 

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

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

14 holding company (within the meaning of section 

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

16 income’ shall not include— 

17 ‘‘(i) interest income earned by such 

18 bank or company, or 

19 ‘‘(ii) dividends on assets required to 

20 be held by such bank or company, includ21 ing stock in the Federal Reserve Bank, the 

22 Federal Home Loan Bank, or the Federal 

23 Agricultural Mortgage Bank or participa24 tion certificates issued by a Federal Inter25 mediate Credit Bank.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2004. 

4 SEC. 228. TREATMENT OF BANK DIRECTOR SHARES. 

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

7 subsection: 

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

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

10 stock shall not be taken into account as outstanding 

11 stock of the S corporation in applying this sub12 chapter (other than section 1368(f)). 

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

14 For purposes of this subsection, the term ‘restricted 

15 bank director stock’ means stock in a bank (as de16 fined in section 581), a bank holding company (with17 in the meaning of section 2(a) of the Bank Holding 

18 Company Act of 1956 (12 U.S.C. 1841(a))), or a fi19 nancial holding company (within the meaning of sec20 tion 2(p) of such Act), registered with the Federal 

21 Reserve System, if such stock— 

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

23 under applicable Federal or State law in order 

24 to permit such individual to serve as a director, 

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

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

4 such bank or company) pursuant to which the 

5 holder is required to sell back such stock (at 

6 the same price as the individual acquired such 

7 stock) upon ceasing to hold the office of direc8 tor. 

9 ‘‘(3) CROSS REFERENCE.— 

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

1368(f).’’. 

10 (b) DISTRIBUTIONS.—Section 1368 (relating to dis11 tributions) is amended by adding at the end the following 

12 new subsection: 

13 ‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di14 rector receives a distribution (not in part or full payment 

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

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

17 1361(f)), the amount of such distribution— 

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

19 director, and 

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

21 the taxable year of such corporation in which or with 

22 which ends the taxable year in which such amount 

23 in included in the gross income of the director.’’. 
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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. 229. RELIEF FROM INADVERTENTLY INVALID QUALI5 FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 

6 AND TERMINATIONS. 

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

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

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

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

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

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

14 follows: 

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

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

18 the case may be, or’’, 

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

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

22 made, and each person who was a shareholder in 

23 such corporation at any time during the period spec24 ified pursuant to this subsection, agrees to make 

25 such adjustments (consistent with the treatment of 
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1 such corporation as an S corporation or a qualified 

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

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

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

6 subsidiary, as the case may be’’ after ‘‘S corpora7 tion’’ in the matter following paragraph (4). 

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

9 this section shall apply to taxable years beginning after 

10 December 31, 2004. 

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

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

14 to treatment of certain wholly owned subsidiaries) is 

15 amended by inserting ‘‘and in the case of information re16 turns required under part III of subchapter A of chapter 

17 61’’ after ‘‘Secretary’’. 

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

19 this section shall apply to taxable years beginning after 

20 December 31, 2004. 

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

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

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

2 FOR QUALIFYING EMPLOYER SECURITIES.—A plan 

3 shall not be treated as violating the requirements of 

4 section 401 or 409 or subsection (e)(7), or as engag5 ing in a prohibited transaction for purposes of sub6 section (d)(3), merely by reason of any distribution 

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

8 corporation stock that constitutes qualifying em9 ployer securities, which in accordance with the plan 

10 provisions is used to make payments on a loan de11 scribed in subsection (d)(3) the proceeds of which 

12 were used to acquire such qualifying employer secu13 rities (whether or not allocated to participants). The 

14 preceding sentence shall not apply in the case of a 

15 distribution which is paid with respect to any em16 ployer security which is allocated to a participant 

17 unless the plan provides that employer securities 

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

19 of such distribution are allocated to such participant 

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

21 such distribution would have been allocated to such 

22 participant.’’. 

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

24 this section shall apply to distributions with respect to S 

25 corporation stock made after December 31, 2004. 
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1 Subtitle D—Alternative Minimum 

2 Tax Relief 

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

5 (a) IN GENERAL.— 

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

7 striking paragraph (2) and by redesignating para8 graphs (3) and (4) as paragraphs (2) and (3), re9 spectively. 

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

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

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2004. 

15 SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE 

16 MINIMUM TAX FOR SMALL CORPORATIONS. 

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

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

19 ‘‘$7,500,000’’ each place it appears and inserting 

20 ‘‘$20,000,000’’. 

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

22 this section shall apply to taxable years beginning after 

23 December 31, 2005. 
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1 SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO IN2 CREASE ALTERNATIVE MINIMUM TAX. 

3 (a) IN GENERAL.—Subsection (c) of section 55 (de4 fining regular tax) is amended by redesignating paragraph 

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

6 the following new paragraph: 

7 ‘‘(2) COORDINATION WITH INCOME AVERAGING

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

9 section 1301 (relating to averaging of farm income) 

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

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

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

14 December 31, 2003. 

15 Subtitle E—Restructuring of 

16 Incentives for Alcohol Fuels, Etc. 

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

18 WITH EXCISE TAX CREDIT; REPEAL OF 

19 OTHER ALCOHOL-BASED FUEL INCENTIVES; 

20 ETC. 

21 (a) EXCISE TAX CREDIT FOR ALCOHOL FUEL MIX22 TURES.— 

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

24 6427 is amended to read as follows: 

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

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

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

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

5 occurring during such period, be treated— 

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

8 and 

9 ‘‘(ii) as received at the time of the 

10 taxable event, and 

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

12 exceeds such liability for such period, shall (ex13 cept as provided in subsection (k)) be paid sub14 ject to subsection (i)(3) by the Secretary with15 out interest. 

16 ‘‘(2) SPECIAL RULES.— 

17 ‘‘(A) ONLY CERTAIN ALCOHOL TAKEN

18 INTO ACCOUNT.—For purposes of paragraph 

19 (1), section 40 shall be applied— 

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

21 with a proof of less than 190, and 

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

23 gallon equivalent of ethyl tertiary butyl 

24 ether or other ethers produced from such 

25 alcohol. 
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1 ‘‘(B) TREATMENT OF REFINERS.—For 

2 purposes of paragraph (1), in the case of a mix3 ture— 

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

5 in subparagraph (A)(ii), and 

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

7 at a refinery prior to any taxable event, 

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

10 its removal from the refinery (and only at such 

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

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

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

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

15 subsection. 

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

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

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

20 31, 2007’, and 

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

22 2008’.’’ 

23 (2) REVISION OF RULES FOR PAYMENT OF

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

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

2 CREDIT.— 

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

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

5 any period— 

6 ‘‘(i) for which $200 or more is pay7 able under such subsection (f)(1)(B), and 

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

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

11 (i). 

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

14 has not paid pursuant to a claim filed under 

15 this section within 45 days of the date of the 

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

17 electronic claim), the claim shall be paid with 

18 interest from such date determined by using the 

19 overpayment rate and method under section 

20 6621. 

21 ‘‘(C) 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 (b) REPEAL OF OTHER INCENTIVES FOR FUEL MIX2 TURES.— 

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

4 to read as follows: 

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

6 USE.— 

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

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

9 used in an off-highway business use. 

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

11 which no tax was imposed by reason of paragraph 

12 (1) is used otherwise than in an off-highway busi13 ness use, a tax shall be imposed by paragraph 

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

15 (whichever is appropriate) and by the corresponding 

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

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

18 For purposes of this subsection, the term ‘off-high19 way business use’ has the meaning given to such 

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

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

22 use in a diesel-powered train.’’ 

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

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

25 (4) Section 4091(c) is hereby repealed. 
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1 (c) TRANSFERS TO HIGHWAY TRUST FUND.— 

2 (1) Paragraph (4) of section 9503(b) is amend3 ed by adding ‘‘or’’ at the end of subparagraph (C), 

4 by striking the comma at the end of subparagraph 

5 (D) and inserting a period, and by striking subpara6 graphs (E) and (F). 

7 (2) Paragraph (4) of section 9503(b), as 

8 amended by paragraph (1), is further amended by 

9 adding ‘‘or’’ at the end of subparagraph (B), by 

10 striking the comma at the end of subparagraph (C) 

11 and inserting a period, and by striking subparagraph 

12 (D). 

13 (d) CONFORMING AMENDMENTS.— 

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

15 read as follows: 

16 ‘‘(c) COORDINATION WITH EXCISE TAX BENE17 FITS.—The amount of the credit determined under this 

18 section with respect to any alcohol shall, under regulations 

19 prescribed by the Secretary, be properly reduced to take 

20 into account the benefit provided with respect to such alco21 hol under section 6427(f).’’ 

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

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

24 4081(c)’’ and inserting ‘‘under section 6427(f)’’. 

25 (e) EFFECTIVE DATES.— 
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1 (1) IN GENERAL.—Except as provided by para2 graph (2), the amendments made by this section 

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

4 2004. 

5 (2) SUBSECTION (c).— 

6 (A) The amendments made by subsection 

7 (c)(1) shall apply to taxes imposed after Sep8 tember 30, 2003. 

9 (B) The amendments made by subsection 

10 (c)(2) shall apply to taxes imposed after Sep11 tember 30, 2006. 

12 SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL 

13 FUND. 

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

15 amended by adding at the end the following new flush sen16 tence: 

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

18 taxes received under section 4081 shall include any 

19 amount treated as a payment under section 

20 6427(f)(1)(A) and shall not be reduced by the 

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

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

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

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

25 apply to claims under section 6427(f)(1)(B).’’ 
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1 (c) EFFECTIVE DATE.— 

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

3 subsection (a) shall apply to taxes received after 

4 September 30, 2004. 

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

6 subsection (b) shall apply to amounts paid after 

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

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

9 fuel used after such date. 

10 Subtitle F—Stock Options and Em11 ployee Stock Purchase Plan 

12 Stock Options 

13 SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 

14 EMPLOYEE STOCK PURCHASE PLAN STOCK 

15 OPTIONS FROM WAGES. 

16 (a) EXCLUSION FROM EMPLOYMENT TAXES.— 

17 (1) SOCIAL SECURITY TAXES.— 

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

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

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

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

22 and by inserting after paragraph (21) the fol23 lowing new paragraph: 

24 ‘‘(22) remuneration on account of— 
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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) Section 209(a) of the Social Security 

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

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

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

12 by inserting after paragraph (18) the following 

13 new paragraph: 

14 ‘‘(19) Remuneration on account of— 

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

16 individual pursuant to an exercise of an incen17 tive stock option (as defined in section 422(b) 

18 of the Internal Revenue Code of 1986) or under 

19 an employee stock purchase plan (as defined in 

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

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

22 such stock.’’. 

23 (2) RAILROAD RETIREMENT TAXES.—Sub24 section (e) of section 3231 is amended by adding at 

25 the end the following new paragraph: 
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1 ‘‘(12) QUALIFIED STOCK OPTIONS.—The term 

2 ‘compensation’ shall not include any remuneration 

3 on account of— 

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

5 individual pursuant to an exercise of an incen6 tive stock option (as defined in section 422(b)) 

7 or under an employee stock purchase plan (as 

8 defined in section 423(b)), or 

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

10 such stock.’’. 

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

12 (relating to definition of wages) is amended by strik13 ing ‘‘or’’ at the end of paragraph (17), by striking 

14 the period at the end of paragraph (18) and insert15 ing ‘‘; or’’, and by inserting after paragraph (18) the 

16 following new paragraph: 

17 ‘‘(19) remuneration on account of— 

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

19 individual pursuant to an exercise of an incen20 tive stock option (as defined in section 422(b)) 

21 or under an employee stock purchase plan (as 

22 defined in section 423(b)), or 

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

24 such stock.’’. 
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1 (b) WAGE WITHHOLDING NOT REQUIRED ON DIS2 QUALIFYING DISPOSITIONS.—Section 421(b) (relating to 

3 effect of disqualifying dispositions) is amended by adding 

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

5 be required to be deducted and withheld under chapter 

6 24 with respect to any increase in income attributable to 

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

8 (c) WAGE WITHHOLDING NOT REQUIRED ON COM9 PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER10 CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 

11 423(c) (relating to special rule where option price is be12 tween 85 percent and 100 percent of value of stock) is 

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

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

15 under chapter 24 with respect to any amount treated as 

16 compensation under this subsection.’’. 

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

18 this section shall apply to stock acquired pursuant to op19 tions exercised after the date of the enactment of this Act. 

20 Subtitle G—Incentives to Reinvest 

21 Foreign Earnings in United States 

22 SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN 

23 UNITED STATES. 

24 (a) IN GENERAL.—Subpart F of part III of sub25 chapter N of chapter 1 (relating to controlled foreign cor-
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1 porations) is amended by adding at the end the following 

2 new section: 

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

4 ‘‘(a) DEDUCTION.— 

5 ‘‘(1) IN GENERAL.—In the case of a corpora6 tion which is a United States shareholder, there 

7 shall be allowed as a deduction an amount equal to 

8 85 percent of the dividends which are received by 

9 such shareholder from controlled foreign corpora10 tions during the election period. 

11 ‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON12 TROLLED FOREIGN CORPORATIONS.—If, within the 

13 election period, a United States shareholder receives 

14 a distribution from a controlled foreign corporation 

15 which is excluded from gross income under section 

16 959(a), such distribution shall be treated for pur17 poses of this section as a dividend to the extent of 

18 any amount included in income by such United 

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

20 result of any dividend paid during the election period 

21 to— 

22 ‘‘(A) such controlled foreign corporation 

23 from another controlled foreign corporation that 

24 is in a chain of ownership described in section 

25 958(a), or 
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1 ‘‘(B) any other controlled foreign corpora2 tion in such chain of ownership, but only to the 

3 extent of distributions described in section 

4 959(b) which are made during the election pe5 riod to the controlled foreign corporation from 

6 which such United States shareholder received 

7 such distribution. 

8 ‘‘(b) LIMITATIONS.— 

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

10 taken into account under subsection (a) shall not ex11 ceed the greater of— 

12 ‘‘(A) $500,000,000, 

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

14 financial statement as earnings permanently re15 invested outside the United States, or 

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

17 statement which fails to show a specific amount 

18 of earnings permanently reinvested outside the 

19 United States and which shows a specific 

20 amount of tax liability attributable to such 

21 earnings, the amount of such earnings deter22 mined in such manner as the Secretary may 

23 prescribe. 

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

25 no statement or such statement fails to show a spe-
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1 cific amount of such earnings or liability, such 

2 amount shall be treated as being zero for purposes 

3 of this paragraph. 

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

5 The amount of dividends taken into account under 

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

7 of— 

8 ‘‘(A) the dividends received during the tax9 able year by such shareholder from controlled 

10 foreign corporations, over 

11 ‘‘(B) the annual average for the base pe12 riod years of— 

13 ‘‘(i) the dividends received during 

14 each base period year by such shareholder 

15 from such corporations, 

16 ‘‘(ii) the amounts includible in such 

17 shareholder’s gross income for each base 

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

19 with respect to such corporations, and 

20 ‘‘(iii) the amounts that would have 

21 been included for each base period year 

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

23 corporations. 

24 The amount taken into account under clause 

25 (iii) for any base period year shall not include 
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1 any amount which is not includible in gross in2 come by reason of an amount described in 

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

4 ‘‘(3) REQUIREMENT TO INVEST IN UNITED

5 STATES.—Subsection (a) shall not apply to any divi6 dend received by a United States shareholder unless 

7 the amount of the dividend is invested in the United 

8 States pursuant to a plan describing the expendi9 tures to be made with such amount— 

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

11 is approved by the president or chief executive 

12 officer of such shareholder, and 

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

14 Directors (or management committee) of such 

15 shareholder no later than its first meeting on or 

16 after the date the dividend is received. 

17 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur18 poses of this section— 

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

20 period’ means— 

21 ‘‘(A) if this section applies to the tax22 payer’s last taxable year beginning before the 

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

24 month or shorter period during such year which 
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1 is after the date of the enactment of this sec2 tion and which is selected by the taxpayer, and 

3 ‘‘(B) if this section applies to the tax4 payer’s first taxable year beginning on or after 

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

6 year. 

7 ‘‘(2) APPLICABLE FINANCIAL STATEMENT.— 

8 The term ‘applicable financial statement’ means the 

9 most recently audited financial statement (including 

10 notes and other documents which accompany such 

11 statement)— 

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

13 31, 2003, as being prepared in accordance with 

14 generally accepted accounting principles, and 

15 ‘‘(B) which is used for the purposes of a 

16 statement or report— 

17 ‘‘(i) to creditors, 

18 ‘‘(ii) to shareholders, or 

19 ‘‘(iii) for any other substantial nontax 

20 purpose. 

21 In the case of a corporation required to file a finan22 cial statement with the Securities and Exchange 

23 Commission, such term means the most recent such 

24 statement filed on or before March 31, 2003. 
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1 ‘‘(3) BASE PERIOD YEARS.—The base period 

2 years are the 3 taxable years— 

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

4 taxable years ending on or before March 31, 

5 2003, and 

6 ‘‘(B) which are determined by dis7 regarding— 

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

9 of the amounts described in clauses (i), 

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

11 largest, and 

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

13 sum is the smallest. 

14 Rules similar to the rules of subparagraphs (A) and 

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

16 this paragraph. 

17 ‘‘(4) COORDINATION WITH DIVIDENDS RE18 CEIVED DEDUCTION.—No deduction shall be allowed 

19 under section 243 or 245 for any dividend for which 

20 a deduction is allowed under this section. 

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

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

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

24 treated as paid or accrued) with respect to the de25 ductible portion of any dividend or of any amount 
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1 described in subsection (a)(2). No deduction shall be 

2 allowed under this chapter for any tax for which 

3 credit is not allowable by reason of the preceding 

4 sentence. 

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

6 paragraph (1), unless the taxpayer otherwise speci7 fies, the deductible portion of any dividend is the 

8 amount which bears the same ratio to the amount 

9 of such dividend as the amount allowed as a deduc10 tion under subsection (a) for the taxable year bears 

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

12 such year. 

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

14 REDUCED BY CREDITS, ETC.— 

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

16 by reason of nondeductible CFC dividends shall not 

17 be treated as tax imposed by this chapter for pur18 poses of determining— 

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

20 under this chapter, or 

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

22 section 55. 

23 Subparagraph (A) shall not apply to the credit 

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

25 with respect to taxes attributable to such dividends. 
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1 ‘‘(2) INCLUSIONS MAY NOT BE OFFSET BY NET

2 OPERATING LOSSES.— 

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

4 any United States shareholder for any taxable 

5 year shall in no event be less than the amount 

6 of nondeductible CFC dividends received during 

7 such year. 

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

9 The nondeductible CFC dividends for any tax10 able year shall not be taken into account— 

11 ‘‘(i) in determining under section 172 

12 the amount of any net operating loss for 

13 such taxable year, and 

14 ‘‘(ii) in determining taxable income 

15 for such taxable year for purposes of the 

16 2nd sentence of section 172(b)(2). 

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

18 purposes of this subsection, the term ‘nondeductible 

19 CFC dividends’ means the excess of the amount of 

20 dividends taken into account under subsection (a) 

21 over the deduction allowed under subsection (a) for 

22 such dividends. 

23 ‘‘(f) ELECTION.—This section shall apply for the tax24 payer’s first taxable year beginning on or after the date 

25 of the enactment of this section if the taxpayer elects its 
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1 application for such taxable year. The taxpayer may elect 

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

3 beginning before the date of the enactment of this section 

4 in lieu of such first taxable year.’’ 

5 (b) ALTERNATIVE MINIMUM TAX.—Subparagraph 

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

7 the following new clause: 

8 ‘‘(v) SPECIAL RULE FOR CERTAIN DIS9 TRIBUTIONS FROM CONTROLLED FOREIGN

10 CORPORATIONS.—Clause (i) shall not apply 

11 to any deduction allowable under section 

12 965.’’. 

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

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

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

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

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

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

18 the date of the enactment of this Act. 

19 Subtitle H—Other Incentive 

20 Provisions 

21 SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON AC22 COUNT OF WEATHER-RELATED CONDITIONS. 

23 (a) RULES FOR REPLACEMENT OF INVOLUNTARILY

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

25 (relating to involuntary conversions) is amended— 
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1 (1) by striking ‘‘CONDITIONS.—For purposes’’ 

2 and inserting ‘‘CONDITIONS.— 

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

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

5 paragraph: 

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

7 ‘‘(A) IN GENERAL.—In the case of 

8 drought, flood, or other weather-related condi9 tions described in paragraph (1) which result in 

10 the area being designated as eligible for assist11 ance by the Federal Government, subsection 

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

13 converted property by substituting ‘4 years’ for 

14 ‘2 years’. 

15 ‘‘(B) FURTHER EXTENSION BY SEC16 RETARY.—The Secretary may extend on a re17 gional basis the period for replacement under 

18 this section (after the application of subpara19 graph (A)) for such additional time as the Sec20 retary determines appropriate if the weather-re21 lated conditions which resulted in such applica22 tion continue for more than 3 years.’’. 

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

24 section 451 (relating to special rule for proceeds from live25 stock sold on account of drought, flood, or other weather- 
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1 related conditions) is amended by adding at the end the 

2 following new paragraph: 

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

4 1033(e)(2) applies to a sale or exchange of livestock 

5 described in paragraph (1), the election under para6 graph (1) shall be deemed valid if made during the 

7 replacement period described in such section.’’. 

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

9 this section shall apply to any taxable year with respect 

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

11 the return is after December 31, 2002. 

12 SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA13 TIVES WITHOUT REDUCING PATRONAGE 

14 DIVIDENDS. 

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

16 (relating to patronage dividend defined) is amended by 

17 adding at the end the following: ‘‘For purposes of para18 graph (3), net earnings shall not be reduced by amounts 

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

20 proprietary capital interests of the organization to the ex21 tent that the articles of incorporation or bylaws of such 

22 organization or other contract with patrons provide that 

23 such dividends are in addition to amounts otherwise pay24 able to patrons which are derived from business done with 

25 or for patrons during the taxable year.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to distributions in taxable years 

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

4 SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 

5 631(b) TO APPLY TO OUTRIGHT SALES BY 

6 LANDOWNERS. 

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

8 631(b) (relating to disposal of timber with a retained eco9 nomic interest) is amended by striking ‘‘retains an eco10 nomic interest in such timber’’ and inserting ‘‘either re11 tains an economic interest in such timber or makes an 

12 outright sale of such timber’’. 

13 (b) CONFORMING AMENDMENTS.— 

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

15 amended by striking ‘‘The date of disposal’’ and in16 serting ‘‘In the case of disposal of timber with a re17 tained economic interest, the date of disposal’’. 

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

19 by striking ‘‘WITH A RETAINED ECONOMIC INTER20 EST’’. 

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

22 this section shall apply to sales after December 31, 2004. 
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1 SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PART2 NERSHIPS TREATED AS QUALIFYING INCOME 

3 OF REGULATED INVESTMENT COMPANIES. 

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

5 (defining regulated investment company) is amended to 

6 read as follows: 

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

8 derived from— 

9 ‘‘(A) dividends, interest, payments with re10 spect to securities loans (as defined in section 

11 512(a)(5)), and gains from the sale or other 

12 disposition of stock or securities (as defined in 

13 section 2(a)(36) of the Investment Company 

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

15 or other income (including but not limited to 

16 gains from options, futures or forward con17 tracts) derived with respect to its business of 

18 investing in such stock, securities, or currencies, 

19 and 

20 ‘‘(B) distributions or other income derived 

21 from an interest in a qualified publicly traded 

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

23 and’’. 

24 (b) SOURCE FLOW-THROUGH RULE NOT TO

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

26 by inserting ‘‘(other than a qualified publicly traded part-
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1 nership as defined in subsection (h))’’ after ‘‘derived from 

2 a partnership’’. 

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

4 section 851 is amended by redesignating paragraph (5) 

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

6 following new paragraph: 

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

8 such issuer’ shall include the equity securities of a 

9 qualified publicly traded partnership (as defined in 

10 subsection (h)).’’. 

11 (d) DEFINITION OF QUALIFIED PUBLICLY TRADED

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

13 end the following new subsection: 

14 ‘‘(h) QUALIFIED PUBLICLY TRADED PARTNER15 SHIP.—For purposes of this section, the term ‘qualified 

16 publicly traded partnership’ means a publicly traded part17 nership described in section 7704(b) other than a partner18 ship which would satisfy the gross income requirements 

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

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

21 (e) DEFINITION OF QUALIFYING INCOME.—Section 

22 7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ 

23 and inserting ‘‘section 851(b)(2)(A)’’. 
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1 (f) LIMITATION ON COMPOSITION OF ASSETS.—Sub2 paragraph (B) of section 851(b)(3) is amended to read 

3 as follows: 

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

5 value of its total assets is invested in— 

6 ‘‘(i) the securities (other than Govern7 ment securities or the securities of other 

8 regulated investment companies) of any 

9 one issuer, 

10 ‘‘(ii) the securities (other than the se11 curities of other regulated investment com12 panies) of two or more issuers which the 

13 taxpayer controls and which are deter14 mined, under regulations prescribed by the 

15 Secretary, to be engaged in the same or 

16 similar trades or businesses or related 

17 trades or businesses, or 

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

19 qualified publicly traded partnerships (as 

20 defined in subsection (h)).’’. 

21 (g) APPLICATION OF SPECIAL PASSIVE ACTIVITY

22 RULE TO REGULATED INVESTMENT COMPANIES.—Sub23 section (k) of section 469 (relating to separate application 

24 of section in case of publicly traded partnerships) is 
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1 amended by adding at the end the following new para2 graph: 

3 ‘‘(4) APPLICATION TO REGULATED INVEST4 MENT COMPANIES.—For purposes of this section, a 

5 regulated investment company (as defined in section 

6 851) holding an interest in a qualified publicly trad7 ed partnership (as defined in section 851(h)) shall 

8 be treated as a taxpayer described in subsection 

9 (a)(2) with respect to items attributable to such in10 terest.’’. 

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

12 this section shall apply to taxable years beginning after 

13 the date of the enactment of this Act. 

14 SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE IN15 VESTMENT TRUSTS. 

16 (a) EXPANSION OF STRAIGHT DEBT SAFE HAR17 BOR.—Section 856 (defining real estate investment trust) 

18 is amended— 

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

20 and 

21 (2) by adding at the end the following new sub22 section: 

23 ‘‘(m) SAFE HARBOR IN APPLYING SUBSECTION

24 (c)(4).— 
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1 ‘‘(1) IN GENERAL.—In applying subclause (III) 

2 of subsection (c)(4)(B)(iii), except as otherwise de3 termined by the Secretary in regulations, the fol4 lowing shall not be considered securities held by the 

5 trust: 

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

7 which meet the requirements of paragraph (2). 

8 ‘‘(B) Any loan to an individual or an es9 tate. 

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

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

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

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

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

15 ‘‘(E) Any security issued by a State or any 

16 political subdivision thereof, the District of Co17 lumbia, a foreign government or any political 

18 subdivision thereof, or the Commonwealth of 

19 Puerto Rico, but only if the determination of 

20 any payment received or accrued under such se21 curity does not depend in whole or in part on 

22 the profits of any entity not described in this 

23 subparagraph or payments on any obligation 

24 issued by such an entity, 
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1 ‘‘(F) Any security issued by a real estate 

2 investment trust. 

3 ‘‘(G) Any other arrangement as deter4 mined by the Secretary. 

5 ‘‘(2) SPECIAL RULES RELATING TO STRAIGHT

6 DEBT SECURITIES.— 

7 ‘‘(A) IN GENERAL.—For purposes of para8 graph (1)(A), securities meet the requirements 

9 of this paragraph if such securities are straight 

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

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

12 ‘‘(B) SPECIAL RULES RELATING TO CER13 TAIN CONTINGENCIES.—For purposes of sub14 paragraph (A), any interest or principal shall 

15 not be treated as failing to satisfy section 

16 1361(c)(5)(B)(i) solely by reason of the fact 

17 that— 

18 ‘‘(i) the time of payment of such in19 terest or principal is subject to a contin20 gency, but only if— 

21 ‘‘(I) any such contingency does 

22 not have the effect of changing the ef23 fective yield to maturity, as deter24 mined under section 1272, other than 

25 a change in the annual yield to matu-
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1 rity which does not exceed the greater 

of 1 2 ⁄4 of 1 percent or 5 percent of the 

3 annual yield to maturity, or 

4 ‘‘(II) neither the aggregate issue price 

5 nor the aggregate face amount of the 

6 issuer’s debt instruments held by the trust 

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

8 months of unaccrued interest can be re9 quired to be prepaid thereunder, or 

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

11 is subject to a contingency upon a default 

12 or the exercise of a prepayment right by 

13 the issuer of the debt, but only if such con14 tingency is consistent with customary com15 mercial practice. 

16 ‘‘(C) SPECIAL RULES RELATING TO COR17 PORATE OR PARTNERSHIP ISSUERS.—In the 

18 case of an issuer which is a corporation or a 

19 partnership, securities that otherwise would be 

20 described in paragraph (1)(A) shall be consid21 ered not to be so described if the trust holding 

22 such securities and any of its controlled taxable 

23 REIT subsidiaries (as defined in subsection 

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

25 which— 
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1 ‘‘(i) are not described in paragraph 

2 (1) (prior to the application of this sub3 paragraph), and 

4 ‘‘(ii) have an aggregate value greater 

5 than 1 percent of the issuer’s outstanding 

6 securities determined without regard to 

7 paragraph (3)(A)(i). 

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

9 SECURITIES.— 

10 ‘‘(A) IN GENERAL.—For purposes of ap11 plying subclause (III) of subsection 

12 (c)(4)(B)(iii)— 

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

14 a partnership (as defined in section 

15 7701(a)(2)) shall not be considered a secu16 rity, and 

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

18 its proportionate share of each of the as19 sets of the partnership. 

20 ‘‘(B) DETERMINATION OF TRUST’S INTER21 EST IN PARTNERSHIP ASSETS.—For purposes 

22 of subparagraph (A), with respect to any tax23 able year beginning after the date of the enact24 ment of this subparagraph— 
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1 ‘‘(i) the trust’s interest in the partner2 ship assets shall be the trust’s propor3 tionate interest in any securities issued by 

4 the partnership (determined without re5 gard to subparagraph (A)(i) and para6 graph (4), but not including securities de7 scribed in paragraph (1)), and 

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

9 shall be the adjusted issue price thereof, as 

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

11 ‘‘(4) CERTAIN PARTNERSHIP DEBT INSTRU12 MENTS NOT TREATED AS A SECURITY.—For pur13 poses of applying subclause (III) of subsection 

14 (c)(4)(B)(iii)— 

15 ‘‘(A) any debt instrument issued by a part16 nership and not described in paragraph (1) 

17 shall not be considered a security to the extent 

18 of the trust’s interest as a partner in the part19 nership, and 

20 ‘‘(B) any debt instrument issued by a part21 nership and not described in paragraph (1) 

22 shall not be considered a security if at least 75 

23 percent of the partnership’s gross income (ex24 cluding gross income from prohibited trans-
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1 actions) is derived from sources referred to in 

2 subsection (c)(3). 

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

4 is authorized to provide guidance (including through 

5 the issuance of a written determination, as defined 

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

7 considered a security held by the trust for purposes 

8 of applying subclause (III) of subsection 

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

10 otherwise could be considered a security under sub11 paragraph (F) of subsection (c)(5).’’. 

12 (b) CLARIFICATION OF APPLICATION OF LIMITED

13 RENTAL EXCEPTION.—Subparagraph (A) of section 

14 856(d)(8) (relating to special rules for taxable REIT sub15 sidiaries) is amended to read as follows: 

16 ‘‘(A) LIMITED RENTAL EXCEPTION.— 

17 ‘‘(i) IN GENERAL.—The requirements 

18 of this subparagraph are met with respect 

19 to any property if at least 90 percent of 

20 the leased space of the property is rented 

21 to persons other than taxable REIT sub22 sidiaries of such trust and other than per23 sons described in paragraph (2)(B). 

24 ‘‘(ii) RENTS MUST BE SUBSTANTIALLY

25 COMPARABLE.—Clause (i) shall apply only 
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1 to the extent that the amounts paid to the 

2 trust as rents from real property (as de3 fined in paragraph (1) without regard to 

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

5 substantially comparable to such rents paid 

6 by the other tenants of the trust’s property 

7 for comparable space. 

8 ‘‘(iii) TIMES FOR TESTING RENT COM9 PARABILITY.—The substantial com10 parability requirement of clause (ii) shall 

11 be treated as met with respect to a lease 

12 to a taxable REIT subsidiary of the trust 

13 if such requirement is met under the terms 

14 of the lease— 

15 ‘‘(I) at the time such lease is en16 tered into, 

17 ‘‘(II) at the time of each exten18 sion of the lease, including a failure to 

19 exercise a right to terminate, and 

20 ‘‘(III) at the time of any modi21 fication of the lease between the trust 

22 and the taxable REIT subsidiary if 

23 the rent under such lease is effectively 

24 increased pursuant to such modifica25 tion. 
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1 With respect to subclause (III), if the tax2 able REIT subsidiary of the trust is a con3 trolled taxable REIT subsidiary of the 

4 trust, the term ‘rents from real property’ 

5 shall not in any event include rent under 

6 such lease to the extent of the increase in 

7 such rent on account of such modification. 

8 ‘‘(iv) CONTROLLED TAXABLE REIT

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

10 the term ‘controlled taxable REIT sub11 sidiary’ means, with respect to any real es12 tate investment trust, any taxable REIT 

13 subsidiary of such trust if such trust owns 

14 directly or indirectly— 

15 ‘‘(I) stock possessing more than 

16 50 percent of the total voting power 

17 of the outstanding stock of such sub18 sidiary, or 

19 ‘‘(II) stock having a value of 

20 more than 50 percent of the total 

21 value of the outstanding stock of such 

22 subsidiary. 

23 ‘‘(v) CONTINUING QUALIFICATION

24 BASED ON THIRD PARTY ACTIONS.—If the 

25 requirements of clause (i) are met at a 
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1 time referred to in clause (iii), such re2 quirements shall continue to be treated as 

3 met so long as there is no increase in the 

4 space leased to any taxable REIT sub5 sidiary of such trust or to any person de6 scribed in paragraph (2)(B). 

7 ‘‘(vi) CORRECTION PERIOD.—If there 

8 is an increase referred to in clause (v) dur9 ing any calendar quarter with respect to 

10 any property, the requirements of clause 

11 (iii) shall be treated as met during the 

12 quarter and the succeeding quarter if such 

13 requirements are met at the close of such 

14 succeeding quarter.’’. 

15 (c) DELETION OF CUSTOMARY SERVICES EXCEP16 TION.—Subparagraph (B) of section 857(b)(7) (relating 

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

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

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

20 (d) CONFORMITY WITH GENERAL HEDGING DEFINI21 TION.—Subparagraph (G) of section 856(c)(5) (relating 

22 to treatment of certain hedging instruments) is amended 

23 to read as follows: 

24 ‘‘(G) TREATMENT OF CERTAIN HEDGING

25 INSTRUMENTS.—Except to the extent provided 
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1 by regulations, any income of a real estate in2 vestment trust from a hedging transaction (as 

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

4 1221(b)(2)(A)) which is clearly identified pur5 suant to section 1221(a)(7), including gain 

6 from the sale or disposition of such a trans7 action, shall not constitute gross income under 

8 paragraph (2) to the extent that the transaction 

9 hedges any indebtedness incurred or to be in10 curred by the trust to acquire or carry real es11 tate assets.’’. 

12 (e) CONFORMITY WITH REGULATED INVESTMENT

13 COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re14 lating to imposition of tax in case of failure to meet certain 

15 requirements) is amended by striking ‘‘90 percent’’ and 

16 inserting ‘‘95 percent’’. 

17 (f) SAVINGS PROVISIONS.— 

18 (1) RULES OF APPLICATION FOR FAILURE TO

19 SATISFY SECTION 856(c)(4).—Section 856(c) (relat20 ing to definition of real estate investment trust) is 

21 amended by inserting after paragraph (6) the fol22 lowing new paragraph: 

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

24 SATISFY PARAGRAPH (4).— 
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1 ‘‘(A) DE MINIMIS FAILURE.—A corpora2 tion, trust, or association that fails to meet the 

3 requirements of paragraph (4)(B)(iii) for a par4 ticular quarter shall nevertheless be considered 

5 to have satisfied the requirements of such para6 graph for such quarter if— 

7 ‘‘(i) such failure is due to the owner8 ship of assets the total value of which does 

9 not exceed the lesser of— 

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

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

12 quarter for which such measurement 

13 is done, and 

14 ‘‘(II) $10,000,000, and 

15 ‘‘(ii)(I) the corporation, trust, or asso16 ciation, following the identification of such 

17 failure, disposes of assets in order to meet 

18 the requirements of such paragraph within 

19 6 months after the last day of the quarter 

20 in which the corporation, trust or associa21 tion’s identification of the failure to satisfy 

22 the requirements of such paragraph oc23 curred or such other time period prescribed 

24 by the Secretary and in the manner pre25 scribed by the Secretary, or 
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1 ‘‘(II) the requirements of such para2 graph are otherwise met within the time 

3 period specified in subclause (I). 

4 ‘‘(B) FAILURES EXCEEDING DE MINIMIS

5 AMOUNT.—A corporation, trust, or association 

6 that fails to meet the requirements of para7 graph (4) for a particular quarter shall never8 theless be considered to have satisfied the re9 quirements of such paragraph for such quarter 

10 if— 

11 ‘‘(i) such failure involves the owner12 ship of assets the total value of which ex13 ceeds the de minimis standard described in 

14 subparagraph (A)(i) at the end of the 

15 quarter for which such measurement is 

16 done, 

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

18 or association’s identification of the failure 

19 to satisfy the requirements of such para20 graph for a particular quarter, a descrip21 tion of each asset that causes the corpora22 tion, trust, or association to fail to satisfy 

23 the requirements of such paragraph at the 

24 close of such quarter of any taxable year is 

25 set forth in a schedule for such quarter 
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1 filed in accordance with regulations pre2 scribed by the Secretary, 

3 ‘‘(iii) the failure to meet the require4 ments of such paragraph for a particular 

5 quarter is due to reasonable cause and not 

6 due to willful neglect, 

7 ‘‘(iv) the corporation, trust, or asso8 ciation pays a tax computed under sub9 paragraph (C), and 

10 ‘‘(v)(I) the corporation, trust, or asso11 ciation disposes of the assets set forth on 

12 the schedule specified in clause (ii) within 

13 6 months after the last day of the quarter 

14 in which the corporation, trust or associa15 tion’s identification of the failure to satisfy 

16 the requirements of such paragraph oc17 curred or such other time period prescribed 

18 by the Secretary and in the manner pre19 scribed by the Secretary, or 

20 ‘‘(II) the requirements of such para21 graph are otherwise met within the time 

22 period specified in subclause (I). 

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

24 (B)(iv)— 
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1 ‘‘(i) TAX IMPOSED.—If a corporation, 

2 trust, or association elects the application 

3 of this subparagraph, there is hereby im4 posed a tax on the failure described in sub5 paragraph (B) of such corporation, trust, 

6 or association. Such tax shall be paid by 

7 the corporation, trust, or association. 

8 ‘‘(ii) TAX COMPUTED.—The amount 

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

10 the greater of— 

11 ‘‘(I) $50,000, or 

12 ‘‘(II) the amount determined 

13 (pursuant to regulations promulgated 

14 by the Secretary) by multiplying the 

15 net income generated by the assets 

16 described in the schedule specified in 

17 subparagraph (B)(ii) for the period 

18 specified in clause (iii) by the highest 

19 rate of tax specified in section 11. 

20 ‘‘(iii) PERIOD.—For purposes of 

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

22 clause is the period beginning on the first 

23 date that the failure to satisfy the require24 ments of such paragraph (4) occurs as a 

25 result of the ownership of such assets and 
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1 ending on the earlier of the date on which 

2 the trust disposes of such assets or the end 

3 of the first quarter when there is no longer 

4 a failure to satisfy such paragraph (4). 

5 ‘‘(iv) ADMINISTRATIVE PROVISIONS.— 

6 For purposes of subtitle F, the taxes im7 posed by this subparagraph shall be treat8 ed as excise taxes with respect to which the 

9 deficiency procedures of such subtitle 

10 apply.’’. 

