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[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4520 Introduced in House (IH)]

108th CONGRESS
  2d Session
                                H. R. 4520

  To amend the Internal Revenue Code of 1986 to remove impediments in 
  such Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at home and 
                                abroad.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                              June 4, 2004

     Mr. Thomas (for himself, Mr. Crane, Mr. Shaw, Mrs. Johnson of 
   Connecticut, Mr. Houghton, Mr. Herger, Mr. McCrery, Mr. Camp, Mr. 
Ramstad, Mr. Sam Johnson of Texas, Ms. Dunn, Mr. Collins, Mr. Portman, 
   Mr. English, Mr. Hayworth, Mr. Hulshof, Mr. McInnis, Mr. Lewis of 
  Kentucky, Mr. Foley, Mr. Brady of Texas, and Mr. Ryan of Wisconsin) 
 introduced the following bill; which was referred to the Committee on 
Ways and Means, and in addition to the Committee on Agriculture, for a 
 period to be subsequently determined by the Speaker, in each case for 
consideration of such provisions as fall within the jurisdiction of the 
                          committee concerned

_______________________________________________________________________

                                 A BILL

 
  To amend the Internal Revenue Code of 1986 to remove impediments in 
  such Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at home and 
                                abroad.

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

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``American Jobs 
Creation Act of 2004''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents of 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.
Sec. 226. Use of passive activity loss and at-risk amounts by qualified 
                            subchapter S trust income beneficiaries.
Sec. 227. Exclusion of investment securities income from passive income 
                            test for bank S corporations.
Sec. 228. Treatment of bank director shares.
Sec. 229. Relief from inadvertently invalid qualified subchapter S 
                            subsidiary elections and terminations.
Sec. 230. Information returns for qualified subchapter S subsidiaries.
Sec. 231. Repayment of loans for qualifying employer securities.
               Subtitle D--Alternative Minimum Tax Relief

Sec. 241. Foreign tax credit under alternative minimum tax.
Sec. 242. Expansion of exemption from alternative minimum tax for small 
                            corporations.
Sec. 243. Income averaging for farmers not to increase alternative 
                            minimum tax.
    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

Sec. 251. Reduced rates of tax on gasohol replaced with excise tax 
                            credit; repeal of other alcohol-based fuel 
                            incentives; etc.
Sec. 252. Alcohol fuel subsidies borne by general fund.
   Subtitle F--Stock Options and Employee Stock Purchase Plan Stock 
                                Options

Sec. 261. Exclusion of incentive stock options and employee stock 
                            purchase plan stock options from wages.
  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

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

Sec. 281. Special rules for livestock sold on account of weather-
                            related conditions.
Sec. 282. Payment of dividends on stock of cooperatives without 
                            reducing patronage dividends.
Sec. 283. Capital gain treatment under section 631(b) to apply to 
                            outright sales by landowners.
Sec. 284. Distributions from publicly traded partnerships treated as 
                            qualifying income of regulated investment 
                            companies.
Sec. 285. Improvements related to real estate investment trusts.
Sec. 286. Treatment of certain dividends of regulated investment 
                            companies.
Sec. 287. Taxation of certain settlement funds.
Sec. 288. Expansion of human clinical trials qualifying for orphan drug 
                            credit.
Sec. 289. Simplification of excise tax imposed on bows and arrows.
Sec. 290. Repeal of excise tax on fishing tackle boxes.
Sec. 291. Sonar devices suitable for finding fish.
Sec. 292. Income tax credit to distilled spirits wholesalers for cost 
                            of carrying Federal excise taxes on bottled 
                            distilled spirits.
Sec. 293. Suspension of occupational taxes relating to distilled 
                            spirits, wine, and beer.
 TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES

Sec. 301. Interest expense allocation rules.
Sec. 302. Recharacterization of overall domestic loss.
Sec. 303. Reduction to 2 foreign tax credit baskets.
Sec. 304. Look-thru rules to apply to dividends from noncontrolled 
                            section 902 corporations.
Sec. 305. Attribution of stock ownership through partnerships to apply 
                            in determining section 902 and 960 credits.
Sec. 306. Clarification of treatment of certain transfers of intangible 
                            property.
Sec. 307. United States property not to include certain assets of 
                            controlled foreign corporation.
Sec. 308. Election not to use average exchange rate for foreign tax 
                            paid other than in functional currency.
Sec. 309. Repeal of withholding tax on dividends from certain foreign 
                            corporations.
Sec. 310. Provide equal treatment for interest paid by foreign 
                            partnerships and foreign corporations.
Sec. 311. Look-thru treatment of payments between related controlled 
                            foreign corporations under foreign personal 
                            holding company income rules.
Sec. 312. Look-thru treatment for sales of partnership interests.
Sec. 313. Repeal of foreign personal holding company rules and foreign 
                            investment company rules.
Sec. 314. Determination of foreign personal holding company income with 
                            respect to transactions in commodities.
Sec. 315. Modifications to treatment of aircraft leasing and shipping 
                            income.
Sec. 316. Modification of exceptions under subpart F for active 
                            financing.
           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

Sec. 401. Allowance of nonrefundable personal credits against regular 
                            and minimum tax liability.
Sec. 402. Extension of research credit.
Sec. 403. Extension of credit for electricity produced from certain 
                            renewable resources.
Sec. 404. Indian employment tax credit.
Sec. 405. Work opportunity credit.
Sec. 406. Welfare-to-work credit.
Sec. 407. Certain expenses of elementary and secondary school teachers.
Sec. 408. Extension of accelerated depreciation benefit for property on 
                            Indian reservations.
Sec. 409. Charitable contributions of computer technology and equipment 
                            used for educational purposes.
Sec. 410. Expensing of environmental remediation costs.
Sec. 411. Availability of medical savings accounts.
Sec. 412. Taxable income limit on percentage depletion for oil and 
                            natural gas produced from marginal 
                            properties.
Sec. 413. Qualified zone academy bonds.
Sec. 414. District of Columbia.
Sec. 415. Extension of certain New York Liberty Zone bond financing.
Sec. 416. Disclosures relating to terrorist activities.
Sec. 417. Disclosure of return information relating to student loans.
Sec. 418. Cover over of tax on distilled spirits.
Sec. 419. Joint review of strategic plans and budget for the Internal 
                            Revenue Service.
Sec. 420. Parity in the application of certain limits to mental health 
                            benefits.
Sec. 421. Combined employment tax reporting project.
Sec. 422. Clean-fuel vehicles.
       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

Sec. 501. Deduction of State and local general sales taxes in lieu of 
                            State and local income taxes.
                      TITLE VI--REVENUE PROVISIONS

 Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and 
                         Corporate Expatriation

Sec. 601. Tax treatment of expatriated entities and their foreign 
                            parents.
Sec. 602. Excise tax on stock compensation of insiders in expatriated 
                            corporations.
Sec. 603. Reinsurance of United States risks in foreign jurisdictions.
Sec. 604. Revision of tax rules on expatriation of individuals.
Sec. 605. Reporting of taxable mergers and acquisitions.
Sec. 606. Studies.
            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

Sec. 611. Penalty for failing to disclose reportable transactions.
Sec. 612. Accuracy-related penalty for listed transactions, other 
                            reportable transactions having a 
                            significant tax avoidance purpose, etc.
Sec. 613. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 614. Statute of limitations for taxable years for which required 
                            listed transactions not reported.
Sec. 615. Disclosure of reportable transactions.
Sec. 616. Failure to furnish information regarding reportable 
                            transactions.
Sec. 617. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 618. Penalty on promoters of tax shelters.
Sec. 619. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
Sec. 620. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 621. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 622. Regulation of individuals practicing before the Department of 
                            the Treasury.
                       Part II--Other Provisions

Sec. 631. Treatment of stripped interests in bond and preferred stock 
                            funds, etc.
Sec. 632. Minimum holding period for foreign tax credit on withholding 
                            taxes on income other than dividends.
Sec. 633. Disallowance of certain partnership loss transfers.
Sec. 634. No reduction of basis under section 734 in stock held by 
                            partnership in corporate partner.
Sec. 635. Repeal of special rules for FASITs.
Sec. 636. Limitation on transfer of built-in losses on REMIC residuals.
Sec. 637. Clarification of banking business for purposes of determining 
                            investment of earnings in United States 
                            property.
Sec. 638. Alternative tax for certain small insurance companies.
Sec. 639. Denial of deduction for interest on underpayments 
                            attributable to nondisclosed reportable 
                            transactions.
Sec. 640. Clarification of rules for payment of estimated tax for 
                            certain deemed asset sales.
Sec. 641. Recognition of gain from the sale of a principal residence 
                            acquired in a like-kind exchange within 5 
                            years of sale.
Sec. 642. Prevention of mismatching of interest and original issue 
                            discount deductions and income inclusions 
                            in transactions with related foreign 
                            persons.
Sec. 643. Exclusion from gross income for interest on overpayments of 
                            income tax by individuals.
Sec. 644. Deposits made to suspend running of interest on potential 
                            underpayments.
Sec. 645. Partial payment of tax liability in installment agreements.
Sec. 646. Affirmation of consolidated return regulation authority.
                           Part III--Leasing

Sec. 647. Reform of tax treatment of certain leasing arrangements.
Sec. 648. Limitation on deductions allocable to property used by 
                            governments or other tax-exempt entities.
Sec. 649. Effective date.
               Subtitle C--Reduction of Fuel Tax Evasion

Sec. 651. Exemption from certain excise taxes for mobile machinery.
Sec. 652. Taxation of aviation-grade kerosene.
Sec. 653. Dye injection equipment.
Sec. 654. Authority to inspect on-site records.
Sec. 655. Registration of pipeline or vessel operators required for 
                            exemption of bulk transfers to registered 
                            terminals or refineries.
Sec. 656. Display of registration.
Sec. 657. Penalties for failure to register and failure to report.
Sec. 658. Collection from customs bond where importer not registered.
Sec. 659. Modifications of tax on use of certain vehicles.
Sec. 660. Modification of ultimate vendor refund claims with respect to 
                            farming.
Sec. 661. Dedication of revenues from certain penalties to the Highway 
                            Trust Fund.
Sec. 662. Taxable fuel refunds for certain ultimate vendors.
Sec. 663. Two-party exchanges.
Sec. 664. Simplification of tax on tires.
          Subtitle D--Nonqualified Deferred Compensation Plans

Sec. 671. Treatment of nonqualified deferred compensation plans.
                  Subtitle E--Other Revenue Provisions

Sec. 681. Qualified tax collection contracts.
Sec. 682. Treatment of charitable contributions of patents and similar 
                            property.
Sec. 683. Increased reporting for noncash charitable contributions.
Sec. 684. Donations of motor vehicles, boats, and aircraft.
Sec. 685. Extension of amortization of intangibles to sports 
                            franchises.
Sec. 686. Modification of continuing levy on payments to Federal 
                            venders.
Sec. 687. Modification of straddle rules.
Sec. 688. Addition of vaccines against hepatitis A to list of taxable 
                            vaccines.
Sec. 689. Addition of vaccines against influenza to list of taxable 
                            vaccines.
Sec. 690. Extension of IRS user fees.
Sec. 691. COBRA fees.
Sec. 692. Safe harbor for churches.
              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

Sec. 701. Short title.
Sec. 702. Effective date.
  Subtitle A--Termination of Federal Tobacco Quota and Price Support 
                                Programs

Sec. 711. Termination of tobacco quota program and related provisions.
Sec. 712. Termination of tobacco price support program and related 
                            provisions.
Sec. 713. Liability.
 Subtitle B--Transitional Payments to Tobacco Quota Holders and Active 
                          Producers of Tobacco

Sec. 721. Definitions of active tobacco producer and quota holder.
Sec. 722. Payments to tobacco quota holders.
Sec. 723. Transition payments for active producers of quota tobacco.
Sec. 724. Resolution of disputes.
Sec. 725. Source of funds for payments.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

    (a) In General.--Section 114 is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subpart E of part III of subchapter N of chapter 1 
        (relating to qualifying foreign trade income) is hereby 
        repealed.
            (2) The table of subparts for such part III is amended by 
        striking the item relating to subpart E.
            (3) The table of sections for part III of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        114.
            (4) The second sentence of section 56(g)(4)(B)(i) is 
        amended by striking ``114 or''.
            (5) Section 275(a) is amended--
                    (A) by inserting ``or'' at the end of paragraph 
                (4)(A), by striking ``or'' at the end of paragraph 
                (4)(B) and inserting a period, and by striking 
                subparagraph (C), and
                    (B) by striking the last sentence.
            (6) Paragraph (3) of section 864(e) is amended--
                    (A) by striking:
            ``(3) Tax-exempt assets not taken into account.--
                    ``(A) In general.--For purposes of''; and 
                inserting:
            ``(3) Tax-exempt assets not taken into account.--For 
        purposes of'', and
                    (B) by striking subparagraph (B).
            (7) Section 903 is amended by striking ``114, 164(a),'' and 
        inserting ``164(a)''.
            (8) Section 999(c)(1) is amended by striking 
        ``941(a)(5),''.
    (c) Effective Date.--Except as provided in subsection (d), the 
amendments made by this section shall apply to transactions after 
December 31, 2004.
    (d) Transitional Rule for 2005 and 2006.--
            (1) In general.--In the case of transactions during 2005 or 
        2006, the amount includible in gross income by reason of the 
        amendments made by this section shall not exceed the applicable 
        percentage of the amount which would have been so included but 
        for this subsection.
            (2) Applicable percentage.--For purposes of paragraph (1), 
        the applicable percentage shall be as follows:
                    (A) For 2005, the applicable percentage shall be 20 
                percent.
                    (B) For 2006, the applicable percentage shall be 40 
                percent.
    (e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of 
this Act, a corporation for which an election is in effect under 
section 943(e) of the Internal Revenue Code of 1986 revokes such 
election, no gain or loss shall be recognized with respect to property 
treated as transferred under clause (ii) of section 943(e)(4)(B) of 
such Code to the extent such property--
            (1) was treated as transferred under clause (i) thereof, or
            (2) was acquired during a taxable year to which such 
        election applies and before May 1, 2003, in the ordinary course 
        of its trade or business.
The Secretary of the Treasury (or such Secretary's delegate) may 
prescribe such regulations as may be necessary to prevent the abuse of 
the purposes of this subsection.
    (f) Binding Contracts.--The amendments made by this section shall 
not apply to any transaction in the ordinary course of a trade or 
business which occurs pursuant to a binding contract--
            (1) which is between the taxpayer and a person who is not a 
        related person (as defined in section 943(b)(3) of such Code, 
        as in effect on the day before the date of the enactment of 
        this Act), and
            (2) which is in effect on January 14, 2002, and at all 
        times thereafter.
For purposes of this subsection, a binding contract shall include a 
purchase option, renewal option, or replacement option which is 
included in such contract and which is enforceable against the seller 
or lessor.

SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR DOMESTIC PRODUCTION 
              ACTIVITIES INCOME.

    (a) Limitation on Tax on Qualified Production Activities Income.--
Section 11 is amended by redesignating subsections (c) and (d) as 
subsections (d) and (e), respectively, and by inserting after 
subsection (b) the following new subsection:
    ``(c) Limitation on Tax on Qualified Production Activities 
Income.--
            ``(1) In general.--If a corporation has qualified 
        production activities income for any taxable year, the tax 
        imposed by this section shall not exceed the sum of--
                    ``(A) a tax computed at the rates and in the manner 
                as if this subsection had not been enacted on the 
                taxable income reduced by the amount of qualified 
                production activities income, plus
                    ``(B) a tax equal to 32 percent (34 percent in the 
                case of taxable years beginning before January 1, 2007) 
                of the qualified production activities income (or, if 
                less, taxable income).
            ``(2) Qualified production activities income.--
                    ``(A) In general.--The term `qualified production 
                activities income' for any taxable year means an amount 
                equal to the excess (if any) of--
                            ``(i) the taxpayer's domestic production 
                        gross receipts for such taxable year, over
                            ``(ii) the sum of--
                                    ``(I) the cost of goods sold that 
                                are allocable to such receipts,
                                    ``(II) other deductions, expenses, 
                                or losses directly allocable to such 
                                receipts, and
                                    ``(III) a ratable portion of other 
                                deductions, expenses, and losses that 
                                are not directly allocable to such 
                                receipts or another class of income.
                    ``(B) Allocation method.--The Secretary shall 
                prescribe rules for the proper allocation of items of 
                income, deduction, expense, and loss for purposes of 
                determining income attributable to domestic production 
                activities.
            ``(3) Domestic production gross receipts.--For purposes of 
        this subsection, the term `domestic production gross receipts' 
        means the gross receipts of the taxpayer which are derived 
        from--
                    ``(A) any lease, rental, license, sale, exchange, 
                or other disposition of--
                            ``(i) qualifying production property which 
                        was manufactured, produced, grown, or extracted 
                        in whole or in significant part by the taxpayer 
                        within the United States, or
                            ``(ii) any qualified film produced by the 
                        taxpayer, or
                    ``(B) construction, engineering, or architectural 
                services performed in the United States for 
                construction projects in the United States.
            ``(4) Qualifying production property.--For purposes of this 
        subsection, the term `qualifying production property' means--
                    ``(A) tangible personal property,
                    ``(B) any computer software, and
                    ``(C) any property described in section 168(f)(4).
            ``(5) Qualified film.--For purposes of this subsection--
                    ``(A) In general.--The term `qualified film' means 
                any property described in section 168(f)(3) if not less 
                than 50 percent of the total compensation relating to 
                the production of such property is compensation for 
                services performed in the United States by actors, 
                production personnel, directors, and producers.
                    ``(B) Exception.--Such term does not include 
                property with respect to which records are required to 
                be maintained under section 2257 of title 18, United 
                States Code.
            ``(6) Related persons.--For purposes of this subsection--
                    ``(A) In general.--The term `domestic production 
                gross receipts' shall not include any gross receipts of 
                the taxpayer derived from property leased, licensed, or 
                rented by the taxpayer for use by any related person.
                    ``(B) Related person.--For purposes of subparagraph 
                (A), a person shall be treated as related to another 
                person if such persons are treated as a single employer 
                under subsection (a) or (b) of section 52 or subsection 
                (m) or (o) of section 414, except that determinations 
                under subsections (a) and (b) of section 52 shall be 
                made without regard to section 1563(b).''.
    (b) Special Rule Relating to Election To Treat Cutting of Timber as 
a Sale or Exchange.--In the case of a corporation, any election under 
section 631(a) of the Internal Revenue Code of 1986 made for a taxable 
year ending on or before the date of the enactment of this Act may be 
revoked by the taxpayer for any taxable year ending after such date. 
For purposes of determining whether such taxpayer may make a further 
election under such section, such election (and any revocation under 
this section) shall not be taken into account.
    (c) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR SMALL CORPORATIONS.

    (a) In General.--Subsection (b) of section 11 (relating to tax 
imposed on corporations) is amended by redesignating paragraph (2) as 
paragraph (6) and by striking paragraph (1) and inserting the following 
new paragraphs:
            ``(1) For taxable years beginning after 2012.--In the case 
        of taxable years beginning after 2012, the amount of the tax 
        imposed by subsection (a) shall be determined in accordance 
        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 
        $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.
            ``(2) For taxable years beginning in 2011 or 2012.--In the 
        case of taxable years beginning in 2011 or 2012, the amount of 
        the tax imposed by subsection (a) shall be determined in 
        accordance with the following table:

``If taxable income is:             The tax is:
    Not over $50,000...............
                                        15% of taxable income.
    Over $50,000 but not over 
        $75,000.
                                        $7,500, plus 25% of the excess 
                                                over $50,000.
    Over $75,000 but not over 
        $5,000,000.
                                        $13,750, plus 32% of the excess 
                                                over $75,000.
    Over $5,000,000 but not over 
        $10,000,000.
                                        $1,589,750, plus 34% of the 
                                                excess over $5,000,000.
    Over $10,000,000...............
                                        $3,289,750, plus 35% of the 
                                                excess over 
                                                $10,000,000.
            ``(3) For taxable years beginning in 2008, 2009, or 2010.--
        In the case of taxable years beginning in 2008, 2009, or 2010, 
        the amount of the tax imposed by subsection (a) shall be 
        determined in accordance 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.
            ``(4) For taxable years beginning in 2005, 2006, or 2007.--
        In the case of taxable years beginning in 2005, 2006, or 2007, 
        the amount of the tax imposed by subsection (a) shall be 
        determined in accordance 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.
            ``(5) Phaseout of lower rates for certain taxpayers.--
                    ``(A) General rule for years before 2013.--
                            ``(i) In general.--In the case of taxable 
                        years beginning before 2013 with respect to a 
                        corporation which has taxable income in excess 
                        of the applicable amount for any taxable year, 
                        the amount of tax determined under paragraph 
                        (1), (2), (3) or (4) for such taxable year 
                        shall be increased by the lesser of (I) 5 
                        percent of such excess, or (II) the maximum 
                        increase amount.
                            ``(ii) Maximum increase amount.--For 
                        purposes of clause (i)--
      

------------------------------------------------------------------------
                                                          The maximum
    ``In the case of any taxable      The applicable    increase amount
    year     beginning during:          amount is:            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.
------------------------------------------------------------------------

                    ``(B) Higher income corporations.--In the case of a 
                corporation which has taxable income in excess of 
                $20,000,000 ($15,000,000 in the case of taxable years 
                beginning before 2013), the amount of the tax 
                determined under the foregoing provisions of this 
                subsection shall be increased by an additional amount 
                equal to the lesser of (i) 3 percent of such excess, or 
                (ii) $610,250 ($100,000 in the case of taxable years 
                beginning before 2013).''.
    (b) Conforming Amendments.--
            (1) Section 904(b)(3)(D)(ii) is amended to read as follows:
                            ``(ii) in the case of a corporation, 
                        section 1201(a) applies to such taxable 
                        year.''.
            (2) Section 1201(a) is amended by striking ``the last 2 
        sentences of section 11(b)(1)'' and inserting ``section 
        11(b)(5)''.
            (3) Section 1561(a) is amended--
                    (A) by striking ``the last 2 sentences of section 
                11(b)(1)'' and inserting ``section 11(b)(5)'', and
                    (B) by striking ``such last 2 sentences'' and 
                inserting ``section 11(b)(5)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

    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.

    Subsections (b), (c), and (d) of section 179 are each amended by 
striking ``2006'' each place it appears and inserting ``2008''.

                        Subtitle B--Depreciation

SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN LEASEHOLD 
              IMPROVEMENTS AND RESTAURANT PROPERTY.

    (a) 15-Year Recovery Period.--Subparagraph (E) of section 168(e)(3) 
(relating to classification of certain property) is amended by striking 
``and'' at the end of clause (ii), by striking the period at the end of 
clause (iii) and inserting a comma, and by adding at the end the 
following new clauses:
                            ``(iv) any qualified leasehold improvement 
                        property placed in service before January 1, 
                        2006, and
                            ``(v) any qualified restaurant property 
                        placed in service before January 1, 2006.''
    (b) Qualified Leasehold Improvement Property.--Subsection (e) of 
section 168 is amended by adding at the end the following new 
paragraph:
            ``(6) Qualified leasehold improvement property.--The term 
        `qualified leasehold improvement property' has the meaning 
        given such term in section 168(k)(3) except that the following 
        special rules shall apply:
                    ``(A) Improvements made by lessor.--In the case of 
                an improvement made by the person who was the lessor of 
                such improvement when such improvement was placed in 
                service, such improvement shall be qualified leasehold 
                improvement property (if at all) only so long as such 
                improvement is held by such person.
                    ``(B) Exception for changes in form of business.--
                Property shall not cease to be qualified leasehold 
                improvement property under subparagraph (A) by reason 
                of--
                            ``(i) death,
                            ``(ii) a transaction to which section 
                        381(a) applies,
                            ``(iii) a mere change in the form of 
                        conducting the trade or business so long as the 
                        property is retained in such trade or business 
                        as qualified leasehold improvement property and 
                        the taxpayer retains a substantial interest in 
                        such trade or business,
                            ``(iv) the acquisition of such property in 
                        an exchange described in section 1031, 1033, or 
                        1038 to the extent that the basis of such 
                        property includes an amount representing the 
                        adjusted basis of other property owned by the 
                        taxpayer or a related person, or
                            ``(v) the acquisition of such property by 
                        the taxpayer in a transaction described in 
                        section 332, 351, 361, 721, or 731 (or the 
                        acquisition of such property by the taxpayer 
                        from the transferee or acquiring corporation in 
                        a transaction described in such section), to 
                        the extent that the basis of the property in 
                        the hands of the taxpayer is determined by 
                        reference to its basis in the hands of the 
                        transferor or distributor.''.
    (c) Qualified Restaurant Property.--Subsection (e) of section 168 
(as amended by subsection (b)) is further amended by adding at the end 
the following new paragraph:
            ``(7) Qualified restaurant property.--The term `qualified 
        restaurant property' means any section 1250 property which is 
        an improvement to a building if--
                    ``(A) such improvement is placed in service more 
                than 3 years after the date such building was first 
                placed in service, and
                    ``(B) more than 50 percent of the building's square 
                footage is devoted to preparation of, and seating for 
                on-premises consumption of, prepared meals.''.
    (d) Requirement To Use Straight Line Method.--
            (1) Paragraph (3) of section 168(b) is amended by adding at 
        the end the following new subparagraphs:
                    ``(G) Qualified leasehold improvement property 
                described in subsection (e)(6).
                    ``(H) Qualified restaurant property described in 
                subsection (e)(7).''.
            (2) Subparagraph (A) of section 168(b)(2) is amended by 
        inserting before the comma ``not referred to in paragraph 
        (3)''.
    (e) Alternative System.--The table contained in section 
168(g)(3)(B) is amended by adding at the end the following new items:

          ``(E)(iv)..................................       39         
          ``(E)(v)...................................     39''.        
    (f) Effective Date.--The amendments made by this section shall 
apply to property placed in service after the date of the enactment of 
this Act.

SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT.

    (a) Aircraft Treated as Qualified Property.--
            (1) In general.--Paragraph (2) of section 168(k) is amended 
        by redesignating subparagraphs (C) through (F) as subparagraphs 
        (D) through (G), respectively, and by inserting after 
        subparagraph (B) the following new subparagraph:
                    ``(C) Certain aircraft.--The term `qualified 
                property' includes property--
                            ``(i) which meets the requirements of 
                        clauses (ii) and (iii) of subparagraph (A),
                            ``(ii) which is an aircraft which is not a 
                        transportation property (as defined in 
                        subparagraph (B)(iii)) other than for 
                        agricultural or firefighting purposes,
                            ``(iii) which is purchased and on which 
                        such purchaser, at the time of the contract for 
                        purchase, has made a nonrefundable deposit of 
                        the lesser of--
                                    ``(I) 10 percent of the cost, or
                                    ``(II) $100,000, and
                            ``(iv) which has--
                                    ``(I) an estimated production 
                                period exceeding 4 months, and
                                    ``(II) a cost exceeding 
                                $200,000.''.
            (2) Placed in service date.--Clause (iv) of section 
        168(k)(2)(A) is amended by striking ``subparagraph (B)'' and 
        inserting ``subparagraphs (B) and (C)''.
    (b) Conforming Amendments.--
            (1) Section 168(k)(2)(B) is amended by adding at the end 
        the following new clause:
                            ``(iv) Application of subparagraph.--This 
                        subparagraph shall not apply to any property 
                        which is described in subparagraph (C).''.
            (2) Section 168(k)(4)(A)(ii) is amended by striking 
        ``paragraph (2)(C)'' and inserting ``paragraph (2)(D)''.
            (3) Section 168(k)(4)(B)(iii) is amended by inserting ``and 
        paragraph (2)(C)'' after ``of this paragraph)''.
            (4) Section 168(k)(4)(C) is amended by striking 
        ``subparagraphs (B) and (D)'' and inserting ``subparagraphs 
        (B), (C), and (E)''.
            (5) Section 168(k)(4)(D) is amended by striking ``Paragraph 
        (2)(E)'' and inserting ``Paragraph (2)(F)''.
    (c) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 101 of the Job 
Creation and Worker Assistance Act of 2002.

SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS DEPRECIATION 
              PROPERTY.

    (a) In General.--Section 168(k)(2)(D) (relating to special rules) 
is amended by adding at the end the following new clause:
                            ``(iii) Syndication.--For purposes of 
                        subparagraph (A)(ii), if--
                                    ``(I) property is originally placed 
                                in service after September 10, 2001, by 
                                the lessor of such property,
                                    ``(II) such property is sold by 
                                such lessor or any subsequent purchaser 
                                within 3 months after the date so 
                                placed in service (or, in the case of 
                                multiple units of property subject to 
                                the same lease, within 3 months after 
                                the date the final unit is placed in 
                                service, so long as the period between 
                                the time the first unit is placed in 
                                service and the time the last unit is 
                                placed in service does not exceed 12 
                                months), and
                                    ``(III) the user of such property 
                                after the last sale during such 3-month 
                                period remains the same as when such 
                                property was originally placed in 
                                service,
                        such property shall be treated as originally 
                        placed in service not earlier than the date of 
                        such last sale, so long as no previous owner of 
                        such property elects the application of this 
                        subsection with respect to such property.''.
    (b) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 101 of the Job 
Creation and Worker Assistance Act of 2002; except that the 
parenthetical material in section 168(k)(2)(D)(iii)(II) of the Internal 
Revenue Code of 1986, as added by this section, shall apply to property 
sold after June 4, 2004.

          Subtitle C--S Corporation Reform and Simplification

SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    (a) In General.--Paragraph (1) of section 1361(c) (relating to 
special rules for applying subsection (b)) is amended to read as 
follows:
            ``(1) Members of family treated as 1 shareholder.--
                    ``(A) In general.--For purpose of subsection 
                (b)(1)(A)--
                            ``(i) except as provided in clause (ii), a 
                        husband and wife (and their estates) shall be 
                        treated as 1 shareholder, and
                            ``(ii) in the case of a family with respect 
                        to which an election is in effect under 
                        subparagraph (D), all members of the family 
                        shall be treated as 1 shareholder.
                    ``(B) Members of the family.--For purpose of 
                subparagraph (A)(ii)--
                            ``(i) In general.--The term `members of the 
                        family' means the common ancestor, lineal 
                        descendants of the common ancestor, and the 
                        spouses (or former spouses) of such lineal 
                        descendants or common ancestor.
                            ``(ii) Common Ancestor.--For purposes of 
                        this paragraph, an individual shall not be 
                        considered a common ancestor if, as of the 
                        later of the effective date of this paragraph 
                        or the time the election under section 1362(a) 
                        is made, the individual is more than 3 
                        generations removed from the youngest 
                        generation of shareholders who would (but for 
                        this clause) be members of the family. For 
                        purposes of the preceding sentence, a spouse 
                        (or former spouse) shall be treated as being of 
                        the same generation as the individual to which 
                        such spouse is (or was) married.
                    ``(C) Effect of adoption, etc.--In determining 
                whether any relationship specified in subparagraph (B) 
                exists, the rules of section 152(b)(2) shall apply.
                    ``(D) Election.--An election under subparagraph 
                (A)(ii)--
                            ``(i) may, except as otherwise provided in 
                        regulations prescribed by the Secretary, be 
                        made by any member of the family, and
                            ``(ii) shall remain in effect until 
                        terminated as provided in regulations 
                        prescribed by the Secretary.''.
    (b) Relief From Inadvertent Invalid Election or Termination.--
Section 1362(f) (relating to inadvertent invalid elections or 
terminations), as amended by section 229, is amended--
            (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
        ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
            (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
        ``section 1361(b)(3)(C),'' in paragraph (1)(B).
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxable years beginning after December 31, 2004.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to elections and terminations made after December 
        31, 2004.

SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

    (a) In General.--Section 1361(b)(1)(A) (defining small business 
corporation) is amended by striking ``75'' and inserting ``100''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE SHAREHOLDERS TO 
              INCLUDE IRAS.

    (a) In General.--Section 1361(c)(2)(A) (relating to certain trusts 
permitted as shareholders) is amended by inserting after clause (v) the 
following new clause:
                            ``(vi) In the case of a corporation which 
                        is a bank (as defined in section 581), a trust 
                        which constitutes an individual retirement 
                        account under section 408(a), including one 
                        designated as a Roth IRA under section 408A, 
                        but only to the extent of the stock held by 
                        such trust in such bank as of the date of the 
                        enactment of this clause.''.
    (b) Treatment as Shareholder.--Section 1361(c)(2)(B) (relating to 
treatment as shareholders) is amended by adding at the end the 
following new clause:
                            ``(vi) In the case of a trust described in 
                        clause (vi) of subparagraph (A), the individual 
                        for whose benefit the trust was created shall 
                        be treated as a shareholder.''.
    (c) Sale of Bank Stock in IRA Relating to S Corporation Election 
Exempt From Prohibited Transaction Rules.--Section 4975(d) (relating to 
exemptions) is amended by striking ``or'' at the end of paragraph (14), 
by striking the period at the end of paragraph (15) and inserting ``; 
or'', and by adding at the end the following new paragraph:
            ``(16) a sale of stock held by a trust which constitutes an 
        individual retirement account under section 408(a) to the 
        individual for whose benefit such account is established if--
                    ``(A) such stock is in a bank (as defined in 
                section 581),
                    ``(B) such stock is held by such trust as of the 
                date of the enactment of this paragraph,
                    ``(C) such sale is pursuant to an election under 
                section 1362(a) by such bank,
                    ``(D) such sale is for fair market value at the 
                time of sale (as established by an independent 
                appraiser) and the terms of the sale are otherwise at 
                least as favorable to such trust as the terms that 
                would apply on a sale to an unrelated party,
                    ``(E) such trust does not pay any commissions, 
                costs, or other expenses in connection with the sale, 
                and
                    ``(F) the stock is sold in a single transaction for 
                cash not later than 120 days after the S corporation 
                election is made.''.
    (d) Conforming Amendment.--Section 512(e)(1) is amended by 
inserting ``1361(c)(2)(A)(vi) or'' before ``1361(c)(6)''.
    (e) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 224. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN DETERMINING 
              POTENTIAL CURRENT BENEFICIARIES OF ESBT.

    (a) In General.--Section 1361(e)(2) (defining potential current 
beneficiary) is amended--
            (1) by inserting ``(determined without regard to any power 
        of appointment to the extent such power remains unexercised at 
        the end of such period)'' after ``of the trust'' in the first 
        sentence, and
            (2) by striking ``60-day'' in the second sentence and 
        inserting ``1-year''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, ETC.

    (a) In General.--Section 1366(d)(2) (relating to indefinite 
carryover of disallowed losses and deductions) is amended to read as 
follows:
            ``(2) Indefinite carryover of disallowed losses and 
        deductions.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), any loss or deduction which is 
                disallowed for any taxable year by reason of paragraph 
                (1) shall be treated as incurred by the corporation in 
                the succeeding taxable year with respect to that 
                shareholder.
                    ``(B) Transfers of stock between spouses or 
                incident to divorce.--In the case of any transfer 
                described in section 1041(a) of stock of an S 
                corporation, any loss or deduction described in 
                subparagraph (A) with respect such stock shall be 
                treated as incurred by the corporation in the 
                succeeding taxable year with respect to the 
                transferee.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY QUALIFIED 
              SUBCHAPTER S TRUST INCOME BENEFICIARIES.

    (a) In General.--Section 1361(d)(1) (relating to special rule for 
qualified subchapter S trust) is amended--
            (1) by striking ``and'' at the end of subparagraph (A),
            (2) by striking the period at the end of subparagraph (B) 
        and inserting ``, and'', and
            (3) by adding at the end the following new subparagraph:
                    ``(C) for purposes of applying sections 465 and 469 
                to the beneficiary of the trust, the disposition of the 
                S corporation stock by the trust shall be treated as a 
                disposition by such beneficiary.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transfers made after December 31, 2004.

SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE INCOME 
              TEST FOR BANK S CORPORATIONS.

    (a) In General.--Section 1362(d)(3) (relating to where passive 
investment income exceeds 25 percent of gross receipts for 3 
consecutive taxable years and corporation has accumulated earnings and 
profits) is amended by adding at the end the following new 
subparagraph:
                    ``(F) Exception for banks; etc.--In the case of a 
                bank (as defined in section 581), a bank holding 
                company (within the meaning of section 2(a) of the Bank 
                Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a 
                financial holding company (within the meaning of 
                section 2(p) of such Act), the term `passive investment 
                income' shall not include--
                            ``(i) interest income earned by such bank 
                        or company, or
                            ``(ii) dividends on assets required to be 
                        held by such bank or company, including stock 
                        in the Federal Reserve Bank, the Federal Home 
                        Loan Bank, or the Federal Agricultural Mortgage 
                        Bank or participation certificates issued by a 
                        Federal Intermediate Credit Bank.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 228. TREATMENT OF BANK DIRECTOR SHARES.

    (a) In General.--Section 1361 (defining S corporation) is amended 
by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--
            ``(1) In general.--Restricted bank director stock shall not 
        be taken into account as outstanding stock of the S corporation 
        in applying this subchapter (other than section 1368(f)).
            ``(2) Restricted bank director stock.--For purposes of this 
        subsection, the term `restricted bank director stock' means 
        stock in a bank (as defined in section 581), a bank holding 
        company (within the meaning of section 2(a) of the Bank Holding 
        Company Act of 1956 (12 U.S.C. 1841(a))), or a financial 
        holding company (within the meaning of section 2(p) of such 
        Act), registered with the Federal Reserve System if such 
        stock--
                    ``(A) is required to be held by an individual under 
                applicable Federal or State law in order to permit such 
                individual to serve as a director, and
                    ``(B) is subject to an agreement with such bank or 
                company (or a corporation which controls (within the 
                meaning of section 368(c)) such bank or company) 
                pursuant to which the holder is required to sell back 
                such stock (at the same price as the individual 
                acquired such stock) upon ceasing to hold the office of 
                director.
            ``(3) Cross reference.--

                                ``For treatment of certain 
distributions with respect to restricted bank director stock, see 
section 1368(f).''.
    (b) Distributions.--Section 1368 (relating to distributions) is 
amended by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--If a director receives a 
distribution (not in part or full payment in exchange for stock) from 
an S corporation with respect to any restricted bank director stock (as 
defined in section 1361(f)), the amount of such distribution--
            ``(1) shall be includible in gross income of the director, 
        and
            ``(2) shall be deductible by the corporation for the 
        taxable year of such corporation in which or with which ends 
        the taxable year in which such amount in included in the gross 
        income of the director.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S 
              SUBSIDIARY ELECTIONS AND TERMINATIONS.

    (a) In General.--Section 1362(f) (relating to inadvertent invalid 
elections or terminations) is amended--
            (1) by inserting ``, section 1361(b)(3)(B)(ii),'' after 
        ``subsection (a)'' in paragraph (1),
            (2) by inserting ``, section 1361(b)(3)(C),'' after 
        ``subsection (d)'' in paragraph (1)(B),
            (3) by amending paragraph (3)(A) to read as follows:
                    ``(A) so that the corporation for which the 
                election was made is a small business corporation or a 
                qualified subchapter S subsidiary, as the case may be, 
                or'',
            (4) by amending paragraph (4) to read as follows:
            ``(4) the corporation for which the election was made, and 
        each person who was a shareholder in such corporation at any 
        time during the period specified pursuant to this subsection, 
        agrees to make such adjustments (consistent with the treatment 
        of such corporation as an S corporation or a qualified 
        subchapter S subsidiary, as the case may be) as may be required 
        by the Secretary with respect to such period,'', and
            (5) by inserting ``or a qualified subchapter S subsidiary, 
        as the case may be'' after ``S corporation'' in the matter 
        following paragraph (4).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.

    (a) In General.--Section 1361(b)(3)(A) (relating to treatment of 
certain wholly owned subsidiaries) is amended by inserting ``and in the 
case of information returns required under part III of subchapter A of 
chapter 61'' after ``Secretary''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER SECURITIES.

    (a) In General.--Subsection (f) of section 4975 (relating to other 
definitions and special rules) is amended by adding at the end the 
following new paragraph:
            ``(7) S corporation repayment of loans for qualifying 
        employer securities.--A plan shall not be treated as violating 
        the requirements of section 401 or 409 or subsection (e)(7), or 
        as engaging in a prohibited transaction for purposes of 
        subsection (d)(3), merely by reason of any distribution (as 
        described in section 1368(a)) with respect to S corporation 
        stock that constitutes qualifying employer securities, which in 
        accordance with the plan provisions is used to make payments on 
        a loan described in subsection (d)(3) the proceeds of which 
        were used to acquire such qualifying employer securities 
        (whether or not allocated to participants). The preceding 
        sentence shall not apply in the case of a distribution which is 
        paid with respect to any employer security which is allocated 
        to a participant unless the plan provides that employer 
        securities with a fair market value of not less than the amount 
        of such distribution are allocated to such participant for the 
        year which (but for the preceding sentence) such distribution 
        would have been allocated to such participant.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions with respect to S corporation stock made after 
December 31, 2004.

               Subtitle D--Alternative Minimum Tax Relief

SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

    (a) In General.--
            (1) Subsection (a) of section 59 is amended by striking 
        paragraph (2) and by redesignating paragraphs (3) and (4) as 
        paragraphs (2) and (3), respectively.
            (2) Section 53(d)(1)(B)(i)(II) is amended by striking ``and 
        if section 59(a)(2) did not apply''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL 
              CORPORATIONS.

    (a) In General.--Subparagraphs (A) and (B) of section 55(e)(1) are 
each amended by striking ``$7,500,000'' each place it appears and 
inserting ``$20,000,000''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2005.

SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO INCREASE ALTERNATIVE 
              MINIMUM TAX.

    (a) In General.--Subsection (c) of section 55 (defining regular 
tax) is amended by redesignating paragraph (2) as paragraph (3) and by 
inserting after paragraph (1) the following new paragraph:
            ``(2) Coordination with income averaging for farmers.--
        Solely for purposes of this section, section 1301 (relating to 
        averaging of farm income) shall not apply in computing the 
        regular tax liability.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2003.

    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.

    (a) Excise Tax Credit for Alcohol Fuel Mixtures.--
            (1) In general.--Subsection (f) of section 6427 is amended 
        to read as follows:
    ``(f) Alcohol Fuel Mixtures.--
            ``(1) In general.--The amount of credit which would (but 
        for section 40(c)) be determined under section 40(a)(1) for any 
        period--
                    ``(A) shall, with respect to taxable events 
                occurring during such period, be treated--
                            ``(i) as a payment of the taxpayer's 
                        liability for tax imposed by section 4081, and
                            ``(ii) as received at the time of the 
                        taxable event, and
                    ``(B) to the extent such amount of credit exceeds 
                such liability for such period, shall (except as 
                provided in subsection (k)) be paid subject to 
                subsection (i)(3) by the Secretary without interest.
            ``(2) Special rules.--
                    ``(A) Only certain alcohol taken into account.--For 
                purposes of paragraph (1), section 40 shall be 
                applied--
                            ``(i) by not taking into account alcohol 
                        with a proof of less than 190, and
                            ``(ii) by treating as alcohol the alcohol 
                        gallon equivalent of ethyl tertiary butyl ether 
                        or other ethers produced from such alcohol.
                    ``(B) Treatment of refiners.--For purposes of 
                paragraph (1), in the case of a mixture--
                            ``(i) the alcohol in which is described in 
                        subparagraph (A)(ii), and
                            ``(ii) which is produced by any person at a 
                        refinery prior to any taxable event,
                section 40 shall be applied by treating such person as 
                having sold such mixture at the time of its removal 
                from the refinery (and only at such time) to another 
                person for use as a fuel.
            ``(3) Mixtures not used as fuel.--Rules similar to the 
        rules of subparagraphs (A) and (D) of section 40(d)(3) shall 
        apply for purposes of this subsection.
            ``(4) Termination.--This section shall apply only to 
        periods to which section 40 applies, determined by substituting 
        in section 40(e)--
                    ``(A) `December 31, 2010' for `December 31, 2007', 
                and
                    ``(B) `January 1, 2011' for `January 1, 2008'.''
            (2) Revision of rules for payment of credit.--Paragraph (3) 
        of section 6427(i) is amended to read as follows:
            ``(3) Special rule for alcohol mixture credit.--
                    ``(A) In general.--A claim may be filed under 
                subsection (f)(1)(B) by any person for any period--
                            ``(i) for which $200 or more is payable 
                        under such subsection (f)(1)(B), and
                            ``(ii) which is not less than 1 week.
                In the case of an electronic claim, this subparagraph 
                shall be applied without regard to clause (i).
                    ``(B) Payment of claim.--Notwithstanding subsection 
                (f)(1)(B), if the Secretary has not paid pursuant to a 
                claim filed under this section within 45 days of the 
                date of the filing of such claim (20 days in the case 
                of an electronic claim), the claim shall be paid with 
                interest from such date determined by using the 
                overpayment rate and method under section 6621.
                    ``(C) Time for filing claim.--No claim filed under 
                this paragraph shall be allowed unless filed on or 
                before the last day of the first quarter following the 
                earliest quarter included in the claim.''
    (b) Repeal of Other Incentives for Fuel Mixtures.--
            (1) Subsection (b) of section 4041 is amended to read as 
        follows:
    ``(b) Exemption for Off-Highway Business Use.--
            ``(1) In general.--No tax shall be imposed by subsection 
        (a) or (d)(1) on liquids sold for use or used in an off-highway 
        business use.
            ``(2) Tax where other use.--If a liquid on which no tax was 
        imposed by reason of paragraph (1) is used otherwise than in an 
        off-highway business use, a tax shall be imposed by paragraph 
        (1)(B), (2)(B), or (3)(A)(ii) of subsection (a) (whichever is 
        appropriate) and by the corresponding provision of subsection 
        (d)(1) (if any).
            ``(3) Off-highway business use defined.--For purposes of 
        this subsection, the term `off-highway business use' has the 
        meaning given to such term by section 6421(e)(2); except that 
        such term shall not, for purposes of subsection (a)(1), include 
        use in a diesel-powered train.''
            (2) Section 4041(k) is hereby repealed.
            (3) Section 4081(c) is hereby repealed.
            (4) Section 4091(c) is hereby repealed.
    (c) Transfers to Highway Trust Fund.--Paragraph (4) of section 
9503(b) is amended by adding ``or'' at the end of subparagraph (B), by 
striking the comma at the end of subparagraph (C) and inserting a 
period, and by striking subparagraphs (D), (E), and (F).
    (d) Conforming Amendments.--
            (1) Subsection (c) of section 40 is amended to read as 
        follows:
    ``(c) Coordination With Excise Tax Benefits.--The amount of the 
credit determined under this section with respect to any alcohol shall, 
under regulations prescribed by the Secretary, be properly reduced to 
take into account the benefit provided with respect to such alcohol 
under section 6427(f).''
            (2) Subparagraph (B) of section 40(d)(4) is amended by 
        striking ``under section 4041(k) or 4081(c)'' and inserting 
        ``under section 6427(f)''.
    (e) Effective Dates.--
            (1) In general.--Except as provided by paragraph (2), the 
        amendments made by this section shall apply to fuel sold or 
        used after September 30, 2004.
            (2) Subsection (c).--The amendments made by subsection (c) 
        shall apply to taxes imposed after September 30, 2003.

SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL FUND.

    (a) Transfers to Fund.--Section 9503(b)(1) is amended by adding at 
the end the following new flush sentence:
        ``For purposes of this paragraph, the amount of taxes received 
        under section 4081 shall include any amount treated as a 
        payment under section 6427(f)(1)(A) and shall not be reduced by 
        the amount paid under section 6427(f)(1)(B).''.
    (b) Transfers From Fund.--Subparagraph (A) of section 9503(c)(2) is 
amended by adding at the end the following new sentence: ``Clauses 
(i)(III) and (ii) shall not apply to claims under section 
6427(f)(1)(B).''
    (c) Effective Date.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxes received after September 30, 2004.
            (2) Subsection (b).--The amendment made by subsection (b) 
        shall apply to amounts paid after September 30, 2004, and (to 
        the extent related to section 34 of the Internal Revenue Code 
        of 1986) to fuel used after such date.

   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.

    (a) Exclusion From Employment Taxes.--
            (1) Social security taxes.--
                    (A) Section 3121(a) (relating to definition of 
                wages) is amended by striking ``or'' at the end of 
                paragraph (20), by striking the period at the end of 
                paragraph (21) and inserting ``; or'', and by inserting 
                after paragraph (21) the following new paragraph:
            ``(22) remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
                    (B) Section 209(a) of the Social Security Act is 
                amended by striking ``or'' at the end of paragraph 
                (17), by striking the period at the end of paragraph 
                (18) and inserting ``; or'', and by inserting after 
                paragraph (18) the following new paragraph:
            ``(19) Remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b) of the 
                Internal Revenue Code of 1986) or under an employee 
                stock purchase plan (as defined in section 423(b) of 
                such Code), or
                    ``(B) any disposition by the individual of such 
                stock.''.
            (2) Railroad retirement taxes.--Subsection (e) of section 
        3231 is amended by adding at the end the following new 
        paragraph:
            ``(12) Qualified stock options.--The term `compensation' 
        shall not include any remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
            (3) Unemployment taxes.--Section 3306(b) (relating to 
        definition of wages) is amended by striking ``or'' at the end 
        of paragraph (17), by striking the period at the end of 
        paragraph (18) and inserting ``; or'', and by inserting after 
        paragraph (18) the following new paragraph:
            ``(19) remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
    (b) Wage Withholding Not Required on Disqualifying Dispositions.--
Section 421(b) (relating to effect of disqualifying dispositions) is 
amended by adding at the end the following new sentence: ``No amount 
shall be required to be deducted and withheld under chapter 24 with 
respect to any increase in income attributable to a disposition 
described in the preceding sentence.''.
    (c) Wage Withholding Not Required on Compensation Where Option 
Price Is Between 85 Percent and 100 Percent of Value of Stock.--Section 
423(c) (relating to special rule where option price is between 85 
percent and 100 percent of value of stock) is amended by adding at the 
end the following new sentence: ``No amount shall be required to be 
deducted and withheld under chapter 24 with respect to any amount 
treated as compensation under this subsection.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to stock acquired pursuant to options exercised after the date of 
the enactment of this Act.

  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN UNITED STATES.

    (a) In General.--Subpart F of part III of subchapter N of chapter 1 
(relating to controlled foreign corporations) is amended by adding at 
the end the following new section:

``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

    ``(a) Deduction.--
            ``(1) In general.--In the case of a corporation which is a 
        United States shareholder, there shall be allowed as a 
        deduction an amount equal to 85 percent of the dividends which 
        are received by such shareholder from controlled foreign 
        corporations during the election period.
            ``(2) Dividends paid indirectly from controlled foreign 
        corporations.--If, within the election period, a United States 
        shareholder receives a distribution from a controlled foreign 
        corporation which is excluded from gross income under section 
        959(a), such distribution shall be treated for purposes of this 
        section as a dividend to the extent of any amount included in 
        income by such United States shareholder under section 
        951(a)(1)(A) as a result of any dividend paid during the 
        election period to--
                    ``(A) such controlled foreign corporation from 
                another controlled foreign corporation that is in a 
                chain of ownership described in section 958(a), or
                    ``(B) any other controlled foreign corporation in 
                such chain of ownership, but only to the extent of 
                distributions described in section 959(b) which are 
                made during the election period to the controlled 
                foreign corporation from which such United States 
                shareholder received such distribution.
    ``(b) Limitations.--
            ``(1) In general.--The amount of dividends taken into 
        account under subsection (a) shall not exceed the greater of--
                    ``(A) $500,000,000,
                    ``(B) the amount shown on the applicable financial 
                statement as earnings permanently reinvested outside 
                the United States, or
                    ``(C) in the case of an applicable financial 
                statement which fails to show a specific amount of 
                earnings permanently reinvested outside the United 
                States and which shows a specific amount of tax 
                liability attributable to such earnings, the amount of 
                such earnings determined in such manner as the 
                Secretary may prescribe.
        Except as provided in subparagraph (C), if there is no 
        statement or such statement fails to show a specific amount of 
        such earnings or liability, such amount shall be treated as 
        being zero for purposes of this paragraph.
            ``(2) Dividends must be extraordinary.--The amount of 
        dividends taken into account under subsection (a) shall not 
        exceed the excess (if any) of--
                    ``(A) the dividends received during the taxable 
                year by such shareholder from controlled foreign 
                corporations, over
                    ``(B) the annual average for the base period years 
                of--
                            ``(i) the dividends received during each 
                        base period year by such shareholder from such 
                        corporations,
                            ``(ii) the amounts includible in such 
                        shareholder's gross income for each base period 
                        year under section 951(a)(1)(B) with respect to 
                        such corporations, and
                            ``(iii) the amounts that would have been 
                        included for each base period year but for 
                        section 959(a) with respect to such 
                        corporations.
                The amount taken into account under clause (iii) for 
                any base period year shall not include any amount which 
                is not includible in gross income by reason of an 
                amount described in clause (ii) with respect to a prior 
                taxable year.
            ``(3) Requirement to invest in united states.--Subsection 
        (a) shall not apply to any dividend received by a United States 
        shareholder unless the amount of the dividend is invested in 
        the United States pursuant to a plan describing the 
        expenditures to be made with such amount--
                    ``(A) which, before the dividend is received, is 
                approved by the president or chief executive officer of 
                such shareholder, and
                    ``(B) which is approved by the Board of Directors 
                (or management committee) of such shareholder no later 
                than its first meeting on or after the date the 
                dividend is received.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Election period.--The term `election period' means--
                    ``(A) if this section applies to the taxpayer's 
                last taxable year beginning before the date of the 
                enactment of this section, any 6-month or shorter 
                period during such year which is after the date of the 
                enactment of this section and which is selected by the 
                taxpayer, and
                    ``(B) if this section applies to the taxpayer's 
                first taxable year beginning on or after such date, the 
                1st 6 months of such taxable year.
            ``(2) Applicable financial statement.--The term `applicable 
        financial statement' means the most recently audited financial 
        statement (including notes and other documents which accompany 
        such statement)--
                    ``(A) which is certified on or before March 31, 
                2003, as being prepared in accordance with generally 
                accepted accounting principles, and
                    ``(B) which is used for the purposes of a statement 
                or report--
                            ``(i) to creditors,
                            ``(ii) to shareholders, or
                            ``(iii) for any other substantial nontax 
                        purpose.
        In the case of a corporation required to file a financial 
        statement with the Securities and Exchange Commission, such 
        term means the most recent such statement filed on or before 
        March 31, 2003.
            ``(3) Base period years.--The base period years are the 3 
        taxable years--
                    ``(A) which are among the 5 most recent taxable 
                years ending on or before March 31, 2003, and
                    ``(B) which are determined by disregarding--
                            ``(i) 1 taxable year for which the sum of 
                        the amounts described in clauses (i), (ii), and 
                        (iii) of subsection (b)(2)(B) is the largest, 
                        and
                            ``(ii) 1 taxable year for which such sum is 
                        the smallest.
        Rules similar to the rules of subparagraphs (A) and (B) of 
        section 41(f)(3) shall apply for purposes of this paragraph.
            ``(4) Coordination with dividends received deduction.--No 
        deduction shall be allowed under section 243 or 245 for any 
        dividend for which a deduction is allowed under this section.
    ``(d) Denial of Foreign Tax Credit.--
            ``(1) In general.--No credit shall be allowed under section 
        901 for any taxes paid or accrued (or treated as paid or 
        accrued) with respect to the deductible portion of any dividend 
        or of any amount described in subsection (a)(2). No deduction 
        shall be allowed under this chapter for any tax for which 
        credit is not allowable by reason of the preceding sentence.
            ``(2) Deductible portion.--For purposes of paragraph (1), 
        unless the taxpayer otherwise specifies, the deductible portion 
        of any dividend is the amount which bears the same ratio to the 
        amount of such dividend as the amount allowed as a deduction 
        under subsection (a) for the taxable year bears to the amount 
        described in subsection (b)(2)(A) for such year.
    ``(e) Increase in Tax on Included Amounts Not Reduced by Credits, 
Etc.--
            ``(1) In general.--Any tax under this chapter by reason of 
        nondeductible CFC dividends shall not be treated as tax imposed 
        by this chapter for purposes of determining--
                    ``(A) the amount of any credit allowable under this 
                chapter, or
                    ``(B) the amount of the tax imposed by section 55.
        Subparagraph (A) shall not apply to the credit under section 53 
        or to the credit under section 27(a) with respect to taxes 
        attributable to such dividends.
            ``(2) Inclusions may not be offset by net operating 
        losses.--
                    ``(A) In general.--The taxable income of any United 
                States shareholder for any taxable year shall in no 
                event be less than the amount of nondeductible CFC 
                dividends received during such year.
                    ``(B) Coordination with section 172.--The 
                nondeductible CFC dividends for any taxable year shall 
                not be taken into account--
                            ``(i) in determining under section 172 the 
                        amount of any net operating loss for such 
                        taxable year, and
                            ``(ii) in determining taxable income for 
                        such taxable year for purposes of the 2nd 
                        sentence of section 172(b)(2).
            ``(3) Nondeductible cfc dividends.--For purposes of this 
        subsection, the term `nondeductible CFC dividends' means the 
        excess of the amount of dividends taken into account under 
        subsection (a) over the deduction allowed under subsection (a) 
        for such dividends.
    ``(f) Election.--This section shall apply for the taxpayer's first 
taxable year beginning on or after the date of the enactment of this 
section if the taxpayer elects its application for such taxable year. 
The taxpayer may elect to apply this section to the taxpayer's last 
taxable year beginning before the date of the enactment of this section 
in lieu of such first taxable year.''
    (b) Alternative Minimum Tax.--Subparagraph (C) of section 56(g)(4) 
is amended by adding at the end the following new clause:
                            ``(v) Special rule for certain 
                        distributions from controlled foreign 
                        corporations.--Clause (i) shall not apply to 
                        any deduction allowable under section 965.''.
    (c) Clerical Amendment.--The table of sections for subpart F of 
part III of subchapter N of chapter 1 is amended by adding at the end 
the following new item:

                              ``Sec. 965. Temporary dividends received 
                                        deduction.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending on or after the date of the enactment of 
this Act.

                 Subtitle H--Other Incentive Provisions

SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
              RELATED CONDITIONS.

    (a) Rules for Replacement of Involuntarily Converted Livestock.--
Subsection (e) of section 1033 (relating to involuntary conversions) is 
amended--
            (1) by striking ``Conditions.--For purposes'' and inserting 
        ``Conditions.--
            ``(1) In general.--For purposes'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Extension of replacement period.--
                    ``(A) In general.--In the case of drought, flood, 
                or other weather-related conditions described in 
                paragraph (1) which result in the area being designated 
                as eligible for assistance by the Federal Government, 
                subsection (a)(2)(B) shall be applied with respect to 
                any converted property by substituting `4 years' for `2 
                years'.
                    ``(B) Further extension by secretary.--The 
                Secretary may extend on a regional basis the period for 
                replacement under this section (after the application 
                of subparagraph (A)) for such additional time as the 
                Secretary determines appropriate if the weather-related 
                conditions which resulted in such application continue 
                for more than 3 years.''.
    (b) Income Inclusion Rules.--Subsection (e) of section 451 
(relating to special rule for proceeds from livestock sold on account 
of drought, flood, or other weather-related conditions) is amended by 
adding at the end the following new paragraph:
            ``(3) Special election rules.--If section 1033(e)(2) 
        applies to a sale or exchange of livestock described in 
        paragraph (1), the election under paragraph (1) shall be deemed 
        valid if made during the replacement period described in such 
        section.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to any taxable year with respect to which the due date (without 
regard to extensions) for the return is after December 31, 2002.

SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT 
              REDUCING PATRONAGE DIVIDENDS.

    (a) In General.--Subsection (a) of section 1388 (relating to 
patronage dividend defined) is amended by adding at the end the 
following: ``For purposes of paragraph (3), net earnings shall not be 
reduced by amounts paid during the year as dividends on capital stock 
or other proprietary capital interests of the organization to the 
extent that the articles of incorporation or bylaws of such 
organization or other contract with patrons provide that such dividends 
are in addition to amounts otherwise payable to patrons which are 
derived from business done with or for patrons during the taxable 
year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO 
              OUTRIGHT SALES BY LANDOWNERS.

    (a) In General.--The first sentence of section 631(b) (relating to 
disposal of timber with a retained economic interest) is amended by 
striking ``retains an economic interest in such timber'' and inserting 
``either retains an economic interest in such timber or makes an 
outright sale of such timber''.
    (b) Conforming Amendments.--
            (1) The third sentence of section 631(b) is amended by 
        striking ``The date of disposal'' and inserting ``In the case 
        of disposal of timber with a retained economic interest, the 
        date of disposal''.
            (2) The heading for section 631(b) is amended by striking 
        ``With a Retained Economic Interest''.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales after December 31, 2004.

SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS TREATED AS 
              QUALIFYING INCOME OF REGULATED INVESTMENT COMPANIES.

    (a) In General.--Paragraph (2) of section 851(b) (defining 
regulated investment company) is amended to read as follows:
            ``(2) at least 90 percent of its gross income is derived 
        from--
                    ``(A) dividends, interest, payments with respect to 
                securities loans (as defined in section 512(a)(5)), and 
                gains from the sale or other disposition of stock or 
                securities (as defined in section 2(a)(36) of the 
                Investment Company Act of 1940, as amended) or foreign 
                currencies, or other income (including but not limited 
                to gains from options, futures or forward contracts) 
                derived with respect to its business of investing in 
                such stock, securities, or currencies, and
                    ``(B) distributions or other income derived from an 
                interest in a qualified publicly traded partnership (as 
                defined in subsection (h)); and''.
    (b) Source Flow-Through Rule Not To Apply.--The last sentence of 
section 851(b) is amended by inserting ``(other than a qualified 
publicly traded partnership as defined in subsection (h))'' after 
``derived from a partnership''.
    (c) Limitation on Ownership.--Subsection (c) of section 851 is 
amended by redesignating paragraph (5) as paragraph (6) and inserting 
after paragraph (4) the following new paragraph:
            ``(5) The term `outstanding voting securities of such 
        issuer' shall include the equity securities of a qualified 
        publicly traded partnership (as defined in subsection (h)).''.
    (d) Definition of Qualified Publicly Traded Partnership.--Section 
851 is amended by adding at the end the following new subsection:
    ``(h) Qualified Publicly Traded Partnership.--For purposes of this 
section, the term `qualified publicly traded partnership' means a 
publicly traded partnership described in section 7704(b) other than a 
partnership which would satisfy the gross income requirements of 
section 7704(c)(2) if qualifying income included only income described 
in subsection (b)(2)(A).''.
    (e) Definition of Qualifying Income.--Section 7704(d)(4) is amended 
by striking ``section 851(b)(2)'' and inserting ``section 
851(b)(2)(A)''.
    (f) Limitation on Composition of Assets.--Subparagraph (B) of 
section 851(b)(3) is amended to read as follows:
                    ``(B) not more than 25 percent of the value of its 
                total assets is invested in--
                            ``(i) the securities (other than Government 
                        securities or the securities of other regulated 
                        investment companies) of any one issuer,
                            ``(ii) the securities (other than the 
                        securities of other regulated investment 
                        companies) of two or more issuers which the 
                        taxpayer controls and which are determined, 
                        under regulations prescribed by the Secretary, 
                        to be engaged in the same or similar trades or 
                        businesses or related trades or businesses, or
                            ``(iii) the securities of one or more 
                        qualified publicly traded partnerships (as 
                        defined in subsection (h)).''.
    (g) Application of Special Passive Activity Rule to Regulated 
Investment Companies.--Subsection (k) of section 469 (relating to 
separate application of section in case of publicly traded 
partnerships) is amended by adding at the end the following new 
paragraph:
            ``(4) Application to regulated investment companies.--For 
        purposes of this section, a regulated investment company (as 
        defined in section 851) holding an interest in a qualified 
        publicly traded partnership (as defined in section 851(h)) 
        shall be treated as a taxpayer described in subsection (a)(2) 
        with respect to items attributable to such interest.''.
    (h) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE INVESTMENT TRUSTS.

    (a) Expansion of Straight Debt Safe Harbor.--Section 856 (defining 
real estate investment trust) is amended--
            (1) in subsection (c) by striking paragraph (7), and
            (2) by adding at the end the following new subsection:
    ``(m) Safe Harbor in Applying Subsection (c)(4).--
            ``(1) In general.--In applying subclause (III) of 
        subsection (c)(4)(B)(iii), except as otherwise determined by 
        the Secretary in regulations, the following shall not be 
        considered securities held by the trust:
                    ``(A) Straight debt securities of an issuer which 
                meet the requirements of paragraph (2).
                    ``(B) Any loan to an individual or an estate.
                    ``(C) Any section 467 rental agreement (as defined 
                in section 467(d)), other than with a person described 
                in subsection (d)(2)(B).
                    ``(D) Any obligation to pay rents from real 
                property (as defined in subsection (d)(1)).
                    ``(E) Any security issued by a State or any 
                political subdivision thereof, the District of 
                Columbia, a foreign government or any political 
                subdivision thereof, or the Commonwealth of Puerto 
                Rico, but only if the determination of any payment 
                received or accrued under such security does not depend 
                in whole or in part on the profits of any entity not 
                described in this subparagraph or payments on any 
                obligation issued by such an entity,
                    ``(F) Any security issued by a real estate 
                investment trust.
                    ``(G) Any other arrangement as determined by the 
                Secretary.
            ``(2) Special rules relating to straight debt securities.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(A), securities meet the requirements of this 
                paragraph if such securities are straight debt, as 
                defined in section 1361(c)(5) (without regard to 
                subparagraph (B)(iii) thereof).
                    ``(B) Special rules relating to certain 
                contingencies.--For purposes of subparagraph (A), any 
                interest or principal shall not be treated as failing 
                to satisfy section 1361(c)(5)(B)(i) solely by reason of 
                the fact that--
                            ``(i) the time of payment of such interest 
                        or principal is subject to a contingency, but 
                        only if--
                                    ``(I) any such contingency does not 
                                have the effect of changing the 
                                effective yield to maturity, as 
                                determined under section 1272, other 
                                than a change in the annual yield to 
                                maturity which does not exceed the 
                                greater of \1/4\ of 1 percent or 5 
                                percent of the annual yield to 
                                maturity, or
                                    ``(II) neither the aggregate issue 
                                price nor the aggregate face amount of 
                                the issuer's debt instruments held by 
                                the trust exceeds $1,000,000 and not 
                                more than 12 months of unaccrued 
                                interest can be required to be prepaid 
                                thereunder, or
                            ``(ii) the time or amount of payment is 
                        subject to a contingency upon a default or the 
                        exercise of a prepayment right by the issuer of 
                        the debt, but only if such contingency is 
                        consistent with customary commercial practice.
                    ``(C) Special rules relating to corporate or 
                partnership issuers.--In the case of an issuer which is 
                a corporation or a partnership, securities that 
                otherwise would be described in paragraph (1)(A) shall 
                be considered not to be so described if the trust 
                holding such securities and any of its controlled 
                taxable REIT subsidiaries (as defined in subsection 
                (d)(8)(A)(iv)) hold any securities of the issuer 
                which--
                            ``(i) are not described in paragraph (1) 
                        (prior to the application of this 
                        subparagraph), and
                            ``(ii) have an aggregate value greater than 
                        1 percent of the issuer's outstanding 
                        securities determined without regard to 
                        paragraph (3)(A)(i).
            ``(3) Look-through rule for partnership securities.--
                    ``(A) In general.--For purposes of applying 
                subclause (III) of subsection (c)(4)(B)(iii)--
                            ``(i) a trust's interest as a partner in a 
                        partnership (as defined in section 7701(a)(2)) 
                        shall not be considered a security, and
                            ``(ii) the trust shall be deemed to own its 
                        proportionate share of each of the assets of 
                        the partnership.
                    ``(B) Determination of trust's interest in 
                partnership assets.--For purposes of subparagraph (A), 
                with respect to any taxable year beginning after the 
                date of the enactment of this subparagraph--
                            ``(i) the trust's interest in the 
                        partnership assets shall be the trust's 
                        proportionate interest in any securities issued 
                        by the partnership (determined without regard 
                        to subparagraph (A)(i) and paragraph (4), but 
                        not including securities described in paragraph 
                        (1)), and
                            ``(ii) the value of any debt instrument 
                        shall be the adjusted issue price thereof, as 
                        defined in section 1272(a)(4).
            ``(4) Certain partnership debt instruments not treated as a 
        security.--For purposes of applying subclause (III) of 
        subsection (c)(4)(B)(iii)--
                    ``(A) any debt instrument issued by a partnership 
                and not described in paragraph (1) shall not be 
                considered a security to the extent of the trust's 
                interest as a partner in the partnership, and
                    ``(B) any debt instrument issued by a partnership 
                and not described in paragraph (1) shall not be 
                considered a security if at least 75 percent of the 
                partnership's gross income (excluding gross income from 
                prohibited transactions) is derived from sources 
                referred to in subsection (c)(3).
            ``(5) Secretarial guidance.--The Secretary is authorized to 
        provide guidance (including through the issuance of a written 
        determination, as defined in section 6110(b)) that an 
        arrangement shall not be considered a security held by the 
        trust for purposes of applying subclause (III) of subsection 
        (c)(4)(B)(iii) notwithstanding that such arrangement otherwise 
        could be considered a security under subparagraph (F) of 
        subsection (c)(5).''.
    (b) Clarification of Application of Limited Rental Exception.--
Subparagraph (A) of section 856(d)(8) (relating to special rules for 
taxable REIT subsidiaries) is amended to read as follows:
                    ``(A) Limited rental exception.--
                            ``(i) In general.--The requirements of this 
                        subparagraph are met with respect to any 
                        property if at least 90 percent of the leased 
                        space of the property is rented to persons 
                        other than taxable REIT subsidiaries of such 
                        trust and other than persons described in 
                        paragraph (2)(B).
                            ``(ii) Rents must be substantially 
                        comparable.--Clause (i) shall apply only to the 
                        extent that the amounts paid to the trust as 
                        rents from real property (as defined in 
                        paragraph (1) without regard to paragraph 
                        (2)(B)) from such property are substantially 
                        comparable to such rents paid by the other 
                        tenants of the trust's property for comparable 
                        space.
                            ``(iii) Times for testing rent 
                        comparability.--The substantial comparability 
                        requirement of clause (ii) shall be treated as 
                        met with respect to a lease to a taxable REIT 
                        subsidiary of the trust if such requirement is 
                        met under the terms of the lease--
                                    ``(I) at the time such lease is 
                                entered into,
                                    ``(II) at the time of each 
                                extension of the lease, including a 
                                failure to exercise a right to 
                                terminate, and
                                    ``(III) at the time of any 
                                modification of the lease between the 
                                trust and the taxable REIT subsidiary 
                                if the rent under such lease is 
                                effectively increased pursuant to such 
                                modification.
                        With respect to subclause (III), if the taxable 
                        REIT subsidiary of the trust is a controlled 
                        taxable REIT subsidiary of the trust, the term 
                        `rents from real property' shall not in any 
                        event include rent under such lease to the 
                        extent of the increase in such rent on account 
                        of such modification.
                            ``(iv) Controlled taxable reit 
                        subsidiary.--For purposes of clause (iii), the 
                        term `controlled taxable REIT subsidiary' 
                        means, with respect to any real estate 
                        investment trust, any taxable REIT subsidiary 
                        of such trust if such trust owns directly or 
                        indirectly--
                                    ``(I) stock possessing more than 50 
                                percent of the total voting power of 
                                the outstanding stock of such 
                                subsidiary, or
                                    ``(II) stock having a value of more 
                                than 50 percent of the total value of 
                                the outstanding stock of such 
                                subsidiary.
                            ``(v) Continuing qualification based on 
                        third party actions.--If the requirements of 
                        clause (i) are met at a time referred to in 
                        clause (iii), such requirements shall continue 
                        to be treated as met so long as there is no 
                        increase in the space leased to any taxable 
                        REIT subsidiary of such trust or to any person 
                        described in paragraph (2)(B).
                            ``(vi) Correction period.--If there is an 
                        increase referred to in clause (v) during any 
                        calendar quarter with respect to any property, 
                        the requirements of clause (iii) shall be 
                        treated as met during the quarter and the 
                        succeeding quarter if such requirements are met 
                        at the close of such succeeding quarter.''.
    (c) Deletion of Customary Services Exception.--Subparagraph (B) of 
section 857(b)(7) (relating to redetermined rents) is amended by 
striking clause (ii) and by redesignating clauses (iii), (iv), (v), 
(vi), and (vii) as clauses (ii), (iii), (iv), (v), and (vi), 
respectively.
    (d) Conformity With General Hedging Definition.--Subparagraph (G) 
of section 856(c)(5) (relating to treatment of certain hedging 
instruments) is amended to read as follows:
                    ``(G) Treatment of certain hedging instruments.--
                Except to the extent provided by regulations, any 
                income of a real estate investment trust from a hedging 
                transaction (as defined in clause (ii) or (iii) of 
                section 1221(b)(2)(A)) which is clearly identified 
                pursuant to section 1221(a)(7), including gain from the 
                sale or disposition of such a transaction, shall not 
                constitute gross income under paragraph (2) to the 
                extent that the transaction hedges any indebtedness 
                incurred or to be incurred by the trust to acquire or 
                carry real estate assets.''.
    (e) Conformity With Regulated Investment Company Rules.--Clause (i) 
of section 857(b)(5)(A) (relating to imposition of tax in case of 
failure to meet certain requirements) is amended by striking ``90 
percent'' and inserting ``95 percent''.
    (f) Savings Provisions.--
            (1) Rules of application for failure to satisfy section 
        856(c)(4).--Section 856(c) (relating to definition of real 
        estate investment trust) is amended by inserting after 
        paragraph (6) the following new paragraph:
            ``(7) Rules of application for failure to satisfy paragraph 
        (4).--
                    ``(A) De minimis failure.--A corporation, trust, or 
                association that fails to meet the requirements of 
                paragraph (4)(B)(iii) for a particular quarter shall 
                nevertheless be considered to have satisfied the 
                requirements of such paragraph for such quarter if--
                            ``(i) such failure is due to the ownership 
                        of assets the total value of which does not 
                        exceed the lesser of--
                                    ``(I) 1 percent of the total value 
                                of the trust's assets at the end of the 
                                quarter for which such measurement is 
                                done, and
                                    ``(II) $10,000,000, and
                            ``(ii)(I) the corporation, trust, or 
                        association, following the identification of 
                        such failure, disposes of assets in order to 
                        meet the requirements of such paragraph within 
                        6 months after the last day of the quarter in 
                        which the corporation, trust or association's 
                        identification of the failure to satisfy the 
                        requirements of such paragraph occurred or such 
                        other time period prescribed by the Secretary 
                        and in the manner prescribed by the Secretary, 
                        or
                            ``(II) the requirements of such paragraph 
                        are otherwise met within the time period 
                        specified in subclause (I).
                    ``(B) Failures exceeding de minimis amount.--A 
                corporation, trust, or association that fails to meet 
                the requirements of paragraph (4) for a particular 
                quarter shall nevertheless be considered to have 
                satisfied the requirements of such paragraph for such 
                quarter if--
                            ``(i) such failure involves the ownership 
                        of assets the total value of which exceeds the 
                        de minimis standard described in subparagraph 
                        (A)(i) at the end of the quarter for which such 
                        measurement is done,
                            ``(ii) following the corporation, trust, or 
                        association's identification of the failure to 
                        satisfy the requirements of such paragraph for 
                        a particular quarter, a description of each 
                        asset that causes the corporation, trust, or 
                        association to fail to satisfy the requirements 
                        of such paragraph at the close of such quarter 
                        of any taxable year is set forth in a schedule 
                        for such quarter filed in accordance with 
                        regulations prescribed by the Secretary,
                            ``(iii) the failure to meet the 
                        requirements of such paragraph for a particular 
                        quarter is due to reasonable cause and not due 
                        to willful neglect,
                            ``(iv) the corporation, trust, or 
                        association pays a tax computed under 
                        subparagraph (C), and
                            ``(v)(I) the corporation, trust, or 
                        association disposes of the assets set forth on 
                        the schedule specified in clause (ii) within 6 
                        months after the last day of the quarter in 
                        which the corporation, trust or association's 
                        identification of the failure to satisfy the 
                        requirements of such paragraph occurred or such 
                        other time period prescribed by the Secretary 
                        and in the manner prescribed by the Secretary, 
                        or
                            ``(II) the requirements of such paragraph 
                        are otherwise met within the time period 
                        specified in subclause (I).
                    ``(C) Tax.--For purposes of subparagraph (B)(iv)--
                            ``(i) Tax imposed.--If a corporation, 
                        trust, or association elects the application of 
                        this subparagraph, there is hereby imposed a 
                        tax on the failure described in subparagraph 
                        (B) of such corporation, trust, or association. 
                        Such tax shall be paid by the corporation, 
                        trust, or association.
                            ``(ii) Tax computed.--The amount of the tax 
                        imposed by clause (i) shall be the greater of--
                                    ``(I) $50,000, or
                                    ``(II) the amount determined 
                                (pursuant to regulations promulgated by 
                                the Secretary) by multiplying the net 
                                income generated by the assets 
                                described in the schedule specified in 
                                subparagraph (B)(ii) for the period 
                                specified in clause (iii) by the 
                                highest rate of tax specified in 
                                section 11.
                            ``(iii) Period.--For purposes of clause 
                        (ii)(II), the period described in this clause 
                        is the period beginning on the first date that 
                        the failure to satisfy the requirements of such 
                        paragraph (4) occurs as a result of the 
                        ownership of such assets and ending on the 
                        earlier of the date on which the trust disposes 
                        of such assets or the end of the first quarter 
                        when there is no longer a failure to satisfy 
                        such paragraph (4).
                            ``(iv) Administrative provisions.--For 
                        purposes of subtitle F, the taxes imposed by 
                        this subparagraph shall be treated as excise 
                        taxes with respect to which the deficiency 
                        procedures of such subtitle apply.''.
            (2) Modification of rules of application for failure to 
        satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of 
        section 856(c) (relating to definition of real estate 
        investment trust) is amended by striking subparagraphs (A) and 
        (B), by redesignating subparagraph (C) as subparagraph (B), and 
        by inserting before subparagraph (B) (as so redesignated) the 
        following new subparagraph:
                    ``(A) following the corporation, trust, or 
                association's identification of the failure to meet the 
                requirements of paragraph (2) or (3), or of both such 
                paragraphs, for any taxable year, a description of each 
                item of its gross income described in such paragraphs 
                is set forth in a schedule for such taxable year filed 
                in accordance with regulations prescribed by the 
                Secretary, and''.
            (3) Reasonable cause exception to loss of reit status if 
        failure to satisfy requirements.--Subsection (g) of section 856 
        (relating to termination of election) is amended--
                    (A) in paragraph (1) by inserting before the period 
                at the end of the first sentence the following: 
                ``unless paragraph (5) applies'', and
                    (B) by adding at the end the following new 
                paragraph:
            ``(5) Entities to which paragraph applies.--This paragraph 
        applies to a corporation, trust, or association--
                    ``(A) which is not a real estate investment trust 
                to which the provisions of this part apply for the 
                taxable year due to one or more failures to comply with 
                one or more of the provisions of this part (other than 
                subsection (c)(6) or (c)(7) of section 856),
                    ``(B) such failures are due to reasonable cause and 
                not due to willful neglect, and
                    ``(C) if such corporation, trust, or association 
                pays (as prescribed by the Secretary in regulations and 
                in the same manner as tax) a penalty of $50,000 for 
                each failure to satisfy a provision of this part due to 
                reasonable cause and not willful neglect.''.
            (4) Deduction of tax paid from amount required to be 
        distributed.--Subparagraph (E) of section 857(b)(2) is amended 
        by striking ``(7)'' and inserting ``(7) of this subsection, 
        section 856(c)(7)(B)(iii), and section 856(g)(1).''.
            (5) Expansion of deficiency dividend procedure.--Subsection 
        (e) of section 860 is amended by striking ``or'' at the end of 
        paragraph (2), by striking the period at the end of paragraph 
        (3) and inserting ``; or'', and by adding at the end the 
        following new paragraph:
            ``(4) a statement by the taxpayer attached to its amendment 
        or supplement to a return of tax for the relevant tax year.''.
    (g) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2000.
            (2) Subparagraphs (c) through  (f).--The amendments made by 
        subsections (c), (d), (e), and (f) shall apply to taxable years 
        beginning after the date of the enactment of this Act.

SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT 
              COMPANIES.

    (a) Treatment of Certain Dividends.--
            (1) Nonresident alien individuals.--Section 871 (relating 
        to tax on nonresident alien individuals) is amended by 
        redesignating subsection (k) as subsection (l) and by inserting 
        after subsection (j) the following new subsection:
    ``(k) Exemption for Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any interest-
                related dividend received from a regulated investment 
                company.
                    ``(B) Exceptions.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any interest-related dividend 
                        received from a regulated investment company by 
                        a person to the extent such dividend is 
                        attributable to interest (other than interest 
                        described in subparagraph (E) (i) or (iii)) 
                        received by such company on indebtedness issued 
                        by such person or by any corporation or 
                        partnership with respect to which such person 
                        is a 10-percent shareholder,
                            ``(ii) to any interest-related dividend 
                        with respect to stock of a regulated investment 
                        company unless the person who would otherwise 
                        be required to deduct and withhold tax from 
                        such dividend under chapter 3 receives a 
                        statement (which meets requirements similar to 
                        the requirements of subsection (h)(5)) that the 
                        beneficial owner of such stock is not a United 
                        States person, and
                            ``(iii) to any interest-related dividend 
                        paid to any person within a foreign country (or 
                        any interest-related dividend payment addressed 
                        to, or for the account of, persons within such 
                        foreign country) during any period described in 
                        subsection (h)(6) with respect to such country.
                Clause (iii) shall not apply to any dividend with 
                respect to any stock which was acquired on or before 
                the date of the publication of the Secretary's 
                determination under subsection (h)(6).
                    ``(C) Interest-related dividend.--For purposes of 
                this paragraph, an interest-related dividend is any 
                dividend (or part thereof) which is designated by the 
                regulated investment company as an interest-related 
                dividend in a written notice mailed to its shareholders 
                not later than 60 days after the close of its taxable 
                year. If the aggregate amount so designated with 
                respect to a taxable year of the company (including 
                amounts so designated with respect to dividends paid 
                after the close of the taxable year described in 
                section 855) is greater than the qualified net interest 
                income of the company for such taxable year, the 
                portion of each distribution which shall be an 
                interest-related dividend shall be only that portion of 
                the amounts so designated which such qualified net 
                interest income bears to the aggregate amount so 
                designated.
                    ``(D) Qualified net interest income.--For purposes 
                of subparagraph (C), the term `qualified net interest 
                income' means the qualified interest income of the 
                regulated investment company reduced by the deductions 
                properly allocable to such income.
                    ``(E) Qualified interest income.--For purposes of 
                subparagraph (D), the term `qualified interest income' 
                means the sum of the following amounts derived by the 
                regulated investment company from sources within the 
                United States:
                            ``(i) Any amount includible in gross income 
                        as original issue discount (within the meaning 
                        of section 1273) on an obligation payable 183 
                        days or less from the date of original issue 
                        (without regard to the period held by the 
                        company).
                            ``(ii) Any interest includible in gross 
                        income (including amounts recognized as 
                        ordinary income in respect of original issue 
                        discount or market discount or acquisition 
                        discount under part V of subchapter P and such 
                        other amounts as regulations may provide) on an 
                        obligation which is in registered form; except 
                        that this clause shall not apply to--
                                    ``(I) any interest on an obligation 
                                issued by a corporation or partnership 
                                if the regulated investment company is 
                                a 10-percent shareholder in such 
                                corporation or partnership, and
                                    ``(II) any interest which is 
                                treated as not being portfolio interest 
                                under the rules of subsection (h)(4).
                            ``(iii) Any interest referred to in 
                        subsection (i)(2)(A) (without regard to the 
                        trade or business of the regulated investment 
                        company).
                            ``(iv) Any interest-related dividend 
                        includable in gross income with respect to 
                        stock of another regulated investment company.
                    ``(F) 10-percent shareholder.--For purposes of this 
                paragraph, the term `10-percent shareholder' has the 
                meaning given such term by subsection (h)(3)(B).
            ``(2) Short-term capital gain dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any short-term 
                capital gain dividend received from a regulated 
                investment company.
                    ``(B) Exception for aliens taxable under subsection 
                (a)(2).--Subparagraph (A) shall not apply in the case 
                of any nonresident alien individual subject to tax 
                under subsection (a)(2).
                    ``(C) Short-term capital gain dividend.--For 
                purposes of this paragraph, a short-term capital gain 
                dividend is any dividend (or part thereof) which is 
                designated by the regulated investment company as a 
                short-term capital gain dividend in a written notice 
                mailed to its shareholders not later than 60 days after 
                the close of its taxable year. If the aggregate amount 
                so designated with respect to a taxable year of the 
                company (including amounts so designated with respect 
                to dividends paid after the close of the taxable year 
                described in section 855) is greater than the qualified 
                short-term gain of the company for such taxable year, 
                the portion of each distribution which shall be a 
                short-term capital gain dividend shall be only that 
                portion of the amounts so designated which such 
                qualified short-term gain bears to the aggregate amount 
                so designated.
                    ``(D) Qualified short-term gain.--For purposes of 
                subparagraph (C), the term `qualified short-term gain' 
                means the excess of the net short-term capital gain of 
                the regulated investment company for the taxable year 
                over the net long-term capital loss (if any) of such 
                company for such taxable year. For purposes of this 
                subparagraph--
                            ``(i) the net short-term capital gain of 
                        the regulated investment company shall be 
                        computed by treating any short-term capital 
                        gain dividend includible in gross income with 
                        respect to stock of another regulated 
                        investment company as a short-term capital 
                        gain, and
                            ``(ii) the excess of the net short-term 
                        capital gain for a taxable year over the net 
                        long-term capital loss for a taxable year (to 
                        which an election under section 4982(e)(4) does 
                        not apply) shall be determined without regard 
                        to any net capital loss or net short-term 
                        capital loss attributable to transactions after 
                        October 31 of such year, and any such net 
                        capital loss or net short-term capital loss 
                        shall be treated as arising on the 1st day of 
                        the next taxable year.
                To the extent provided in regulations, clause (ii) 
                shall apply also for purposes of computing the taxable 
                income of the regulated investment company.''
            (2) Foreign corporations.--Section 881 (relating to tax on 
        income of foreign corporations not connected with United States 
        business) is amended by redesignating subsection (e) as 
        subsection (f) and by inserting after subsection (d) the 
        following new subsection:
    ``(e) Tax Not To Apply to Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1) of subsection (a) on any interest-related 
                dividend (as defined in section 871(k)(1)) received 
                from a regulated investment company.
                    ``(B) Exception.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any dividend referred to in 
                        section 871(k)(1)(B), and
                            ``(ii) to any interest-related dividend 
                        received by a controlled foreign corporation 
                        (within the meaning of section 957(a)) to the 
                        extent such dividend is attributable to 
                        interest received by the regulated investment 
                        company from a person who is a related person 
                        (within the meaning of section 864(d)(4)) with 
                        respect to such controlled foreign corporation.
                    ``(C) Treatment of dividends received by controlled 
                foreign corporations.--The rules of subsection 
                (c)(5)(A) shall apply to any interest-related dividend 
                received by a controlled foreign corporation (within 
                the meaning of section 957(a)) to the extent such 
                dividend is attributable to interest received by the 
                regulated investment company which is described in 
                clause (ii) of section 871(k)(1)(E) (and not described 
                in clause (i) or (iii) of such section).
            ``(2) Short-term capital gain dividends.--No tax shall be 
        imposed under paragraph (1) of subsection (a) on any short-term 
        capital gain dividend (as defined in section 871(k)(2)) 
        received from a regulated investment company.''.
            (3) Withholding taxes.--
                    (A) Section 1441(c) (relating to exceptions) is 
                amended by adding at the end the following new 
                paragraph:
            ``(12) Certain dividends received from regulated investment 
        companies.--
                    ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
                871(a)(1)(A) by reason of section 871(k).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), clause (i) of section 871(k)(1)(B) shall not apply 
                to any dividend unless the regulated investment company 
                knows that such dividend is a dividend referred to in 
                such clause. A similar rule shall apply with respect to 
                the exception contained in section 871(k)(2)(B).''.
                    (B) Section 1442(a) (relating to withholding of tax 
                on foreign corporations) is amended--
                            (i) by striking ``and the reference in 
                        section 1441(c)(10)'' and inserting ``the 
                        reference in section 1441(c)(10)'', and
                            (ii) by inserting before the period at the 
                        end the following: ``, and the references in 
                        section 1441(c)(12) to sections 871(a) and 
                        871(k) shall be treated as referring to 
                        sections 881(a) and 881(e) (except that for 
                        purposes of applying subparagraph (A) of 
                        section 1441(c)(12), as so modified, clause 
                        (ii) of section 881(e)(1)(B) shall not apply to 
                        any dividend unless the regulated investment 
                        company knows that such dividend is a dividend 
                        referred to in such clause)''.
    (b) Estate Tax Treatment of Interest in Certain Regulated 
Investment Companies.--Section 2105 (relating to property without the 
United States for estate tax purposes) is amended by adding at the end 
the following new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, stock 
        in a regulated investment company (as defined in section 851) 
        owned by a nonresident not a citizen of the United States shall 
        not be deemed property within the United States in the 
        proportion that, at the end of the quarter of such investment 
        company's taxable year immediately preceding a decedent's date 
        of death (or at such other time as the Secretary may designate 
        in regulations), the assets of the investment company that were 
        qualifying assets with respect to the decedent bore to the 
        total assets of the investment company.
            ``(2) Qualifying assets.--For purposes of this subsection, 
        qualifying assets with respect to a decedent are assets that, 
        if owned directly by the decedent, would have been--
                    ``(A) amounts, deposits, or debt obligations 
                described in subsection (b) of this section,
                    ``(B) debt obligations described in the last 
                sentence of section 2104(c), or
                    ``(C) other property not within the United 
                States.''
    (c) Treatment of Regulated Investment Companies Under Section 
897.--
            (1) Paragraph (1) of section 897(h) is amended by striking 
        ``REIT'' each place it appears and inserting ``qualified 
        investment entity''.
            (2) Paragraphs (2) and (3) of section 897(h) are amended to 
        read as follows:
            ``(2) Sale of stock in domestically controlled entity not 
        taxed.--The term `United States real property interest' does 
        not include any interest in a domestically controlled qualified 
        investment entity.
            ``(3) Distributions by domestically controlled qualified 
        investment entities.--In the case of a domestically controlled 
        qualified investment entity, rules similar to the rules of 
        subsection (d) shall apply to the foreign ownership percentage 
        of any gain.''
            (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
        amended to read as follows:
                    ``(A) Qualified investment entity.--The term 
                `qualified investment entity' means any real estate 
                investment trust and any regulated investment company.
                    ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment entity' 
                means any qualified investment entity in which at all 
                times during the testing period less than 50 percent in 
                value of the stock was held directly or indirectly by 
                foreign persons.''
            (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
        amended by striking ``REIT'' and inserting ``qualified 
        investment entity''.
            (5) The subsection heading for subsection (h) of section 
        897 is amended by striking ``REITS'' and inserting ``Certain 
        Investment Entities''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        dividends with respect to taxable years of regulated investment 
        companies beginning after December 31, 2004.
            (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after December 
        31, 2004.
            (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect after December 31, 2004.

SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS.

    (a) In General.--Subsection (g) of section 468B (relating to 
clarification of taxation of certain funds) is amended to read as 
follows:
    ``(g) Clarification of Taxation of Certain Funds.--
            ``(1) In general.--Except as provided in paragraph (2), 
        nothing in any provision of law shall be construed as providing 
        that an escrow account, settlement fund, or similar fund is not 
        subject to current income tax. The Secretary shall prescribe 
        regulations providing for the taxation of any such account or 
        fund whether as a grantor trust or otherwise.
            ``(2) Exemption from tax for certain settlement funds.--An 
        escrow account, settlement fund, or similar fund shall be 
        treated as beneficially owned by the United States and shall be 
        exempt from taxation under this subtitle if--
                    ``(A) it is established pursuant to a consent 
                decree entered by a judge of a United States District 
                Court,
                    ``(B) it is created for the receipt of settlement 
                payments as directed by a government entity for the 
                sole purpose of resolving or satisfying one or more 
                claims asserting liability under the Comprehensive 
                Environmental Response, Compensation, and Liability Act 
                of 1980,
                    ``(C) the authority and control over the 
                expenditure of funds therein (including the expenditure 
                of contributions thereto and any net earnings thereon) 
                is with such government entity, and
                    ``(D) upon termination, any remaining funds will be 
                disbursed upon instructions by such government entity 
                in accordance with applicable law.
        For purposes of this paragraph, the term `government entity' 
        means the United States, any State or political subdivision 
        thereof, the District of Columbia, any possession of the United 
        States, and any agency or instrumentality of any of the 
        foregoing.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN DRUG 
              CREDIT.

    (a) In General.--Paragraph (2) of section 45C(b) (relating to 
qualified clinical testing expenses) is amended by adding at the end 
the following new subparagraph:
                    ``(C) Treatment of certain expenses incurred before 
                designation.--For purposes of subparagraph (A)(ii)(I), 
                if a drug is designated under section 526 of the 
                Federal Food, Drug, and Cosmetic Act not later than the 
                due date (including extensions) for filing the return 
                of tax under this subtitle for the taxable year in 
                which the application for such designation of such drug 
                was filed, such drug shall be treated as having been 
                designated on the date that such application was 
                filed.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to expenses incurred after the date of the enactment of this Act.

SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS.

    (a) Bows.--Paragraph (1) of section 4161(b) (relating to bows) is 
amended to read as follows:
            ``(1) Bows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                bow which has a peak draw weight of 30 pounds or more, 
                a tax equal to 11 percent of the price for which so 
                sold.
                    ``(B) Archery equipment.--There is hereby imposed 
                on the sale by the manufacturer, producer, or 
                importer--
                            ``(i) of any part or accessory suitable for 
                        inclusion in or attachment to a bow described 
                        in subparagraph (A), and
                            ``(ii) of any quiver or broadhead suitable 
                        for use with an arrow described in paragraph 
                        (2),
                a tax equal to 11 percent of the price for which so 
                sold.''.
    (b) Arrows.--Subsection (b) of section 4161 (relating to bows and 
arrows, etc.) is amended by redesignating paragraph (3) as paragraph 
(4) and inserting after paragraph (2) the following:
            ``(3) Arrows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                arrow, a tax equal to 12 percent of the price for which 
                so sold.
                    ``(B) Exception.--In the case of any arrow of which 
                the shaft or any other component has been previously 
                taxed under paragraph (1) or (2)--
                            ``(i) section 6416(b)(3) shall not apply, 
                        and
                            ``(ii) the tax imposed by subparagraph (A) 
                        shall be an amount equal to the excess (if any) 
                        of--
                                    ``(I) the amount of tax imposed by 
                                this paragraph (determined without 
                                regard to this subparagraph), over
                                    ``(II) the amount of tax paid with 
                                respect to the tax imposed under 
                                paragraph (1) or (2) on such shaft or 
                                component.
                    ``(C) Arrow.--For purposes of this paragraph, the 
                term `arrow' means any shaft described in paragraph (2) 
                to which additional components are attached.''.
    (c) Conforming Amendments.--Section 4161(b)(2) is amended--
            (1) by inserting ``(other than broadheads)'' after 
        ``point'', and
            (2) by striking ``Arrows.--'' in the heading and inserting 
        ``Arrow components.--''.
    (d) Effective Date.--The amendments made by this section shall 
apply to articles sold by the manufacturer, producer, or importer after 
December 31, 2004.

SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

    (a) Repeal.--Paragraph (6) of section 4162(a) (defining sport 
fishing equipment) is amended by striking subparagraph (C) and by 
redesignating subparagraphs (D) through (J) as subparagraphs (C) 
through (I), respectively.
    (b) Effective Date.--The amendments made this section shall apply 
to articles sold by the manufacturer, producer, or importer after 
December 31, 2004.

SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH.

    (a) Not Treated as Sport Fishing Equipment.--Subsection (a) of 
section 4162 (relating to sport fishing equipment defined) is amended 
by inserting ``and'' at the end of paragraph (8), by striking ``, and'' 
at the end of paragraph (9) and inserting a period, and by striking 
paragraph (10).
    (b) Conforming Amendment.--Section 4162 is amended by striking 
subsection (b) and by redesignating subsection (c) as subsection (b).
    (c) Effective Date.--The amendments made this section shall apply 
to articles sold by the manufacturer, producer, or importer after 
December 31, 2004.

SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS WHOLESALERS FOR COST 
              OF CARRYING FEDERAL EXCISE TAXES ON BOTTLED DISTILLED 
              SPIRITS.

    (a) In General.--Subpart A of part I of subchapter A of chapter 51 
(relating to gallonage and occupational taxes) is amended by adding at 
the end the following new section:

``SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER'S AVERAGE COST OF 
              CARRYING EXCISE TAX.

    ``(a) In General.--For purposes of section 38, in the case of an 
eligible wholesaler, the amount of the distilled spirits wholesalers 
credit for any taxable year is the amount equal to the product of--
            ``(1) the number of cases of bottled distilled spirits--
                    ``(A) which were bottled in the United States, and
                    ``(B) which are purchased by such wholesaler during 
                the taxable year directly from the bottler of such 
                spirits, and
            ``(2) the average tax-financing cost per case for the most 
        recent calendar year ending before the beginning of such 
        taxable year.
    ``(b) Eligible Wholesaler.--For purposes of this section, the term 
`eligible wholesaler' means any person who holds a permit under the 
Federal Alcohol Administration Act as a wholesaler of distilled 
spirits.
    ``(c) Average Tax-Financing Cost.--
            ``(1) In general.--For purposes of this section, the 
        average tax-financing cost per case for any calendar year is 
        the amount of interest which would accrue at the deemed 
        financing rate during a 60-day period on an amount equal to the 
        deemed Federal excise per case.
            ``(2) Deemed financing rate.--For purposes of paragraph 
        (1), the deemed financing rate for any calendar year is the 
        average of the corporate overpayment rates under paragraph (1) 
        of section 6621(a) (determined without regard to the last 
        sentence of such paragraph) for calendar quarters of such year.
            ``(3) Deemed federal excise tax based on case.--For 
        purposes of paragraph (1), the deemed Federal excise tax per 
        case of 12 80-proof 750ml bottles is $22.83.
            ``(4) Number of cases in lot.--For purposes of this 
        section, the number of cases in any lot of distilled spirits 
        shall be determined by dividing the number of liters in such 
        lot by 9.''
    (b) Conforming Amendments.--
            (1) Subsection (b) of section 38 is amended by striking 
        ``plus'' at the end of paragraph (14), by striking the period 
        at the end of paragraph (15) and inserting ``, plus'', and by 
        adding at the end the following new paragraph:
            ``(16) in the case of an eligible wholesaler (as defined in 
        section 5011(b)), the distilled spirits wholesalers credit 
        determined under section 5011(a).''
            (2) Subsection (d) of section 39 (relating to carryback and 
        carryforward of unused credits) is amended by adding at the end 
        the following new paragraph:
            ``(11) No carryback of section 5011 credit before january 
        1, 2005.--No portion of the unused business credit for any 
        taxable year which is attributable to the credit determined 
        under section 5011(a) may be carried back to a taxable year 
        beginning before January 1, 2005.''.
            (3) The table of sections for subpart A of part I of 
        subchapter A of chapter 51 is amended by adding at the end the 
        following new item:

                              ``Sec. 5011. Income tax credit for 
                                        wholesaler's average cost of 
                                        carrying excise tax.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO DISTILLED 
              SPIRITS, WINE, AND BEER.

    (a) In General.--Subpart G of part II of subchapter A of chapter 51 
is amended by redesignating section 5148 as section 5149 and by 
inserting after section 5147 the following new section:

``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

    ``(a) In General.--Notwithstanding sections 5081, 5091, 5111, 5121, 
and 5131, the rate of tax imposed under such sections for the 
suspension period shall be zero. During such period, persons engaged in 
or carrying on a trade or business covered by such sections shall 
register under section 5141 and shall comply with the recordkeeping 
requirements under this part.
    ``(b) Suspension Period.--For purposes of subsection (a), the 
suspension period is the period beginning on July 1, 2004, and ending 
on June 30, 2007.''.
    (b) Conforming Amendment.--Section 5117 is amended by adding at the 
end the following new subsection:
    ``(d) Special Rule During Suspension Period.--Except as provided by 
the Secretary, during the suspension period (as defined in section 
5148) it shall be unlawful for any dealer to purchase distilled spirits 
for resale from any person other than a wholesale dealer in liquors who 
is required to keep records under section 5114.''.
    (c) Clerical Amendment.--The table of sections for subpart G of 
part II of subchapter A of chapter 51 is amended by striking the last 
item and inserting the following new items:

                              ``Sec. 5148. Suspension of occupational 
                                        tax.
                              ``Sec. 5149. Cross references.''.
    (d) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

 TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES

SEC. 301. INTEREST EXPENSE ALLOCATION RULES.

    (a) Election To Allocate on Worldwide Basis.--Section 864 is 
amended by redesignating subsection (f) as subsection (g) and by 
inserting after subsection (e) the following new subsection:
    ``(f) Election To Allocate Interest, etc. on Worldwide Basis.--For 
purposes of this subchapter, at the election of the worldwide 
affiliated group--
            ``(1) Allocation and apportionment of interest expense.--
                    ``(A) In general.--The taxable income of each 
                domestic corporation which is a member of a worldwide 
                affiliated group shall be determined by allocating and 
                apportioning interest expense of each member as if all 
                members of such group were a single corporation.
                    ``(B) Treatment of worldwide affiliated group.--The 
                taxable income of the domestic members of a worldwide 
                affiliated group from sources outside the United States 
                shall be determined by allocating and apportioning the 
                interest expense of such domestic members to such 
                income in an amount equal to the excess (if any) of--
                            ``(i) the total interest expense of the 
                        worldwide affiliated group multiplied by the 
                        ratio which the foreign assets of the worldwide 
                        affiliated group bears to all the assets of the 
                        worldwide affiliated group, over
                            ``(ii) the interest expense of all foreign 
                        corporations which are members of the worldwide 
                        affiliated group to the extent such interest 
                        expense of such foreign corporations would have 
                        been allocated and apportioned to foreign 
                        source income if this subsection were applied 
                        to a group consisting of all the foreign 
                        corporations in such worldwide affiliated 
                        group.
                    ``(C) Worldwide affiliated group.--For purposes of 
                this paragraph, the term `worldwide affiliated group' 
                means a group consisting of--
                            ``(i) the includible members of an 
                        affiliated group (as defined in section 
                        1504(a), determined without regard to 
                        paragraphs (2) and (4) of section 1504(b)), and
                            ``(ii) all controlled foreign corporations 
                        in which such members in the aggregate meet the 
                        ownership requirements of section 1504(a)(2) 
                        either directly or indirectly through applying 
                        paragraph (2) of section 958(a) or through 
                        applying rules similar to the rules of such 
                        paragraph to stock owned directly or indirectly 
                        by domestic partnerships, trusts, or estates.
            ``(2) Allocation and apportionment of other expenses.--
        Expenses other than interest which are not directly allocable 
        or apportioned to any specific income producing activity shall 
        be allocated and apportioned as if all members of the 
        affiliated group were a single corporation. For purposes of the 
        preceding sentence, the term `affiliated group' has the meaning 
        given such term by section 1504 (determined without regard to 
        paragraph (4) of section 1504(b)).
            ``(3) Treatment of tax-exempt assets; basis of stock in 
        nonaffiliated 10-percent owned corporations.--The rules of 
        paragraphs (3) and (4) of subsection (e) shall apply for 
        purposes of this subsection, except that paragraph (4) shall be 
        applied on a worldwide affiliated group basis.
            ``(4) Treatment of certain financial institutions.--
                    ``(A) In general.--For purposes of paragraph (1), 
                any corporation described in subparagraph (B) shall be 
                treated as an includible corporation for purposes of 
                section 1504 only for purposes of applying this 
                subsection separately to corporations so described.
                    ``(B) Description.--A corporation is described in 
                this subparagraph if--
                            ``(i) such corporation is a financial 
                        institution described in section 581 or 591,
                            ``(ii) the business of such financial 
                        institution is predominantly with persons other 
                        than related persons (within the meaning of 
                        subsection (d)(4)) or their customers, and
                            ``(iii) such financial institution is 
                        required by State or Federal law to be operated 
                        separately from any other entity which is not 
                        such an institution.
                    ``(C) Treatment of bank and financial holding 
                companies.--To the extent provided in regulations--
                            ``(i) a bank holding company (within the 
                        meaning of section 2(a) of the Bank Holding 
                        Company Act of 1956 (12 U.S.C. 1841(a)),
                            ``(ii) a financial holding company (within 
                        the meaning of section 2(p) of the Bank Holding 
                        Company Act of 1956 (12 U.S.C. 1841(p)), and
                            ``(iii) any subsidiary of a financial 
                        institution described in section 581 or 591, or 
                        of any such bank or financial holding company, 
                        if such subsidiary is predominantly engaged 
                        (directly or indirectly) in the active conduct 
                        of a banking, financing, or similar business,
                shall be treated as a corporation described in 
                subparagraph (B).
            ``(5) Election to expand financial institution group of 
        worldwide group.--
                    ``(A) In general.--If a worldwide affiliated group 
                elects the application of this subsection, all 
                financial corporations which--
                            ``(i) are members of such worldwide 
                        affiliated group, but
                            ``(ii) are not corporations described in 
                        paragraph (4)(B),
                shall be treated as described in paragraph (4)(B) for 
                purposes of applying paragraph (4)(A). This subsection 
                (other than this paragraph) shall apply to any such 
                group in the same manner as this subsection (other than 
                this paragraph) applies to the pre-election worldwide 
                affiliated group of which such group is a part.
                    ``(B) Financial corporation.--For purposes of this 
                paragraph, the term `financial corporation' means any 
                corporation if at least 80 percent of its gross income 
                is income described in section 904(d)(2)(C)(ii) and the 
                regulations thereunder which is derived from 
                transactions with persons who are not related (within 
                the meaning of section 267(b) or 707(b)(1)) to the 
                corporation. For purposes of the preceding sentence, 
                there shall be disregarded any item of income or gain 
                from a transaction or series of transactions a 
                principal purpose of which is the qualification of any 
                corporation as a financial corporation.
                    ``(C) Antiabuse rules.--In the case of a 
                corporation which is a member of an electing financial 
                institution group, to the extent that such 
                corporation--
                            ``(i) distributes dividends or makes other 
                        distributions with respect to its stock after 
                        the date of the enactment of this paragraph to 
                        any member of the pre-election worldwide 
                        affiliated group (other than to a member of the 
                        electing financial institution group) in excess 
                        of the greater of--
                                    ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5-
                                taxable-year period ending with the 
                                taxable year preceding the taxable 
                                year, or
                                    ``(II) 25 percent of its average 
                                annual earnings and profits for such 5-
                                taxable-year period, or
                            ``(ii) deals with any person in any manner 
                        not clearly reflecting the income of the 
                        corporation (as determined under principles 
                        similar to the principles of section 482),
                an amount of indebtedness of the electing financial 
                institution group equal to the excess distribution or 
                the understatement or overstatement of income, as the 
                case may be, shall be recharacterized (for the taxable 
                year and subsequent taxable years) for purposes of this 
                paragraph as indebtedness of the worldwide affiliated 
                group (excluding the electing financial institution 
                group). If a corporation has not been in existence for 
                5 taxable years, this subparagraph shall be applied 
                with respect to the period it was in existence.
                    ``(D) Election.--An election under this paragraph 
                with respect to any financial institution group may be 
                made only by the common parent of the pre-election 
                worldwide affiliated group and may be made only for the 
                first taxable year beginning after December 31, 2008, 
                in which such affiliated group includes 1 or more 
                financial corporations. Such an election, once made, 
                shall apply to all financial corporations which are 
                members of the electing financial institution group for 
                such taxable year and all subsequent years unless 
                revoked with the consent of the Secretary.
                    ``(E) Definitions relating to groups.--For purposes 
                of this paragraph--
                            ``(i) Pre-election worldwide affiliated 
                        group.--The term `pre-election worldwide 
                        affiliated group' means, with respect to a 
                        corporation, the worldwide affiliated group of 
                        which such corporation would (but for an 
                        election under this paragraph) be a member for 
                        purposes of applying paragraph (1).
                            ``(ii) Electing financial institution 
                        group.--The term `electing financial 
                        institution group' means the group of 
                        corporations to which this subsection applies 
                        separately by reason of the application of 
                        paragraph (4)(A) and which includes financial 
                        corporations by reason of an election under 
                        subparagraph (A).
                    ``(F) Regulations.--The Secretary shall prescribe 
                such regulations as may be appropriate to carry out 
                this subsection, including regulations--
                            ``(i) providing for the direct allocation 
                        of interest expense in other circumstances 
                        where such allocation would be appropriate to 
                        carry out the purposes of this subsection,
                            ``(ii) preventing assets or interest 
                        expense from being taken into account more than 
                        once, and
                            ``(iii) dealing with changes in members of 
                        any group (through acquisitions or otherwise) 
                        treated under this paragraph as an affiliated 
                        group for purposes of this subsection.
            ``(6) Election.--An election to have this subsection apply 
        with respect to any worldwide affiliated group may be made only 
        by the common parent of the domestic affiliated group referred 
        to in paragraph (1)(C) and may be made only for the first 
        taxable year beginning after December 31, 2008, in which a 
        worldwide affiliated group exists which includes such 
        affiliated group and at least 1 foreign corporation. Such an 
        election, once made, shall apply to such common parent and all 
        other corporations which are members of such worldwide 
        affiliated group for such taxable year and all subsequent years 
        unless revoked with the consent of the Secretary.''.
    (b) Expansion of Regulatory Authority.--Paragraph (7) of section 
864(e) is amended--
            (1) by inserting before the comma at the end of 
        subparagraph (B) ``and in other circumstances where such 
        allocation would be appropriate to carry out the purposes of 
        this subsection'', and
            (2) by striking ``and'' at the end of subparagraph (E), by 
        redesignating subparagraph (F) as subparagraph (G), and by 
        inserting after subparagraph (E) the following new 
        subparagraph:
                    ``(F) preventing assets or interest expense from 
                being taken into account more than once, and''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

    (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), 
(k), and (l) respectively, and by inserting after subsection (f) the 
following new subsection:
    ``(g) Recharacterization of Overall Domestic Loss.--
            ``(1) General rule.--For purposes of this subpart and 
        section 936, in the case of any taxpayer who sustains an 
        overall domestic loss for any taxable year beginning after 
        December 31, 2006, that portion of the taxpayer's taxable 
        income from sources within the United States for each 
        succeeding taxable year which is equal to the lesser of--
                    ``(A) the amount of such loss (to the extent not 
                used under this paragraph in prior taxable years), or
                    ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
            ``(2) Overall domestic loss defined.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                    ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer chose the benefits of this subpart for 
                such taxable year.
            ``(3) Characterization of subsequent income.--
                    ``(A) In general.--Any income from sources within 
                the United States that is treated as income from 
                sources without the United States under paragraph (1) 
                shall be allocated among and increase the income 
                categories in proportion to the loss from sources 
                within the United States previously allocated to those 
                income categories.
                    ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given such term by subsection (f)(5)(E)(i).
            ``(4) Coordination with subsection (f).--The Secretary 
        shall prescribe such regulations as may be necessary to 
        coordinate the provisions of this subsection with the 
        provisions of subsection (f).''.
    (b) Conforming Amendments.--
            (1) Section 535(d)(2) is amended by striking ``section 
        904(g)(6)'' and inserting ``section 904(h)(6)''.
            (2) Subparagraph (A) of section 936(a)(2) is amended by 
        striking ``section 904(f)'' and inserting ``subsections (f) and 
        (g) of section 904''.
    (c) Effective Date.--The amendments made by this section shall 
apply to losses for taxable years beginning after December 31, 2006.

SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.

    (a) In General.--Paragraph (1) of section 904(d) (relating to 
separate application of section with respect to certain categories of 
income) is amended to read as follows:
            ``(1) In general.--The provisions of subsections (a), (b), 
        and (c) and sections 902, 907, and 960 shall be applied 
        separately with respect to--
                    ``(A) passive category income, and
                    ``(B) general category income.''
    (b) Categories.--Paragraph (2) of section 904(d) is amended by 
striking subparagraph (B), by redesignating subparagraph (A) as 
subparagraph (B), and by inserting before subparagraph (B) (as so 
redesignated) the following new subparagraph:
                    ``(A) Categories.--
                            ``(i) Passive category income.--The term 
                        `passive category income' means passive income 
                        and specified passive category income.
                            ``(ii) General category income.--The term 
                        `general category income' means income other 
                        than passive category income.''
    (c) Specified Passive Category Income.--Subparagraph (B) of section 
904(d)(2), as so redesignated, is amended by adding at the end the 
following new clause:
                            ``(v) Specified passive category income.--
                        The term `specified passive category income' 
                        means--
                                    ``(I) dividends from a DISC or 
                                former DISC (as defined in section 
                                992(a)) to the extent such dividends 
                                are treated as income from sources 
                                without the United States,
                                    ``(II) taxable income attributable 
                                to foreign trade income (within the 
                                meaning of section 923(b)), and
                                    ``(III) distributions from a FSC 
                                (or a former FSC) out of earnings and 
                                profits attributable to foreign trade 
                                income (within the meaning of section 
                                923(b)) or interest or carrying charges 
                                (as defined in section 927(d)(1)) 
                                derived from a transaction which 
                                results in foreign trade income (as 
                                defined in section 923(b)).''
    (d) Treatment of Financial Services.--Paragraph (2) of section 
904(d) is amended by striking subparagraph (D), by redesignating 
subparagraph (C) as subparagraph (D), and by inserting before 
subparagraph (D) (as so redesignated) the following new subparagraph:
                    ``(C) Treatment of financial services income and 
                companies.--
                            ``(i) In general.--Financial services 
                        income shall be treated as general category 
                        income in the case of--
                                    ``(I) a member of a financial 
                                services group, and
                                    ``(II) any other person if such 
                                person is predominantly engaged in the 
                                active conduct of a banking, insurance, 
                                financing, or similar business.
                            ``(ii) Financial services group.--The term 
                        `financial services group' means any affiliated 
                        group (as defined in section 1504(a) without 
                        regard to paragraphs (2) and (3) of section 
                        1504(b)) which is predominantly engaged in the 
                        active conduct of a banking, insurance, 
                        financing, or similar business. In determining 
                        whether such a group is so engaged, there shall 
                        be taken into account only the income of 
                        members of the group that are--
                                    ``(I) United States corporations, 
                                or
                                    ``(II) controlled foreign 
                                corporations in which such United 
                                States corporations own, directly or 
                                indirectly, at least 80 percent of the 
                                total voting power and value of the 
                                stock.
                            ``(iii) Pass-thru entities.--The Secretary 
                        shall by regulation specify for purposes of 
                        this subparagraph the treatment of financial 
                        services income received or accrued by 
                        partnerships and by other pass-thru entities 
                        which are not members of a financial services 
                        group.''
    (e) Conforming Amendments.--
            (1) Clause (iii) of section 904(d)(2)(B) (relating to 
        exceptions from passive income), as so redesignated, is amended 
        by striking subclause (I) and by redesignating subclauses (II) 
        and (III) as subclauses (I) and (II), respectively.
            (2) Clause (i) of section 904(d)(2)(D) (defining financial 
        services income), as so redesignated, is amended by adding 
        ``or'' at the end of subclause (I) and by striking subclauses 
        (II) and (III) and inserting the following new subclause:
                                    ``(II) passive income (determined 
                                without regard to subparagraph 
                                (B)(iii)(II)).''
            (3) Section 904(d)(2)(D) (defining financial services 
        income), as so redesignated, is amended by striking clause 
        (iii).
            (4) Paragraph (3) of section 904(d) is amended to read as 
        follows:
            ``(3) Look-thru in case of controlled foreign 
        corporations.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, dividends, interest, rents, and 
                royalties received or accrued by the taxpayer from a 
                controlled foreign corporation in which the taxpayer is 
                a United States shareholder shall not be treated as 
                passive category income.
                    ``(B) Subpart f inclusions.--Any amount included in 
                gross income under section 951(a)(1)(A) shall be 
                treated as passive category income to the extent the 
                amount so included is attributable to passive category 
                income.
                    ``(C) Interest, rents, and royalties.--Any 
                interest, rent, or royalty which is received or accrued 
                from a controlled foreign corporation in which the 
                taxpayer is a United States shareholder shall be 
                treated as passive category income to the extent it is 
                properly allocable (under regulations prescribed by the 
                Secretary) to passive category income of the controlled 
                foreign corporation.
                    ``(D) Dividends.--Any dividend paid out of the 
                earnings and profits of any controlled foreign 
                corporation in which the taxpayer is a United States 
                shareholder shall be treated as passive category income 
                in proportion to the ratio of--
                            ``(i) the portion of the earnings and 
                        profits attributable to passive category 
                        income, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(E) Look-thru applies only where subpart f 
                applies.--If a controlled foreign corporation meets the 
                requirements of section 954(b)(3)(A) (relating to de 
                minimis rule) for any taxable year, for purposes of 
                this paragraph, none of its foreign base company income 
                (as defined in section 954(a) without regard to section 
                954(b)(5)) and none of its gross insurance income (as 
                defined in section 954(b)(3)(C)) for such taxable year 
                shall be treated as passive category income, except 
                that this sentence shall not apply to any income which 
                (without regard to this sentence) would be treated as 
                financial services income. Solely for purposes of 
                applying subparagraph (D), passive income of a 
                controlled foreign corporation shall not be treated as 
                passive category income if the requirements of section 
                954(b)(4) are met with respect to such income.
                    ``(F) Coordination with high-taxed income 
                provisions.--
                            ``(i) In determining whether any income of 
                        a controlled foreign corporation is passive 
                        category income, subclause (II) of paragraph 
                        (2)(B)(iii) shall not apply.
                            ``(ii) Any income of the taxpayer which is 
                        treated as passive category income under this 
                        paragraph shall be so treated notwithstanding 
                        any provision of paragraph (2); except that the 
                        determination of whether any amount is high-
                        taxed income shall be made after the 
                        application of this paragraph.
                    ``(G) Dividend.--For purposes of this paragraph, 
                the term `dividend' includes any amount included in 
                gross income in section 951(a)(1)(B). Any amount 
                included in gross income under section 78 to the extent 
                attributable to amounts included in gross income in 
                section 951(a)(1)(A) shall not be treated as a dividend 
                but shall be treated as included in gross income under 
                section 951(a)(1)(A).
                    ``(H) Look-thru applies to passive foreign 
                investment company inclusion.--If--
                            ``(i) a passive foreign investment company 
                        is a controlled foreign corporation, and
                            ``(ii) the taxpayer is a United States 
                        shareholder in such controlled foreign 
                        corporation,
                any amount included in gross income under section 1293 
                shall be treated as income in a separate category to 
                the extent such amount is attributable to income in 
                such category.''
            (5) Treatment of income tax base differences.--Paragraph 
        (2) of section 904(d) is amended by redesignating subparagraphs 
        (H) and (I) as subparagraphs (I) and (J), respectively, and by 
        inserting after subparagraph (G) the following new 
        subparagraph:
                    ``(H) Treatment of income tax base differences.--
                Tax imposed under the law of a foreign country or 
                possession of the United States on an amount which does 
                not constitute income under United States tax 
                principles shall be treated as imposed on income 
                described in paragraph (1)(B).''
            (6) Paragraph (2) of section 904(d) is amended by adding at 
        the end the following new subparagraph:
                    ``(K) Transitional rules for 2007 changes.--For 
                purposes of paragraph (1)--
                            ``(i) taxes carried from any taxable year 
                        beginning before January 1, 2007, to any 
                        taxable year beginning on or after such date, 
                        with respect to any item of income, shall be 
                        treated as described in the subparagraph of 
                        paragraph (1) in which such income would be 
                        described were such taxes paid or accrued in a 
                        taxable year beginning on or after such date, 
                        and
                            ``(ii) the Secretary may by regulations 
                        provide for the allocation of any carryback of 
                        taxes with respect to income to such a taxable 
                        year for purposes of allocating such income 
                        among the separate categories in effect for 
                        such taxable year.''.
            (7) Section 904(j)(3)(A)(i) is amended by striking 
        ``subsection (d)(2)(A)'' and inserting ``subsection 
        (d)(2)(B)''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED 
              SECTION 902 CORPORATIONS.

    (a) In General.--Section 904(d)(4) (relating to look-thru rules 
apply to dividends from noncontrolled section 902 corporations) is 
amended to read as follows:
            ``(4) Look-thru applies to dividends from noncontrolled 
        section 902 corporations.--
                    ``(A) In general.--For purposes of this subsection, 
                any dividend from a noncontrolled section 902 
                corporation with respect to the taxpayer shall be 
                treated as income described in a subparagraph of 
                paragraph (1) in proportion to the ratio of--
                            ``(i) the portion of earnings and profits 
                        attributable to income described in such 
                        subparagraph, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(B) Earnings and profits of controlled foreign 
                corporations.--In the case of any distribution from a 
                controlled foreign corporation to a United States 
                shareholder, rules similar to the rules of subparagraph 
                (A) shall apply in determining the extent to which 
                earnings and profits of the controlled foreign 
                corporation which are attributable to dividends 
                received from a noncontrolled section 902 corporation 
                may be treated as income in a separate category.
                    ``(C) Special rules.--For purposes of this 
                paragraph--
                            ``(i) Earnings and profits.--
                                    ``(I) In general.--The rules of 
                                section 316 shall apply.
                                    ``(II) Regulations.--The Secretary 
                                may prescribe regulations regarding the 
                                treatment of distributions out of 
                                earnings and profits for periods before 
                                the taxpayer's acquisition of the stock 
                                to which the distributions relate.
                            ``(ii) Inadequate substantiation.--If the 
                        Secretary determines that the proper 
                        subparagraph of paragraph (1) in which a 
                        dividend is described has not been 
                        substantiated, such dividend shall be treated 
                        as income described in paragraph (1)(A).
                            ``(iii) Coordination with high-taxed income 
                        provisions.--Rules similar to the rules of 
                        paragraph (3)(F) shall apply for purposes of 
                        this paragraph.
                            ``(iv) Look-thru with respect to carryover 
                        of credit.--Rules similar to subparagraph (A) 
                        also shall apply to any carryforward under 
                        subsection (c) from a taxable year beginning 
                        before January 1, 2003, of tax allocable to a 
                        dividend from a noncontrolled section 902 
                        corporation with respect to the taxpayer. The 
                        Secretary may by regulations provide for the 
                        allocation of any carryback of tax allocable to 
                        a dividend from a noncontrolled section 902 
                        corporation to such a taxable year for purposes 
                        of allocating such dividend among the separate 
                        categories in effect for such taxable year.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (E) of section 904(d)(1) is hereby 
        repealed.
            (2) Section 904(d)(2)(C)(iii) is amended by adding ``and'' 
        at the end of subclause (I), by striking subclause (II), and by 
        redesignating subclause (III) as subclause (II).
            (3) The last sentence of section 904(d)(2)(D) is amended to 
        read as follows: ``Such term does not include any financial 
        services income.''.
            (4) Section 904(d)(2)(E) is amended--
                    (A) by inserting ``or (4)'' after ``paragraph (3)'' 
                in clause (i), and
                    (B) by striking clauses (ii) and (iv) and by 
                redesignating clause (iii) as clause (ii).
            (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
        (E)'' and inserting ``or (D)''.
            (6) Section 864(d)(5)(A)(i) is amended by striking 
        ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS TO APPLY 
              IN DETERMINING SECTION 902 AND 960 CREDITS.

    (a) In General.--Subsection (c) of section 902 is amended by 
redesignating paragraph (7) as paragraph (8) and by inserting after 
paragraph (6) the following new paragraph:
            ``(7) Constructive ownership through partnerships.--Stock 
        owned, directly or indirectly, by or for a partnership shall be 
        considered as being owned proportionately by its partners. 
        Stock considered to be owned by a person by reason of the 
        preceding sentence shall, for purposes of applying such 
        sentence, be treated as actually owned by such person. The 
        Secretary may prescribe such regulations as may be necessary to 
        carry out the purposes of this paragraph, including rules to 
        account for special partnership allocations of dividends, 
        credits, and other incidents of ownership of stock in 
        determining proportionate ownership.''.
    (b) Clarification of Comparable Attribution Under Section 
901(b)(5).--Paragraph (5) of section 901(b) is amended by striking 
``any individual'' and inserting ``any person''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxes of foreign corporations for taxable years of such 
corporations beginning after the date of the enactment of this Act.

SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF INTANGIBLE 
              PROPERTY.

    (a) In General.--Subparagraph (C) of section 367(d)(2) is amended 
by adding at the end the following new sentence: ``For purposes of 
applying section 904(d), any such amount shall be treated in the same 
manner as if such amount were a royalty.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts treated as received pursuant to section 367(d)(2) of the 
Internal Revenue Code of 1986 on or after August 5, 1997.

SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS OF 
              CONTROLLED FOREIGN CORPORATION.

    (a) In General.--Section 956(c)(2) (relating to exceptions from 
property treated as United States property) is amended by striking 
``and'' at the end of subparagraph (J), by striking the period at the 
end of subparagraph (K) and inserting a semicolon, and by adding at the 
end the following new subparagraphs:
                    ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if--
                            ``(i) the dealer accounts for the 
                        securities as securities held primarily for 
                        sale to customers in the ordinary course of 
                        business, and
                            ``(ii) the dealer disposes of the 
                        securities (or such securities mature while 
                        held by the dealer) within a period consistent 
                        with the holding of securities for sale to 
                        customers in the ordinary course of business; 
                        and
                    ``(M) an obligation of a United States person 
                which--
                            ``(i) is not a domestic corporation, and
                            ``(ii) is not--
                                    ``(I) a United States shareholder 
                                (as defined in section 951(b)) of the 
                                controlled foreign corporation, or
                                    ``(II) a partnership, estate, or 
                                trust in which the controlled foreign 
                                corporation, or any related person (as 
                                defined in section 954(d)(3)), is a 
                                partner, beneficiary, or trustee 
                                immediately after the acquisition of 
                                any obligation of such partnership, 
                                estate, or trust by the controlled 
                                foreign corporation.''.
    (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX 
              PAID OTHER THAN IN FUNCTIONAL CURRENCY.

    (a) In General.--Paragraph (1) of section 986(a) (relating to 
determination of foreign taxes and foreign corporation's earnings and 
profits) is amended by redesignating subparagraph (D) as subparagraph 
(E) and by inserting after subparagraph (C) the following new 
subparagraph:
                    ``(D) Elective exception for taxes paid other than 
                in functional currency.--
                            ``(i) In general.--At the election of the 
                        taxpayer, subparagraph (A) shall not apply to 
                        any foreign income taxes the liability for 
                        which is denominated in any currency other than 
                        in the taxpayer's functional currency.
                            ``(ii) Application to qualified business 
                        units.--An election under this subparagraph may 
                        apply to foreign income taxes attributable to a 
                        qualified business unit in accordance with 
                        regulations prescribed by the Secretary.
                            ``(iii) Election.--Any such election shall 
                        apply to the taxable year for which made and 
                        all subsequent taxable years unless revoked 
                        with the consent of the Secretary.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN 
              CORPORATIONS.

    (a) In General.--Paragraph (2) of section 871(i) (relating to tax 
not to apply to certain interest and dividends) is amended by adding at 
the end the following new subparagraph:
                    ``(D) Dividends paid by a foreign corporation which 
                are treated under section 861(a)(2)(B) as income from 
                sources within the United States.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2004.

SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY FOREIGN 
              PARTNERSHIPS AND FOREIGN CORPORATIONS.

    (a) In General.--Paragraph (1) of section 861(a) is amended by 
striking ``and'' at the end of subparagraph (A), by striking the period 
at the end of subparagraph (B) and inserting ``, and'', and by adding 
at the end the following new subparagraph:
                    ``(C) in the case of a foreign partnership, which 
                is predominantly engaged in the active conduct of a 
                trade or business outside the United States, any 
                interest not paid by a trade or business engaged in by 
                the partnership in the United States and not allocable 
                to income which is effectively connected (or treated as 
                effectively connected) with the conduct of a trade or 
                business in the United States.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED 
              FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING 
              COMPANY INCOME RULES.

    (a) In General.--Subsection (c) of section 954, as amended by this 
Act, is amended by adding after paragraph (4) the following new 
paragraph:
            ``(5) Look-thru in the case of related controlled foreign 
        corporations.--For purposes of this subsection, dividends, 
        interest, rents, and royalties received or accrued from a 
        controlled foreign corporation which is a related person (as 
        defined in subsection (b)(9)) shall not be treated as foreign 
        personal holding company income to the extent attributable or 
        properly allocable (determined under rules similar to the rules 
        of subparagraphs (C) and (D) of section 904(d)(3)) to income of 
        the related person which is not subpart F income (as defined in 
        section 952). For purposes of this paragraph, interest shall 
        include factoring income which is treated as income equivalent 
        to interest for purposes of paragraph (1)(E). The Secretary 
        shall prescribe such regulations as may be appropriate to 
        prevent the abuse of the purposes of this paragraph.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2004, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

    (a) In General.--Section 954(c) (defining foreign personal holding 
company income), as amended by this Act, is amended by adding after 
paragraph (5) the following new paragraph:
            ``(6) Look-thru rule for certain partnership sales.--
                    ``(A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest in a 
                partnership with respect to which such corporation is a 
                25-percent owner, such corporation shall be treated for 
                purposes of this subsection as selling the 
                proportionate share of the assets of the partnership 
                attributable to such interest. The Secretary shall 
                prescribe such regulations as may be appropriate to 
                prevent abuse of the purposes of this paragraph, 
                including regulations providing for coordination of 
                this paragraph with the provisions of subchapter K.
                    ``(B) 25-percent owner.--For purposes of this 
                paragraph, the term `25-percent owner' means a 
                controlled foreign corporation which owns directly 25 
                percent or more of the capital or profits interest in a 
                partnership. For purposes of the preceding sentence, if 
                a controlled foreign corporation is a shareholder or 
                partner of a corporation or partnership, the controlled 
                foreign corporation shall be treated as owning directly 
                its proportionate share of any such capital or profits 
                interest held directly or indirectly by such 
                corporation or partnership''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2004, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN 
              INVESTMENT COMPANY RULES.

