IB 
Union Calendar No. 226
108TH CONGRESS 
1ST SESSION H. R. 2896
[Report No. 108–393] 
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 
JULY 25, 2003
Mr. THOMAS introduced the following bill; which was referred to the 
Committee on Ways and Means 
NOVEMBER 21, 2003
Reported with an amendment, committed to the Committee of the Whole 
House on the State of the Union, and ordered to be printed 
[Strike out all after the enacting clause and insert the part printed in italic] 
[For text of introduced bill, see copy of bill as introduced on July 25, 2003] 
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 Representa-
tives 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 2003’’. 
(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 consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; etc. 
TITLE I—CORPORATE REFORM AND GROWTH INCENTIVES 
Subtitle A—Reduction in Corporate Income Tax Rates 
Sec. 1001. Reduced corporate income tax rate for domestic production activities 
income. 
Sec. 1002. Reduced corporate income tax rate for small corporations. 
Subtitle B—Small Business Expensing 
Sec. 1011. 2-year extension of increased expensing for small business. 
Subtitle C—Depreciation 
Sec. 1021. Recovery period for depreciation of certain leasehold improvements 
and restaurant property. 
Subtitle D—Alternative Minimum Tax Relief 
Sec. 1031. Net operating losses and foreign tax credit under alternative minimum 
tax. 
Sec. 1032. Expansion of exemption from alternative minimum tax for small cor-
porations. 
Sec. 1033. Income averaging for farmers not to increase alternative minimum 
tax. 
Subtitle E—S Corporation Reform and Simplification 
Sec. 1041. Members of family treated as 1 shareholder. 
Sec. 1042. Increase in number of eligible shareholders to 100. 
Sec. 1043. Expansion of bank S corporation eligible shareholders to include IRAs. 
Sec. 1044. Disregard of unexercised powers of appointment in determining poten-
tial current beneficiaries of ESBT. 
Sec. 1045. Transfer of suspended losses incident to divorce, etc.
Sec. 1046. Use of passive activity loss and at-risk amounts by qualified sub-
chapter S trust income beneficiaries. 
Sec. 1047. Exclusion of investment securities income from passive income test for 
bank S corporations. 
Sec. 1048. Treatment of bank director shares. 
Sec. 1049. Relief from inadvertently invalid qualified subchapter S subsidiary 
elections and terminations. 
Sec. 1050. Information returns for qualified subchapter S subsidiaries. 
Sec. 1051. Repayment of loans for qualifying employer securities. 
Subtitle F—Protecting Employee Benefits 
Sec. 1061. Treatment of nonqualified deferred compensation plans. 
Sec. 1062. Exclusion of incentive stock options and employee stock purchase plan 
stock options from wages. 
Sec. 1063. Extension of transfers of excess pension assets to retiree health ac-
counts. 
Subtitle G—Treatment of Active Income 
Sec. 1071. Member states of the European Union treated as a single country for 
certain purposes 
Sec. 1072. Look-thru treatment of payments between related controlled foreign 
corporations under foreign personal holding company income 
rules. 
Sec. 1073. Look-thru treatment for sales of partnership interests. 
Sec. 1074. Repeal of foreign personal holding company rules and foreign invest-
ment company rules. 
Sec. 1075. Clarification of treatment of pipeline transportation income. 
Sec. 1076. Determination of foreign personal holding company income with re-
spect to transactions in commodities. 
Sec. 1077. Repeal of CFC rules on foreign base company shipping income. 
Sec. 1078. Modification of subpart F exemption for active financing. 
Sec. 1079. Partial exclusion for income attributable to films used outside the 
United States. 
Subtitle H—Reduction of Double Taxation of Earnings 
Sec. 1081. Interest expense allocation rules. 
Sec. 1082. Recharacterization of overall domestic loss. 
Sec. 1083. Reduction to 2 foreign tax credit baskets. 
Sec. 1084. Look-thru rules to apply to dividends from noncontrolled section 902 
corporations. 
Sec. 1085. Attribution of stock ownership through partnerships to apply in deter-
mining section 902 and 960 credits. 
Sec. 1086. Clarification of treatment of certain transfers of intangible property. 
Sec. 1087. United States property not to include certain assets acquired by deal-
ers in ordinary course of trade or business. 
Sec. 1088. Election not to use average exchange rate for foreign tax paid other 
than in functional currency. 
Sec. 1089. Repeal of withholding tax on dividends from certain foreign corpora-
tions. 
Sec. 1090. Provide equal treatment for interest paid by foreign partnerships and 
foreign corporations. 
Sec. 1091. Treatment of certain dividends of regulated investment companies.
Subtitle I—Other Provisions 
Sec. 1101. Special rules for livestock sold on account of weather-related condi-
tions. 