11 (2) MODIFICATION OF RULES OF APPLICATION

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

13 856(c)(3).—Paragraph (6) of section 856(c) (relat14 ing to definition of real estate investment trust) is 

15 amended by striking subparagraphs (A) and (B), by 

16 redesignating subparagraph (C) as subparagraph 

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

18 so redesignated) the following new subparagraph: 

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

20 association’s identification of the failure to meet 

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

22 both such paragraphs, for any taxable year, a 

23 description of each item of its gross income de24 scribed in such paragraphs is set forth in a 

25 schedule for such taxable year filed in accord-
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1 ance with regulations prescribed by the Sec2 retary, and’’. 

3 (3) REASONABLE CAUSE EXCEPTION TO LOSS

4 OF REIT STATUS IF FAILURE TO SATISFY REQUIRE5 MENTS.—Subsection (g) of section 856 (relating to 

6 termination of election) is amended— 

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

8 the period at the end of the first sentence the 

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

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

11 paragraph: 

12 ‘‘(5) ENTITIES TO WHICH PARAGRAPH AP13 PLIES.—This paragraph applies to a corporation, 

14 trust, or association— 

15 ‘‘(A) which is not a real estate investment 

16 trust to which the provisions of this part apply 

17 for the taxable year due to one or more failures 

18 to comply with one or more of the provisions of 

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

20 of section 856), 

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

22 cause and not due to willful neglect, and 

23 ‘‘(C) if such corporation, trust, or associa24 tion pays (as prescribed by the Secretary in 

25 regulations and in the same manner as tax) a 
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1 penalty of $50,000 for each failure to satisfy a 

2 provision of this part due to reasonable cause 

3 and not willful neglect.’’. 

4 (4) DEDUCTION OF TAX PAID FROM AMOUNT

5 REQUIRED TO BE DISTRIBUTED.—Subparagraph (E) 

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

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

8 856(c)(7)(B)(iii), and section 856(g)(1).’’. 

9 (5) EXPANSION OF DEFICIENCY DIVIDEND PRO10 CEDURE.—Subsection (e) of section 860 is amended 

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

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

13 inserting ‘‘; or’’, and by adding at the end the fol14 lowing new paragraph: 

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

16 amendment or supplement to a return of tax for the 

17 relevant tax year.’’. 

18 (g) EFFECTIVE DATES.— 

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

21 shall apply to taxable years beginning after Decem22 ber 31, 2000. 

23 (2) SUBSECTIONS (c) THROUGH (f).—The 

24 amendments made by subsections (c), (d), (e), and 
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1 (f) shall apply to taxable years beginning after the 

2 date of the enactment of this Act. 

3 SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGU4 LATED INVESTMENT COMPANIES. 

5 (a) TREATMENT OF CERTAIN DIVIDENDS.— 

6 (1) NONRESIDENT ALIEN INDIVIDUALS.—Sec7 tion 871 (relating to tax on nonresident alien indi8 viduals) is amended by redesignating subsection (k) 

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

10 the following new subsection: 

11 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG12 ULATED INVESTMENT COMPANIES.— 

13 ‘‘(1) INTEREST-RELATED DIVIDENDS.— 

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

15 subparagraph (B), no tax shall be imposed 

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

17 any interest-related dividend received from a 

18 regulated investment company. 

19 ‘‘(B) EXCEPTIONS.—Subparagraph (A) 

20 shall not apply— 

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

22 received from a regulated investment com23 pany by a person to the extent such divi24 dend is attributable to interest (other than 

25 interest described in subparagraph (E) (i) 
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1 or (iii)) received by such company on in2 debtedness issued by such person or by any 

3 corporation or partnership with respect to 

4 which such person is a 10-percent share5 holder, 

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

7 with respect to stock of a regulated invest8 ment company unless the person who 

9 would otherwise be required to deduct and 

10 withhold tax from such dividend under 

11 chapter 3 receives a statement (which 

12 meets requirements similar to the require13 ments of subsection (h)(5)) that the bene14 ficial owner of such stock is not a United 

15 States person, and 

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

17 paid to any person within a foreign coun18 try (or any interest-related dividend pay19 ment addressed to, or for the account of, 

20 persons within such foreign country) dur21 ing any period described in subsection 

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

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

24 respect to any stock which was acquired on or 
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1 before the date of the publication of the Sec2 retary’s determination under subsection (h)(6). 

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

4 purposes of this paragraph, an interest-related 

5 dividend is any dividend (or part thereof) which 

6 is designated by the regulated investment com7 pany as an interest-related dividend in a writ8 ten notice mailed to its shareholders not later 

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

10 If the aggregate amount so designated with re11 spect to a taxable year of the company (includ12 ing amounts so designated with respect to divi13 dends paid after the close of the taxable year 

14 described in section 855) is greater than the 

15 qualified net interest income of the company for 

16 such taxable year, the portion of each distribu17 tion which shall be an interest-related dividend 

18 shall be only that portion of the amounts so 

19 designated which such qualified net interest in20 come bears to the aggregate amount so des21 ignated. 

22 ‘‘(D) QUALIFIED NET INTEREST IN23 COME.—For purposes of subparagraph (C), the 

24 term ‘qualified net interest income’ means the 

25 qualified interest income of the regulated in-
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1 vestment company reduced by the deductions 

2 properly allocable to such income. 

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

4 purposes of subparagraph (D), the term ‘quali5 fied interest income’ means the sum of the fol6 lowing amounts derived by the regulated invest7 ment company from sources within the United 

8 States: 

9 ‘‘(i) Any amount includible in gross 

10 income as original issue discount (within 

11 the meaning of section 1273) on an obliga12 tion payable 183 days or less from the date 

13 of original issue (without regard to the pe14 riod held by the company). 

15 ‘‘(ii) Any interest includible in gross 

16 income (including amounts recognized as 

17 ordinary income in respect of original issue 

18 discount or market discount or acquisition 

19 discount under part V of subchapter P and 

20 such other amounts as regulations may 

21 provide) on an obligation which is in reg22 istered form; except that this clause shall 

23 not apply to— 

24 ‘‘(I) any interest on an obligation 

25 issued by a corporation or partnership 
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1 if the regulated investment company 

2 is a 10-percent shareholder in such 

3 corporation or partnership, and 

4 ‘‘(II) any interest which is treat5 ed as not being portfolio interest 

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

7 ‘‘(iii) Any interest referred to in sub8 section (i)(2)(A) (without regard to the 

9 trade or business of the regulated invest10 ment company). 

11 ‘‘(iv) Any interest-related dividend in12 cludable in gross income with respect to 

13 stock of another regulated investment com14 pany. 

15 ‘‘(F) 10-PERCENT SHAREHOLDER.—For 

16 purposes of this paragraph, the term ‘10-per17 cent shareholder’ has the meaning given such 

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

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

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

21 subparagraph (B), no tax shall be imposed 

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

23 any short-term capital gain dividend received 

24 from a regulated investment company. 
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1 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

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

3 shall not apply in the case of any nonresident 

4 alien individual subject to tax under subsection 

5 (a)(2). 

6 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI7 DEND.—For purposes of this paragraph, a 

8 short-term capital gain dividend is any dividend 

9 (or part thereof) which is designated by the reg10 ulated investment company as a short-term cap11 ital gain dividend in a written notice mailed to 

12 its shareholders not later than 60 days after the 

13 close of its taxable year. If the aggregate 

14 amount so designated with respect to a taxable 

15 year of the company (including amounts so des16 ignated with respect to dividends paid after the 

17 close of the taxable year described in section 

18 855) is greater than the qualified short-term 

19 gain of the company for such taxable year, the 

20 portion of each distribution which shall be a 

21 short-term capital gain dividend shall be only 

22 that portion of the amounts so designated 

23 which such qualified short-term gain bears to 

24 the aggregate amount so designated. 
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1 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 

2 purposes of subparagraph (C), the term ‘quali3 fied short-term gain’ means the excess of the 

4 net short-term capital gain of the regulated in5 vestment company for the taxable year over the 

6 net long-term capital loss (if any) of such com7 pany for such taxable year. For purposes of this 

8 subparagraph— 

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

10 the regulated investment company shall be 

11 computed by treating any short-term cap12 ital gain dividend includible in gross in13 come with respect to stock of another regu14 lated investment company as a short-term 

15 capital gain, and 

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

17 capital gain for a taxable year over the net 

18 long-term capital loss for a taxable year (to 

19 which an election under section 4982(e)(4) 

20 does not apply) shall be determined with21 out regard to any net capital loss or net 

22 short-term capital loss attributable to 

23 transactions after October 31 of such year, 

24 and any such net capital loss or net short- 
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1 term capital loss shall be treated as arising 

2 on the 1st day of the next taxable year. 

3 To the extent provided in regulations, clause 

4 (ii) shall apply also for purposes of computing 

5 the taxable income of the regulated investment 

6 company.’’ 

7 (2) FOREIGN CORPORATIONS.—Section 881 (re8 lating to tax on income of foreign corporations not 

9 connected with United States business) is amended 

10 by redesignating subsection (e) as subsection (f) and 

11 by inserting after subsection (d) the following new 

12 subsection: 

13 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS

14 OF REGULATED INVESTMENT COMPANIES.— 

15 ‘‘(1) INTEREST-RELATED DIVIDENDS.— 

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

17 subparagraph (B), no tax shall be imposed 

18 under paragraph (1) of subsection (a) on any 

19 interest-related dividend (as defined in section 

20 871(k)(1)) received from a regulated investment 

21 company. 

22 ‘‘(B) EXCEPTION.—Subparagraph (A) 

23 shall not apply— 

24 ‘‘(i) to any dividend referred to in sec25 tion 871(k)(1)(B), and 
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1 ‘‘(ii) to any interest-related dividend 

2 received by a controlled foreign corporation 

3 (within the meaning of section 957(a)) to 

4 the extent such dividend is attributable to 

5 interest received by the regulated invest6 ment company from a person who is a re7 lated person (within the meaning of section 

8 864(d)(4)) with respect to such controlled 

9 foreign corporation. 

10 ‘‘(C) TREATMENT OF DIVIDENDS RE11 CEIVED BY CONTROLLED FOREIGN CORPORA12 TIONS.—The rules of subsection (c)(5)(A) shall 

13 apply to any interest-related dividend received 

14 by a controlled foreign corporation (within the 

15 meaning of section 957(a)) to the extent such 

16 dividend is attributable to interest received by 

17 the regulated investment company which is de18 scribed in clause (ii) of section 871(k)(1)(E) 

19 (and not described in clause (i) or (iii) of such 

20 section). 

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

22 No tax shall be imposed under paragraph (1) of sub23 section (a) on any short-term capital gain dividend 

24 (as defined in section 871(k)(2)) received from a 

25 regulated investment company.’’. 
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1 (3) WITHHOLDING TAXES.— 

2 (A) Section 1441(c) (relating to excep3 tions) is amended by adding at the end the fol4 lowing new paragraph: 

5 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

6 REGULATED INVESTMENT COMPANIES.— 

7 ‘‘(A) IN GENERAL.—No tax shall be re8 quired to be deducted and withheld under sub9 section (a) from any amount exempt from the 

10 tax imposed by section 871(a)(1)(A) by reason 

11 of section 871(k). 

12 ‘‘(B) SPECIAL RULE.—For purposes of 

13 subparagraph (A), clause (i) of section 

14 871(k)(1)(B) shall not apply to any dividend 

15 unless the regulated investment company knows 

16 that such dividend is a dividend referred to in 

17 such clause. A similar rule shall apply with re18 spect to the exception contained in section 

19 871(k)(2)(B).’’. 

20 (B) Section 1442(a) (relating to with21 holding of tax on foreign corporations) is 

22 amended— 

23 (i) by striking ‘‘and the reference in 

24 section 1441(c)(10)’’ and inserting ‘‘the 

25 reference in section 1441(c)(10)’’, and 
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1 (ii) by inserting before the period at 

2 the end the following: ‘‘, and the references 

3 in section 1441(c)(12) to sections 871(a) 

4 and 871(k) shall be treated as referring to 

5 sections 881(a) and 881(e) (except that for 

6 purposes of applying subparagraph (A) of 

7 section 1441(c)(12), as so modified, clause 

8 (ii) of section 881(e)(1)(B) shall not apply 

9 to any dividend unless the regulated invest10 ment company knows that such dividend is 

11 a dividend referred to in such clause)’’. 

12 (b) ESTATE TAX TREATMENT OF INTEREST IN CER13 TAIN REGULATED INVESTMENT COMPANIES.—Section 

14 2105 (relating to property without the United States for 

15 estate tax purposes) is amended by adding at the end the 

16 following new subsection: 

17 ‘‘(d) STOCK IN A RIC.— 

18 ‘‘(1) IN GENERAL.—For purposes of this sub19 chapter, stock in a regulated investment company 

20 (as defined in section 851) owned by a nonresident 

21 not a citizen of the United States shall not be 

22 deemed property within the United States in the 

23 proportion that, at the end of the quarter of such in24 vestment company’s taxable year immediately pre25 ceding a decedent’s date of death (or at such other 
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1 time as the Secretary may designate in regulations), 

2 the assets of the investment company that were 

3 qualifying assets with respect to the decedent bore 

4 to the total assets of the investment company. 

5 ‘‘(2) QUALIFYING ASSETS.—For purposes of 

6 this subsection, qualifying assets with respect to a 

7 decedent are assets that, if owned directly by the de8 cedent, would have been— 

9 ‘‘(A) amounts, deposits, or debt obligations 

10 described in subsection (b) of this section, 

11 ‘‘(B) debt obligations described in the last 

12 sentence of section 2104(c), or 

13 ‘‘(C) other property not within the United 

14 States.’’ 

15 (c) TREATMENT OF REGULATED INVESTMENT COM16 PANIES UNDER SECTION 897.— 

17 (1) Paragraph (1) of section 897(h) is amended 

18 by striking ‘‘REIT’’ each place it appears and in19 serting ‘‘qualified investment entity’’. 

20 (2) Paragraphs (2) and (3) of section 897(h) 

21 are amended to read as follows: 

22 ‘‘(2) SALE OF STOCK IN DOMESTICALLY CON23 TROLLED ENTITY NOT TAXED.—The term ‘United 

24 States real property interest’ does not include any 
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1 interest in a domestically controlled qualified invest2 ment entity. 

3 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON4 TROLLED QUALIFIED INVESTMENT ENTITIES.—In 

5 the case of a domestically controlled qualified invest6 ment entity, rules similar to the rules of subsection 

7 (d) shall apply to the foreign ownership percentage 

8 of any gain.’’ 

9 (3) Subparagraphs (A) and (B) of section 

10 897(h)(4) are amended to read as follows: 

11 ‘‘(A) QUALIFIED INVESTMENT ENTITY.— 

12 The term ‘qualified investment entity’ means 

13 any real estate investment trust and any regu14 lated investment company. 

15 ‘‘(B) DOMESTICALLY CONTROLLED.—The 

16 term ‘domestically controlled qualified invest17 ment entity’ means any qualified investment en18 tity in which at all times during the testing pe19 riod less than 50 percent in value of the stock 

20 was held directly or indirectly by foreign per21 sons.’’ 

22 (4) Subparagraphs (C) and (D) of section 

23 897(h)(4) are each amended by striking ‘‘REIT’’ 

24 and inserting ‘‘qualified investment entity’’. 
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1 (5) The subsection heading for subsection (h) of 

2 section 897 is amended by striking ‘‘REITS’’ and 

3 inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 

4 (d) EFFECTIVE DATE.— 

5 (1) IN GENERAL.—Except as otherwise pro6 vided in this subsection, the amendments made by 

7 this section shall apply to dividends with respect to 

8 taxable years of regulated investment companies be9 ginning after December 31, 2004. 

10 (2) ESTATE TAX TREATMENT.—The amend11 ment made by subsection (b) shall apply to estates 

12 of decedents dying after December 31, 2004. 

13 (3) CERTAIN OTHER PROVISIONS.—The amend14 ments made by subsection (c) (other than paragraph 

15 (1) thereof) shall take effect after December 31, 

16 2004. 

17 SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS. 

18 (a) IN GENERAL.—Subsection (g) of section 468B 

19 (relating to clarification of taxation of certain funds) is 

20 amended to read as follows: 

21 ‘‘(g) CLARIFICATION OF TAXATION OF CERTAIN

22 FUNDS.— 

23 ‘‘(1) IN GENERAL.—Except as provided in para24 graph (2), nothing in any provision of law shall be 

25 construed as providing that an escrow account, set-
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1 tlement fund, or similar fund is not subject to cur2 rent income tax. The Secretary shall prescribe regu3 lations providing for the taxation of any such ac4 count or fund whether as a grantor trust or other5 wise. 

6 ‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET7 TLEMENT FUNDS.—An escrow account, settlement 

8 fund, or similar fund shall be treated as beneficially 

9 owned by the United States and shall be exempt 

10 from taxation under this subtitle if— 

11 ‘‘(A) it is established pursuant to a con12 sent decree entered by a judge of a United 

13 States District Court, 

14 ‘‘(B) it is created for the receipt of settle15 ment payments as directed by a government en16 tity for the sole purpose of resolving or satis17 fying one or more claims asserting liability 

18 under the Comprehensive Environmental Re19 sponse, Compensation, and Liability Act of 

20 1980, 

21 ‘‘(C) the authority and control over the ex22 penditure of funds therein (including the ex23 penditure of contributions thereto and any net 

24 earnings thereon) is with such government enti25 ty, and 
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1 ‘‘(D) upon termination, any remaining 

2 funds will be disbursed to such government en3 tity for use in accordance with applicable law. 

4 For purposes of this paragraph, the term ‘govern5 ment entity’ means the United States, any State or 

6 political subdivision thereof, the District of Colum7 bia, any possession of the United States, and any 

8 agency or instrumentality of any of the foregoing.’’. 

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

10 this section shall apply to taxable years beginning after 

11 December 31, 2004. 

12 SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALI13 FYING FOR ORPHAN DRUG CREDIT. 

14 (a) IN GENERAL.—Paragraph (2) of section 45C(b) 

15 (relating to qualified clinical testing expenses) is amended 

16 by adding at the end the following new subparagraph: 

17 ‘‘(C) TREATMENT OF CERTAIN EXPENSES

18 INCURRED BEFORE DESIGNATION.—For pur19 poses of subparagraph (A)(ii)(I), if a drug is 

20 designated under section 526 of the Federal 

21 Food, Drug, and Cosmetic Act not later than 

22 the due date (including extensions) for filing 

23 the return of tax under this subtitle for the tax24 able year in which the application for such des25 ignation of such drug was filed, such drug shall 
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1 be treated as having been designated on the 

2 date that such application was filed.’’. 

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

4 subsection (a) shall apply to expenses incurred after the 

5 date of the enactment of this Act. 

6 SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 

7 BOWS AND ARROWS. 

8 (a) BOWS.—Paragraph (1) of section 4161(b) (relat9 ing to bows) is amended to read as follows: 

10 ‘‘(1) BOWS.— 

11 ‘‘(A) IN GENERAL.—There is hereby im12 posed on the sale by the manufacturer, pro13 ducer, or importer of any bow which has a peak 

14 draw weight of 30 pounds or more, a tax equal 

15 to 11 percent of the price for which so sold. 

16 ‘‘(B) ARCHERY EQUIPMENT.—There is 

17 hereby imposed on the sale by the manufac18 turer, producer, or importer— 

19 ‘‘(i) of any part or accessory suitable 

20 for inclusion in or attachment to a bow de21 scribed in subparagraph (A), and 

22 ‘‘(ii) of any quiver or broadhead suit23 able for use with an arrow described in 

24 paragraph (2), 
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1 a tax equal to 11 percent of the price for which 

2 so sold.’’. 

3 (b) ARROWS.—Subsection (b) of section 4161 (relat4 ing to bows and arrows, etc.) is amended by redesignating 

5 paragraph (3) as paragraph (4) and inserting after para6 graph (2) the following: 

7 ‘‘(3) ARROWS.— 

8 ‘‘(A) IN GENERAL.—There is hereby im9 posed on the sale by the manufacturer, pro10 ducer, or importer of any arrow, a tax equal to 

11 12 percent of the price for which so sold. 

12 ‘‘(B) EXCEPTION.—In the case of any 

13 arrow of which the shaft or any other compo14 nent has been previously taxed under paragraph 

15 (1) or (2)— 

16 ‘‘(i) section 6416(b)(3) shall not 

17 apply, and 

18 ‘‘(ii) the tax imposed by subparagraph 

19 (A) shall be an amount equal to the excess 

20 (if any) of— 

21 ‘‘(I) the amount of tax imposed 

22 by this paragraph (determined with23 out regard to this subparagraph), over 

24 ‘‘(II) the amount of tax paid with 

25 respect to the tax imposed under 
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1 paragraph (1) or (2) on such shaft or 

2 component. 

3 ‘‘(C) ARROW.—For purposes of this para4 graph, the term ‘arrow’ means any shaft de5 scribed in paragraph (2) to which additional 

6 components are attached.’’. 

7 (c) CONFORMING AMENDMENTS.—Section 

8 4161(b)(2) is amended— 

9 (1) by inserting ‘‘(other than broadheads)’’ 

10 after ‘‘point’’, and 

11 (2) by striking ‘‘ARROWS.—’’ in the heading 

12 and inserting ‘‘ARROW COMPONENTS.—’’. 

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

14 this section shall apply to articles sold by the manufac15 turer, producer, or importer after December 31, 2004. 

16 SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE 

17 BOXES. 

18 (a) REPEAL.—Paragraph (6) of section 4162(a) (de19 fining sport fishing equipment) is amended by striking 

20 subparagraph (C) and by redesignating subparagraphs 

21 (D) through (J) as subparagraphs (C) through (I), respec22 tively. 

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

24 section shall apply to articles sold by the manufacturer, 

25 producer, or importer after December 31, 2004. 
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1 SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH. 

2 (a) NOT TREATED AS SPORT FISHING EQUIP3 MENT.—Subsection (a) of section 4162 (relating to sport 

4 fishing equipment defined) is amended by inserting ‘‘and’’ 

5 at the end of paragraph (8), by striking ‘‘, and’’ at the 

6 end of paragraph (9) and inserting a period, and by strik7 ing paragraph (10). 

8 (b) CONFORMING AMENDMENT.—Section 4162 is 

9 amended by striking subsection (b) and by redesignating 

10 subsection (c) as subsection (b). 

11 (c) EFFECTIVE DATE.—The amendments made this 

12 section shall apply to articles sold by the manufacturer, 

13 producer, or importer after December 31, 2004. 

14 SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS 

15 WHOLESALERS FOR COST OF CARRYING FED16 ERAL EXCISE TAXES ON BOTTLED DISTILLED 

17 SPIRITS. 

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

19 A of chapter 51 (relating to gallonage and occupational 

20 taxes) is amended by adding at the end the following new 

21 section: 

22 ‘‘SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER’S AV23 ERAGE COST OF CARRYING EXCISE TAX. 

24 ‘‘(a) IN GENERAL.—For purposes of section 38, in 

25 the case of an eligible wholesaler, the amount of the dis-
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1 tilled spirits wholesalers credit for any taxable year is the 

2 amount equal to the product of— 

3 ‘‘(1) the number of cases of bottled distilled 

4 spirits— 

5 ‘‘(A) which were bottled in the United 

6 States, and 

7 ‘‘(B) which are purchased by such whole8 saler during the taxable year directly from the 

9 bottler of such spirits, and 

10 ‘‘(2) the average tax-financing cost per case for 

11 the most recent calendar year ending before the be12 ginning of such taxable year. 

13 ‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 

14 section, the term ‘eligible wholesaler’ means any person 

15 who holds a permit under the Federal Alcohol Administra16 tion Act as a wholesaler of distilled spirits. 

17 ‘‘(c) AVERAGE TAX-FINANCING COST.— 

18 ‘‘(1) IN GENERAL.—For purposes of this sec19 tion, the average tax-financing cost per case for any 

20 calendar year is the amount of interest which would 

21 accrue at the deemed financing rate during a 60-day 

22 period on an amount equal to the deemed Federal 

23 excise per case. 

24 ‘‘(2) DEEMED FINANCING RATE.—For purposes 

25 of paragraph (1), the deemed financing rate for any 
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1 calendar year is the average of the corporate over2 payment rates under paragraph (1) of section 

3 6621(a) (determined without regard to the last sen4 tence of such paragraph) for calendar quarters of 

5 such year. 

6 ‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON

7 CASE.—For purposes of paragraph (1), the deemed 

8 Federal excise tax per case of 12 80-proof 750ml 

9 bottles is $22.83. 

10 ‘‘(4) NUMBER OF CASES IN LOT.—For purposes 

11 of this section, the number of cases in any lot of dis12 tilled spirits shall be determined by dividing the 

13 number of liters in such lot by 9.’’ 

14 (b) CONFORMING AMENDMENTS.— 

15 (1) Subsection (b) of section 38 is amended by 

16 striking ‘‘plus’’ at the end of paragraph (14), by 

17 striking the period at the end of paragraph (15) and 

18 inserting ‘‘, plus’’, and by adding at the end the fol19 lowing new paragraph: 

20 ‘‘(16) in the case of an eligible wholesaler (as 

21 defined in section 5011(b)), the distilled spirits 

22 wholesalers credit determined under section 

23 5011(a).’’ 

24 (2) Subsection (d) of section 39 (relating to 

25 carryback and carryforward of unused credits) is 
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1 amended by adding at the end the following new 

2 paragraph: 

3 ‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT

4 BEFORE JANUARY 1, 2005.—No portion of the un5 used business credit for any taxable year which is 

6 attributable to the credit determined under section 

7 5011(a) may be carried back to a taxable year be8 ginning before January 1, 2005.’’. 

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

10 I of subchapter A of chapter 51 is amended by add11 ing at the end the following new item: 

‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of carrying excise tax.’’. 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2004. 

15 SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELAT16 ING TO DISTILLED SPIRITS, WINE, AND BEER. 

17 (a) IN GENERAL.—Subpart G of part II of sub18 chapter A of chapter 51 is amended by redesignating sec19 tion 5148 as section 5149 and by inserting after section 

20 5147 the following new section: 

21 ‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 

22 ‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 

23 5091, 5111, 5121, and 5131, the rate of tax imposed 

24 under such sections for the suspension period shall be 
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1 zero. During such period, persons engaged in or carrying 

2 on a trade or business covered by such sections shall reg3 ister under section 5141 and shall comply with the record4 keeping requirements under this part. 

5 ‘‘(b) SUSPENSION PERIOD.—For purposes of sub6 section (a), the suspension period is the period beginning 

7 on July 1, 2004, and ending on June 30, 2007.’’. 

8 (b) CONFORMING AMENDMENT.—Section 5117 is 

9 amended by adding at the end the following new sub10 section: 

11 ‘‘(d) SPECIAL RULE DURING SUSPENSION PE12 RIOD.—Except as provided in subsection (b) or by the Sec13 retary, during the suspension period (as defined in section 

14 5148) it shall be unlawful for any dealer to purchase dis15 tilled spirits for resale from any person other than a 

16 wholesale dealer in liquors who is required to keep records 

17 under section 5114.’’. 

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

19 for subpart G of part II of subchapter A of chapter 51 

20 is amended by striking the last item and inserting the fol21 lowing new items: 

‘‘Sec. 5148. Suspension of occupational tax. 

‘‘Sec. 5149. Cross references.’’. 

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

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

24 of this Act. 
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1 SEC. 294. MODIFICATION OF UNRELATED BUSINESS IN2 COME LIMITATION ON INVESTMENT IN CER3 TAIN SMALL BUSINESS INVESTMENT COMPA4 NIES. 

5 (a) IN GENERAL.—Paragraph (6) of section 514(c) 

6 (relating to acquisition indebtedness) is amended to read 

7 as follows: 

8 ‘‘(6) CERTAIN FEDERAL FINANCING.— 

9 ‘‘(A) IN GENERAL.—For purposes of this 

10 section, the term ‘acquisition indebtedness’ does 

11 not include— 

12 ‘‘(i) an obligation, to the extent that 

13 it is insured by the Federal Housing Ad14 ministration, to finance the purchase, reha15 bilitation, or construction of housing for 

16 low and moderate income persons, or 

17 ‘‘(ii) indebtedness incurred by a small 

18 business investment company licensed 

19 under the Small Business Investment Act 

20 of 1958 and formed after the date of the 

21 enactment of the American Jobs Creation 

22 Act of 2004, if such indebtedness is evi23 denced by a debenture— 

24 ‘‘(I) issued by such company 

25 under section 303(a) of such Act, and 
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1 ‘‘(II) held or guaranteed by the 

2 Small Business Administration. 

3 ‘‘(B) LIMITATION.—Subparagraph (A)(ii) 

4 shall not apply with respect to any small busi5 ness investment company during any period 

6 that— 

7 ‘‘(i) any organization which is exempt 

8 from tax under this title (other than a gov9 ernmental unit) owns more than 25 per10 cent of the capital or profits interest in 

11 such company, or 

12 ‘‘(ii) organizations which are exempt 

13 from tax under this title (including govern14 mental units other than any agency or in15 strumentality of the United States) own, in 

16 the aggregate, 50 percent or more of the 

17 capital or profits interest in such com18 pany.’’. 

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

20 this section shall apply to indebtedness incurred by small 

21 business investment companies formed after the date of 

22 the enactment of the American Jobs Creation Act of 2004. 
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1 SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME 

2 FROM CERTAIN INTERNATIONAL SHIPPING 

3 ACTIVITIES USING PER TON RATE. 

4 (a) IN GENERAL.—Chapter 1 of the Internal Rev5 enue Code of 1986 is amended by inserting after sub6 chapter Q the following new subchapter: 

7 ‘‘Subchapter R—Election To Determine Tax8 able Income From Certain International 

9 Shipping Activities Using per Ton Rate 

‘‘Sec. 1352. Alternative tax on qualifying shipping activities. 

‘‘Sec. 1353. Taxable income from qualifying shipping activities. 

‘‘Sec. 1354. Qualifying shipping tax election; revocation; termination. 

‘‘Sec. 1355. Definitions and special rules. 

‘‘Sec. 1356. Qualifying shipping activities. 

‘‘Sec. 1357. Items not subject to regular tax; depreciation; interest. 

‘‘Sec. 1358. Allocation of credits, income, and deductions. 

‘‘Sec. 1359. Disposition of qualifying shipping assets. 

10 ‘‘SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING 

11 ACTIVITIES. 

12 ‘‘(a) IN GENERAL.—The taxable income of an elect13 ing corporation from qualifying shipping activities shall be 

14 the amount determined under this subchapter, and the 

15 corporate percentages of the items of income, gain, loss, 

16 deduction, or credit of an electing corporation and of other 

17 members of the electing group of such corporation which 

18 would otherwise be taken into account by reason of its 

19 qualifying shipping activities shall be taken into account 

20 to the extent provided in section 1357. 
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1 ‘‘(b) ALTERNATIVE TAX.—The taxable income of an 

2 electing corporation from qualifying shipping activities, if 

3 otherwise taxable under section 11, 55, 882, 887, or 

4 1201(a) shall be subject to tax only under this section at 

5 the maximum rate specified in section 11(b). The income 

6 of a foreign corporation shall not be subject to tax under 

7 this subchapter to the extent its income is excludible from 

8 gross income under section 883(a)(1). 

9 ‘‘SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING 

10 ACTIVITIES. 

11 ‘‘(a) IN GENERAL.—For purposes of this subchapter, 

12 the taxable income of an electing corporation from quali13 fying shipping activities shall be its corporate income per14 centage of the sum of the amounts determined under sub15 section (b) for each qualifying vessel operated by such 

16 electing corporation or other electing entity. 

17 ‘‘(b) AMOUNTS.—For purposes of subsection (a), the 

18 amount of taxable income of an electing entity for each 

19 qualifying vessel shall equal the product of— 

20 ‘‘(1) the daily notional taxable income from the 

21 operation of the qualifying vessel in United States 

22 foreign trade, and 

23 ‘‘(2) the number of days during the taxable 

24 year that the electing entity operated such vessel as 

25 a qualifying vessel in United States foreign trade. 
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1 ‘‘(c) DAILY NOTIONAL TAXABLE INCOME.—For pur2 poses of subsection (b), the daily notional taxable income 

3 from the operation of a qualifying vessel is 40 cents for 

4 each 100 tons of the net tonnage of the vessel, up to 

5 25,000 net tons, and 20 cents for each 100 tons of the 

6 net tonnage of the vessel, in excess of 25,000 net tons. 

7 ‘‘(d) MULTIPLE OPERATORS OF VESSEL.—If 2 or 

8 more persons have a joint interest in a qualifying vessel 

9 and are treated as operators of that vessel, the taxable 

10 income from the operation of such vessel for that time (as 

11 determined under this section) shall be allocated among 

12 such persons on the basis of their ownership and charter 

13 interests in such vessel or on such other basis as the Sec14 retary may prescribe by regulations. 

15 ‘‘(e) NONCORPORATE PERCENTAGE.—Notwith16 standing any contrary provision of this subchapter, the 

17 noncorporate percentage of any item of income, gain, loss, 

18 deduction, or credit of any member of an electing group 

19 shall be taken into account for all purposes of this subtitle 

20 as if this subchapter were not in effect. 

21 ‘‘SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REV22 OCATION; TERMINATION. 

23 ‘‘(a) IN GENERAL.—Except as provided in sub24 sections (b) and (f), a qualifying shipping tax election may 

25 be made in respect of any qualifying entity. 
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1 ‘‘(b) CONDITION OF ELECTION.—An election may be 

2 made by a member of a controlled group under this sub3 section for any taxable year only if all qualifying entities 

4 that are members of the controlled group join in the elec5 tion. 

6 ‘‘(c) WHEN MADE.—An election under subsection (a) 

7 may be made by a qualifying entity in such form as pre8 scribed by the Secretary. Such election shall be filed with 

9 the qualifying entity’s return for the first taxable year to 

10 which the election shall apply, by the due date for such 

11 return (including any applicable extensions). 

12 ‘‘(d) YEARS FOR WHICH EFFECTIVE.—An election 

13 under subsection (a) shall be effective for the taxable year 

14 of the qualifying entity for which it is made and for all 

15 succeeding taxable years of the entity, until such election 

16 is terminated under subsection (e). 

17 ‘‘(e) TERMINATION.— 

18 ‘‘(1) BY REVOCATION.— 

19 ‘‘(A) IN GENERAL.—An election under 

20 subsection (a) may be terminated by revocation. 

21 ‘‘(B) WHEN EFFECTIVE.—Except as pro22 vided in subparagraph (C)— 

23 ‘‘(i) a revocation made during the tax24 able year and on or before the 15th day of 
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1 the 3rd month thereof shall be effective on 

2 the 1st day of such taxable year, and 

3 ‘‘(ii) a revocation made during the 

4 taxable year but after such 15th day shall 

5 be effective on the 1st day of the following 

6 taxable year. 

7 ‘‘(C) REVOCATION MAY SPECIFY PROSPEC8 TIVE DATE.—If the revocation specifies a date 

9 for revocation which is on or after the day on 

10 which the revocation is made, the revocation 

11 shall be effective on and after the date so speci12 fied. 

13 ‘‘(2) BY ENTITY CEASING TO BE QUALIFYING

14 ENTITY.— 

15 ‘‘(A) IN GENERAL.—An election under 

16 subsection (a) shall be terminated whenever (at 

17 any time on or after the 1st day of the 1st tax18 able year for which the entity is an electing en19 tity) such entity ceases to be a qualifying enti20 ty. 

21 ‘‘(B) WHEN EFFECTIVE.—Any termination 

22 under this paragraph shall be effective on and 

23 after the date of cessation. 

24 ‘‘(f) ELECTION AFTER TERMINATION.—If a quali25 fying entity has made an election under subsection (a) and 
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1 if such election has been terminated under subsection (e), 

2 such entity (and any successor entity) shall not be eligible 

3 to make an election under subsection (a) for any taxable 

4 year before its 5th taxable year which begins after the 1st 

5 taxable year for which such termination is effective, unless 

6 the Secretary consents to such election. 

7 ‘‘SEC. 1355. DEFINITIONS AND SPECIAL RULES. 

8 ‘‘(a) DEFINITIONS.—For purposes of this sub9 chapter: 

10 ‘‘(1) The term ‘controlled group’ means any 

11 group of trusts and business entities whose members 

12 would be treated as a single employer under the 

13 rules of section 52(a) (without regard to paragraphs 

14 (1) and (2) thereof) and section 52(b)(1). 

15 ‘‘(2) The term ‘corporate income percentage’ 

16 means the least aggregate share, expressed as a per17 centage, of any item of income or gain of an electing 

18 corporation or electing group of which such corpora19 tion is a member from qualifying shipping activities 

20 that would, but for an election in effect under this 

21 subchapter, be required to be reported on the Fed22 eral income tax return of an electing corporation 

23 during any taxable period. In the case of an electing 

24 group which includes two or more electing corpora25 tions, the corporate income percentage of each such 
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1 corporation shall be determined on the basis of such 

2 corporations’ direct and indirect ownership and 

3 charter interests in qualifying vessels of the electing 

4 group or on such other basis as the Secretary may 

5 prescribe by regulations. 

6 ‘‘(3) The term ‘corporate loss percentage’ 

7 means the greatest aggregate share, expressed as a 

8 percentage, of any item of loss, deduction or credit 

9 of an electing corporation or electing group of which 

10 such corporation is a member from qualifying ship11 ping activities that would, but for an election in ef12 fect under this subchapter, be required to be re13 ported on the Federal income tax return of an elect14 ing corporation during any taxable period. 

15 ‘‘(4) The term ‘corporate percentages’ means 

16 the corporate income percentage and the corporate 

17 loss percentage. 

18 ‘‘(5) The term ‘electing corporation’ means any 

19 C corporation that is an electing entity or that 

20 would, but for an election in effect under this sub21 chapter, be required to report any item of income, 

22 gain, loss, deduction, or credit of an electing entity 

23 on its Federal income tax return. 
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1 ‘‘(6) The term ‘electing entity’ means any quali2 fying entity for which an election is in effect under 

3 this subchapter. 

4 ‘‘(7) The term ‘electing group’ means a con5 trolled group of which one or more members is an 

6 electing entity. 

7 ‘‘(8) The term ‘noncorporate percentage’ means 

8 the difference between one hundred percent and the 

9 corporate income percentage or corporate loss per10 centage, as applicable. 

11 ‘‘(9) The term ‘qualifying entity’ means a trust 

12 or business entity that— 

13 ‘‘(A) operates one or more qualifying ves14 sels, and 

15 ‘‘(B) meets the shipping activity require16 ment in subsection (c). 

17 ‘‘(10) The term ‘qualifying shipping assets’ 

18 means any qualifying vessel and other assets which 

19 are used in core qualifying activities as described in 

20 section 1356(b). 

21 ‘‘(11) The term ‘qualifying vessel’ means a self22 propelled (or a combination self-propelled and non23 self-propelled) United States flag vessel of not less 

24 than 10,000 deadweight tons used in the United 

25 States foreign trade. 
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1 ‘‘(12) The term ‘United States domestic trade’ 

2 means the transportation of goods or passengers be3 tween places in the United States. 

4 ‘‘(13) The term ‘United States flag vessel’ 

5 means any vessel documented under the laws of the 

6 United States. 

7 ‘‘(14) The term ‘United States foreign trade’ 

8 means the transportation of goods or passengers be9 tween a place in the United States and a foreign 

10 place or between foreign places. 

11 ‘‘(b) OPERATING A VESSEL.—For purposes of this 

12 subchapter: 

13 ‘‘(1) Except as provided in paragraph (2), an 

14 entity is treated as operating any vessel owned by, 

15 or chartered (including a time charter) to, the enti16 ty. 

17 ‘‘(2) An entity is treated as operating a vessel 

18 that it has chartered out on bareboat charter terms 

19 only if— 

20 ‘‘(A) the vessel is temporarily surplus to 

21 the entity’s requirements and the term of the 

22 charter does not exceed three years; or 

23 ‘‘(B) the vessel is bareboat chartered to a 

24 member of a controlled group which includes 

25 such entity or to an unrelated third party that 
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1 sub-bareboats or time charters the vessel to a 

2 member of such controlled group (including the 

3 owner). 

4 ‘‘(c) SHIPPING ACTIVITY REQUIREMENT.—For pur5 poses of this section, the shipping activity requirement is 

6 met for a taxable year only by an entity described in para7 graph (1), (2), or (3). 