    (a) General Rule.--The following provisions are hereby repealed:
            (1) Part III of subchapter G of chapter 1 (relating to 
        foreign personal holding companies).
            (2) Section 1246 (relating to gain on foreign investment 
        company stock).
            (3) Section 1247 (relating to election by foreign 
        investment companies to distribute income currently).
    (b) Exemption of Foreign Corporations From Personal Holding Company 
Rules.--
            (1) In general.--Subsection (c) of section 542 (relating to 
        exceptions) is amended--
                    (A) by striking paragraph (5) and inserting the 
                following:
            ``(5) a foreign corporation,'',
                    (B) by striking paragraphs (7) and (10) and by 
                redesignating paragraphs (8) and (9) as paragraphs (7) 
                and (8), respectively,
                    (C) by inserting ``and'' at the end of paragraph 
                (7) (as so redesignated), and
                    (D) by striking ``; and'' at the end of paragraph 
                (8) (as so redesignated) and inserting a period.
            (2) Treatment of income from personal service contracts.--
        Paragraph (1) of section 954(c) is amended by adding at the end 
        the following new subparagraph:
                    ``(I) Personal service contracts.--
                            ``(i) Amounts received under a contract 
                        under which the corporation is to furnish 
                        personal services if--
                                    ``(I) some person other than the 
                                corporation has the right to designate 
                                (by name or by description) the 
                                individual who is to perform the 
                                services, or
                                    ``(II) the individual who is to 
                                perform the services is designated (by 
                                name or by description) in the 
                                contract, and
                            ``(ii) amounts received from the sale or 
                        other disposition of such a contract.
                This subparagraph shall apply with respect to amounts 
                received for services under a particular contract only 
                if at some time during the taxable year 25 percent or 
                more in value of the outstanding stock of the 
                corporation is owned, directly or indirectly, by or for 
                the individual who has performed, is to perform, or may 
                be designated (by name or by description) as the one to 
                perform, such services.''.
    (c) Conforming Amendments.--
            (1) Section 1(h) is amended--
                    (A) in paragraph (10), by inserting ``and'' at the 
                end of subparagraph (F), by striking subparagraph (G), 
                and by redesignating subparagraph (H) as subparagraph 
                (G), and
                    (B) by striking ``a foreign personal holding 
                company (as defined in section 552), a foreign 
                investment company (as defined in section 1246(b)), 
                or'' in paragraph (11)(C)(iii).
            (2) Section 163(e)(3)(B), as amended by section 642(a) of 
        this Act, is amended by striking ``which is a foreign personal 
        holding company (as defined in section 552), a controlled 
        foreign corporation (as defined in section 957), or'' and 
        inserting ``which is a controlled foreign corporation (as 
        defined in section 957) or''.
            (3) Paragraph (2) of section 171(c) is amended--
                    (A) by striking ``, or by a foreign personal 
                holding company, as defined in section 552'', and
                    (B) by striking ``, or foreign personal holding 
                company''.
            (4) Paragraph (2) of section 245(a) is amended by striking 
        ``foreign personal holding company or''.
            (5) Section 267(a)(3)(B), as amended by section 642(b) of 
        this Act, is amended by striking ``to a foreign personal 
        holding company (as defined in section 552), a controlled 
        foreign corporation (as defined in section 957), or'' and 
        inserting ``to a controlled foreign corporation (as defined in 
        section 957) or''.
            (6) Section 312 is amended by striking subsection (j).
            (7) Subsection (m) of section 312 is amended by striking 
        ``, a foreign investment company (within the meaning of section 
        1246(b)), or a foreign personal holding company (within the 
        meaning of section 552)''.
            (8) Subsection (e) of section 443 is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) and (5) as 
        paragraphs (3) and (4), respectively.
            (9) Subparagraph (B) of section 465(c)(7) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (10) Paragraph (1) of section 543(b) is amended by 
        inserting ``and'' at the end of subparagraph (A), by striking 
        ``, and'' at the end of subparagraph (B) and inserting a 
        period, and by striking subparagraph (C).
            (11) Paragraph (1) of section 562(b) is amended by striking 
        ``or a foreign personal holding company described in section 
        552''.
            (12) Section 563 is amended--
                    (A) by striking subsection (c),
                    (B) by redesignating subsection (d) as subsection 
                (c), and
                    (C) by striking ``subsection (a), (b), or (c)'' in 
                subsection (c) (as so redesignated) and inserting 
                ``subsection (a) or (b)''.
            (13) Subsection (d) of section 751 is amended by adding 
        ``and'' at the end of paragraph (2), by striking paragraph (3), 
        by redesignating paragraph (4) as paragraph (3), and by 
        striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so 
        redesignated) and inserting ``paragraph (1) or (2)''.
            (14) Paragraph (2) of section 864(d) is amended by striking 
        subparagraph (A) and by redesignating subparagraphs (B) and (C) 
        as subparagraphs (A) and (B), respectively.
            (15)(A) Subparagraph (A) of section 898(b)(1) is amended to 
        read as follows:
                    ``(A) which is treated as a controlled foreign 
                corporation for any purpose under subpart F of part III 
                of this subchapter, and''.
            (B) Subparagraph (B) of section 898(b)(2) is amended by 
        striking ``and sections 551(f) and 554, whichever are 
        applicable,''.
            (C) Paragraph (3) of section 898(b) is amended to read as 
        follows:
            ``(3) United states shareholder.--The term `United States 
        shareholder' has the meaning given to such term by section 
        951(b), except that, in the case of a foreign corporation 
        having related person insurance income (as defined in section 
        953(c)(2)), the Secretary may treat any person as a United 
        States shareholder for purposes of this section if such person 
        is treated as a United States shareholder under section 
        953(c)(1).''.
            (D) Subsection (c) of section 898 is amended to read as 
        follows:
    ``(c) Determination of Required Year.--
            ``(1) In general.--The required year is--
                    ``(A) the majority U.S. shareholder year, or
                    ``(B) if there is no majority U.S. shareholder 
                year, the taxable year prescribed under regulations.
            ``(2) 1-month deferral allowed.--A specified foreign 
        corporation may elect, in lieu of the taxable year under 
        paragraph (1)(A), a taxable year beginning 1 month earlier than 
        the majority U.S. shareholder year.
            ``(3) Majority u.s. shareholder year.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `majority U.S. shareholder year' means the 
                taxable year (if any) which, on each testing day, 
                constituted the taxable year of--
                            ``(i) each United States shareholder 
                        described in subsection (b)(2)(A), and
                            ``(ii) each United States shareholder not 
                        described in clause (i) whose stock was treated 
                        as owned under subsection (b)(2)(B) by any 
                        shareholder described in such clause.
                    ``(B) Testing day.--The testing days shall be--
                            ``(i) the first day of the corporation's 
                        taxable year (determined without regard to this 
                        section), or
                            ``(ii) the days during such representative 
                        period as the Secretary may prescribe.''.
            (16) Clause (ii) of section 904(d)(2)(A) is amended to read 
        as follows:
                            ``(ii) Certain amounts included.--Except as 
                        provided in clause (iii), the term `passive 
                        income' includes, except as provided in 
                        subparagraph (E)(iii) or paragraph (3)(I), any 
                        amount includible in gross income under section 
                        1293 (relating to certain passive foreign 
                        investment companies).''.
            (17)(A) Subparagraph (A) of section 904(h)(1), as 
        redesignated by section 302, is amended by adding ``or'' at the 
        end of clause (i), by striking clause (ii), and by 
        redesignating clause (iii) as clause (ii).
            (B) The paragraph heading of paragraph (2) of section 
        904(h), as so redesignated, is amended by striking ``foreign 
        personal holding or''.
            (18) Section 951 is amended by striking subsections (c) and 
        (d) and by redesignating subsections (e) and (f) as subsections 
        (c) and (d), respectively.
            (19) Paragraph (3) of section 989(b) is amended by striking 
        ``, 551(a),''.
            (20) Paragraph (5) of section 1014(b) is amended by 
        inserting ``and before January 1, 2005,'' after ``August 26, 
        1937,''.
            (21) Subsection (a) of section 1016 is amended by striking 
        paragraph (13).
            (22)(A) Paragraph (3) of section 1212(a) is amended to read 
        as follows:
            ``(3) Special rules on carrybacks.--A net capital loss of a 
        corporation shall not be carried back under paragraph (1)(A) to 
        a taxable year--
                    ``(A) for which it is a regulated investment 
                company (as defined in section 851), or
                    ``(B) for which it is a real estate investment 
                trust (as defined in section 856).''.
            (B) The amendment made by subparagraph (A) shall apply to 
        taxable years beginning after December 31, 2004.
            (23) Section 1223 is amended by striking paragraph (10) and 
        by redesignating the following paragraphs accordingly.
            (24) Subsection (d) of section 1248 is amended by striking 
        paragraph (5) and by redesignating paragraphs (6) and (7) as 
        paragraphs (5) and (6), respectively.
            (25) Paragraph (2) of section 1260(c) is amended by 
        striking subparagraphs (H) and (I) and by redesignating 
        subparagraph (J) as subparagraph (H).
            (26)(A) Subparagraph (F) of section 1291(b)(3) is amended 
        by striking ``551(d), 959(a),'' and inserting ``959(a)''.
            (B) Subsection (e) of section 1291 is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the American Jobs Creation Act of 2004)'' after ``section 
        1246''.
            (27) Paragraph (2) of section 1294(a) is amended to read as 
        follows:
            ``(2) Election not permitted where amounts otherwise 
        includible under section 951.--The taxpayer may not make an 
        election under paragraph (1) with respect to the undistributed 
        PFIC earnings tax liability attributable to a qualified 
        electing fund for the taxable year if any amount is includible 
        in the gross income of the taxpayer under section 951 with 
        respect to such fund for such taxable year.''.
            (28) Section 6035 is hereby repealed.
            (29) Subparagraph (D) of section 6103(e)(1) is amended by 
        striking clause (iv) and redesignating clauses (v) and (vi) as 
        clauses (iv) and (v), respectively.
            (30) Subparagraph (B) of section 6501(e)(1) is amended to 
        read as follows:
                    ``(B) Constructive dividends.--If the taxpayer 
                omits from gross income an amount properly includible 
                therein under section 951(a), the tax may be assessed, 
                or a proceeding in court for the collection of such tax 
                may be done without assessing, at any time within 6 
                years after the return was filed.''.
            (31) Subsection (a) of section 6679 is amended--
                    (A) by striking ``6035, 6046, and 6046A'' in 
                paragraph (1) and inserting ``6046 and 6046A'', and
                    (B) by striking paragraph (3).
            (32) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
        are each amended by striking ``556(b)(2),'' each place it 
        appears.
            (33) The table of parts for subchapter G of chapter 1 is 
        amended by striking the item relating to part III.
            (34) The table of sections for part IV of subchapter P of 
        chapter 1 is amended by striking the items relating to sections 
        1246 and 1247.
            (35) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6035.
    (d) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years of 
        foreign corporations beginning after December 31, 2004, and to 
        taxable years of United States shareholders with or within 
        which such taxable years of foreign corporations end.
            (2) Subsection (c)(29).--The amendments made by subsection 
        (c)(29) shall apply to disclosures of return or return 
        information with respect to taxable years beginning after 
        December 31, 2004.

SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH 
              RESPECT TO TRANSACTIONS IN COMMODITIES.

    (a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C) 
(relating to commodity transactions) are amended to read as follows:
                            ``(i) arise out of commodity hedging 
                        transactions (as defined in paragraph (4)(A)),
                            ``(ii) are active business gains or losses 
                        from the sale of commodities, but only if 
                        substantially all of the controlled foreign 
                        corporation's commodities are property 
                        described in paragraph (1), (2), or (8) of 
                        section 1221(a), or''.
    (b) Definition and Special Rules.--Subsection (c) of section 954 is 
amended by adding after paragraph (3) the following new paragraph:
            ``(4) Definition and special rules relating to commodity 
        transactions.--
                    ``(A) Commodity hedging transactions.--For purposes 
                of paragraph (1)(C)(i), the term `commodity hedging 
                transaction' means any transaction with respect to a 
                commodity if such transaction--
                            ``(i) is a hedging transaction as defined 
                        in section 1221(b)(2), determined--
                                    ``(I) without regard to 
                                subparagraph (A)(ii) thereof,
                                    ``(II) by applying subparagraph 
                                (A)(i) thereof by substituting 
                                `ordinary property or property 
                                described in section 1231(b)' for 
                                `ordinary property', and
                                    ``(III) by substituting `controlled 
                                foreign corporation' for `taxpayer' 
                                each place it appears, and
                            ``(ii) is clearly identified as such in 
                        accordance with section 1221(a)(7).
                    ``(B) Treatment of dealer activities under 
                paragraph (1)(C).--Commodities with respect to which 
                gains and losses are not taken into account under 
                paragraph (2)(C) in computing a controlled foreign 
                corporation's foreign personal holding company income 
                shall not be taken into account in applying the 
                substantially all test under paragraph (1)(C)(ii) to 
                such corporation.
                    ``(C) Regulations.--The Secretary shall prescribe 
                such regulations as are appropriate to carry out the 
                purposes of paragraph (1)(C) in the case of 
                transactions involving related parties.''.
    (c) Modification of Exception for Dealers.--Clause (i) of section 
954(c)(2)(C) is amended by inserting ``and transactions involving 
physical settlement'' after ``(including hedging transactions''.
    (d) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after December 31, 2004.

SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND SHIPPING 
              INCOME.

    (a) Elimination of Foreign Base Company Shipping Income.--Section 
954 (relating to foreign base company income) is amended--
            (1) by striking paragraph (4) of subsection (a) (relating 
        to foreign base company shipping income), and
            (2) by striking subsection (f) (relating to foreign base 
        company shipping income).
    (b) Safe Harbor for Certain Leasing Activities.--Subparagraph (A) 
of section 954(c)(2) is amended by adding at the end the following new 
sentence: ``For purposes of the preceding sentence, rents derived from 
leasing an aircraft or vessel in foreign commerce shall not fail to be 
treated as derived in the active conduct of a trade or business if, as 
determined under regulations prescribed by the Secretary, the active 
leasing expenses are not less than 10 percent of the profit on the 
lease.''
    (c) Conforming Amendments.--
            (1) Section 952(c)(1)(B)(iii) is amended by striking 
        subclause (I) and redesignating subclauses (II) through (VI) as 
        subclauses (I) through (V), respectively.
            (2) Subsection (b) of section 954 is amended--
                    (A) by striking ``the foreign base company shipping 
                income,'' in paragraph (5),
                    (B) by striking paragraphs (6) and (7), and
                    (C) by redesignating paragraph (8) as paragraph 
                (6).
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR ACTIVE 
              FINANCING.

    (a) In General.--Section 954(h)(3) is amended by adding at the end 
the following:
                    ``(E) Direct conduct of activities.--For purposes 
                of subparagraph (A)(ii)(II), an activity shall be 
                treated as conducted directly by an eligible controlled 
                foreign corporation or qualified business unit in its 
                home country if the activity is performed by employees 
                of a related person and--
                            ``(i) the related person is an eligible 
                        controlled foreign corporation the home country 
                        of which is the same as the home country of the 
                        corporation or unit to which subparagraph 
                        (A)(ii)(II) is being applied,
                            ``(ii) the activity is performed in the 
                        home country of the related person, and
                            ``(iii) the related person is compensated 
                        on an arm's-length basis for the performance of 
                        the activity by its employees and such 
                        compensation is treated as earned by such 
                        person in its home country for purposes of the 
                        home country's tax laws.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of such foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders with or 
within which such taxable years of such foreign corporations end.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST REGULAR 
              AND MINIMUM TAX LIABILITY.

    (a) In General.--Paragraph (2) of section 26(a) is amended--
            (1) by striking ``rule for 2000, 2001, 2002, and 2003.--'' 
        and inserting ``rule for taxable years 2000 through 2005.--'', 
        and
            (2) by striking ``or 2003,'' and inserting ``2003, 2004, or 
        2005,''.
    (b) Conforming Provisions.--
            (1) Section 904(h) is amended by striking ``or 2003'' and 
        inserting ``2003, 2004, or 2005''.
            (2) The amendments made by sections 201(b), 202(f), and 
        618(b) of the Economic Growth and Tax Relief Reconciliation Act 
        of 2001 shall not apply to taxable years beginning during 2004 
        or 2005.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 402. EXTENSION OF RESEARCH CREDIT.

    (a) Extension.--
            (1) In general.--Section 41(h)(1)(B) (relating to 
        termination) is amended by striking ``June 30, 2004'' and 
        inserting ``December 31, 2005''.
            (2) Conforming amendment.--Section 45C(b)(1)(D) is amended 
        by striking ``June 30, 2004'' and inserting ``December 31, 
        2005''.
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to amounts paid or incurred after the date of the enactment of 
this Act.

SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN 
              RENEWABLE RESOURCES.

    (a) In General.--Subparagraphs (A) and (B) of section 45(c)(3) 
(defining qualified facility) are both amended by striking ``2004'' and 
inserting ``2006''.
    (b) Effective Date.--The amendments made by this section shall 
apply to electricity produced and sold after December 31, 2003.

SEC. 404. INDIAN EMPLOYMENT TAX CREDIT.

    Section 45A(f) (relating to termination) is amended by striking 
``December 31, 2004'' and inserting ``December 31, 2005''.

SEC. 405. WORK OPPORTUNITY CREDIT.

    (a) In General.--Subparagraph (B) of section 51(c)(4) is amended by 
striking ``December 31, 2003'' and inserting ``December 31, 2005''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to individuals who begin work for the employer after December 31, 
2003.

SEC. 406. WELFARE-TO-WORK CREDIT.

    (a) In General.--Subsection (f) of section 51A is amended by 
striking ``December 31, 2003'' and inserting ``December 31, 2005''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to individuals who begin work for the employer after December 31, 
2003.

SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS.

    (a) In General.--Subparagraph (D) of section 62(a)(2) (relating to 
certain trade and business deductions of employees) is amended by 
striking ``or 2003'' and inserting ``, 2003, 2004, or 2005''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2003.

SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION BENEFIT FOR PROPERTY ON 
              INDIAN RESERVATIONS.

    Paragraph (8) of section 168(j) (relating to termination) is 
amended by striking ``December 31, 2004'' and inserting ``December 31, 
2005''.

SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT 
              USED FOR EDUCATIONAL PURPOSES.

    (a) In General.--Subparagraph (G) of section 170(e)(6) (relating to 
special rule for contributions of computer technology and equipment for 
educational purposes) is amended by striking ``December 31, 2003'' and 
inserting ``December 31, 2005''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2003.

SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

    (a) In General.--Subsection (h) of section 198 (relating to 
termination) is amended by striking ``December 31, 2003'' and inserting 
``December 31, 2005''.
    (b) Effective Date.--The amendments made by subsection (a) shall 
apply to expenditures paid or incurred after December 31, 2003.

SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.

    (a) In General.--Paragraphs (2) and (3)(B) of section 220(i) 
(defining cut-off year) are each amended by striking ``2003'' each 
place it appears in the text and headings and inserting ``2004''.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 220(j)(4) is amended by 
        striking ``and 2002'' and inserting ``2002, and 2004''.
            (2) Subparagraph (C) of section 220(j)(2) is amended to 
        read as follows:
                    ``(C) No limitation for 2000 or 2003.--The 
                numerical limitation shall not apply for 2000 or 
                2003.''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2004.
    (d) Time for Filing Reports.--The report required by section 
220(j)(4) of the Internal Revenue Code of 1986 to be made on August 1, 
2004, shall be treated as timely if made before the close of the 90-day 
period beginning on the date of the enactment of this Act.

SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR OIL AND 
              NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES.

    (a) In General.--Subparagraph (H) of section 613A(c)(6) is amended 
by striking ``January 1, 2004'' and inserting ``January 1, 2006''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2003.

SEC. 413. QUALIFIED ZONE ACADEMY BONDS.

    (a) In General.--Paragraph (1) of section 1397E(e) is amended by 
striking ``and 2003'' and inserting ``2003, 2004, and 2005''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to obligations issued after the date of the enactment of this 
Act.

SEC. 414. DISTRICT OF COLUMBIA.

    (a) District of Columbia Enterprise Zone.--Subsection (f) of 
section 1400 is amended by striking ``December 31, 2003'' both places 
it appears and inserting ``December 31, 2005''.
    (b)  Tax-Exempt Economic Development Bonds.--Subsection (b) of 
section 1400A is amended by striking ``December 31, 2003'' and 
inserting ``December 31, 2005''.
    (c) Zero Percent Capital Gains Rate.--
            (1) Section 1400B is amended by striking ``January 1, 
        2004'' each place it appears and inserting ``January 1, 2006''.
            (2) Subsections (e)(2) and (g)(2) of section 1400B are each 
        amended by striking ``2008'' each place it appears in the 
        headings and text and inserting ``2010''.
            (3) Subsection (d) of section 1400F is amended by striking 
        ``December 31, 2008'' and inserting ``December 31, 2010''.
    (d) First-Time Homebuyer Credit.--Subsection (i) of section 1400C 
is amended by striking ``January 1, 2004'' and inserting ``January 1, 
2006''.
    (e) Effective Dates.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall take 
        effect on the date of the enactment of this Act.
            (2) Tax-exempt economic development bonds.--The amendment 
        made by subsection (b) shall apply to obligations issued after 
        December 31, 2003.

SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY ZONE BOND FINANCING.

    Subparagraph (D) of section 1400L(d)(2) is amended by striking 
``2005'' and inserting ``2009''.

SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVITIES.

    (a) In General.--Clause (iv) of section 6103(i)(3)(C) and 
subparagraph (E) of section 6103(i)(7) are both amended by striking 
``December 31, 2003'' and inserting ``December 31, 2005''.
    (b) Disclosure of Taxpayer Identity to Law Enforcement Agencies 
Investigating Terrorism.--Subparagraph (A) of section 6103(i)(7) is 
amended by adding at the end the following new clause:
                            ``(v) Taxpayer identity.--For purposes of 
                        this subparagraph, a taxpayer's identity shall 
                        not be treated as taxpayer return 
                        information.''.
    (c) Effective Dates.--
            (1) In general.--The amendments made by subsection (a) 
        shall apply to disclosures on or after the date of the 
        enactment of this Act.
            (2) Subsection (b).--The amendment made by subsection (b) 
        shall take effect as if included in section 201 of the Victims 
        of Terrorism Tax Relief Act of 2001.

SEC. 417. DISCLOSURE OF RETURN INFORMATION RELATING TO STUDENT LOANS.

    Section 6103(l)(13)(D) (relating to termination) is amended by 
striking ``December 31, 2004'' and inserting ``December 31, 2005''.

SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS.

    (a) In General.--Paragraph (1) of section 7652(f) is amended by 
striking ``January 1, 2004'' and inserting ``January 1, 2006''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to articles brought into the United States after December 31, 
2003.

SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR THE INTERNAL 
              REVENUE SERVICE.

    (a) In General.--Paragraph (2) of section 8021(f) (relating to 
joint reviews) is amended by striking ``2004'' and inserting ``2005''.
    (b) Report.--Subparagraph (C) of section 8022(3) (regarding 
reports) is amended--
            (1) by striking ``2004'' and inserting ``2005'', and
            (2) by striking ``with respect to--'' and all that follows 
        and inserting ``with respect to the matters addressed in the 
        joint review referred to in section 8021(f)(2).''.
    (c) Time for Joint Review.--The joint review required by section 
8021(f)(2) of the Internal Revenue Code of 1986 to be made before June 
1, 2004, shall be treated as timely if made before June 1, 2005.

SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH 
              BENEFITS.

    (a) In General.--Subsection (f) of section 9812 is amended--
    (1) by striking ``and'' at the end of paragraph (1), by striking 
paragraph (2), and by inserting after paragraph (1) the following new 
paragraphs:
            ``(2) on or after January 1, 2004, and before the date of 
        the enactment of American Jobs Creation Act of 2004, and
            ``(3) after December 31, 2005.''.
    (b) ERISA.--Section 712(f) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1185a(f)) is amended by striking ``on 
or after December 31, 2004'' and inserting ``after December 31, 2005''.
    (c) PHSA.--Section 2705(f) of the Public Health Service Act (42 
U.S.C. 300gg-5(f)) is amended by striking ``on or after December 31, 
2004'' and inserting ``after December 31, 2005''.
    (d) Effective Date.--The amendments made by this section shall 
apply to benefits for services furnished on or after December 31, 2003.

SEC. 421. COMBINED EMPLOYMENT TAX REPORTING PROJECT.

    (a) In General.--Paragraph (1) of section 976(b) of the Taxpayer 
Relief Act of 1997 (111 Stat. 898) is amended by striking ``for a 
period ending with the date which is 5 years after the date of the 
enactment of this Act'' and inserting ``during the period ending on 
December 31, 2005''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to disclosures on or after the date of the enactment of this Act.

SEC. 422. CLEAN-FUEL VEHICLES.

    (a) Credit for Qualified Electric Vehicles.--Paragraph (2) of 
section 30(b) (relating to phaseout) is amended to read as follows:
            ``(2) Phaseout.--In the case of any qualified electric 
        vehicle placed in service after December 31, 2005, the credit 
        otherwise allowable under subsection (a) (determined after the 
        application of paragraph (1)) shall be reduced by 75 
        percent.''.
    (b) Deduction for Qualified Clean-Fuel Vehicle Property.--
Subparagraph (B) of section 179A(b)(1) (relating to phaseout) is 
amended to read as follows:
                    ``(B) Phaseout.--In the case of any qualified 
                clean-fuel vehicle property placed in service after 
                December 31, 2005, the limit otherwise applicable under 
                subparagraph (A) shall be reduced by 75 percent.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to property placed in service after December 31, 2003.

       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.

    (a) In General.--Subsection (b) of section 164 (relating to 
definitions and special rules) is amended by adding at the end the 
following:
            ``(5) General sales taxes.--For purposes of subsection 
        (a)--
                    ``(A) Election to deduct state and local sales 
                taxes in lieu of state and local income taxes.--
                            ``(i) In general.--At the election of the 
                        taxpayer for the taxable year, subsection (a) 
                        shall be applied--
                                    ``(I) without regard to the 
                                reference to State and local income 
                                taxes, and
                                    ``(II) as if State and local 
                                general sales taxes were referred to in 
                                a paragraph thereof.
                    ``(B) Definition of general sales tax.--The term 
                `general sales tax' means a tax imposed at one rate 
                with respect to the sale at retail of a broad range of 
                classes of items.
                    ``(C) Special rules for food, etc.--In the case of 
                items of food, clothing, medical supplies, and motor 
                vehicles--
                            ``(i) the fact that the tax does not apply 
                        with respect to some or all of such items shall 
                        not be taken into account in determining 
                        whether the tax applies with respect to a broad 
                        range of classes of items, and
                            ``(ii) the fact that the rate of tax 
                        applicable with respect to some or all of such 
                        items is lower than the general rate of tax 
                        shall not be taken into account in determining 
                        whether the tax is imposed at one rate.
                    ``(D) Items taxed at different rates.--Except in 
                the case of a lower rate of tax applicable with respect 
                to an item described in subparagraph (C), no deduction 
                shall be allowed under this paragraph for any general 
                sales tax imposed with respect to an item at a rate 
                other than the general rate of tax.
                    ``(E) Compensating use taxes.--A compensating use 
                tax with respect to an item shall be treated as a 
                general sales tax. For purposes of the preceding 
                sentence, the term `compensating use tax' means, with 
                respect to any item, a tax which--
                            ``(i) is imposed on the use, storage, or 
                        consumption of such item, and
                            ``(ii) is complementary to a general sales 
                        tax, but only if a deduction is allowable under 
                        this paragraph with respect to items sold at 
                        retail in the taxing jurisdiction which are 
                        similar to such item.
                    ``(F) Special rule for motor vehicles.--In the case 
                of motor vehicles, if the rate of tax exceeds the 
                general rate, such excess shall be disregarded and the 
                general rate shall be treated as the rate of tax.
                    ``(G) Separately stated general sales taxes.--If 
                the amount of any general sales tax is separately 
                stated, then, to the extent that the amount so stated 
                is paid by the consumer (other than in connection with 
                the consumer's trade or business) to the seller, such 
                amount shall be treated as a tax imposed on, and paid 
                by, such consumer.
                    ``(H) Amount of deduction to be determined under 
                tables.--
                            ``(i) In general.--The amount of the 
                        deduction allowed under this paragraph shall be 
                        determined under tables prescribed by the 
                        Secretary.
                            ``(ii) Requirements for tables.--The tables 
                        prescribed under clause (i)--
                                    ``(I) shall reflect the provisions 
                                of this paragraph,
                                    ``(II) shall be based on the 
                                average consumption by taxpayers on a 
                                State-by-State basis, as determined by 
                                the Secretary, taking into account 
                                filing status, number of dependents, 
                                adjusted gross income, and rates of 
                                State and local general sales taxation, 
                                and
                                    ``(III) need only be determined 
                                with respect to adjusted gross incomes 
                                up to the applicable amount (as 
                                determined under section 68(b)).
                    ``(I) Application of paragraph.--This paragraph 
                shall apply to taxable years beginning after December 
                31, 2003, and before January 1, 2006.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

                      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.

    (a) In General.--Subchapter C of chapter 80 (relating to provisions 
affecting more than one subtitle) is amended by adding at the end the 
following new section:

``SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES AND THEIR FOREIGN 
              PARENTS.

    ``(a) Tax on Inversion Gain of Expatriated Entities.--
            ``(1) In general.--The taxable income of an expatriated 
        entity for any taxable year which includes any portion of the 
        applicable period shall in no event be less than the inversion 
        gain of the entity for the taxable year.
            ``(2) Expatriated entity.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `expatriated entity' 
                means--
                            ``(i) the domestic corporation or 
                        partnership referred to in subparagraph (B)(i) 
                        with respect to which a foreign corporation is 
                        a surrogate foreign corporation, and
                            ``(ii) any United States person who is 
                        related (within the meaning of section 267(b) 
                        or 707(b)(1)) to a domestic corporation or 
                        partnership described in clause (i).
                    ``(B) Surrogate foreign corporation.--A foreign 
                corporation shall be treated as a surrogate foreign 
                corporation if, pursuant to a plan (or a series of 
                related transactions)--
                            ``(i) the entity completes after March 4, 
                        2003, the direct or indirect acquisition of 
                        substantially all of the properties held 
                        directly or indirectly by a domestic 
                        corporation or substantially all of the 
                        properties constituting a trade or business of 
                        a domestic partnership,
                            ``(ii) after the acquisition at least 60 
                        percent of the stock (by vote or value) of the 
                        entity is held--
                                    ``(I) in the case of an acquisition 
                                with respect to a domestic corporation, 
                                by former shareholders of the domestic 
                                corporation by reason of holding stock 
                                in the domestic corporation, or
                                    ``(II) in the case of an 
                                acquisition with respect to a domestic 
                                partnership, by former partners of the 
                                domestic partnership by reason of 
                                holding a capital or profits interest 
                                in the domestic partnership, and
                            ``(iii) after the acquisition the expanded 
                        affiliated group which includes the entity does 
                        not have substantial business activities in the 
                        foreign country in which, or under the law of 
                        which, the entity is created or organized, when 
                        compared to the total business activities of 
                        such expanded affiliated group.
                An entity otherwise described in clause (i) with 
                respect to any domestic corporation or partnership 
                trade or business shall be treated as not so described 
                if, on or before March 4, 2003, such entity acquired 
                directly or indirectly more than half of the properties 
                held directly or indirectly by such corporation or more 
                than half of the properties constituting such 
                partnership trade or business, as the case may be.
    ``(b) Definitions and Special Rules.--
            ``(1) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group as defined in 
        section 1504(a) but without regard to section 1504(b)(3), 
        except that section 1504(a) shall be applied by substituting 
        `more than 50 percent' for `at least 80 percent' each place it 
        appears.
            ``(2) Certain stock disregarded.--There shall not be taken 
        into account in determining ownership under subsection 
        (a)(2)(B)(ii)--
                    ``(A) stock held by members of the expanded 
                affiliated group which includes the foreign 
                corporation, or
                    ``(B) stock of such foreign corporation which is 
                sold in a public offering related to the acquisition 
                described in subsection (a)(2)(B)(i).
            ``(3) Plan deemed in certain cases.--If a foreign 
        corporation acquires directly or indirectly substantially all 
        of the properties of a domestic corporation or partnership 
        during the 4-year period beginning on the date which is 2 years 
        before the ownership requirements of subsection (a)(2)(B)(ii) 
        are met, such actions shall be treated as pursuant to a plan.
            ``(4) Certain transfers disregarded.--The transfer of 
        properties or liabilities (including by contribution or 
        distribution) shall be disregarded if such transfers are part 
        of a plan a principal purpose of which is to avoid the purposes 
        of this section.
            ``(5) Special rule for related partnerships.--For purposes 
        of applying subsection (a)(2)(B)(ii) to the acquisition of a 
        trade or business of a domestic partnership, except as provided 
        in regulations, all partnerships which are under common control 
        (within the meaning of section 482) shall be treated as 1 
        partnership.
            ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to determine whether a 
        corporation is a surrogate foreign corporation, including 
        regulations--
                    ``(A) to treat warrants, options, contracts to 
                acquire stock, convertible debt interests, and other 
                similar interests as stock, and
                    ``(B) to treat stock as not stock.
    ``(c) Other Definitions.--For purposes of this section--
            ``(1) Applicable period.--The term `applicable period' 
        means the period--
                    ``(A) beginning on the first date properties are 
                acquired as part of the acquisition described in 
                subsection (a)(2)(B)(i), and
                    ``(B) ending on the date which is 10 years after 
                the last date properties are acquired as part of such 
                acquisition.
            ``(2) Inversion gain.--The term `inversion gain' means the 
        income or gain recognized by reason of the transfer during the 
        applicable period of stock or other properties by an 
        expatriated entity, and any income received or accrued during 
        the applicable period by reason of a license of any property by 
        an expatriated entity--
                    ``(A) as part of the acquisition described in 
                subsection (a)(2)(B)(i), or
                    ``(B) after such acquisition if the transfer or 
                license is to a foreign related person.
        Subparagraph (B) shall not apply to property described in 
        section 1221(a)(1) in the hands of the expatriated entity.
            ``(3) Foreign related person.--The term `foreign related 
        person' means, with respect to any expatriated entity, a 
        foreign person which--
                    ``(A) is related (within the meaning of section 
                267(b) or 707(b)(1)) to such entity, or
                    ``(B) is under the same common control (within the 
                meaning of section 482) as such entity.
    ``(d) Special Rules.--
            ``(1) Credits not allowed against tax on inversion gain.--
        Credits (other than the credit allowed by section 901) shall be 
        allowed against the tax imposed by this chapter on an 
        expatriated entity for any taxable year described in subsection 
        (a) only to the extent such tax exceeds the product of--
                    ``(A) the amount of the inversion gain for the 
                taxable year, and
                    ``(B) the highest rate of tax specified in section 
                11(b)(1).
        For purposes of determining the credit allowed by section 901, 
        inversion gain shall be treated as from sources within the 
        United States.
            ``(2) Special rules for partnerships.--In the case of an 
        expatriated entity which is a partnership--
                    ``(A) subsection (a)(1) shall apply at the partner 
                rather than the partnership level,
                    ``(B) the inversion gain of any partner for any 
                taxable year shall be equal to the sum of--
                            ``(i) the partner's distributive share of 
                        inversion gain of the partnership for such 
                        taxable year, plus
                            ``(ii) gain recognized for the taxable year 
                        by the partner by reason of the transfer during 
                        the applicable period of any partnership 
                        interest of the partner in such partnership to 
                        the surrogate foreign corporation, and
                    ``(C) the highest rate of tax specified in the rate 
                schedule applicable to the partner under this chapter 
                shall be substituted for the rate of tax referred to in 
                paragraph (1).
            ``(3) Coordination with section 172 and minimum tax.--Rules 
        similar to the rules of paragraphs (3) and (4) of section 
        860E(a) shall apply for purposes of subsection (a).
            ``(4) Statute of limitations.--
                    ``(A) In general.--The statutory period for the 
                assessment of any deficiency attributable to the 
                inversion gain of any taxpayer for any pre-inversion 
                year shall not expire before the expiration of 3 years 
                from the date the Secretary is notified by the taxpayer 
                (in such manner as the Secretary may prescribe) of the 
                acquisition described in subsection (a)(2)(B)(i) to 
                which such gain relates and such deficiency may be 
                assessed before the expiration of such 3-year period 
                notwithstanding the provisions of any other law or rule 
                of law which would otherwise prevent such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' means 
                any taxable year if--
                            ``(i) any portion of the applicable period 
                        is included in such taxable year, and
                            ``(ii) such year ends before the taxable 
                        year in which the acquisition described in 
                        subsection (a)(2)(B)(i) is completed.
    ``(e) Special Rule for Treaties.--Nothing in section 894 or 7852(d) 
or in any other provision of law shall be construed as permitting an 
exemption, by reason of any treaty obligation of the United States 
heretofore or hereafter entered into, from the provisions of this 
section.
    ``(f) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including regulations 
providing for such adjustments to the application of this section as 
are necessary to prevent the avoidance of the purposes of this section, 
including the avoidance of such purposes through--
            ``(1) the use of related persons, pass-through or other 
        noncorporate entities, or other intermediaries, or
            ``(2) transactions designed to have persons cease to be (or 
        not become) members of expanded affiliated groups or related 
        persons.''.
    (b) Conforming Amendment.--The table of sections for subchapter C 
of chapter 80 is amended by adding at the end the following new item:

                              ``Sec. 7874. Rules relating to 
                                        expatriated entities and their 
                                        foreign parents.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after March 4, 2003.

SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
              CORPORATIONS.

    (a) In General.--Subtitle D is amended by inserting after chapter 
44 end the following new chapter:

       ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

                              ``Sec. 4985. Stock compensation of 
                                        insiders in expatriated 
                                        corporations.

``SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
              CORPORATIONS.

    ``(a) Imposition of Tax.--In the case of an individual who is a 
disqualified individual with respect to any expatriated corporation, 
there is hereby imposed on such person a tax equal to 15 percent of the 
value (determined under subsection (b)) of the specified stock 
compensation held (directly or indirectly) by or for the benefit of 
such individual or a member of such individual's family (as defined in 
section 267) at any time during the 12-month period beginning on the 
date which is 6 months before the expatriation date.
    ``(b) Value.--For purposes of subsection (a)--
            ``(1) In general.--The value of specified stock 
        compensation shall be--
                    ``(A) in the case of a stock option (or other 
                similar right) or a stock appreciation right, the fair 
                value of such option or right, and
                    ``(B) in any other case, the fair market value of 
                such compensation.
            ``(2) Date for determining value.--The determination of 
        value shall be made--
                    ``(A) in the case of specified stock compensation 
                held on the expatriation date, on such date,
                    ``(B) in the case of such compensation which is 
                canceled during the 6 months before the expatriation 
                date, on the day before such cancellation, and
                    ``(C) in the case of such compensation which is 
                granted after the expatriation date, on the date such 
                compensation is granted.
    ``(c) Tax To Apply Only if Shareholder Gain Recognized.--Subsection 
(a) shall apply to any disqualified individual with respect to an 
expatriated corporation only if gain (if any) on any stock in such 
corporation is recognized in whole or part by any shareholder by reason 
of the acquisition referred to in section 7874(a)(2)(B)(i) with respect 
to such corporation.
    ``(d) Exception Where Gain Recognized on Compensation.--Subsection 
(a) shall not apply to--
            ``(1) any stock option which is exercised on the 
        expatriation date or during the 6-month period before such date 
        and to the stock acquired in such exercise, if income is 
        recognized under section 83 on or before the expatriation date 
        with respect to the stock acquired pursuant to such exercise, 
        and
            ``(2) any other specified stock compensation which is 
        exercised, sold, exchanged, distributed, cashed-out, or 
        otherwise paid during such period in a transaction in which 
        income, gain, or loss is recognized in full.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Disqualified individual.--The term `disqualified 
        individual' means, with respect to a corporation, any 
        individual who, at any time during the 12-month period 
        beginning on the date which is 6 months before the expatriation 
        date--
                    ``(A) is subject to the requirements of section 
                16(a) of the Securities Exchange Act of 1934 with 
                respect to such corporation or any member of the 
                expanded affiliated group which includes such 
                corporation, or
                    ``(B) would be subject to such requirements if such 
                corporation or member were an issuer of equity 
                securities referred to in such section.
            ``(2) Expatriated corporation; expatriation date.--
                    ``(A) Expatriated corporation.--The term 
                `expatriated corporation' means any corporation which 
                is an expatriated entity (as defined in section 
                7874(a)(2)). Such term includes any predecessor or 
                successor of such a corporation.
                    ``(B) Expatriation date.--The term `expatriation 
                date' means, with respect to a corporation, the date on 
                which the corporation first becomes an expatriated 
                corporation.
            ``(3) Specified stock compensation.--
                    ``(A) In general.--The term `specified stock 
                compensation' means payment (or right to payment) 
                granted by the expatriated corporation (or by any 
                member of the expanded affiliated group which includes 
                such corporation) to any person in connection with the 
                performance of services by a disqualified individual 
                for such corporation or member if the value of such 
                payment or right is based on (or determined by 
                reference to) the value (or change in value) of stock 
                in such corporation (or any such member).
                    ``(B) Exceptions.--Such term shall not include--
                            ``(i) any option to which part II of 
                        subchapter D of chapter 1 applies, or
                            ``(ii) any payment or right to payment from 
                        a plan referred to in section 280G(b)(6).
            ``(4) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group (as defined in 
        section 1504(a) without regard to section 1504(b)(3)); except 
        that section 1504(a) shall be applied by substituting `more 
        than 50 percent' for `at least 80 percent' each place it 
        appears.
    ``(f) Special Rules.--For purposes of this section--
            ``(1) Cancellation of restriction.--The cancellation of a 
        restriction which by its terms will never lapse shall be 
        treated as a grant.
            ``(2) Payment or reimbursement of tax by corporation 
        treated as specified stock compensation.--Any payment of the 
        tax imposed by this section directly or indirectly by the 
        expatriated corporation or by any member of the expanded 
        affiliated group which includes such corporation--
                    ``(A) shall be treated as specified stock 
                compensation, and
                    ``(B) shall not be allowed as a deduction under any 
                provision of chapter 1.
            ``(3) Certain restrictions ignored.--Whether there is 
        specified stock compensation, and the value thereof, shall be 
        determined without regard to any restriction other than a 
        restriction which by its terms will never lapse.
            ``(4) Property transfers.--Any transfer of property shall 
        be treated as a payment and any right to a transfer of property 
        shall be treated as a right to a payment.
            ``(5) Other administrative provisions.--For purposes of 
        subtitle F, any tax imposed by this section shall be treated as 
        a tax imposed by subtitle A.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Denial of Deduction.--
            (1) In general.--Paragraph (6) of section 275(a) is amended 
        by inserting ``45,'' before ``46,''.
            (2) $1,000,000 limit on deductible compensation reduced by 
        payment of excise tax on specified stock compensation.--
        Paragraph (4) of section 162(m) is amended by adding at the end 
        the following new subparagraph:
                    ``(G) Coordination with excise tax on specified 
                stock compensation.--The dollar limitation contained in 
                paragraph (1) with respect to any covered employee 
                shall be reduced (but not below zero) by the amount of 
                any payment (with respect to such employee) of the tax 
                imposed by section 4985 directly or indirectly by the 
                expatriated corporation (as defined in such section) or 
                by any member of the expanded affiliated group (as 
                defined in such section) which includes such 
                corporation.''
    (c) Conforming Amendments.--
            (1) The last sentence of section 3121(v)(2)(A) is amended 
        by inserting before the period ``or to any specified stock 
        compensation (as defined in section 4985) on which tax is 
        imposed by section 4985''.
            (2) The table of chapters for subtitle D is amended by 
        inserting after the item relating to chapter 44 the following 
        new item:

                              ``Chapter 45. Provisions relating to 
                                        expatriated entities.''
    (d) Effective Date.--The amendments made by this section shall take 
effect on March 4, 2003; except that periods before such date shall not 
be taken into account in applying the periods in subsections (a) and 
(e)(1) of section 4985 of the Internal Revenue Code of 1986, as added 
by this section.

SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOREIGN JURISDICTIONS.

    (a) In General.--Section 845(a) (relating to allocation in case of 
reinsurance agreement involving tax avoidance or evasion) is amended by 
striking ``source and character'' and inserting ``amount, source, or 
character''.
    (b) Effective Date.--The amendments made by this section shall 
apply to any risk reinsured after the date of the enactment of this 
Act.

SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.