Sec. 1102. Payment of dividends on stock of cooperatives without reducing pa-
tronage dividends. 
Sec. 1103. Vaccine tax to apply to Hepatitis A vaccine. 
Sec. 1104. Expansion of human clinical trials qualifying for orphan drug credit. 
Sec. 1105. Distributions from publicly traded partnerships treated as qualifying 
income of regulated investment companies. 
Sec. 1106. Improvements related to real estate investment trusts. 
Sec. 1107. Simplification of excise tax imposed on bows and arrows. 
Sec. 1108. Repeal of excise tax on fishing tackle boxes. 
Sec. 1109. Income tax credit to distilled spirits wholesalers for cost of carrying 
Federal excise taxes on bottled distilled spirits. 
Sec. 1110. Capital gain treatment under section 631(b) to apply to outright sales 
by landowners. 
Sec. 1111. Sonar devices suitable for finding fish. 
Sec. 1112. Taxation of certain settlement funds. 
Sec. 1113. Suspension of occupational taxes relating to distilled spirits, wine, and 
beer. 
TITLE II—PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH 
CORPORATE EARNINGS STRIPPING AND EXPATRIATION 
Sec. 2001. Reduction in potential for earnings stripping by further limiting de-
duction for interest on certain indebtedness. 
Sec. 2002. Tax treatment of expatriated entities and their foreign parents. 
Sec. 2003. Excise tax on stock compensation of insiders in expatriated corpora-
tions. 
Sec. 2004. Reinsurance of United States risks in foreign jurisdictions. 
Sec. 2005. Revision of tax rules on expatriation of individuals. 
Sec. 2006. Reporting of taxable mergers and acquisitions. 
Sec. 2007. Studies. 
TITLE III—PROVISIONS RELATING TO TAX SHELTERS 
Subtitle A—Taxpayer-Related Provisions 
Sec. 3001. Penalty for failing to disclose reportable transactions. 
Sec. 3002. Accuracy-related penalty for listed transactions, other reportable trans-
actions having a significant tax avoidance purpose, etc. 
Sec. 3003. Tax shelter exception to confidentiality privileges relating to taxpayer 
communications. 
Sec. 3004. Statute of limitations for taxable years for which required listed trans-
actions not reported. 
Sec. 3005. Disclosure of reportable transactions. 
Sec. 3006. Failure to furnish information regarding reportable transactions. 
Sec. 3007. Modification of penalty for failure to maintain lists of investors. 
Sec. 3008. Penalty on promoters of tax shelters. 
Sec. 3009. Modifications of substantial understatement penalty for nonreportable 
transactions. 
Sec. 3010. Modification of actions to enjoin certain conduct related to tax shelters 
and reportable transactions. 
Sec. 3011. Penalty on failure to report interests in foreign financial accounts.
Sec. 3012. Regulation of individuals practicing before the Department of the 
Treasury. 
Subtitle B—Other Provisions 
Sec. 3021. Treatment of stripped interests in bond and preferred stock funds, etc. 
Sec. 3022. Minimum holding period for foreign tax credit on withholding taxes 
on income other than dividends. 
Sec. 3023. Disallowance of certain partnership loss transfers. 
Sec. 3024. No reduction of basis under section 734 in stock held by partnership 
in corporate partner. 
Sec. 3025. Repeal of special rules for FASITS. 
Sec. 3026. Limitation on transfer of built-in losses on REMIC residuals. 
Sec. 3027. Clarification of banking business for purposes of determining invest-
ment of earnings in United States property. 
Sec. 3028. Modifications related to certain small insurance companies. 
Sec. 3029. Definition of insurance company for section 831. 
Sec. 3030. Denial of deduction for interest on underpayments attributable to non-
disclosed reportable transactions. 
Sec. 3031. Clarification of rules for payment of estimated tax for certain deemed 
asset sales. 
Sec. 3032. Recognition of gain from the sale of a principal residence acquired in 
a like-kind exchange within 5 years of sale. 
Sec. 3033. Prevention of mismatching of interest and original issue discount de-
ductions and income inclusions in transactions with related for-
eign persons. 
Sec. 3034. Exclusion from gross income for interest on overpayments of income 
tax by individuals. 
Sec. 3035. Deposits made to suspend running of interest on potential underpay-
ments. 
Sec. 3036. Partial payment of tax liability in installment agreements. 
Sec. 3037. Extension of IRS user fees. 
TITLE IV—TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS 
Sec. 4001. Repeal of exclusion for extraterritorial income. 
Sec. 4002. COBRA fees.
TITLE I—CORPORATE REFORM 
AND GROWTH INCENTIVES 
Subtitle A—Reduction in Corporate 
Income Tax Rates
SEC. 1001. REDUCED CORPORATE INCOME TAX RATE FOR 
DOMESTIC PRODUCTION ACTIVITIES INCOME. 