8 ‘‘(1) An entity in the first taxable year of its 

9 qualifying shipping tax election if, for the preceding 

10 taxable year, the test in paragraph (4) is met. 

11 ‘‘(2) An entity in the second or any subsequent 

12 taxable year of its qualifying shipping tax election if, 

13 for each of the two preceding taxable years, the test 

14 in paragraph (4) is met. 

15 ‘‘(3) An entity that would be described in para16 graph (1) or (2) if the test in paragraph (4) were 

17 applied on an aggregate basis to the controlled 

18 group of which such entity is a member, and vessel 

19 charters between members of the controlled group 

20 were disregarded. 

21 ‘‘(4) The test in this paragraph is met if on av22 erage at least 25 percent of the aggregate tonnage 

23 of qualifying vessels operated by the entity were 

24 owned by the entity or chartered to the entity on 

25 bareboat charter terms. For purposes of the pre-
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1 ceding sentence, vessels chartered (including time 

2 chartered) to an entity by a member of a controlled 

3 group which includes the entity, or by a third party 

4 that bareboat charters the vessels from the entity or 

5 a member of the entity’s controlled group, shall be 

6 treated as chartered to the entity on bareboat char7 ter terms. 

8 ‘‘(d) EFFECT OF TEMPORARILY CEASING TO OPER9 ATE A QUALIFYING VESSEL.— 

10 ‘‘(1) A temporary cessation by an electing enti11 ty in operation of a qualifying vessel shall be dis12 regarded for purposes of subsections (b) and (c) if 

13 the electing entity gives timely notice to the Sec14 retary stating— 

15 ‘‘(A) that it has temporarily ceased to op16 erate the qualifying vessel, and 

17 ‘‘(B) its intention to resume operating the 

18 qualifying vessel. 

19 ‘‘(2) Notice shall be deemed timely if given not 

20 later than the due date (including extensions) for 

21 the electing entity’s tax return (as set forth in sec22 tion 6072(b)) for the taxable year in which the tem23 porary cessation begins. 

24 ‘‘(3) The treatment provided by paragraph (1) 

25 shall continue until the earlier of— 
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1 ‘‘(A) the electing entity abandoning its in2 tention to resume operation of the qualifying 

3 vessel, or 

4 ‘‘(B) the electing entity resuming operation 

5 of the qualifying vessel. 

6 ‘‘(e) EFFECT OF TEMPORARILY OPERATING A

7 QUALIFYING VESSEL IN THE UNITED STATES DOMESTIC

8 TRADE.— 

9 ‘‘(1) The temporary operation in the United 

10 States domestic trade of any qualifying vessel which 

11 had been used in the United States foreign trade 

12 shall be disregarded for purposes of this subchapter 

13 if the electing entity gives timely notice to the Sec14 retary stating— 

15 ‘‘(A) that it temporarily operates or has 

16 operated in the United States domestic trade a 

17 qualifying vessel which had been used in the 

18 United States foreign trade, and 

19 ‘‘(B) its intention to resume operation of 

20 the vessel in the United States foreign trade. 

21 ‘‘(2) Notice shall be deemed timely if given not 

22 later than the due date (including extensions) for 

23 the electing entity’s tax return (as set forth in sec24 tion 6072(b)) for the taxable year in which the tem25 porary cessation begins. 
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1 ‘‘(3) The treatment provided by paragraph (1) 

2 shall continue until the earlier of— 

3 ‘‘(A) the electing entity abandoning its in4 tention to resume operations of the vessel in the 

5 United States foreign trade, or 

6 ‘‘(B) the electing entity resuming operation 

7 of the vessel in the United States foreign trade. 

8 ‘‘(f) EFFECT OF CHANGE IN USE.— 

9 ‘‘(1) Except as provided in subsection (e), a 

10 vessel that is used other than for operations in the 

11 United States foreign trade on other than a tem12 porary basis ceases to be a qualifying vessel when 

13 such use begins. 

14 ‘‘(2) For purposes of this subsection, a change 

15 in use of a vessel, other than a commencement of 

16 operation in the United States domestic trade, is 

17 taken to be permanent unless there are cir18 cumstances indicating that it is temporary. 

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

20 such regulations as may be necessary or appropriate to 

21 carry out the purposes of this section. 

22 ‘‘SEC. 1356. QUALIFYING SHIPPING ACTIVITIES. 

23 ‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur24 poses of this subchapter the ‘qualifying shipping activities’ 

25 of an electing entity consist of— 
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1 ‘‘(1) core qualifying activities, 

2 ‘‘(2) qualifying secondary activities, and 

3 ‘‘(3) qualifying incidental activities. 

4 ‘‘(b) CORE QUALIFYING ACTIVITIES.— 

5 ‘‘(1) The ‘core qualifying activities’ of an elect6 ing entity are— 

7 ‘‘(A) its activities in operating qualifying 

8 vessels in United States foreign trade, and 

9 ‘‘(B) other activities of the electing entity 

10 and other members of its electing group that 

11 are an integral part of its business of operating 

12 qualifying vessels in United States foreign 

13 trade, including ownership or operation of 

14 barges, containers, chassis, and other equip15 ment that are the complement of, or used in 

16 connection with, a qualifying vessel in United 

17 States foreign trade, the inland haulage of 

18 cargo shipped, or to be shipped, on qualifying 

19 vessels in United States foreign trade, and the 

20 provision of terminal, maintenance, repair, 

21 logistical, or other vessel, container, or cargo-re22 lated services that are an integral part of oper23 ating qualifying vessels in United States foreign 

24 trade. 
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1 ‘‘(2) ‘Core qualifying activities’ do not include 

2 the provision by an entity of facilities or services to 

3 any person, other than— 

4 ‘‘(A) another member of such entity’s 

5 electing group, 

6 ‘‘(B) a consignor, consignee, or other cus7 tomer of such entity’s business of operating 

8 qualifying vessels in United States foreign 

9 trade, or 

10 ‘‘(C) a member of an alliance, joint ven11 ture, pool, partnership or similar undertaking 

12 involving the operation of qualifying vessels in 

13 United States foreign trade of which such enti14 ty is a member. 

15 ‘‘(c) QUALIFYING SECONDARY ACTIVITIES.—For 

16 purposes of this subsection— 

17 ‘‘(1) the term ‘secondary activities’ means ac18 tivities that are not core qualifying activities, and— 

19 ‘‘(A) are the active management or oper20 ation of vessels in the United States foreign 

21 trade, 

22 ‘‘(B) the provision of vessel, container, or 

23 cargo-related facilities or services to any person, 

24 or 
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1 ‘‘(C) such other activities as may be pre2 scribed by the Secretary pursuant to regula3 tions, and 

4 ‘‘(2) the ‘qualified secondary activities’ of an 

5 electing entity are its secondary activities and the 

6 secondary activities of other members of its electing 

7 group, but only to the extent that, without regard to 

8 this subchapter, the aggregate gross income derived 

9 by the electing entity and the other members of its 

10 electing group from such activities does not exceed 

11 20 percent of the aggregate gross income derived by 

12 the electing entity and the other members of its 

13 electing group from their core qualifying activities. 

14 ‘‘(d) QUALIFYING INCIDENTAL ACTIVITIES.—Ship15 ping-related activities carried on by an electing entity or 

16 another member of its electing group are qualified inci17 dental activities of the electing entity if— 

18 ‘‘(1) incidental to its core qualifying activities, 

19 ‘‘(2) not qualifying secondary activities, and 

20 ‘‘(3) without regard to this subchapter, the ag21 gregate gross income derived by the electing entity 

22 and other members of its electing group from such 

23 activities does not exceed 0.1 percent of such enti24 ties’ aggregate gross income from their core quali25 fying activities. 
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1 ‘‘SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRE2 CIATION; INTEREST. 

3 ‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in4 come of an electing entity shall not include the corporate 

5 income percentage of— 

6 ‘‘(1) income from qualifying shipping activities 

7 in the United States foreign trade, 

8 ‘‘(2) income from money, bank deposits and 

9 other temporary investments which are reasonably 

10 necessary to meet the working capital requirements 

11 of qualifying shipping activities, and 

12 ‘‘(3) income from money or other intangible as13 sets accumulated pursuant to a plan to purchase 

14 qualifying shipping assets. 

15 ‘‘(b) ELECTING GROUP MEMBER.—Gross income of 

16 a member of an electing group that is not an electing enti17 ty shall not include the corporate income percentage of 

18 its income from qualifying shipping activities that are 

19 taken into account under this subchapter as qualifying 

20 shipping activities of an electing entity. 

21 ‘‘(c) DENIAL OF LOSSES, DEDUCTIONS, AND CRED22 ITS.— 

23 ‘‘(1) GENERAL RULE.—Subject to paragraph 

24 (2), the corporate loss percentage of each item of 

25 loss, deduction (other than for interest expense), or 

26 credit of any taxpayer with respect to any activity 
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1 the income from which is excluded from gross in2 come under this section shall be disallowed. 

3 ‘‘(2) DEPRECIATION.—Notwithstanding para4 graph (1), the deduction for depreciation of a quali5 fying shipping asset shall be allowed in determining 

6 the adjusted basis of such asset for purposes of de7 termining gain from its disposition. 

8 ‘‘(A) Except as provided in subparagraph 

9 (B), the straight line method of depreciation 

10 shall apply to the corporate income percentage 

11 of qualifying shipping assets the income from 

12 operation of which is excluded from gross in13 come under this section. 

14 ‘‘(B) Subparagraph (A) shall not apply to 

15 any qualifying shipping asset which is subject 

16 to a charter entered into prior to the effective 

17 date of this subchapter. 

18 ‘‘(3) INTEREST.—The corporate loss percentage 

19 of an electing entity’s interest expense shall be dis20 allowed in the ratio that the fair market value of its 

21 qualifying vessel assets bears to the fair market 

22 value of its total assets. 

23 ‘‘(d) SECTION INAPPLICABLE TO UNRELATED PER24 SONS.—This section shall not apply to a taxpayer that is 

25 not a member of an electing group. 
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1 ‘‘SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DE2 DUCTIONS. 

3 ‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur4 poses of this chapter, the qualifying shipping activities of 

5 an electing entity shall be treated as a separate trade or 

6 business activity from all other activities conducted by the 

7 entity. 

8 ‘‘(b) EXCLUSION OF CREDITS OR DEDUCTIONS.— 

9 ‘‘(1) No deduction shall be allowed against the 

10 taxable income of an electing corporation from quali11 fying shipping activities, and no credit shall be al12 lowed against the tax imposed by section 1352(b). 

13 ‘‘(2) No deduction shall be allowed for any net 

14 operating loss attributable to the qualifying shipping 

15 activities of a corporation to the extent that such 

16 loss is carried forward by the corporation from a 

17 taxable year preceding the first taxable year for 

18 which such corporation was an electing corporation. 

19 ‘‘(c) TRANSACTIONS NOT AT ARM’S LENGTH.—Sec20 tion 482 shall apply in accordance with this subsection to 

21 a transaction or series of transactions— 

22 ‘‘(1) as between an electing entity and another 

23 person, or 

24 ‘‘(2) as between an entity’s qualifying shipping 

25 activities and other activities carried on by it. 
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1 ‘‘SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING AS2 SETS. 

3 ‘‘(a) IN GENERAL.—If an electing entity sells or dis4 poses of qualifying shipping assets (as defined in sub5 section (c)) in an otherwise taxable transaction, at the 

6 election of the entity no gain shall be recognized if replace7 ment qualifying shipping assets are acquired during the 

8 period specified in subsection (b), except to the extent that 

9 the amount realized upon such sale or disposition exceeds 

10 the cost of the replacement qualifying shipping assets. 

11 ‘‘(b) PERIOD WITHIN WHICH PROPERTY MUST BE

12 REPLACED.—The period referred to in subsection (a) shall 

13 be the period beginning one year prior to the disposition 

14 of the qualifying shipping assets and ending— 

15 ‘‘(1) 3 years after the close of the first taxable 

16 year in which the gain is realized, or 

17 ‘‘(2) subject to such terms and conditions as 

18 may be specified by the Secretary, on such later date 

19 as the Secretary may designate on application by the 

20 taxpayer. Such application shall be made at such 

21 time and in such manner as the Secretary may by 

22 regulations prescribe. 

23 ‘‘(c) TIME FOR ASSESSMENT OF DEFICIENCY AT24 TRIBUTABLE TO GAIN.—If an electing entity has made the 

25 election provided in subsection (a), then— 
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1 ‘‘(1) the statutory period for the assessment of 

2 any deficiency, for any taxable year in which any 

3 part of the gain is realized, attributable to such gain 

4 shall not expire prior to the expiration of 3 years 

5 from the date the Secretary is notified by the entity 

6 (in such manner as the Secretary may by regulations 

7 prescribe) of the replacement tonnage tax property 

8 or of an intention not to replace, and 

9 ‘‘(2) such deficiency may be assessed before the 

10 expiration of such 3-year period notwithstanding the 

11 provisions of section 6212(c) or the provisions of any 

12 other law or rule of law which would otherwise pre13 vent such assessment. 

14 ‘‘(d) BASIS OF REPLACEMENT QUALIFYING SHIP15 PING ASSETS.—In the case of replacement qualifying ship16 ping assets purchased by an electing entity which resulted 

17 in the nonrecognition of any part of the gain realized as 

18 the result of a sale or other disposition of qualifying ship19 ping assets, the basis shall be the cost of such property 

20 decreased in the amount of the gain not so recognized; 

21 and if the property purchased consists of more than one 

22 piece of property, the basis determined under this sentence 

23 shall be allocated to the purchased properties in propor24 tion to their respective costs. 
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1 ‘‘(e) REPLACEMENT QUALIFYING SHIPPING ASSETS

2 MUST BE ACQUIRED FROM UNRELATED PERSON IN CER3 TAIN CASES.— 

4 ‘‘(1) IN GENERAL.—Subsection (a) shall not 

5 apply if the replacement qualifying shipping assets 

6 are acquired from a related person except to the ex7 tent that the related person acquired the replace8 ment qualifying shipping assets from an unrelated 

9 person during the period applicable under subsection 

10 (b). 

11 ‘‘(2) RELATED PERSON.—For purposes of this 

12 subsection, a person is related to another person if 

13 the person bears a relationship to the other person 

14 described in section 267(b) or 707(b)(1).’’. 

15 (b) TECHNICAL AND CONFORMING AMENDMENT.— 

16 The second sentence of section 56(g)(4)(B)(i), as amended 

17 by this Act, is further amended by inserting ‘‘or 1357’’ 

18 after ‘‘section 139A’’. 

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

20 this section shall apply to taxable years beginning after 

21 the date of the enactment of this Act. 
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1 SEC. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR 

2 CERTAIN EXPENSES INCURRED IN SUPPORT 

3 OF NATIVE ALASKAN SUBSISTENCE WHAL4 ING. 

5 (a) IN GENERAL.—Section 170 (relating to chari6 table, etc., contributions and gifts), as amended by this 

7 Act, is amended by redesignating subsection (n) as sub8 section (o) and by inserting after subsection (m) the fol9 lowing new subsection: 

10 ‘‘(n) EXPENSES PAID BY CERTAIN WHALING CAP11 TAINS IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE

12 WHALING.— 

13 ‘‘(1) IN GENERAL.—In the case of an individual 

14 who is recognized by the Alaska Eskimo Whaling 

15 Commission as a whaling captain charged with the 

16 responsibility of maintaining and carrying out sanc17 tioned whaling activities and who engages in such 

18 activities during the taxable year, the amount de19 scribed in paragraph (2) (to the extent such amount 

20 does not exceed $10,000 for the taxable year) shall 

21 be treated for purposes of this section as a chari22 table contribution. 

23 ‘‘(2) AMOUNT DESCRIBED.— 

24 ‘‘(A) IN GENERAL.—The amount described 

25 in this paragraph is the aggregate of the rea26 sonable and necessary whaling expenses paid by 
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1 the taxpayer during the taxable year in carrying 

2 out sanctioned whaling activities. 

3 ‘‘(B) WHALING EXPENSES.—For purposes 

4 of subparagraph (A), the term ‘whaling ex5 penses’ includes expenses for— 

6 ‘‘(i) the acquisition and maintenance 

7 of whaling boats, weapons, and gear used 

8 in sanctioned whaling activities, 

9 ‘‘(ii) the supplying of food for the 

10 crew and other provisions for carrying out 

11 such activities, and 

12 ‘‘(iii) storage and distribution of the 

13 catch from such activities. 

14 ‘‘(3) SANCTIONED WHALING ACTIVITIES.—For 

15 purposes of this subsection, the term ‘sanctioned 

16 whaling activities’ means subsistence bowhead whale 

17 hunting activities conducted pursuant to the man18 agement plan of the Alaska Eskimo Whaling Com19 mission.’’. 

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

21 subsection (a) shall apply to contributions made after De22 cember 31, 2004. 
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1 TITLE III—TAX REFORM AND 

2 SIMPLIFICATION FOR UNITED 

3 STATES BUSINESSES 

4 SEC. 301. INTEREST EXPENSE ALLOCATION RULES. 

5 (a) ELECTION TO ALLOCATE ON WORLDWIDE

6 BASIS.—Section 864 is amended by redesignating sub7 section (f) as subsection (g) and by inserting after sub8 section (e) the following new subsection: 

9 ‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON

10 WORLDWIDE BASIS.—For purposes of this subchapter, at 

11 the election of the worldwide affiliated group— 

12 ‘‘(1) ALLOCATION AND APPORTIONMENT OF IN13 TEREST EXPENSE.— 

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

15 each domestic corporation which is a member of 

16 a worldwide affiliated group shall be determined 

17 by allocating and apportioning interest expense 

18 of each member as if all members of such group 

19 were a single corporation. 

20 ‘‘(B) TREATMENT OF WORLDWIDE AFFILI21 ATED GROUP.—The taxable income of the do22 mestic members of a worldwide affiliated group 

23 from sources outside the United States shall be 

24 determined by allocating and apportioning the 

25 interest expense of such domestic members to 
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1 such income in an amount equal to the excess 

2 (if any) of— 

3 ‘‘(i) the total interest expense of the 

4 worldwide affiliated group multiplied by 

5 the ratio which the foreign assets of the 

6 worldwide affiliated group bears to all the 

7 assets of the worldwide affiliated group, 

8 over 

9 ‘‘(ii) the interest expense of all foreign 

10 corporations which are members of the 

11 worldwide affiliated group to the extent 

12 such interest expense of such foreign cor13 porations would have been allocated and 

14 apportioned to foreign source income if 

15 this subsection were applied to a group 

16 consisting of all the foreign corporations in 

17 such worldwide affiliated group. 

18 ‘‘(C) WORLDWIDE AFFILIATED GROUP.— 

19 For purposes of this paragraph, the term 

20 ‘worldwide affiliated group’ means a group con21 sisting of— 

22 ‘‘(i) the includible members of an af23 filiated group (as defined in section 

24 1504(a), determined without regard to 
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1 paragraphs (2) and (4) of section 

2 1504(b)), and 

3 ‘‘(ii) all controlled foreign corpora4 tions in which such members in the aggre5 gate meet the ownership requirements of 

6 section 1504(a)(2) either directly or indi7 rectly through applying paragraph (2) of 

8 section 958(a) or through applying rules 

9 similar to the rules of such paragraph to 

10 stock owned directly or indirectly by do11 mestic partnerships, trusts, or estates. 

12 ‘‘(2) ALLOCATION AND APPORTIONMENT OF

13 OTHER EXPENSES.—Expenses other than interest 

14 which are not directly allocable or apportioned to 

15 any specific income producing activity shall be allo16 cated and apportioned as if all members of the affili17 ated group were a single corporation. For purposes 

18 of the preceding sentence, the term ‘affiliated group’ 

19 has the meaning given such term by section 1504 

20 (determined without regard to paragraph (4) of sec21 tion 1504(b)). 

22 ‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; 

23 BASIS OF STOCK IN NONAFFILIATED 10-PERCENT

24 OWNED CORPORATIONS.—The rules of paragraphs 

25 (3) and (4) of subsection (e) shall apply for purposes 
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1 of this subsection, except that paragraph (4) shall be 

2 applied on a worldwide affiliated group basis. 

3 ‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN4 STITUTIONS.— 

5 ‘‘(A) IN GENERAL.—For purposes of para6 graph (1), any corporation described in sub7 paragraph (B) shall be treated as an includible 

8 corporation for purposes of section 1504 only 

9 for purposes of applying this subsection sepa10 rately to corporations so described. 

11 ‘‘(B) DESCRIPTION.—A corporation is de12 scribed in this subparagraph if— 

13 ‘‘(i) such corporation is a financial in14 stitution described in section 581 or 591, 

15 ‘‘(ii) the business of such financial in16 stitution is predominantly with persons 

17 other than related persons (within the 

18 meaning of subsection (d)(4)) or their cus19 tomers, and 

20 ‘‘(iii) such financial institution is re21 quired by State or Federal law to be oper22 ated separately from any other entity 

23 which is not such an institution. 
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1 ‘‘(C) TREATMENT OF BANK AND FINAN2 CIAL HOLDING COMPANIES.—To the extent pro3 vided in regulations— 

4 ‘‘(i) a bank holding company (within 

5 the meaning of section 2(a) of the Bank 

6 Holding Company Act of 1956 (12 U.S.C. 

7 1841(a)), 

8 ‘‘(ii) a financial holding company 

9 (within the meaning of section 2(p) of the 

10 Bank Holding Company Act of 1956 (12 

11 U.S.C. 1841(p)), and 

12 ‘‘(iii) any subsidiary of a financial in13 stitution described in section 581 or 591, 

14 or of any such bank or financial holding 

15 company, if such subsidiary is predomi16 nantly engaged (directly or indirectly) in 

17 the active conduct of a banking, financing, 

18 or similar business, 

19 shall be treated as a corporation described in 

20 subparagraph (B). 

21 ‘‘(5) ELECTION TO EXPAND FINANCIAL INSTI22 TUTION GROUP OF WORLDWIDE GROUP.— 

23 ‘‘(A) IN GENERAL.—If a worldwide affili24 ated group elects the application of this sub25 section, all financial corporations which— 
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1 ‘‘(i) are members of such worldwide 

2 affiliated group, but 

3 ‘‘(ii) are not corporations described in 

4 paragraph (4)(B), 

5 shall be treated as described in paragraph 

6 (4)(B) for purposes of applying paragraph 

7 (4)(A). This subsection (other than this para8 graph) shall apply to any such group in the 

9 same manner as this subsection (other than this 

10 paragraph) applies to the pre-election worldwide 

11 affiliated group of which such group is a part. 

12 ‘‘(B) FINANCIAL CORPORATION.—For pur13 poses of this paragraph, the term ‘financial cor14 poration’ means any corporation if at least 80 

15 percent of its gross income is income described 

16 in section 904(d)(2)(C)(ii) and the regulations 

17 thereunder which is derived from transactions 

18 with persons who are not related (within the 

19 meaning of section 267(b) or 707(b)(1)) to the 

20 corporation. For purposes of the preceding sen21 tence, there shall be disregarded any item of in22 come or gain from a transaction or series of 

23 transactions a principal purpose of which is the 

24 qualification of any corporation as a financial 

25 corporation. 
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1 ‘‘(C) ANTIABUSE RULES.—In the case of a 

2 corporation which is a member of an electing fi3 nancial institution group, to the extent that 

4 such corporation— 

5 ‘‘(i) distributes dividends or makes 

6 other distributions with respect to its stock 

7 after the date of the enactment of this 

8 paragraph to any member of the pre-elec9 tion worldwide affiliated group (other than 

10 to a member of the electing financial insti11 tution group) in excess of the greater of— 

12 ‘‘(I) its average annual dividend 

13 (expressed as a percentage of current 

14 earnings and profits) during the 5- 

15 taxable-year period ending with the 

16 taxable year preceding the taxable 

17 year, or 

18 ‘‘(II) 25 percent of its average 

19 annual earnings and profits for such 

20 5-taxable-year period, or 

21 ‘‘(ii) deals with any person in any 

22 manner not clearly reflecting the income of 

23 the corporation (as determined under prin24 ciples similar to the principles of section 

25 482), 
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1 an amount of indebtedness of the electing fi2 nancial institution group equal to the excess 

3 distribution or the understatement or overstate4 ment of income, as the case may be, shall be re5 characterized (for the taxable year and subse6 quent taxable years) for purposes of this para7 graph as indebtedness of the worldwide affili8 ated group (excluding the electing financial in9 stitution group). If a corporation has not been 

10 in existence for 5 taxable years, this subpara11 graph shall be applied with respect to the pe12 riod it was in existence. 

13 ‘‘(D) ELECTION.—An election under this 

14 paragraph with respect to any financial institu15 tion group may be made only by the common 

16 parent of the pre-election worldwide affiliated 

17 group and may be made only for the first tax18 able year beginning after December 31, 2008, 

19 in which such affiliated group includes 1 or 

20 more financial corporations. Such an election, 

21 once made, shall apply to all financial corpora22 tions which are members of the electing finan23 cial institution group for such taxable year and 

24 all subsequent years unless revoked with the 

25 consent of the Secretary. 
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1 ‘‘(E) DEFINITIONS RELATING TO

2 GROUPS.—For purposes of this paragraph— 

3 ‘‘(i) PRE-ELECTION WORLDWIDE AF4 FILIATED GROUP.—The term ‘pre-election 

5 worldwide affiliated group’ means, with re6 spect to a corporation, the worldwide affili7 ated group of which such corporation 

8 would (but for an election under this para9 graph) be a member for purposes of apply10 ing paragraph (1). 

11 ‘‘(ii) ELECTING FINANCIAL INSTITU12 TION GROUP.—The term ‘electing financial 

13 institution group’ means the group of cor14 porations to which this subsection applies 

15 separately by reason of the application of 

16 paragraph (4)(A) and which includes fi17 nancial corporations by reason of an elec18 tion under subparagraph (A). 

19 ‘‘(F) REGULATIONS.—The Secretary shall 

20 prescribe such regulations as may be appro21 priate to carry out this subsection, including 

22 regulations— 

23 ‘‘(i) providing for the direct allocation 

24 of interest expense in other circumstances 

25 where such allocation would be appropriate 
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1 to carry out the purposes of this sub2 section, 

3 ‘‘(ii) preventing assets or interest ex4 pense from being taken into account more 

5 than once, and 

6 ‘‘(iii) dealing with changes in mem7 bers of any group (through acquisitions or 

8 otherwise) treated under this paragraph as 

9 an affiliated group for purposes of this 

10 subsection. 

11 ‘‘(6) ELECTION.—An election to have this sub12 section apply with respect to any worldwide affiliated 

13 group may be made only by the common parent of 

14 the domestic affiliated group referred to in para15 graph (1)(C) and may be made only for the first 

16 taxable year beginning after December 31, 2008, in 

17 which a worldwide affiliated group exists which in18 cludes such affiliated group and at least 1 foreign 

19 corporation. Such an election, once made, shall apply 

20 to such common parent and all other corporations 

21 which are members of such worldwide affiliated 

22 group for such taxable year and all subsequent years 

23 unless revoked with the consent of the Secretary.’’. 

24 (b) EXPANSION OF REGULATORY AUTHORITY.— 

25 Paragraph (7) of section 864(e) is amended— 
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1 (1) by inserting before the comma at the end of 

2 subparagraph (B) ‘‘and in other circumstances 

3 where such allocation would be appropriate to carry 

4 out the purposes of this subsection’’, and 

5 (2) by striking ‘‘and’’ at the end of subpara6 graph (E), by redesignating subparagraph (F) as 

7 subparagraph (G), and by inserting after subpara8 graph (E) the following new subparagraph: 

9 ‘‘(F) preventing assets or interest expense 

10 from being taken into account more than once, 

11 and’’. 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2008. 

15 SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC 

16 LOSS. 

17 (a) GENERAL RULE.—Section 904 is amended by re18 designating subsections (g), (h), (i), (j), and (k) as sub19 sections (h), (i), (j), (k), and (l) respectively, and by in20 serting after subsection (f) the following new subsection: 

21 ‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC

22 LOSS.— 

23 ‘‘(1) GENERAL RULE.—For purposes of this 

24 subpart and section 936, in the case of any taxpayer 

25 who sustains an overall domestic loss for any taxable 
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1 year beginning after December 31, 2006, that por2 tion of the taxpayer’s taxable income from sources 

3 within the United States for each succeeding taxable 

4 year which is equal to the lesser of— 

5 ‘‘(A) the amount of such loss (to the extent 

6 not used under this paragraph in prior taxable 

7 years), or 

8 ‘‘(B) 50 percent of the taxpayer’s taxable 

9 income from sources within the United States 

10 for such succeeding taxable year, 

11 shall be treated as income from sources without the 

12 United States (and not as income from sources with13 in the United States). 

14 ‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 

15 purposes of this subsection— 

16 ‘‘(A) IN GENERAL.—The term ‘overall do17 mestic loss’ means any domestic loss to the ex18 tent such loss offsets taxable income from 

19 sources without the United States for the tax20 able year or for any preceding taxable year by 

21 reason of a carryback. For purposes of the pre22 ceding sentence, the term ‘domestic loss’ means 

23 the amount by which the gross income for the 

24 taxable year from sources within the United 

25 States is exceeded by the sum of the deductions 
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1 properly apportioned or allocated thereto (deter2 mined without regard to any carryback from a 

3 subsequent taxable year). 

4 ‘‘(B) TAXPAYER MUST HAVE ELECTED

5 FOREIGN TAX CREDIT FOR YEAR OF LOSS.— 

6 The term ‘overall domestic loss’ shall not in7 clude any loss for any taxable year unless the 

8 taxpayer chose the benefits of this subpart for 

9 such taxable year. 

10 ‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN11 COME.— 

12 ‘‘(A) IN GENERAL.—Any income from 

13 sources within the United States that is treated 

14 as income from sources without the United 

15 States under paragraph (1) shall be allocated 

16 among and increase the income categories in 

17 proportion to the loss from sources within the 

18 United States previously allocated to those in19 come categories. 

20 ‘‘(B) INCOME CATEGORY.—For purposes of 

21 this paragraph, the term ‘income category’ has 

22 the meaning given such term by subsection 

23 (f)(5)(E)(i). 

24 ‘‘(4) COORDINATION WITH SUBSECTION (f).— 

25 The Secretary shall prescribe such regulations as 
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1 may be necessary to coordinate the provisions of this 

2 subsection with the provisions of subsection (f).’’. 

3 (b) CONFORMING AMENDMENTS.— 

4 (1) Section 535(d)(2) is amended by striking 

5 ‘‘section 904(g)(6)’’ and inserting ‘‘section 

6 904(h)(6)’’. 

7 (2) Subparagraph (A) of section 936(a)(2) is 

8 amended by striking ‘‘section 904(f)’’ and inserting 

9 ‘‘subsections (f) and (g) of section 904’’. 

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

11 this section shall apply to losses for taxable years begin12 ning after December 31, 2006. 

13 SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS. 

14 (a) IN GENERAL.—Paragraph (1) of section 904(d) 

15 (relating to separate application of section with respect to 

16 certain categories of income) is amended to read as fol17 lows: 

18 ‘‘(1) IN GENERAL.—The provisions of sub19 sections (a), (b), and (c) and sections 902, 907, and 

20 960 shall be applied separately with respect to— 

21 ‘‘(A) passive category income, and 

22 ‘‘(B) general category income.’’ 

23 (b) CATEGORIES.—Paragraph (2) of section 904(d) 

24 is amended by striking subparagraph (B), by redesig25 nating subparagraph (A) as subparagraph (B), and by in-
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1 serting before subparagraph (B) (as so redesignated) the 

2 following new subparagraph: 

3 ‘‘(A) CATEGORIES.— 

4 ‘‘(i) PASSIVE CATEGORY INCOME.— 

5 The term ‘passive category income’ means 

6 passive income and specified passive cat7 egory income. 

8 ‘‘(ii) GENERAL CATEGORY INCOME.— 

9 The term ‘general category income’ means 

10 income other than passive category in11 come.’’. 

12 (c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub13 paragraph (B) of section 904(d)(2), as so redesignated, 

14 is amended by adding at the end the following new clause: 

15 ‘‘(v) SPECIFIED PASSIVE CATEGORY

16 INCOME.—The term ‘specified passive cat17 egory income’ means— 

18 ‘‘(I) dividends from a DISC or 

19 former DISC (as defined in section 

20 992(a)) to the extent such dividends 

21 are treated as income from sources 

22 without the United States, 

23 ‘‘(II) taxable income attributable 

24 to foreign trade income (within the 

25 meaning of section 923(b)), and 
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1 ‘‘(III) distributions from a FSC 

2 (or a former FSC) out of earnings 

3 and profits attributable to foreign 

4 trade income (within the meaning of 

5 section 923(b)) or interest or carrying 

6 charges (as defined in section 

7 927(d)(1)) derived from a transaction 

8 which results in foreign trade income 

9 (as defined in section 923(b)).’’. 

10 (d) TREATMENT OF FINANCIAL SERVICES.—Para11 graph (2) of section 904(d) is amended by striking sub12 paragraph (D), by redesignating subparagraph (C) as sub13 paragraph (D), and by inserting before subparagraph (D) 

14 (as so redesignated) the following new subparagraph: 

15 ‘‘(C) TREATMENT OF FINANCIAL SERVICES

16 INCOME AND COMPANIES.— 

17 ‘‘(i) IN GENERAL.—Financial services 

18 income shall be treated as general category 

19 income in the case of— 

20 ‘‘(I) a member of a financial 

21 services group, and 

22 ‘‘(II) any other person if such 

23 person is predominantly engaged in 

24 the active conduct of a banking, insur25 ance, financing, or similar business. 
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1 ‘‘(ii) FINANCIAL SERVICES GROUP.— 

2 The term ‘financial services group’ means 

3 any affiliated group (as defined in section 

4 1504(a) without regard to paragraphs (2) 

5 and (3) of section 1504(b)) which is pre6 dominantly engaged in the active conduct 

7 of a banking, insurance, financing, or simi8 lar business. In determining whether such 

9 a group is so engaged, there shall be taken 

10 into account only the income of members 

11 of the group that are— 

12 ‘‘(I) United States corporations, 

13 or 

14 ‘‘(II) controlled foreign corpora15 tions in which such United States cor16 porations own, directly or indirectly, 

17 at least 80 percent of the total voting 

18 power and value of the stock. 

19 ‘‘(iii) PASS-THRU ENTITIES.—The 

20 Secretary shall by regulation specify for 

21 purposes of this subparagraph the treat22 ment of financial services income received 

23 or accrued by partnerships and by other 

24 pass-thru entities which are not members 

25 of a financial services group.’’. 
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1 (e) CONFORMING AMENDMENTS.— 

2 (1) Clause (iii) of section 904(d)(2)(B) (relating 

3 to exceptions from passive income), as so redesig4 nated, is amended by striking subclause (I) and by 

5 redesignating subclauses (II) and (III) as subclauses 

6 (I) and (II), respectively. 

7 (2) Clause (i) of section 904(d)(2)(D) (defining 

8 financial services income), as so redesignated, is 

9 amended by adding ‘‘or’’ at the end of subclause (I) 

10 and by striking subclauses (II) and (III) and insert11 ing the following new subclause: 

12 ‘‘(II) passive income (determined 

13 without regard to subparagraph 

14 (B)(iii)(II)).’’ 

15 (3) Section 904(d)(2)(D) (defining financial 

16 services income), as so redesignated, is amended by 

17 striking clause (iii). 

18 (4) Paragraph (3) of section 904(d) is amended 

19 to read as follows: 

20 ‘‘(3) LOOK-THRU IN CASE OF CONTROLLED

21 FOREIGN CORPORATIONS.— 

22 ‘‘(A) IN GENERAL.—Except as otherwise 

23 provided in this paragraph, dividends, interest, 

24 rents, and royalties received or accrued by the 

25 taxpayer from a controlled foreign corporation 
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1 in which the taxpayer is a United States share2 holder shall not be treated as passive category 

3 income. 

4 ‘‘(B) SUBPART F INCLUSIONS.—Any 

5 amount included in gross income under section 

6 951(a)(1)(A) shall be treated as passive cat7 egory income to the extent the amount so in8 cluded is attributable to passive category in9 come. 

10 ‘‘(C) INTEREST, RENTS, AND ROYAL11 TIES.—Any interest, rent, or royalty which is 

12 received or accrued from a controlled foreign 

13 corporation in which the taxpayer is a United 

14 States shareholder shall be treated as passive 

15 category income to the extent it is properly allo16 cable (under regulations prescribed by the Sec17 retary) to passive category income of the con18 trolled foreign corporation. 

19 ‘‘(D) DIVIDENDS.—Any dividend paid out 

20 of the earnings and profits of any controlled 

21 foreign corporation in which the taxpayer is a 

22 United States shareholder shall be treated as 

23 passive category income in proportion to the 

24 ratio of— 
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1 ‘‘(i) the portion of the earnings and 

2 profits attributable to passive category in3 come, to 

4 ‘‘(ii) the total amount of earnings and 

5 profits. 

6 ‘‘(E) LOOK-THRU APPLIES ONLY WHERE

7 SUBPART F APPLIES.—If a controlled foreign 

8 corporation meets the requirements of section 

9 954(b)(3)(A) (relating to de minimis rule) for 

10 any taxable year, for purposes of this para11 graph, none of its foreign base company income 

12 (as defined in section 954(a) without regard to 

13 section 954(b)(5)) and none of its gross insur14 ance income (as defined in section 

15 954(b)(3)(C)) for such taxable year shall be 

16 treated as passive category income, except that 

17 this sentence shall not apply to any income 

18 which (without regard to this sentence) would 

19 be treated as financial services income. Solely 

20 for purposes of applying subparagraph (D), 

21 passive income of a controlled foreign corpora22 tion shall not be treated as passive category in23 come if the requirements of section 954(b)(4) 

24 are met with respect to such income. 
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1 ‘‘(F) COORDINATION WITH HIGH-TAXED

2 INCOME PROVISIONS.— 

3 ‘‘(i) In determining whether any in4 come of a controlled foreign corporation is 

5 passive category income, subclause (II) of 

6 paragraph (2)(B)(iii) shall not apply. 

7 ‘‘(ii) Any income of the taxpayer 

8 which is treated as passive category income 

9 under this paragraph shall be so treated 

10 notwithstanding any provision of para11 graph (2); except that the determination of 

12 whether any amount is high-taxed income 

13 shall be made after the application of this 

14 paragraph. 

15 ‘‘(G) DIVIDEND.—For purposes of this 

16 paragraph, the term ‘dividend’ includes any 

17 amount included in gross income in section 

18 951(a)(1)(B). Any amount included in gross in19 come under section 78 to the extent attrib20 utable to amounts included in gross income in 

21 section 951(a)(1)(A) shall not be treated as a 

22 dividend but shall be treated as included in 

23 gross income under section 951(a)(1)(A). 
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1 ‘‘(H) LOOK-THRU APPLIES TO PASSIVE

2 FOREIGN INVESTMENT COMPANY INCLUSION.— 

3 If— 

4 ‘‘(i) a passive foreign investment com5 pany is a controlled foreign corporation, 

6 and 

7 ‘‘(ii) the taxpayer is a United States 

8 shareholder in such controlled foreign cor9 poration, 

10 any amount included in gross income under sec11 tion 1293 shall be treated as income in a sepa12 rate category to the extent such amount is at13 tributable to income in such category.’’. 

14 (5) TREATMENT OF INCOME TAX BASE DIF15 FERENCES.—Paragraph (2) of section 904(d) is 

16 amended by redesignating subparagraphs (H) and 

17 (I) as subparagraphs (I) and (J), respectively, and 

18 by inserting after subparagraph (G) the following 

19 new subparagraph: 

20 ‘‘(H) TREATMENT OF INCOME TAX BASE

21 DIFFERENCES.—Tax imposed under the law of 

22 a foreign country or possession of the United 

23 States on an amount which does not constitute 

24 income under United States tax principles shall 
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1 be treated as imposed on income described in 

2 paragraph (1)(B).’’ 

3 (6) Paragraph (2) of section 904(d) is amended 

4 by adding at the end the following new subpara5 graph: 

6 ‘‘(K) TRANSITIONAL RULES FOR 2007

7 CHANGES.—For purposes of paragraph (1)— 

8 ‘‘(i) taxes carried from any taxable 

9 year beginning before January 1, 2007, to 

10 any taxable year beginning on or after 

11 such date, with respect to any item of in12 come, shall be treated as described in the 

13 subparagraph of paragraph (1) in which 

14 such income would be described were such 

15 taxes paid or accrued in a taxable year be16 ginning on or after such date, and 

17 ‘‘(ii) the Secretary may by regulations 

18 provide for the allocation of any carryback 

19 of taxes with respect to income to such a 

20 taxable year for purposes of allocating such 

21 income among the separate categories in 

22 effect for such taxable year.’’. 