    (a) Expatriation To Avoid Tax.--
            (1) In general.--Subsection (a) of section 877 (relating to 
        treatment of expatriates) is amended to read as follows:
    ``(a) Treatment of Expatriates.--
            ``(1) In general.--Every nonresident alien individual to 
        whom this section applies and who, within the 10-year period 
        immediately preceding the close of the taxable year, lost 
        United States citizenship shall be taxable for such taxable 
        year in the manner provided in subsection (b) if the tax 
        imposed pursuant to such subsection (after any reduction in 
        such tax under the last sentence of such subsection) exceeds 
        the tax which, without regard to this section, is imposed 
        pursuant to section 871.
            ``(2) Individuals subject to this section.--This section 
        shall apply to any individual if--
                    ``(A) the average annual net income tax (as defined 
                in section 38(c)(1)) of such individual for the period 
                of 5 taxable years ending before the date of the loss 
                of United States citizenship is greater than $124,000,
                    ``(B) the net worth of the individual as of such 
                date is $2,000,000 or more, or
                    ``(C) such individual fails to certify under 
                penalty of perjury that he has met the requirements of 
                this title for the 5 preceding taxable years or fails 
                to submit such evidence of such compliance as the 
                Secretary may require.
        In the case of the loss of United States citizenship in any 
        calendar year after 2004, such $124,000 amount shall be 
        increased by an amount equal to such dollar amount multiplied 
        by the cost-of-living adjustment determined under section 
        1(f)(3) for such calendar year by substituting `2003' for 
        `1992' in subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest multiple of 
        $1,000.''.
            (2) Revision of exceptions from alternative tax.--
        Subsection (c) of section 877 (relating to tax avoidance not 
        presumed in certain cases) is amended to read as follows:
    ``(c) Exceptions.--
            ``(1) In general.--Subparagraphs (A) and (B) of subsection 
        (a)(2) shall not apply to an individual described in paragraph 
        (2) or (3).
            ``(2) Dual citizens.--
                    ``(A) In general.--An individual is described in 
                this paragraph if--
                            ``(i) the individual became at birth a 
                        citizen of the United States and a citizen of 
                        another country and continues to be a citizen 
                        of such other country, and
                            ``(ii) the individual has had no 
                        substantial contacts with the United States.
                    ``(B) Substantial contacts.--An individual shall be 
                treated as having no substantial contacts with the 
                United States only if the individual--
                            ``(i) was never a resident of the United 
                        States (as defined in section 7701(b)),
                            ``(ii) has never held a United States 
                        passport, and
                            ``(iii) was not present in the United 
                        States for more than 30 days during any 
                        calendar year which is 1 of the 10 calendar 
                        years preceding the individual's loss of United 
                        States citizenship.
            ``(3) Certain minors.--An individual is described in this 
        paragraph if--
                    ``(A) the individual became at birth a citizen of 
                the United States,
                    ``(B) neither parent of such individual was a 
                citizen of the United States at the time of such birth,
                    ``(C) the individual's loss of United States 
                citizenship occurs before such individual attains age 
                18\1/2\, and
                    ``(D) the individual was not present in the United 
                States for more than 30 days during any calendar year 
                which is 1 of the 10 calendar years preceding the 
                individual's loss of United States citizenship.''.
            (3) Conforming amendment.--Section 2107(a) is amended to 
        read as follows:
    ``(a) Treatment of Expatriates.--A tax computed in accordance with 
the table contained in section 2001 is hereby imposed on the transfer 
of the taxable estate, determined as provided in section 2106, of every 
decedent nonresident not a citizen of the United States if the date of 
death occurs during a taxable year with respect to which the decedent 
is subject to tax under section 877(b).''.
    (b) Special Rules for Determining When an Individual Is No Longer a 
United States Citizen or Long-Term Resident.--Section 7701 (relating to 
definitions) is amended by redesignating subsection (n) as subsection 
(o) and by inserting after subsection (m) the following new subsection:
    ``(n) Special Rules for Determining When an Individual Is No Longer 
a United States Citizen or Long-Term Resident.--An individual who would 
(but for this subsection) cease to be treated as a citizen or resident 
of the United States shall continue to be treated as a citizen or 
resident of the United States, as the case may be, until such 
individual--
            ``(1) gives notice of an expatriating act or termination of 
        residency (with the requisite intent to relinquish citizenship 
        or terminate residency) to the Secretary of State or the 
        Secretary of Homeland Security, and
            ``(2) provides a statement in accordance with section 
        6039G.''.
    (c) Physical Presence in the United States for More Than 30 Days.--
Section 877 (relating to expatriation to avoid tax) is amended by 
adding at the end the following new subsection:
    ``(g) Physical Presence.--
            ``(1) In general.--This section shall not apply to any 
        individual to whom this section would otherwise apply for any 
        taxable year during the 10-year period referred to in 
        subsection (a) in which such individual is physically present 
        in the United States at any time on more than 30 days in the 
        calendar year ending in such taxable year, and such individual 
        shall be treated for purposes of this title as a citizen or 
        resident of the United States, as the case may be, for such 
        taxable year.
            ``(2) Exception.--
                    ``(A) In general.--In the case of an individual 
                described in any of the following subparagraphs of this 
                paragraph, a day of physical presence in the United 
                States shall be disregarded if the individual is 
                performing services in the United States on such day 
                for an employer. The preceding sentence shall not apply 
                if--
                            ``(i) such employer is related (within the 
                        meaning of section 267 and 707) to such 
                        individual, or
                            ``(ii) such employer fails to meet such 
                        requirements as the Secretary may prescribe by 
                        regulations to prevent the avoidance of the 
                        purposes of this paragraph.
                Not more than 30 days during any calendar year may be 
                disregarded under this subparagraph.
                    ``(B) Individuals with ties to other countries.--An 
                individual is described in this subparagraph if--
                            ``(i) the individual becomes (not later 
                        than the close of a reasonable period after 
                        loss of United States citizenship or 
                        termination of residency) a citizen or resident 
                        of the country in which--
                                    ``(I) such individual was born,
                                    ``(II) if such individual is 
                                married, such individual's spouse was 
                                born, or
                                    ``(III) either of such individual's 
                                parents were born, and
                            ``(ii) the individual becomes fully liable 
                        for income tax in such country.
                    ``(C) Minimal prior physical presence in the united 
                states.--An individual is described in this 
                subparagraph if, for each year in the 10-year period 
                ending on the date of loss of United States citizenship 
                or termination of residency, the individual was 
                physically present in the United States for 30 days or 
                less. The rule of section 7701(b)(3)(D)(ii) shall apply 
                for purposes of this subparagraph.''.
    (d) Transfers Subject to Gift Tax.--
            (1) In general.--Subsection (a) of section 2501 (relating 
        to taxable transfers) is amended by striking paragraph (4), by 
        redesignating paragraph (5) as paragraph (4), and by striking 
        paragraph (3) and inserting the following new paragraph:
            ``(3) Exception.--
                    ``(A) Certain individuals.--Paragraph (2) shall not 
                apply in the case of a donor to whom section 877(b) 
                applies for the taxable year which includes the date of 
                the transfer.
                    ``(B) Credit for foreign gift taxes.--The tax 
                imposed by this section solely by reason of this 
                paragraph shall be credited with the amount of any gift 
                tax actually paid to any foreign country in respect of 
                any gift which is taxable under this section solely by 
                reason of this paragraph.''
            (2) Transfers of certain stock.--Subsection (a) of section 
        2501 is amended by adding at the end the following new 
        paragraph:
            ``(5) Transfers of certain stock.--
                    ``(A) In general.--In the case of a transfer of 
                stock in a foreign corporation described in 
                subparagraph (B) by a donor to whom section 877(b) 
                applies for the taxable year which includes the date of 
                the transfer--
                            ``(i) section 2511(a) shall be applied 
                        without regard to whether such stock is 
                        situated within the United States, and
                            ``(ii) the value of such stock for purposes 
                        of this chapter shall be its U.S.-asset value 
                        determined under subparagraph (C).
                    ``(B) Foreign corporation described.--A foreign 
                corporation is described in this subparagraph with 
                respect to a donor if--
                            ``(i) the donor owned (within the meaning 
                        of section 958(a)) at the time of such transfer 
                        10 percent or more of the total combined voting 
                        power of all classes of stock entitled to vote 
                        of the foreign corporation, and
                            ``(ii) such donor owned (within the meaning 
                        of section 958(a)), or is considered to have 
                        owned (by applying the ownership rules of 
                        section 958(b)), at the time of such transfer, 
                        more than 50 percent of--
                                    ``(I) the total combined voting 
                                power of all classes of stock entitled 
                                to vote of such corporation, or
                                    ``(II) the total value of the stock 
                                of such corporation.
                    ``(C) U.S.-asset value.--For purposes of 
                subparagraph (A), the U.S.-asset value of stock shall 
                be the amount which bears the same ratio to the fair 
                market value of such stock at the time of transfer as--
                            ``(i) the fair market value (at such time) 
                        of the assets owned by such foreign corporation 
                        and situated in the United States, bears to
                            ``(ii) the total fair market value (at such 
                        time) of all assets owned by such foreign 
                        corporation.''
    (e) Enhanced Information Reporting From Individuals Losing United 
States Citizenship.--
            (1) In general.--Subsection (a) of section 6039G is amended 
        to read as follows:
    ``(a) In General.--Notwithstanding any other provision of law, any 
individual to whom section 877(b) applies for any taxable year shall 
provide a statement for such taxable year which includes the 
information described in subsection (b).''.
            (2) Information to be provided.--Subsection (b) of section 
        6039G is amended to read as follows:
    ``(b) Information To Be Provided.--Information required under 
subsection (a) shall include--
            ``(1) the taxpayer's TIN,
            ``(2) the mailing address of such individual's principal 
        foreign residence,
            ``(3) the foreign country in which such individual is 
        residing,
            ``(4) the foreign country of which such individual is a 
        citizen,
            ``(5) information detailing the income, assets, and 
        liabilities of such individual,
            ``(6) the number of days during any portion of which that 
        the individual was physically present in the United States 
        during the taxable year, and
            ``(7) such other information as the Secretary may 
        prescribe.''.
            (3) Increase in penalty.--Subsection (d) of section 6039G 
        is amended to read as follows:
    ``(d) Penalty.--If--
            ``(1) an individual is required to file a statement under 
        subsection (a) for any taxable year, and
            ``(2) fails to file such a statement with the Secretary on 
        or before the date such statement is required to be filed or 
        fails to include all the information required to be shown on 
        the statement or includes incorrect information,
such individual shall pay a penalty of $10,000 unless it is shown that 
such failure is due to reasonable cause and not to willful neglect.''.
            (4) Conforming amendment.--Section 6039G is amended by 
        striking subsections (c), (f), and (g) and by redesignating 
        subsections (d) and (e) as subsection (c) and (d), 
        respectively.
    (f) Effective Date.--The amendments made by this section shall 
apply to individuals who expatriate after June 3, 2004.

SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

    (a) In General.--Subpart B of part III of subchapter A of chapter 
61 is amended by inserting after section 6043 the following new 
section:

``SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS AND ACQUISITIONS.

    ``(a) In General.--According to the forms or regulations prescribed 
by the Secretary, the acquiring corporation in any taxable acquisition 
shall make a return setting forth--
            ``(1) a description of the acquisition,
            ``(2) the name and address of each shareholder of the 
        acquired corporation who is required to recognize gain (if any) 
        as a result of the acquisition,
            ``(3) the amount of money and the fair market value of 
        other property transferred to each such shareholder as part of 
        such acquisition, and
            ``(4) such other information as the Secretary may 
        prescribe.
To the extent provided by the Secretary, the requirements of this 
section applicable to the acquiring corporation shall be applicable to 
the acquired corporation and not to the acquiring corporation.
    ``(b) Nominees.--According to the forms or regulations prescribed 
by the Secretary--
            ``(1) Reporting.--Any person who holds stock as a nominee 
        for another person shall furnish in the manner prescribed by 
        the Secretary to such other person the information provided by 
        the corporation under subsection (d).
            ``(2) Reporting to nominees.--In the case of stock held by 
        any person as a nominee, references in this section (other than 
        in subsection (c)) to a shareholder shall be treated as a 
        reference to the nominee.
    ``(c) Taxable Acquisition.--For purposes of this section, the term 
`taxable acquisition' means any acquisition by a corporation of stock 
in or property of another corporation if any shareholder of the 
acquired corporation is required to recognize gain (if any) as a result 
of such acquisition.
    ``(d) Statements To Be Furnished to Shareholders.--According to the 
forms or regulations prescribed by the Secretary, every person required 
to make a return under subsection (a) shall furnish to each shareholder 
whose name is required to be set forth in such return a written 
statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return,
            ``(2) the information required to be shown on such return 
        with respect to such shareholder, and
            ``(3) such other information as the Secretary may 
        prescribe.
The written statement required under the preceding sentence shall be 
furnished to the shareholder on or before January 31 of the year 
following the calendar year during which the taxable acquisition 
occurred.''
    (b) Assessable Penalties.--
            (1) Subparagraph (B) of section 6724(d)(1) (relating to 
        definitions) is amended by redesignating clauses (ii) through 
        (xviii) as clauses (iii) through (xix), respectively, and by 
        inserting after clause (i) the following new clause:
                            ``(ii) section 6043A(a) (relating to 
                        returns relating to taxable mergers and 
                        acquisitions),''.
            (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (F) through (BB) as subparagraphs 
        (G) through (CC), respectively, and by inserting after 
        subparagraph (E) the following new subparagraph:
                    ``(F) subsections (b) and (d) of section 6043A 
                (relating to returns relating to taxable mergers and 
                acquisitions).''.
    (c) Clerical Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 61 is amended by inserting after 
the item relating to section 6043 the following new item:

                              ``Sec. 6043A. Returns relating to taxable 
                                        mergers and acquisitions.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to acquisitions after the date of the enactment of this Act.

SEC. 606. STUDIES.

    (a) Transfer Pricing Rules.--The Secretary of the Treasury or the 
Secretary's delegate shall conduct a study regarding the effectiveness 
of current transfer pricing rules and compliance efforts in ensuring 
that cross-border transfers and other related-party transactions, 
particularly transactions involving intangible assets, service 
contracts, or leases cannot be used improperly to shift income out of 
the United States. The study shall include a review of the 
contemporaneous documentation and penalty rules under section 6662 of 
the Internal Revenue Code of 1986, a review of the regulatory and 
administrative guidance implementing the principles of section 482 of 
such Code to transactions involving intangible property and services 
and to cost-sharing arrangements, and an examination of whether 
increased disclosure of cross-border transactions should be required. 
The study shall set forth specific recommendations to address all 
abuses identified in the study. Not later than June 30, 2005, such 
Secretary or delegate shall submit to the Congress a report of such 
study.
    (b) Income Tax Treaties.--The Secretary of the Treasury or the 
Secretary's delegate shall conduct a study of United States income tax 
treaties to identify any inappropriate reductions in United States 
withholding tax that provide opportunities for shifting income out of 
the United States, and to evaluate whether existing anti-abuse 
mechanisms are operating properly. The study shall include specific 
recommendations to address all inappropriate uses of tax treaties. Not 
later than June 30, 2005, such Secretary or delegate shall submit to 
the Congress a report of such study.
    (c) Impact of Corporate Expatriation Provisions.--The Secretary of 
the Treasury or the Secretary's delegate shall conduct a study of the 
impact of the provisions of this title on corporate expatriation. The 
study shall include such recommendations as such Secretary or delegate 
may have to improve the impact of such provisions in carrying out the 
purposes of this title. Not later than December 31, 2005, such 
Secretary or delegate shall submit to the Congress a report of such 
study.

            Subtitle B--Provisions Relating to Tax Shelters

                  PART I--TAXPAYER-RELATED PROVISIONS

SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTIONS.

    (a) In General.--Part I of subchapter B of chapter 68 (relating to 
assessable penalties) is amended by inserting after section 6707 the 
following new section:

``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION 
              INFORMATION WITH RETURN.

    ``(a) Imposition of Penalty.--Any person who fails to include on 
any return or statement any information with respect to a reportable 
transaction which is required under section 6011 to be included with 
such return or statement shall pay a penalty in the amount determined 
under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        amount of the penalty under subsection (a) shall be--
                    ``(A) $10,000 in the case of a natural person, and
                    ``(B) $50,000 in any other case.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be--
                    ``(A) $100,000 in the case of a natural person, and
                    ``(B) $200,000 in any other case.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to which 
        information is required to be included with a return or 
        statement because, as determined under regulations prescribed 
        under section 6011, such transaction is of a type which the 
        Secretary determines as having a potential for tax avoidance or 
        evasion.
            ``(2) Listed transaction.--The term `listed transaction' 
        means a reportable transaction which is the same as, or 
        substantially similar to, a transaction specifically identified 
        by the Secretary as a tax avoidance transaction for purposes of 
        section 6011.
    ``(d) Authority To Rescind Penalty.--
            ``(1) In general.--The Commissioner of Internal Revenue may 
        rescind all or any portion of any penalty imposed by this 
        section with respect to any violation if--
                    ``(A) the violation is with respect to a reportable 
                transaction other than a listed transaction, and
                    ``(B) rescinding the penalty would promote 
                compliance with the requirements of this title and 
                effective tax administration.
            ``(2) No judicial appeal.--Notwithstanding any other 
        provision of law, any determination under this subsection may 
        not be reviewed in any judicial proceeding.
            ``(3) Records.--If a penalty is rescinded under paragraph 
        (1), the Commissioner shall place in the file in the Office of 
        the Commissioner the opinion of the Commissioner or the head of 
        the Office of Tax Shelter Analysis with respect to the 
        determination, including--
                    ``(A) a statement of the facts and circumstances 
                relating to the violation,
                    ``(B) the reasons for the rescission, and
                    ``(C) the amount of the penalty rescinded.
    ``(e) Coordination With Other Penalties.--The penalty imposed by 
this section shall be in addition to any other penalty imposed by this 
title.''
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by inserting after the item 
relating to section 6707 the following:

                              ``Sec. 6707A. Penalty for failure to 
                                        include reportable transaction 
                                        information with return.''
    (c) Effective Date.--The amendments made by this section shall 
apply to returns and statements the due date for which is after the 
date of the enactment of this Act.
    (d) Report.--The Commissioner of Internal Revenue shall annually 
report to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate--
            (1) a summary of the total number and aggregate amount of 
        penalties imposed, and rescinded, under section 6707A of the 
        Internal Revenue Code of 1986, and
            (2) a description of each penalty rescinded under section 
        6707(c) of such Code and the reasons therefor.

SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER 
              REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
              AVOIDANCE PURPOSE, ETC.

    (a) In General.--Subchapter A of chapter 68 is amended by inserting 
after section 6662 the following new section:

``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS 
              WITH RESPECT TO REPORTABLE TRANSACTIONS.

    ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be added 
to the tax an amount equal to 20 percent of the amount of such 
understatement.
    ``(b) Reportable Transaction Understatement.--For purposes of this 
section--
            ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                    ``(A) the product of--
                            ``(i) the amount of the increase (if any) 
                        in taxable income which results from a 
                        difference between the proper tax treatment of 
                        an item to which this section applies and the 
                        taxpayer's treatment of such item (as shown on 
                        the taxpayer's return of tax), and
                            ``(ii) the highest rate of tax imposed by 
                        section 1 (section 11 in the case of a taxpayer 
                        which is a corporation), and
                    ``(B) the amount of the decrease (if any) in the 
                aggregate amount of credits determined under subtitle A 
                which results from a difference between the taxpayer's 
                treatment of an item to which this section applies (as 
                shown on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the excess 
        of deductions allowed for the taxable year over gross income 
        for such year, and any reduction in the amount of capital 
        losses which would (without regard to section 1211) be allowed 
        for such year, shall be treated as an increase in taxable 
        income.
            ``(2) Items to which section applies.--This section shall 
        apply to any item which is attributable to--
                    ``(A) any listed transaction, and
                    ``(B) any reportable transaction (other than a 
                listed transaction) if a significant purpose of such 
                transaction is the avoidance or evasion of Federal 
                income tax.
    ``(c) Higher Penalty for Nondisclosed Transactions.--Subsection (a) 
shall be applied by substituting `30 percent' for `20 percent' with 
respect to the portion of any reportable transaction understatement 
with respect to which the requirement of section 6664(d)(2)(A) is not 
met.
    ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' and 
`listed transaction' have the respective meanings given to such terms 
by section 6707A(c).
    ``(e) Special Rules.--
            ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as defined 
        in section 6662(d)(2))--
                    ``(A) the amount of such understatement (determined 
                without regard to this paragraph) shall be increased by 
                the aggregate amount of reportable transaction 
                understatements for purposes of determining whether 
                such understatement is a substantial understatement 
                under section 6662(d)(1), and
                    ``(B) the addition to tax under section 6662(a) 
                shall apply only to the excess of the amount of the 
                substantial understatement (if any) after the 
                application of subparagraph (A) over the aggregate 
                amount of reportable transaction understatements.
            ``(2) Coordination with other penalties.--
                    ``(A) Application of fraud penalty.--References to 
                an underpayment in section 6663 shall be treated as 
                including references to a reportable transaction 
                understatement.
                    ``(B) No double penalty.--This section shall not 
                apply to any portion of an understatement on which a 
                penalty is imposed under section 6663.
            ``(3) Special rule for amended returns.--Except as provided 
        in regulations, in no event shall any tax treatment included 
        with an amendment or supplement to a return of tax be taken 
        into account in determining the amount of any reportable 
        transaction understatement if the amendment or supplement is 
        filed after the earlier of the date the taxpayer is first 
        contacted by the Secretary regarding the examination of the 
        return or such other date as is specified by the Secretary.''
    (b) Determination of Other Understatements.--Subparagraph (A) of 
section 6662(d)(2) is amended by adding at the end the following flush 
sentence:
                ``The excess under the preceding sentence shall be 
                determined without regard to items to which section 
                6662A applies.''
    (c) Reasonable Cause Exception.--
            (1) In general.--Section 6664 is amended by adding at the 
        end the following new subsection:
    ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
            ``(1) In general.--No penalty shall be imposed under 
        section 6662A with respect to any portion of a reportable 
        transaction understatement if it is shown that there was a 
        reasonable cause for such portion and that the taxpayer acted 
        in good faith with respect to such portion.
            ``(2) Special rules.--Paragraph (1) shall not apply to any 
        reportable transaction understatement unless--
                    ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed in 
                accordance with the regulations prescribed under 
                section 6011,
                    ``(B) there is or was substantial authority for 
                such treatment, and
                    ``(C) the taxpayer reasonably believed that such 
                treatment was more likely than not the proper 
                treatment.
        A taxpayer failing to adequately disclose in accordance with 
        section 6011 shall be treated as meeting the requirements of 
        subparagraph (A) if the penalty for such failure was rescinded 
        under section 6707A(d).
            ``(3) Rules relating to reasonable belief.--For purposes of 
        paragraph (2)(C)--
                    ``(A) In general.--A taxpayer shall be treated as 
                having a reasonable belief with respect to the tax 
                treatment of an item only if such belief--
                            ``(i) is based on the facts and law that 
                        exist at the time the return of tax which 
                        includes such tax treatment is filed, and
                            ``(ii) relates solely to the taxpayer's 
                        chances of success on the merits of such 
                        treatment and does not take into account the 
                        possibility that a return will not be audited, 
                        such treatment will not be raised on audit, or 
                        such treatment will be resolved through 
                        settlement if it is raised.
                    ``(B) Certain opinions may not be relied upon.--
                            ``(i) In general.--An opinion of a tax 
                        advisor may not be relied upon to establish the 
                        reasonable belief of a taxpayer if--
                                    ``(I) the tax advisor is described 
                                in clause (ii), or
                                    ``(II) the opinion is described in 
                                clause (iii).
                            ``(ii) Disqualified tax advisors.--A tax 
                        advisor is described in this clause if the tax 
                        advisor--
                                    ``(I) is a material advisor (within 
                                the meaning of section 6111(b)(1)) and 
                                participates in the organization, 
                                management, promotion, or sale of the 
                                transaction or is related (within the 
                                meaning of section 267(b) or 707(b)(1)) 
                                to any person who so participates,
                                    ``(II) is compensated directly or 
                                indirectly by a material advisor with 
                                respect to the transaction,
                                    ``(III) has a fee arrangement with 
                                respect to the transaction which is 
                                contingent on all or part of the 
                                intended tax benefits from the 
                                transaction being sustained, or
                                    ``(IV) as determined under 
                                regulations prescribed by the 
                                Secretary, has a disqualifying 
                                financial interest with respect to the 
                                transaction.
                            ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                    ``(I) is based on unreasonable 
                                factual or legal assumptions (including 
                                assumptions as to future events),
                                    ``(II) unreasonably relies on 
                                representations, statements, findings, 
                                or agreements of the taxpayer or any 
                                other person,
                                    ``(III) does not identify and 
                                consider all relevant facts, or
                                    ``(IV) fails to meet any other 
                                requirement as the Secretary may 
                                prescribe.''
            (2) Conforming amendments.--
                    (A) Paragraph (1) of section 6664(c) is amended by 
                striking ``this part'' and inserting ``section 6662 or 
                6663''.
                    (B) The heading for subsection (c) of section 6664 
                is amended by inserting ``for Underpayments'' after 
                ``Exception''.
    (d) Reduction in Penalty for Substantial Understatement of Income 
Tax Not To Apply to Tax Shelters.--Subparagraph (C) of section 
6662(d)(2) (relating to substantial understatement of income tax) is 
amended to read as follows:
                    ``(C) Reduction not to apply to tax shelters.--
                            ``(i) In general.--Subparagraph (B) shall 
                        not apply to any item attributable to a tax 
                        shelter.
                            ``(ii) Tax shelter.--For purposes of clause 
                        (i), the term `tax shelter' means--
                                    ``(I) a partnership or other 
                                entity,
                                    ``(II) any investment plan or 
                                arrangement, or
                                    ``(III) any other plan or 
                                arrangement,
                        if a significant purpose of such partnership, 
                        entity, plan, or arrangement is the avoidance 
                        or evasion of Federal income tax.''
    (e) Conforming Amendments.--
            (1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each 
        amended by striking ``section 6662(d)(2)(C)(iii)'' and 
        inserting ``section 6662(d)(2)(C)(ii)''.
            (2) The heading for section 6662 is amended to read as 
        follows:

``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''

            (3) The table of sections for part II of subchapter A of 
        chapter 68 is amended by striking the item relating to section 
        6662 and inserting the following 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.''
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING 
              TO TAXPAYER COMMUNICATIONS.

    (a) In General.--Section 7525(b) (relating to section not to apply 
to communications regarding corporate tax shelters) is amended to read 
as follows:
    ``(b) Section Not To Apply to Communications Regarding Tax 
Shelters.--The privilege under subsection (a) shall not apply to any 
written communication which is--
            ``(1) between a federally authorized tax practitioner and--
                    ``(A) any person,
                    ``(B) any director, officer, employee, agent, or 
                representative of the person, or
                    ``(C) any other person holding a capital or profits 
                interest in the person, and
            ``(2) in connection with the promotion of the direct or 
        indirect participation of the person in any tax shelter (as 
        defined in section 6662(d)(2)(C)(ii)).''
    (b) Effective Date.--The amendment made by this section shall apply 
to communications made on or after the date of the enactment of this 
Act.

SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH REQUIRED 
              LISTED TRANSACTIONS NOT REPORTED.

    (a) In General.--Section 6501(c) (relating to exceptions) is 
amended by adding at the end the following new paragraph:
            ``(10) Listed transactions.--If a taxpayer fails to include 
        on any return or statement for any taxable year any information 
        with respect to a listed transaction (as defined in section 
        6707A(c)(2)) which is required under section 6011 to be 
        included with such return or statement, the time for assessment 
        of any tax imposed by this title with respect to such 
        transaction shall not expire before the date which is 1 year 
        after the earlier of--
                    ``(A) the date on which the Secretary is furnished 
                the information so required, or
                    ``(B) the date that a material advisor (as defined 
                in section 6111) meets the requirements of section 6112 
                with respect to a request by the Secretary under 
                section 6112(b) relating to such transaction with 
                respect to such taxpayer.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years with respect to which the period for assessing a 
deficiency did not expire before the date of the enactment of this Act.

SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS.

    (a) In General.--Section 6111 (relating to registration of tax 
shelters) is amended to read as follows:

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

    ``(a) In General.--Each material advisor with respect to any 
reportable transaction shall make a return (in such form as the 
Secretary may prescribe) setting forth--
            ``(1) information identifying and describing the 
        transaction,
            ``(2) information describing any potential tax benefits 
        expected to result from the transaction, and
            ``(3) such other information as the Secretary may 
        prescribe.
Such return shall be filed not later than the date specified by the 
Secretary.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Material advisor.--
                    ``(A) In general.--The term `material advisor' 
                means any person--
                            ``(i) who provides any material aid, 
                        assistance, or advice with respect to 
                        organizing, managing, promoting, selling, 
                        implementing, or carrying out any reportable 
                        transaction, and
                            ``(ii) who directly or indirectly derives 
                        gross income in excess of the threshold amount 
                        (or such other amount as may be prescribed by 
                        the Secretary) for such advice or assistance.
                    ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the threshold amount is--
                            ``(i) $50,000 in the case of a reportable 
                        transaction substantially all of the tax 
                        benefits from which are provided to natural 
                        persons, and
                            ``(ii) $250,000 in any other case.
            ``(2) Reportable transaction.--The term `reportable 
        transaction' has the meaning given to such term by section 
        6707A(c).
    ``(c) Regulations.--The Secretary may prescribe regulations which 
provide--
            ``(1) that only 1 person shall be required to meet the 
        requirements of subsection (a) in cases in which 2 or more 
        persons would otherwise be required to meet such requirements,
            ``(2) exemptions from the requirements of this section, and
            ``(3) such rules as may be necessary or appropriate to 
        carry out the purposes of this section.''
    (b) Conforming Amendments.--
            (1) The item relating to section 6111 in the table of 
        sections for subchapter B of chapter 61 is amended to read as 
        follows:

                              ``Sec. 6111. Disclosure of reportable 
                                        transactions.''
            (2) So much of section 6112 as precedes subsection (c) 
        thereof is amended to read as follows:

``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP 
              LISTS OF ADVISEES, ETC.

    ``(a) In General.--Each material advisor (as defined in section 
6111) with respect to any reportable transaction (as defined in section 
6707A(c)) shall (whether or not required to file a return under section 
6111 with respect to such transaction) maintain (in such manner as the 
Secretary may by regulations prescribe) a list--
            ``(1) identifying each person with respect to whom such 
        advisor acted as a material advisor with respect to such 
        transaction, and
            ``(2) containing such other information as the Secretary 
        may by regulations require.''
            (3) Section 6112 is amended--
                    (A) by redesignating subsection (c) as subsection 
                (b),
                    (B) by inserting ``written'' before ``request'' in 
                subsection (b)(1) (as so redesignated), and
                    (C) by striking ``shall prescribe'' in subsection 
                (b)(2) (as so redesignated) and inserting ``may 
                prescribe''.
            (4) The item relating to section 6112 in the table of 
        sections for subchapter B of chapter 61 is amended to read as 
        follows:

                              ``Sec. 6112. Material advisors of 
                                        reportable transactions must 
                                        keep lists of advisees, etc.''
            (5)(A) The heading for section 6708 is amended to read as 
        follows:

``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO 
              REPORTABLE TRANSACTIONS.''

            (B) The item relating to section 6708 in the table of 
        sections for part I of subchapter B of chapter 68 is amended to 
        read as follows:

                              ``Sec. 6708. Failure to maintain lists of 
                                        advisees with respect to 
                                        reportable transactions.''
    (c) Required Disclosure Not Subject to Claim of Confidentiality.--
Paragraph (1) of section 6112(b), as redesignated by subsection (b), is 
amended by adding at the end the following new flush sentence:
        ``For purposes of this section, the identity of any person on 
        such list shall not be privileged.''.
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to transactions 
        with respect to which material aid, assistance, or advice 
        referred to in section 6111(b)(1)(A)(i) of the Internal Revenue 
        Code of 1986 (as added by this section) is provided after the 
        date of the enactment of this Act.
            (2) No claim of confidentiality against disclosure.--The 
        amendment made by subsection (c) shall take effect as if 
        included in the amendments made by section 142 of the Deficit 
        Reduction Act of 1984.

SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
              TRANSACTIONS.

    (a) In General.--Section 6707 (relating to failure to furnish 
information regarding tax shelters) is amended to read as follows:

``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
              TRANSACTIONS.

    ``(a) In General.--If a person who is required to file a return 
under section 6111(a) with respect to any reportable transaction--
            ``(1) fails to file such return on or before the date 
        prescribed therefor, or
            ``(2) files false or incomplete information with the 
        Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in the 
amount determined under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        penalty imposed under subsection (a) with respect to any 
        failure shall be $50,000.
            ``(2) Listed transactions.--The penalty imposed under 
        subsection (a) with respect to any listed transaction shall be 
        an amount equal to the greater of--
                    ``(A) $200,000, or
                    ``(B) 50 percent of the gross income derived by 
                such person with respect to aid, assistance, or advice 
                which is provided with respect to the listed 
                transaction before the date the return is filed under 
                section 6111.
        Subparagraph (B) shall be applied by substituting `75 percent' 
        for `50 percent' in the case of an intentional failure or act 
        described in subsection (a).
    ``(c) Rescission Authority.--The provisions of section 6707A(d) 
(relating to authority of Commissioner to rescind penalty) shall apply 
to any penalty imposed under this section.
    ``(d) Reportable and Listed Transactions.--For purposes of this 
section, the terms `reportable transaction' and `listed transaction' 
have the respective meanings given to such terms by section 6707A(c).''
    (b) Clerical Amendment.--The item relating to section 6707 in the 
table of sections for part I of subchapter B of chapter 68 is amended 
by striking ``tax shelters'' and inserting ``reportable transactions''.
    (c) Effective Date.--The amendments made by this section shall 
apply to returns the due date for which is after the date of the 
enactment of this Act.

SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
              INVESTORS.

    (a) In General.--Subsection (a) of section 6708 is amended to read 
as follows:
    ``(a) Imposition of Penalty.--
            ``(1) In general.--If any person who is required to 
        maintain a list under section 6112(a) fails to make such list 
        available upon written request to the Secretary in accordance 
        with section 6112(b) within 20 business days after the date of 
        such request, such person shall pay a penalty of $10,000 for 
        each day of such failure after such 20th day.
            ``(2) Reasonable cause exception.--No penalty shall be 
        imposed by paragraph (1) with respect to the failure on any day 
        if such failure is due to reasonable cause.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to requests made after the date of the enactment of this Act.

SEC. 618. PENALTY ON PROMOTERS OF TAX SHELTERS.

    (a) Penalty on Promoting Abusive Tax Shelters.--Section 6700(a) is 
amended by adding at the end the following new sentence: 
``Notwithstanding the first sentence, if an activity with respect to 
which a penalty imposed under this subsection involves a statement 
described in paragraph (2)(A), the amount of the penalty shall be equal 
to 50 percent of the gross income derived (or to be derived) from such 
activity by the person on which the penalty is imposed.''
    (b) Effective Date.--The amendment made by this section shall apply 
to activities after the date of the enactment of this Act.

SEC. 619. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR 
              NONREPORTABLE TRANSACTIONS.

    (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is amended to 
read as follows:
                    ``(B) Special rule for corporations.--In the case 
                of a corporation other than an S corporation or a 
                personal holding company (as defined in section 542), 
                there is a substantial understatement of income tax for 
                any taxable year if the amount of the understatement 
                for the taxable year exceeds the lesser of--
                            ``(i) 10 percent of the tax required to be 
                        shown on the return for the taxable year (or, 
                        if greater, $10,000), or
                            ``(ii) $10,000,000.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 620. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO 
              TAX SHELTERS AND REPORTABLE TRANSACTIONS.

    (a) In General.--Section 7408 (relating to action to enjoin 
promoters of abusive tax shelters, etc.) is amended by redesignating 
subsection (c) as subsection (d) and by striking subsections (a) and 
(b) and inserting the following new subsections:
    ``(a) Authority To Seek Injunction.--A civil action in the name of 
the United States to enjoin any person from further engaging in 
specified conduct may be commenced at the request of the Secretary. Any 
action under this section shall be brought in the district court of the 
United States for the district in which such person resides, has his 
principal place of business, or has engaged in specified conduct. The 
court may exercise its jurisdiction over such action (as provided in 
section 7402(a)) separate and apart from any other action brought by 
the United States against such person.
    ``(b) Adjudication and Decree.--In any action under subsection (a), 
if the court finds--
            ``(1) that the person has engaged in any specified conduct, 
        and
            ``(2) that injunctive relief is appropriate to prevent 
        recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in 
any other activity subject to penalty under this title.
    ``(c) Specified Conduct.--For purposes of this section, the term 
`specified conduct' means any action, or failure to take action, 
subject to penalty under section 6700, 6701, 6707, or 6708.''
    (b) Conforming Amendments.--
            (1) The heading for section 7408 is amended to read as 
        follows:

``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX 
              SHELTERS AND REPORTABLE TRANSACTIONS.''

            (2) The table of sections for subchapter A of chapter 76 is 
        amended by striking the item relating to section 7408 and 
        inserting the following new item:

        ``Sec. 7408. Actions to enjoin specified conduct related to tax 
                            shelters and reportable transactions.''
    (c) Effective Date.--The amendment made by this section shall take 
effect on the day after the date of the enactment of this Act.

SEC. 621. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
              ACCOUNTS.

    (a) In General.--Section 5321(a)(5) of title 31, United States 
Code, is amended to read as follows:
            ``(5) Foreign financial agency transaction violation.--
                    ``(A) Penalty authorized.--The Secretary of the 
                Treasury may impose a civil money penalty on any person 
                who violates, or causes any violation of, any provision 
                of section 5314.
                    ``(B) Amount of penalty.--
                            ``(i) In general.--Except as provided in 
                        subparagraph (C), the amount of any civil 
                        penalty imposed under subparagraph (A) shall 
                        not exceed $5,000.
                            ``(ii) Reasonable cause exception.--No 
                        penalty shall be imposed under subparagraph (A) 
                        with respect to any violation if--
                                    ``(I) such violation was due to 
                                reasonable cause, and
                                    ``(II) the amount of the 
                                transaction or the balance in the 
                                account at the time of the transaction 
                                was properly reported.
                    ``(C) Willful violations.--In the case of any 
                person willfully violating, or willfully causing any 
                violation of, any provision of section 5314--
                            ``(i) the maximum penalty under 
                        subparagraph (B)(i) shall be increased to the 
                        greater of--
                                    ``(I) $25,000, or
                                    ``(II) the amount (not exceeding 
                                $100,000) determined under subparagraph 
                                (D), and
                            ``(ii) subparagraph (B)(ii) shall not 
                        apply.
                    ``(D) Amount.--The amount determined under this 
                subparagraph is--
                            ``(i) in the case of a violation involving 
                        a transaction, the amount of the transaction, 
                        or
                            ``(ii) in the case of a violation involving 
                        a failure to report the existence of an account 
                        or any identifying information required to be 
                        provided with respect to an account, the 
                        balance in the account at the time of the 
                        violation.''
    (b) Effective Date.--The amendment made by this section shall apply 
to violations occurring after the date of the enactment of this Act.

SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 
              THE TREASURY.

    (a) Censure; Imposition of Penalty.--
            (1) In general.--Section 330(b) of title 31, United States 
        Code, is amended--
                    (A) by inserting ``, or censure,'' after 
                ``Department'', and
                    (B) by adding at the end the following new flush 
                sentence:
``The Secretary may impose a monetary penalty on any representative 
described in the preceding sentence. If the representative was acting 
on behalf of an employer or any firm or other entity in connection with 
the conduct giving rise to such penalty, the Secretary may impose a 
monetary penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such penalty shall not 
exceed the gross income derived (or to be derived) from the conduct 
giving rise to the penalty. Any such penalty imposed on an individual 
may be in addition to, or in lieu of, any suspension, disbarment, or 
censure of such individual.''
            (2) Effective date.--The amendments made by this subsection 
        shall apply to actions taken after the date of the enactment of 
        this Act.
    (b) Tax Shelter Opinions, etc.--Section 330 of such title 31 is 
amended by adding at the end the following new subsection:
    ``(d) Nothing in this section or in any other provision of law 
shall be construed to limit the authority of the Secretary of the 
Treasury to impose standards applicable to the rendering of written 
advice with respect to any entity, transaction plan or arrangement, or 
other plan or arrangement, which is of a type which the Secretary 
determines as having a potential for tax avoidance or evasion.''

                       PART II--OTHER PROVISIONS

SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND AND PREFERRED STOCK 
              FUNDS, ETC.

    (a) In General.--Section 1286 (relating to tax treatment of 
stripped bonds) is amended by redesignating subsection (f) as 
subsection (g) and by inserting after subsection (e) the following new 
subsection:
    ``(f) Treatment of Stripped Interests in Bond and Preferred Stock 
Funds, etc.--In the case of an account or entity substantially all of 
the assets of which consist of bonds, preferred stock, or a combination 
thereof, the Secretary may by regulations provide that rules similar to 
the rules of this section and 305(e), as appropriate, shall apply to 
interests in such account or entity to which (but for this subsection) 
this section or section 305(e), as the case may be, would not apply.''
    (b) Cross Reference.--Subsection (e) of section 305 is amended by 
adding at the end the following new paragraph:
            ``(7) Cross reference.--

                                ``For treatment of stripped interests 
in certain accounts or entities holding preferred stock, see section 
1286(f).''
    (c) Effective Date.--The amendments made by this section shall 
apply to purchases and dispositions after the date of the enactment of 
this Act.

SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON WITHHOLDING 
              TAXES ON INCOME OTHER THAN DIVIDENDS.

    (a) In General.--Section 901 is amended by redesignating subsection 
(l) as subsection (m) and by inserting after subsection (k) the 
following new subsection:
    ``(l) Minimum Holding Period for Withholding Taxes on Gain and 
Income Other Than Dividends etc.--
            ``(1) In general.--In no event shall a credit be allowed 
        under subsection (a) for any withholding tax (as defined in 
        subsection (k)) on any item of income or gain with respect to 
        any property if--
                    ``(A) such property is held by the recipient of the 
                item for 15 days or less during the 30-day period 
                beginning on the date which is 15 days before the date 
                on which the right to receive payment of such item 
                arises, or
                    ``(B) to the extent that the recipient of the item 
                is under an obligation (whether pursuant to a short 
                sale or otherwise) to make related payments with 
                respect to positions in substantially similar or 
                related property.
        This paragraph shall not apply to any dividend to which 
        subsection (k) applies.
            ``(2) Exception for taxes paid by dealers.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any qualified tax with respect to any property held in 
                the active conduct in a foreign country of a business 
                as a dealer in such property.
                    ``(B) Qualified tax.--For purposes of subparagraph 
                (A), the term `qualified tax' means a tax paid to a 
                foreign country (other than the foreign country 
                referred to in subparagraph (A)) if--
                            ``(i) the item to which such tax is 
                        attributable is subject to taxation on a net 
                        basis by the country referred to in 
                        subparagraph (A), and
                            ``(ii) such country allows a credit against 
                        its net basis tax for the full amount of the 
                        tax paid to such other foreign country.
                    ``(C) Dealer.--For purposes of subparagraph (A), 
                the term `dealer' means--
                            ``(i) with respect to a security, any 
                        person to whom paragraphs (1) and (2) of 
                        subsection (k) would not apply by reason of 
                        paragraph (4) thereof if such security were 
                        stock, and
                            ``(ii) with respect to any other property, 
                        any person with respect to whom such property 
                        is described in section 1221(a)(1).
                    ``(D) Regulations.--The Secretary may prescribe 
                such regulations as may be appropriate to carry out 
                this paragraph, including regulations to prevent the 
                abuse of the exception provided by this paragraph and 
                to treat other taxes as qualified taxes.
            ``(3) Exceptions.--The Secretary may by regulation provide 
        that paragraph (1) shall not apply to property where the 
        Secretary determines that the application of paragraph (1) to 
        such property is not necessary to carry out the purposes of 
        this subsection.
            ``(4) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (5), (6), and (7) of subsection (k) shall apply 
        for purposes of this subsection.
            ``(5) Determination of holding period.--Holding periods 
        shall be determined for purposes of this subsection without 
        regard to section 1235 or any similar rule.''
    (b) Conforming Amendment.--The heading of subsection (k) of section 
901 is amended by inserting ``on Dividends'' after ``Taxes''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or accrued more than 30 days after the date of 
the enactment of this Act.

SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) is amended by striking ``and'' at the 
end of subparagraph (A), by striking the period at the end of 
subparagraph (B) and inserting ``, and'', and by adding at the end the 
following:
                    ``(C) if any property so contributed has a built-in 
                loss--
                            ``(i) such built-in loss shall be taken 
                        into account only in determining the amount of 
                        items allocated to the contributing partner, 
                        and
                            ``(ii) except as provided in regulations, 
                        in determining the amount of items allocated to 
                        other partners, the basis of the contributed 
                        property in the hands of the partnership shall 
                        be treated as being equal to its fair market 
                        value at the time of contribution.
        For purposes of subparagraph (C), the term `built-in loss' 
        means the excess of the adjusted basis of the property 
        (determined without regard to subparagraph (C)(ii)) over its 
        fair market value at the time of contribution.''
    (b) Special Rules for Transfers of Partnership Interest if There Is 
Substantial Built-In Loss.--
            (1) Adjustment of partnership basis required.--Subsection 
        (a) of section 743 (relating to optional adjustment to basis of 
        partnership property) is amended by inserting before the period 
        ``or unless the partnership has a substantial built-in loss 
        immediately after such transfer''.
            (2) Adjustment.--Subsection (b) of section 743 is amended 
        by inserting ``or with respect to which there is a substantial 
        built-in loss immediately after such transfer'' after ``section 
        754 is in effect''.
            (3) Substantial built-in loss.--Section 743 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Built-In Loss.--
            ``(1) In general.--For purposes of this section, a 
        partnership has a substantial built-in loss with respect to a 
        transfer of an interest in a partnership if the partnership's 
        adjusted basis in the partnership property exceeds by more than 
        $250,000 the fair market value of such property.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        paragraph (1) and section 734(d), including regulations 
        aggregating related partnerships and disregarding property 
        acquired by the partnership in an attempt to avoid such 
        purposes.''
            (4) Alternative rules for electing investment 
        partnerships.--
                    (A) In general.--Section 743 is amended by adding 
                at the end the following new subsection:
    ``(e) Alternative Rules for Electing Investment Partnerships.--
            ``(1) No adjustment of partnership basis.--For purposes of 
        this section, an electing investment partnership shall not be 
        treated as having a substantial built-in loss with respect to 
        any transfer occurring while the election under paragraph 
        (6)(A) is in effect.
            ``(2) Loss deferral for transferee partner.--In the case of 
        a transfer of an interest in an electing investment 
        partnership, the transferee partner's distributive share of 
        losses (without regard to gains) from the sale or exchange of 
        partnership property shall not be allowed except to the extent 
        that it is established that such losses exceed the loss (if 
        any) recognized by the transferor (or any prior transferor to 
        the extent not fully offset by a prior disallowance under this 
        paragraph) on the transfer of the partnership interest.
            ``(3) No reduction in partnership basis.--Losses disallowed 
        under paragraph (2) shall not decrease the transferee partner's 
        basis in the partnership interest.
            ``(4) Effect of termination of partnership.--This 
        subsection shall be applied without regard to any termination 
        of a partnership under section 708(b)(1)(B).
            ``(5) Certain basis reductions treated as losses.--In the 
        case of a transferee partner whose basis in property 
        distributed by the partnership is reduced under section 
        732(a)(2), the amount of the loss recognized by the transferor 
        on the transfer of the partnership interest which is taken into 
        account under paragraph (2) shall be reduced by the amount of 
        such basis reduction.
            ``(6) Electing investment partnership.--For purposes of 
        this subsection, the term `electing investment partnership' 
        means any partnership if--
                    ``(A) the partnership makes an election to have 
                this subsection apply,
                    ``(B) the partnership would be an investment 
                company under section 3(a)(1)(A) of the Investment 
                Company Act of 1940 but for an exemption under 
                paragraph (1) or (7) of section 3(c) of such Act,
                    ``(C) such partnership has never been engaged in a 
                trade or business,
                    ``(D) substantially all of the assets of such 
                partnership are held for investment,
                    ``(E) at least 95 percent of the assets contributed 
                to such partnership consist of money,
                    ``(F) no assets contributed to such partnership had 
                an adjusted basis in excess of fair market value at the 
                time of contribution,
                    ``(G) all partnership interests of such partnership 
                are issued by such partnership pursuant to a private 
                offering and during the 24-month period beginning on 
                the date of the first capital contribution to such 
                partnership,
                    ``(H) the partnership agreement of such partnership 
                has substantive restrictions on each partner's ability 
                to cause a redemption of the partner's interest, and
                    ``(I) the partnership agreement of such partnership 
                provides for a term that is not in excess of 15 years.
        The election described in subparagraph (A), once made, shall be 
        irrevocable except with the consent of the Secretary.
            ``(7) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        this subsection, including regulations for applying this 
        subsection to tiered partnerships.''.
                    (B) Information reporting.--Section 6031 is amended 
                by adding at the end the following new subsection:
    ``(f) Electing Investment Partnerships.--In the case of any 
electing investment partnership (as defined in section 743(e)(6)), the 
information required under subsection (b) to be furnished to any 
partner to whom section 743(e)(2) applies shall include such 
information as is necessary to enable the partner to compute the amount 
of losses disallowed under section 743(e).''.
            (5) Clerical amendments.--
                    (A) The section heading for section 743 is amended 
                to read as follows:

``SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION OR SUBSTANTIAL 
              BUILT-IN LOSS.''