(a) LIMITATION ON TAX ON QUALIFIED PRODUCTION 
ACTIVITIES INCOME.—Section 11 is amended by redesig-
nating subsections (c) and (d) as subsections (d) and (e), 
respectively, and by inserting after subsection (b) the fol-
lowing new subsection: 
‘‘(c) LIMITATION ON TAX ON QUALIFIED PRODUCTION 
ACTIVITIES INCOME.—
‘‘(1) IN GENERAL.—If a corporation has quali-
fied 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 en-
acted 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 ac-
tivities income (or, if less, taxable income). 
‘‘(2) QUALIFIED
PRODUCTION
ACTIVITIES
IN-
COME.—
‘‘(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 re-
ceipts, and 
‘‘(III) a ratable portion of other 
deductions, expenses, and losses that 
are not directly allocable to such re-
ceipts 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, ex-
change, 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 architec-
tural 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 pro-
duction 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 per-
sonnel, directors, and producers.
‘‘(B) EXCEPTION.—Such term does not in-
clude 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 pro-
duction gross receipts’ shall not include any 
gross receipts of the taxpayer derived from prop-
erty 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 Decem-
ber 31, 2003. 
SEC. 1002. REDUCED CORPORATE INCOME TAX RATE FOR 
SMALL CORPORATIONS. 
(a) IN GENERAL.—Subsection (b) of section 11 (relat-
ing to tax imposed on corporations) is amended by redesig-
nating paragraph (2) as paragraph (6) and by striking 
paragraph (1) and inserting the following new paragraphs: 
‘‘(1) FOR
TAXABLE
YEARS
BEGINNING
AFTER 
2011.—In the case of taxable years beginning after 
2011, 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 2009, 
2010, OR 2011.—In the case of taxable years beginning 
in 2009, 2010, or 2011, the amount of the tax im-
posed by subsection (a) shall be determined in accord-
ance with the following table:
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$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 2007 OR 
2008.—In the case of taxable years beginning in 2007 
or 2008, the amount of the tax imposed by subsection 
(a) shall be determined in accordance with the fol-
lowing table:
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$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 2004, 
2005, OR 2006.—In the case of taxable years beginning 
in 2004, 2005, or 2006, the amount of the tax im-
posed by subsection (a) shall be determined in accord-
ance with the following table:
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$1,000,000.
$13,750, plus 33% of the excess over 
$75,000.
‘‘If taxable income is: 
The tax is: 
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 
2012.—
‘‘(i) IN GENERAL.—In the case of tax-
able years beginning before 2012 with re-
spect to a corporation which has taxable in-
come in excess of the applicable amount for 
any taxable year, the amount of tax deter-
mined 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)—
‘‘In the case of any taxable year
beginning during: 
The applicable 
amount is: 
The maximum 
increase 
amount is: 
2004, 2005, or 2006 ...................................
$1,000,000
$21,000
2007 or 2008 ...............................................
$1,000,000
$30,250
2009, 2010, or 2011 ...................................
$5,000,000
$110,250. 
‘‘(B) HIGHER INCOME CORPORATIONS.—In 
the case of a corporation which has taxable in-
come in excess of $20,000,000 ($15,000,000 in 
the case of taxable years beginning before 2012),
the amount of the tax determined under the fore-
going provisions of this subsection shall be in-
creased 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 2012).’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 904(b)(3)(D)(ii) is amended to read 
as follows: 
‘‘(ii) in the case of a corporation, sec-
tion 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 sec-
tion 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 Decem-
ber 31, 2003.
Subtitle B—Small Business 
Expensing 
SEC. 1011. 2-YEAR EXTENSION OF INCREASED EXPENSING 
FOR SMALL BUSINESS. 
Subsections (b), (c), and (d) of section 179 (as amend-
ed by the Jobs and Growth Tax Relief Reconciliation Act 
of 2003) are each amended by striking ‘‘2006’’ each place 
it appears and inserting ‘‘2008’’.
Subtitle C—Depreciation 
SEC. 1021. RECOVERY PERIOD FOR DEPRECIATION OF CER-
TAIN LEASEHOLD IMPROVEMENTS AND RES-
TAURANT 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 improve-
ment property placed in service before Jan-
uary 1, 2006, and
‘‘(v) any qualified restaurant property 
placed in service before January 1, 2006.’’
(b) QUALIFIED LEASEHOLD IMPROVEMENT PROP-
ERTY.—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 improve-
ment 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 im-
provement 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 quali-
fied leasehold improvement property under sub-
paragraph (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 sub-
stantial 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 rep-
resenting the adjusted basis of other prop-
erty 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 sec-
tion 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 METH-
OD.—
(1) Paragraph (3) of section 168(b) is amended 
by adding at the end the following new subpara-
graphs: 
‘‘(G) Qualified leasehold improvement prop-
erty described in subsection (e)(6). 