23 (7) Section 904(j)(3)(A)(i) is amended by strik24 ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 

25 (d)(2)(B)’’. 
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1 (f) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2006. 

4 SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS 

5 FROM NONCONTROLLED SECTION 902 COR6 PORATIONS. 

7 (a) IN GENERAL.—Section 904(d)(4) (relating to 

8 look-thru rules apply to dividends from noncontrolled sec9 tion 902 corporations) is amended to read as follows: 

10 ‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM

11 NONCONTROLLED SECTION 902 CORPORATIONS.— 

12 ‘‘(A) IN GENERAL.—For purposes of this 

13 subsection, any dividend from a noncontrolled 

14 section 902 corporation with respect to the tax15 payer shall be treated as income described in a 

16 subparagraph of paragraph (1) in proportion to 

17 the ratio of— 

18 ‘‘(i) the portion of earnings and prof19 its attributable to income described in such 

20 subparagraph, to 

21 ‘‘(ii) the total amount of earnings and 

22 profits. 

23 ‘‘(B) EARNINGS AND PROFITS OF CON24 TROLLED FOREIGN CORPORATIONS.—In the 

25 case of any distribution from a controlled for-
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1 eign corporation to a United States share2 holder, rules similar to the rules of subpara3 graph (A) shall apply in determining the extent 

4 to which earnings and profits of the controlled 

5 foreign corporation which are attributable to 

6 dividends received from a noncontrolled section 

7 902 corporation may be treated as income in a 

8 separate category. 

9 ‘‘(C) SPECIAL RULES.—For purposes of 

10 this paragraph— 

11 ‘‘(i) EARNINGS AND PROFITS.— 

12 ‘‘(I) IN GENERAL.—The rules of 

13 section 316 shall apply. 

14 ‘‘(II) REGULATIONS.—The Sec15 retary may prescribe regulations re16 garding the treatment of distributions 

17 out of earnings and profits for periods 

18 before the taxpayer’s acquisition of 

19 the stock to which the distributions 

20 relate. 

21 ‘‘(ii) INADEQUATE SUBSTAN22 TIATION.—If the Secretary determines that 

23 the proper subparagraph of paragraph (1) 

24 in which a dividend is described has not 

25 been substantiated, such dividend shall be 
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1 treated as income described in paragraph 

2 (1)(A). 

3 ‘‘(iii) COORDINATION WITH HIGH4 TAXED INCOME PROVISIONS.—Rules simi5 lar to the rules of paragraph (3)(F) shall 

6 apply for purposes of this paragraph. 

7 ‘‘(iv) LOOK-THRU WITH RESPECT TO

8 CARRYOVER OF CREDIT.—Rules similar to 

9 subparagraph (A) also shall apply to any 

10 carryforward under subsection (c) from a 

11 taxable year beginning before January 1, 

12 2003, of tax allocable to a dividend from a 

13 noncontrolled section 902 corporation with 

14 respect to the taxpayer. The Secretary may 

15 by regulations provide for the allocation of 

16 any carryback of tax allocable to a divi17 dend from a noncontrolled section 902 cor18 poration to such a taxable year for pur19 poses of allocating such dividend among 

20 the separate categories in effect for such 

21 taxable year.’’. 

22 (b) CONFORMING AMENDMENTS.— 

23 (1) Subparagraph (E) of section 904(d)(1) is 

24 hereby repealed. 
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1 (2) Section 904(d)(2)(C)(iii) is amended by 

2 adding ‘‘and’’ at the end of subclause (I), by striking 

3 subclause (II), and by redesignating subclause (III) 

4 as subclause (II). 

5 (3) The last sentence of section 904(d)(2)(D) is 

6 amended to read as follows: ‘‘Such term does not in7 clude any financial services income.’’. 

8 (4) Section 904(d)(2)(E) is amended— 

9 (A) by inserting ‘‘or (4)’’ after ‘‘paragraph 

10 (3)’’ in clause (i), and 

11 (B) by striking clauses (ii) and (iv) and by 

12 redesignating clause (iii) as clause (ii). 

13 (5) Section 904(d)(3)(F) is amended by strik14 ing ‘‘(D), or (E)’’ and inserting ‘‘or (D)’’. 

15 (6) Section 864(d)(5)(A)(i) is amended by 

16 striking ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’. 

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

18 this section shall apply to taxable years beginning after 

19 December 31, 2002. 

20 SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 

21 PARTNERSHIPS TO APPLY IN DETERMINING 

22 SECTION 902 AND 960 CREDITS. 

23 (a) IN GENERAL.—Subsection (c) of section 902 is 

24 amended by redesignating paragraph (7) as paragraph (8) 
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1 and by inserting after paragraph (6) the following new 

2 paragraph: 

3 ‘‘(7) CONSTRUCTIVE OWNERSHIP THROUGH

4 PARTNERSHIPS.—Stock owned, directly or indirectly, 

5 by or for a partnership shall be considered as being 

6 owned proportionately by its partners. Stock consid7 ered to be owned by a person by reason of the pre8 ceding sentence shall, for purposes of applying such 

9 sentence, be treated as actually owned by such per10 son. The Secretary may prescribe such regulations 

11 as may be necessary to carry out the purposes of 

12 this paragraph, including rules to account for special 

13 partnership allocations of dividends, credits, and 

14 other incidents of ownership of stock in determining 

15 proportionate ownership.’’. 

16 (b) CLARIFICATION OF COMPARABLE ATTRIBUTION

17 UNDER SECTION 901(b)(5).—Paragraph (5) of section 

18 901(b) is amended by striking ‘‘any individual’’ and in19 serting ‘‘any person’’. 

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

21 this section shall apply to taxes of foreign corporations 

22 for taxable years of such corporations beginning after the 

23 date of the enactment of this Act. 
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1 SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN 

2 TRANSFERS OF INTANGIBLE PROPERTY. 

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

4 367(d)(2) is amended by adding at the end the following 

5 new sentence: ‘‘For purposes of applying section 904(d), 

6 any such amount shall be treated in the same manner as 

7 if such amount were a royalty.’’. 

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

9 this section shall apply to amounts treated as received pur10 suant to section 367(d)(2) of the Internal Revenue Code 

11 of 1986 on or after August 5, 1997. 

12 SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE 

13 CERTAIN ASSETS OF CONTROLLED FOREIGN 

14 CORPORATION. 

15 (a) IN GENERAL.—Section 956(c)(2) (relating to ex16 ceptions from property treated as United States property) 

17 is amended by striking ‘‘and’’ at the end of subparagraph 

18 (J), by striking the period at the end of subparagraph (K) 

19 and inserting a semicolon, and by adding at the end the 

20 following new subparagraphs: 

21 ‘‘(L) securities acquired and held by a con22 trolled foreign corporation in the ordinary 

23 course of its business as a dealer in securities 

24 if— 

25 ‘‘(i) the dealer accounts for the securi26 ties as securities held primarily for sale to 
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1 customers in the ordinary course of busi2 ness, and 

3 ‘‘(ii) the dealer disposes of the securi4 ties (or such securities mature while held 

5 by the dealer) within a period consistent 

6 with the holding of securities for sale to 

7 customers in the ordinary course of busi8 ness; and 

9 ‘‘(M) an obligation of a United States per10 son which— 

11 ‘‘(i) is not a domestic corporation, and 

12 ‘‘(ii) is not— 

13 ‘‘(I) a United States shareholder 

14 (as defined in section 951(b)) of the 

15 controlled foreign corporation, or 

16 ‘‘(II) a partnership, estate, or 

17 trust in which the controlled foreign 

18 corporation, or any related person (as 

19 defined in section 954(d)(3)), is a 

20 partner, beneficiary, or trustee imme21 diately after the acquisition of any ob22 ligation of such partnership, estate, or 

23 trust by the controlled foreign cor24 poration.’’. 
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1 (b) CONFORMING AMENDMENT.—Section 956(c)(2) 

2 is amended by striking ‘‘and (K)’’ in the last sentence and 

3 inserting ‘‘, (K), and (L)’’. 

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

5 this section shall apply to taxable years of foreign corpora6 tions beginning after December 31, 2004, and to taxable 

7 years of United States shareholders with or within which 

8 such taxable years of foreign corporations end. 

9 SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE 

10 RATE FOR FOREIGN TAX PAID OTHER THAN 

11 IN FUNCTIONAL CURRENCY. 

12 (a) IN GENERAL.—Paragraph (1) of section 986(a) 

13 (relating to determination of foreign taxes and foreign cor14 poration’s earnings and profits) is amended by redesig15 nating subparagraph (D) as subparagraph (E) and by in16 serting after subparagraph (C) the following new subpara17 graph: 

18 ‘‘(D) ELECTIVE EXCEPTION FOR TAXES

19 PAID OTHER THAN IN FUNCTIONAL CUR20 RENCY.— 

21 ‘‘(i) IN GENERAL.—At the election of 

22 the taxpayer, subparagraph (A) shall not 

23 apply to any foreign income taxes the li24 ability for which is denominated in any 
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1 currency other than in the taxpayer’s func2 tional currency. 

3 ‘‘(ii) APPLICATION TO QUALIFIED

4 BUSINESS UNITS.—An election under this 

5 subparagraph may apply to foreign income 

6 taxes attributable to a qualified business 

7 unit in accordance with regulations pre8 scribed by the Secretary. 

9 ‘‘(iii) ELECTION.—Any such election 

10 shall apply to the taxable year for which 

11 made and all subsequent taxable years un12 less revoked with the consent of the Sec13 retary.’’. 

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

15 this section shall apply to taxable years beginning after 

16 December 31, 2004. 

17 SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 

18 FROM CERTAIN FOREIGN CORPORATIONS. 

19 (a) IN GENERAL.—Paragraph (2) of section 871(i) 

20 (relating to tax not to apply to certain interest and divi21 dends) is amended by adding at the end the following new 

22 subparagraph: 

23 ‘‘(D) Dividends paid by a foreign corpora24 tion which are treated under section 
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1 861(a)(2)(B) as income from sources within the 

2 United States.’’. 

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

4 this section shall apply to payments made after December 

5 31, 2004. 

6 SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST 

7 PAID BY FOREIGN PARTNERSHIPS AND FOR8 EIGN CORPORATIONS. 

9 (a) IN GENERAL.—Paragraph (1) of section 861(a) 

10 is amended by striking ‘‘and’’ at the end of subparagraph 

11 (A), by striking the period at the end of subparagraph 

12 (B) and inserting ‘‘, and’’, and by adding at the end the 

13 following new subparagraph: 

14 ‘‘(C) in the case of a foreign partnership, 

15 which is predominantly engaged in the active 

16 conduct of a trade or business outside the 

17 United States, any interest not paid by a trade 

18 or business engaged in by the partnership in 

19 the United States and not allocable to income 

20 which is effectively connected (or treated as ef21 fectively connected) with the conduct of a trade 

22 or business in the United States.’’. 

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

24 this section shall apply to taxable years beginning after 

25 December 31, 2003. 
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1 SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BE2 TWEEN RELATED CONTROLLED FOREIGN 

3 CORPORATIONS UNDER FOREIGN PERSONAL 

4 HOLDING COMPANY INCOME RULES. 

5 (a) IN GENERAL.—Subsection (c) of section 954, as 

6 amended by this Act, is amended by adding after para7 graph (4) the following new paragraph: 

8 ‘‘(5) LOOK-THRU IN THE CASE OF RELATED

9 CONTROLLED FOREIGN CORPORATIONS.—For pur10 poses of this subsection, dividends, interest, rents, 

11 and royalties received or accrued from a controlled 

12 foreign corporation which is a related person (as de13 fined in subsection (b)(9)) shall not be treated as 

14 foreign personal holding company income to the ex15 tent attributable or properly allocable (determined 

16 under rules similar to the rules of subparagraphs 

17 (C) and (D) of section 904(d)(3)) to income of the 

18 related person which is not subpart F income (as de19 fined in section 952). For purposes of this para20 graph, interest shall include factoring income which 

21 is treated as income equivalent to interest for pur22 poses of paragraph (1)(E). The Secretary shall pre23 scribe such regulations as may be appropriate to 

24 prevent the abuse of the purposes of this para25 graph.’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years of foreign corpora3 tions beginning after December 31, 2004, and to taxable 

4 years of United States shareholders with or within which 

5 such taxable years of foreign corporations end. 

6 SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PART7 NERSHIP INTERESTS. 

8 (a) IN GENERAL.—Section 954(c) (defining foreign 

9 personal holding company income), as amended by this 

10 Act, is amended by adding after paragraph (5) the fol11 lowing new paragraph: 

12 ‘‘(6) LOOK-THRU RULE FOR CERTAIN PARTNER13 SHIP SALES.— 

14 ‘‘(A) IN GENERAL.—In the case of any 

15 sale by a controlled foreign corporation of an 

16 interest in a partnership with respect to which 

17 such corporation is a 25-percent owner, such 

18 corporation shall be treated for purposes of this 

19 subsection as selling the proportionate share of 

20 the assets of the partnership attributable to 

21 such interest. The Secretary shall prescribe 

22 such regulations as may be appropriate to pre23 vent abuse of the purposes of this paragraph, 

24 including regulations providing for coordination 
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1 of this paragraph with the provisions of sub2 chapter K. 

3 ‘‘(B) 25-PERCENT OWNER.—For purposes 

4 of this paragraph, the term ‘25-percent owner’ 

5 means a controlled foreign corporation which 

6 owns directly 25 percent or more of the capital 

7 or profits interest in a partnership. For pur8 poses of the preceding sentence, if a controlled 

9 foreign corporation is a shareholder or partner 

10 of a corporation or partnership, the controlled 

11 foreign corporation shall be treated as owning 

12 directly its proportionate share of any such cap13 ital or profits interest held directly or indirectly 

14 by such corporation or partnership.’’. 

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

16 this section shall apply to taxable years of foreign corpora17 tions beginning after December 31, 2004, and to taxable 

18 years of United States shareholders with or within which 

19 such taxable years of foreign corporations end. 

20 SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COM21 PANY RULES AND FOREIGN INVESTMENT 

22 COMPANY RULES. 

23 (a) GENERAL RULE.—The following provisions are 

24 hereby repealed: 
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1 (1) Part III of subchapter G of chapter 1 (re2 lating to foreign personal holding companies). 

3 (2) Section 1246 (relating to gain on foreign in4 vestment company stock). 

5 (3) Section 1247 (relating to election by foreign 

6 investment companies to distribute income cur7 rently). 

8 (b) EXEMPTION OF FOREIGN CORPORATIONS FROM

9 PERSONAL HOLDING COMPANY RULES.— 

10 (1) IN GENERAL.—Subsection (c) of section 

11 542 (relating to exceptions) is amended— 

12 (A) by striking paragraph (5) and insert13 ing the following: 

14 ‘‘(5) a foreign corporation,’’, 

15 (B) by striking paragraphs (7) and (10) 

16 and by redesignating paragraphs (8) and (9) as 

17 paragraphs (7) and (8), respectively, 

18 (C) by inserting ‘‘and’’ at the end of para19 graph (7) (as so redesignated), and 

20 (D) by striking ‘‘; and’’ at the end of para21 graph (8) (as so redesignated) and inserting a 

22 period. 

23 (2) TREATMENT OF INCOME FROM PERSONAL

24 SERVICE CONTRACTS.—Paragraph (1) of section 
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1 954(c) is amended by adding at the end the fol2 lowing new subparagraph: 

3 ‘‘(I) PERSONAL SERVICE CONTRACTS.— 

4 ‘‘(i) Amounts received under a con5 tract under which the corporation is to fur6 nish personal services if— 

7 ‘‘(I) some person other than the 

8 corporation has the right to designate 

9 (by name or by description) the indi10 vidual who is to perform the services, 

11 or 

12 ‘‘(II) the individual who is to per13 form the services is designated (by 

14 name or by description) in the con15 tract, and 

16 ‘‘(ii) amounts received from the sale 

17 or other disposition of such a contract. 

18 This subparagraph shall apply with respect to 

19 amounts received for services under a particular 

20 contract only if at some time during the taxable 

21 year 25 percent or more in value of the out22 standing stock of the corporation is owned, di23 rectly or indirectly, by or for the individual who 

24 has performed, is to perform, or may be des-
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1 ignated (by name or by description) as the one 

2 to perform, such services.’’. 

3 (c) CONFORMING AMENDMENTS.— 

4 (1) Section 1(h) is amended— 

5 (A) in paragraph (10), by inserting ‘‘and’’ 

6 at the end of subparagraph (F), by striking 

7 subparagraph (G), and by redesignating sub8 paragraph (H) as subparagraph (G), and 

9 (B) by striking ‘‘a foreign personal holding 

10 company (as defined in section 552), a foreign 

11 investment company (as defined in section 

12 1246(b)), or’’ in paragraph (11)(C)(iii). 

13 (2) Section 163(e)(3)(B), as amended by sec14 tion 642(a) of this Act, is amended by striking 

15 ‘‘which is a foreign personal holding company (as 

16 defined in section 552), a controlled foreign corpora17 tion (as defined in section 957), or’’ and inserting 

18 ‘‘which is a controlled foreign corporation (as de19 fined in section 957) or’’. 

20 (3) Paragraph (2) of section 171(c) is amend21 ed— 

22 (A) by striking ‘‘, or by a foreign personal 

23 holding company, as defined in section 552’’, 

24 and 
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1 (B) by striking ‘‘, or foreign personal hold2 ing company’’. 

3 (4) Paragraph (2) of section 245(a) is amended 

4 by striking ‘‘foreign personal holding company or’’. 

5 (5) Section 267(a)(3)(B), as amended by sec6 tion 642(b) of this Act, is amended by striking ‘‘to 

7 a foreign personal holding company (as defined in 

8 section 552), a controlled foreign corporation (as de9 fined in section 957), or’’ and inserting ‘‘to a con10 trolled foreign corporation (as defined in section 

11 957) or’’. 

12 (6) Section 312 is amended by striking sub13 section (j). 

14 (7) Subsection (m) of section 312 is amended 

15 by striking ‘‘, a foreign investment company (within 

16 the meaning of section 1246(b)), or a foreign per17 sonal holding company (within the meaning of sec18 tion 552)’’. 

19 (8) Subsection (e) of section 443 is amended by 

20 striking paragraph (3) and by redesignating para21 graphs (4) and (5) as paragraphs (3) and (4), re22 spectively. 

23 (9) Subparagraph (B) of section 465(c)(7) is 

24 amended by adding ‘‘or’’ at the end of clause (i), by 
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1 striking clause (ii), and by redesignating clause (iii) 

2 as clause (ii). 

3 (10) Paragraph (1) of section 543(b) is amend4 ed by inserting ‘‘and’’ at the end of subparagraph 

5 (A), by striking ‘‘, and’’ at the end of subparagraph 

6 (B) and inserting a period, and by striking subpara7 graph (C). 

8 (11) Paragraph (1) of section 562(b) is amend9 ed by striking ‘‘or a foreign personal holding com10 pany described in section 552’’. 

11 (12) Section 563 is amended— 

12 (A) by striking subsection (c), 

13 (B) by redesignating subsection (d) as sub14 section (c), and 

15 (C) by striking ‘‘subsection (a), (b), or (c)’’ 

16 in subsection (c) (as so redesignated) and in17 serting ‘‘subsection (a) or (b)’’. 

18 (13) Subsection (d) of section 751 is amended 

19 by adding ‘‘and’’ at the end of paragraph (2), by 

20 striking paragraph (3), by redesignating paragraph 

21 (4) as paragraph (3), and by striking ‘‘paragraph 

22 (1), (2), or (3)’’ in paragraph (3) (as so redesig23 nated) and inserting ‘‘paragraph (1) or (2)’’. 

24 (14) Paragraph (2) of section 864(d) is amend25 ed by striking subparagraph (A) and by redesig-
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1 nating subparagraphs (B) and (C) as subparagraphs 

2 (A) and (B), respectively. 

3 (15)(A) Subparagraph (A) of section 898(b)(1) 

4 is amended to read as follows: 

5 ‘‘(A) which is treated as a controlled for6 eign corporation for any purpose under subpart 

7 F of part III of this subchapter, and’’. 

8 (B) Subparagraph (B) of section 898(b)(2) is 

9 amended by striking ‘‘and sections 551(f) and 554, 

10 whichever are applicable,’’. 

11 (C) Paragraph (3) of section 898(b) is amended 

12 to read as follows: 

13 ‘‘(3) UNITED STATES SHAREHOLDER.—The 

14 term ‘United States shareholder’ has the meaning 

15 given to such term by section 951(b), except that, in 

16 the case of a foreign corporation having related per17 son insurance income (as defined in section 

18 953(c)(2)), the Secretary may treat any person as a 

19 United States shareholder for purposes of this sec20 tion if such person is treated as a United States 

21 shareholder under section 953(c)(1).’’. 

22 (D) Subsection (c) of section 898 is amended to 

23 read as follows: 

24 ‘‘(c) DETERMINATION OF REQUIRED YEAR.— 

25 ‘‘(1) IN GENERAL.—The required year is— 
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1 ‘‘(A) the majority U.S. shareholder year, 

2 or 

3 ‘‘(B) if there is no majority U.S. share4 holder year, the taxable year prescribed under 

5 regulations. 

6 ‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci7 fied foreign corporation may elect, in lieu of the tax8 able year under paragraph (1)(A), a taxable year be9 ginning 1 month earlier than the majority U.S. 

10 shareholder year. 

11 ‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.— 

12 ‘‘(A) IN GENERAL.—For purposes of this 

13 subsection, the term ‘majority U.S. shareholder 

14 year’ means the taxable year (if any) which, on 

15 each testing day, constituted the taxable year 

16 of— 

17 ‘‘(i) each United States shareholder 

18 described in subsection (b)(2)(A), and 

19 ‘‘(ii) each United States shareholder 

20 not described in clause (i) whose stock was 

21 treated as owned under subsection 

22 (b)(2)(B) by any shareholder described in 

23 such clause. 

24 ‘‘(B) TESTING DAY.—The testing days 

25 shall be— 
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1 ‘‘(i) the first day of the corporation’s 

2 taxable year (determined without regard to 

3 this section), or 

4 ‘‘(ii) the days during such representa5 tive period as the Secretary may pre6 scribe.’’. 

7 (16) Clause (ii) of section 904(d)(2)(A) is 

8 amended to read as follows: 

9 ‘‘(ii) CERTAIN AMOUNTS INCLUDED.— 

10 Except as provided in clause (iii), the term 

11 ‘passive income’ includes, except as pro12 vided in subparagraph (E)(iii) or para13 graph (3)(I), any amount includible in 

14 gross income under section 1293 (relating 

15 to certain passive foreign investment com16 panies).’’. 

17 (17)(A) Subparagraph (A) of section 904(h)(1), 

18 as redesignated by section 302, is amended by add19 ing ‘‘or’’ at the end of clause (i), by striking clause 

20 (ii), and by redesignating clause (iii) as clause (ii). 

21 (B) The paragraph heading of paragraph (2) of 

22 section 904(h), as so redesignated, is amended by 

23 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 June 30, 2004. 

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 facilities placed in service after 

20 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 ‘‘2005’’. 

6 (b) CONFORMING AMENDMENTS.— 

7 (1) Paragraph (2) of section 220(j) is amend8 ed— 

9 (A) in the text by striking ‘‘or 2002’’ each 

10 place it appears and inserting ‘‘2002, or 2004’’, 

11 and 

12 (B) in the heading by striking ‘‘OR 2002’’ 

13 and inserting ‘‘2002, OR 2004’’. 

14 (2) Subparagraph (A) of section 220(j)(4) is 

15 amended by striking ‘‘and 2002’’ and inserting 

16 ‘‘2002, and 2004’’. 

17 (3) Subparagraph (C) of section 220(j)(2) is 

18 amended to read as follows: 

19 ‘‘(C) NO LIMITATION FOR 2000 OR 2003.— 

20 The numerical limitation shall not apply for 

21 2000 or 2003.’’. 

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

23 this section shall take effect on January 1, 2004. 

24 (d) TIME FOR FILING REPORTS, ETC.— 

25 (1) The report required by section 220(j)(4) of 

26 the Internal Revenue Code of 1986 to be made on 
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1 August 1, 2004, shall be treated as timely if made 

2 before the close of the 90-day period beginning on 

3 the date of the enactment of this Act. 

4 (2) The determination and publication required 

5 by section 220(j)(5) of such Code with respect to 

6 calendar year 2004 shall be treated as timely if 

7 made before the close of the 120-day period begin8 ning on the date of the enactment of this Act. If the 

9 determination under the preceding sentence is that 

10 2004 is a cut-off year under section 220(i) of such 

11 Code, the cut-off date under such section 220(i) 

12 shall be the last day of such 120-day period. 

13 SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE14 TION FOR OIL AND NATURAL GAS PRODUCED 

15 FROM MARGINAL PROPERTIES. 

16 (a) IN GENERAL.—Subparagraph (H) of section 

17 613A(c)(6) is amended by striking ‘‘January 1, 2004’’ and 

18 inserting ‘‘January 1, 2006’’. 

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

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

21 December 31, 2003. 

22 SEC. 413. QUALIFIED ZONE ACADEMY BONDS. 

23 (a) IN GENERAL.—Paragraph (1) of section 

24 1397E(e) is amended by striking ‘‘and 2003’’ and insert25 ing ‘‘2003, 2004, and 2005’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 subsection (a) shall apply to obligations issued after the 

3 date of the enactment of this Act. 

4 SEC. 414. DISTRICT OF COLUMBIA. 

5 (a) DISTRICT OF COLUMBIA ENTERPRISE ZONE.— 

6 Subsection (f) of section 1400 is amended by striking 

7 ‘‘December 31, 2003’’ both places it appears and inserting 

8 ‘‘December 31, 2005’’. 

9 (b) TAX-EXEMPT ECONOMIC DEVELOPMENT

10 BONDS.—Subsection (b) of section 1400A is amended by 

11 striking ‘‘December 31, 2003’’ and inserting ‘‘December 

12 31, 2005’’. 

13 (c) ZERO PERCENT CAPITAL GAINS RATE.— 

14 (1) Section 1400B is amended by striking 

15 ‘‘January 1, 2004’’ each place it appears and insert16 ing ‘‘January 1, 2006’’. 

17 (2) Subsections (e)(2) and (g)(2) of section 

18 1400B are each amended by striking ‘‘2008’’ each 

19 place it appears in the headings and text and insert20 ing ‘‘2010’’. 

21 (3) Subsection (d) of section 1400F is amended 

22 by striking ‘‘December 31, 2008’’ and inserting 

23 ‘‘December 31, 2010’’. 
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1 (d) FIRST-TIME HOMEBUYER CREDIT.—Subsection 

2 (i) of section 1400C is amended by striking ‘‘January 1, 

3 2004’’ and inserting ‘‘January 1, 2006’’. 

4 (e) EFFECTIVE DATES.— 

5 (1) IN GENERAL.—Except as otherwise pro6 vided in this subsection, the amendments made by 

7 this section shall take effect on the date of the en8 actment of this Act. 

9 (2) TAX-EXEMPT ECONOMIC DEVELOPMENT

10 BONDS.—The amendment made by subsection (b) 

11 shall apply to obligations issued after December 31, 

12 2003. 

13 SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY 

14 ZONE BOND FINANCING. 

15 Subparagraph (D) of section 1400L(d)(2) is amend16 ed by striking ‘‘2005’’ and inserting ‘‘2010’’. 

17 SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVI18 TIES. 

19 (a) IN GENERAL.—Clause (iv) of section 

20 6103(i)(3)(C) and subparagraph (E) of section 6103(i)(7) 

21 are both amended by striking ‘‘December 31, 2003’’ and 

22 inserting ‘‘December 31, 2005’’. 

23 (b) DISCLOSURE OF TAXPAYER IDENTITY TO LAW

24 ENFORCEMENT AGENCIES INVESTIGATING TERRORISM.— 
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1 Subparagraph (A) of section 6103(i)(7) is amended by 

2 adding at the end the following new clause: 

3 ‘‘(v) TAXPAYER IDENTITY.—For pur4 poses of this subparagraph, a taxpayer’s 

5 identity shall not be treated as taxpayer 

6 return information.’’. 

7 (c) EFFECTIVE DATES.— 

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

9 subsection (a) shall apply to disclosures on or after 

10 the date of the enactment of this Act. 

11 (2) SUBSECTION (b).—The amendment made 

12 by subsection (b) shall take effect as if included in 

13 section 201 of the Victims of Terrorism Tax Relief 

14 Act of 2001. 

15 SEC. 417. DISCLOSURE OF RETURN INFORMATION RELAT16 ING TO STUDENT LOANS. 

17 Section 6103(l)(13)(D) (relating to termination) is 

18 amended by striking ‘‘December 31, 2004’’ and inserting 

19 ‘‘December 31, 2005’’. 

20 SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS. 

21 (a) IN GENERAL.—Paragraph (1) of section 7652(f) 

22 is amended by striking ‘‘January 1, 2004’’ and inserting 

23 ‘‘January 1, 2006’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 subsection (a) shall apply to articles brought into the 

3 United States after December 31, 2003. 

4 SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDG5 ET FOR THE INTERNAL REVENUE SERVICE. 

6 (a) IN GENERAL.—Paragraph (2) of section 8021(f) 

7 (relating to joint reviews) is amended by striking ‘‘2004’’ 

8 and inserting ‘‘2005’’. 

9 (b) REPORT.—Subparagraph (C) of section 8022(3) 

10 (regarding reports) is amended— 

11 (1) by striking ‘‘2004’’ and inserting ‘‘2005’’, 

12 and 

13 (2) by striking ‘‘with respect to—’’ and all that 

14 follows and inserting ‘‘with respect to the matters 

15 addressed in the joint review referred to in section 

16 8021(f)(2).’’. 

17 (c) TIME FOR JOINT REVIEW.—The joint review re18 quired by section 8021(f)(2) of the Internal Revenue Code 

19 of 1986 to be made before June 1, 2004, shall be treated 

20 as timely if made before June 1, 2005. 

21 SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS 

22 TO MENTAL HEALTH BENEFITS. 

23 (a) IN GENERAL.—Subsection (f) of section 9812 is 

24 amended by striking ‘‘and’’ at the end of paragraph (1), 
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1 by striking paragraph (2), and by inserting after para2 graph (1) the following new paragraphs: 

3 ‘‘(2) on or after January 1, 2004, and before 

4 the date of the enactment of American Jobs Cre5 ation Act of 2004, and 

6 ‘‘(3) after December 31, 2005.’’. 

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

8 this section shall apply to benefits for services furnished 

9 on or after December 31, 2003. 

10 SEC. 421. COMBINED EMPLOYMENT TAX REPORTING 

11 PROJECT. 

12 (a) IN GENERAL.—Paragraph (1) of section 976(b) 

13 of the Taxpayer Relief Act of 1997 (111 Stat. 898) is 

14 amended by striking ‘‘for a period ending with the date 

15 which is 5 years after the date of the enactment of this 

16 Act’’ and inserting ‘‘during the period ending on Decem17 ber 31, 2005’’. 

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

19 subsection (a) shall apply to disclosures on or after the 

20 date of the enactment of this Act. 

21 SEC. 422. CLEAN-FUEL VEHICLES. 

22 (a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.— 

23 Paragraph (2) of section 30(b) (relating to phaseout) is 

24 amended to read as follows: 
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1 ‘‘(2) PHASEOUT.—In the case of any qualified 

2 electric vehicle placed in service after December 31, 

3 2005, the credit otherwise allowable under sub4 section (a) (determined after the application of para5 graph (1)) shall be reduced by 75 percent.’’. 

6 (b) DEDUCTION FOR QUALIFIED CLEAN-FUEL VEHI7 CLE PROPERTY.—Subparagraph (B) of section 

8 179A(b)(1) (relating to phaseout) is amended to read as 

9 follows: 

10 ‘‘(B) PHASEOUT.—In the case of any 

11 qualified clean-fuel vehicle property placed in 

12 service after December 31, 2005, the limit oth13 erwise applicable under subparagraph (A) shall 

14 be reduced by 75 percent.’’. 

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

16 this section shall apply to property placed in service after 

17 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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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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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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‘‘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) EFFECTIVE DATE.—The amendments made by 

10 this section shall apply to transactions with respect to 

11 which material aid, assistance, or advice referred to in sec12 tion 6111(b)(1)(A)(i) of the Internal Revenue Code of 

13 1986 (as added by this section) is provided after the date 

14 of the enactment of this Act. 

15 SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING 

16 REPORTABLE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 6707 (relating to failure 

18 to furnish information regarding tax shelters) is amended 

19 to read as follows: 
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1 ‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD2 ING REPORTABLE TRANSACTIONS. 

3 ‘‘(a) IN GENERAL.—If a person who is required to 

4 file a return under section 6111(a) with respect to any 

5 reportable transaction— 

6 ‘‘(1) fails to file such return on or before the 

7 date prescribed therefor, or 

8 ‘‘(2) files false or incomplete information with 

9 the Secretary with respect to such transaction, 

10 such person shall pay a penalty with respect to such return 

11 in the amount determined under subsection (b). 

12 ‘‘(b) AMOUNT OF PENALTY.— 

13 ‘‘(1) IN GENERAL.—Except as provided in para14 graph (2), the penalty imposed under subsection (a) 

15 with respect to any failure shall be $50,000. 

16 ‘‘(2) LISTED TRANSACTIONS.—The penalty im17 posed under subsection (a) with respect to any listed 

18 transaction shall be an amount equal to the greater 

19 of— 

20 ‘‘(A) $200,000, or 

21 ‘‘(B) 50 percent of the gross income de22 rived by such person with respect to aid, assist23 ance, or advice which is provided with respect 

24 to the listed transaction before the date the re25 turn is filed under section 6111. 
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1 Subparagraph (B) shall be applied by substituting 

2 ‘75 percent’ for ‘50 percent’ in the case of an inten3 tional failure or act described in subsection (a). 

4 ‘‘(c) RESCISSION AUTHORITY.—The provisions of 

5 section 6707A(d) (relating to authority of Commissioner 

6 to rescind penalty) shall apply to any penalty imposed 

7 under this section. 

8 ‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.— 

9 For purposes of this section, the terms ‘reportable trans10 action’ and ‘listed transaction’ have the respective mean11 ings given to such terms by section 6707A(c).’’. 

12 (b) CLERICAL AMENDMENT.—The item relating to 

13 section 6707 in the table of sections for part I of sub14 chapter B of chapter 68 is amended by striking ‘‘tax shel15 ters’’ and inserting ‘‘reportable transactions’’. 

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

17 this section shall apply to returns the due date for which 

18 is after the date of the enactment of this Act. 

19 SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO 

20 MAINTAIN LISTS OF INVESTORS. 

21 (a) IN GENERAL.—Subsection (a) of section 6708 is 

22 amended to read as follows: 

23 ‘‘(a) IMPOSITION OF PENALTY.— 

24 ‘‘(1) IN GENERAL.—If any person who is re25 quired to maintain a list under section 6112(a) fails 
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1 to make such list available upon written request to 

2 the Secretary in accordance with section 6112(b) 

3 within 20 business days after the date of such re4 quest, such person shall pay a penalty of $10,000 

5 for each day of such failure after such 20th day. 

6 ‘‘(2) REASONABLE CAUSE EXCEPTION.—No 

7 penalty shall be imposed by paragraph (1) with re8 spect to the failure on any day if such failure is due 

9 to reasonable cause.’’. 

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

11 this section shall apply to requests made after the date 

12 of the enactment of this Act. 

13 SEC. 618. PENALTY ON PROMOTERS OF TAX SHELTERS. 

14 (a) PENALTY ON PROMOTING ABUSIVE TAX SHEL15 TERS.—Section 6700(a) is amended by adding at the end 

16 the following new sentence: ‘‘Notwithstanding the first 

17 sentence, if an activity with respect to which a penalty 

18 imposed under this subsection involves a statement de19 scribed in paragraph (2)(A), the amount of the penalty 

20 shall be equal to 50 percent of the gross income derived 

21 (or to be derived) from such activity by the person on 

22 which the penalty is imposed.’’ 

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

24 this section shall apply to activities after the date of the 

25 enactment of this Act. 
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1 SEC. 619. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE2 MENT PENALTY FOR NONREPORTABLE 

3 TRANSACTIONS. 

4 (a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA5 TIONS.—Section 6662(d)(1)(B) (relating to special rule 

6 for corporations) is amended to read as follows: 

7 ‘‘(B) SPECIAL RULE FOR CORPORA8 TIONS.—In the case of a corporation other than 

9 an S corporation or a personal holding company 

10 (as defined in section 542), there is a substan11 tial understatement of income tax for any tax12 able year if the amount of the understatement 

13 for the taxable year exceeds the lesser of— 

14 ‘‘(i) 10 percent of the tax required to 

15 be shown on the return for the taxable 

16 year (or, if greater, $10,000), or 

17 ‘‘(ii) $10,000,000.’’. 

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

19 this section shall apply to taxable years beginning after 

20 the date of the enactment of this Act. 

21 SEC. 620. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 

22 CONDUCT RELATED TO TAX SHELTERS AND 

23 REPORTABLE TRANSACTIONS. 

24 (a) IN GENERAL.—Section 7408 (relating to action 

25 to enjoin promoters of abusive tax shelters, etc.) is amend26 ed by redesignating subsection (c) as subsection (d) and 
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1 by striking subsections (a) and (b) and inserting the fol2 lowing new subsections: 

3 ‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac4 tion in the name of the United States to enjoin any person 

5 from further engaging in specified conduct may be com6 menced at the request of the Secretary. Any action under 

7 this section shall be brought in the district court of the 

8 United States for the district in which such person resides, 

9 has his principal place of business, or has engaged in spec10 ified conduct. The court may exercise its jurisdiction over 

11 such action (as provided in section 7402(a)) separate and 

12 apart from any other action brought by the United States 

13 against such person. 

14 ‘‘(b) ADJUDICATION AND DECREE.—In any action 

15 under subsection (a), if the court finds— 

16 ‘‘(1) that the person has engaged in any speci17 fied conduct, and 

18 ‘‘(2) that injunctive relief is appropriate to pre19 vent recurrence of such conduct, 

20 the court may enjoin such person from engaging in such 

21 conduct or in any other activity subject to penalty under 

22 this title. 

23 ‘‘(c) SPECIFIED CONDUCT.—For purposes of this 

24 section, the term ‘specified conduct’ means any action, or 
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1 failure to take action, subject to penalty under section 

2 6700, 6701, 6707, or 6708.’’. 

3 (b) CONFORMING AMENDMENTS.— 

4 (1) The heading for section 7408 is amended to 

5 read as follows: 

6 ‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE7 LATED TO TAX SHELTERS AND REPORTABLE 

8 TRANSACTIONS.’’ 

9 (2) The table of sections for subchapter A of 

10 chapter 76 is amended by striking the item relating 

11 to section 7408 and inserting the following new 

12 item: 

‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 

reportable transactions.’’. 

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

14 this section shall take effect on the day after the date of 

15 the enactment of this Act. 

16 SEC. 621. PENALTY ON FAILURE TO REPORT INTERESTS IN 

17 FOREIGN FINANCIAL ACCOUNTS. 

18 (a) IN GENERAL.—Section 5321(a)(5) of title 31, 

19 United States Code, is amended to read as follows: 

20 ‘‘(5) FOREIGN FINANCIAL AGENCY TRANS21 ACTION VIOLATION.— 

22 ‘‘(A) PENALTY AUTHORIZED.—The Sec23 retary of the Treasury may impose a civil 

24 money penalty on any person who violates, or 
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1 causes any violation of, any provision of section 

2 5314. 

3 ‘‘(B) AMOUNT OF PENALTY.— 

4 ‘‘(i) IN GENERAL.—Except as pro5 vided in subparagraph (C), the amount of 

6 any civil penalty imposed under subpara7 graph (A) shall not exceed $5,000. 

8 ‘‘(ii) REASONABLE CAUSE EXCEP9 TION.—No penalty shall be imposed under 

10 subparagraph (A) with respect to any vio11 lation if— 

12 ‘‘(I) such violation was due to 

13 reasonable cause, and 

14 ‘‘(II) the amount of the trans15 action or the balance in the account 

16 at the time of the transaction was 

17 properly reported. 