                    (B) The table of sections for subpart C of part II 
                of subchapter K of chapter 1 is amended by striking the 
                item relating to section 743 and inserting the 
                following new item:

                              ``Sec. 743. Special rules where section 
                                        754 election or substantial 
                                        built-in loss.''
    (c) Adjustment to Basis of Undistributed Partnership Property if 
There Is Substantial Basis Reduction.--
            (1) Adjustment required.--Subsection (a) of section 734 
        (relating to optional adjustment to basis of undistributed 
        partnership property) is amended by inserting before the period 
        ``or unless there is a substantial basis reduction''.
            (2) Adjustment.--Subsection (b) of section 734 is amended 
        by inserting ``or unless there is a substantial basis 
        reduction'' after ``section 754 is in effect''.
            (3) Substantial basis reduction.--Section 734 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Basis Reduction.--
            ``(1) In general.--For purposes of this section, there is a 
        substantial basis reduction with respect to a distribution if 
        the sum of the amounts described in subparagraphs (A) and (B) 
        of subsection (b)(2) exceeds $250,000.
            ``(2) Regulations.--

                                ``For regulations to carry out this 
subsection, see section 743(d)(2).''
            (4) Clerical amendments.--
                    (A) The section heading for section 734 is amended 
                to read as follows:

``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY 
              WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS 
              REDUCTION.''

                    (B) The table of sections for subpart B of part II 
                of subchapter K of chapter 1 is amended by striking the 
                item relating to section 734 and inserting the 
                following new item:

                              ``Sec. 734. Adjustment to basis of 
                                        undistributed partnership 
                                        property where section 754 
                                        election or substantial basis 
                                        reduction.''
    (d) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to contributions made after the date of the 
        enactment of this Act.
            (2) Subsection (b).--
                    (A) In general.--Except as provided in subparagraph 
                (B), the amendments made by subsection (b) shall apply 
                to transfers after the date of the enactment of this 
                Act.
                    (B) Transition rule.--In the case of an electing 
                investment partnership which is in existence on June 4, 
                2004, section 743(e)(6)(H) of the Internal Revenue Code 
                of 1986, as added by this section, shall not apply to 
                such partnership and section 743(e)(6)(I) of such Code, 
                as so added, shall be applied by substituting ``20 
                years'' for ``15 years''.
            (3) Subsection (c).--The amendments made by subsection (c) 
        shall apply to distributions after the date of the enactment of 
        this Act.

SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY 
              PARTNERSHIP IN CORPORATE PARTNER.

    (a) In General.--Section 755 is amended by adding at the end the 
following new subsection:
    ``(c) No Allocation of Basis Decrease to Stock of Corporate 
Partner.--In making an allocation under subsection (a) of any decrease 
in the adjusted basis of partnership property under section 734(b)--
            ``(1) no allocation may be made to stock in a corporation 
        (or any person related (within the meaning of sections 267(b) 
        and 707(b)(1)) to such corporation) which is a partner in the 
        partnership, and
            ``(2) any amount not allocable to stock by reason of 
        paragraph (1) shall be allocated under subsection (a) to other 
        partnership property.
Gain shall be recognized to the partnership to the extent that the 
amount required to be allocated under paragraph (2) to other 
partnership property exceeds the aggregate adjusted basis of such other 
property immediately before the allocation required by paragraph (2).''
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions after the date of the enactment of this Act.

SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS.

    (a) In General.--Part V of subchapter M of chapter 1 (relating to 
financial asset securitization investment trusts) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 56(g) is amended by striking 
        ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (2) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``a REMIC to which part IV of subchapter M applies, or 
        a FASIT to which part V of subchapter M applies,'' and 
        inserting ``or a REMIC to which part IV of subchapter M 
        applies,''.
            (3) Paragraph (1) of section 582(c) is amended by striking 
        ``, and any regular interest in a FASIT,''.
            (4) Subparagraph (E) of section 856(c)(5) is amended by 
        striking the last sentence.
            (5)(A) Section 860G(a)(1) is amended by adding at the end 
        the following new sentence: ``An interest shall not fail to 
        qualify as a regular interest solely because the specified 
        principal amount of the regular interest (or the amount of 
        interest accrued on the regular interest) can be reduced as a 
        result of the nonoccurrence of 1 or more contingent payments 
        with respect to any reverse mortgage loan held by the REMIC if, 
        on the startup day for the REMIC, the sponsor reasonably 
        believes that all principal and interest due under the regular 
        interest will be paid at or prior to the liquidation of the 
        REMIC.''.
            (B) The last sentence of section 860G(a)(3) is amended by 
        inserting ``, and any reverse mortgage loan (and each balance 
        increase on such loan meeting the requirements of subparagraph 
        (A)(iii)) shall be treated as an obligation secured by an 
        interest in real property'' before the period at the end.
            (6) Paragraph (3) of section 860G(a) is amended by adding 
        ``and'' at the end of subparagraph (B), by striking ``, and'' 
        at the end of subparagraph (C) and inserting a period, and by 
        striking subparagraph (D).
            (7) Section 860G(a)(3), as amended by paragraph (6), is 
        amended by adding at the end the following new sentence: ``For 
        purposes of subparagraph (A), if more than 50 percent of the 
        obligations transferred to, or purchased by, the REMIC are 
        originated by the United States or any State (or any political 
        subdivision, agency, or instrumentality of the United States or 
        any State) and are principally secured by an interest in real 
        property, then each obligation transferred to, or purchased by, 
        the REMIC shall be treated as secured by an interest in real 
        property.''.
            (8)(A) Section 860G(a)(3)(A) is amended by striking ``or'' 
        at the end of clause (i), by inserting ``or'' at the end of 
        clause (ii), and by inserting after clause (ii) the following 
        new clause:
                            ``(iii) represents an increase in the 
                        principal amount under the original terms of an 
                        obligation described in clause (i) or (ii) if 
                        such increase--
                                    ``(I) is attributable to an advance 
                                made to the obligor pursuant to the 
                                original terms of the obligation,
                                    ``(II) occurs after the startup 
                                day, and
                                    ``(III) is purchased by the REMIC 
                                pursuant to a fixed price contract in 
                                effect on the startup day.''.
            (B) Section 860G(a)(7)(B) is amended to read as follows:
                    ``(B) Qualified reserve fund.--For purposes of 
                subparagraph (A), the term `qualified reserve fund' 
                means any reasonably required reserve to--
                            ``(i) provide for full payment of expenses 
                        of the REMIC or amounts due on regular 
                        interests in the event of defaults on qualified 
                        mortgages or lower than expected returns on 
                        cash flow investments, or
                            ``(ii) provide a source of funds for the 
                        purchase of obligations described in clause 
                        (ii) or (iii) of paragraph (3)(A).
                The aggregate fair market value of the assets held in 
                any such reserve shall not exceed 50 percent of the 
                aggregate fair market value of all of the assets of the 
                REMIC on the startup day, and the amount of any such 
                reserve shall be promptly and appropriately reduced to 
                the extent the amount held in such reserve is no longer 
                reasonably required for purposes specified in clause 
                (i) or (ii) of this subparagraph.''.
            (9) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (10) Clause (xi) of section 7701(a)(19)(C) is amended--
                    (A) by striking ``and any regular interest in a 
                FASIT,'', and
                    (B) by striking ``or FASIT'' each place it appears.
            (11) Subparagraph (A) of section 7701(i)(2) is amended by 
        striking ``or a FASIT''.
            (12) The table of parts for subchapter M of chapter 1 is 
        amended by striking the item relating to part V.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall take effect on January 1, 
        2005.
            (2) Exception for existing fasits.--Paragraph (1) shall not 
        apply to any FASIT in existence on the date of the enactment of 
        this Act to the extent that regular interests issued by the 
        FASIT before such date continue to remain outstanding in 
        accordance with the original terms of issuance.

SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES ON REMIC RESIDUALS.

    (a) In General.--Section 362 (relating to basis to corporations) is 
amended by adding at the end the following new subsection:
    ``(e) Limitation on Transfer of Built-in Losses on REMIC Residuals 
in Section 351 Transactions.--If--
            ``(1) a residual interest (as defined in section 
        860G(a)(2)) in a REMIC is transferred in any transaction which 
        is described in subsection (a), and
            ``(2) the transferee's adjusted basis in such residual 
        interest would (but for this paragraph) exceed its fair market 
        value immediately after such transaction,
then, notwithstanding subsection (a), the transferee's adjusted basis 
in such residual interest shall not exceed its fair market value 
(whether or not greater than zero) immediately after such 
transaction.''
    (b) Effective Date.--The amendment made by this section shall apply 
to transactions after the date of the enactment of this Act.

SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF DETERMINING 
              INVESTMENT OF EARNINGS IN UNITED STATES PROPERTY.

    (a) In General.--Subparagraph (A) of section 956(c)(2) is amended 
to read as follows:
                    ``(A) obligations of the United States, money, or 
                deposits with persons described in paragraph (4);''.
    (b) Eligible Persons.--Section 956(c) (relating to exceptions to 
definition of United States property) is amended by adding at the end 
the following new paragraph:
            ``(4) Financial services providers.--
                    ``(A) In general.--For purposes of paragraph 
                (2)(A), a person is described in this paragraph if at 
                least 80 percent of the person's income is from the 
                active conduct of a banking business which is derived 
                from persons who are not related persons.
                    ``(B) Special rules.--For purposes of subparagraph 
                (A) all related persons shall be treated as 1 person in 
                applying the 80-percent test.
                    ``(C) Related person.--For purposes of this 
                paragraph, a person is a related person to another 
                person if--
                            ``(i) the related person bears a 
                        relationship to such person specified in 
                        section 267(b) or 707(b)(1), or
                            ``(ii) such persons are members of the same 
                        controlled group of corporations (as defined in 
                        section 1563(a), except that `more than 50 
                        percent' shall be substituted for `at least 80 
                        percent' each place it appears therein).''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE COMPANIES.

    (a) In General.--Clause (i) of section 831(b)(2)(A) is amended by 
striking ``$1,200,000'' and inserting ``$1,890,000''.
    (b) Inflation Adjustment.--Paragraph (2) of section 831(b) is 
amended by adding at the end the following new subparagraph:
                    ``(C) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 2004, 
                the $1,890,000 amount in subparagraph (A) shall be 
                increased by an amount equal to--
                            ``(i) $1,890,000, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for such 
                        calendar year by substituting `calendar year 
                        2003' for `calendar year 1992' in subparagraph 
                        (B) thereof.
                If the amount as adjusted under the preceding sentence 
                is not a multiple of $1,000, such amount shall be 
                rounded to the next lowest multiple of $1,000.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONDISCLOSED REPORTABLE TRANSACTIONS.

    (a) In General.--Section 163 (relating to deduction for interest) 
is amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new subsection:
    ``(m) Interest on Unpaid Taxes Attributable to Nondisclosed 
Reportable Transactions.--No deduction shall be allowed under this 
chapter for any interest paid or accrued under section 6601 on any 
underpayment of tax which is attributable to the portion of any 
reportable transaction understatement (as defined in section 6662A(b)) 
with respect to which the requirement of section 6664(d)(2)(A) is not 
met.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX FOR 
              CERTAIN DEEMED ASSET SALES.

    (a) In General.--Paragraph (13) of section 338(h) (relating to tax 
on deemed sale not taken into account for estimated tax purposes) is 
amended by adding at the end the following: ``The preceding sentence 
shall not apply with respect to a qualified stock purchase for which an 
election is made under paragraph (10).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to transactions occurring after the date of the enactment of this 
Act.

SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL RESIDENCE 
              ACQUIRED IN A LIKE-KIND EXCHANGE WITHIN 5 YEARS OF SALE.

    (a) In General.--Section 121(d) (relating to special rules for 
exclusion of gain from sale of principal residence) is amended by 
adding at the end the following new paragraph:
            ``(10) Property acquired in like-kind exchange.--If a 
        taxpayer acquired property in an exchange to which section 1031 
        applied, subsection (a) shall not apply to the sale or exchange 
        of such property if it occurs during the 5-year period 
        beginning with the date of the acquisition of such property.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to sales or exchanges after the date of the enactment of this Act.

SEC. 642. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL ISSUE 
              DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS IN TRANSACTIONS 
              WITH RELATED FOREIGN PERSONS.

    (a) Original Issue Discount.--Section 163(e)(3) (relating to 
special rule for original issue discount on obligation held by related 
foreign person) is amended by redesignating subparagraph (B) as 
subparagraph (C) and by inserting after subparagraph (A) the following 
new subparagraph:
                    ``(B) Special rule for certain foreign entities.--
                            ``(i) In general.--In the case of any debt 
                        instrument having original issue discount which 
                        is held by a related foreign person which is a 
                        foreign personal holding company (as defined in 
                        section 552), a controlled foreign corporation 
                        (as defined in section 957), or a passive 
                        foreign investment company (as defined in 
                        section 1297), a deduction shall be allowable 
                        to the issuer with respect to such original 
                        issue discount for any taxable year before the 
                        taxable year in which paid only to the extent 
                        such original issue discount (reduced by 
                        properly allowable deductions and qualified 
                        deficits under section 952(c)(1)(B)) is 
                        includible during such prior taxable year in 
                        the gross income of a United States person who 
                        owns (within the meaning of section 958(a)) 
                        stock in such corporation.
                            ``(ii) Secretarial authority.--The 
                        Secretary may by regulation exempt transactions 
                        from the application of clause (i), including 
                        any transaction which is entered into by a 
                        payor in the ordinary course of a trade or 
                        business in which the payor is predominantly 
                        engaged.''.
    (b) Interest and Other Deductible Amounts.--Section 267(a)(3) is 
amended--
            (1) by striking ``The Secretary'' and inserting:
                    ``(A) In general.--The Secretary'', and
            (2) by adding at the end the following new subparagraph:
                    ``(B) Special rule for certain foreign entities.--
                            ``(i) In general.--Notwithstanding 
                        subparagraph (A), in the case of any item 
                        payable to a foreign personal holding company 
                        (as defined in section 552), a controlled 
                        foreign corporation (as defined in section 
                        957), or a passive foreign investment company 
                        (as defined in section 1297), a deduction shall 
                        be allowable to the payor with respect to such 
                        amount for any taxable year before the taxable 
                        year in which paid only to the extent that an 
                        amount attributable to such item (reduced by 
                        properly allowable deductions and qualified 
                        deficits under section 952(c)(1)(B)) is 
                        includible during such prior taxable year in 
                        the gross income of a United States person who 
                        owns (within the meaning of section 958(a)) 
                        stock in such corporation.
                            ``(ii) Secretarial authority.--The 
                        Secretary may by regulation exempt transactions 
                        from the application of clause (i), including 
                        any transaction which is entered into by a 
                        payor in the ordinary course of a trade or 
                        business in which the payor is predominantly 
                        engaged and in which the payment of the accrued 
                        amounts occurs within 8\1/2\ months after 
                        accrual or within such other period as the 
                        Secretary may prescribe.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to payments accrued on or after the date of the enactment of this 
Act.

SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF 
              INCOME TAX BY INDIVIDUALS.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by inserting 
after section 139A the following new section:

``SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS 
              OF INCOME TAX BY INDIVIDUALS.

    ``(a) In General.--In the case of an individual, gross income shall 
not include interest paid under section 6611 on any overpayment of tax 
imposed by this subtitle.
    ``(b) Exception.--Subsection (a) shall not apply in the case of a 
failure to claim items resulting in the overpayment on the original 
return if the Secretary determines that the principal purpose of such 
failure is to take advantage of subsection (a).
    ``(c) Special Rule for Determining Modified Adjusted Gross 
Income.--For purposes of this title, interest not included in gross 
income under subsection (a) shall not be treated as interest which is 
exempt from tax for purposes of sections 32(i)(2)(B) and 6012(d) or any 
computation in which interest exempt from tax under this title is added 
to adjusted gross income.''.
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by inserting after the item 
relating to section 139A the following new item:

                              ``Sec. 139B. Exclusion from gross income 
                                        for interest on overpayments of 
                                        income tax by individuals.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to interest received in calendar years beginning after the date 
of the enactment of this Act.

SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS.

    (a) In General.--Subchapter A of chapter 67 (relating to interest 
on underpayments) is amended by adding at the end the following new 
section:

``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS, ETC.

    ``(a) Authority To Make Deposits Other Than As Payment of Tax.--A 
taxpayer may make a cash deposit with the Secretary which may be used 
by the Secretary to pay any tax imposed under subtitle A or B or 
chapter 41, 42, 43, or 44 which has not been assessed at the time of 
the deposit. Such a deposit shall be made in such manner as the 
Secretary shall prescribe.
    ``(b) No Interest Imposed.--To the extent that such deposit is used 
by the Secretary to pay tax, for purposes of section 6601 (relating to 
interest on underpayments), the tax shall be treated as paid when the 
deposit is made.
    ``(c) Return of Deposit.--Except in a case where the Secretary 
determines that collection of tax is in jeopardy, the Secretary shall 
return to the taxpayer any amount of the deposit (to the extent not 
used for a payment of tax) which the taxpayer requests in writing.
    ``(d) Payment of Interest.--
            ``(1) In general.--For purposes of section 6611 (relating 
        to interest on overpayments), a deposit which is returned to a 
        taxpayer shall be treated as a payment of tax for any period to 
        the extent (and only to the extent) attributable to a 
        disputable tax for such period. Under regulations prescribed by 
        the Secretary, rules similar to the rules of section 6611(b)(2) 
        shall apply.
            ``(2) Disputable tax.--
                    ``(A) In general.--For purposes of this section, 
                the term `disputable tax' means the amount of tax 
                specified at the time of the deposit as the taxpayer's 
                reasonable estimate of the maximum amount of any tax 
                attributable to disputable items.
                    ``(B) Safe harbor based on 30-day letter.--In the 
                case of a taxpayer who has been issued a 30-day letter, 
                the maximum amount of tax under subparagraph (A) shall 
                not be less than the amount of the proposed deficiency 
                specified in such letter.
            ``(3) Other definitions.--For purposes of paragraph (2)--
                    ``(A) Disputable item.--The term `disputable item' 
                means any item of income, gain, loss, deduction, or 
                credit if the taxpayer--
                            ``(i) has a reasonable basis for its 
                        treatment of such item, and
                            ``(ii) reasonably believes that the 
                        Secretary also has a reasonable basis for 
                        disallowing the taxpayer's treatment of such 
                        item.
                    ``(B) 30-day letter.--The term `30-day letter' 
                means the first letter of proposed deficiency which 
                allows the taxpayer an opportunity for administrative 
                review in the Internal Revenue Service Office of 
                Appeals.
            ``(4) Rate of interest.--The rate of interest allowable 
        under this subsection shall be the Federal short-term rate 
        determined under section 6621(b), compounded daily.
    ``(e) Use of Deposits.--
            ``(1) Payment of tax.--Except as otherwise provided by the 
        taxpayer, deposits shall be treated as used for the payment of 
        tax in the order deposited.
            ``(2) Returns of deposits.--Deposits shall be treated as 
        returned to the taxpayer on a last-in, first-out basis.''.
    (b) Clerical Amendment.--The table of sections for subchapter A of 
chapter 67 is amended by adding at the end the following new item:

                              ``Sec. 6603. Deposits made to suspend 
                                        running of interest on 
                                        potential underpayments, 
                                        etc.''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to deposits made after the date of the enactment of this 
        Act.
            (2) Coordination with deposits made under revenue procedure 
        84-58.--In the case of an amount held by the Secretary of the 
        Treasury or his delegate on the date of the enactment of this 
        Act as a deposit in the nature of a cash bond deposit pursuant 
        to Revenue Procedure 84-58, the date that the taxpayer 
        identifies such amount as a deposit made pursuant to section 
        6603 of the Internal Revenue Code (as added by this Act) shall 
        be treated as the date such amount is deposited for purposes of 
        such section 6603.

SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.

    (a) In General.--
            (1) Section 6159(a) (relating to authorization of 
        agreements) is amended--
                    (A) by striking ``satisfy liability for payment 
                of'' and inserting ``make payment on'', and
                    (B) by inserting ``full or partial'' after 
                ``facilitate''.
            (2) Section 6159(c) (relating to Secretary required to 
        enter into installment agreements in certain cases) is amended 
        in the matter preceding paragraph (1) by inserting ``full'' 
        before ``payment''.
    (b) Requirement To Review Partial Payment Agreements Every Two 
Years.--Section 6159 is amended by redesignating subsections (d) and 
(e) as subsections (e) and (f), respectively, and inserting after 
subsection (c) the following new subsection:
    ``(d) Secretary Required To Review Installment Agreements for 
Partial Collection Every Two Years.--In the case of an agreement 
entered into by the Secretary under subsection (a) for partial 
collection of a tax liability, the Secretary shall review the agreement 
at least once every 2 years.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to agreements entered into on or after the date of the enactment 
of this Act.

SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

    (a) In General.--Section 1502 is amended by adding at the end the 
following new sentence: ``In carrying out the preceding sentence, the 
Secretary may prescribe rules that are different from the provisions of 
chapter 1 that would apply if such corporations filed separate 
returns.''.
    (b) Result Not Overturned.--Notwithstanding the amendment made by 
subsection (a), the Internal Revenue Code of 1986 shall be construed by 
treating Treasury Regulation Sec. 1.1502-20(c)(1)(iii) (as in effect on 
January 1, 2001) as being inapplicable to the factual situation in Rite 
Aid Corporation and Subsidiary Corporations v. United States, 255 F.3d 
1357 (Fed. Cir. 2001).
    (c) Effective Date.--This section, and the amendment made by this 
section, shall apply to taxable years beginning before, on, or after 
the date of the enactment of this Act.

                           PART III--LEASING

SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEASING ARRANGEMENTS.

    (a) Clarification of Recovery Period for Tax-Exempt Use Property 
Subject to Lease.--Subparagraph (A) of section 168(g)(3) (relating to 
special rules for determining class life) is amended by inserting 
``(notwithstanding any other subparagraph of this paragraph)'' after 
``shall''.
    (b) Limitation on Depreciation Period for Software Leased to Tax-
Exempt Entity.--Paragraph (1) of section 167(f) is amended by adding at 
the end the following new subparagraph:
                    ``(C) Tax-exempt use property subject to lease.--In 
                the case of computer software which would be tax-exempt 
                use property as defined in subsection (h) of section 
                168 if such section applied to computer software, the 
                useful life under subparagraph (A) shall not be less 
                than 125 percent of the lease term (within the meaning 
                of section 168(i)(3)).''.
    (c) Lease Term To Include Related Service Contracts.--Subparagraph 
(A) of section 168(i)(3) (relating to lease term) is amended by 
striking ``and'' at the end of clause (i), by redesignating clause (ii) 
as clause (iii), and by inserting after clause (i) the following new 
clause:
                            ``(ii) the term of a lease shall include 
                        the term of any service contract or similar 
                        arrangement (whether or not treated as a lease 
                        under section 7701(e))--
                                    ``(I) which is part of the same 
                                transaction (or series of related 
                                transactions) which includes the lease, 
                                and
                                    ``(II) which is with respect to the 
                                property subject to the lease or 
                                substantially similar property, and''.
    (d) Expansion of Short-Term Lease Exemption for Qualified 
Technological Equipment.--Subparagraph (A) of section 168(h)(3) is 
amended by adding at the end the following new sentence: 
``Notwithstanding subsection (i)(3)(A)(i), in determining a lease term 
for purposes of the preceding sentence, there shall not be taken into 
account any option of the lessee to renew at the fair market value rent 
determined at the time of renewal; except that the aggregate period not 
taken into account by reason of this sentence shall not exceed 24 
months.''

SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED BY 
              GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

    (a) In General.--Subpart C of part II of subchapter E of chapter 1 
(relating to taxable year for which deductions taken) is amended by 
adding at the end the following new section:

``SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED BY 
              GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

    ``(a) Limitation on Losses.--Except as otherwise provided in this 
section, a tax-exempt use loss for any taxable year shall not be 
allowed.
    ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt use 
loss with respect to any tax-exempt use property which is disallowed 
under subsection (a) for any taxable year shall be treated as a 
deduction with respect to such property in the next taxable year.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
        means, with respect to any taxable year, the amount (if any) by 
        which--
                    ``(A) the sum of--
                            ``(i) the aggregate deductions (other than 
                        interest) directly allocable to a tax-exempt 
                        use property, plus
                            ``(ii) the aggregate deductions for 
                        interest properly allocable to such property, 
                        exceed
                    ``(B) the aggregate income from such property.
            ``(2) Tax-exempt use property.--The term `tax-exempt use 
        property' has the meaning given to such term by section 168(h) 
        (without regard to paragraphs (1)(C) and (3) thereof and 
        determined as if property described in section 167(f)(1)(B) 
        were tangible property). Such term shall not include property 
        which would (but for this sentence) be tax-exempt use property 
        solely by reason of section 168(h)(6) if any credit is 
        allowable under section 42 or 47 with respect to such property.
    ``(d) Exception for Certain Leases.--This section shall not apply 
to any lease of property which meets the requirements of all of the 
following paragraphs:
            ``(1) Availability of funds.--
                    ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if (at all times during 
                the lease term) not more than an allowable amount of 
                funds are--
                            ``(i) subject to any arrangement referred 
                        to in subparagraph (B), or
                            ``(ii) set aside or expected to be set 
                        aside,
                to or for the benefit of the lessor or any lender, or 
                to or for the benefit of the lessee to satisfy the 
                lessee's obligations or options under the lease. For 
                purposes of clause (ii), funds shall be treated as set 
                aside or expected to be set aside only if a reasonable 
                person would conclude, based on the facts and 
                circumstances, that such funds are set aside or 
                expected to be set aside.
                    ``(B) Arrangements.--The arrangements referred to 
                in this subparagraph include a defeasance arrangement, 
                a loan by the lessee to the lessor or any lender, a 
                deposit arrangement, a letter of credit collateralized 
                with cash or cash equivalents, a payment undertaking 
                agreement, prepaid rent (within the meaning of the 
                regulations under section 467), a sinking fund 
                arrangement, a guaranteed investment contract, 
                financial guaranty insurance, and any similar 
                arrangement (whether or not such arrangement provides 
                credit support).
                    ``(C) Allowable amount.--
                            ``(i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        `allowable amount' means an amount equal to 20 
                        percent of the lessor's adjusted basis in the 
                        property at the time the lease is entered into.
                            ``(ii) Higher amount permitted in certain 
                        cases.--To the extent provided in regulations, 
                        a higher percentage shall be permitted under 
                        clause (i) where necessary because of the 
                        credit-worthiness of the lessee. In no event 
                        may such regulations permit a percentage of 
                        more than 50 percent.
                            ``(iii) Option to purchase other than at 
                        fair market value.--If under the lease the 
                        lessee has the option to purchase the property 
                        for a fixed price or for other than the fair 
                        market value of the property (determined at the 
                        time of exercise), the allowable amount at the 
                        time such option may be exercised may not 
                        exceed 50 percent of the price at which such 
                        option may be exercised.
                            ``(iv) No allowable amount for certain 
                        arrangements.--The allowable amount shall be 
                        zero with respect to any arrangement which 
                        involves--
                                    ``(I) a loan from the lessee to the 
                                lessor or a lender,
                                    ``(II) any deposit received, letter 
                                of credit issued, or payment 
                                undertaking agreement entered into by a 
                                lender otherwise involved in the 
                                transaction, or
                                    ``(III) in the case of a 
                                transaction which involves a lender, 
                                any credit support made available to 
                                the lessor in which any such lender 
                                does not have a claim that is senior to 
                                the lessor.
                        For purposes of subclause (I), the term `loan' 
                        shall not include any amount treated as a loan 
                        under section 467 with respect to a section 467 
                        rental agreement.
            ``(2) Lessor must make substantial equity investment.--A 
        lease of property meets the requirements of this paragraph if--
                    ``(A) the lessor--
                            ``(i) has at the time the lease is entered 
                        into an unconditional at-risk equity investment 
                        (as determined by the Secretary) in the 
                        property of at least 20 percent of the lessor's 
                        adjusted basis in the property as of that time, 
                        and
                            ``(ii) maintains such investment throughout 
                        the term of the lease, and
                    ``(B) the fair market value of the property at the 
                end of the lease term is reasonably expected to be 
                equal to at least 20 percent of such basis.
        Subparagraphs (A)(ii) and (B) shall not apply to any lease with 
        a lease term of 5 years or less. For purposes of subparagraph 
        (B), the fair market value at the end of the lease term shall 
        be reduced to the extent that a person other than the lessor 
        bears a risk of loss in the value of the property.
            ``(3) Lessee may not bear more than minimal risk of loss.--
                    ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if there is no 
                arrangement under which the lessee bears--
                            ``(i) any portion of the loss that would 
                        occur if the fair market value of the leased 
                        property were 25 percent less than its 
                        reasonably expected fair market value at the 
                        time the lease is terminated, or
                            ``(ii) more than 50 percent of the loss 
                        that would occur if the fair market value of 
                        the leased property at the time the lease is 
                        terminated were zero.
                    ``(B) Exception.--The Secretary may by regulations 
                provide that the requirements of this paragraph are not 
                met where the lessee bears more than a minimal risk of 
                loss.
                    ``(C) Paragraph not to apply to short-term 
                leases.--This paragraph shall not apply to any lease 
                with a lease term of 5 years or less.
    ``(e) Special Rules.--
            ``(1) Treatment of former tax-exempt use property.--
                    ``(A) In general.--In the case of any former tax-
                exempt use property--
                            ``(i) any deduction allowable under 
                        subsection (b) with respect to such property 
                        for any taxable year shall be allowed only to 
                        the extent of any net income (without regard to 
                        such deduction) from such property for such 
                        taxable year, and
                            ``(ii) any portion of such unused deduction 
                        remaining after application of clause (i) shall 
                        be treated as a deduction allowable under 
                        subsection (b) with respect to such property in 
                        the next taxable year.
                    ``(B) Former tax-exempt use property.--For purposes 
                of this subsection, the term `former tax-exempt use 
                property' means any property which--
                            ``(i) is not tax-exempt use property for 
                        the taxable year, but
                            ``(ii) was tax-exempt use property for any 
                        prior taxable year.
            ``(2) Disposition of entire interest in property.--If 
        during the taxable year a taxpayer disposes of the taxpayer's 
        entire interest in tax-exempt use property (or former tax-
        exempt use property), rules similar to the rules of section 
        469(g) shall apply for purposes of this section.
            ``(3) Coordination with section 469.--This section shall be 
        applied before the application of section 469.
            ``(4) Coordination with sections 1031 and 1033.--
                    ``(A) In general.--Sections 1031(a) and 1033(a) 
                shall not apply if--
                            ``(i) the exchanged or converted property 
                        is tax-exempt use property subject to a lease 
                        which was entered into before March 13, 2004, 
                        and which would not have met the requirements 
                        of subsection (d) had such requirements been in 
                        effect when the lease was entered into, or
                            ``(ii) the replacement property is tax-
                        exempt use property subject to a lease which 
                        does not meet the requirements of subsection 
                        (d).
                    ``(B) Adjusted basis.--In the case of property 
                acquired by the lessor in a transaction to which 
                section 1031 or 1033 applies, the adjusted basis of 
                such property for purposes of this section shall not 
                exceed the lesser of--
                            ``(i) the fair market value of the property 
                        as of the beginning of the lease term, or
                            ``(ii) the amount which would be the 
                        lessor's adjusted basis if such sections did 
                        not apply to such transaction.
    ``(f) Other Definitions.--For purposes of this section--
            ``(1) Related parties.--The terms `lessor', `lessee', and 
        `lender' each include any related party (within the meaning of 
        section 197(f)(9)(C)(i)).
            ``(2) Lease term.--The term `lease term' has the meaning 
        given to such term by section 168(i)(3).
            ``(3) Lender.--The term `lender' means, with respect to any 
        lease, a person that makes a loan to the lessor which is 
        secured (or economically similar to being secured) by the lease 
        or the leased property.
            ``(4) Loan.--The term `loan' includes any similar 
        arrangement.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the provisions of this 
section, including regulations which--
            ``(1) allow in appropriate cases the aggregation of 
        property subject to the same lease, and
            ``(2) provide for the determination of the allocation of 
        interest expense for purposes of this section.''.
    (b) Conforming Amendment.--The table of sections for subpart C of 
part II of subchapter E of chapter 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.''.

SEC. 649. EFFECTIVE DATE.

    (a) In General.--Except as provided in this section, the amendments 
made by this part shall apply to leases entered into after March 12, 
2004.
    (b) Exception.--
            (1) In general.--The amendments made by this part shall not 
        apply to qualified transportation property.
            (2) Qualified transportation property.--For purposes of 
        paragraph (1), the term ``qualified transportation property'' 
        means domestic property subject to a lease with respect to 
        which a formal application--
                    (A) was submitted for approval to the Federal 
                Transit Administration (an agency of the Department of 
                Transportation) after June 30, 2003, and before March 
                13, 2004,
                    (B) is approved by the Federal Transit 
                Administration before January 1, 2005, and
                    (C) includes a description of such property and the 
                value of such property.
            (3) Exchanges and conversion of tax-exempt use property.--
        Section 470(e)(4) of the Internal Revenue Code of 1986, as 
        added by this section, shall apply to property exchanged or 
        converted after the date of the enactment of this Act.

               Subtitle C--Reduction of Fuel Tax Evasion

SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR MOBILE MACHINERY.

    (a) Exemption From Tax on Heavy Trucks and Trailers Sold at 
Retail.--
            (1) In general.--Section 4053 (relating to exemptions) is 
        amended by adding at the end the following new paragraph:
            ``(8) Mobile machinery.--Any vehicle which consists of a 
        chassis--
                    ``(A) to which there has been permanently mounted 
                (by welding, bolting, riveting, or other means) 
                machinery or equipment to perform a construction, 
                manufacturing, processing, farming, mining, drilling, 
                timbering, or similar operation if the operation of the 
                machinery or equipment is unrelated to transportation 
                on or off the public highways,
                    ``(B) which has been specially designed to serve 
                only as a mobile carriage and mount (and a power 
                source, where applicable) for the particular machinery 
                or equipment involved, whether or not such machinery or 
                equipment is in operation, and
                    ``(C) which, by reason of such special design, 
                could not, without substantial structural modification, 
                be used as a component of a vehicle designed to perform 
                a function of transporting any load other than that 
                particular machinery or equipment or similar machinery 
                or equipment requiring such a specially designed 
                chassis.''.
            (2) Effective date.--The amendment made by this subsection 
        shall take effect on the day after the date of the enactment of 
        this Act.
    (b) Exemption From Tax on Use of Certain Vehicles.--
            (1) In general.--Section 4483 (relating to exemptions) is 
        amended by redesignating subsection (g) as subsection (h) and 
        by inserting after subsection (f) the following new subsection:
    ``(g) Exemption for Mobile Machinery.--No tax shall be imposed by 
section 4481 on the use of any vehicle described in section 4053(8).''.
            (2) Effective date.--The amendments made by this subsection 
        shall take effect on the day after the date of the enactment of 
        this Act.
    (c) Exemption From Tax on Tires.--
            (1) In General.--Section 4072(b)(2) is amended by adding at 
        the end the following flush sentence: ``Such term shall not 
        include tires of a type used exclusively on vehicles described 
        in section 4053(8).''.
            (2) Effective date.--The amendment made by this subsection 
        shall take effect on the day after the date of the enactment of 
        this Act.
    (d) Refund of Fuel Taxes.--
            (1) In general.--Section 6421(e)(2) (defining off-highway 
        business use) is amended by adding at the end the following new 
        subparagraph:
                    ``(C) Uses in mobile machinery.--
                            ``(i) In general.--The term `off-highway 
                        business use' shall include any use in a 
                        vehicle which meets the requirements described 
                        in clause (ii).
                            ``(ii) Requirements for mobile machinery.--
                        The requirements described in this clause are--
                                    ``(I) the design-based test, and
                                    ``(II) the use-based test.
                            ``(iii) Design-based test.--For purposes of 
                        clause (ii)(I), the design-based test is met if 
                        the vehicle consists of a chassis--
                                    ``(I) to which there has been 
                                permanently mounted (by welding, 
                                bolting, riveting, or other means) 
                                machinery or equipment to perform a 
                                construction, manufacturing, 
                                processing, farming, mining, drilling, 
                                timbering, or similar operation if the 
                                operation of the machinery or equipment 
                                is unrelated to transportation on or 
                                off the public highways,
                                    ``(II) which has been specially 
                                designed to serve only as a mobile 
                                carriage and mount (and a power source, 
                                where applicable) for the particular 
                                machinery or equipment involved, 
                                whether or not such machinery or 
                                equipment is in operation, and
                                    ``(III) which, by reason of such 
                                special design, could not, without 
                                substantial structural modification, be 
                                used as a component of a vehicle 
                                designed to perform a function of 
                                transporting any load other than that 
                                particular machinery or equipment or 
                                similar machinery or equipment 
                                requiring such a specially designed 
                                chassis.
                            ``(iv) Use-based test.--For purposes of 
                        clause (ii)(II), the use-based test is met if 
                        the use of the vehicle on public highways was 
                        less than 7,500 miles during the taxpayer's 
                        taxable year.''.
            (2) No tax-free sales.--Subsection (b) of section 4082, as 
        amended by section 652, is amended by inserting before the 
        period at the end ``and such term shall not include any use 
        described in section 6421(e)(2)(C)''.
            (3) Annual refund of tax paid.--Section 6427(i)(2) 
        (relating to exceptions) is amended by adding at the end the 
        following new subparagraph:
                    ``(C) Nonapplication of paragraph.--This paragraph 
                shall not apply to any fuel used solely in any off-
                highway business use described in section 
                6421(e)(2)(C).''.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after the date of the 
        enactment of this Act.

SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE.

    (a) Rate of Tax.--
            (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
        amended by striking ``and'' at the end of clause (ii), by 
        striking the period at the end of clause (iii) and inserting 
        ``, and'', and by adding at the end the following new clause:
                            ``(iv) in the case of aviation-grade 
                        kerosene, 21.8 cents per gallon.''.
            (2) Commercial aviation.--Paragraph (2) of section 4081(a) 
        is amended by adding at the end the following new subparagraph:
                    ``(C) Taxes imposed on fuel used in commercial 
                aviation.--In the case of aviation-grade kerosene which 
                is removed from any refinery or terminal directly into 
                the fuel tank of an aircraft for use in commercial 
                aviation, the rate of tax under subparagraph (A)(iv) 
                shall be 4.3 cents per gallon.''.
            (3) Certain refueler trucks, tankers, and tank wagons 
        treated as terminal.--Subsection (a) of section 4081 is amended 
        by adding at the end the following new paragraph:
            ``(3) Certain refueler trucks, tankers, and tank wagons 
        treated as terminal.--
                    ``(A) In general.--In the case of aviation-grade 
                kerosene which is removed from any terminal directly 
                into the fuel tank of an aircraft (determined without 
                regard to any refueler truck, tanker, or tank wagon 
                which meets the requirements of subparagraph (B)), a 
                refueler truck, tanker, or tank wagon shall be treated 
                as part of such terminal if--
                            ``(i) such truck, tanker, or wagon meets 
                        the requirements of subparagraph (B) with 
                        respect to an airport, and
                            ``(ii) except in the case of exigent 
                        circumstances identified by the Secretary in 
                        regulations, no vehicle registered for highway 
                        use is loaded with aviation-grade kerosene at 
                        such terminal.
                    ``(B) Requirements.--A refueler truck, tanker, or 
                tank wagon meets the requirements of this subparagraph 
                with respect to an airport if such truck, tanker, or 
                wagon--
                            ``(i) is loaded with aviation-grade 
                        kerosene at such terminal located within such 
                        airport and delivers such kerosene only into 
                        aircraft at such airport,
                            ``(ii) has storage tanks, hose, and 
                        coupling equipment designed and used for the 
                        purposes of fueling aircraft,
                            ``(iii) is not registered for highway use, 
                        and
                            ``(iv) is operated by--
                                    ``(I) the terminal operator of such 
                                terminal, or
                                    ``(II) a person that makes a daily 
                                accounting to such terminal operator of 
                                each delivery of fuel from such truck, 
                                tanker, or wagon.
                    ``(C) Reporting.--The Secretary shall require under 
                section 4101(d) reporting by such terminal operator 
                of--
                            ``(i) any information obtained under 
                        subparagraph (B)(iv)(II), and
                            ``(ii) any similar information maintained 
                        by such terminal operator with respect to 
                        deliveries of fuel made by trucks, tankers, or 
                        wagons operated by such terminal operator.''.
            (4) Liability for tax on aviation-grade kerosene used in 
        commercial aviation.--Subsection (a) of section 4081 is amended 
        by adding at the end the following new paragraph:
            ``(4) Liability for tax on aviation-grade kerosene used in 
        commercial aviation.--For purposes of paragraph (2)(C), the 
        person who uses the fuel for commercial aviation shall pay the 
        tax imposed under such paragraph. For purposes of the preceding 
        sentence, fuel shall be treated as used when such fuel is 
        removed into the fuel tank.''.
            (5) Nontaxable uses.--
                    (A) In general.--Section 4082 is amended by 
                redesignating subsections (e) and (f) as subsections 
                (f) and (g), respectively, and by inserting after 
                subsection (d) the following new subsection:
    ``(e) Aviation-Grade Kerosene.--In the case of aviation-grade 
kerosene which is exempt from the tax imposed by section 4041(c) (other 
than by reason of a prior imposition of tax) and which is removed from 
any refinery or terminal directly into the fuel tank of an aircraft, 
the rate of tax under section 4081(a)(2)(A)(iv) shall be zero.''.
                    (B) Conforming amendments.--
                            (i) Subsection (b) of section 4082 is 
                        amended by adding at the end the following new 
                        flush sentence:
``The term `nontaxable use' does not include the use of aviation-grade 
kerosene in an aircraft.''.
                            (ii) Section 4082(d) is amended by striking 
                        paragraph (1) and by redesignating paragraphs 
                        (2) and (3) as paragraphs (1) and (2), 
                        respectively.
            (6) Nonaircraft use of aviation-grade kerosene.--
                    (A) In general.--Subparagraph (B) of section 
                4041(a)(1) is amended by adding at the end the 
                following new sentence: ``This subparagraph shall not 
                apply to aviation-grade kerosene.''.
                    (B) Conforming amendment.--The heading for 
                paragraph (1) of section 4041(a) is amended by 
                inserting ``and kerosene'' after ``diesel fuel''.
    (b) Commercial Aviation.--Section 4083 is amended by redesignating 
subsections (b) and (c) as subsections (c) and (d), respectively, and 
by inserting after subsection (a) the following new subsection:
    ``(b) Commercial Aviation.--For purposes of this subpart, the term 
`commercial aviation' means any use of an aircraft in a business of 
transporting persons or property for compensation or hire by air, 
unless properly allocable to any transportation exempt from the taxes 
imposed by sections 4261 and 4271 by reason of section 4281 or 4282 or 
by reason of section 4261(h).''.
    (c) Refunds.--
            (1) In general.--Paragraph (4) of section 6427(l) is 
        amended to read as follows:
            ``(4) Refunds for aviation-grade kerosene.--
                    ``(A) No refund of certain taxes on fuel used in 
                commercial aviation.--In the case of aviation-grade 
                kerosene used in commercial aviation (as defined in 
                section 4083(b)) (other than supplies for vessels or 
                aircraft within the meaning of section 4221(d)(3)), 
                paragraph (1) shall not apply to so much of the tax 
                imposed by section 4081 as is attributable to--
                            ``(i) the Leaking Underground Storage Tank 
                        Trust Fund financing rate imposed by such 
                        section, and
                            ``(ii) so much of the rate of tax specified 
                        in section 4081(a)(2)(A)(iv) as does not exceed 
                        4.3 cents per gallon.
                    ``(B) Payment to ultimate, registered vendor.--With 
                respect to aviation-grade kerosene, if the ultimate 
                purchaser of such kerosene waives (at such time and in 
                such form and manner as the Secretary shall prescribe) 
                the right to payment under paragraph (1) and assigns 
                such right to the ultimate vendor, then the Secretary 
                shall pay the amount which would be paid under 
                paragraph (1) to such ultimate vendor, but only if such 
                ultimate vendor--
                            ``(i) is registered under section 4101, and
                            ``(ii) meets the requirements of 
                        subparagraph (A), (B), or (D) of section 
                        6416(a)(1).''.
            (2) Time for filing claims.--Subparagraph (A) of section 
        6427(i)(4) is amended--
                    (A) by striking ``subsection (l)(5)'' both places 
                it appears and inserting ``paragraph (4)(B) or (5) of 
                subsection (l)'', and
                    (B) by striking ``the preceding sentence'' and 
                inserting ``subsection (l)(5)''.
            (3) Conforming amendment.--Subparagraph (B) of section 
        6427(l)(2) is amended to read as follows:
                    ``(B) in the case of aviation-grade kerosene--
                            ``(i) any use which is exempt from the tax 
                        imposed by section 4041(c) other than by reason 
                        of a prior imposition of tax, or
                            ``(ii) any use in commercial aviation 
                        (within the meaning of section 4083(b)).''.
    (d) Repeal of Prior Taxation of Aviation Fuel.--
            (1) In general.--Part III of subchapter A of chapter 32 is 
        amended by striking subpart B and by redesignating subpart C as 
        subpart B.
            (2) Conforming amendments.--
                    (A) Section 4041(c) is amended to read as follows:
    ``(c) Aviation-Grade Kerosene.--
            ``(1) In general.--There is hereby imposed a tax upon 
        aviation-grade kerosene--
                    ``(A) sold by any person to an owner, lessee, or 
                other operator of an aircraft for use in such aircraft, 
                or
                    ``(B) used by any person in an aircraft unless 
                there was a taxable sale of such fuel under 
                subparagraph (A).
            ``(2) Exemption for previously taxed fuel.--No tax shall be 
        imposed by this subsection on the sale or use of any aviation-
        grade kerosene if tax was imposed on such liquid under section 
        4081 and the tax thereon was not credited or refunded.
            ``(3) Rate of tax.--The rate of tax imposed by this 
        subsection shall be the rate of tax specified in section 
        4081(a)(2)(A)(iv) which is in effect at the time of such sale 
        or use.''.
                    (B) Section 4041(d)(2) is amended by striking 
                ``section 4091'' and inserting ``section 4081''.
                    (C) Section 4041 is amended by striking subsection 
                (e).
                    (D) Section 4041 is amended by striking subsection 
                (i).
                    (E) Sections 4101(a), 4103, 4221(a), and 6206 are 
                each amended by striking ``, 4081, or 4091'' and 
                inserting ``or 4081''.
                    (F) Section 6416(b)(2) is amended by striking 
                ``4091 or''.
                    (G) Section 6416(b)(3) is amended by striking ``or 
                4091'' each place it appears.
                    (H) Section 6416(d) is amended by striking ``or to 
                the tax imposed by section 4091 in the case of refunds 
                described in section 4091(d)''.
                    (I) Section 6427(j)(1) is amended by striking ``, 
                4081, and 4091'' and inserting ``and 4081''.
                    (J)(i) Section 6427(l)(1) is amended to read as 
                follows:
            ``(1) In general.--Except as otherwise provided in this 
        subsection and in subsection (k), if any diesel fuel or 
        kerosene on which tax has been imposed by section 4041 or 4081 
        is used by any person in a nontaxable use, the Secretary shall 
        pay (without interest) to the ultimate purchaser of such fuel 
        an amount equal to the aggregate amount of tax imposed on such 
        fuel under section 4041 or 4081, as the case may be, reduced by 
        any payment made to the ultimate vendor under paragraph 
        (4)(B).''.
                    (ii) Paragraph (5)(B) of section 6427(l) is amended 
                by striking ``Paragraph (1)(A) shall not apply to 
                kerosene'' and inserting ``Paragraph (1) shall not 
                apply to kerosene (other than aviation-grade 
                kerosene)''.
                    (K) Subparagraph (B) of section 6724(d)(1) is 
                amended by striking clause (xv) and by redesignating 
                the succeeding clauses accordingly.
                    (L) Paragraph (2) of section 6724(d) is amended by 
                striking subparagraph (W) and by redesignating the 
                succeeding subparagraphs accordingly.
                    (M) Paragraph (1) of section 9502(b) is amended by 
                adding ``and'' at the end of subparagraph (B) and by 
                striking subparagraphs (C) and (D) and inserting the 
                following new subparagraph:
                    ``(C) section 4081 with respect to aviation 
                gasoline and aviation-grade kerosene, and''.
                    (N) The last sentence of section 9502(b) is amended 
                to read as follows:
``There shall not be taken into account under paragraph (1) so much of 
the taxes imposed by section 4081 as are determined at the rate 
specified in section 4081(a)(2)(B).''.
                    (O) Subsection (b) of section 9508 is amended by 
                striking paragraph (3) and by redesignating paragraphs 
                (4) and (5) as paragraphs (3) and (4), respectively.
                    (P) Section 9508(c)(2)(A) is amended by striking 
                ``sections 4081 and 4091'' and inserting ``section 
                4081''.
                    (Q) The table of subparts for part III of 
                subchapter A of chapter 32 is amended to read as 
                follows:

                              ``Subpart A. Motor and aviation fuels.
                              ``Subpart B. Special provisions 
                                        applicable to fuels tax.''.
                    (R) The heading for subpart A of part III of 
                subchapter A of chapter 32 is amended to read as 
                follows:

                ``Subpart A--Motor and Aviation Fuels''.