‘‘(H) Qualified restaurant property de-
scribed 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) .......................................................................
‘‘(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.
Subtitle D—Alternative Minimum 
Tax Relief 
SEC. 1031. NET OPERATING LOSSES AND FOREIGN TAX 
CREDIT UNDER ALTERNATIVE MINIMUM TAX. 
(a) NET OPERATING LOSSES.—
(1) IN GENERAL.—Subparagraph (A) of section 
56(d)(1) is amended to read as follows: 
‘‘(A) the amount of such deduction shall not 
exceed the applicable percentage (determined 
under paragraph (3)) of the alternative min-
imum taxable income determined without regard 
to such deduction, and’’. 
(2) APPLICABLE
PERCENTAGE.—Subsection (d) 
of section 56 is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(3) APPLICABLE
PERCENTAGE.—For purposes 
of paragraph (1)(A)—
‘‘For taxable years beginning 
The applicable 
in calendar year—
percentage is—
2005, 2006, or 2007 ...................................................................
2008 or 2009 ..............................................................................
2010 ............................................................................................
2011 ............................................................................................
2012 or thereafter ......................................................................
100.’’
(b) FOREIGN TAX CREDIT.—
section 1301 (relating to averaging of farm income) 
shall not apply in computing the regular tax liabil-
ity.’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 2002. 
Subtitle E—S Corporation Reform 
and Simplification 
SEC. 1041. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER. 
(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
SHAREHOLDER.—
‘‘(A) IN
GENERAL.—For purpose of sub-
section (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 re-
spect to which an election is in effect under 
subparagraph (D), all members of the fam-
ily shall be treated as 1 shareholder.
‘‘(B) MEMBERS OF THE FAMILY.—For pur-
pose 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 pur-
poses of this paragraph, an individual shall 
not be considered a common ancestor if, as 
of the later of the effective date of this para-
graph or the time the election under section 
1362(a) is made, the individual is more 
than 3 generations removed from the young-
est generation of shareholders who would 
(but for this clause) be members of the fam-
ily. For purposes of the preceding sentence, 
a spouse (or former spouse) shall be treated 
as being of the same generation as the indi-
vidual to which such spouse is (or was) 
married. 
‘‘(C) EFFECT OF ADOPTION, ETC.—In deter-
mining whether any relationship specified in 
subparagraph (B) exists, the rules of section 
152(b)(2) shall apply.
‘‘(D) ELECTION.—An election under sub-
paragraph (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 termi-
nated 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 
1049, 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, 2003. 
(2) SUBSECTION (b).—The amendments made by 
subsection (b) shall apply to elections and termi-
nations made after December 31, 2003.
SEC. 1042. INCREASE IN NUMBER OF ELIGIBLE SHARE-
HOLDERS 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 Decem-
ber 31, 2003. 
SEC. 1043. 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 in-
serting 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 re-
tirement account under section 408(a), in-
cluding 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 indi-
vidual for whose benefit the trust was cre-
ated 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 ex-
emptions) is amended by striking ‘‘or’’ at the end of para-
graph (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 con-
stitutes an individual retirement account under sec-
tion 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 inde-
pendent 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 unre-
lated party, 
‘‘(E) such trust does not pay any commis-
sions, 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 cor-
poration 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. 1044. DISREGARD OF UNEXERCISED POWERS OF AP-
POINTMENT IN DETERMINING POTENTIAL 
CURRENT BENEFICIARIES OF ESBT. 
(a) IN GENERAL.—Section 1361(e)(2) (defining poten-
tial 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 Decem-
ber 31, 2003. 
SEC. 1045. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 
DIVORCE, ETC. 
(a) IN GENERAL.—Section 1366(d)(2) (relating to in-
definite 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 corpora-
tion 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 Decem-
ber 31, 2003. 
SEC. 1046. 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 spe-
cial rule for qualified subchapter S trust) is amended—
(1) by striking ‘‘and’’ at the end of subpara-
graph (A), 
(2) by striking the period at the end of subpara-
graph (B) and inserting ‘‘, and’’, and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(C) for purposes of applying sections 465 
and 469 to the beneficiary of the trust, the dis-
position of the S corporation stock by the trust 
shall be treated as a disposition by such bene-
ficiary.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transfers made after December 31, 
2003.
SEC. 1047. EXCLUSION OF INVESTMENT SECURITIES IN-
COME 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 Fed-
eral Home Loan Bank, or the Federal Agri-
cultural 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 Decem-
ber 31, 2003. 
SEC. 1048. TREATMENT OF BANK DIRECTOR SHARES. 