18 ‘‘(C) WILLFUL VIOLATIONS.—In the case 

19 of any person willfully violating, or willfully 

20 causing any violation of, any provision of sec21 tion 5314— 

22 ‘‘(i) the maximum penalty under sub23 paragraph (B)(i) shall be increased to the 

24 greater of— 

25 ‘‘(I) $25,000, or 
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1 ‘‘(II) the amount (not exceeding 

2 $100,000) determined under subpara3 graph (D), and 

4 ‘‘(ii) subparagraph (B)(ii) shall not 

5 apply. 

6 ‘‘(D) AMOUNT.—The amount determined 

7 under this subparagraph is— 

8 ‘‘(i) in the case of a violation involving 

9 a transaction, the amount of the trans10 action, or 

11 ‘‘(ii) in the case of a violation involv12 ing a failure to report the existence of an 

13 account or any identifying information re14 quired to be provided with respect to an 

15 account, the balance in the account at the 

16 time of the violation.’’. 

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

18 this section shall apply to violations occurring after the 

19 date of the enactment of this Act. 

20 SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BE21 FORE THE DEPARTMENT OF THE TREASURY. 

22 (a) CENSURE; IMPOSITION OF PENALTY.— 

23 (1) IN GENERAL.—Section 330(b) of title 31, 

24 United States Code, is amended— 
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1 (A) by inserting ‘‘, or censure,’’ after ‘‘De2 partment’’, and 

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

4 flush sentence: 

5 ‘‘The Secretary may impose a monetary penalty on any 

6 representative described in the preceding sentence. If the 

7 representative was acting on behalf of an employer or any 

8 firm or other entity in connection with the conduct giving 

9 rise to such penalty, the Secretary may impose a monetary 

10 penalty on such employer, firm, or entity if it knew, or 

11 reasonably should have known, of such conduct. Such pen12 alty shall not exceed the gross income derived (or to be 

13 derived) from the conduct giving rise to the penalty. Any 

14 such penalty imposed on an individual may be in addition 

15 to, or in lieu of, any suspension, disbarment, or censure 

16 of such individual.’’ 

17 (2) EFFECTIVE DATE.—The amendments made 

18 by this subsection shall apply to actions taken after 

19 the date of the enactment of this Act. 

20 (b) TAX SHELTER OPINIONS, ETC.—Section 330 of 

21 such title 31 is amended by adding at the end the fol22 lowing new subsection: 

23 ‘‘(d) Nothing in this section or in any other provision 

24 of law shall be construed to limit the authority of the Sec25 retary of the Treasury to impose standards applicable to 
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1 the rendering of written advice with respect to any entity, 

2 transaction plan or arrangement, or other plan or arrange3 ment, which is of a type which the Secretary determines 

4 as having a potential for tax avoidance or evasion.’’. 

5 Part II—Other Provisions 

6 SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND 

7 AND PREFERRED STOCK FUNDS, ETC. 

8 (a) IN GENERAL.—Section 1286 (relating to tax 

9 treatment of stripped bonds) is amended by redesignating 

10 subsection (f) as subsection (g) and by inserting after sub11 section (e) the following new subsection: 

12 ‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND

13 AND PREFERRED STOCK FUNDS, ETC.—In the case of an 

14 account or entity substantially all of the assets of which 

15 consist of bonds, preferred stock, or a combination thereof, 

16 the Secretary may by regulations provide that rules simi17 lar to the rules of this section and 305(e), as appropriate, 

18 shall apply to interests in such account or entity to which 

19 (but for this subsection) this section or section 305(e), as 

20 the case may be, would not apply.’’. 

21 (b) CROSS REFERENCE.—Subsection (e) of section 

22 305 is amended by adding at the end the following new 

23 paragraph: 
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1 ‘‘(7) CROSS REFERENCE.— 

‘‘For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(f).’’. 

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

3 this section shall apply to purchases and dispositions after 

4 the date of the enactment of this Act. 

5 SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 

6 CREDIT ON WITHHOLDING TAXES ON INCOME 

7 OTHER THAN DIVIDENDS. 

8 (a) IN GENERAL.—Section 901 is amended by redes9 ignating subsection (l) as subsection (m) and by inserting 

10 after subsection (k) the following new subsection: 

11 ‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING

12 TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS

13 ETC.— 

14 ‘‘(1) IN GENERAL.—In no event shall a credit 

15 be allowed under subsection (a) for any withholding 

16 tax (as defined in subsection (k)) on any item of in17 come or gain with respect to any property if— 

18 ‘‘(A) such property is held by the recipient 

19 of the item for 15 days or less during the 30- 

20 day period beginning on the date which is 15 

21 days before the date on which the right to re22 ceive payment of such item arises, or 

23 ‘‘(B) to the extent that the recipient of the 

24 item is under an obligation (whether pursuant 
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1 to a short sale or otherwise) to make related 

2 payments with respect to positions in substan3 tially similar or related property. 

4 This paragraph shall not apply to any dividend to 

5 which subsection (k) applies. 

6 ‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL7 ERS.— 

8 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

9 not apply to any qualified tax with respect to 

10 any property held in the active conduct in a for11 eign country of a business as a dealer in such 

12 property. 

13 ‘‘(B) QUALIFIED TAX.—For purposes of 

14 subparagraph (A), the term ‘qualified tax’ 

15 means a tax paid to a foreign country (other 

16 than the foreign country referred to in subpara17 graph (A)) if— 

18 ‘‘(i) the item to which such tax is at19 tributable is subject to taxation on a net 

20 basis by the country referred to in sub21 paragraph (A), and 

22 ‘‘(ii) such country allows a credit 

23 against its net basis tax for the full 

24 amount of the tax paid to such other for25 eign country. 
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1 ‘‘(C) DEALER.—For purposes of subpara2 graph (A), the term ‘dealer’ means— 

3 ‘‘(i) with respect to a security, any 

4 person to whom paragraphs (1) and (2) of 

5 subsection (k) would not apply by reason 

6 of paragraph (4) thereof if such security 

7 were stock, and 

8 ‘‘(ii) with respect to any other prop9 erty, any person with respect to whom 

10 such property is described in section 

11 1221(a)(1). 

12 ‘‘(D) REGULATIONS.—The Secretary may 

13 prescribe such regulations as may be appro14 priate to carry out this paragraph, including 

15 regulations to prevent the abuse of the excep16 tion provided by this paragraph and to treat 

17 other taxes as qualified taxes. 

18 ‘‘(3) EXCEPTIONS.—The Secretary may by reg19 ulation provide that paragraph (1) shall not apply to 

20 property where the Secretary determines that the 

21 application of paragraph (1) to such property is not 

22 necessary to carry out the purposes of this sub23 section. 

24 ‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 

25 to the rules of paragraphs (5), (6), and (7) of sub-
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1 section (k) shall apply for purposes of this sub2 section. 

3 ‘‘(5) DETERMINATION OF HOLDING PERIOD.— 

4 Holding periods shall be determined for purposes of 

5 this subsection without regard to section 1235 or 

6 any similar rule.’’. 

7 (b) CONFORMING AMENDMENT.—The heading of 

8 subsection (k) of section 901 is amended by inserting ‘‘ON

9 DIVIDENDS’’ after ‘‘TAXES’’. 

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

11 this section shall apply to amounts paid or accrued more 

12 than 30 days after the date of the enactment of this Act. 

13 SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 

14 TRANSFERS. 

15 (a) TREATMENT OF CONTRIBUTED PROPERTY WITH

16 BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 

17 amended by striking ‘‘and’’ at the end of subparagraph 

18 (A), by striking the period at the end of subparagraph 

19 (B) and inserting ‘‘, and’’, and by adding at the end the 

20 following: 

21 ‘‘(C) if any property so contributed has a 

22 built-in loss— 

23 ‘‘(i) such built-in loss shall be taken 

24 into account only in determining the 
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1 amount of items allocated to the contrib2 uting partner, and 

3 ‘‘(ii) except as provided in regulations, 

4 in determining the amount of items allo5 cated to other partners, the basis of the 

6 contributed property in the hands of the 

7 partnership shall be treated as being equal 

8 to its fair market value at the time of con9 tribution. 

10 For purposes of subparagraph (C), the term ‘built11 in loss’ means the excess of the adjusted basis of the 

12 property (determined without regard to subpara13 graph (C)(ii)) over its fair market value at the time 

14 of contribution.’’. 

15 (b) SPECIAL RULES FOR TRANSFERS OF PARTNER16 SHIP INTEREST IF THERE IS SUBSTANTIAL BUILT-IN

17 LOSS.— 

18 (1) ADJUSTMENT OF PARTNERSHIP BASIS RE19 QUIRED.—Subsection (a) of section 743 (relating to 

20 optional adjustment to basis of partnership prop21 erty) is amended by inserting before the period ‘‘or 

22 unless the partnership has a substantial built-in loss 

23 immediately after such transfer’’. 

24 (2) ADJUSTMENT.—Subsection (b) of section 

25 743 is amended by inserting ‘‘or which has a sub-
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1 stantial built-in loss immediately after such trans2 fer’’ after ‘‘section 754 is in effect’’. 

3 (3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 

4 is amended by adding at the end the following new 

5 subsection: 

6 ‘‘(d) SUBSTANTIAL BUILT-IN LOSS.— 

7 ‘‘(1) IN GENERAL.—For purposes of this sec8 tion, a partnership has a substantial built-in loss 

9 with respect to a transfer of an interest in a part10 nership if the partnership’s adjusted basis in the 

11 partnership property exceeds by more than $250,000 

12 the fair market value of such property. 

13 ‘‘(2) REGULATIONS.—The Secretary shall pre14 scribe such regulations as may be appropriate to 

15 carry out the purposes of paragraph (1) and section 

16 734(d), including regulations aggregating related 

17 partnerships and disregarding property acquired by 

18 the partnership in an attempt to avoid such pur19 poses.’’. 

20 (4) ALTERNATIVE RULES FOR ELECTING IN21 VESTMENT PARTNERSHIPS.— 

22 (A) IN GENERAL.—Section 743 is amended 

23 by adding at the end the following new sub24 section: 
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1 ‘‘(e) ALTERNATIVE RULES FOR ELECTING INVEST2 MENT PARTNERSHIPS.— 

3 ‘‘(1) NO ADJUSTMENT OF PARTNERSHIP

4 BASIS.—For purposes of this section, an electing in5 vestment partnership shall not be treated as having 

6 a substantial built-in loss with respect to any trans7 fer occurring while the election under paragraph 

8 (6)(A) is in effect. 

9 ‘‘(2) LOSS DEFERRAL FOR TRANSFEREE PART10 NER.—In the case of a transfer of an interest in an 

11 electing investment partnership, the transferee part12 ner’s distributive share of losses (without regard to 

13 gains) from the sale or exchange of partnership 

14 property shall not be allowed except to the extent 

15 that it is established that such losses exceed the loss 

16 (if any) recognized by the transferor (or any prior 

17 transferor to the extent not fully offset by a prior 

18 disallowance under this paragraph) on the transfer 

19 of the partnership interest. 

20 ‘‘(3) NO REDUCTION IN PARTNERSHIP BASIS.— 

21 Losses disallowed under paragraph (2) shall not de22 crease the transferee partner’s basis in the partner23 ship interest. 

24 ‘‘(4) EFFECT OF TERMINATION OF PARTNER25 SHIP.—This subsection shall be applied without re-
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1 gard to any termination of a partnership under sec2 tion 708(b)(1)(B). 

3 ‘‘(5) CERTAIN BASIS REDUCTIONS TREATED AS

4 LOSSES.—In the case of a transferee partner whose 

5 basis in property distributed by the partnership is 

6 reduced under section 732(a)(2), the amount of the 

7 loss recognized by the transferor on the transfer of 

8 the partnership interest which is taken into account 

9 under paragraph (2) shall be reduced by the amount 

10 of such basis reduction. 

11 ‘‘(6) ELECTING INVESTMENT PARTNERSHIP.— 

12 For purposes of this subsection, the term ‘electing 

13 investment partnership’ means any partnership if— 

14 ‘‘(A) the partnership makes an election to 

15 have this subsection apply, 

16 ‘‘(B) the partnership would be an invest17 ment company under section 3(a)(1)(A) of the 

18 Investment Company Act of 1940 but for an 

19 exemption under paragraph (1) or (7) of section 

20 3(c) of such Act, 

21 ‘‘(C) such partnership has never been en22 gaged in a trade or business, 

23 ‘‘(D) substantially all of the assets of such 

24 partnership are held for investment, 
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1 ‘‘(E) at least 95 percent of the assets con2 tributed to such partnership consist of money, 

3 ‘‘(F) no assets contributed to such part4 nership had an adjusted basis in excess of fair 

5 market value at the time of contribution, 

6 ‘‘(G) all partnership interests of such part7 nership are issued by such partnership pursu8 ant to a private offering and during the 24- 

9 month period beginning on the date of the first 

10 capital contribution to such partnership, 

11 ‘‘(H) the partnership agreement of such 

12 partnership has substantive restrictions on each 

13 partner’s ability to cause a redemption of the 

14 partner’s interest, and 

15 ‘‘(I) the partnership agreement of such 

16 partnership provides for a term that is not in 

17 excess of 15 years. 

18 The election described in subparagraph (A), once 

19 made, shall be irrevocable except with the consent of 

20 the Secretary. 

21 ‘‘(7) REGULATIONS.—The Secretary shall pre22 scribe such regulations as may be appropriate to 

23 carry out the purposes of this subsection, including 

24 regulations for applying this subsection to tiered 

25 partnerships.’’. 
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1 (B) INFORMATION REPORTING.—Section 

2 6031 is amended by adding at the end the fol3 lowing new subsection: 

4 ‘‘(f) ELECTING INVESTMENT PARTNERSHIPS.—In 

5 the case of any electing investment partnership (as defined 

6 in section 743(e)(6)), the information required under sub7 section (b) to be furnished to any partner to whom section 

8 743(e)(2) applies shall include such information as is nec9 essary to enable the partner to compute the amount of 

10 losses disallowed under section 743(e).’’. 

11 (5) CLERICAL AMENDMENTS.— 

12 (A) The section heading for section 743 is 

13 amended to read as follows: 

14 ‘‘SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION 

15 OR SUBSTANTIAL BUILT-IN LOSS.’’ 

16 (B) The table of sections for subpart C of 

17 part II of subchapter K of chapter 1 is amend18 ed by striking the item relating to section 743 

19 and inserting the following new item: 

‘‘Sec. 743. Special rules where section 754 election or substantial 

built-in loss.’’. 

20 (c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED

21 PARTNERSHIP PROPERTY IF THERE IS SUBSTANTIAL

22 BASIS REDUCTION.— 

23 (1) ADJUSTMENT REQUIRED.—Subsection (a) 

24 of section 734 (relating to optional adjustment to 
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1 basis of undistributed partnership property) is 

2 amended by inserting before the period ‘‘or unless 

3 there is a substantial basis reduction’’. 

4 (2) ADJUSTMENT.—Subsection (b) of section 

5 734 is amended by inserting ‘‘or unless there is a 

6 substantial basis reduction’’ after ‘‘section 754 is in 

7 effect’’. 

8 (3) SUBSTANTIAL BASIS REDUCTION.—Section 

9 734 is amended by adding at the end the following 

10 new subsection: 

11 ‘‘(d) SUBSTANTIAL BASIS REDUCTION.— 

12 ‘‘(1) IN GENERAL.—For purposes of this sec13 tion, there is a substantial basis reduction with re14 spect to a distribution if the sum of the amounts de15 scribed in subparagraphs (A) and (B) of subsection 

16 (b)(2) exceeds $250,000. 

17 ‘‘(2) REGULATIONS.— 

‘‘For regulations to carry out this subsection, see 

section 743(d)(2).’’. 

18 (4) CLERICAL AMENDMENTS.— 

19 (A) The section heading for section 734 is 

20 amended to read as follows: 
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1 ‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 

2 PARTNERSHIP PROPERTY WHERE SECTION 

3 754 ELECTION OR SUBSTANTIAL BASIS RE4 DUCTION.’’ 

5 (B) The table of sections for subpart B of 

6 part II of subchapter K of chapter 1 is amend7 ed by striking the item relating to section 734 

8 and inserting the following new item: 

‘‘Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis 

reduction.’’. 

9 (d) EFFECTIVE DATES.— 

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

11 by subsection (a) shall apply to contributions made 

12 after the date of the enactment of this Act. 

13 (2) SUBSECTION (b).— 

14 (A) IN GENERAL.—Except as provided in 

15 subparagraph (B), the amendments made by 

16 subsection (b) shall apply to transfers after the 

17 date of the enactment of this Act. 

18 (B) TRANSITION RULE.—In the case of an 

19 electing investment partnership which is in ex20 istence on June 4, 2004, section 743(e)(6)(H) 

21 of the Internal Revenue Code of 1986, as added 

22 by this section, shall not apply to such partner23 ship and section 743(e)(6)(I) of such Code, as 
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1 so added, shall be applied by substituting ‘‘20 

2 years’’ for ‘‘15 years’’. 

3 (3) SUBSECTION (c).—The amendments made 

4 by subsection (c) shall apply to distributions after 

5 the date of the enactment of this Act. 

6 SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN 

7 STOCK HELD BY PARTNERSHIP IN COR8 PORATE PARTNER. 

9 (a) IN GENERAL.—Section 755 is amended by adding 

10 at the end the following new subsection: 

11 ‘‘(c) NO ALLOCATION OF BASIS DECREASE TO

12 STOCK OF CORPORATE PARTNER.—In making an alloca13 tion under subsection (a) of any decrease in the adjusted 

14 basis of partnership property under section 734(b)— 

15 ‘‘(1) no allocation may be made to stock in a 

16 corporation (or any person related (within the mean17 ing of sections 267(b) and 707(b)(1)) to such cor18 poration) which is a partner in the partnership, and 

19 ‘‘(2) any amount not allocable to stock by rea20 son of paragraph (1) shall be allocated under sub21 section (a) to other partnership property. 

22 Gain shall be recognized to the partnership to the extent 

23 that the amount required to be allocated under paragraph 

24 (2) to other partnership property exceeds the aggregate 
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1 adjusted basis of such other property immediately before 

2 the allocation required by paragraph (2).’’. 

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

4 this section shall apply to distributions after the date of 

5 the enactment of this Act. 

6 SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS. 

7 (a) IN GENERAL.—Part V of subchapter M of chap8 ter 1 (relating to financial asset securitization investment 

9 trusts) is hereby repealed. 

10 (b) CONFORMING AMENDMENTS.— 

11 (1) Paragraph (6) of section 56(g) is amended 

12 by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 

13 REMIC’’. 

14 (2) Clause (ii) of section 382(l)(4)(B) is amend15 ed by striking ‘‘a REMIC to which part IV of sub16 chapter M applies, or a FASIT to which part V of 

17 subchapter M applies,’’ and inserting ‘‘or a REMIC 

18 to which part IV of subchapter M applies,’’. 

19 (3) Paragraph (1) of section 582(c) is amended 

20 by striking ‘‘, and any regular interest in a 

21 FASIT,’’. 

22 (4) Subparagraph (E) of section 856(c)(5) is 

23 amended by striking the last sentence. 

24 (5)(A) Section 860G(a)(1) is amended by add25 ing at the end the following new sentence: ‘‘An inter-
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1 est shall not fail to qualify as a regular interest sole2 ly because the specified principal amount of the reg3 ular interest (or the amount of interest accrued on 

4 the regular interest) can be reduced as a result of 

5 the nonoccurrence of 1 or more contingent payments 

6 with respect to any reverse mortgage loan held by 

7 the REMIC if, on the startup day for the REMIC, 

8 the sponsor reasonably believes that all principal and 

9 interest due under the regular interest will be paid 

10 at or prior to the liquidation of the REMIC.’’. 

11 (B) The last sentence of section 860G(a)(3) is 

12 amended by inserting ‘‘, and any reverse mortgage 

13 loan (and each balance increase on such loan meet14 ing the requirements of subparagraph (A)(iii)) shall 

15 be treated as an obligation secured by an interest in 

16 real property’’ before the period at the end. 

17 (6) Paragraph (3) of section 860G(a) is amend18 ed by adding ‘‘and’’ at the end of subparagraph (B), 

19 by striking ‘‘, and’’ at the end of subparagraph (C) 

20 and inserting a period, and by striking subparagraph 

21 (D). 

22 (7) Section 860G(a)(3), as amended by para23 graph (6), is amended by adding at the end the fol24 lowing new sentence: ‘‘For purposes of subparagraph 

25 (A), if more than 50 percent of the obligations 
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1 transferred to, or purchased by, the REMIC are 

2 originated by the United States or any State (or any 

3 political subdivision, agency, or instrumentality of 

4 the United States or any State) and are principally 

5 secured by an interest in real property, then each 

6 obligation transferred to, or purchased by, the 

7 REMIC shall be treated as secured by an interest in 

8 real property.’’. 

9 (8)(A) Section 860G(a)(3)(A) is amended by 

10 striking ‘‘or’’ at the end of clause (i), by inserting 

11 ‘‘or’’ at the end of clause (ii), and by inserting after 

12 clause (ii) the following new clause: 

13 ‘‘(iii) represents an increase in the 

14 principal amount under the original terms 

15 of an obligation described in clause (i) or 

16 (ii) if such increase— 

17 ‘‘(I) is attributable to an advance 

18 made to the obligor pursuant to the 

19 original terms of the obligation, 

20 ‘‘(II) occurs after the startup 

21 day, and 

22 ‘‘(III) is purchased by the 

23 REMIC pursuant to a fixed price con24 tract in effect on the startup day.’’. 
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1 (B) Section 860G(a)(7)(B) is amended to read 

2 as follows: 

3 ‘‘(B) QUALIFIED RESERVE FUND.—For 

4 purposes of subparagraph (A), the term ‘quali5 fied reserve fund’ means any reasonably re6 quired reserve to— 

7 ‘‘(i) provide for full payment of ex8 penses of the REMIC or amounts due on 

9 regular interests in the event of defaults on 

10 qualified mortgages or lower than expected 

11 returns on cash flow investments, or 

12 ‘‘(ii) provide a source of funds for the 

13 purchase of obligations described in clause 

14 (ii) or (iii) of paragraph (3)(A). 

15 The aggregate fair market value of the assets 

16 held in any such reserve shall not exceed 50 

17 percent of the aggregate fair market value of all 

18 of the assets of the REMIC on the startup day, 

19 and the amount of any such reserve shall be 

20 promptly and appropriately reduced to the ex21 tent the amount held in such reserve is no 

22 longer reasonably required for purposes speci23 fied in clause (i) or (ii) of this subparagraph.’’. 
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1 (9) Subparagraph (C) of section 1202(e)(4) is 

2 amended by striking ‘‘REMIC, or FASIT’’ and in3 serting ‘‘or REMIC’’. 

4 (10) Clause (xi) of section 7701(a)(19)(C) is 

5 amended— 

6 (A) by striking ‘‘and any regular interest 

7 in a FASIT,’’, and 

8 (B) by striking ‘‘or FASIT’’ each place it 

9 appears. 

10 (11) Subparagraph (A) of section 7701(i)(2) is 

11 amended by striking ‘‘or a FASIT’’. 

12 (12) The table of parts for subchapter M of 

13 chapter 1 is amended by striking the item relating 

14 to part V. 

15 (c) EFFECTIVE DATE.— 

16 (1) IN GENERAL.—Except as provided in para17 graph (2), the amendments made by this section 

18 shall take effect on January 1, 2005. 

19 (2) EXCEPTION FOR EXISTING FASITS.—Para20 graph (1) shall not apply to any FASIT in existence 

21 on the date of the enactment of this Act to the ex22 tent that regular interests issued by the FASIT be23 fore such date continue to remain outstanding in ac24 cordance with the original terms of issuance. 
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1 SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 

2 ON REMIC RESIDUALS. 

3 (a) IN GENERAL.—Section 362 (relating to basis to 

4 corporations) is amended by adding at the end the fol5 lowing new subsection: 

6 ‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN

7 LOSSES ON REMIC RESIDUALS IN SECTION 351 TRANS8 ACTIONS.—If— 

9 ‘‘(1) a residual interest (as defined in section 

10 860G(a)(2)) in a REMIC is transferred in any 

11 transaction which is described in subsection (a), and 

12 ‘‘(2) the transferee’s adjusted basis in such re13 sidual interest would (but for this paragraph) exceed 

14 its fair market value immediately after such trans15 action, 

16 then, notwithstanding subsection (a), the transferee’s ad17 justed basis in such residual interest shall not exceed its 

18 fair market value (whether or not greater than zero) im19 mediately after such transaction.’’. 

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

21 this section shall apply to transactions after the date of 

22 the enactment of this Act. 
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1 SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PUR2 POSES OF DETERMINING INVESTMENT OF 

3 EARNINGS IN UNITED STATES PROPERTY. 

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

5 956(c)(2) is amended to read as follows: 

6 ‘‘(A) obligations of the United States, 

7 money, or deposits with persons described in 

8 paragraph (4);’’. 

9 (b) ELIGIBLE PERSONS.—Section 956(c) (relating to 

10 exceptions to definition of United States property) is 

11 amended by adding at the end the following new para12 graph: 

13 ‘‘(4) FINANCIAL SERVICES PROVIDERS.— 

14 ‘‘(A) IN GENERAL.—For purposes of para15 graph (2)(A), a person is described in this para16 graph if at least 80 percent of the person’s in17 come is from the active conduct of a banking 

18 business which is derived from persons who are 

19 not related persons. 

20 ‘‘(B) SPECIAL RULES.—For purposes of 

21 subparagraph (A) all related persons shall be 

22 treated as 1 person in applying the 80-percent 

23 test. 

24 ‘‘(C) RELATED PERSON.—For purposes of 

25 this paragraph, a person is a related person to 

26 another person if— 
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1 ‘‘(i) the related person bears a rela2 tionship to such person specified in section 

3 267(b) or 707(b)(1), or 

4 ‘‘(ii) such persons are members of the 

5 same controlled group of corporations (as 

6 defined in section 1563(a), except that 

7 ‘more than 50 percent’ shall be substituted 

8 for ‘at least 80 percent’ each place it ap9 pears therein).’’. 

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

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

12 of this Act. 

13 SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSUR14 ANCE COMPANIES. 

15 (a) IN GENERAL.—Clause (i) of section 831(b)(2)(A) 

16 is amended by striking ‘‘$1,200,000’’ and inserting 

17 ‘‘$1,890,000’’. 

18 (b) INFLATION ADJUSTMENT.—Paragraph (2) of sec19 tion 831(b) is amended by adding at the end the following 

20 new subparagraph: 

21 ‘‘(C) INFLATION ADJUSTMENT.—In the 

22 case of any taxable year beginning in a calendar 

23 year after 2004, the $1,890,000 amount in sub24 paragraph (A) shall be increased by an amount 

25 equal to— 
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1 ‘‘(i) $1,890,000, multiplied by 

2 ‘‘(ii) the cost-of-living adjustment de3 termined under section 1(f)(3) for such 

4 calendar year by substituting ‘calendar 

5 year 2003’ for ‘calendar year 1992’ in sub6 paragraph (B) thereof. 

7 If the amount as adjusted under the preceding 

8 sentence is not a multiple of $1,000, such 

9 amount shall be rounded to the next lowest 

10 multiple of $1,000.’’. 

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

12 this section shall apply to taxable years beginning after 

13 December 31, 2003. 

14 SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UN15 DERPAYMENTS ATTRIBUTABLE TO NONDIS16 CLOSED REPORTABLE TRANSACTIONS. 

17 (a) IN GENERAL.—Section 163 (relating to deduction 

18 for interest) is amended by redesignating subsection (m) 

19 as subsection (n) and by inserting after subsection (l) the 

20 following new subsection: 

21 ‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE

22 TO NONDISCLOSED REPORTABLE TRANSACTIONS.—No 

23 deduction shall be allowed under this chapter for any in24 terest paid or accrued under section 6601 on any under25 payment of tax which is attributable to the portion of any 
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1 reportable transaction understatement (as defined in sec2 tion 6662A(b)) with respect to which the requirement of 

3 section 6664(d)(2)(A) is not met.’’. 

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

5 this section shall apply to transactions in taxable years 

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

7 SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ES8 TIMATED TAX FOR CERTAIN DEEMED ASSET 

9 SALES. 

10 (a) IN GENERAL.—Paragraph (13) of section 338(h) 

11 (relating to tax on deemed sale not taken into account for 

12 estimated tax purposes) is amended by adding at the end 

13 the following: ‘‘The preceding sentence shall not apply 

14 with respect to a qualified stock purchase for which an 

15 election is made under paragraph (10).’’. 

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

17 subsection (a) shall apply to transactions occurring after 

18 the date of the enactment of this Act. 

19 SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A 

20 PRINCIPAL RESIDENCE ACQUIRED IN A LIKE21 KIND EXCHANGE WITHIN 5 YEARS OF SALE. 

22 (a) IN GENERAL.—Section 121(d) (relating to special 

23 rules for exclusion of gain from sale of principal residence) 

24 is amended by adding at the end the following new para25 graph: 
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1 ‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX2 CHANGE.—If a taxpayer acquired property in an ex3 change to which section 1031 applied, subsection (a) 

4 shall not apply to the sale or exchange of such prop5 erty if it occurs during the 5-year period beginning 

6 with the date of the acquisition of such property.’’. 

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

8 this section shall apply to sales or exchanges after the date 

9 of the enactment of this Act. 

10 SEC. 642. PREVENTION OF MISMATCHING OF INTEREST 

11 AND ORIGINAL ISSUE DISCOUNT DEDUC12 TIONS AND INCOME INCLUSIONS IN TRANS13 ACTIONS WITH RELATED FOREIGN PERSONS. 

14 (a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 

15 (relating to special rule for original issue discount on obli16 gation held by related foreign person) is amended by re17 designating subparagraph (B) as subparagraph (C) and 

18 by inserting after subparagraph (A) the following new sub19 paragraph: 

20 ‘‘(B) SPECIAL RULE FOR CERTAIN FOR21 EIGN ENTITIES.— 

22 ‘‘(i) IN GENERAL.—In the case of any 

23 debt instrument having original issue dis24 count which is held by a related foreign 

25 person which is a foreign personal holding 
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1 company (as defined in section 552), a 

2 controlled foreign corporation (as defined 

3 in section 957), or a passive foreign invest4 ment company (as defined in section 

5 1297), a deduction shall be allowable to 

6 the issuer with respect to such original 

7 issue discount for any taxable year before 

8 the taxable year in which paid only to the 

9 extent such original issue discount (re10 duced by properly allowable deductions and 

11 qualified deficits under section 

12 952(c)(1)(B)) is includible during such 

13 prior taxable year in the gross income of a 

14 United States person who owns (within the 

15 meaning of section 958(a)) stock in such 

16 corporation. 

17 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

18 Secretary may by regulation exempt trans19 actions from the application of clause (i), 

20 including any transaction which is entered 

21 into by a payor in the ordinary course of 

22 a trade or business in which the payor is 

23 predominantly engaged.’’. 

24 (b) INTEREST AND OTHER DEDUCTIBLE

25 AMOUNTS.—Section 267(a)(3) is amended— 
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1 (1) by striking ‘‘The Secretary’’ and inserting: 

2 ‘‘(A) IN GENERAL.—The Secretary’’, and 

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

5 ‘‘(B) SPECIAL RULE FOR CERTAIN FOR6 EIGN ENTITIES.— 

7 ‘‘(i) IN GENERAL.—Notwithstanding 

8 subparagraph (A), in the case of any item 

9 payable to a foreign personal holding com10 pany (as defined in section 552), a con11 trolled foreign corporation (as defined in 

12 section 957), or a passive foreign invest13 ment company (as defined in section 

14 1297), a deduction shall be allowable to 

15 the payor with respect to such amount for 

16 any taxable year before the taxable year in 

17 which paid only to the extent that an 

18 amount attributable to such item (reduced 

19 by properly allowable deductions and quali20 fied deficits under section 952(c)(1)(B)) is 

21 includible during such prior taxable year in 

22 the gross income of a United States person 

23 who owns (within the meaning of section 

24 958(a)) stock in such corporation. 
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1 ‘‘(ii) SECRETARIAL AUTHORITY.—The 

2 Secretary may by regulation exempt trans3 actions from the application of clause (i), 

4 including any transaction which is entered 

5 into by a payor in the ordinary course of 

6 a trade or business in which the payor is 

7 predominantly engaged and in which the 

8 payment of the accrued amounts occurs 

within 81 9 ⁄2 months after accrual or within 

10 such other period as the Secretary may 

11 prescribe.’’. 

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

13 this section shall apply to payments accrued on or after 

14 the date of the enactment of this Act. 

15 SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST 

16 ON OVERPAYMENTS OF INCOME TAX BY INDI17 VIDUALS. 

18 (a) IN GENERAL.—Part III of subchapter B of chap19 ter 1 (relating to items specifically excluded from gross 

20 income) is amended by inserting after section 139A the 

21 following new section: 
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1 ‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER2 EST ON OVERPAYMENTS OF INCOME TAX BY 

3 INDIVIDUALS. 

4 ‘‘(a) IN GENERAL.—In the case of an individual, 

5 gross income shall not include interest paid under section 

6 6611 on any overpayment of tax imposed by this subtitle. 

7 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 

8 the case of a failure to claim items resulting in the over9 payment on the original return if the Secretary determines 

10 that the principal purpose of such failure is to take advan11 tage of subsection (a). 

12 ‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED

13 ADJUSTED GROSS INCOME.—For purposes of this title, 

14 interest not included in gross income under subsection (a) 

15 shall not be treated as interest which is exempt from tax 

16 for purposes of sections 32(i)(2)(B) and 6012(d) or any 

17 computation in which interest exempt from tax under this 

18 title is added to adjusted gross income.’’. 

19 (b) CLERICAL AMENDMENT.—The table of sections 

20 for part III of subchapter B of chapter 1 is amended by 

21 inserting after the item relating to section 139A the fol22 lowing new item: 

‘‘Sec. 139B. Exclusion from gross income for interest on overpayments of income tax by individuals.’’. 

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

24 this section shall apply to interest received in calendar 
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1 years beginning after the date of the enactment of this 

2 Act. 

3 SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF IN4 TEREST ON POTENTIAL UNDERPAYMENTS. 

5 (a) IN GENERAL.—Subchapter A of chapter 67 (re6 lating to interest on underpayments) is amended by add7 ing at the end the following new section: 

8 ‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN9 TEREST ON POTENTIAL UNDERPAYMENTS, 

10 ETC. 

11 ‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN

12 AS PAYMENT OF TAX.—A taxpayer may make a cash de13 posit with the Secretary which may be used by the Sec14 retary to pay any tax imposed under subtitle A or B or 

15 chapter 41, 42, 43, or 44 which has not been assessed 

16 at the time of the deposit. Such a deposit shall be made 

17 in such manner as the Secretary shall prescribe. 

18 ‘‘(b) NO INTEREST IMPOSED.—To the extent that 

19 such deposit is used by the Secretary to pay tax, for pur20 poses of section 6601 (relating to interest on underpay21 ments), the tax shall be treated as paid when the deposit 

22 is made. 

23 ‘‘(c) RETURN OF DEPOSIT.—Except in a case where 

24 the Secretary determines that collection of tax is in jeop25 ardy, the Secretary shall return to the taxpayer any 
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1 amount of the deposit (to the extent not used for a pay2 ment of tax) which the taxpayer requests in writing. 

3 ‘‘(d) PAYMENT OF INTEREST.— 

4 ‘‘(1) IN GENERAL.—For purposes of section 

5 6611 (relating to interest on overpayments), a de6 posit which is returned to a taxpayer shall be treated 

7 as a payment of tax for any period to the extent 

8 (and only to the extent) attributable to a disputable 

9 tax for such period. Under regulations prescribed by 

10 the Secretary, rules similar to the rules of section 

11 6611(b)(2) shall apply. 

12 ‘‘(2) DISPUTABLE TAX.— 

13 ‘‘(A) IN GENERAL.—For purposes of this 

14 section, the term ‘disputable tax’ means the 

15 amount of tax specified at the time of the de16 posit as the taxpayer’s reasonable estimate of 

17 the maximum amount of any tax attributable to 

18 disputable items. 

19 ‘‘(B) SAFE HARBOR BASED ON 30-DAY

20 LETTER.—In the case of a taxpayer who has 

21 been issued a 30-day letter, the maximum 

22 amount of tax under subparagraph (A) shall 

23 not be less than the amount of the proposed de24 ficiency specified in such letter. 
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1 ‘‘(3) OTHER DEFINITIONS.—For purposes of 

2 paragraph (2)— 

3 ‘‘(A) DISPUTABLE ITEM.—The term ‘dis4 putable item’ means any item of income, gain, 

5 loss, deduction, or credit if the taxpayer— 

6 ‘‘(i) has a reasonable basis for its 

7 treatment of such item, and 

8 ‘‘(ii) reasonably believes that the Sec9 retary also has a reasonable basis for dis10 allowing the taxpayer’s treatment of such 

11 item. 

12 ‘‘(B) 30-DAY LETTER.—The term ‘30-day 

13 letter’ means the first letter of proposed defi14 ciency which allows the taxpayer an opportunity 

15 for administrative review in the Internal Rev16 enue Service Office of Appeals. 

17 ‘‘(4) RATE OF INTEREST.—The rate of interest 

18 allowable under this subsection shall be the Federal 

19 short-term rate determined under section 6621(b), 

20 compounded daily. 

21 ‘‘(e) USE OF DEPOSITS.— 

22 ‘‘(1) PAYMENT OF TAX.—Except as otherwise 

23 provided by the taxpayer, deposits shall be treated 

24 as used for the payment of tax in the order depos25 ited. 
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1 ‘‘(2) RETURNS OF DEPOSITS.—Deposits shall 

2 be treated as returned to the taxpayer on a last-in, 

3 first-out basis.’’. 

4 (b) CLERICAL AMENDMENT.—The table of sections 

5 for subchapter A of chapter 67 is amended by adding at 

6 the end the following new item: 

‘‘Sec. 6603. Deposits made to suspend running of interest on potential underpayments, etc.’’. 

7 (c) EFFECTIVE DATE.— 

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

9 this section shall apply to deposits made after the 

10 date of the enactment of this Act. 

11 (2) COORDINATION WITH DEPOSITS MADE

12 UNDER REVENUE PROCEDURE 84–58.—In the case of 

13 an amount held by the Secretary of the Treasury or 

14 his delegate on the date of the enactment of this Act 

15 as a deposit in the nature of a cash bond deposit 

16 pursuant to Revenue Procedure 84–58, the date that 

17 the taxpayer identifies such amount as a deposit 

18 made pursuant to section 6603 of the Internal Rev19 enue Code (as added by this Act) shall be treated as 

20 the date such amount is deposited for purposes of 

21 such section 6603. 

22 SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN IN23 STALLMENT AGREEMENTS. 

24 (a) IN GENERAL.— 
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1 (1) Section 6159(a) (relating to authorization 

2 of agreements) is amended— 

3 (A) by striking ‘‘satisfy liability for pay4 ment of’’ and inserting ‘‘make payment on’’, 

5 and 

6 (B) by inserting ‘‘full or partial’’ after ‘‘fa7 cilitate’’. 

8 (2) Section 6159(c) (relating to Secretary re9 quired to enter into installment agreements in cer10 tain cases) is amended in the matter preceding para11 graph (1) by inserting ‘‘full’’ before ‘‘payment’’. 

12 (b) REQUIREMENT TO REVIEW PARTIAL PAYMENT

13 AGREEMENTS EVERY TWO YEARS.—Section 6159 is 

14 amended by redesignating subsections (d) and (e) as sub15 sections (e) and (f), respectively, and inserting after sub16 section (c) the following new subsection: 

17 ‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL18 MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY

19 TWO YEARS.—In the case of an agreement entered into 

20 by the Secretary under subsection (a) for partial collection 

21 of a tax liability, the Secretary shall review the agreement 

22 at least once every 2 years.’’. 

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

24 this section shall apply to agreements entered into on or 

25 after the date of the enactment of this Act. 
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1 SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGU2 LATION AUTHORITY. 

3 (a) IN GENERAL.—Section 1502 is amended by add4 ing at the end the following new sentence: ‘‘In carrying 

5 out the preceding sentence, the Secretary may prescribe 

6 rules that are different from the provisions of chapter 1 

7 that would apply if such corporations filed separate re8 turns.’’. 