                    (S) The heading for subpart B of part III of 
                subchapter A of chapter 32, as redesignated by 
                paragraph (1), is amended to read as follows:

       ``Subpart B--Special Provisions Applicable to Fuels Tax''.

    (e) Effective Date.--The amendments made by this section shall 
apply to aviation-grade kerosene removed, entered, or sold after 
September 30, 2004.
    (f) Floor Stocks Tax.--
            (1) In general.--There is hereby imposed on aviation-grade 
        kerosene held on October 1, 2004, by any person a tax equal 
        to--
                    (A) the tax which would have been imposed before 
                such date on such kerosene had the amendments made by 
                this section been in effect at all times before such 
                date, reduced by
                    (B) the tax imposed before such date under section 
                4091 of the Internal Revenue Code of 1986, as in effect 
                on the day before the date of the enactment of this 
                Act.
            (2) Liability for tax and method of payment.--
                    (A) Liability for tax.--The person holding the 
                kerosene on October 1, 2004, to which the tax imposed 
                by paragraph (1) applies shall be liable for such tax.
                    (B) Method and time for payment.--The tax imposed 
                by paragraph (1) shall be paid at such time and in such 
                manner as the Secretary of the Treasury (or the 
                Secretary's delegate) shall prescribe, including the 
                nonapplication of such tax on de minimis amounts of 
                kerosene.
            (3) Transfer of floor stock tax revenues to trust funds.--
        For purposes of determining the amount transferred to any trust 
        fund, the tax imposed by this subsection shall be treated as 
        imposed by section 4081 of the Internal Revenue Code of 1986--
                    (A) at the Leaking Underground Storage Tank Trust 
                Fund financing rate under such section to the extent of 
                0.1 cents per gallon, and
                    (B) at the rate under section 4081(a)(2)(A)(iv) to 
                the extent of the remainder.
            (4) Held by a person.--For purposes of this section, 
        kerosene shall be considered as held by a person if title 
        thereto has passed to such person (whether or not delivery to 
        the person has been made).
            (5) Other laws applicable.--All provisions of law, 
        including penalties, applicable with respect to the tax imposed 
        by section 4081 of such Code shall, insofar as applicable and 
        not inconsistent with the provisions of this subsection, apply 
        with respect to the floor stock tax imposed by paragraph (1) to 
        the same extent as if such tax were imposed by such section.

SEC. 653. DYE INJECTION EQUIPMENT.

    (a) In General.--Section 4082(a)(2) (relating to exemptions for 
diesel fuel and kerosene) is amended by inserting ``by mechanical 
injection'' after ``indelibly dyed''.
    (b) Dye Injector Security.--Not later than 180 days after the date 
of the enactment of this Act, the Secretary of the Treasury shall issue 
regulations regarding mechanical dye injection systems described in the 
amendment made by subsection (a), and such regulations shall include 
standards for making such systems tamper resistant.
    (c) Penalty for Tampering With or Failing To Maintain Security 
Requirements for Mechanical Dye Injection Systems.--
            (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by adding after 
        section 6715 the following new section:

``SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN SECURITY 
              REQUIREMENTS FOR MECHANICAL DYE INJECTION SYSTEMS.

    ``(a) Imposition of Penalty--
            ``(1) Tampering.--If any person tampers with a mechanical 
        dye injection system used to indelibly dye fuel for purposes of 
        section 4082, such person shall pay a penalty in addition to 
        the tax (if any).
            ``(2) Failure to maintain security requirements.--If any 
        operator of a mechanical dye injection system used to indelibly 
        dye fuel for purposes of section 4082 fails to maintain the 
        security standards for such system as established by the 
        Secretary, then such operator shall pay a penalty in addition 
        to the tax (if any).
    ``(b) Amount of Penalty.--The amount of the penalty under 
subsection (a) shall be--
            ``(1) for each violation described in paragraph (1), the 
        greater of--
                    ``(A) $25,000, or
                    ``(B) $10 for each gallon of fuel involved, and
            ``(2) for each--
                    ``(A) failure to maintain security standards 
                described in paragraph (2), $1,000, and
                    ``(B) failure to correct a violation described in 
                paragraph (2), $1,000 per day for each day after which 
                such violation was discovered or such person should 
                have reasonably known of such violation.
    ``(c) Joint and Several Liability.--
            ``(1) In general.--If a penalty is imposed under this 
        section on any business entity, each officer, employee, or 
        agent of such entity or other contracting party who willfully 
        participated in any act giving rise to such penalty shall be 
        jointly and severally liable with such entity for such penalty.
            ``(2) Affiliated groups.--If a business entity described in 
        paragraph (1) is part of an affiliated group (as defined in 
        section 1504(a)), the parent corporation of such entity shall 
        be jointly and severally liable with such entity for the 
        penalty imposed under this section.''.
            (2) Clerical amendment.--The table of sections for part I 
        of subchapter B of chapter 68 is amended by adding after the 
        item related to section 6715 the following new item:

                              ``Sec. 6715A. Tampering with or failing 
                                        to maintain security 
                                        requirements for mechanical dye 
                                        injection systems.''.
    (d) Effective Date.--The amendments made by subsections (a) and (c) 
shall take effect on the 180th day after the date on which the 
Secretary issues the regulations described in subsection (b).

SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS.

    (a) In General.--Section 4083(d)(1)(A) (relating to administrative 
authority), as previously amended by this Act, is amended by striking 
``and'' at the end of clause (i) and by inserting after clause (ii) the 
following new clause:
                            ``(iii) inspecting any books and records 
                        and any shipping papers pertaining to such 
                        fuel, and''.
    (b) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERATORS REQUIRED FOR 
              EXEMPTION OF BULK TRANSFERS TO REGISTERED TERMINALS OR 
              REFINERIES.

    (a) In General.--Section 4081(a)(1)(B) (relating to exemption for 
bulk transfers to registered terminals or refineries) is amended--
            (1) by inserting ``by pipeline or vessel'' after 
        ``transferred in bulk'', and
            (2) by inserting ``, the operator of such pipeline or 
        vessel,'' after ``the taxable fuel''.
    (b) Effective Date.--The amendments made by this section shall take 
effect on October 1, 2004.
    (c) Publication of Registered Persons.--Beginning on July 1, 2004, 
the Secretary of the Treasury (or the Secretary's delegate) shall 
periodically publish a current list of persons registered under section 
4101 of the Internal Revenue Code of 1986 who are required to register 
under such section.

SEC. 656. DISPLAY OF REGISTRATION.

    (a) In General.--Subsection (a) of section 4101 (relating to 
registration) is amended--
            (1) by striking ``Every'' and inserting the following:
            ``(1) In general.--Every'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Display of registration.--Every operator of a vessel 
        required by the Secretary to register under this section shall 
        display proof of registration through an electronic 
        identification device prescribed by the Secretary on each 
        vessel used by such operator to transport any taxable fuel.''.
    (b) Civil Penalty for Failure To Display Registration.--
            (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by inserting 
        after section 6716 the following new section:

``SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON VESSELS.

    ``(a) Failure To Display Registration.--Every operator of a vessel 
who fails to display proof of registration pursuant to section 
4101(a)(2) shall pay a penalty of $500 for each such failure. With 
respect to any vessel, only one penalty shall be imposed by this 
section during any calendar month.
    ``(b) Multiple Violations.--In determining the penalty under 
subsection (a) on any person, subsection (a) shall be applied by 
increasing the amount in subsection (a) by the product of such amount 
and the aggregate number of penalties (if any) imposed with respect to 
prior months by this section on such person (or a related person or any 
predecessor of such person or related person).
    ``(c) Reasonable Cause Exception.--No penalty shall be imposed 
under this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
            (2) Clerical amendment.--The table of sections for part I 
        of subchapter B of chapter 68 is amended by inserting after the 
        item relating to section 6716 the following new item:

                              ``Sec. 6717. Failure to display tax 
                                        registration on vessels.''.
    (c) Effective Dates.--
            (1) Subsection (a).--The amendments made by subsection (a) 
        shall take effect on October 1, 2004.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to penalties imposed after September 30, 2004.

SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO REPORT.

    (a) Increased Penalty.--Subsection (a) of section 7272 (relating to 
penalty for failure to register) is amended by inserting ``($10,000 in 
the case of a failure to register under section 4101)'' after ``$50''.
    (b) Increased Criminal Penalty.--Section 7232 (relating to failure 
to register under section 4101, false representations of registration 
status, etc.) is amended by striking ``$5,000'' and inserting 
``$10,000''.
    (c) Assessable Penalty for Failure To Register.--
            (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by inserting 
        after section 6717 the following new section:

``SEC. 6718. FAILURE TO REGISTER.

    ``(a) Failure To Register.--Every person who is required to 
register under section 4101 and fails to do so shall pay a penalty in 
addition to the tax (if any).
    ``(b) Amount of Penalty.--The amount of the penalty under 
subsection (a) shall be--
            ``(1) $10,000 for each initial failure to register, and
            ``(2) $1,000 for each day thereafter such person fails to 
        register.
    ``(c) Reasonable Cause Exception.--No penalty shall be imposed 
under this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
            (2) Clerical amendment.--The table of sections for part I 
        of subchapter B of chapter 68 is amended by inserting after the 
        item relating to section 6717 the following new item:

                              ``Sec. 6718. Failure to register.''.
    (d) Assessable Penalty for Failure To Report.--
            (1) In general.--Part II of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by adding at the 
        end the following new section:

``SEC. 6725. FAILURE TO REPORT INFORMATION UNDER SECTION 4101.

    ``(a) In General.--In the case of each failure described in 
subsection (b) by any person with respect to a vessel or facility, such 
person shall pay a penalty of $10,000 in addition to the tax (if any).
    ``(b) Failures Subject to Penalty.--For purposes of subsection (a), 
the failures described in this subsection are--
            ``(1) any failure to make a report under section 4101(d) on 
        or before the date prescribed therefor, and
            ``(2) any failure to include all of the information 
        required to be shown on such report or the inclusion of 
        incorrect information.
    ``(c) Reasonable Cause Exception.--No penalty shall be imposed 
under this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
            (2) Clerical amendment.--The table of sections for part II 
        of subchapter B of chapter 68 is amended by adding at the end 
        the following new item:

                              ``Sec. 6725. Failure to report 
                                        information under section 
                                        4101.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to penalties imposed after September 30, 2004.

SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT REGISTERED.

    (a) Tax at Point of Entry Where Importer Not Registered.--Subpart B 
of part III of subchapter A of chapter 32, as redesignated by section 
652(d), is amended by adding after section 4103 the following new 
section:

``SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT 
              REGISTERED.

    ``(a) In General.--The importer of record shall be jointly and 
severally liable for the tax imposed by section 4081(a)(1)(A)(iii) if, 
under regulations prescribed by the Secretary, any other person that is 
not a person who is registered under section 4101 is liable for such 
tax.
    ``(b) Collection From Customs Bond.--If any tax for which any 
importer of record is liable under subsection (a), or for which any 
importer of record that is not a person registered under section 4101 
is otherwise liable, is not paid on or before the last date prescribed 
for payment, the Secretary may collect such tax from the Customs bond 
posted with respect to the importation of the taxable fuel to which the 
tax relates. For purposes of determining the jurisdiction of any court 
of the United States or any agency of the United States, any action by 
the Secretary described in the preceding sentence shall be treated as 
an action to collect the tax from a bond described in section 
4101(b)(1) and not as an action to collect from a bond relating to the 
importation of merchandise.''.
    (b) Conforming Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 32, as redesignated by section 
652(d), is amended by adding after the item related to section 4103 the 
following new item:

                              ``Sec. 4104. Collection from Customs bond 
                                        where importer not 
                                        registered.''.
    (c) Effective Date.--The amendments made by this section shall 
apply with respect to fuel entered after September 30, 2004.

SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.

    (a) Proration of Tax Where Vehicle Sold.--
            (1) In general.--Subparagraph (A) of section 4481(c)(2) 
        (relating to where vehicle destroyed or stolen) is amended by 
        striking ``destroyed or stolen'' both places it appears and 
        inserting ``sold, destroyed, or stolen''.
            (2) Conforming amendment.--The heading for section 
        4481(c)(2) is amended by striking ``destroyed or stolen'' and 
        inserting ``sold, destroyed, or stolen''.
    (b) Repeal of Installment Payment.--
            (1) Section 6156 (relating to installment payment of tax on 
        use of highway motor vehicles) is repealed.
            (2) The table of sections for subchapter A of chapter 62 is 
        amended by striking the item relating to section 6156.
    (c) Electronic Filing.--Section 4481 is amended by redesignating 
subsection (e) as subsection (f) and by inserting after subsection (d) 
the following new subsection:
    ``(e) Electronic Filing.--Any taxpayer who files a return under 
this section with respect to 25 or more vehicles for any taxable period 
shall file such return electronically.''.
    (d) Repeal of Reduction in Tax for Certain Trucks.--Section 4483 is 
amended by striking subsection (f).
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable periods beginning after the date of the enactment of 
this Act.

SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND CLAIMS WITH RESPECT TO 
              FARMING.

    (a) In General.--
            (1) Refunds.--Section 6427(l) is amended by adding at the 
        end the following new paragraph:
            ``(6) Registered vendors permitted to administer certain 
        claims for refund of diesel fuel and kerosene sold to 
        farmers.--
                    ``(A) In general.--In the case of diesel fuel or 
                kerosene used on a farm for farming purposes (within 
                the meaning of section 6420(c)), paragraph (1) shall 
                not apply to the aggregate amount of such diesel fuel 
                or kerosene if such amount does not exceed 250 gallons 
                (as determined under subsection (i)(5)(A)(iii)).
                    ``(B) Payment to ultimate vendor.--The amount which 
                would (but for subparagraph (A)) have been paid under 
                paragraph (1) with respect to any fuel shall be paid to 
                the ultimate vendor of such fuel, if such vendor--
                            ``(i) is registered under section 4101, and
                            ``(ii) meets the requirements of 
                        subparagraph (A), (B), or (D) of section 
                        6416(a)(1).''.
            (2) Filing of claims.--Section 6427(i) is amended by 
        inserting at the end the following new paragraph:
            ``(5) Special rule for vendor refunds with respect to 
        farmers.--
                    ``(A) In general.--A claim may be filed under 
                subsection (l)(6) by any person with respect to fuel 
                sold by such person for any period--
                            ``(i) for which $200 or more ($100 or more 
                        in the case of kerosene) is payable under 
                        subsection (l)(6),
                            ``(ii) which is not less than 1 week, and
                            ``(iii) which is for not more than 250 
                        gallons for each farmer for which there is a 
                        claim.
                Notwithstanding subsection (l)(1), paragraph (3)(B) 
                shall apply to claims filed under the preceding 
                sentence.
                    ``(B) Time for filing claim.--No claim filed under 
                this paragraph shall be allowed unless filed on or 
                before the last day of the first quarter following the 
                earliest quarter included in the claim.''.
            (3) Conforming amendments.--
                    (A) Section 6427(l)(5)(A) is amended to read as 
                follows:
                    ``(A) In general.--Paragraph (1) shall not apply to 
                diesel fuel or kerosene used by a State or local 
                government.''.
                    (B) The heading for section 6427(l)(5) is amended 
                by striking ``farmers and''.
    (b) Effective Date.--The amendment made by this section shall apply 
to fuels sold for nontaxable use after the date of the enactment of 
this Act.

SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO THE HIGHWAY 
              TRUST FUND.

    (a) In General.--Subsection (b) of section 9503 (relating to 
transfer to Highway Trust Fund of amounts equivalent to certain taxes) 
is amended by redesignating paragraph (5) as paragraph (6) and 
inserting after paragraph (4) the following new paragraph:
            ``(5) Certain penalties.--There are hereby appropriated to 
        the Highway Trust Fund amounts equivalent to the penalties paid 
        under sections 6715, 6715A, 6717, 6718, 6725, 7232, and 7272 
        (but only with regard to penalties under such section related 
        to failure to register under section 4101).''.
    (b) Conforming Amendments.--
            (1) The heading of subsection (b) of section 9503 is 
        amended by inserting ``and Penalties'' after ``Taxes''.
            (2) The heading of paragraph (1) of section 9503(b) is 
        amended by striking ``In general'' and inserting ``Certain 
        taxes''.
    (c) Effective Date.--The amendments made by this section shall 
apply to penalties assessed after October 1, 2004.

SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.

    (a) In General.--Paragraph (4) of section 6416(a) (relating to 
abatements, credits, and refunds) is amended to read as follows:
            ``(4) Registered ultimate vendor to administer credits and 
        refunds of gasoline tax.--
                    ``(A) In general.--For purposes of this subsection, 
                if an ultimate vendor purchases any gasoline on which 
                tax imposed by section 4081 has been paid and sells 
                such gasoline to an ultimate purchaser described in 
                subparagraph (C) or (D) of subsection (b)(2) (and such 
                gasoline is for a use described in such subparagraph), 
                such ultimate vendor shall be treated as the person 
                (and the only person) who paid such tax, but only if 
                such ultimate vendor is registered under section 4101. 
                For purposes of this subparagraph, if the sale of 
                gasoline is made by means of a credit card, the person 
                extending the credit to the ultimate purchaser shall be 
                deemed to be the ultimate vendor.
                    ``(B) Timing of claims.--The procedure and timing 
                of any claim under subparagraph (A) shall be the same 
                as for claims under section 6427(i)(4), except that the 
                rules of section 6427(i)(3)(B) regarding electronic 
                claims shall not apply unless the ultimate vendor has 
                certified to the Secretary for the most recent quarter 
                of the taxable year that all ultimate purchasers of the 
                vendor covered by such claim are certified and entitled 
                to a refund under subparagraph (C) or (D) of subsection 
                (b)(2).''.
    (b) Credit Card Purchases of Diesel Fuel or Kerosene by State and 
Local Governments.--Section 6427(l)(5)(C) (relating to nontaxable uses 
of diesel fuel, kerosene, and aviation fuel) is amended by adding at 
the end the following new flush sentence: ``For purposes of this 
subparagraph, if the sale of diesel fuel or kerosene is made by means 
of a credit card, the person extending the credit to the ultimate 
purchaser shall be deemed to be the ultimate vendor.''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on October 1, 2004.

SEC. 663. TWO-PARTY EXCHANGES.

    (a) In General.--Subpart B of part III of subchapter A of chapter 
32, as amended by this Act, is amended by adding after section 4104 the 
following new section:

``SEC. 4105. TWO-PARTY EXCHANGES.

    ``(a) In General.--In a two-party exchange, the delivering person 
shall not be liable for the tax imposed under section 
4081(a)(1)(A)(ii).
    ``(b) Two-Party Exchange.--The term `two-party exchange' means a 
transaction, other than a sale, in which taxable fuel is transferred 
from a delivering person registered under section 4101 as a taxable 
fuel registrant fuel to a receiving person who is so registered where 
all of the following occur:
            ``(1) The transaction includes a transfer from the 
        delivering person, who holds the inventory position for taxable 
        fuel in the terminal as reflected in the records of the 
        terminal operator.
            ``(2) The exchange transaction occurs before or 
        contemporaneous with completion of removal across the rack from 
        the terminal by the receiving person.
            ``(3) The terminal operator in its books and records treats 
        the receiving person as the person that removes the taxable 
        fuel across the terminal rack for purposes of reporting the 
        transaction to the Secretary.
            ``(4) The transaction is the subject of a written 
        contract.''.
    (b) Conforming Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 32, as amended by this Act, is 
amended by adding after the item relating to section 4104 the following 
new item:

                              ``Sec. 4105. Two-party exchanges.''.
    (c) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 664. SIMPLIFICATION OF TAX ON TIRES.

    (a) In General.--Subsection (a) of section 4071 is amended to read 
as follows:
    ``(a) Imposition and Rate of Tax.--There is hereby imposed on 
taxable tires sold by the manufacturer, producer, or importer thereof a 
tax at the rate of 9.4 cents (4.7 cents in the case of a biasply tire) 
for each 10 pounds so much of the maximum rated load capacity thereof 
as exceeds 3,500 pounds.''
    (b) Taxable Tire.--Section 4072 is amended by redesignating 
subsections (a) and (b) as subsections (b) and (c), respectively, and 
by inserting before subsection (b) (as so redesignated) the following 
new subsection:
    ``(a) Taxable Tire.--For purposes of this chapter, the term 
`taxable tire' means any tire of the type used on highway vehicles if 
wholly or in part made of rubber and if marked pursuant to Federal 
regulations for highway use.''
    (c) Exemption for Tires Sold to Department of Defense.--Section 
4073 is amended to read as follows:

``SEC. 4073. EXEMPTIONS.

    ``The tax imposed by section 4071 shall not apply to tires sold for 
the exclusive use of the Department of Defense or the Coast Guard.''
    (d) Conforming Amendments.--
            (1) Section 4071 is amended by striking subsection (c) and 
        by moving subsection (e) after subsection (b) and redesignating 
        subsection (e) as subsection (c).
            (2) The item relating to section 4073 in the table of 
        sections for part II of subchapter A of chapter 32 is amended 
        to read as follows:

                              ``Sec. 4073. Exemptions.''
    (e) Effective Date.--The amendments made by this section shall 
apply to sales in calendar years beginning more than 30 days after the 
date of the enactment of this Act.

          Subtitle D--Nonqualified Deferred Compensation Plans

SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.

    (a) In General.--Subpart A of part I of subchapter D of chapter 1 
is amended by adding at the end the following new section:

``SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER 
              NONQUALIFIED DEFERRED COMPENSATION PLANS.

    ``(a) Rules Relating to Constructive Receipt.--
            ``(1) In general.--
                    ``(A) Gross income inclusion.--In the case of a 
                nonqualified deferred compensation plan, all 
                compensation deferred under the plan for all taxable 
                years (to the extent not subject to a substantial risk 
                of forfeiture and not previously included in gross 
                income) shall be includible in gross income for the 
                taxable year unless at all times during the taxable 
                year the plan meets the requirements of paragraphs (2), 
                (3), and (4) and is operated in accordance with such 
                requirements.
                    ``(B) Interest on tax liability payable with 
                respect to previously deferred compensation.--
                            ``(i) In general.--If compensation is 
                        required to be included in gross income under 
                        subparagraph (A) for a taxable year, the tax 
                        imposed by this chapter for such taxable year 
                        shall be increased by the amount of interest 
                        determined under clause (ii).
                            ``(ii) Interest.--For purposes of clause 
                        (i), the interest determined under this clause 
                        for any taxable year is the amount of interest 
                        at the underpayment rate plus 1 percentage 
                        point on the underpayments that would have 
                        occurred had the deferred compensation been 
                        includible in gross income for the taxable year 
                        in which first deferred or, if later, the first 
                        taxable year in which such deferred 
                        compensation is not subject to a substantial 
                        risk of forfeiture.
            ``(2) Distributions.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the plan provides that 
                compensation deferred under the plan may not be 
                distributed earlier than--
                            ``(i) separation from service as determined 
                        by the Secretary (except as provided in 
                        subparagraph (B)(i)),
                            ``(ii) the date the participant becomes 
                        disabled (within the meaning of subparagraph 
                        (C)),
                            ``(iii) death,
                            ``(iv) a specified time (or pursuant to a 
                        fixed schedule) specified under the plan at the 
                        date of the deferral of such compensation,
                            ``(v) to the extent provided by the 
                        Secretary, a change in the ownership or 
                        effective control of the corporation, or in the 
                        ownership of a substantial portion of the 
                        assets of the corporation, or
                            ``(vi) the occurrence of an unforeseeable 
                        emergency.
                    ``(B) Special rules.--
                            ``(i) Specified employees.--In the case of 
                        specified employees, the requirement of 
                        subparagraph (A)(i) is met only if 
                        distributions may not be made earlier than 6 
                        months after the date of separation from 
                        service. For purposes of the preceding 
                        sentence, a specified employee is a key 
                        employee (as defined in section 416(i)) of a 
                        corporation the stock in which is publicly 
                        traded on an established securities market or 
                        otherwise.
                            ``(ii) Unforeseeable emergency.--For 
                        purposes of subparagraph (A)(vi)--
                                    ``(I) In general.--The term 
                                `unforeseeable emergency' means a 
                                severe financial hardship to the 
                                participant resulting from a sudden and 
                                unexpected illness or accident of the 
                                participant, the participant's spouse, 
                                or a dependent (as defined in section 
                                152(a)) of the participant, loss of the 
                                participant's property due to casualty, 
                                or other similar extraordinary and 
                                unforeseeable circumstances arising as 
                                a result of events beyond the control 
                                of the participant.
                                    ``(II) Limitation on 
                                distributions.--The requirement of 
                                subparagraph (A)(vi) is met only if, as 
                                determined under regulations of the 
                                Secretary, the amounts distributed with 
                                respect to an emergency do not exceed 
                                the amounts necessary to satisfy such 
                                emergency plus amounts necessary to pay 
                                taxes reasonably anticipated as a 
                                result of the distribution, after 
                                taking into account the extent to which 
                                such hardship is or may be relieved 
                                through reimbursement or compensation 
                                by insurance or otherwise or by 
                                liquidation of the participant's assets 
                                (to the extent the liquidation of such 
                                assets would not itself cause severe 
                                financial hardship).
                    ``(C) Disabled.--For purposes of subparagraph 
                (A)(ii), a participant shall be considered disabled if 
                the participant--
                            ``(i) is unable to engage in any 
                        substantial gainful activity by reason of any 
                        medically determinable physical or mental 
                        impairment which can be expected to result in 
                        death or can be expected to last for a 
                        continuous period of not less than 12 months, 
                        or
                            ``(ii) is, by reason of any medically 
                        determinable physical or mental impairment 
                        which can be expected to result in death or can 
                        be expected to last for a continuous period of 
                        not less than 12 months, receiving income 
                        replacement benefits for a period of not less 
                        than 3 months under an accident and health plan 
                        covering employees of the participant's 
                        employer.
            ``(3) Acceleration of benefits.--The requirements of this 
        paragraph are met if the plan does not permit the acceleration 
        of the time or schedule of any payment under the plan, except 
        as provided in regulations by the Secretary.
            ``(4) Elections.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the requirements of subparagraphs 
                (B) and (C) are met.
                    ``(B) Initial deferral decision.--The requirements 
                of this subparagraph are met if the plan provides that 
                compensation for services performed during a taxable 
                year may be deferred at the participant's election only 
                if the election to defer such compensation is made not 
                later than the close of the preceding taxable year or 
                at such other time as provided in regulations. In the 
                case of the first year in which a participant becomes 
                eligible to participate in the plan, such election may 
                be made with respect to services to be performed 
                subsequent to the election within 30 days after the 
                date the participant becomes eligible to participate in 
                such plan.
                    ``(C) Changes in time and form of distribution.--
                The requirements of this subparagraph are met if, in 
                the case of a plan which permits under a subsequent 
                election a delay in a payment or a change in the form 
                of payment--
                            ``(i) the plan requires that such election 
                        may not take effect until at least 12 months 
                        after the date on which the election is made,
                            ``(ii) in the case an election related to a 
                        payment not described in clause (ii), (iii), or 
                        (vi) of paragraph (2)(A), the plan requires 
                        that the first payment with respect to which 
                        such election is made be deferred for a period 
                        of not less than 5 years from the date such 
                        payment would otherwise have been made, and
                            ``(iii) the plan requires that any election 
                        related to a payment described in paragraph 
                        (2)(A)(iv) may not be made less than 12 months 
                        prior to the date of the first scheduled 
                        payment under such paragraph.
    ``(b) Rules Relating to Funding.--
            ``(1) Offshore property in a trust.--In the case of assets 
        set aside (directly or indirectly) in a trust (or other 
        arrangement determined by the Secretary) for purposes of paying 
        deferred compensation under a nonqualified deferred 
        compensation plan, for purposes of section 83 such assets shall 
        be treated as property transferred in connection with the 
        performance of services whether or not such assets are 
        available to satisfy claims of general creditors--
                    ``(A) at the time set aside if such assets are 
                located outside of the United States, or
                    ``(B) at the time transferred if such assets are 
                subsequently transferred outside of the United States.
            ``(2) Employer's financial health.--In the case of 
        compensation deferred under a nonqualified deferred 
        compensation plan, there is a transfer of property within the 
        meaning of section 83 with respect to such compensation as of 
        the earlier of--
                    ``(A) the date on which the plan first provides 
                that assets will become restricted to the provision of 
                benefits under the plan in connection with a change in 
                the employer's financial health, or
                    ``(B) the date on which assets are so restricted.
            ``(3) Income inclusion for offshore trusts and employer's 
        financial health.--For each taxable year that assets treated as 
        transferred under this subsection remain set aside in a trust 
        or other arrangement subject to paragraph (1) or (2), any 
        increase in value in, or earnings with respect to, such assets 
        shall be treated as an additional transfer of property under 
        this subsection (to the extent not previously included in 
        income).
            ``(4) Interest on tax liability payable with respect to 
        transferred property.--
                    ``(A) In general.--If amounts are required to be 
                included in gross income by reason of paragraph (1) or 
                (2) for a taxable year, the tax imposed by this chapter 
                for such taxable year shall be increased by the amount 
                of interest determined under subparagraph (B).
                    ``(B) Interest.--The interest determined under this 
                subparagraph for any taxable year is the amount of 
                interest at the underpayment rate plus 1 percentage 
                point on the underpayments that would have occurred had 
                the amounts so required to be included in gross income 
                by paragraph (1) or (2) been includible in gross income 
                for the taxable year in which first deferred or, if 
                later, the first taxable year in which such deferred 
                compensation is not subject to a substantial risk of 
                forfeiture.
    ``(c) No Inference on Earlier Income Inclusion or Requirement of 
Later Inclusion.--Nothing in this section shall be construed to prevent 
the inclusion of amounts in gross income under any other provision of 
this chapter or any other rule of law earlier than the time provided in 
this section. Any amount included in gross income under this section 
shall not be required to be included in gross income under any other 
provision of this chapter or any other rule of law later than the time 
provided in this section.
    ``(d) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Nonqualified deferred compensation plan.--The term 
        `nonqualified deferred compensation plan' means any plan that 
        provides for the deferral of compensation, other than--
                    ``(A) a qualified employer plan, and
                    ``(B) any bona fide vacation leave, sick leave, 
                compensatory time, disability pay, or death benefit 
                plan.
            ``(2) Qualified employer plan.--The term `qualified 
        employer plan' means--
                    ``(A) any plan, contract, pension, account, or 
                trust described in subparagraph (A) or (B) of section 
                219(g)(5), and
                    ``(B) any eligible deferred compensation plan 
                (within the meaning of section 457(b)) of an employer 
                described in section 457(e)(1)(A).
            ``(3) Plan includes arrangements, etc.--The term `plan' 
        includes any agreement or arrangement, including an agreement 
        or arrangement that includes one person.
            ``(4) Substantial risk of forfeiture.--The rights of a 
        person to compensation are subject to a substantial risk of 
        forfeiture if such person's rights to such compensation are 
        conditioned upon the future performance of substantial services 
        by any individual.
            ``(5) Treatment of earnings.--References to deferred 
        compensation shall be treated as including references to income 
        (whether actual or notional) attributable to such compensation 
        or such income.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations--
            ``(1) providing for the determination of amounts of 
        deferral in the case of a nonqualified deferred compensation 
        plan which is a defined benefit plan,
            ``(2) relating to changes in the ownership and control of a 
        corporation or assets of a corporation for purposes of 
        subsection (a)(2)(A)(v),
            ``(3) exempting arrangements from the application of 
        subsection (b) if such arrangements will not result in an 
        improper deferral of United States tax and will not result in 
        assets being effectively beyond the reach of creditors,
            ``(4) defining financial health for purposes of subsection 
        (b)(2), and
            ``(5) disregarding a substantial risk of forfeiture in 
        cases where necessary to carry out the purposes of this 
        section.''.
    (b) W-2 Forms.--
            (1) In general.--Subsection (a) of section 6051 (relating 
        to receipts for employees) is amended by striking ``and'' at 
        the end of paragraph (11), by striking the period at the end of 
        paragraph (12) and inserting ``, and'', and by inserting after 
        paragraph (12) the following new paragraph:
            ``(13) the total amount of deferrals under a nonqualified 
        deferred compensation plan (within the meaning of section 
        409A(d)).''.
            (2) Threshold.--Subsection (a) of section 6051 is amended 
        by adding at the end the following: ``In the case of the 
        amounts required to be shown by paragraph (13), the Secretary 
        (by regulation) may establish a minimum amount of deferrals 
        below which paragraph (13) does not apply and may provide that 
        paragraph (13) does not apply with respect to amounts of 
        deferrals which are not reasonably ascertainable.''.
    (c) Conforming and Clerical Amendments.--
            (1) Section 414(b) is amended by inserting ``409A,'' after 
        ``408(p),''.
            (2) Section 414(c) is amended by inserting ``409A,'' after 
        ``408(p),''.
            (3) The table of sections for such subpart A of part I of 
        subchapter D of chapter 1 is amended by adding at the end the 
        following new item:

                              ``Sec. 409A. Inclusion in gross income of 
                                        deferred compensation under 
                                        nonqualified deferred 
                                        compensation plans.''.
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to amounts deferred after June 3, 2004.
            (2) Certain amounts deferred in 2004 under certain 
        irrevocable elections and binding arrangements.--The amendments 
        made by this section shall not apply to amounts deferred after 
        June 3, 2004, and before January 1, 2005, pursuant to an 
        irrevocable election or binding arrangement made before June 4, 
        2004.
            (3) Earnings attributable to amount previously deferred.--
        The amendments made by this section shall apply to earnings on 
        deferred compensation only to the extent that such amendments 
        apply to such compensation.
    (e) Guidance Relating to Change of Ownership or Control.--Not later 
than 90 days after the date of the enactment of this Act, the Secretary 
of the Treasury shall issue guidance on what constitutes a change in 
ownership or effective control for purposes of section 409A of the 
Internal Revenue Code of 1986, as added by this section.
    (f) Guidance Relating to Termination of Certain Existing 
Arrangements.--Not later than 90 days after the date of the enactment 
of this Act, the Secretary of the Treasury shall issue guidance 
providing a limited period during which an individual participating in 
a nonqualified deferred compensation plan adopted before June 4, 2004, 
may, without violating the requirements of paragraphs (2), (3), and (4) 
of section 409A(a)(2) of the Internal Revenue Code of 1986 (as added by 
this section), terminate participation or cancel an outstanding 
deferral election with regard to amounts earned after June 3, 2004, if 
such amounts are includible in income as earned.

                  Subtitle E--Other Revenue Provisions

SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS.

    (a) Contract Requirements.--
            (1) In general.--Subchapter A of chapter 64 (relating to 
        collection) is amended by adding at the end the following new 
        section:

``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

    ``(a) In General.--Nothing in any provision of law shall be 
construed to prevent the Secretary from entering into a qualified tax 
collection contract.
    ``(b) Qualified Tax Collection Contract.--For purposes of this 
section, the term `qualified tax collection contract' means any 
contract which--
            ``(1) is for the services of any person (other than an 
        officer or employee of the Treasury Department)--
                    ``(A) to locate and contact any taxpayer specified 
                by the Secretary,
                    ``(B) to request full payment from such taxpayer of 
                an amount of Federal tax specified by the Secretary 
                and, if such request cannot be met by the taxpayer, to 
                offer the taxpayer an installment agreement providing 
                for full payment of such amount during a period not to 
                exceed 5 years, and
                    ``(C) to obtain financial information specified by 
                the Secretary with respect to such taxpayer,
            ``(2) prohibits each person providing such services under 
        such contract from committing any act or omission which 
        employees of the Internal Revenue Service are prohibited from 
        committing in the performance of similar services,
            ``(3) prohibits subcontractors from--
                    ``(A) having contacts with taxpayers,
                    ``(B) providing quality assurance services, and
                    ``(C) composing debt collection notices, and
            ``(4) permits subcontractors to perform other services only 
        with the approval of the Secretary.
    ``(c) Fees.--The Secretary may retain and use an amount not in 
excess of 25 percent of the amount collected under any qualified tax 
collection contract for the costs of services performed under such 
contract. The Secretary shall keep adequate records regarding amounts 
so retained and used. The amount credited as paid by any taxpayer shall 
be determined without regard to this subsection.
    ``(d) No Federal Liability.--The United States shall not be liable 
for any act or omission of any person performing services under a 
qualified tax collection contract.
    ``(e) Application of Fair Debt Collection Practices Act.--The 
provisions of the Fair Debt Collection Practices Act (15 U.S.C. 1692 et 
seq.) shall apply to any qualified tax collection contract, except to 
the extent superseded by section 6304, section 7602(c), or by any other 
provision of this title.
    ``(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).''.
            (2) Conforming amendments.--
                    (A) Section 7809(a) is amended by inserting 
                ``6306,'' before ``7651''.
                    (B) The table of sections for subchapter A of 
                chapter 64 is amended by adding at the end the 
                following new item:

                              ``Sec. 6306. Qualified Tax Collection 
                                        Contracts.''.
    (b) Civil Damages for Certain Unauthorized Collection Actions by 
Persons Performing Services Under Qualified Tax Collection Contracts.--
            (1) In general.--Subchapter B of chapter 76 (relating to 
        proceedings by taxpayers and third parties) is amended by 
        inserting after section 7433 the following new section:

``SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION ACTIONS 
              BY PERSONS PERFORMING SERVICES UNDER QUALIFIED TAX 
              COLLECTION CONTRACTS.

    ``(a) In General.--Subject to the modifications provided by 
subsection (b), section 7433 shall apply to the acts and omissions of 
any person performing services under a qualified tax collection 
contract (as defined in section 6306(b)) to the same extent and in the 
same manner as if such person were an employee of the Internal Revenue 
Service.
    ``(b) Modifications.--For purposes of subsection (a)--
            ``(1) Any civil action brought under section 7433 by reason 
        of this section shall be brought against the person who entered 
        into the qualified tax collection contract with the Secretary 
        and shall not be brought against the United States.
            ``(2) Such person and not the United States shall be liable 
        for any damages and costs determined in such civil action.
            ``(3) Such civil action shall not be an exclusive remedy 
        with respect to such person.
            ``(4) Subsections (c), (d)(1), and (e) of section 7433 
        shall not apply.''.
            (2) Clerical amendment.--The table of sections for 
        subchapter B of chapter 76 is amended by inserting after the 
        item relating to section 7433 the following new item:

                              ``Sec. 7433A. Civil damages for certain 
                                        unauthorized collection actions 
                                        by persons performing services 
                                        under a qualified tax 
                                        collection contract.''.
    (c) Application of Taxpayer Assistance Orders to Persons Performing 
Services Under a Qualified Tax Collection Contract.--Section 7811 
(relating to taxpayer assistance orders) is amended by adding at the 
end the following new subsection:
    ``(g) Application to Persons Performing Services Under a Qualified 
Tax Collection Contract.--Any order issued or action taken by the 
National Taxpayer Advocate pursuant to this section shall apply to 
persons performing services under a qualified tax collection contract 
(as defined in section 6306(b)) to the same extent and in the same 
manner as such order or action applies to the Secretary.''.
    (d) Ineligibility of Individuals Who Commit Misconduct to Perform 
Under Contract.--Section 1203 of the Internal Revenue Service 
Restructuring Act of 1998 (relating to termination of employment for 
misconduct) is amended by adding at the end the following new 
subsection:
    ``(e) Individuals Performing Services Under a Qualified Tax 
Collection Contract.--An individual shall cease to be permitted to 
perform any services under any qualified tax collection contract (as 
defined in section 6306(b) of the Internal Revenue Code of 1986) if 
there is a final determination by the Secretary of the Treasury under 
such contract that such individual committed any act or omission 
described under subsection (b) in connection with the performance of 
such services.''.
    (e) Effective Date.--The amendments made to this section shall take 
effect on the date of the enactment of this Act.

SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS AND SIMILAR 
              PROPERTY.

    (a) In General.--Subparagraph (B) of section 170(e)(1) is amended 
by striking ``or'' at the end of clause (i), by adding ``or'' at the 
end of clause (ii), and by inserting after clause (ii) the following 
new clause:
                            ``(iii) of any patent, copyright (other 
                        than a copyright described in section 
                        1221(a)(3) or 1231(b)(1)(C)), trademark, trade 
                        name, trade secret, know-how, software (other 
                        than software described in section 
                        197(e)(3)(A)(i)), or similar property, or 
                        applications or registrations of such 
                        property,''.
    (b) Certain Donee Income From Intellectual Property Treated as an 
Additional Charitable Contribution.--Section 170 is amended by 
redesignating subsection (m) as subsection (n) and by inserting after 
subsection (l) the following new subsection:
    ``(m) Certain Donee Income From Intellectual Property Treated as an 
Additional Charitable Contribution.--
            ``(1) Treatment as additional contribution.--In the case of 
        a taxpayer who makes a qualified intellectual property 
        contribution, the deduction allowed under subsection (a) for 
        each taxable year of the taxpayer ending on or after the date 
        of such contribution shall be increased (subject to the 
        limitations under subsection (b)) by the applicable percentage 
        of qualified donee income with respect to such contribution 
        which is properly allocable to such year under this subsection.
            ``(2) Reduction in additional deductions to extent of 
        initial deduction.--With respect to any qualified intellectual 
        property contribution, the deduction allowed under subsection 
        (a) shall be increased under paragraph (1) only to the extent 
        that the aggregate amount of such increases with respect to 
        such contribution exceed the amount allowed as a deduction 
        under subsection (a) with respect to such contribution 
        determined without regard to this subsection.
            ``(3) Qualified donee income.--For purposes of this 
        subsection, the term `qualified donee income' means any net 
        income received by or accrued to the donee which is properly 
        allocable to the qualified intellectual property.
            ``(4) Allocation of qualified donee income to taxable years 
        of donor.--For purposes of this subsection, qualified donee 
        income shall be treated as properly allocable to a taxable year 
        of the donor if such income is received by or accrued to the 
        donee for the taxable year of the donee which ends within or 
        with such taxable year of the donor.
            ``(5) 10-year limitation.--Income shall not be treated as 
        properly allocable to qualified intellectual property for 
        purposes of this subsection if such income is received by or 
        accrued to the donee after the 10-year period beginning on the 
        date of the contribution of such property.
            ``(6) Benefit limited to life of intellectual property.--
        Income shall not be treated as properly allocable to qualified 
        intellectual property for purposes of this subsection if such 
        income is received by or accrued to the donee after the 
        expiration of the legal life of such property.
            ``(7) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means the 
        percentage determined under the following table which 
        corresponds to a taxable year of the donor ending on or after 
        the date of the qualified 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.
            ``(8) Qualified intellectual property contribution.--For 
        purposes of this subsection, the term `qualified intellectual 
        property contribution' means any charitable contribution of 
        qualified intellectual property--
                    ``(A) the amount of which taken into account under 
                this section is reduced by reason of subsection (e)(1), 
                and
                    ``(B) with respect to which the donor informs the 
                donee at the time of such contribution that the donor 
                intends to treat such contribution as a qualified 
                intellectual property contribution for purposes of this 
                subsection and section 6050L.
            ``(9) Qualified intellectual property.--For purposes of 
        this subsection, the term `qualified intellectual property' 
        means property described in subsection (e)(1)(B)(iii) (other 
        than property contributed to or for the use of an organization 
        described in subsection (e)(1)(B)(ii)).
            ``(10) Other special rules.--
                    ``(A) Application of limitations on charitable 
                contributions.--Any increase under this subsection of 
                the deduction provided under subsection (a) shall be 
                treated for purposes of subsection (b) as a deduction 
                which is attributable to a charitable contribution to 
                the donee to which such increase relates.
                    ``(B) Net income determined by donee.--The net 
                income taken into account under paragraph (3) shall not 
                exceed the amount of such income reported under section 
                6050L(b)(1).
                    ``(C) Deduction limited to 12 taxable years.--
                Except as may be provided under subparagraph (D)(i), 
                this subsection shall not apply with respect to any 
                qualified intellectual property contribution for any 
                taxable year of the donor after the 12th taxable year 
                of the donor which ends on or after the date of such 
                contribution.
                    ``(D) Regulations.--The Secretary may issue 
                regulations or other guidance to carry out the purposes 
                of this subsection, including regulations or guidance--
                            ``(i) modifying the application of this 
                        subsection in the case of a donor or donee with 
                        a short taxable year, and
                            ``(ii) providing for the determination of 
                        an amount to be treated as net income of the 
                        donee which is properly allocable to qualified 
                        intellectual property in the case of a donee 
                        who uses such property to further a purpose or 
                        function constituting the basis of the donee's 
                        exemption under section 501 (or, in the case of 
                        a governmental unit, any purpose described in 
                        section 170(c)) and does not possess a right to 
                        receive any payment from a third party with 
                        respect to such property.''.
    (c) Reporting Requirements.--
            (1) In general.--Section 6050L (relating to returns 
        relating to certain dispositions of donated property) is 
        amended to read as follows:

``SEC. 6050L. RETURNS RELATING TO CERTAIN DONATED PROPERTY.

    ``(a) Dispositions of Donated Property.--
            ``(1) In general.--If the donee of any charitable deduction 
        property sells, exchanges, or otherwise disposes of such 
        property within 2 years after its receipt, the donee shall make 
        a return (in accordance with forms and regulations prescribed 
        by the Secretary) showing--
                    ``(A) the name, address, and TIN of the donor,
                    ``(B) a description of the property,
                    ``(C) the date of the contribution,
                    ``(D) the amount received on the disposition, and
                    ``(E) the date of such disposition.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Charitable deduction property.--The term 
                `charitable deduction property' means any property 
                (other than publicly traded securities) contributed in 
                a contribution for which a deduction was claimed under 
                section 170 if the claimed value of such property (plus 
                the claimed value of all similar items of property 
                donated by the donor to 1 or more donees) exceeds 
                $5,000.
                    ``(B) Publicly traded securities.--The term 
                `publicly traded securities' means securities for which 
                (as of the date of the contribution) market quotations 
                are readily available on an established securities 
                market.
    ``(b) Qualified Intellectual Property Contributions.--
            ``(1) In general.--Each donee with respect to a qualified 
        intellectual property contribution shall make a return (at such 
        time and in such form and manner as the Secretary may by 
        regulations prescribe) with respect to each specified taxable 
        year of the donee showing--
                    ``(A) the name, address, and TIN of the donor,
                    ``(B) a description of the qualified intellectual 
                property contributed,
                    ``(C) the date of the contribution, and
                    ``(D) the amount of net income of the donee for the 
                taxable year which is properly allocable to the 
                qualified intellectual property (determined without 
                regard to paragraph (10)(B) of section 170(m) and with 
                the modifications described in paragraphs (5) and (6) 
                of such section).
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) In general.--Terms used in this subsection 
                which are also used in section 170(m) have the 
                respective meanings given such terms in such section.
                    ``(B) Specified taxable year.--The term `specified 
                taxable year' means, with respect to any qualified 
                intellectual property contribution, any taxable year of 
                the donee any portion of which is part of the 10-year 
                period beginning on the date of such contribution.
    ``(c) Statement To Be Furnished to Donors.--Every person making a 
return under subsection (a) or (b) shall furnish a copy of such return 
to the donor at such time and in such manner as the Secretary may by 
regulations prescribe.''.
    (d) Coordination With Appraisal Requirements.--Subclause (I) of 
section 170(f)(11)(A)(ii), as added by section 683, is amended by 
inserting ``subsection (e)(1)(B)(iii) or'' before ``section 
1221(a)(1)''.
    (e) Anti-Abuse Rules.--The Secretary of the Treasury may prescribe 
such regulations or other guidance as may be necessary or appropriate 
to prevent the avoidance of the purposes of section 170(e)(1)(B)(iii) 
of the Internal Revenue Code of 1986 (as added by subsection (a)), 
including preventing--
            (1) the circumvention of the reduction of the charitable 
        deduction by embedding or bundling the patent or similar 
        property as part of a charitable contribution of property that 
        includes the patent or similar property,
            (2) the manipulation of the basis of the property to 
        increase the amount of the charitable deduction through the use 
        of related persons, pass-thru entities, or other 
        intermediaries, or through the use of any provision of law or 
        regulation (including the consolidated return regulations), and
            (3) a donor from changing the form of the patent or similar 
        property to property of a form for which different deduction 
        rules would apply.
    (f) Effective Date.--The amendments made by this section shall 
apply to contributions made after June 3, 2004.

SEC. 683. INCREASED REPORTING FOR NONCASH CHARITABLE CONTRIBUTIONS.

    (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) is 
amended by adding after paragraph (10) the following new paragraph:
            ``(11) Qualified appraisal and other documentation for 
        certain contributions.--
                    ``(A) In general.--
                            ``(i) Denial of deduction.--In the case of 
                        an individual, partnership, or corporation, no 
                        deduction shall be allowed under subsection (a) 
                        for any contribution of property for which a 
                        deduction of more than $500 is claimed unless 
                        such person meets the requirements of 
                        subparagraphs (B), (C), and (D), as the case 
                        may be, with respect to such contribution.
                            ``(ii) Exceptions.--
                                    ``(I) Readily valued property.--
                                Subparagraphs (C) and (D) shall not 
                                apply to cash, property described in 
                                section 1221(a)(1), and publicly traded 
                                securities (as defined in section 
                                6050L(a)(2)(B)).
                                    ``(II) Reasonable cause.--Clause 
                                (i) shall not apply if it is shown that 
                                the failure to meet such requirements 
                                is due to reasonable cause and not to 
                                willful neglect.
                    ``(B) Property description for contributions of 
                more than $500.--In the case of contributions of 
                property for which a deduction of more than $500 is 
                claimed, the requirements of this subparagraph are met 
                if the individual, partnership or corporation includes 
                with the return for the taxable year in which the 
                contribution is made a description of such property and 
                such other information as the Secretary may require. 
                The requirements of this subparagraph shall not apply 
                to a C corporation which is not a personal service 
                corporation or a closely held C corporation.
                    ``(C) Qualified appraisal for contributions of more 
                than $5,000.--In the case of contributions of property 
                for which a deduction of more than $5,000 is claimed, 
                the requirements of this subparagraph are met if the 
                individual, partnership, or corporation obtains a 
                qualified appraisal of such property and attaches to 
                the return for the taxable year in which such 
                contribution is made such information regarding such 
                property and such appraisal as the Secretary may 
                require.
                    ``(D) Substantiation for contributions of more than 
                $500,000.--In the case of contributions of property for 
                which a deduction of more than $500,000 is claimed, the 
                requirements of this subparagraph are met if the 
                individual, partnership, or corporation attaches to the 
                return for the taxable year a qualified appraisal of 
                such property.
                    ``(E) Qualified appraisal.--For purposes of this 
                paragraph, the term `qualified appraisal' means, with 
                respect to any property, an appraisal of such property 
                which is treated for purposes of this paragraph as a 
                qualified appraisal under regulations or other guidance 
                prescribed by the Secretary.
                    ``(F) Aggregation of similar items of property.--
                For purposes of determining thresholds under this 
                paragraph, property and all similar items of property 
                donated to 1 or more donees shall be treated as 1 
                property.
                    ``(G) Special rule for pass-thru entities.--In the 
                case of a partnership or S corporation, this paragraph 
                shall be applied at the entity level, except that the 
                deduction shall be denied at the partner or shareholder 
                level.
                    ``(H) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or appropriate to 
                carry out the purposes of this paragraph, including 
                regulations that may provide that some or all of the 
                requirements of this paragraph do not apply in 
                appropriate cases.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after June 3, 2004.

SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRCRAFT.

    (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) is 
amended by adding after paragraph (11) the following new paragraph:
            ``(12) Contributions of motor vehicles, boats, and 
        aircraft.--
                    ``(A) In general.--Except as provided in 
                regulations or other guidance, in the case of a 
                contribution of a specified vehicle to which paragraph 
                (8) applies, no deduction shall be allowed under 
                subsection (a) for such contribution unless the 
                taxpayer obtains a qualified appraisal of the specified 
                vehicle on or before the date of such contribution.
                    ``(B) Exception for inventory property.--
                Subparagraph (A) shall not apply to property which is 
                described in section 1221(a)(1).
                    ``(C) Specified vehicle.--For purposes of this 
                paragraph, the term `specified vehicle' means any--
                            ``(i) motor vehicle manufactured primarily 
                        for use on public streets, roads, and highways,
                            ``(ii) boat, or
                            ``(iii) aircraft.
                    ``(D) Qualified appraisal.--For purposes of this 
                paragraph, the term `qualified appraisal' means any 
                appraisal which is treated for purposes of this 
                paragraph as a qualified appraisal under regulations or 
                other guidance prescribed by the Secretary.
                    ``(E) Regulations or other guidance.--The Secretary 
                shall prescribe such regulations or other guidance as 
                may be necessary to carry out the purposes of this 
                paragraph.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to contributions made after June 3, 2004.

SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS 
              FRANCHISES.

    (a) In General.--Section 197(e) (relating to exceptions to 
definition of section 197 intangible) is amended by striking paragraph 
(6) and by redesignating paragraphs (7) and (8) as paragraphs (6) and 
(7), respectively.
    (b) Conforming Amendments.--
            (1)(A) Section 1056 (relating to basis limitation for 
        player contracts transferred in connection with the sale of a 
        franchise) is repealed.
            (B) The table of sections for part IV of subchapter O of 
        chapter 1 is amended by striking the item relating to section 
        1056.
            (2) Section 1245(a) (relating to gain from disposition of 
        certain depreciable property) is amended by striking paragraph 
        (4).
            (3) Section 1253 (relating to transfers of franchises, 
        trademarks, and trade names) is amended by striking subsection 
        (e).
    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to property 
        acquired after the date of the enactment of this Act.
            (2) Section 1245.--The amendment made by subsection (b)(2) 
        shall apply to franchises acquired after the date of the 
        enactment of this Act.

SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO FEDERAL 
              VENDERS.

    (a) In General.--Section 6331(h) (relating to continuing levy on 
certain payments) is amended by adding at the end the following new 
paragraph:
            ``(3) Increase in levy for certain payments.--Paragraph (1) 
        shall be applied by substituting `100 percent' for `15 percent' 
        in the case of any specified payment due to a vendor of goods 
        or services sold or leased to the Federal Government.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 687. MODIFICATION OF STRADDLE RULES.

    (a) Rules Relating to Identified Straddles.--
            (1) In general.--Subparagraph (A) of section 1092(a)(2) 
        (relating to special rule for identified straddles) is amended 
        to read as follows:
                    ``(A) In general.--In the case of any straddle 
                which is an identified straddle--
                            ``(i) paragraph (1) shall not apply with 
                        respect to identified positions comprising the 
                        identified straddle,
                            ``(ii) if there is any loss with respect to 
                        any identified position of the identified 
                        straddle, the basis of each of the identified 
                        offsetting positions in the identified straddle 
                        shall be increased by an amount which bears the 
                        same ratio to the loss as the unrecognized gain 
                        with respect to such offsetting position bears 
                        to the aggregate unrecognized gain with respect 
                        to all such offsetting positions, and
                            ``(iii) any loss described in clause (ii) 
                        shall not otherwise be taken into account for 
                        purposes of this title.''.
            (2) Identified straddle.--Section 1092(a)(2)(B) (defining 
        identified straddle) is amended--
                    (A) by striking clause (ii) and inserting the 
                following:
                            ``(ii) to the extent provided by 
                        regulations, the value of each position of 
                        which (in the hands of the taxpayer immediately 
                        before the creation of the straddle) is not 
                        less than the basis of such position in the 
                        hands of the taxpayer at the time the straddle 
                        is created, and'', and
                    (B) by adding at the end the following new flush 
                sentence:
                ``The Secretary shall prescribe regulations which 
                specify the proper methods for clearly identifying a 
                straddle as an identified straddle (and the positions 
                comprising such straddle), which specify the rules for 
                the application of this section for a taxpayer which 
                fails to properly identify the positions of an 
                identified straddle, and which specify the ordering 
                rules in cases where a taxpayer disposes of less than 
                an entire position which is part of an identified 
                straddle.''.
            (3) Unrecognized gain.--Section 1092(a)(3) (defining 
        unrecognized gain) is amended by redesignating subparagraph (B) 
        as subparagraph (C) and by inserting after subparagraph (A) the 
        following new subparagraph:
                    ``(B) Special rule for identified straddles.--For 
                purposes of paragraph (2)(A)(ii), the unrecognized gain 
                with respect to any identified offsetting position 
                shall be the excess of the fair market value of the 
                position at the time of the determination over the fair 
                market value of the position at the time the taxpayer 
                identified the position as a position in an identified 
                straddle.''.
            (4) Conforming amendment.--Section 1092(c)(2) is amended by 
        striking subparagraph (B) and by redesignating subparagraph (C) 
        as subparagraph (B).
    (b) Physically Settled Positions.--Section 1092(d) (relating to 
definitions and special rules) is amended by adding at the end the 
following new paragraph:
            ``(8) Special rules for physically settled positions.--For 
        purposes of subsection (a), if a taxpayer settles a position 
        which is part of a straddle by delivering property to which the 
        position relates (and such position, if terminated, would 
        result in a realization of a loss), then such taxpayer shall be 
        treated as if such taxpayer--
                    ``(A) terminated the position for its fair market 
                value immediately before the settlement, and
                    ``(B) sold the property so delivered by the 
                taxpayer at its fair market value.''.
    (c) Repeal of Stock Exception.--
            (1) In general.--Paragraph (3) of section 1092(d) (relating 
        to definitions and special rules) is amended to read as 
        follows:
            ``(3) Special rules for stock.--For purposes of paragraph 
        (1)--
                    ``(A) In general.--The term `personal property' 
                includes--
                            ``(i) any stock which is a part of a 
                        straddle at least 1 of the offsetting positions 
                        of which is a position with respect to such 
                        stock or substantially similar or related 
                        property, or
                            ``(ii) any stock of a corporation formed or 
                        availed of to take positions in personal 
                        property which offset positions taken by any 
                        shareholder.
                    ``(B) Rule for application.--For purposes of 
                determining whether subsection (e) applies to any 
                transaction with respect to stock described in 
                subparagraph (A)(ii), all includible corporations of an 
                affiliated group (within the meaning of section 
                1504(a)) shall be treated as 1 taxpayer.''.
            (2) Conforming amendment.--Section 1258(d)(1) is amended by 
        striking ``; except that the term `personal property' shall 
        include stock''.
    (d) Holding period for dividend exclusion.--The last sentence of 
section 246(c) is amended by inserting: ``, other than a qualified 
covered call option to which section 1092(f) applies'' before the 
period at the end.
    (e) Effective Date.--The amendments made by this section shall 
apply to positions established on or after the date of the enactment of 
this Act.

SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF TAXABLE 
              VACCINES.

    (a) In General.--Paragraph (1) of section 4132(a) (defining taxable 
vaccine) is amended by redesignating subparagraphs (I), (J), (K), and 
(L) as subparagraphs (J), (K), (L), and (M), respectively, and by 
inserting after subparagraph (H) the following new subparagraph:
                    ``(I) Any vaccine against hepatitis A.''
    (b) Effective Date.--
            (1) Sales, etc.--The amendments made by subsection (a) 
        shall apply to sales and uses on or after the first day of the 
        first month which begins more than 4 weeks after the date of 
        the enactment of this Act.
            (2) Deliveries.--For purposes of paragraph (1) and section 
        4131 of the Internal Revenue Code of 1986, in the case of sales 
        on or before the effective date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.

SEC. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF TAXABLE 
              VACCINES.

    (a) In General.--Section 4132(a)(1) (defining taxable vaccine), as 
amended by this Act, is amended by adding at the end the following new 
subparagraph:
                    ``(N) Any trivalent vaccine against influenza.''.
    (b) Effective Date.--
            (1) Sales, etc.--The amendment made by this section shall 
        apply to sales and uses on or after the later of--
                    (A) the first day of the first month which begins 
                more than 4 weeks after the date of the enactment of 
                this Act, or
                    (B) the date on which the Secretary of Health and 
                Human Services lists any vaccine against influenza for 
                purposes of compensation for any vaccine-related injury 
                or death through the Vaccine Injury Compensation Trust 
                Fund.
            (2) Deliveries.--For purposes of paragraph (1) and section 
        4131 of the Internal Revenue Code of 1986, in the case of sales 
        on or before the effective date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.

SEC. 690. EXTENSION OF IRS USER FEES.

    (a) In General.--Section 7528(c) (relating to termination) is 
amended by striking ``December 31, 2004'' and inserting ``September 30, 
2014''.
    (b) Effective Date.--The amendment made by this section shall apply 
to requests after the date of the enactment of this Act.

SEC. 691. COBRA FEES.

    (a) Use of Merchandise Processing Fee.--Section 13031(f) of the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 
58c(f)) is amended--
            (1) in paragraph (1), by aligning subparagraph (B) with 
        subparagraph (A); and
            (2) in paragraph (2), by striking ``commercial operations'' 
        and all that follows through ``processing.'' and inserting 
        ``customs revenue functions as defined in section 415 of the 
        Homeland Security Act of 2002 (other than functions performed 
        by the Office of International Affairs referred to in section 
        415(8) of that Act), and for automation (including the 
        Automation Commercial Environment computer system), and for no 
        other purpose. To the extent that funds in the Customs User Fee 
        Account are insufficient to pay the costs of such customs 
        revenue functions, customs duties in an amount equal to the 
        amount of such insufficiency shall be available, to the extent 
        provided for in appropriations Acts, to pay the costs of such 
        customs revenue functions in the amount of such insufficiency, 
        and shall be available for no other purpose. The provisions of 
        the first and second sentences of this paragraph specifying the 
        purposes for which amounts in the Customs User Fee Account may 
        be made available shall not be superseded except by a provision 
        of law which specifically modifies or supersedes such 
        provisions.''.
    (b) Reimbursement of Appropriations From COBRA Fees.--Section 
13031(f)(3) of the Consolidated Omnibus Budget Reconciliation Act of 
1985 (19 U.S.C. 58c(f)(3)) is amended by adding at the end the 
following:
    ``(E) Nothing in this paragraph shall be construed to preclude the 
use of appropriated funds, from sources other than the fees collected 
under subsection (a), to pay the costs set forth in clauses (i), (ii), 
and (iii) of subparagraph (A).''.
    (c) Sense of Congress; Effective Period for Collecting Fees; 
Standard for Setting Fees.--
            (1) Sense of congress.--The Congress finds that--
                    (A) the fees set forth in paragraphs (1) through 
                (8) of subsection (a) of section 13031 of the 
                Consolidated Omnibus Budget Reconciliation Act of 1985 
                have been reasonably related to the costs of providing 
                customs services in connection with the activities or 
                items for which the fees have been charged under such 
                paragraphs; and
                    (B) the fees collected under such paragraphs have 
                not exceeded, in the aggregate, the amounts paid for 
                the costs described in subsection (f)(3)(A) incurred in 
                providing customs services in connection with the 
                activities or items for which the fees were charged 
                under such paragraphs.
            (2) Effective period; standard for setting fees.--Section 
        13031(j)(3) of the Consolidated Omnibus Budget Reconciliation 
        Act of 1985 is amended to read as follows:
    ``(3)(A) Fees may not be charged under paragraphs (9) and (10) of 
subsection (a) after September 30, 2014.
    ``(B)(i) Subject to clause (ii), Fees may not be charged under 
paragraphs (1) through (8) of subsection (a) after September 30, 2014.
    ``(ii) In fiscal year 2006 and in each succeeding fiscal year for 
which fees under paragraphs (1) through (8) of subsection (a) are 
authorized--
            ``(I) the Secretary of the Treasury shall charge fees under 
        each such paragraph in amounts that are reasonably related to 
        the costs of providing customs services in connection with the 
        activity or item for which the fee is charged under such 
        paragraph, except that in no case may the fee charged under any 
        such paragraph exceed by more than 10 percent the amount 
        otherwise prescribed by such paragraph;
            ``(II) the amount of fees collected under such paragraphs 
        may not exceed, in the aggregate, the amounts paid in that 
        fiscal year for the costs described in subsection (f)(3)(A) 
        incurred in providing customs services in connection with the 
        activity or item for which the fees are charged under such 
        paragraphs;
            ``(III) a fee may not be collected under any such paragraph 
        except to the extent such fee will be expended to pay the costs 
        described in subsection (f)(3)(A) incurred in providing customs 
        services in connection with the activity or item for which the 
        fee is charged under such paragraph; and
            ``(IV) any fee collected under any such paragraph shall be 
        available for expenditure only to pay the costs described in 
        subsection (f)(3)(A) incurred in providing customs services in 
        connection with the activity or item for which the fee is 
        charged under such paragraph.''.
    (d) Clerical Amendments.--Section 13031 of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 is amended--
            (1) in subsection (a)(5)(B), by striking ``$1.75'' and 
        inserting ``$1.75.'';
            (2) in subsection (b)--
                    (A) in paragraph (1)(A), by aligning clause (iii) 
                with clause (ii);
                    (B) in paragraph (7), by striking ``paragraphs'' 
                and inserting ``paragraph''; and
                    (C) in paragraph (9), by aligning subparagraph (B) 
                with subparagraph (A); and
            (3) in subsection (e)(2), by aligning subparagraph (B) with 
        subparagraph (A).
    (e) Study of All Fees Collected by Department of Homeland 
Security.--The Secretary of the Treasury shall conduct a study of all 
the fees collected by the Department of Homeland Security, and shall 
submit to the Congress, not later than September 30, 2005, a report 
containing the recommendations of the Secretary on--
            (1) what fees should be eliminated;
            (2) what the rate of fees retained should be; and
            (3) any other recommendations with respect to the fees that 
        the Secretary considers appropriate.

SEC. 692. SAFE HARBOR FOR CHURCHES.

    (a) In General.--Section 501 is amended by redesignating subsection 
(q) as subsection (r) and by inserting after subsection (p) the 
following new subsection:
    ``(q) Safe Harbor for Churches.--
            ``(1) Statements by religious leaders as private 
        citizens.--An organization described in section 508(c)(1)(A) 
        (relating to churches) shall not fail to be treated as 
        organized and operated exclusively for a religious purpose, or 
        to have participated in, or intervened in any political 
        campaign on behalf of (or in opposition to) any candidate for 
        public office, for purposes of subsection (c)(3), or section 
        170(c)(2) (relating to charitable contributions), 4955, or 4956 
        solely by reason of a statement by a religious leader of such 
        organization which is clearly identified as a statement made as 
        a private citizen and not made on behalf of or in 
        representation of such organization. A statement shall not be 
        treated as clearly identified for purposes of this paragraph if 
        such statement is made in an official publication of such 
        organization, at an official function of such organization, or 
        if such statement is paid for in whole or part by such 
        organization.
            ``(2) Unintentional violations.--An organization described 
        in section 508(c)(1)(A) (relating to churches) shall not fail 
        to be treated as organized and operated exclusively for a 
        religious purpose, or to have participated in, or intervened in 
        any political campaign on behalf of (or in opposition to) any 
        candidate for public office, for purposes of subsection (c)(3), 
        or section 170(c)(2) (relating to charitable contributions) 
        unless such organization or any of its religious leaders so 
        participates or intervenes on more than 3 separate occasions 
        during any calendar year. This paragraph shall not apply with 
        respect to any such participation or intervention which 
        constitutes an intentional disregard by such organization or 
        any of its religious leaders of the prohibition of such 
        activity under subsection (c)(3) or section 170(c)(2).
            ``(3) Cross reference.--

                                ``For tax imposed on churches for 
impermissible activities, see section 4956.''.
    (b) Imposition of Tax on Impermissible Activities.--
            (1) In general.--Subchapter C of chapter 42 is amended by 
        inserting after section 4955 the following new section:

``SEC. 4956. TAX ON IMPERMISSIBLE ACTIVITIES BY CHURCHES.

    ``(a) Imposition of Tax.--There is hereby imposed on each 
organization described in section 508(c)(1)(A) which is an organization 
exempt from tax under section 501(a) by reason of section 501(q)(2), a 
tax equal to--
            ``(1) the highest rate of tax specified by section 11(b), 
        multiplied by
            ``(2) the gross income of such organization for such 
        calendar year.
The tax imposed by this subsection shall be paid by the organization.
    ``(b) Reduction for less than 3 violations.--In the case of an 
organization described in subsection (a) which committed not more than 
2 acts of participation in, or intervention in a political campaign on 
behalf of (or in opposition to) any candidate for public office during 
such calendar year, the amount taken into account under subsection 
(a)(2) shall be the amount which would have been taken into account 
under subsection (a)(2) (but for this subsection) divided by--
            ``(1) 52 in the case of one such act during such calendar 
        year, or
            ``(2) 2 in the case of 2 such acts during such calendar 
        year.
    ``(c) Coordination with section 4955.--The tax imposed under this 
section with respect to any act shall be reduced by the amount of any 
tax imposed under section 4955 with respect to such act.''.
            (2) Clerical amendments.--
                    (A) The table of section for subchapter C of 
                chapter 42 is amended by adding at the end the 
                following new item:

                              ``Sec. 4956. Tax on impermissible 
                                        activities by churches.''.
                    (B) The heading for subchapter C of chapter 42 is 
                amended by striking ``Expenditures'' and inserting 
                ``Activities''.
    (c) Reporting.--
            (1) Requirement.--Subsection (a) of section 6012 is amended 
        by adding at the end the following new paragraph:
            ``(10) Every organization described in section 508(c)(1)(A) 
        with respect to which tax is imposed under section 4956.''.
            (2) Form and manner.--Section 6033 is amended by 
        redesignating subsection (h) as subsection (i) and by inserting 
        after subsection (g) the following new subsection:
    ``(h) Returns Required by Churches Participating in Certain 
Activities.--Any organization on which tax is imposed under section 
4956 shall file a return at such time, in such manner, and including 
such information as the Secretary may prescribe.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to acts occurring after the date of the enactment of this Act.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

SEC. 701. SHORT TITLE.

    This title may be cited as the ``Fair and Equitable Tobacco Reform 
Act of 2004''.

SEC. 702. EFFECTIVE DATE.

    This title and the amendments made by this title shall apply 
beginning with the 2005 marketing year of each kind of tobacco.

  Subtitle A--Termination of Federal Tobacco Quota and Price Support 
                                Programs

SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM AND RELATED PROVISIONS.

    (a) Marketing Quotas.--Part I of subtitle B of title III of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) is 
repealed.
    (b) Processing.--Section 9(b) of the Agricultural Adjustment Act (7 
U.S.C. 609(b)), reenacted with amendments by the Agricultural Marketing 
Agreement Act of 1937, is amended--
            (1) in paragraph (2), by striking ``tobacco,''; and
            (2) in paragraph (6)(B)(i), by striking ``, or, in the case 
        of tobacco, is less than the fair exchange value by not more 
        than 10 per centum,''.
    (c) Declaration of Policy.--Section 2 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1282) is amended by striking 
``tobacco,''.
    (d) Definitions.--Section 301(b) of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1301(b)) is amended--
            (1) in paragraph (3)--
                    (A) by striking subparagraph (C); and
                    (B) by redesignating subparagraph (D) as 
                subparagraph (C);
            (2) in paragraph (6)(A), by striking ``tobacco,'';
            (3) in paragraph (10)--
                    (A) by striking subparagraph (B); and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B);
            (4) in paragraph (11)(B), by striking ``and tobacco'';
            (5) in paragraph (12), by striking ``tobacco,'';
            (6) in paragraph (14)--
                    (A) in subparagraph (A), by striking ``(A)''; and
                    (B) by striking subparagraphs (B), (C), and (D);
            (7) by striking paragraph (15);
            (8) in paragraph (16)--
                    (A) by striking subparagraph (B); and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B);
            (9) by striking paragraph (17); and
            (10) by redesignating paragraph (16) as paragraph (15).
    (e) Parity Payments.--Section 303 of the Agricultural Adjustment 
Act of 1938 (7 U.S.C. 1303) is amended in the first sentence by 
striking ``rice, or tobacco,'' and inserting ``or rice,''.
    (f) Administrative Provisions.--Section 361 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1361) is amended by striking 
``tobacco,''.
    (g) Adjustment of Quotas.--Section 371 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1371) is amended--
            (1) in the first sentence of subsection (a), by striking 
        ``rice, or tobacco'' and inserting ``or rice''; and
            (2) in the first sentence of subsection (b), by striking 
        ``rice, or tobacco'' and inserting ``or rice''.
    (h) Regulations.--Section 375 of the Agricultural Adjustment Act of 
1938 (7 U.S.C. 1375) is amended--
            (1) in subsection (a), by striking ``peanuts, or tobacco'' 
        and inserting ``or peanuts''; and
            (2) by striking subsection (c).
    (i) Eminent Domain.--Section 378 of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1378) is amended--
            (1) in the first sentence of subsection (c), by striking 
        ``cotton, and tobacco'' and inserting ``and cotton''; and
            (2) by striking subsections (d), (e), and (f).
    (j) Burley Tobacco Farm Reconstitution.--Section 379 of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is amended--
            (1) in subsection (a)--
                    (A) by striking ``(a)''; and
                    (B) in paragraph (6), by striking ``, but this 
                clause (6) shall not be applicable in the case of 
                burley tobacco''; and
            (2) by striking subsections (b) and (c).
    (k) Acreage-Poundage Quotas.--Section 4 of the Act of April 16, 
1955 (Public Law 89-12; 7 U.S.C. 1314c note), is repealed.
    (l) Burley Tobacco Acreage Allotments.--The Act of July 12, 1952 (7 
U.S.C. 1315), is repealed.
    (m) Transfer of Allotments.--Section 703 of the Food and 
Agriculture Act of 1965 (7 U.S.C. 1316) is repealed.
    (n) Advance Recourse Loans.--Section 13(a)(2)(B) of the Food 
Security Improvements Act of 1986 (7 U.S.C. 1433c-1(a)(2)(B)) is 
amended by striking ``tobacco and''.
    (o) Tobacco Field Measurement.--Section 1112 of the Omnibus Budget 
Reconciliation Act of 1987 (Public Law 100-203) is amended by striking 
subsection (c).

SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT PROGRAM AND RELATED 
              PROVISIONS.

    (a) Termination of Tobacco Price Support and No Net Cost 
Provisions.--Sections 106, 106A, and 106B of the Agricultural Act of 
1949 (7 U.S.C. 1445, 1445-1, 1445-2) are repealed.
    (b) Parity Price Support.--Section 101 of the Agricultural Act of 
1949 (7 U.S.C. 1441) is amended--
            (1) in the first sentence of subsection (a), by striking 
        ``tobacco (except as otherwise provided herein), corn,'' and 
        inserting ``corn'';
            (2) by striking subsections (c), (g), (h), and (i);
            (3) in subsection (d)(3)--
                    (A) by striking ``, except tobacco,''; and
                    (B) by striking ``and no price support shall be 
                made available for any crop of tobacco for which 
                marketing quotas have been disapproved by producers;''; 
                and
            (4) by redesignating subsections (d) and (e) as subsections 
        (c) and (d), respectively.
    (c) Definition of Basic Agricultural Commodity.--Section 408(c) of 
the Agricultural Act of 1949 (7 U.S.C. 1428(c)) is amended by striking 
``tobacco,''.
    (d) Powers of Commodity Credit Corporation.--Section 5 of the 
Commodity Credit Corporation Charter Act (15 U.S.C. 714c) is amended by 
inserting ``(other than tobacco)'' after ``agricultural commodities'' 
each place it appears.

SEC. 713. LIABILITY.

    The amendments made by this subtitle shall not affect the liability 
of any person under any provision of law so amended with respect to any 
crop of tobacco planted before the effective date of this Act.

 Subtitle B--Transitional Payments to Tobacco Quota Holders and Active 
                          Producers of Tobacco

SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER AND QUOTA HOLDER.

    In this subtitle:
            (1) Active tobacco producer.--The term ``active tobacco 
        producer'' means an owner, operator, landlord, tenant, or 
        sharecropper who--
                    (A) shared in the risk of producing tobacco on a 
                farm where tobacco was produced or considered planted 
                pursuant to a tobacco farm marketing quota or farm 
                acreage allotment established under part I of subtitle 
                B of title III of the Agricultural Adjustment Act of 
                1938 (7 U.S.C. 1311 et seq.) for the 2004 marketing 
                year; and
                    (B) was actively engaged on that farm.
            (2) Considered planted.--The term ``considered planted'' 
        means tobacco that was planted, but failed to be produced as a 
        result of a natural disaster, as determined by the Secretary.
            (3) Tobacco quota holder.--The term ``tobacco quota 
        holder'' means a person that was an owner of a farm, as of July 
        1, 2004, for which a basic tobacco farm marketing quota or farm 
        acreage allotment for quota tobacco was established for the 
        2004 tobacco marketing year.
            (4) Secretary.--The term ``Secretary'' means the Secretary 
        of Agriculture.

SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS.

    (a) Payment Required.--The Secretary shall make payments to each 
eligible tobacco quota holder for the termination of tobacco marketing 
quotas and related price support under subtitle A, which shall 
constitute full and fair compensation for any losses relating to such 
termination.
    (b) Eligibility.--To be eligible to receive a payment under this 
section, a person shall submit to the Secretary an application 
containing such information as the Secretary may require to demonstrate 
to the satisfaction of the Secretary that the person satisfies the 
definition of tobacco quota holder. The application shall be submitted 
within such time, in such form, and in such manner as the Secretary may 
require.
    (c) Individual Base Quota Level.--
            (1) In general.--The Secretary shall establish a base quota 
        level applicable to each eligible tobacco quota holder 
        identified under subsection (b).
            (2) Poundage quotas.--Subject to adjustment under 
        subsection (d), for each kind of tobacco for which the 
        marketing quota is expressed in pounds, the base quota level 
        for each tobacco quota holder shall be equal to the basic 
        tobacco marketing quota under the Agriculture Adjustment Act of 
        1938 for the marketing year in effect on the date of the 
        enactment of this Act for quota tobacco on the farm owned by 
        the tobacco quota holder.
            (3) Marketing quotas other than poundage quotas.--Subject 
        to adjustment under subsection (d), for each kind of tobacco 
        for which there is marketing quota or allotment on an acreage 
        basis, the base quota level for each tobacco quota holder shall 
        be the amount equal to the product obtained by multiplying--
                    (A) the basic tobacco farm marketing quota or 
                allotment for the marketing year in effect on the date 
                of the enactment of this Act, as established by the 
                Secretary for quota tobacco on the farm owned by the 
                tobacco quota holder; by
                    (B) the average county production yield per acre 
                for the county in which the farm is located for the 
                kind of tobacco for that marketing year.
    (d) Treatment of Certain Contracts and Agreements.--
            (1) Effect of purchase contract.--If there was an agreement 
        for the purchase of all or part of a farm described in 
        subsection (c) as of the date of the enactment of this Act, and 
        the parties to the sale are unable to agree to the disposition 
        of eligibility for payments under this section, the Secretary, 
        taking into account any transfer of quota that has been agreed 
        to, shall provide for the equitable division of the payments 
        among the parties by adjusting the determination of who is the 
        tobacco quota holder with respect to particular pounds of the 
        quota.
            (2) Effect of agreement for permanent quota transfer.--If 
        the Secretary determines that there was in existence, as of the 
        day before the date of the enactment of this Act, an agreement 
        for the permanent transfer of quota, but that the transfer was 
        not completed by that date, the Secretary shall consider the 
        tobacco quota holder to be the party to the agreement that, as 
        of that date, was the owner of the farm to which the quota was 
        to be transferred.
    (e) Total Payment Amounts Based on 2002 Marketing Year.--
            (1) Calculation of annual payment amount.--During fiscal 
        years 2005 through 2009, the Secretary shall make payments to 
        all eligible tobacco quota holders identified under subsection 
        (b) in an annual amount equal to the product obtained by 
        multiplying, for each kind of tobacco--
                    (A) $1.40 per pound; by
                    (B) the total national basic marketing quota 
                established under the Agriculture Adjustment Act of 
                1938 for the 2002 marketing year for that kind of 
                tobacco.
            (2) Marketing quotas other than poundage quotas.--For each 
        kind of tobacco for which there is a marketing quota or 
        allotment on an acreage basis, the Secretary shall convert the 
        tobacco farm marketing quotas or allotments established under 
        the Agriculture Adjustment Act of 1938 for the 2002 marketing 
        year for that kind of tobacco as the Secretary considers 
        appropriate.
    (f) Individual Payment Amounts.--The annual payment amount for each 
eligible tobacco quota holder with respect to a kind of tobacco under 
this section shall bear the same ratio to the amount determined by the 
Secretary under subsection (e) with respect to that kind of tobacco as 
the individual base quota level of that eligible tobacco quota holder 
under subsection (c) with respect to that kind of tobacco bears to the 
total base quota levels of all eligible tobacco quota holders with 
respect to that kind of tobacco.
    (g) Death of Tobacco Quota Holder.--If a tobacco quota holder who 
is entitled to payments under this section dies and is survived by a 
spouse or one or more dependents, the right to receive the payments 
shall transfer to the surviving spouse or, if there is no surviving 
spouse, to the estate of the tobacco quota holder.

SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS OF QUOTA TOBACCO.

    (a) Transition Payments Required.--The Secretary shall make 
transition payments under this section to eligible active producers of 
quota tobacco.
    (b) Eligibility.--To be eligible to receive a transition payment 
under this section, a person shall submit to the Secretary an 
application containing such information as the Secretary may require to 
demonstrate to the satisfaction of the Secretary that the person 
satisfies the definition of active producer of quota tobacco. The 
application shall be submitted within such time, in such form, and in 
such manner as the Secretary may require.
    (c) Current Production Base.--The Secretary shall establish a 
production base applicable to each eligible active producer of quota 
tobacco identified under subsection (b). A producer's production base 
shall be equal to the quantity, in pounds, of quota tobacco subject to 
the basic marketing quota marketed or considered planted by the 
producer under the Agriculture Adjustment Act of 1938 for the marketing 
year in effect on the date of the enactment of this Act.
    (d) Total Payment Amounts Based on 2002 Marketing Year.--
            (1) Calculation of annual payment amount.--During fiscal 
        years 2005 through 2009, the Secretary shall make payments to 
        all eligible active producers of quota tobacco identified under 
        subsection (b) in an annual amount equal to the product 
        obtained by multiplying, for each kind of tobacco--
                    (A) $0.60 per pound; by
                    (B) the total national effective marketing quota 
                established under the Agriculture Adjustment Act of 
                1938 for the 2002 marketing year for that kind of 
                tobacco.
            (2) Marketing quotas other than poundage quotas.--For each 
        kind of tobacco for which there is a marketing quota or 
        allotment on an acreage basis, the Secretary shall convert the 
        tobacco farm marketing quotas or allotments established under 
        the Agriculture Adjustment Act of 1938 for the 2002 marketing 
        year for that kind of tobacco to a poundage basis before 
        executing the mathematical equation specified in paragraph (1).
    (e) Individual Payment Amounts.--The annual payment amount for each 
eligible active producer of quota tobacco identified under subsection 
(b) with respect to a kind of tobacco under this section shall bear the 
same ratio to the amount determined by the Secretary under subsection 
(d) with respect to that kind of tobacco as the individual production 
base of that eligible active producer under subsection (c) with respect 
to that kind of tobacco bears to the total production bases determined 
under that subsection for all eligible active producers of that kind of 
tobacco.
    (f) Death of Tobacco Producer.--If a tobacco producer who is 
entitled to payments under this section dies and is survived by a 
spouse or one or more dependents, the right to receive the payments 
shall transfer to the surviving spouse or, if there is no surviving 
spouse, to the estate of the tobacco producer.

SEC. 724. RESOLUTION OF DISPUTES.

    Any dispute regarding the eligibility of a person to receive a 
payment under this subtitle, or the amount of the payment, shall be 
resolved by the county committee established under section 8 of the 
Soil Conservation and Domestic Allotment Act (16 U.S.C. 590h) for the 
county or other area in which the farming operation of the person is 
located.

SEC. 725. SOURCE OF FUNDS FOR PAYMENTS.

    There is hereby appropriated to the Secretary, from amounts in the 
general fund of the Treasury, such amounts as the Secretary needs in 
order to make the payments required by sections 722 and 723, except 
that such amounts shall not exceed the lesser of--
            (1) amounts received in the Treasury under chapter 52 of 
        the Internal Revenue Code of 1986 (relating to tobacco products 
        and cigarette papers and tubes), or
            (2) $9,600,000,000.
                                 <all>
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