(a) IN GENERAL.—Section 1361 (defining S corpora-
tion) 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 Com-
pany 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 Sys-
tem 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 con-
trols (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 re-
spect to restricted bank director stock, see section 
1368(f).’’.
(b) DISTRIBUTIONS.—Section 1368 (relating to dis-
tributions) is amended by adding at the end the following 
new subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di-
rector 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 di-
rector, 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 Decem-
ber 31, 2003. 
SEC. 1049. RELIEF FROM INADVERTENTLY INVALID QUALI-
FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 
AND TERMINATIONS. 
(a) IN GENERAL.—Section 1362(f) (relating to inad-
vertent 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 corpora-
tion or a qualified subchapter S subsidiary, as 
the case may be, or’’, 
(4) by amending paragraph (4) to read as fol-
lows: 
‘‘(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 ad-
justments (consistent with the treatment of such cor-
poration as an S corporation or a qualified sub-
chapter S subsidiary, as the case may be) as may be 
required by the Secretary with respect to such pe-
riod,’’, 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 Decem-
ber 31, 2003. 
SEC. 1050. INFORMATION RETURNS FOR QUALIFIED SUB-
CHAPTER 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 re-
quired 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 Decem-
ber 31, 2003.
SEC. 1051. REPAYMENT OF LOANS FOR QUALIFYING EM-
PLOYER SECURITIES. 
(a) IN GENERAL.—Subsection (f) of section 4975 (re-
lating 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 de-
scribed in section 1368(a)) with respect to S corpora-
tion stock that constitutes qualifying employer securi-
ties, which in accordance with the plan provisions is 
used to make payments on a loan described in sub-
section (d)(3) the proceeds of which were used to ac-
quire 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 allo-
cated 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 cor-
poration stock made after December 31, 2003.
Subtitle F—Protecting Employee 
Benefits
SEC. 1061. TREATMENT OF NONQUALIFIED DEFERRED COM-
PENSATION PLANS. 
(a) IN GENERAL.—Subpart A of part I of subchapter 
D of chapter 1 is amended by adding at the end the fol-
lowing new section: 
‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 
COMPENSATION UNDER NONQUALIFIED DE-
FERRED 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 pre-
viously included in gross income) shall be in-
cludible in gross income for the taxable year un-
less 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 COM-
PENSATION.—
‘‘(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 under-
payments 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 for-
feiture. 
‘‘(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 deter-
mined by the Secretary (except as provided 
in subparagraph (B)(i)), 
‘‘(ii) disability (as defined by section 
223(d) of the Social Security Act), 
‘‘(iii) death, 
‘‘(iv) a specified time (or pursuant to 
a fixed schedule) specified under the plan at 
the date of the deferral of such compensa-
tion, 
‘‘(v) to the extent provided by the Sec-
retary, a change in the ownership or effec-
tive control of the corporation, or in the 
ownership of a substantial portion of the as-
sets 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 dis-
tributions may not be made earlier than 6 
months after the date of separation from
service. For purposes of the preceding sen-
tence, a specified employee is a key em-
ployee (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 ‘un-
foreseeable emergency’ means a severe 
financial hardship to the participant 
resulting from a sudden and unex-
pected illness or accident of the partici-
pant, the participant’s spouse, or a de-
pendent (as defined in section 152(a)) 
of the participant, loss of the partici-
pant’s property due to casualty, or 
other similar extraordinary and un-
foreseeable circumstances arising as a 
result of events beyond the control of 
the participant. 
‘‘(II) LIMITATION
ON
DISTRIBU-
TIONS.—The requirement of subpara-
graph (A)(vi) is met only if, as deter-
mined under regulations of the Sec-
retary, 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 in-
surance 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). 
‘‘(3) ACCELERATION OF BENEFITS.—The require-
ments 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 regu-
lations 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 per-
formed during a taxable year may be deferred at 
the participant’s election only if the election to 
defer such compensation is made during the pre-
ceding taxable year or at such other time as pro-
vided in regulations. In the case of the first year 
in which a participant becomes eligible to par-
ticipate in the plan, such election may be made 
with respect to services to be performed subse-
quent to the election within 30 days after the 
date the participant becomes eligible to partici-
pate in such plan. 
‘‘(C) CHANGES IN TIME AND FORM OF DIS-
TRIBUTION.—The requirements of this subpara-
graph 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 pay-
ment—
‘‘(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 re-
quires 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 elec-
tion 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 held in a trust or set aside (directly or 
indirectly) in another arrangement, as determined by 
the Secretary, for purposes of paying deferred com-
pensation 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 a nonqualified deferred compensation plan,
there is a transfer of property within the meaning of 
section 83 as of the earlier of—
‘‘(A) the date on which the plan first pro-
vides that assets will become restricted to the 
provision of benefits under the plan in connec-
tion with a change in the employer’s financial 
health, or 
‘‘(B) the date on which assets are so re-
stricted. 