9 (b) RESULT NOT OVERTURNED.—Notwithstanding 

10 the amendment made by subsection (a), the Internal Rev11 enue Code of 1986 shall be construed by treating Treasury 

12 Regulation § 1.1502-20(c)(1)(iii) (as in effect on January 

13 1, 2001) as being inapplicable to the factual situation in 

14 Rite Aid Corporation and Subsidiary Corporations v. 

15 United States, 255 F.3d 1357 (Fed. Cir. 2001). 

16 (c) EFFECTIVE DATE.—This section, and the amend17 ment made by this section, shall apply to taxable years 

18 beginning before, on, or after the date of the enactment 

19 of this Act. 

20 Part III—Leasing 

21 SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEAS22 ING ARRANGEMENTS. 

23 (a) CLARIFICATION OF RECOVERY PERIOD FOR TAX24 EXEMPT USE PROPERTY SUBJECT TO LEASE.—Subpara25 graph (A) of section 168(g)(3) (relating to special rules 

26 for determining class life) is amended by inserting ‘‘(not-
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1 withstanding any other subparagraph of this paragraph)’’ 

2 after ‘‘shall’’. 

3 (b) LIMITATION ON DEPRECIATION PERIOD FOR

4 SOFTWARE LEASED TO TAX-EXEMPT ENTITY.—Para5 graph (1) of section 167(f) is amended by adding at the 

6 end the following new subparagraph: 

7 ‘‘(C) TAX-EXEMPT USE PROPERTY SUB8 JECT TO LEASE.—In the case of computer soft9 ware which would be tax-exempt use property 

10 as defined in subsection (h) of section 168 if 

11 such section applied to computer software, the 

12 useful life under subparagraph (A) shall not be 

13 less than 125 percent of the lease term (within 

14 the meaning of section 168(i)(3)).’’. 

15 (c) LEASE TERM TO INCLUDE RELATED SERVICE

16 CONTRACTS.—Subparagraph (A) of section 168(i)(3) (re17 lating to lease term) is amended by striking ‘‘and’’ at the 

18 end of clause (i), by redesignating clause (ii) as clause 

19 (iii), and by inserting after clause (i) the following new 

20 clause: 

21 ‘‘(ii) the term of a lease shall include 

22 the term of any service contract or similar 

23 arrangement (whether or not treated as a 

24 lease under section 7701(e))— 
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1 ‘‘(I) which is part of the same 

2 transaction (or series of related trans3 actions) which includes the lease, and 

4 ‘‘(II) which is with respect to the 

5 property subject to the lease or sub6 stantially similar property, and’’. 

7 (d) EXPANSION OF SHORT-TERM LEASE EXEMPTION

8 FOR QUALIFIED TECHNOLOGICAL EQUIPMENT.—Sub9 paragraph (A) of section 168(h)(3) is amended by adding 

10 at the end the following new sentence: ‘‘Notwithstanding 

11 subsection (i)(3)(A)(i), in determining a lease term for 

12 purposes of the preceding sentence, there shall not be 

13 taken into account any option of the lessee to renew at 

14 the fair market value rent determined at the time of re15 newal; except that the aggregate period not taken into ac16 count by reason of this sentence shall not exceed 24 

17 months.’’. 

18 SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO 

19 PROPERTY USED BY GOVERNMENTS OR 

20 OTHER TAX-EXEMPT ENTITIES. 

21 (a) IN GENERAL.—Subpart C of part II of sub22 chapter E of chapter 1 (relating to taxable year for which 

23 deductions taken) is amended by adding at the end the 

24 following new section: 
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1 ‘‘SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO 

2 PROPERTY USED BY GOVERNMENTS OR 

3 OTHER TAX-EXEMPT ENTITIES. 

4 ‘‘(a) LIMITATION ON LOSSES.—Except as otherwise 

5 provided in this section, a tax-exempt use loss for any tax6 able year shall not be allowed. 

7 ‘‘(b) DISALLOWED LOSS CARRIED TO NEXT YEAR.— 

8 Any tax-exempt use loss with respect to any tax-exempt 

9 use property which is disallowed under subsection (a) for 

10 any taxable year shall be treated as a deduction with re11 spect to such property in the next taxable year. 

12 ‘‘(c) DEFINITIONS.—For purposes of this section— 

13 ‘‘(1) TAX-EXEMPT USE LOSS.—The term ‘tax14 exempt use loss’ means, with respect to any taxable 

15 year, the amount (if any) by which— 

16 ‘‘(A) the sum of— 

17 ‘‘(i) the aggregate deductions (other 

18 than interest) directly allocable to a tax-ex19 empt use property, plus 

20 ‘‘(ii) the aggregate deductions for in21 terest properly allocable to such property, 

22 exceed 

23 ‘‘(B) the aggregate income from such 

24 property. 

25 ‘‘(2) TAX-EXEMPT USE PROPERTY.—The term 

26 ‘tax-exempt use property’ has the meaning given to 
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1 such term by section 168(h) (without regard to 

2 paragraphs (1)(C) and (3) thereof and determined 

3 as if property described in section 167(f)(1)(B) were 

4 tangible property). Such term shall not include prop5 erty which would (but for this sentence) be tax-ex6 empt use property solely by reason of section 

7 168(h)(6) if any credit is allowable under section 42 

8 or 47 with respect to such property. 

9 ‘‘(d) EXCEPTION FOR CERTAIN LEASES.—This sec10 tion shall not apply to any lease of property which meets 

11 the requirements of all of the following paragraphs: 

12 ‘‘(1) AVAILABILITY OF FUNDS.— 

13 ‘‘(A) IN GENERAL.—A lease of property 

14 meets the requirements of this paragraph if (at 

15 any time during the lease term) not more than 

16 an allowable amount of funds are— 

17 ‘‘(i) subject to any arrangement re18 ferred to in subparagraph (B), or 

19 ‘‘(ii) set aside or expected to be set 

20 aside, 

21 to or for the benefit of the lessor or any lender, 

22 or to or for the benefit of the lessee to satisfy 

23 the lessee’s obligations or options under the 

24 lease. For purposes of clause (ii), funds shall be 

25 treated as set aside or expected to be set aside 
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1 only if a reasonable person would conclude, 

2 based on the facts and circumstances, that such 

3 funds are set aside or expected to be set aside. 

4 ‘‘(B) ARRANGEMENTS.—The arrangements 

5 referred to in this subparagraph include a de6 feasance arrangement, a loan by the lessee to 

7 the lessor or any lender, a deposit arrangement, 

8 a letter of credit collateralized with cash or cash 

9 equivalents, a payment undertaking agreement, 

10 prepaid rent (within the meaning of the regula11 tions under section 467), a sinking fund ar12 rangement, a guaranteed investment contract, 

13 financial guaranty insurance, and any similar 

14 arrangement (whether or not such arrangement 

15 provides credit support). 

16 ‘‘(C) ALLOWABLE AMOUNT.— 

17 ‘‘(i) IN GENERAL.—Except as other18 wise provided in this subparagraph, the 

19 term ‘allowable amount’ means an amount 

20 equal to 20 percent of the lessor’s adjusted 

21 basis in the property at the time the lease 

22 is entered into. 

23 ‘‘(ii) HIGHER AMOUNT PERMITTED IN

24 CERTAIN CASES.—To the extent provided 

25 in regulations, a higher percentage shall be 
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1 permitted under clause (i) where necessary 

2 because of the credit-worthiness of the les3 see. In no event may such regulations per4 mit a percentage of more than 50 percent. 

5 ‘‘(iii) OPTION TO PURCHASE OTHER

6 THAN AT FAIR MARKET VALUE.—If under 

7 the lease the lessee has the option to pur8 chase the property for a fixed price or for 

9 other than the fair market value of the 

10 property (determined at the time of exer11 cise), the allowable amount at the time 

12 such option may be exercised may not ex13 ceed 50 percent of the price at which such 

14 option may be exercised. 

15 ‘‘(iv) NO ALLOWABLE AMOUNT FOR

16 CERTAIN ARRANGEMENTS.—The allowable 

17 amount shall be zero with respect to any 

18 arrangement which involves— 

19 ‘‘(I) a loan from the lessee to the 

20 lessor or a lender, 

21 ‘‘(II) any deposit received, letter 

22 of credit issued, or payment under23 taking agreement entered into by a 

24 lender otherwise involved in the trans25 action, or 
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1 ‘‘(III) in the case of a trans2 action which involves a lender, any 

3 credit support made available to the 

4 lessor in which any such lender does 

5 not have a claim that is senior to the 

6 lessor. 

7 For purposes of subclause (I), the term 

8 ‘loan’ shall not include any amount treated 

9 as a loan under section 467 with respect to 

10 a section 467 rental agreement. 

11 ‘‘(2) LESSOR MUST MAKE SUBSTANTIAL EQUITY

12 INVESTMENT.— 

13 ‘‘(A) IN GENERAL.—A lease of property 

14 meets the requirements of this paragraph if— 

15 ‘‘(i) the lessor— 

16 ‘‘(I) has at the time the lease is 

17 entered into an unconditional at-risk 

18 equity investment (as determined by 

19 the Secretary) in the property of at 

20 least 20 percent of the lessor’s ad21 justed basis in the property as of that 

22 time, and 

23 ‘‘(II) maintains such investment 

24 throughout the term of the lease, and 
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1 ‘‘(ii) the fair market value of the 

2 property at the end of the lease term is 

3 reasonably expected to be equal to at least 

4 20 percent of such basis. 

5 ‘‘(B) RISK OF LOSS.—For purposes of 

6 clause (ii), the fair market value at the end of 

7 the lease term shall be reduced to the extent 

8 that a person other than the lessor bears a risk 

9 of loss in the value of the property. 

10 ‘‘(C) PARAGRAPH NOT TO APPLY TO

11 SHORT-TERM LEASES.—This paragraph shall 

12 not apply to any lease with a lease term of 5 

13 years or less. 

14 ‘‘(3) LESSEE MAY NOT BEAR MORE THAN MINI15 MAL RISK OF LOSS.— 

16 ‘‘(A) IN GENERAL.—A lease of property 

17 meets the requirements of this paragraph if 

18 there is no arrangement under which the lessee 

19 bears— 

20 ‘‘(i) any portion of the loss that would 

21 occur if the fair market value of the leased 

22 property were 25 percent less than its rea23 sonably expected fair market value at the 

24 time the lease is terminated, or 
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1 ‘‘(ii) more than 50 percent of the loss 

2 that would occur if the fair market value 

3 of the leased property at the time the lease 

4 is terminated were zero. 

5 ‘‘(B) EXCEPTION.—The Secretary may by 

6 regulations provide that the requirements of 

7 this paragraph are not met where the lessee 

8 bears more than a minimal risk of loss. 

9 ‘‘(C) PARAGRAPH NOT TO APPLY TO

10 SHORT-TERM LEASES.—This paragraph shall 

11 not apply to any lease with a lease term of 5 

12 years or less. 

13 ‘‘(e) SPECIAL RULES.— 

14 ‘‘(1) TREATMENT OF FORMER TAX-EXEMPT

15 USE PROPERTY.— 

16 ‘‘(A) IN GENERAL.—In the case of any 

17 former tax-exempt use property— 

18 ‘‘(i) any deduction allowable under 

19 subsection (b) with respect to such prop20 erty for any taxable year shall be allowed 

21 only to the extent of any net income (with22 out regard to such deduction) from such 

23 property for such taxable year, and 

24 ‘‘(ii) any portion of such unused de25 duction remaining after application of 
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1 clause (i) shall be treated as a deduction 

2 allowable under subsection (b) with respect 

3 to such property in the next taxable year. 

4 ‘‘(B) FORMER TAX-EXEMPT USE PROP5 ERTY.—For purposes of this subsection, the 

6 term ‘former tax-exempt use property’ means 

7 any property which— 

8 ‘‘(i) is not tax-exempt use property for 

9 the taxable year, but 

10 ‘‘(ii) was tax-exempt use property for 

11 any prior taxable year. 

12 ‘‘(2) DISPOSITION OF ENTIRE INTEREST IN

13 PROPERTY.—If during the taxable year a taxpayer 

14 disposes of the taxpayer’s entire interest in tax-ex15 empt use property (or former tax-exempt use prop16 erty), rules similar to the rules of section 469(g) 

17 shall apply for purposes of this section. 

18 ‘‘(3) COORDINATION WITH SECTION 469.—This 

19 section shall be applied before the application of sec20 tion 469. 

21 ‘‘(4) COORDINATION WITH SECTIONS 1031 AND

22 1033.— 

23 ‘‘(A) IN GENERAL.—Sections 1031(a) and 

24 1033(a) shall not apply if— 
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1 ‘‘(i) the exchanged or converted prop2 erty is tax-exempt use property subject to 

3 a lease which was entered into before 

4 March 13, 2004, and which would not have 

5 met the requirements of subsection (d) had 

6 such requirements been in effect when the 

7 lease was entered into, or 

8 ‘‘(ii) the replacement property is tax9 exempt use property subject to a lease 

10 which does not meet the requirements of 

11 subsection (d). 

12 ‘‘(B) ADJUSTED BASIS.—In the case of 

13 property acquired by the lessor in a transaction 

14 to which section 1031 or 1033 applies, the ad15 justed basis of such property for purposes of 

16 this section shall be equal to the lesser of— 

17 ‘‘(i) the fair market value of the prop18 erty as of the beginning of the lease term, 

19 or 

20 ‘‘(ii) the amount which would be the 

21 lessor’s adjusted basis if such sections did 

22 not apply to such transaction. 

23 ‘‘(f) OTHER DEFINITIONS.—For purposes of this sec24 tion— 
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1 ‘‘(1) RELATED PARTIES.—The terms ‘lessor’, 

2 ‘lessee’, and ‘lender’ each include any related party 

3 (within the meaning of section 197(f)(9)(C)(i)). 

4 ‘‘(2) LEASE TERM.—The term ‘lease term’ has 

5 the meaning given to such term by section 168(i)(3). 

6 ‘‘(3) LENDER.—The term ‘lender’ means, with 

7 respect to any lease, a person that makes a loan to 

8 the lessor which is secured (or economically similar 

9 to being secured) by the lease or the leased property. 

10 ‘‘(4) LOAN.—The term ‘loan’ includes any simi11 lar arrangement. 

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

13 such regulations as may be necessary or appropriate to 

14 carry out the provisions of this section, including regula15 tions which— 

16 ‘‘(1) allow in appropriate cases the aggregation 

17 of property subject to the same lease, and 

18 ‘‘(2) provide for the determination of the alloca19 tion of interest expense for purposes of this sec20 tion.’’. 

21 (b) CONFORMING AMENDMENT.—The table of sec22 tions for subpart C of part II of subchapter E of chapter 

23 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.’’. 
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1 SEC. 649. EFFECTIVE DATE. 

2 (a) IN GENERAL.—Except as provided in this section, 

3 the amendments made by this part shall apply to leases 

4 entered into after March 12, 2004. 

5 (b) EXCEPTION.— 

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

7 this part shall not apply to qualified transportation 

8 property. 

9 (2) QUALIFIED TRANSPORTATION PROPERTY.— 

10 For purposes of paragraph (1), the term ‘‘qualified 

11 transportation property’’ means domestic property 

12 subject to a lease with respect to which a formal ap13 plication— 

14 (A) was submitted for approval to the Fed15 eral Transit Administration (an agency of the 

16 Department of Transportation) after June 30, 

17 2003, and before March 13, 2004, 

18 (B) is approved by the Federal Transit Ad19 ministration before January 1, 2005, and 

20 (C) includes a description of such property 

21 and the value of such property. 

22 (3) EXCHANGES AND CONVERSION OF TAX-EX23 EMPT USE PROPERTY.—Section 470(e)(4) of the In24 ternal Revenue Code of 1986, as added by this sec25 tion, shall apply to property exchanged or converted 

26 after the date of the enactment of this Act. 
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1 Subtitle C—Reduction of Fuel Tax 

2 Evasion 

3 SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR 

4 MOBILE MACHINERY. 

5 (a) EXEMPTION FROM TAX ON HEAVY TRUCKS AND

6 TRAILERS SOLD AT RETAIL.— 

7 (1) IN GENERAL.—Section 4053 (relating to ex8 emptions) is amended by adding at the end the fol9 lowing new paragraph: 

10 ‘‘(8) MOBILE MACHINERY.—Any vehicle which 

11 consists of a chassis— 

12 ‘‘(A) to which there has been permanently 

13 mounted (by welding, bolting, riveting, or other 

14 means) machinery or equipment to perform a 

15 construction, manufacturing, processing, farm16 ing, mining, drilling, timbering, or similar oper17 ation if the operation of the machinery or 

18 equipment is unrelated to transportation on or 

19 off the public highways, 

20 ‘‘(B) which has been specially designed to 

21 serve only as a mobile carriage and mount (and 

22 a power source, where applicable) for the par23 ticular machinery or equipment involved, wheth24 er or not such machinery or equipment is in op25 eration, and 
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1 ‘‘(C) which, by reason of such special de2 sign, could not, without substantial structural 

3 modification, be used as a component of a vehi4 cle designed to perform a function of trans5 porting any load other than that particular ma6 chinery or equipment or similar machinery or 

7 equipment requiring such a specially designed 

8 chassis.’’. 

9 (2) EFFECTIVE DATE.—The amendment made 

10 by this subsection shall take effect on the day after 

11 the date of the enactment of this Act. 

12 (b) EXEMPTION FROM TAX ON USE OF CERTAIN VE13 HICLES.— 

14 (1) IN GENERAL.—Section 4483 (relating to ex15 emptions) is amended by redesignating subsection 

16 (g) as subsection (h) and by inserting after sub17 section (f) the following new subsection: 

18 ‘‘(g) EXEMPTION FOR MOBILE MACHINERY.—No tax 

19 shall be imposed by section 4481 on the use of any vehicle 

20 described in section 4053(8).’’. 

21 (2) EFFECTIVE DATE.—The amendments made 

22 by this subsection shall take effect on the day after 

23 the date of the enactment of this Act. 

24 (c) EXEMPTION FROM TAX ON TIRES.— 
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1 (1) IN GENERAL.—Section 4072(b)(2) is 

2 amended by adding at the end the following flush 

3 sentence: ‘‘Such term shall not include tires of a 

4 type used exclusively on vehicles described in section 

5 4053(8).’’. 

6 (2) EFFECTIVE DATE.—The amendment made 

7 by this subsection shall take effect on the day after 

8 the date of the enactment of this Act. 

9 (d) REFUND OF FUEL TAXES.— 

10 (1) IN GENERAL.—Section 6421(e)(2) (defining 

11 off-highway business use) is amended by adding at 

12 the end the following new subparagraph: 

13 ‘‘(C) USES IN MOBILE MACHINERY.— 

14 ‘‘(i) IN GENERAL.—The term ‘off15 highway business use’ shall include any use 

16 in a vehicle which meets the requirements 

17 described in clause (ii). 

18 ‘‘(ii) REQUIREMENTS FOR MOBILE

19 MACHINERY.—The requirements described 

20 in this clause are— 

21 ‘‘(I) the design-based test, and 

22 ‘‘(II) the use-based test. 

23 ‘‘(iii) DESIGN-BASED TEST.—For pur24 poses of clause (ii)(I), the design-based 
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1 test is met if the vehicle consists of a chas2 sis— 

3 ‘‘(I) to which there has been per4 manently mounted (by welding, bolt5 ing, riveting, or other means) machin6 ery or equipment to perform a con7 struction, manufacturing, processing, 

8 farming, mining, drilling, timbering, 

9 or similar operation if the operation of 

10 the machinery or equipment is unre11 lated to transportation on or off the 

12 public highways, 

13 ‘‘(II) which has been specially de14 signed to serve only as a mobile car15 riage and mount (and a power source, 

16 where applicable) for the particular 

17 machinery or equipment involved, 

18 whether or not such machinery or 

19 equipment is in operation, and 

20 ‘‘(III) which, by reason of such 

21 special design, could not, without sub22 stantial structural modification, be 

23 used as a component of a vehicle de24 signed to perform a function of trans25 porting any load other than that par-
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1 ticular machinery or equipment or 

2 similar machinery or equipment re3 quiring such a specially designed chas4 sis. 

5 ‘‘(iv) USE-BASED TEST.—For pur6 poses of clause (ii)(II), the use-based test 

7 is met if the use of the vehicle on public 

8 highways was less than 7,500 miles during 

9 the taxpayer’s taxable year.’’. 

10 (2) NO TAX-FREE SALES.—Subsection (b) of 

11 section 4082, as amended by section 652, is amend12 ed by inserting before the period at the end ‘‘and 

13 such term shall not include any use described in sec14 tion 6421(e)(2)(C)’’. 

15 (3) ANNUAL REFUND OF TAX PAID.—Section 

16 6427(i)(2) (relating to exceptions) is amended by 

17 adding at the end the following new subparagraph: 

18 ‘‘(C) NONAPPLICATION OF PARAGRAPH.— 

19 This paragraph shall not apply to any fuel used 

20 solely in any off-highway business use described 

21 in section 6421(e)(2)(C).’’. 

22 (4) EFFECTIVE DATE.—The amendments made 

23 by this subsection shall apply to taxable years begin24 ning after the date of the enactment of this Act. 
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1 SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE. 

2 (a) RATE OF TAX.— 

3 (1) IN GENERAL.—Subparagraph (A) of section 

4 4081(a)(2) is amended by striking ‘‘and’’ at the end 

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

6 clause (iii) and inserting ‘‘, and’’, and by adding at 

7 the end the following new clause: 

8 ‘‘(iv) in the case of aviation-grade ker9 osene, 21.8 cents per gallon.’’. 

10 (2) COMMERCIAL AVIATION.—Paragraph (2) of 

11 section 4081(a) is amended by adding at the end the 

12 following new subparagraph: 

13 ‘‘(C) TAXES IMPOSED ON FUEL USED IN

14 COMMERCIAL AVIATION.—In the case of avia15 tion-grade kerosene which is removed from any 

16 refinery or terminal directly into the fuel tank 

17 of an aircraft for use in commercial aviation, 

18 the rate of tax under subparagraph (A)(iv) shall 

19 be 4.3 cents per gallon.’’. 

20 (3) CERTAIN REFUELER TRUCKS, TANKERS, 

21 AND TANK WAGONS TREATED AS TERMINAL.—Sub22 section (a) of section 4081 is amended by adding at 

23 the end the following new paragraph: 

24 ‘‘(3) CERTAIN REFUELER TRUCKS, TANKERS, 

25 AND TANK WAGONS TREATED AS TERMINAL.— 
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1 ‘‘(A) IN GENERAL.—In the case of avia2 tion-grade kerosene which is removed from any 

3 terminal directly into the fuel tank of an air4 craft (determined without regard to any re5 fueler truck, tanker, or tank wagon which meets 

6 the requirements of subparagraph (B)), a re7 fueler truck, tanker, or tank wagon shall be 

8 treated as part of such terminal if— 

9 ‘‘(i) such truck, tanker, or wagon 

10 meets the requirements of subparagraph 

11 (B) with respect to an airport, and 

12 ‘‘(ii) except in the case of exigent cir13 cumstances identified by the Secretary in 

14 regulations, no vehicle registered for high15 way use is loaded with aviation-grade ker16 osene at such terminal. 

17 ‘‘(B) REQUIREMENTS.—A refueler truck, 

18 tanker, or tank wagon meets the requirements 

19 of this subparagraph with respect to an airport 

20 if such truck, tanker, or wagon— 

21 ‘‘(i) is loaded with aviation-grade ker22 osene at such terminal located within such 

23 airport and delivers such kerosene only 

24 into aircraft at such airport, 
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1 ‘‘(ii) has storage tanks, hose, and cou2 pling equipment designed and used for the 

3 purposes of fueling aircraft, 

4 ‘‘(iii) is not registered for highway 

5 use, and 

6 ‘‘(iv) is operated by— 

7 ‘‘(I) the terminal operator of 

8 such terminal, or 

9 ‘‘(II) a person that makes a daily 

10 accounting to such terminal operator 

11 of each delivery of fuel from such 

12 truck, tanker, or wagon. 

13 ‘‘(C) REPORTING.—The Secretary shall re14 quire under section 4101(d) reporting by such 

15 terminal operator of— 

16 ‘‘(i) any information obtained under 

17 subparagraph (B)(iv)(II), and 

18 ‘‘(ii) any similar information main19 tained by such terminal operator with re20 spect to deliveries of fuel made by trucks, 

21 tankers, or wagons operated by such ter22 minal operator.’’. 

23 (4) LIABILITY FOR TAX ON AVIATION-GRADE

24 KEROSENE USED IN COMMERCIAL AVIATION.—Sub-
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1 section (a) of section 4081 is amended by adding at 

2 the end the following new paragraph: 

3 ‘‘(4) LIABILITY FOR TAX ON AVIATION-GRADE

4 KEROSENE USED IN COMMERCIAL AVIATION.—For 

5 purposes of paragraph (2)(C), the person who uses 

6 the fuel for commercial aviation shall pay the tax 

7 imposed under such paragraph. For purposes of the 

8 preceding sentence, fuel shall be treated as used 

9 when such fuel is removed into the fuel tank.’’. 

10 (5) NONTAXABLE USES.— 

11 (A) IN GENERAL.—Section 4082 is amend12 ed by redesignating subsections (e) and (f) as 

13 subsections (f) and (g), respectively, and by in14 serting after subsection (d) the following new 

15 subsection: 

16 ‘‘(e) AVIATION-GRADE KEROSENE.—In the case of 

17 aviation-grade kerosene which is exempt from the tax im18 posed by section 4041(c) (other than by reason of a prior 

19 imposition of tax) and which is removed from any refinery 

20 or terminal directly into the fuel tank of an aircraft, the 

21 rate of tax under section 4081(a)(2)(A)(iv) shall be zero.’’. 

22 (B) CONFORMING AMENDMENTS.— 

23 (i) Subsection (b) of section 4082 is 

24 amended by adding at the end the fol25 lowing new flush sentence: 
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1 ‘‘The term ‘nontaxable use’ does not include the use of 

2 aviation-grade kerosene in an aircraft.’’. 

3 (ii) Section 4082(d) is amended by 

4 striking paragraph (1) and by redesig5 nating paragraphs (2) and (3) as para6 graphs (1) and (2), respectively. 

7 (6) NONAIRCRAFT USE OF AVIATION-GRADE

8 KEROSENE.— 

9 (A) IN GENERAL.—Subparagraph (B) of 

10 section 4041(a)(1) is amended by adding at the 

11 end the following new sentence: ‘‘This subpara12 graph shall not apply to aviation-grade ker13 osene.’’. 

14 (B) CONFORMING AMENDMENT.—The 

15 heading for paragraph (1) of section 4041(a) is 

16 amended by inserting ‘‘AND KEROSENE’’ after 

17 ‘‘DIESEL FUEL’’. 

18 (b) COMMERCIAL AVIATION.—Section 4083 is 

19 amended by redesignating subsections (b) and (c) as sub20 sections (c) and (d), respectively, and by inserting after 

21 subsection (a) the following new subsection: 

22 ‘‘(b) COMMERCIAL AVIATION.—For purposes of this 

23 subpart, the term ‘commercial aviation’ means any use of 

24 an aircraft in a business of transporting persons or prop25 erty for compensation or hire by air, unless properly allo-
328 

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1 cable to any transportation exempt from the taxes imposed 

2 by sections 4261 and 4271 by reason of section 4281 or 

3 4282 or by reason of section 4261(h).’’. 

4 (c) REFUNDS.— 

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

6 6427(l) is amended to read as follows: 

7 ‘‘(4) REFUNDS FOR AVIATION-GRADE KER8 OSENE.— 

9 ‘‘(A) NO REFUND OF CERTAIN TAXES ON

10 FUEL USED IN COMMERCIAL AVIATION.—In the 

11 case of aviation-grade kerosene used in com12 mercial aviation (as defined in section 4083(b)) 

13 (other than supplies for vessels or aircraft with14 in the meaning of section 4221(d)(3)), para15 graph (1) shall not apply to so much of the tax 

16 imposed by section 4081 as is attributable to— 

17 ‘‘(i) the Leaking Underground Stor18 age Tank Trust Fund financing rate im19 posed by such section, and 

20 ‘‘(ii) so much of the rate of tax speci21 fied in section 4081(a)(2)(A)(iv) as does 

22 not exceed 4.3 cents per gallon. 

23 ‘‘(B) PAYMENT TO ULTIMATE, REG24 ISTERED VENDOR.—With respect to aviation25 grade kerosene, if the ultimate purchaser of 
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1 such kerosene waives (at such time and in such 

2 form and manner as the Secretary shall pre3 scribe) the right to payment under paragraph 

4 (1) and assigns such right to the ultimate ven5 dor, then the Secretary shall pay the amount 

6 which would be paid under paragraph (1) to 

7 such ultimate vendor, but only if such ultimate 

8 vendor— 

9 ‘‘(i) is registered under section 4101, 

10 and 

11 ‘‘(ii) meets the requirements of sub12 paragraph (A), (B), or (D) of section 

13 6416(a)(1).’’. 

14 (2) TIME FOR FILING CLAIMS.—Subparagraph 

15 (A) of section 6427(i)(4) is amended— 

16 (A) by striking ‘‘subsection (l)(5)’’ both 

17 places it appears and inserting ‘‘paragraph 

18 (4)(B) or (5) of subsection (l)’’, and 

19 (B) by striking ‘‘the preceding sentence’’ 

20 and inserting ‘‘subsection (l)(5)’’. 

21 (3) CONFORMING AMENDMENT.—Subparagraph 

22 (B) of section 6427(l)(2) is amended to read as fol23 lows: 

24 ‘‘(B) in the case of aviation-grade ker25 osene— 
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1 ‘‘(i) any use which is exempt from the 

2 tax imposed by section 4041(c) other than 

3 by reason of a prior imposition of tax, or 

4 ‘‘(ii) any use in commercial aviation 

5 (within the meaning of section 4083(b)).’’. 

6 (d) REPEAL OF PRIOR TAXATION OF AVIATION

7 FUEL.— 

8 (1) IN GENERAL.—Part III of subchapter A of 

9 chapter 32 is amended by striking subpart B and by 

10 redesignating subpart C as subpart B. 

11 (2) CONFORMING AMENDMENTS.— 

12 (A) Section 4041(c) is amended to read as 

13 follows: 

14 ‘‘(c) AVIATION-GRADE KEROSENE.— 

15 ‘‘(1) IN GENERAL.—There is hereby imposed a 

16 tax upon aviation-grade kerosene— 

17 ‘‘(A) sold by any person to an owner, les18 see, or other operator of an aircraft for use in 

19 such aircraft, or 

20 ‘‘(B) used by any person in an aircraft un21 less there was a taxable sale of such fuel under 

22 subparagraph (A). 

23 ‘‘(2) EXEMPTION FOR PREVIOUSLY TAXED

24 FUEL.—No tax shall be imposed by this subsection 

25 on the sale or use of any aviation-grade kerosene if 
331 

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1 tax was imposed on such liquid under section 4081 

2 and the tax thereon was not credited or refunded. 

3 ‘‘(3) RATE OF TAX.—The rate of tax imposed 

4 by this subsection shall be the rate of tax specified 

5 in section 4081(a)(2)(A)(iv) which is in effect at the 

6 time of such sale or use.’’. 

7 (B) Section 4041(d)(2) is amended by 

8 striking ‘‘section 4091’’ and inserting ‘‘section 

9 4081’’. 

10 (C) Section 4041 is amended by striking 

11 subsection (e). 

12 (D) Section 4041 is amended by striking 

13 subsection (i). 

14 (E) Sections 4101(a), 4103, 4221(a), and 

15 6206 are each amended by striking ‘‘, 4081, or 

16 4091’’ and inserting ‘‘or 4081’’. 

17 (F) Section 6416(b)(2) is amended by 

18 striking ‘‘4091 or’’. 

19 (G) Section 6416(b)(3) is amended by 

20 striking ‘‘or 4091’’ each place it appears. 

21 (H) Section 6416(d) is amended by strik22 ing ‘‘or to the tax imposed by section 4091 in 

23 the case of refunds described in section 

24 4091(d)’’. 
332 

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1 (I) Section 6427(j)(1) is amended by strik2 ing ‘‘, 4081, and 4091’’ and inserting ‘‘and 

3 4081’’. 

4 (J)(i) Section 6427(l)(1) is amended to 

5 read as follows: 

6 ‘‘(1) IN GENERAL.—Except as otherwise pro7 vided in this subsection and in subsection (k), if any 

8 diesel fuel or kerosene on which tax has been im9 posed by section 4041 or 4081 is used by any person 

10 in a nontaxable use, the Secretary shall pay (without 

11 interest) to the ultimate purchaser of such fuel an 

12 amount equal to the aggregate amount of tax im13 posed on such fuel under section 4041 or 4081, as 

14 the case may be, reduced by any payment made to 

15 the ultimate vendor under paragraph (4)(B).’’. 

16 (ii) Paragraph (5)(B) of section 6427(l) is 

17 amended by striking ‘‘Paragraph (1)(A) shall 

18 not apply to kerosene’’ and inserting ‘‘Para19 graph (1) shall not apply to kerosene (other 

20 than aviation-grade kerosene)’’. 

21 (K) Subparagraph (B) of section 

22 6724(d)(1) is amended by striking clause (xv) 

23 and by redesignating the succeeding clauses ac24 cordingly. 
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•HR 4520 EH 

1 (L) Paragraph (2) of section 6724(d) is 

2 amended by striking subparagraph (W) and by 

3 redesignating the succeeding subparagraphs ac4 cordingly. 

5 (M) Paragraph (1) of section 9502(b) is 

6 amended by adding ‘‘and’’ at the end of sub7 paragraph (B) and by striking subparagraphs 

8 (C) and (D) and inserting the following new 

9 subparagraph: 

10 ‘‘(C) section 4081 with respect to aviation 

11 gasoline and aviation-grade kerosene, and’’. 

12 (N) The last sentence of section 9502(b) is 

13 amended to read as follows: 

14 ‘‘There shall not be taken into account under paragraph 

15 (1) so much of the taxes imposed by section 4081 as are 

16 determined at the rate specified in section 

17 4081(a)(2)(B).’’. 

18 (O) Subsection (b) of section 9508 is 

19 amended by striking paragraph (3) and by re20 designating paragraphs (4) and (5) as para21 graphs (3) and (4), respectively. 

22 (P) Section 9508(c)(2)(A) is amended by 

23 striking ‘‘sections 4081 and 4091’’ and insert24 ing ‘‘section 4081’’. 
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1 (Q) The table of subparts for part III of 

2 subchapter A of chapter 32 is amended to read 

3 as follows: 

‘‘Subpart A. Motor and aviation fuels. 

‘‘Subpart B. Special provisions applicable to fuels tax.’’. 

4 (R) The heading for subpart A of part III 

5 of subchapter A of chapter 32 is amended to 

6 read as follows: 

7 ‘‘Subpart A—Motor and Aviation Fuels’’. 

8 (S) The heading for subpart B of part III 

9 of subchapter A of chapter 32, as redesignated 

10 by paragraph (1), is amended to read as fol11 lows: 

12 ‘‘Subpart B—Special Provisions Applicable to Fuels 

13 Tax’’. 

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

15 this section shall apply to aviation-grade kerosene re16 moved, entered, or sold after September 30, 2004. 

17 (f) FLOOR STOCKS TAX.— 

18 (1) IN GENERAL.—There is hereby imposed on 

19 aviation-grade kerosene held on October 1, 2004, by 

20 any person a tax equal to— 

21 (A) the tax which would have been imposed 

22 before such date on such kerosene had the 

23 amendments made by this section been in effect 

24 at all times before such date, reduced by 
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1 (B) the tax imposed before such date 

2 under section 4091 of the Internal Revenue 

3 Code of 1986, as in effect on the day before the 

4 date of the enactment of this Act. 

5 (2) LIABILITY FOR TAX AND METHOD OF PAY6 MENT.— 

7 (A) LIABILITY FOR TAX.—The person 

8 holding the kerosene on October 1, 2004, to 

9 which the tax imposed by paragraph (1) applies 

10 shall be liable for such tax. 

11 (B) METHOD AND TIME FOR PAYMENT.— 

12 The tax imposed by paragraph (1) shall be paid 

13 at such time and in such manner as the Sec14 retary of the Treasury (or the Secretary’s dele15 gate) shall prescribe, including the nonapplica16 tion of such tax on de minimis amounts of ker17 osene. 

18 (3) TRANSFER OF FLOOR STOCK TAX REVE19 NUES TO TRUST FUNDS.—For purposes of deter20 mining the amount transferred to any trust fund, 

21 the tax imposed by this subsection shall be treated 

22 as imposed by section 4081 of the Internal Revenue 

23 Code of 1986— 

24 (A) at the Leaking Underground Storage 

25 Tank Trust Fund financing rate under such 
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1 section to the extent of 0.1 cents per gallon, 

2 and 

3 (B) at the rate under section 

4 4081(a)(2)(A)(iv) to the extent of the remain5 der. 

6 (4) HELD BY A PERSON.—For purposes of this 

7 section, kerosene shall be considered as held by a 

8 person if title thereto has passed to such person 

9 (whether or not delivery to the person has been 

10 made). 

11 (5) OTHER LAWS APPLICABLE.—All provisions 

12 of law, including penalties, applicable with respect to 

13 the tax imposed by section 4081 of such Code shall, 

14 insofar as applicable and not inconsistent with the 

15 provisions of this subsection, apply with respect to 

16 the floor stock tax imposed by paragraph (1) to the 

17 same extent as if such tax were imposed by such 

18 section. 

19 SEC. 653. DYE INJECTION EQUIPMENT. 

20 (a) IN GENERAL.—Section 4082(a)(2) (relating to 

21 exemptions for diesel fuel and kerosene) is amended by 

22 inserting ‘‘by mechanical injection’’ after ‘‘indelibly dyed’’. 

23 (b) DYE INJECTOR SECURITY.—Not later than 180 

24 days after the date of the enactment of this Act, the Sec25 retary of the Treasury shall issue regulations regarding 
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1 mechanical dye injection systems described in the amend2 ment made by subsection (a), and such regulations shall 

3 include standards for making such systems tamper resist4 ant. 

5 (c) PENALTY FOR TAMPERING WITH OR FAILING TO

6 MAINTAIN SECURITY REQUIREMENTS FOR MECHANICAL

7 DYE INJECTION SYSTEMS.— 

8 (1) IN GENERAL.—Part I of subchapter B of 

9 chapter 68 (relating to assessable penalties) is 

10 amended by adding after section 6715 the following 

11 new section: 

12 ‘‘SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN 

13 SECURITY REQUIREMENTS FOR MECHAN14 ICAL DYE INJECTION SYSTEMS. 

15 ‘‘(a) IMPOSITION OF PENALTY— 

16 ‘‘(1) TAMPERING.—If any person tampers with 

17 a mechanical dye injection system used to indelibly 

18 dye fuel for purposes of section 4082, such person 

19 shall pay a penalty in addition to the tax (if any). 

20 ‘‘(2) FAILURE TO MAINTAIN SECURITY RE21 QUIREMENTS.—If any operator of a mechanical dye 

22 injection system used to indelibly dye fuel for pur23 poses of section 4082 fails to maintain the security 

24 standards for such system as established by the Sec-
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1 retary, then such operator shall pay a penalty in ad2 dition to the tax (if any). 

3 ‘‘(b) AMOUNT OF PENALTY.—The amount of the 

4 penalty under subsection (a) shall be— 

5 ‘‘(1) for each violation described in paragraph 

6 (1), the greater of— 

7 ‘‘(A) $25,000, or 

8 ‘‘(B) $10 for each gallon of fuel involved, 

9 and 

10 ‘‘(2) for each— 

11 ‘‘(A) failure to maintain security standards 

12 described in paragraph (2), $1,000, and 

13 ‘‘(B) failure to correct a violation described 

14 in paragraph (2), $1,000 per day for each day 

15 after which such violation was discovered or 

16 such person should have reasonably known of 

17 such violation. 