‘‘(3) INCOME INCLUSION FOR OFFSHORE TRUSTS 
AND EMPLOYER’S FINANCIAL HEALTH.—For each tax-
able year that assets treated as transferred under this 
subsection remain set aside in a trust or other ar-
rangement subject to paragraph (1) or (2), any in-
crease 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 pre-
viously included in income). 
‘‘(4) INTEREST ON TAX LIABILITY PAYABLE WITH 
RESPECT TO TRANSFERRED PROPERTY.—
‘‘(A) IN
GENERAL.—If amounts are re-
quired 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
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) at-
tributable 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 regula-
tions—
‘‘(1) providing for the determination of amounts 
of deferral in the case of a nonqualified deferred com-
pensation 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 applica-
tion 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 (10), by strik-
ing the period at the end of paragraph (11) and in-
serting ‘‘, and’’, and by inserting after paragraph 
(11) the following new paragraph: 
‘‘(12) the total amount of deferrals under a non-
qualified 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 para-
graph (12), the Secretary (by regulation) may estab-
lish a minimum amount of deferrals below which 
paragraph (12) does not apply and may provide that 
paragraph (12) does not apply with respect to 
amounts of deferrals which are not reasonably ascer-
tainable.’’. 
(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.—Except as otherwise provided 
in this subsection, the amendments made by this sec-
tion shall apply to amounts deferred in taxable years 
beginning after December 31, 2003. 
(2) AMOUNTS DEFERRED IN 2004 UNDER CERTAIN 
IRREVOCABLE
ELECTIONS
AND
BINDING
ARRANGE-
MENTS.—The amendments made by this section shall 
not apply to amounts deferred in taxable years begin-
ning after December 31, 2003, and before January 1, 
2005, pursuant to an irrevocable election or binding 
arrangement made before October 24, 2003. 
(3) EARNINGS ATTRIBUTABLE TO AMOUNT PRE-
VIOUSLY DEFERRED.—The amendments made by this 
section shall apply to earnings on deferred compensa-
tion 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 Inter-
nal Revenue Code of 1986, as added by this section. 
(f) GUIDANCE RELATING TO TERMINATION OF CER-
TAIN 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 non-
qualified deferred compensation plan adopted on or before 
December 31, 2003, may, without violating the require-
ments of paragraphs (2), (3), and (4) of section 409A(a)(2) 
of the Internal Revenue Code of 1986 (as added by this sec-
tion), terminate participation or cancel an outstanding de-
ferral election with regard to amounts earned after Decem-
ber 31, 2003, if such amounts are includible in income as 
earned. 
SEC. 1062. 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 incen-
tive stock option (as defined in section 422(b)) or 
under an employee stock purchase plan (as de-
fined 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 incen-
tive 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 sec-
tion 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: 
‘‘(11) 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 incen-
tive stock option (as defined in section 422(b)) or 
under an employee stock purchase plan (as de-
fined 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 strik-
ing ‘‘or’’ at the end of paragraph (16), by striking the 
period at the end of paragraph (17) and inserting ‘‘; 
or’’, and by inserting after paragraph (17) the fol-
lowing new paragraph: 
‘‘(18) remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) or
under an employee stock purchase plan (as de-
fined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(b) WAGE WITHHOLDING NOT REQUIRED ON DIS-
QUALIFYING DISPOSITIONS.—Section 421(b) (relating to ef-
fect 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 disposi-
tion described in the preceding sentence.’’. 
(c) WAGE WITHHOLDING NOT REQUIRED ON COM-
PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER-
CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 
423(c) (relating to special rule where option price is be-
tween 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.
SEC. 1063. EXTENSION OF TRANSFERS OF EXCESS PENSION 
ASSETS TO RETIREE HEALTH ACCOUNTS. 
Paragraph (5) of section 420(b) (relating to expira-
tion) is amended by striking ‘‘December 31, 2005’’ and in-
serting ‘‘December 31, 2013’’. 
Subtitle G—Treatment of Active 
Income 
SEC. 1071. MEMBER STATES OF THE EUROPEAN UNION 
TREATED AS A SINGLE COUNTRY FOR CER-
TAIN PURPOSES. 
(a) IN GENERAL.—Subsection (d) of section 954 is 
amended by adding at the end the following new paragraph: 
‘‘(5) TREATMENT OF MEMBER STATES OF THE 
EUROPEAN UNION.—For purposes of this subsection 
and subsection (e), in the case of a controlled foreign 
corporation which is created or organized under the 
laws of a member state of the European Union, all 
member states of the European Union shall be treated 
as 1 country.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years of foreign corporations 
beginning after December 31, 2008, and to taxable years 
of United States shareholders with or within which such 
taxable years of foreign corporations end.