18 ‘‘(c) JOINT AND SEVERAL LIABILITY.— 

19 ‘‘(1) IN GENERAL.—If a penalty is imposed 

20 under this section on any business entity, each offi21 cer, employee, or agent of such entity or other con22 tracting party who willfully participated in any act 

23 giving rise to such penalty shall be jointly and sever24 ally liable with such entity for such penalty. 
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1 ‘‘(2) AFFILIATED GROUPS.—If a business entity 

2 described in paragraph (1) is part of an affiliated 

3 group (as defined in section 1504(a)), the parent 

4 corporation of such entity shall be jointly and sever5 ally liable with such entity for the penalty imposed 

6 under this section.’’. 

7 (2) CLERICAL AMENDMENT.—The table of sec8 tions for part I of subchapter B of chapter 68 is 

9 amended by adding after the item related to section 

10 6715 the following new item: 

‘‘Sec. 6715A. Tampering with or failing to maintain security requirements for mechanical dye injection systems.’’. 

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

12 subsections (a) and (c) shall take effect on the 180th day 

13 after the date on which the Secretary issues the regula14 tions described in subsection (b). 

15 SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS. 

16 (a) IN GENERAL.—Section 4083(d)(1)(A) (relating 

17 to administrative authority), as previously amended by 

18 this Act, is amended by striking ‘‘and’’ at the end of clause 

19 (i) and by inserting after clause (ii) the following new 

20 clause: 

21 ‘‘(iii) inspecting any books and 

22 records and any shipping papers pertaining 

23 to such fuel, and’’. 
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1 (b) EFFECTIVE DATE.—The amendments made by 

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

3 of this Act. 

4 SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERA5 TORS REQUIRED FOR EXEMPTION OF BULK 

6 TRANSFERS TO REGISTERED TERMINALS OR 

7 REFINERIES. 

8 (a) IN GENERAL.—Section 4081(a)(1)(B) (relating 

9 to exemption for bulk transfers to registered terminals or 

10 refineries) is amended— 

11 (1) by inserting ‘‘by pipeline or vessel’’ after 

12 ‘‘transferred in bulk’’, and 

13 (2) by inserting ‘‘, the operator of such pipeline 

14 or vessel,’’ after ‘‘the taxable fuel’’. 

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

16 this section shall take effect on October 1, 2004. 

17 (c) PUBLICATION OF REGISTERED PERSONS.—Be18 ginning on July 1, 2004, the Secretary of the Treasury 

19 (or the Secretary’s delegate) shall periodically publish a 

20 current list of persons registered under section 4101 of 

21 the Internal Revenue Code of 1986 who are required to 

22 register under such section. 

23 SEC. 656. DISPLAY OF REGISTRATION. 

24 (a) IN GENERAL.—Subsection (a) of section 4101 

25 (relating to registration) is amended— 
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1 (1) by striking ‘‘Every’’ and inserting the fol2 lowing: 

3 ‘‘(1) IN GENERAL.—Every’’, and 

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

5 paragraph: 

6 ‘‘(2) DISPLAY OF REGISTRATION.—Every oper7 ator of a vessel required by the Secretary to register 

8 under this section shall display proof of registration 

9 through an electronic identification device prescribed 

10 by the Secretary on each vessel used by such oper11 ator to transport any taxable fuel.’’. 

12 (b) CIVIL PENALTY FOR FAILURE TO DISPLAY REG13 ISTRATION.— 

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

15 chapter 68 (relating to assessable penalties) is 

16 amended by inserting after section 6716 the fol17 lowing new section: 

18 ‘‘SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON 

19 VESSELS. 

20 ‘‘(a) FAILURE TO DISPLAY REGISTRATION.—Every 

21 operator of a vessel who fails to display proof of registra22 tion pursuant to section 4101(a)(2) shall pay a penalty 

23 of $500 for each such failure. With respect to any vessel, 

24 only one penalty shall be imposed by this section during 

25 any calendar month. 
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1 ‘‘(b) MULTIPLE VIOLATIONS.—In determining the 

2 penalty under subsection (a) on any person, subsection (a) 

3 shall be applied by increasing the amount in subsection 

4 (a) by the product of such amount and the aggregate num5 ber of penalties (if any) imposed with respect to prior 

6 months by this section on such person (or a related person 

7 or any predecessor of such person or related person). 

8 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

9 shall be imposed under this section with respect to any 

10 failure if it is shown that such failure is due to reasonable 

11 cause.’’. 

12 (2) CLERICAL AMENDMENT.—The table of sec13 tions for part I of subchapter B of chapter 68 is 

14 amended by inserting after the item relating to sec15 tion 6716 the following new item: 

‘‘Sec. 6717. Failure to display tax registration on vessels.’’. 

16 (c) EFFECTIVE DATES.— 

17 (1) SUBSECTION (a).—The amendments made 

18 by subsection (a) shall take effect on October 1, 

19 2004. 

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

21 by subsection (b) shall apply to penalties imposed 

22 after September 30, 2004. 
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1 SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND 

2 FAILURE TO REPORT. 

3 (a) INCREASED PENALTY.—Subsection (a) of section 

4 7272 (relating to penalty for failure to register) is amend5 ed by inserting ‘‘($10,000 in the case of a failure to reg6 ister under section 4101)’’ after ‘‘$50’’. 

7 (b) INCREASED CRIMINAL PENALTY.—Section 7232 

8 (relating to failure to register under section 4101, false 

9 representations of registration status, etc.) is amended by 

10 striking ‘‘$5,000’’ and inserting ‘‘$10,000’’. 

11 (c) ASSESSABLE PENALTY FOR FAILURE TO REG12 ISTER.— 

13 (1) IN GENERAL.—Part I of subchapter B of 

14 chapter 68 (relating to assessable penalties) is 

15 amended by inserting after section 6717 the fol16 lowing new section: 

17 ‘‘SEC. 6718. FAILURE TO REGISTER. 

18 ‘‘(a) FAILURE TO REGISTER.—Every person who is 

19 required to register under section 4101 and fails to do 

20 so shall pay a penalty in addition to the tax (if any). 

21 ‘‘(b) AMOUNT OF PENALTY.—The amount of the 

22 penalty under subsection (a) shall be— 

23 ‘‘(1) $10,000 for each initial failure to register, 

24 and 

25 ‘‘(2) $1,000 for each day thereafter such person 

26 fails to register. 
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1 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

2 shall be imposed under this section with respect to any 

3 failure if it is shown that such failure is due to reasonable 

4 cause.’’. 

5 (2) CLERICAL AMENDMENT.—The table of sec6 tions for part I of subchapter B of chapter 68 is 

7 amended by inserting after the item relating to sec8 tion 6717 the following new item: 

‘‘Sec. 6718. Failure to register.’’. 

9 (d) ASSESSABLE PENALTY FOR FAILURE TO RE10 PORT.— 

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

12 chapter 68 (relating to assessable penalties) is 

13 amended by adding at the end the following new sec14 tion: 

15 ‘‘SEC. 6725. FAILURE TO REPORT INFORMATION UNDER 

16 SECTION 4101. 

17 ‘‘(a) IN GENERAL.—In the case of each failure de18 scribed in subsection (b) by any person with respect to 

19 a vessel or facility, such person shall pay a penalty of 

20 $10,000 in addition to the tax (if any). 

21 ‘‘(b) FAILURES SUBJECT TO PENALTY.—For pur22 poses of subsection (a), the failures described in this sub23 section are— 
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1 ‘‘(1) any failure to make a report under section 

2 4101(d) on or before the date prescribed therefor, 

3 and 

4 ‘‘(2) any failure to include all of the informa5 tion required to be shown on such report or the in6 clusion of incorrect information. 

7 ‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 

8 shall be imposed under this section with respect to any 

9 failure if it is shown that such failure is due to reasonable 

10 cause.’’. 

11 (2) CLERICAL AMENDMENT.—The table of sec12 tions for part II of subchapter B of chapter 68 is 

13 amended by adding at the end the following new 

14 item: 

‘‘Sec. 6725. Failure to report information under section 4101.’’. 

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

16 this section shall apply to penalties imposed after Sep17 tember 30, 2004. 

18 SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IM19 PORTER NOT REGISTERED. 

20 (a) TAX AT POINT OF ENTRY WHERE IMPORTER

21 NOT REGISTERED.—Subpart B of part III of subchapter 

22 A of chapter 32, as redesignated by section 652(d), is 

23 amended by adding after section 4103 the following new 

24 section: 
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1 ‘‘SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IM2 PORTER NOT REGISTERED. 

3 ‘‘(a) IN GENERAL.—The importer of record shall be 

4 jointly and severally liable for the tax imposed by section 

5 4081(a)(1)(A)(iii) if, under regulations prescribed by the 

6 Secretary, any other person that is not a person who is 

7 registered under section 4101 is liable for such tax. 

8 ‘‘(b) COLLECTION FROM CUSTOMS BOND.—If any 

9 tax for which any importer of record is liable under sub10 section (a), or for which any importer of record that is 

11 not a person registered under section 4101 is otherwise 

12 liable, is not paid on or before the last date prescribed 

13 for payment, the Secretary may collect such tax from the 

14 Customs bond posted with respect to the importation of 

15 the taxable fuel to which the tax relates. For purposes of 

16 determining the jurisdiction of any court of the United 

17 States or any agency of the United States, any action by 

18 the Secretary described in the preceding sentence shall be 

19 treated as an action to collect the tax from a bond de20 scribed in section 4101(b)(1) and not as an action to col21 lect from a bond relating to the importation of merchan22 dise.’’. 

23 (b) CONFORMING AMENDMENT.—The table of sec24 tions for subpart B of part III of subchapter A of chapter 

25 32, as redesignated by section 652(d), is amended by add-
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1 ing after the item related to section 4103 the following 

2 new item: 

‘‘Sec. 4104. Collection from Customs bond where importer not 

registered.’’. 

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

4 this section shall apply with respect to fuel entered after 

5 September 30, 2004. 

6 SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VE7 HICLES. 

8 (a) PRORATION OF TAX WHERE VEHICLE SOLD.— 

9 (1) IN GENERAL.—Subparagraph (A) of section 

10 4481(c)(2) (relating to where vehicle destroyed or 

11 stolen) is amended by striking ‘‘destroyed or stolen’’ 

12 both places it appears and inserting ‘‘sold, de13 stroyed, or stolen’’. 

14 (2) CONFORMING AMENDMENT.—The heading 

15 for section 4481(c)(2) is amended by striking ‘‘DE16 STROYED OR STOLEN’’ and inserting ‘‘SOLD, DE17 STROYED, OR STOLEN’’. 

18 (b) REPEAL OF INSTALLMENT PAYMENT.— 

19 (1) Section 6156 (relating to installment pay20 ment of tax on use of highway motor vehicles) is re21 pealed. 

22 (2) The table of sections for subchapter A of 

23 chapter 62 is amended by striking the item relating 

24 to section 6156. 
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1 (c) ELECTRONIC FILING.—Section 4481 is amended 

2 by redesignating subsection (e) as subsection (f) and by 

3 inserting after subsection (d) the following new subsection: 

4 ‘‘(e) ELECTRONIC FILING.—Any taxpayer who files 

5 a return under this section with respect to 25 or more 

6 vehicles for any taxable period shall file such return elec7 tronically.’’. 

8 (d) REPEAL OF REDUCTION IN TAX FOR CERTAIN

9 TRUCKS.—Section 4483 is amended by striking subsection 

10 (f). 

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

12 this section shall apply to taxable periods beginning after 

13 the date of the enactment of this Act. 

14 SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND 

15 CLAIMS WITH RESPECT TO FARMING. 

16 (a) IN GENERAL.— 

17 (1) REFUNDS.—Section 6427(l) is amended by 

18 adding at the end the following new paragraph: 

19 ‘‘(6) REGISTERED VENDORS PERMITTED TO AD20 MINISTER CERTAIN CLAIMS FOR REFUND OF DIESEL

21 FUEL AND KEROSENE SOLD TO FARMERS.— 

22 ‘‘(A) IN GENERAL.—In the case of diesel 

23 fuel or kerosene used on a farm for farming 

24 purposes (within the meaning of section 

25 6420(c)), paragraph (1) shall not apply to the 
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1 aggregate amount of such diesel fuel or ker2 osene if such amount does not exceed 250 gal3 lons (as determined under subsection 

4 (i)(5)(A)(iii)). 

5 ‘‘(B) PAYMENT TO ULTIMATE VENDOR.— 

6 The amount which would (but for subparagraph 

7 (A)) have been paid under paragraph (1) with 

8 respect to any fuel shall be paid to the ultimate 

9 vendor of such fuel, if such vendor— 

10 ‘‘(i) is registered under section 4101, 

11 and 

12 ‘‘(ii) meets the requirements of sub13 paragraph (A), (B), or (D) of section 

14 6416(a)(1).’’. 

15 (2) FILING OF CLAIMS.—Section 6427(i) is 

16 amended by inserting at the end the following new 

17 paragraph: 

18 ‘‘(5) SPECIAL RULE FOR VENDOR REFUNDS

19 WITH RESPECT TO FARMERS.— 

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

21 under subsection (l)(6) by any person with re22 spect to fuel sold by such person for any pe23 riod— 
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1 ‘‘(i) for which $200 or more ($100 or 

2 more in the case of kerosene) is payable 

3 under subsection (l)(6), 

4 ‘‘(ii) which is not less than 1 week, 

5 and 

6 ‘‘(iii) which is for not more than 250 

7 gallons for each farmer for which there is 

8 a claim. 

9 Notwithstanding subsection (l)(1), paragraph 

10 (3)(B) shall apply to claims filed under the pre11 ceding sentence. 

12 ‘‘(B) TIME FOR FILING CLAIM.—No claim 

13 filed under this paragraph shall be allowed un14 less filed on or before the last day of the first 

15 quarter following the earliest quarter included 

16 in the claim.’’. 

17 (3) CONFORMING AMENDMENTS.— 

18 (A) Section 6427(l)(5)(A) is amended to 

19 read as follows: 

20 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

21 not apply to diesel fuel or kerosene used by a 

22 State or local government.’’. 

23 (B) The heading for section 6427(l)(5) is 

24 amended by striking ‘‘FARMERS AND’’. 
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1 (b) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to fuels sold for nontaxable use 

3 after the date of the enactment of this Act. 

4 SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PEN5 ALTIES TO THE HIGHWAY TRUST FUND. 

6 (a) IN GENERAL.—Subsection (b) of section 9503 

7 (relating to transfer to Highway Trust Fund of amounts 

8 equivalent to certain taxes) is amended by redesignating 

9 paragraph (5) as paragraph (6) and inserting after para10 graph (4) the following new paragraph: 

11 ‘‘(5) CERTAIN PENALTIES.—There are hereby 

12 appropriated to the Highway Trust Fund amounts 

13 equivalent to the penalties paid under sections 6715, 

14 6715A, 6717, 6718, 6725, 7232, and 7272 (but only 

15 with regard to penalties under such section related 

16 to failure to register under section 4101).’’. 

17 (b) CONFORMING AMENDMENTS.— 

18 (1) The heading of subsection (b) of section 

19 9503 is amended by inserting ‘‘AND PENALTIES’’ 

20 after ‘‘TAXES’’. 

21 (2) The heading of paragraph (1) of section 

22 9503(b) is amended by striking ‘‘IN GENERAL’’ and 

23 inserting ‘‘CERTAIN TAXES’’. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to penalties assessed after October 

3 1, 2004. 

4 SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTI5 MATE VENDORS. 

6 (a) IN GENERAL.—Paragraph (4) of section 6416(a) 

7 (relating to abatements, credits, and refunds) is amended 

8 to read as follows: 

9 ‘‘(4) REGISTERED ULTIMATE VENDOR TO AD10 MINISTER CREDITS AND REFUNDS OF GASOLINE

11 TAX.— 

12 ‘‘(A) IN GENERAL.—For purposes of this 

13 subsection, if an ultimate vendor purchases any 

14 gasoline on which tax imposed by section 4081 

15 has been paid and sells such gasoline to an ulti16 mate purchaser described in subparagraph (C) 

17 or (D) of subsection (b)(2) (and such gasoline 

18 is for a use described in such subparagraph), 

19 such ultimate vendor shall be treated as the 

20 person (and the only person) who paid such tax, 

21 but only if such ultimate vendor is registered 

22 under section 4101. For purposes of this sub23 paragraph, if the sale of gasoline is made by 

24 means of a credit card, the person extending 
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1 the credit to the ultimate purchaser shall be 

2 deemed to be the ultimate vendor. 

3 ‘‘(B) TIMING OF CLAIMS.—The procedure 

4 and timing of any claim under subparagraph 

5 (A) shall be the same as for claims under sec6 tion 6427(i)(4), except that the rules of section 

7 6427(i)(3)(B) regarding electronic claims shall 

8 not apply unless the ultimate vendor has cer9 tified to the Secretary for the most recent quar10 ter of the taxable year that all ultimate pur11 chasers of the vendor covered by such claim are 

12 certified and entitled to a refund under sub13 paragraph (C) or (D) of subsection (b)(2).’’. 

14 (b) CREDIT CARD PURCHASES OF DIESEL FUEL OR

15 KEROSENE BY STATE AND LOCAL GOVERNMENTS.—Sec16 tion 6427(l)(5)(C) (relating to nontaxable uses of diesel 

17 fuel, kerosene, and aviation fuel) is amended by adding 

18 at the end the following new flush sentence: ‘‘For purposes 

19 of this subparagraph, if the sale of diesel fuel or kerosene 

20 is made by means of a credit card, the person extending 

21 the credit to the ultimate purchaser shall be deemed to 

22 be the ultimate vendor.’’. 

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

24 this section shall take effect on October 1, 2004. 
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1 SEC. 663. TWO-PARTY EXCHANGES. 

2 (a) IN GENERAL.—Subpart B of part III of sub3 chapter A of chapter 32, as amended by this Act, is 

4 amended by adding after section 4104 the following new 

5 section: 

6 ‘‘SEC. 4105. TWO-PARTY EXCHANGES. 

7 ‘‘(a) IN GENERAL.—In a two-party exchange, the de8 livering person shall not be liable for the tax imposed 

9 under section 4081(a)(1)(A)(ii). 

10 ‘‘(b) TWO-PARTY EXCHANGE.—The term ‘two-party 

11 exchange’ means a transaction, other than a sale, in which 

12 taxable fuel is transferred from a delivering person reg13 istered under section 4101 as a taxable fuel registrant fuel 

14 to a receiving person who is so registered where all of the 

15 following occur: 

16 ‘‘(1) The transaction includes a transfer from 

17 the delivering person, who holds the inventory posi18 tion for taxable fuel in the terminal as reflected in 

19 the records of the terminal operator. 

20 ‘‘(2) The exchange transaction occurs before or 

21 contemporaneous with completion of removal across 

22 the rack from the terminal by the receiving person. 

23 ‘‘(3) The terminal operator in its books and 

24 records treats the receiving person as the person 

25 that removes the taxable fuel across the terminal 
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1 rack for purposes of reporting the transaction to the 

2 Secretary. 

3 ‘‘(4) The transaction is the subject of a written 

4 contract.’’. 

5 (b) CONFORMING AMENDMENT.—The table of sec6 tions for subpart B of part III of subchapter A of chapter 

7 32, as amended by this Act, is amended by adding after 

8 the item relating to section 4104 the following new item: 

‘‘Sec. 4105. Two-party exchanges.’’. 

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

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

11 of this Act. 

12 SEC. 664. SIMPLIFICATION OF TAX ON TIRES. 

13 (a) IN GENERAL.—Subsection (a) of section 4071 is 

14 amended to read as follows: 

15 ‘‘(a) IMPOSITION AND RATE OF TAX.—There is here16 by imposed on taxable tires sold by the manufacturer, pro17 ducer, or importer thereof a tax at the rate of 9.4 cents 

18 (4.7 cents in the case of a biasply tire) for each 10 pounds 

19 so much of the maximum rated load capacity thereof as 

20 exceeds 3,500 pounds.’’ 

21 (b) TAXABLE TIRE.—Section 4072 is amended by re22 designating subsections (a) and (b) as subsections (b) and 

23 (c), respectively, and by inserting before subsection (b) (as 

24 so redesignated) the following new subsection: 
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1 ‘‘(a) TAXABLE TIRE.—For purposes of this chapter, 

2 the term ‘taxable tire’ means any tire of the type used 

3 on highway vehicles if wholly or in part made of rubber 

4 and if marked pursuant to Federal regulations for high5 way use.’’ 

6 (c) EXEMPTION FOR TIRES SOLD TO DEPARTMENT

7 OF DEFENSE.—Section 4073 is amended to read as fol8 lows: 

9 ‘‘SEC. 4073. EXEMPTIONS. 

10 ‘‘The tax imposed by section 4071 shall not apply to 

11 tires sold for the exclusive use of the Department of De12 fense or the Coast Guard.’’. 

13 (d) CONFORMING AMENDMENTS.— 

14 (1) Section 4071 is amended by striking sub15 section (c) and by moving subsection (e) after sub16 section (b) and redesignating subsection (e) as sub17 section (c). 

18 (2) The item relating to section 4073 in the 

19 table of sections for part II of subchapter A of chap20 ter 32 is amended to read as follows: 

‘‘Sec. 4073. Exemptions.’’. 

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

22 this section shall apply to sales in calendar years begin23 ning more than 30 days after the date of the enactment 

24 of this Act. 
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1 Subtitle D—Nonqualified Deferred 

2 Compensation Plans 

3 SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COM4 PENSATION PLANS. 

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

6 D of chapter 1 is amended by adding at the end the fol7 lowing new section: 

8 ‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 

9 COMPENSATION UNDER NONQUALIFIED DE10 FERRED COMPENSATION PLANS. 

11 ‘‘(a) RULES RELATING TO CONSTRUCTIVE RE12 CEIPT.— 

13 ‘‘(1) IN GENERAL.— 

14 ‘‘(A) GROSS INCOME INCLUSION.—In the 

15 case of a nonqualified deferred compensation 

16 plan, all compensation deferred under the plan 

17 for all taxable years (to the extent not subject 

18 to a substantial risk of forfeiture and not pre19 viously included in gross income) shall be in20 cludible in gross income for the taxable year 

21 unless at all times during the taxable year the 

22 plan meets the requirements of paragraphs (2), 

23 (3), and (4) and is operated in accordance with 

24 such requirements. 
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1 ‘‘(B) INTEREST ON TAX LIABILITY PAY2 ABLE WITH RESPECT TO PREVIOUSLY DE3 FERRED COMPENSATION.— 

4 ‘‘(i) IN GENERAL.—If compensation is 

5 required to be included in gross income 

6 under subparagraph (A) for a taxable year, 

7 the tax imposed by this chapter for such 

8 taxable year shall be increased by the 

9 amount of interest determined under 

10 clause (ii). 

11 ‘‘(ii) INTEREST.—For purposes of 

12 clause (i), the interest determined under 

13 this clause for any taxable year is the 

14 amount of interest at the underpayment 

15 rate plus 1 percentage point on the under16 payments that would have occurred had 

17 the deferred compensation been includible 

18 in gross income for the taxable year in 

19 which first deferred or, if later, the first 

20 taxable year in which such deferred com21 pensation is not subject to a substantial 

22 risk of forfeiture. 

23 ‘‘(2) DISTRIBUTIONS.— 

24 ‘‘(A) IN GENERAL.—The requirements of 

25 this paragraph are met if the plan provides that 
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1 compensation deferred under the plan may not 

2 be distributed earlier than— 

3 ‘‘(i) separation from service as deter4 mined by the Secretary (except as provided 

5 in subparagraph (B)(i)), 

6 ‘‘(ii) the date the participant becomes 

7 disabled (within the meaning of subpara8 graph (C)), 

9 ‘‘(iii) death, 

10 ‘‘(iv) a specified time (or pursuant to 

11 a fixed schedule) specified under the plan 

12 at the date of the deferral of such com13 pensation, 

14 ‘‘(v) to the extent provided by the 

15 Secretary, a change in the ownership or ef16 fective control of the corporation, or in the 

17 ownership of a substantial portion of the 

18 assets of the corporation, or 

19 ‘‘(vi) the occurrence of an unforesee20 able emergency. 

21 ‘‘(B) SPECIAL RULES.— 

22 ‘‘(i) SPECIFIED EMPLOYEES.—In the 

23 case of specified employees, the require24 ment of subparagraph (A)(i) is met only if 

25 distributions may not be made earlier than 
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1 6 months after the date of separation from 

2 service. For purposes of the preceding sen3 tence, a specified employee is a key em4 ployee (as defined in section 416(i)) of a 

5 corporation the stock in which is publicly 

6 traded on an established securities market 

7 or otherwise. 

8 ‘‘(ii) UNFORESEEABLE EMER9 GENCY.—For purposes of subparagraph 

10 (A)(vi)— 

11 ‘‘(I) IN GENERAL.—The term 

12 ‘unforeseeable emergency’ means a se13 vere financial hardship to the partici14 pant resulting from a sudden and un15 expected illness or accident of the par16 ticipant, the participant’s spouse, or a 

17 dependent (as defined in section 

18 152(a)) of the participant, loss of the 

19 participant’s property due to casualty, 

20 or other similar extraordinary and un21 foreseeable circumstances arising as a 

22 result of events beyond the control of 

23 the participant. 

24 ‘‘(II) LIMITATION ON DISTRIBU25 TIONS.—The requirement of subpara-
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1 graph (A)(vi) is met only if, as deter2 mined under regulations of the Sec3 retary, the amounts distributed with 

4 respect to an emergency do not exceed 

5 the amounts necessary to satisfy such 

6 emergency plus amounts necessary to 

7 pay taxes reasonably anticipated as a 

8 result of the distribution, after taking 

9 into account the extent to which such 

10 hardship is or may be relieved 

11 through reimbursement or compensa12 tion by insurance or otherwise or by 

13 liquidation of the participant’s assets 

14 (to the extent the liquidation of such 

15 assets would not itself cause severe fi16 nancial hardship). 

17 ‘‘(C) DISABLED.—For purposes of sub18 paragraph (A)(ii), a participant shall be consid19 ered disabled if the participant— 

20 ‘‘(i) is unable to engage in any sub21 stantial gainful activity by reason of any 

22 medically determinable physical or mental 

23 impairment which can be expected to result 

24 in death or can be expected to last for a 
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1 continuous period of not less than 12 

2 months, or 

3 ‘‘(ii) is, by reason of any medically de4 terminable physical or mental impairment 

5 which can be expected to result in death or 

6 can be expected to last for a continuous 

7 period of not less than 12 months, receiv8 ing income replacement benefits for a pe9 riod of not less than 3 months under an 

10 accident and health plan covering employ11 ees of the participant’s employer. 

12 ‘‘(3) ACCELERATION OF BENEFITS.—The re13 quirements of this paragraph are met if the plan 

14 does not permit the acceleration of the time or 

15 schedule of any payment under the plan, except as 

16 provided in regulations by the Secretary. 

17 ‘‘(4) ELECTIONS.— 

18 ‘‘(A) IN GENERAL.—The requirements of 

19 this paragraph are met if the requirements of 

20 subparagraphs (B) and (C) are met. 

21 ‘‘(B) INITIAL DEFERRAL DECISION.—The 

22 requirements of this subparagraph are met if 

23 the plan provides that compensation for services 

24 performed during a taxable year may be de25 ferred at the participant’s election only if the 
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1 election to defer such compensation is made not 

2 later than the close of the preceding taxable 

3 year or at such other time as provided in regu4 lations. In the case of the first year in which a 

5 participant becomes eligible to participate in the 

6 plan, such election may be made with respect to 

7 services to be performed subsequent to the elec8 tion within 30 days after the date the partici9 pant becomes eligible to participate in such 

10 plan. 

11 ‘‘(C) CHANGES IN TIME AND FORM OF DIS12 TRIBUTION.—The requirements of this subpara13 graph are met if, in the case of a plan which 

14 permits under a subsequent election a delay in 

15 a payment or a change in the form of pay16 ment— 

17 ‘‘(i) the plan requires that such elec18 tion may not take effect until at least 12 

19 months after the date on which the elec20 tion is made, 

21 ‘‘(ii) in the case an election related to 

22 a payment not described in clause (ii), (iii), 

23 or (vi) of paragraph (2)(A), the plan re24 quires that the first payment with respect 

25 to which such election is made be deferred 
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1 for a period of not less than 5 years from 

2 the date such payment would otherwise 

3 have been made, and 

4 ‘‘(iii) the plan requires that any elec5 tion related to a payment described in 

6 paragraph (2)(A)(iv) may not be made less 

7 than 12 months prior to the date of the 

8 first scheduled payment under such para9 graph. 

10 ‘‘(b) RULES RELATING TO FUNDING.— 

11 ‘‘(1) OFFSHORE PROPERTY IN A TRUST.—In 

12 the case of assets set aside (directly or indirectly) in 

13 a trust (or other arrangement determined by the 

14 Secretary) for purposes of paying deferred com15 pensation under a nonqualified deferred compensa16 tion plan, for purposes of section 83 such assets 

17 shall be treated as property transferred in connec18 tion with the performance of services whether or not 

19 such assets are available to satisfy claims of general 

20 creditors— 

21 ‘‘(A) at the time set aside if such assets 

22 are located outside of the United States, or 

23 ‘‘(B) at the time transferred if such assets 

24 are subsequently transferred outside of the 

25 United States. 
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1 ‘‘(2) EMPLOYER’S FINANCIAL HEALTH.—In the 

2 case of compensation deferred under a nonqualified 

3 deferred compensation plan, there is a transfer of 

4 property within the meaning of section 83 with re5 spect to such compensation as of the earlier of— 

6 ‘‘(A) the date on which the plan first pro7 vides that assets will become restricted to the 

8 provision of benefits under the plan in connec9 tion with a change in the employer’s financial 

10 health, or 

11 ‘‘(B) the date on which assets are so re12 stricted. 

13 ‘‘(3) INCOME INCLUSION FOR OFFSHORE

14 TRUSTS AND EMPLOYER’S FINANCIAL HEALTH.—For 

15 each taxable year that assets treated as transferred 

16 under this subsection remain set aside in a trust or 

17 other arrangement subject to paragraph (1) or (2), 

18 any increase in value in, or earnings with respect to, 

19 such assets shall be treated as an additional transfer 

20 of property under this subsection (to the extent not 

21 previously included in income). 

22 ‘‘(4) INTEREST ON TAX LIABILITY PAYABLE

23 WITH RESPECT TO TRANSFERRED PROPERTY.— 

24 ‘‘(A) IN GENERAL.—If amounts are re25 quired to be included in gross income by reason 
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1 of paragraph (1) or (2) for a taxable year, the 

2 tax imposed by this chapter for such taxable 

3 year shall be increased by the amount of inter4 est determined under subparagraph (B). 

5 ‘‘(B) INTEREST.—The interest determined 

6 under this subparagraph for any taxable year is 

7 the amount of interest at the underpayment 

8 rate plus 1 percentage point on the underpay9 ments that would have occurred had the 

10 amounts so required to be included in gross in11 come by paragraph (1) or (2) been includible in 

12 gross income for the taxable year in which first 

13 deferred or, if later, the first taxable year in 

14 which such deferred compensation is not subject 

15 to a substantial risk of forfeiture. 

16 ‘‘(c) NO INFERENCE ON EARLIER INCOME INCLU17 SION OR REQUIREMENT OF LATER INCLUSION.—Nothing 

18 in this section shall be construed to prevent the inclusion 

19 of amounts in gross income under any other provision of 

20 this chapter or any other rule of law earlier than the time 

21 provided in this section. Any amount included in gross in22 come under this section shall not be required to be in23 cluded in gross income under any other provision of this 

24 chapter or any other rule of law later than the time pro25 vided in this section. 
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1 ‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.— 

2 For purposes of this section— 

3 ‘‘(1) NONQUALIFIED DEFERRED COMPENSA4 TION PLAN.—The term ‘nonqualified deferred com5 pensation plan’ means any plan that provides for the 

6 deferral of compensation, other than— 

7 ‘‘(A) a qualified employer plan, and 

8 ‘‘(B) any bona fide vacation leave, sick 

9 leave, compensatory time, disability pay, or 

10 death benefit plan. 

11 ‘‘(2) QUALIFIED EMPLOYER PLAN.—The term 

12 ‘qualified employer plan’ means— 

13 ‘‘(A) any plan, contract, pension, account, 

14 or trust described in subparagraph (A) or (B) 

15 of section 219(g)(5), and 

16 ‘‘(B) any eligible deferred compensation 

17 plan (within the meaning of section 457(b)) of 

18 an employer described in section 457(e)(1)(A). 

19 ‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.— 

20 The term ‘plan’ includes any agreement or arrange21 ment, including an agreement or arrangement that 

22 includes one person. 

23 ‘‘(4) SUBSTANTIAL RISK OF FORFEITURE.—The 

24 rights of a person to compensation are subject to a 

25 substantial risk of forfeiture if such person’s rights 
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1 to such compensation are conditioned upon the fu2 ture performance of substantial services by any indi3 vidual. 

4 ‘‘(5) TREATMENT OF EARNINGS.—References to 

5 deferred compensation shall be treated as including 

6 references to income (whether actual or notional) at7 tributable to such compensation or such income. 

8 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

9 such regulations as may be necessary or appropriate to 

10 carry out the purposes of this section, including regula11 tions— 

12 ‘‘(1) providing for the determination of 

13 amounts of deferral in the case of a nonqualified de14 ferred compensation plan which is a defined benefit 

15 plan, 

16 ‘‘(2) relating to changes in the ownership and 

17 control of a corporation or assets of a corporation 

18 for purposes of subsection (a)(2)(A)(v), 

19 ‘‘(3) exempting arrangements from the applica20 tion of subsection (b) if such arrangements will not 

21 result in an improper deferral of United States tax 

22 and will not result in assets being effectively beyond 

23 the reach of creditors, 

24 ‘‘(4) defining financial health for purposes of 

25 subsection (b)(2), and 
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1 ‘‘(5) disregarding a substantial risk of for2 feiture in cases where necessary to carry out the 

3 purposes of this section.’’. 

4 (b) W–2 FORMS.— 

5 (1) IN GENERAL.—Subsection (a) of section 

6 6051 (relating to receipts for employees) is amended 

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

8 striking the period at the end of paragraph (12) and 

9 inserting ‘‘, and’’, and by inserting after paragraph 

10 (12) the following new paragraph: 

11 ‘‘(13) the total amount of deferrals under a 

12 nonqualified deferred compensation plan (within the 

13 meaning of section 409A(d)).’’. 

14 (2) THRESHOLD.—Subsection (a) of section 

15 6051 is amended by adding at the end the following: 

16 ‘‘In the case of the amounts required to be shown 

17 by paragraph (13), the Secretary (by regulation) 

18 may establish a minimum amount of deferrals below 

19 which paragraph (13) does not apply and may pro20 vide that paragraph (13) does not apply with respect 

21 to amounts of deferrals which are not reasonably as22 certainable.’’. 

23 (c) CONFORMING AND CLERICAL AMENDMENTS.— 

24 (1) Section 414(b) is amended by inserting 

25 ‘‘409A,’’ after ‘‘408(p),’’. 
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1 (2) Section 414(c) is amended by inserting 

2 ‘‘409A,’’ after ‘‘408(p),’’. 

3 (3) The table of sections for such subpart A of 

4 part I of subchapter D of chapter 1 is amended by 

5 adding at the end the following new item: 

‘‘Sec. 409A. Inclusion in gross income of deferred compensation 

under nonqualified deferred compensation plans.’’. 

6 (d) EFFECTIVE DATE.— 

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

8 this section shall apply to amounts deferred after 

9 June 3, 2004. 

10 (2) CERTAIN AMOUNTS DEFERRED IN 2004

11 UNDER CERTAIN IRREVOCABLE ELECTIONS AND

12 BINDING ARRANGEMENTS.—The amendments made 

13 by this section shall not apply to amounts deferred 

14 after June 3, 2004, and before January 1, 2005, 

15 pursuant to an irrevocable election or binding ar16 rangement made before June 4, 2004. 

17 (3) EARNINGS ATTRIBUTABLE TO AMOUNT PRE18 VIOUSLY DEFERRED.—The amendments made by 

19 this section shall apply to earnings on deferred com20 pensation only to the extent that such amendments 

21 apply to such compensation. 

22 (e) GUIDANCE RELATING TO CHANGE OF OWNER23 SHIP OR CONTROL.—Not later than 90 days after the date 

24 of the enactment of this Act, the Secretary of the Treasury 
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1 shall issue guidance on what constitutes a change in own2 ership or effective control for purposes of section 409A 

3 of the Internal Revenue Code of 1986, as added by this 

4 section. 

5 (f) GUIDANCE RELATING TO TERMINATION OF CER6 TAIN EXISTING ARRANGEMENTS.—Not later than 90 days 

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

8 of the Treasury shall issue guidance providing a limited 

9 period during which an individual participating in a non10 qualified deferred compensation plan adopted before June 

11 4, 2004, may, without violating the requirements of para12 graphs (2), (3), and (4) of section 409A(a)(2) of the Inter13 nal Revenue Code of 1986 (as added by this section), ter14 minate participation or cancel an outstanding deferral 

15 election with regard to amounts earned after June 3, 

16 2004, if such amounts are includible in income as earned. 

17 Subtitle E—Other Revenue 

18 Provisions 

19 SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS. 

20 (a) CONTRACT REQUIREMENTS.— 

21 (1) IN GENERAL.—Subchapter A of chapter 64 

22 (relating to collection) is amended by adding at the 

23 end the following new section: 
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1 ‘‘SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS. 

2 ‘‘(a) IN GENERAL.—Nothing in any provision of law 

3 shall be construed to prevent the Secretary from entering 

4 into a qualified tax collection contract. 

5 ‘‘(b) QUALIFIED TAX COLLECTION CONTRACT.—For 

6 purposes of this section, the term ‘qualified tax collection 

7 contract’ means any contract which— 

8 ‘‘(1) is for the services of any person (other 

9 than an officer or employee of the Treasury Depart10 ment)— 

11 ‘‘(A) to locate and contact any taxpayer 

12 specified by the Secretary, 

13 ‘‘(B) to request full payment from such 

14 taxpayer of an amount of Federal tax specified 

15 by the Secretary and, if such request cannot be 

16 met by the taxpayer, to offer the taxpayer an 

17 installment agreement providing for full pay18 ment of such amount during a period not to ex19 ceed 5 years, and 

20 ‘‘(C) to obtain financial information speci21 fied by the Secretary with respect to such tax22 payer, 

23 ‘‘(2) prohibits each person providing such serv24 ices under such contract from committing any act or 

25 omission which employees of the Internal Revenue 
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1 Service are prohibited from committing in the per2 formance of similar services, 

3 ‘‘(3) prohibits subcontractors from— 

4 ‘‘(A) having contacts with taxpayers, 

5 ‘‘(B) providing quality assurance services, 

6 and 

7 ‘‘(C) composing debt collection notices, and 

8 ‘‘(4) permits subcontractors to perform other 

9 services only with the approval of the Secretary. 

10 ‘‘(c) FEES.—The Secretary may retain and use an 

11 amount not in excess of 25 percent of the amount collected 

12 under any qualified tax collection contract for the costs 

13 of services performed under such contract. The Secretary 

14 shall keep adequate records regarding amounts so retained 

15 and used. The amount credited as paid by any taxpayer 

16 shall be determined without regard to this subsection. 

17 ‘‘(d) NO FEDERAL LIABILITY.—The United States 

18 shall not be liable for any act or omission of any person 

19 performing services under a qualified tax collection con20 tract. 

21 ‘‘(e) APPLICATION OF FAIR DEBT COLLECTION

22 PRACTICES ACT.—The provisions of the Fair Debt Collec23 tion Practices Act (15 U.S.C. 1692 et seq.) shall apply 

24 to any qualified tax collection contract, except to the ex-
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1 tent superseded by section 6304, section 7602(c), or by 

2 any other provision of this title. 

3 ‘‘(f) CROSS REFERENCES.— 

‘‘(1) For damages for certain unauthorized collection actions by persons performing services under a 

qualified tax collection contract, see section 7433A. 

‘‘(2) For application of Taxpayer Assistance Orders to persons performing services under a qualified tax collection contract, see section 7811(a)(4).’’. 

4 (2) CONFORMING AMENDMENTS.— 

5 (A) Section 7809(a) is amended by insert6 ing ‘‘6306,’’ before ‘‘7651’’. 

7 (B) The table of sections for subchapter A 

8 of chapter 64 is amended by adding at the end 

9 the following new item: 

‘‘Sec. 6306. Qualified Tax Collection Contracts.’’. 