SEC. 1072. LOOK-THRU TREATMENT OF PAYMENTS BE-
TWEEN 
RELATED 
CONTROLLED 
FOREIGN 
CORPORATIONS UNDER FOREIGN PERSONAL 
HOLDING COMPANY INCOME RULES. 
(a) IN GENERAL.—Subsection (c) of section 954 is 
amended by adding after paragraph (3) the following new 
paragraph: 
‘‘(4) LOOK-THRU IN THE CASE OF RELATED CON-
TROLLED FOREIGN CORPORATIONS.—For purposes of 
this subsection, dividends, interest, rents, and royal-
ties received or accrued from a controlled foreign cor-
poration which is a related person (as defined in sub-
section (d)(3)) 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). The 
Secretary shall prescribe such regulations as may be 
appropriate to prevent the abuse of the purposes of 
this paragraph.’’
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years of foreign corporations 
beginning after December 31, 2006, and to taxable years 
of United States shareholders with or within which such 
taxable years of foreign corporations end.
SEC. 1073. LOOK-THRU TREATMENT FOR SALES OF PART-
NERSHIP INTERESTS. 
(a) IN GENERAL.—Section 954(c) (defining foreign 
personal holding company income) is amended by adding 
after paragraph (4) the following new paragraph: 
‘‘(5) LOOK-THRU RULE FOR CERTAIN PARTNER-
SHIP 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 cor-
poration 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. 
‘‘(B) 25-PERCENT OWNER.—For purposes of 
this paragraph, the term ‘25-percent owner’ 
means a controlled foreign corporation which 
owns (within the meaning of section 958(a)) 25 
percent or more of the capital or profits interest 
in the partnership.’’
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years of foreign corporations 
beginning after December 31, 2006, and to taxable years 
of United States shareholders with or within which such 
taxable years of foreign corporations end.
SEC. 1074. REPEAL OF FOREIGN PERSONAL HOLDING COM-
PANY RULES AND FOREIGN INVESTMENT 
COMPANY RULES. 
(a) GENERAL RULE.—The following provisions are 
hereby repealed: 
(1) Part III of subchapter G of chapter 1 (relat-
ing to foreign personal holding companies). 
(2) Section 1246 (relating to gain on foreign in-
vestment 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 para-
graph (7) (as so redesignated), and 
(D) by striking ‘‘; and’’ at the end of para-
graph (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: 
‘‘(H) 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 indi-
vidual who is to perform the services, 
or 
‘‘(II) the individual who is to per-
form the services is designated (by 
name or by description) in the con-
tract, 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 out-
standing stock of the corporation is owned, di-
rectly or indirectly, by or for the individual who
has performed, is to perform, or may be des-
ignated (by name or by description) as the one 
to perform, such services.’’
(c) CONFORMING AMENDMENTS.—
(1) Clause (iii) of section 1(h)(11)(C) is amended 
by striking ‘‘a foreign personal holding company (as 
defined in section 552), a foreign investment company 
(as defined in section 1246(b)), or’’. 
(2) Paragraph (2) of section 171(c) is amend-
ed—
(A) by striking ‘‘, or by a foreign personal 
holding company, as defined in section 552’’, 
and 
(B) by striking ‘‘or foreign personal holding 
company’’. 
(3) Paragraph (2) of section 245(a) is amended 
by striking ‘‘foreign personal holding company or’’. 
(4) Section 312 is amended by striking sub-
section (j). 
(5) 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)’’.
(6) Subsection (e) of section 443 is amended by 
striking paragraph (3) and by redesignating para-
graphs (4) and (5) as paragraphs (3) and (4), respec-
tively. 
(7) 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). 
(8) 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). 
(9) Paragraph (1) of section 562(b) is amended 
by striking ‘‘or a foreign personal holding company 
described in section 552’’. 
(10) Section 563 is amended—
(A) by striking subsection (c), 
(B) by redesignating subsection (d) as sub-
section (c), and 
(C) by striking ‘‘subsection (a), (b), or (c)’’ 
in subsection (c) (as so redesignated) and insert-
ing ‘‘subsection (a) or (b)’’. 
(11) Subsection (d) of section 751 is amended by 
adding ‘‘and’’ at the end of paragraph (2), by strik-
ing paragraph (3), by redesignating paragraph (4) as 
paragraph (3), and by striking ‘‘paragraph (1), (2), 
or (3)’’ in paragraph (3) (as so redesignated) and in-
serting ‘‘paragraph (1) or (2)’’. 
(12) 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. 
(13)(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 insur-
ance income (as defined in section 953(c)(2)), the Sec-
retary 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 sec-
tion 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. share-
holder 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 begin-
ning 1 month earlier than the majority U.S. share-
holder 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 de-
scribed 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 representa-
tive period as the Secretary may prescribe.’’ 