10 (b) CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED

11 COLLECTION ACTIONS BY PERSONS PERFORMING SERV12 ICES UNDER QUALIFIED TAX COLLECTION CON13 TRACTS.— 

14 (1) In general.—Subchapter B of chapter 76 

15 (relating to proceedings by taxpayers and third par16 ties) is amended by inserting after section 7433 the 

17 following new section: 
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1 ‘‘SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHOR2 IZED COLLECTION ACTIONS BY PERSONS 

3 PERFORMING SERVICES UNDER QUALIFIED 

4 TAX COLLECTION CONTRACTS. 

5 ‘‘(a) IN GENERAL.—Subject to the modifications pro6 vided by subsection (b), section 7433 shall apply to the 

7 acts and omissions of any person performing services 

8 under a qualified tax collection contract (as defined in sec9 tion 6306(b)) to the same extent and in the same manner 

10 as if such person were an employee of the Internal Rev11 enue Service. 

12 ‘‘(b) MODIFICATIONS.—For purposes of subsection 

13 (a)— 

14 ‘‘(1) Any civil action brought under section 

15 7433 by reason of this section shall be brought 

16 against the person who entered into the qualified tax 

17 collection contract with the Secretary and shall not 

18 be brought against the United States. 

19 ‘‘(2) Such person and not the United States 

20 shall be liable for any damages and costs determined 

21 in such civil action. 

22 ‘‘(3) Such civil action shall not be an exclusive 

23 remedy with respect to such person. 

24 ‘‘(4) Subsections (c), (d)(1), and (e) of section 

25 7433 shall not apply.’’. 
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1 (2) CLERICAL AMENDMENT.—The table of sec2 tions for subchapter B of chapter 76 is amended by 

3 inserting after the item relating to section 7433 the 

4 following new item: 

‘‘Sec. 7433A. Civil damages for certain unauthorized collection actions by persons performing services under qualified 

tax collection contracts.’’. 

5 (c) APPLICATION OF TAXPAYER ASSISTANCE OR6 DERS TO PERSONS PERFORMING SERVICES UNDER A

7 QUALIFIED TAX COLLECTION CONTRACT.—Section 7811 

8 (relating to taxpayer assistance orders) is amended by 

9 adding at the end the following new subsection: 

10 ‘‘(g) APPLICATION TO PERSONS PERFORMING SERV11 ICES UNDER A QUALIFIED TAX COLLECTION CON12 TRACT.—Any order issued or action taken by the National 

13 Taxpayer Advocate pursuant to this section shall apply to 

14 persons performing services under a qualified tax collec15 tion contract (as defined in section 6306(b)) to the same 

16 extent and in the same manner as such order or action 

17 applies to the Secretary.’’. 

18 (d) INELIGIBILITY OF INDIVIDUALS WHO COMMIT

19 MISCONDUCT TO PERFORM UNDER CONTRACT.—Section 

20 1203 of the Internal Revenue Service Restructuring Act 

21 of 1998 (relating to termination of employment for mis22 conduct) is amended by adding at the end the following 

23 new subsection: 
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1 ‘‘(e) INDIVIDUALS PERFORMING SERVICES UNDER A

2 QUALIFIED TAX COLLECTION CONTRACT.—An individual 

3 shall cease to be permitted to perform any services under 

4 any qualified tax collection contract (as defined in section 

5 6306(b) of the Internal Revenue Code of 1986) if there 

6 is a final determination by the Secretary of the Treasury 

7 under such contract that such individual committed any 

8 act or omission described under subsection (b) in connec9 tion with the performance of such services.’’. 

10 (e) EFFECTIVE DATE.—The amendments made to 

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

12 of this Act. 

13 SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF 

14 PATENTS AND SIMILAR PROPERTY. 

15 (a) IN GENERAL.—Subparagraph (B) of section 

16 170(e)(1) is amended by striking ‘‘or’’ at the end of clause 

17 (i), by adding ‘‘or’’ at the end of clause (ii), and by insert18 ing after clause (ii) the following new clause: 

19 ‘‘(iii) of any patent, copyright (other 

20 than a copyright described in section 

21 1221(a)(3) or 1231(b)(1)(C)), trademark, 

22 trade name, trade secret, know-how, soft23 ware (other than software described in sec24 tion 197(e)(3)(A)(i)), or similar property, 
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1 or applications or registrations of such 

2 property,’’. 

3 (b) CERTAIN DONEE INCOME FROM INTELLECTUAL

4 PROPERTY TREATED AS AN ADDITIONAL CHARITABLE

5 CONTRIBUTION.—Section 170 is amended by redesig6 nating subsection (m) as subsection (n) and by inserting 

7 after subsection (l) the following new subsection: 

8 ‘‘(m) CERTAIN DONEE INCOME FROM INTELLEC9 TUAL PROPERTY TREATED AS AN ADDITIONAL CHARI10 TABLE CONTRIBUTION.— 

11 ‘‘(1) TREATMENT AS ADDITIONAL CONTRIBU12 TION.—In the case of a taxpayer who makes a quali13 fied intellectual property contribution, the deduction 

14 allowed under subsection (a) for each taxable year of 

15 the taxpayer ending on or after the date of such con16 tribution shall be increased (subject to the limita17 tions under subsection (b)) by the applicable per18 centage of qualified donee income with respect to 

19 such contribution which is properly allocable to such 

20 year under this subsection. 

21 ‘‘(2) REDUCTION IN ADDITIONAL DEDUCTIONS

22 TO EXTENT OF INITIAL DEDUCTION.—With respect 

23 to any qualified intellectual property contribution, 

24 the deduction allowed under subsection (a) shall be 

25 increased under paragraph (1) only to the extent 
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1 that the aggregate amount of such increases with re2 spect to such contribution exceed the amount al3 lowed as a deduction under subsection (a) with re4 spect to such contribution determined without re5 gard to this subsection. 

6 ‘‘(3) QUALIFIED DONEE INCOME.—For pur7 poses of this subsection, the term ‘qualified donee 

8 income’ means any net income received by or ac9 crued to the donee which is properly allocable to the 

10 qualified intellectual property. 

11 ‘‘(4) ALLOCATION OF QUALIFIED DONEE IN12 COME TO TAXABLE YEARS OF DONOR.—For pur13 poses of this subsection, qualified donee income shall 

14 be treated as properly allocable to a taxable year of 

15 the donor if such income is received by or accrued 

16 to the donee for the taxable year of the donee which 

17 ends within or with such taxable year of the donor. 

18 ‘‘(5) 10-YEAR LIMITATION.—Income shall not 

19 be treated as properly allocable to qualified intellec20 tual property for purposes of this subsection if such 

21 income is received by or accrued to the donee after 

22 the 10-year period beginning on the date of the con23 tribution of such property. 

24 ‘‘(6) BENEFIT LIMITED TO LIFE OF INTELLEC25 TUAL PROPERTY.—Income shall not be treated as 
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1 properly allocable to qualified intellectual property 

2 for purposes of this subsection if such income is re3 ceived by or accrued to the donee after the expira4 tion of the legal life of such property. 

5 ‘‘(7) APPLICABLE PERCENTAGE.—For purposes 

6 of this subsection, the term ‘applicable percentage’ 

7 means the percentage determined under the fol8 lowing table which corresponds to a taxable year of 

9 the donor ending on or after the date of the quali10 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. 

11 ‘‘(8) QUALIFIED INTELLECTUAL PROPERTY

12 CONTRIBUTION.—For purposes of this subsection, 

13 the term ‘qualified intellectual property contribution’ 

14 means any charitable contribution of qualified intel15 lectual property— 

16 ‘‘(A) the amount of which taken into ac17 count under this section is reduced by reason of 

18 subsection (e)(1), and 
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1 ‘‘(B) with respect to which the donor in2 forms the donee at the time of such contribu3 tion that the donor intends to treat such con4 tribution as a qualified intellectual property 

5 contribution for purposes of this subsection and 

6 section 6050L. 

7 ‘‘(9) QUALIFIED INTELLECTUAL PROPERTY.— 

8 For purposes of this subsection, the term ‘qualified 

9 intellectual property’ means property described in 

10 subsection (e)(1)(B)(iii) (other than property con11 tributed to or for the use of an organization de12 scribed in subsection (e)(1)(B)(ii)). 

13 ‘‘(10) OTHER SPECIAL RULES.— 

14 ‘‘(A) APPLICATION OF LIMITATIONS ON

15 CHARITABLE CONTRIBUTIONS.—Any increase 

16 under this subsection of the deduction provided 

17 under subsection (a) shall be treated for pur18 poses of subsection (b) as a deduction which is 

19 attributable to a charitable contribution to the 

20 donee to which such increase relates. 

21 ‘‘(B) NET INCOME DETERMINED BY

22 DONEE.—The net income taken into account 

23 under paragraph (3) shall not exceed the 

24 amount of such income reported under section 

25 6050L(b)(1). 
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1 ‘‘(C) DEDUCTION LIMITED TO 12 TAXABLE

2 YEARS.—Except as may be provided under sub3 paragraph (D)(i), this subsection shall not 

4 apply with respect to any qualified intellectual 

5 property contribution for any taxable year of 

6 the donor after the 12th taxable year of the 

7 donor which ends on or after the date of such 

8 contribution. 

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

10 issue regulations or other guidance to carry out 

11 the purposes of this subsection, including regu12 lations or guidance— 

13 ‘‘(i) modifying the application of this 

14 subsection in the case of a donor or donee 

15 with a short taxable year, and 

16 ‘‘(ii) providing for the determination 

17 of an amount to be treated as net income 

18 of the donee which is properly allocable to 

19 qualified intellectual property in the case 

20 of a donee who uses such property to fur21 ther a purpose or function constituting the 

22 basis of the donee’s exemption under sec23 tion 501 (or, in the case of a governmental 

24 unit, any purpose described in section 

25 170(c)) and does not possess a right to re-
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1 ceive any payment from a third party with 

2 respect to such property.’’. 

3 (c) REPORTING REQUIREMENTS.— 

4 (1) IN GENERAL.—Section 6050L (relating to 

5 returns relating to certain dispositions of donated 

6 property) is amended to read as follows: 

7 ‘‘SEC. 6050L. RETURNS RELATING TO CERTAIN DONATED 

8 PROPERTY. 

9 ‘‘(a) DISPOSITIONS OF DONATED PROPERTY.— 

10 ‘‘(1) IN GENERAL.—If the donee of any chari11 table deduction property sells, exchanges, or other12 wise disposes of such property within 2 years after 

13 its receipt, the donee shall make a return (in accord14 ance with forms and regulations prescribed by the 

15 Secretary) showing— 

16 ‘‘(A) the name, address, and TIN of the 

17 donor, 

18 ‘‘(B) a description of the property, 

19 ‘‘(C) the date of the contribution, 

20 ‘‘(D) the amount received on the disposi21 tion, and 

22 ‘‘(E) the date of such disposition. 

23 ‘‘(2) DEFINITIONS.—For purposes of this sub24 section— 
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1 ‘‘(A) CHARITABLE DEDUCTION PROP2 ERTY.—The term ‘charitable deduction prop3 erty’ means any property (other than publicly 

4 traded securities) contributed in a contribution 

5 for which a deduction was claimed under sec6 tion 170 if the claimed value of such property 

7 (plus the claimed value of all similar items of 

8 property donated by the donor to 1 or more 

9 donees) exceeds $5,000. 

10 ‘‘(B) PUBLICLY TRADED SECURITIES.— 

11 The term ‘publicly traded securities’ means se12 curities for which (as of the date of the con13 tribution) market quotations are readily avail14 able on an established securities market. 

15 ‘‘(b) QUALIFIED INTELLECTUAL PROPERTY CON16 TRIBUTIONS.— 

17 ‘‘(1) IN GENERAL.—Each donee with respect to 

18 a qualified intellectual property contribution shall 

19 make a return (at such time and in such form and 

20 manner as the Secretary may by regulations pre21 scribe) with respect to each specified taxable year of 

22 the donee showing— 

23 ‘‘(A) the name, address, and TIN of the 

24 donor, 
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1 ‘‘(B) a description of the qualified intellec2 tual property contributed, 

3 ‘‘(C) the date of the contribution, and 

4 ‘‘(D) the amount of net income of the 

5 donee for the taxable year which is properly al6 locable to the qualified intellectual property (de7 termined without regard to paragraph (10)(B) 

8 of section 170(m) and with the modifications 

9 described in paragraphs (5) and (6) of such 

10 section). 

11 ‘‘(2) DEFINITIONS.—For purposes of this sub12 section— 

13 ‘‘(A) IN GENERAL.—Terms used in this 

14 subsection which are also used in section 

15 170(m) have the respective meanings given 

16 such terms in such section. 

17 ‘‘(B) SPECIFIED TAXABLE YEAR.—The 

18 term ‘specified taxable year’ means, with re19 spect to any qualified intellectual property con20 tribution, any taxable year of the donee any 

21 portion of which is part of the 10-year period 

22 beginning on the date of such contribution. 

23 ‘‘(c) STATEMENT TO BE FURNISHED TO DONORS.— 

24 Every person making a return under subsection (a) or (b) 

25 shall furnish a copy of such return to the donor at such 
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1 time and in such manner as the Secretary may by regula2 tions prescribe.’’. 

3 (2) CLERICAL AMENDMENT.—The table of sec4 tions for subpart A of part II of subchapter A of 

5 chapter 61 is amended by striking the item relating 

6 to section 6050L and inserting the following new 

7 item: 

‘‘Sec. 6050L. Returns relating to certain donated property.’’. 

8 (d) COORDINATION WITH APPRAISAL REQUIRE9 MENTS.—Subclause (I) of section 170(f)(11)(A)(ii), as 

10 added by section 683, is amended by inserting ‘‘subsection 

11 (e)(1)(B)(iii) or’’ before ‘‘section 1221(a)(1)’’. 

12 (e) ANTI-ABUSE RULES.—The Secretary of the 

13 Treasury may prescribe such regulations or other guid14 ance as may be necessary or appropriate to prevent the 

15 avoidance of the purposes of section 170(e)(1)(B)(iii) of 

16 the Internal Revenue Code of 1986 (as added by sub17 section (a)), including preventing— 

18 (1) the circumvention of the reduction of the 

19 charitable deduction by embedding or bundling the 

20 patent or similar property as part of a charitable 

21 contribution of property that includes the patent or 

22 similar property, 

23 (2) the manipulation of the basis of the prop24 erty to increase the amount of the charitable deduc25 tion through the use of related persons, pass-thru 
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1 entities, or other intermediaries, or through the use 

2 of any provision of law or regulation (including the 

3 consolidated return regulations), and 

4 (3) a donor from changing the form of the pat5 ent or similar property to property of a form for 

6 which different deduction rules would apply. 

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

8 this section shall apply to contributions made after June 

9 3, 2004. 

10 SEC. 683. INCREASED REPORTING FOR NONCASH CHARI11 TABLE CONTRIBUTIONS. 

12 (a) IN GENERAL.—Subsection (f) of section 170 (re13 lating to disallowance of deduction in certain cases and 

14 special rules) is amended by adding after paragraph (10) 

15 the following new paragraph: 

16 ‘‘(11) QUALIFIED APPRAISAL AND OTHER DOC17 UMENTATION FOR CERTAIN CONTRIBUTIONS.— 

18 ‘‘(A) IN GENERAL.— 

19 ‘‘(i) DENIAL OF DEDUCTION.—In the 

20 case of an individual, partnership, or cor21 poration, no deduction shall be allowed 

22 under subsection (a) for any contribution 

23 of property for which a deduction of more 

24 than $500 is claimed unless such person 

25 meets the requirements of subparagraphs 
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1 (B), (C), and (D), as the case may be, 

2 with respect to such contribution. 

3 ‘‘(ii) EXCEPTIONS.— 

4 ‘‘(I) READILY VALUED PROP5 ERTY.—Subparagraphs (C) and (D) 

6 shall not apply to cash, property de7 scribed in section 1221(a)(1), and 

8 publicly traded securities (as defined 

9 in section 6050L(a)(2)(B)). 

10 ‘‘(II) REASONABLE CAUSE.— 

11 Clause (i) shall not apply if it is 

12 shown that the failure to meet such 

13 requirements is due to reasonable 

14 cause and not to willful neglect. 

15 ‘‘(B) PROPERTY DESCRIPTION FOR CON16 TRIBUTIONS OF MORE THAN $500.—In the case 

17 of contributions of property for which a deduc18 tion of more than $500 is claimed, the require19 ments of this subparagraph are met if the indi20 vidual, partnership or corporation includes with 

21 the return for the taxable year in which the 

22 contribution is made a description of such prop23 erty and such other information as the Sec24 retary may require. The requirements of this 

25 subparagraph shall not apply to a C corporation 
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1 which is not a personal service corporation or a 

2 closely held C corporation. 

3 ‘‘(C) QUALIFIED APPRAISAL FOR CON4 TRIBUTIONS OF MORE THAN $5,000.—In the 

5 case of contributions of property for which a 

6 deduction of more than $5,000 is claimed, the 

7 requirements of this subparagraph are met if 

8 the individual, partnership, or corporation ob9 tains a qualified appraisal of such property and 

10 attaches to the return for the taxable year in 

11 which such contribution is made such informa12 tion regarding such property and such appraisal 

13 as the Secretary may require. 

14 ‘‘(D) SUBSTANTIATION FOR CONTRIBU15 TIONS OF MORE THAN $500,000.—In the case of 

16 contributions of property for which a deduction 

17 of more than $500,000 is claimed, the require18 ments of this subparagraph are met if the indi19 vidual, partnership, or corporation attaches to 

20 the return for the taxable year a qualified ap21 praisal of such property. 

22 ‘‘(E) QUALIFIED APPRAISAL.—For pur23 poses of this paragraph, the term ‘qualified ap24 praisal’ means, with respect to any property, an 

25 appraisal of such property which is treated for 
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1 purposes of this paragraph as a qualified ap2 praisal under regulations or other guidance pre3 scribed by the Secretary. 

4 ‘‘(F) AGGREGATION OF SIMILAR ITEMS OF

5 PROPERTY.—For purposes of determining 

6 thresholds under this paragraph, property and 

7 all similar items of property donated to 1 or 

8 more donees shall be treated as 1 property. 

9 ‘‘(G) SPECIAL RULE FOR PASS-THRU ENTI10 TIES.—In the case of a partnership or S cor11 poration, this paragraph shall be applied at the 

12 entity level, except that the deduction shall be 

13 denied at the partner or shareholder level. 

14 ‘‘(H) REGULATIONS.—The Secretary may 

15 prescribe such regulations as may be necessary 

16 or appropriate to carry out the purposes of this 

17 paragraph, including regulations that may pro18 vide that some or all of the requirements of this 

19 paragraph do not apply in appropriate cases.’’. 

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

21 this section shall apply to contributions made after June 

22 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 TITLE VII—MARKET REFORM 

4 FOR TOBACCO GROWERS 

5 SEC. 701. SHORT TITLE. 

6 This title may be cited as the ‘‘Fair and Equitable 

7 Tobacco Reform Act of 2004’’. 

8 SEC. 702. EFFECTIVE DATE. 

9 This title and the amendments made by this title 

10 shall apply beginning with the 2005 marketing year of 

11 each kind of tobacco. 

12 Subtitle A—Termination of Federal 

13 Tobacco Quota and Price Sup14 port Programs 

15 SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM 

16 AND RELATED PROVISIONS. 

17 (a) MARKETING QUOTAS.—Part I of subtitle B of 

18 title III of the Agricultural Adjustment Act of 1938 (7 

19 U.S.C. 1311 et seq.) is repealed. 

20 (b) PROCESSING.—Section 9(b) of the Agricultural 

21 Adjustment Act (7 U.S.C. 609(b)), reenacted with amend22 ments by the Agricultural Marketing Agreement Act of 

23 1937, is amended— 

24 (1) in paragraph (2), by striking ‘‘tobacco,’’; 

25 and 
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1 (2) in paragraph (6)(B)(i), by striking ‘‘, or, in 

2 the case of tobacco, is less than the fair exchange 

3 value by not more than 10 per centum,’’. 

4 (c) DECLARATION OF POLICY.—Section 2 of the Ag5 ricultural Adjustment Act of 1938 (7 U.S.C. 1282) is 

6 amended by striking ‘‘tobacco,’’. 

7 (d) DEFINITIONS.—Section 301(b) of the Agricul8 tural Adjustment Act of 1938 (7 U.S.C. 1301(b)) is 

9 amended— 

10 (1) in paragraph (3)— 

11 (A) by striking subparagraph (C); and 

12 (B) by redesignating subparagraph (D) as 

13 subparagraph (C); 

14 (2) in paragraph (6)(A), by striking ‘‘tobacco,’’; 

15 (3) in paragraph (10)— 

16 (A) by striking subparagraph (B); and 

17 (B) by redesignating subparagraph (C) as 

18 subparagraph (B); 

19 (4) in paragraph (11)(B), by striking ‘‘and to20 bacco’’; 

21 (5) in paragraph (12), by striking ‘‘tobacco,’’; 

22 (6) in paragraph (14)— 

23 (A) in subparagraph (A), by striking 

24 ‘‘(A)’’; and 
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1 (B) by striking subparagraphs (B), (C), 

2 and (D); 

3 (7) by striking paragraph (15); 

4 (8) in paragraph (16)— 

5 (A) by striking subparagraph (B); and 

6 (B) by redesignating subparagraph (C) as 

7 subparagraph (B); 

8 (9) by striking paragraph (17); and 

9 (10) by redesignating paragraph (16) as para10 graph (15). 

11 (e) PARITY PAYMENTS.—Section 303 of the Agricul12 tural Adjustment Act of 1938 (7 U.S.C. 1303) is amended 

13 in the first sentence by striking ‘‘rice, or tobacco,’’ and 

14 inserting ‘‘or rice,’’. 

15 (f) ADMINISTRATIVE PROVISIONS.—Section 361 of 

16 the Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) 

17 is amended by striking ‘‘tobacco,’’. 

18 (g) ADJUSTMENT OF QUOTAS.—Section 371 of the 

19 Agricultural Adjustment Act of 1938 (7 U.S.C. 1371) is 

20 amended— 

21 (1) in the first sentence of subsection (a), by 

22 striking ‘‘rice, or tobacco’’ and inserting ‘‘or rice’’; 

23 and 

24 (2) in the first sentence of subsection (b), by 

25 striking ‘‘rice, or tobacco’’ and inserting ‘‘or rice’’. 
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1 (h) REGULATIONS.—Section 375 of the Agricultural 

2 Adjustment Act of 1938 (7 U.S.C. 1375) is amended— 

3 (1) in subsection (a), by striking ‘‘peanuts, or 

4 tobacco’’ and inserting ‘‘or peanuts’’; and 

5 (2) by striking subsection (c). 

6 (i) EMINENT DOMAIN.—Section 378 of the Agricul7 tural Adjustment Act of 1938 (7 U.S.C. 1378) is amend8 ed— 

9 (1) in the first sentence of subsection (c), by 

10 striking ‘‘cotton, and tobacco’’ and inserting ‘‘and 

11 cotton’’; and 

12 (2) by striking subsections (d), (e), and (f). 

13 (j) BURLEY TOBACCO FARM RECONSTITUTION.— 

14 Section 379 of the Agricultural Adjustment Act of 1938 

15 (7 U.S.C. 1379) is amended— 

16 (1) in subsection (a)— 

17 (A) by striking ‘‘(a)’’; and 

18 (B) in paragraph (6), by striking ‘‘, but 

19 this clause (6) shall not be applicable in the 

20 case of burley tobacco’’; and 

21 (2) by striking subsections (b) and (c). 

22 (k) ACREAGE-POUNDAGE QUOTAS.—Section 4 of the 

23 Act of April 16, 1955 (Public Law 89–12; 7 U.S.C. 1314c 

24 note), is repealed. 
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1 (l) BURLEY TOBACCO ACREAGE ALLOTMENTS.—The 

2 Act of July 12, 1952 (7 U.S.C. 1315), is repealed. 

3 (m) TRANSFER OF ALLOTMENTS.—Section 703 of 

4 the Food and Agriculture Act of 1965 (7 U.S.C. 1316) 

5 is repealed. 

6 (n) ADVANCE RECOURSE LOANS.—Section 

7 13(a)(2)(B) of the Food Security Improvements Act of 

8 1986 (7 U.S.C. 1433c–1(a)(2)(B)) is amended by striking 

9 ‘‘tobacco and’’. 

10 (o) TOBACCO FIELD MEASUREMENT.—Section 1112 

11 of the Omnibus Budget Reconciliation Act of 1987 (Public 

12 Law 100–203) is amended by striking subsection (c). 

13 SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT 

14 PROGRAM AND RELATED PROVISIONS. 

15 (a) TERMINATION OF TOBACCO PRICE SUPPORT AND

16 NO NET COST PROVISIONS.—Sections 106, 106A, and 

17 106B of the Agricultural Act of 1949 (7 U.S.C. 1445, 

18 1445–1, 1445–2) are repealed. 

19 (b) PARITY PRICE SUPPORT.—Section 101 of the Ag20 ricultural Act of 1949 (7 U.S.C. 1441) is amended— 

21 (1) in the first sentence of subsection (a), by 

22 striking ‘‘tobacco (except as otherwise provided here23 in), corn,’’ and inserting ‘‘corn’’; 

24 (2) by striking subsections (c), (g), (h), and (i); 

25 (3) in subsection (d)(3)— 
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1 (A) by striking ‘‘, except tobacco,’’; and 

2 (B) by striking ‘‘and no price support shall 

3 be made available for any crop of tobacco for 

4 which marketing quotas have been disapproved 

5 by producers;’’; and 

6 (4) by redesignating subsections (d) and (e) as 

7 subsections (c) and (d), respectively. 

8 (c) DEFINITION OF BASIC AGRICULTURAL COM9 MODITY.—Section 408(c) of the Agricultural Act of 1949 

10 (7 U.S.C. 1428(c)) is amended by striking ‘‘tobacco,’’. 

11 (d) POWERS OF COMMODITY CREDIT CORPORA12 TION.—Section 5 of the Commodity Credit Corporation 

13 Charter Act (15 U.S.C. 714c) is amended by inserting 

14 ‘‘(other than tobacco)’’ after ‘‘agricultural commodities’’ 

15 each place it appears. 

16 SEC. 713. CONTINUATION OF LIABILITY AND NO NET LOSS 

17 ASSESSMENTS TO PREVENT LOSSES ON 

18 PRICE SUPPORT LOANS. 

19 (a) LIABILITY.—The amendments made by this sub20 title shall not affect the liability of any person under any 

21 provision of law so amended with respect to any crop of 

22 tobacco planted before the effective date applicable to that 

23 kind of tobacco under section 702. 

24 (b) ASSESSMENT AUTHORITY.— 
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1 (1) ASSESSMENTS TO COVER OUTSTANDING

2 LOAN COSTS.—The Commodity Credit Corporation 

3 shall impose and collect an assessment on the sale 

4 of 2005 and subsequent crops of each kind of to5 bacco and on the importation of tobacco in such 

6 amounts as may be necessary to obtain funds suffi7 cient to cover any losses incurred by the Corporation 

8 with respect to price support loans that— 

9 (A) were made for that kind of tobacco 

10 under section 106 of the Agricultural Act of 

11 1949 (7 U.S.C. 1445), before the repeal of such 

12 section by section 712 of this Act; and 

13 (B) remain outstanding on or after the 

14 date of the enactment of this Act. 

15 (2) ADMINISTRATION.—Assessments under 

16 paragraph (1) shall be administered in the manner 

17 provided for in section 106B of the Agricultural Act 

18 of 1949 (7 U.S.C. 1445–2), as in effect the day be19 fore the date of the enactment of this Act. To cover 

20 the costs of administering such assessments, the 

21 Commodity Credit Corporation shall use funds re22 maining in the No Net Cost Tobacco Funds and No 

23 Net Cost Tobacco Accounts established pursuant to 

24 sections 106A and 106B of the Agricultural Act of 

25 1949 (7 U.S.C. 1445–1, 1445–2). 
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1 Subtitle B—Transitional Payments 

2 to Tobacco Quota Holders and 

3 Active Producers of Tobacco 

4 SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER 

5 AND QUOTA HOLDER. 

6 In this subtitle: 

7 (1) ACTIVE TOBACCO PRODUCER.—The term 

8 ‘‘active tobacco producer’’ means an owner, oper9 ator, landlord, tenant, or sharecropper who— 

10 (A) shared in the risk of producing tobacco 

11 on a farm where tobacco was produced or con12 sidered planted pursuant to a tobacco farm 

13 marketing quota or farm acreage allotment es14 tablished under part I of subtitle B of title III 

15 of the Agricultural Adjustment Act of 1938 (7 

16 U.S.C. 1311 et seq.) for the 2004 marketing 

17 year; and 

18 (B) was actively engaged on that farm. 

19 (2) CONSIDERED PLANTED.—The term ‘‘con20 sidered planted’’ means tobacco that was planted, 

21 but failed to be produced as a result of a natural 

22 disaster, as determined by the Secretary. 

23 (3) TOBACCO QUOTA HOLDER.—The term ‘‘to24 bacco quota holder’’ means a person that was an 

25 owner of a farm, as of July 1, 2004, for which a 
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1 basic tobacco farm marketing quota or farm acreage 

2 allotment for quota tobacco was established for the 

3 2004 tobacco marketing year. 

4 (4) SECRETARY.—The term ‘‘Secretary’’ means 

5 the Secretary of Agriculture. 

6 SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS. 

7 (a) PAYMENT REQUIRED.—The Secretary shall make 

8 payments to each eligible tobacco quota holder for the ter9 mination of tobacco marketing quotas and related price 

10 support under subtitle A, which shall constitute full and 

11 fair compensation for any losses relating to such termi12 nation. 

13 (b) ELIGIBILITY.—To be eligible to receive a payment 

14 under this section, a person shall submit to the Secretary 

15 an application containing such information as the Sec16 retary may require to demonstrate to the satisfaction of 

17 the Secretary that the person satisfies the definition of 

18 tobacco quota holder. The application shall be submitted 

19 within such time, in such form, and in such manner as 

20 the Secretary may require. 

21 (c) INDIVIDUAL BASE QUOTA LEVEL.— 

22 (1) IN GENERAL.—The Secretary shall establish 

23 a base quota level applicable to each eligible tobacco 

24 quota holder identified under subsection (b). 
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1 (2) POUNDAGE QUOTAS.—Subject to adjust2 ment under subsection (d), for each kind of tobacco 

3 for which the marketing quota is expressed in 

4 pounds, the base quota level for each tobacco quota 

5 holder shall be equal to the basic tobacco marketing 

6 quota under the Agriculture Adjustment Act of 1938 

7 for the marketing year in effect on the date of the 

8 enactment of this Act for quota tobacco on the farm 

9 owned by the tobacco quota holder. 

10 (3) MARKETING QUOTAS OTHER THAN POUND11 AGE QUOTAS.—Subject to adjustment under sub12 section (d), for each kind of tobacco for which there 

13 is marketing quota or allotment on an acreage basis, 

14 the base quota level for each tobacco quota holder 

15 shall be the amount equal to the product obtained 

16 by multiplying— 

17 (A) the basic tobacco farm marketing 

18 quota or allotment for the marketing year in ef19 fect on the date of the enactment of this Act, 

20 as established by the Secretary for quota to21 bacco on the farm owned by the tobacco quota 

22 holder; by 

23 (B) the average county production yield 

24 per acre for the county in which the farm is lo-
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1 cated for the kind of tobacco for that marketing 

2 year. 

3 (d) TREATMENT OF CERTAIN CONTRACTS AND

4 AGREEMENTS.— 

5 (1) EFFECT OF PURCHASE CONTRACT.—If 

6 there was an agreement for the purchase of all or 

7 part of a farm described in subsection (c) as of the 

8 date of the enactment of this Act, and the parties 

9 to the sale are unable to agree to the disposition of 

10 eligibility for payments under this section, the Sec11 retary, taking into account any transfer of quota 

12 that has been agreed to, shall provide for the equi13 table division of the payments among the parties by 

14 adjusting the determination of who is the tobacco 

15 quota holder with respect to particular pounds of the 

16 quota. 

17 (2) EFFECT OF AGREEMENT FOR PERMANENT

18 QUOTA TRANSFER.—If the Secretary determines 

19 that there was in existence, as of the day before the 

20 date of the enactment of this Act, an agreement for 

21 the permanent transfer of quota, but that the trans22 fer was not completed by that date, the Secretary 

23 shall consider the tobacco quota holder to be the 

24 party to the agreement that, as of that date, was the 
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1 owner of the farm to which the quota was to be 

2 transferred. 

3 (e) TOTAL PAYMENT AMOUNTS BASED ON 2002 

4 MARKETING YEAR.— 

5 (1) CALCULATION OF ANNUAL PAYMENT

6 AMOUNT.—During fiscal years 2005 through 2009, 

7 the Secretary shall make payments to all eligible to8 bacco quota holders identified under subsection (b) 

9 in an annual amount equal to the product obtained 

10 by multiplying, for each kind of tobacco— 

11 (A) $1.40 per pound; by 

12 (B) the total national basic marketing 

13 quota established under the Agriculture Adjust14 ment Act of 1938 for the 2002 marketing year 

15 for that kind of tobacco. 

16 (2) MARKETING QUOTAS OTHER THAN POUND17 AGE QUOTAS.—For each kind of tobacco for which 

18 there is a marketing quota or allotment on an acre19 age basis, the Secretary shall convert the tobacco 

20 farm marketing quotas or allotments established 

21 under the Agriculture Adjustment Act of 1938 for 

22 the 2002 marketing year for that kind of tobacco as 

23 the Secretary considers appropriate. 

24 (f) INDIVIDUAL PAYMENT AMOUNTS.—The annual 

25 payment amount for each eligible tobacco quota holder 
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1 with respect to a kind of tobacco under this section shall 

2 bear the same ratio to the amount determined by the Sec3 retary under subsection (e) with respect to that kind of 

4 tobacco as the individual base quota level of that eligible 

5 tobacco quota holder under subsection (c) with respect to 

6 that kind of tobacco bears to the total base quota levels 

7 of all eligible tobacco quota holders with respect to that 

8 kind of tobacco. 

9 (g) DEATH OF TOBACCO QUOTA HOLDER.—If a to10 bacco quota holder who is entitled to payments under this 

11 section dies and is survived by a spouse or one or more 

12 dependents, the right to receive the payments shall trans13 fer to the surviving spouse or, if there is no surviving 

14 spouse, to the estate of the tobacco quota holder. 

15 SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS 

16 OF QUOTA TOBACCO. 

17 (a) TRANSITION PAYMENTS REQUIRED.—The Sec18 retary shall make transition payments under this section 

19 to eligible active producers of quota tobacco. 

20 (b) ELIGIBILITY.—To be eligible to receive a transi21 tion payment under this section, a person shall submit to 

22 the Secretary an application containing such information 

23 as the Secretary may require to demonstrate to the satis24 faction of the Secretary that the person satisfies the defi25 nition of active producer of quota tobacco. The application 
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1 shall be submitted within such time, in such form, and 

2 in such manner as the Secretary may require. 

3 (c) CURRENT PRODUCTION BASE.—The Secretary 

4 shall establish a production base applicable to each eligible 

5 active producer of quota tobacco identified under sub6 section (b). A producer’s production base shall be equal 

7 to the quantity, in pounds, of quota tobacco subject to the 

8 basic marketing quota marketed or considered planted by 

9 the producer under the Agriculture Adjustment Act of 

10 1938 for the marketing year in effect on the date of the 

11 enactment of this Act. 

12 (d) TOTAL PAYMENT AMOUNTS BASED ON 2002 

13 MARKETING YEAR.— 

14 (1) CALCULATION OF ANNUAL PAYMENT

15 AMOUNT.—During fiscal years 2005 through 2009, 

16 the Secretary shall make payments to all eligible ac17 tive producers of quota tobacco identified under sub18 section (b) in an annual amount equal to the prod19 uct obtained by multiplying, for each kind of to20 bacco— 

21 (A) $0.60 per pound; by 

22 (B) the total national effective marketing 

23 quota established under the Agriculture Adjust24 ment Act of 1938 for the 2002 marketing year 

25 for that kind of tobacco. 
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1 (2) MARKETING QUOTAS OTHER THAN POUND2 AGE QUOTAS.—For each kind of tobacco for which 

3 there is a marketing quota or allotment on an acre4 age basis, the Secretary shall convert the tobacco 

5 farm marketing quotas or allotments established 

6 under the Agriculture Adjustment Act of 1938 for 

7 the 2002 marketing year for that kind of tobacco to 

8 a poundage basis before executing the mathematical 

9 equation specified in paragraph (1). 

10 (e) INDIVIDUAL PAYMENT AMOUNTS.—The annual 

11 payment amount for each eligible active producer of quota 

12 tobacco identified under subsection (b) with respect to a 

13 kind of tobacco under this section shall bear the same 

14 ratio to the amount determined by the Secretary under 

15 subsection (d) with respect to that kind of tobacco as the 

16 individual production base of that eligible active producer 

17 under subsection (c) with respect to that kind of tobacco 

18 bears to the total production bases determined under that 

19 subsection for all eligible active producers of that kind of 

20 tobacco. 

21 (f) DEATH OF TOBACCO PRODUCER.—If a tobacco 

22 producer who is entitled to payments under this section 

23 dies and is survived by a spouse or one or more depend24 ents, the right to receive the payments shall transfer to 
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1 the surviving spouse or, if there is no surviving spouse, 

2 to the estate of the tobacco producer. 

3 SEC. 724. RESOLUTION OF DISPUTES. 

4 Any dispute regarding the eligibility of a person to 

5 receive a payment under this subtitle, or the amount of 

6 the payment, shall be resolved by the county committee 

7 established under section 8 of the Soil Conservation and 

8 Domestic Allotment Act (16 U.S.C. 590h) for the county 

9 or other area in which the farming operation of the person 

10 is located. 

11 SEC. 725. SOURCE OF FUNDS FOR PAYMENTS. 

12 There is hereby appropriated to the Secretary, from 

13 amounts in the general fund of the Treasury, such 

14 amounts as the Secretary needs in order to make the pay15 ments required by sections 722 and 723, except that such 

16 amounts shall not exceed the lesser of— 

17 (1) amounts received in the Treasury under 

18 chapter 52 of the Internal Revenue Code of 1986 

19 (relating to tobacco products and cigarette papers 

20 and tubes) during the period beginning on October 

21 1, 2004, and ending on September 30, 2009, or 

22 (2) $9,600,000,000. 
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1 TITLE VIII—TRADE PROVISIONS 

2 SEC. 801. CEILING FANS. 

3 (a) IN GENERAL.—Subchapter II of chapter 99 of 

4 the Harmonized Tariff Schedule of the United States is 

5 amended by inserting in numerical sequence the following 

6 new heading: 

‘‘ 9902.84.14 Ceiling fans for permanent installation (provided for in subheading 

8414.51.00) ....................................... Free No change No change On or before 

12/31/2006 ’’. 

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

8 this section applies to goods entered, or withdrawn from 

9 warehouse, for consumption on or after the 15th day after 

10 the date of enactment of this Act. 

11 SEC. 802. CERTAIN STEAM GENERATORS, AND CERTAIN RE12 ACTOR VESSEL HEADS, USED IN NUCLEAR 

13 FACILITIES. 

14 (a) CERTAIN STEAM GENERATORS.—Heading 

15 9902.84.02 of the Harmonized Tariff Schedule of the 

16 United States is amended by striking ‘‘12/31/2006’’ and 

17 inserting ‘‘12/31/2008’’. 

18 (b) CERTAIN REACTOR VESSEL HEADS.—Sub19 chapter II of chapter 99 of the Harmonized Tariff Sched20 ule of the United States is amended by inserting in numer21 ical sequence the following new heading: 
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‘‘ 9902.84.03 Reactor vessel 

heads for nuclear 

reactors (provided for in subheading 

8401.40.00) ....... Free No change No change On or before 

12/31/2008 ’’. 

1 (c) EFFECTIVE DATE.— 

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

3 by subsection (a) shall take effect on the date of the 

4 enactment of this Act. 

5 (2) SUBSECTION (b).—The amendment made 

6 by subsection (b) shall apply to goods entered, or 

7 withdrawn from warehouse, for consumption on or 

8 after the 15th day after the date of the enactment 

9 of this Act. 

Passed the House of Representatives June 17, 2004. 

Attest: 

Clerk.