(14) 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 pro-
vided in subparagraph (E)(iii) or para-
graph (3)(I), any amount includible in 
gross income under section 1293 (relating to 
certain passive foreign investment compa-
nies).’’
(15)(A) Subparagraph (A) of section 904(g)(1) 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(g) is amended by striking ‘‘FOREIGN PER-
SONAL HOLDING OR’’. 
(16) Section 951 is amended by striking sub-
sections (c) and (d) and by redesignating subsections 
(e) and (f) as subsections (c) and (d), respectively. 
(17) Paragraph (3) of section 989(b) is amended 
by striking ‘‘, 551(a),’’. 
(18) Paragraph (5) of section 1014(b) is amend-
ed by inserting ‘‘and before January 1, 2008,’’ after 
‘‘August 26, 1937,’’. 
(19) Subsection (a) of section 1016 is amended 
by striking paragraph (13). 
(20)(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, 2006.
(21) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly. 
(22) Subsection (d) of section 1248 is amended 
by striking paragraph (5) and by redesignating para-
graphs (6) and (7) as paragraphs (5) and (6), respec-
tively. 
(23) Paragraph (2) of section 1260(c) is amend-
ed by striking subparagraphs (H) and (I) and by re-
designating subparagraph (J) as subparagraph (H). 
(24)(A) Subparagraph (F) of section 1291(b)(3) 
is amended by striking ‘‘551(d), 959(a),’’ and insert-
ing ‘‘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 
2003)’’ after ‘‘section 1246’’. 
(25) Paragraph (2) of section 1294(a) is amend-
ed 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 elect-
ing fund for the taxable year if any amount is in-
cludible in the gross income of the taxpayer under sec-
tion 951 with respect to such fund for such taxable 
year.’’
(26) Section 6035 is hereby repealed. 
(27) Subparagraph (D) of section 6103(e)(1) is 
amended by striking clause (iv) and redesignating 
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively. 
(28) 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 with-
out assessing, at any time within 6 years after 
the return was filed.’’ 
(29) Subsection (a) of section 6679 is amended—
(A) by striking ‘‘6035, 6046, or 6046A’’ in 
paragraph (1) and inserting ‘‘6046 or 6046A’’, 
and 
(B) by striking paragraph (3). 
(30) Sections 170(f)(10)(A), 508(d), 4947, and 
4948(c)(4) are each amended by striking ‘‘556(b)(2),’’ 
each place it appears.
(31) The table of parts for subchapter G of chap-
ter 1 is amended by striking the item relating to part 
III. 
(32) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the 
items relating to sections 1246 and 1247. 
(33) The table of sections for subpart A of part 
III of subchapter A of chapter 61 is amended by strik-
ing the item relating to section 6035. 
(34) 
Sections 
163(e)(3)(B)(i) 
and 
267(a)(3)(B)(i) are each amended by—
(A) striking ‘‘a foreign personal holding 
company (as defined in section 552),’’, and 
(B) striking the comma after ‘‘(as defined 
in section 957)’’. 
(d) EFFECTIVE DATE.—Except as otherwise provided 
in this section, the amendments made by this section shall 
apply to taxable years of foreign corporations beginning 
after December 31, 2006, and to taxable years of United 
States shareholders with or within which such taxable years 
of foreign corporations end. 
SEC. 1075. CLARIFICATION OF TREATMENT OF PIPELINE 
TRANSPORTATION INCOME. 
(a) IN GENERAL.—Section 954(g)(1) (defining foreign 
base company oil related income) is amended by striking
‘‘or’’ at the end of subparagraph (A), by striking the period 
at the end of subparagraph (B) and inserting ‘‘, or’’, and 
by inserting after subparagraph (B) the following new sub-
paragraph: 
‘‘(C) the pipeline transportation of oil or 
gas within such foreign country.’’
(b) 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. 1076. DETERMINATION OF FOREIGN PERSONAL HOLD-
ING 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 
(6)(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 de-
scribed in paragraph (1), (2), or (8) of sec-
tion 1221(a), or’’. 
(b) DEFINITION AND SPECIAL RULES.—Subsection (c) 
of section 954 is amended by adding after paragraph (5) 
the following new paragraph: 
‘‘(6) DEFINITION AND SPECIAL RULES RELATING 
TO COMMODITY TRANSACTIONS.—
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—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 de-
fined in section 1221(b)(2), determined—
‘‘(I) without regard to subpara-
graph (A)(ii) thereof, 
‘‘(II) by applying subparagraph 
(A)(i) thereof by substituting ‘ordinary 
property or property described in sec-
tion 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 ac-
cordance with section 1221(a)(7). 
‘‘(B) 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 per-
sons.’’
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transactions entered into after Decem-
ber 31, 2004. 
SEC. 1077. REPEAL OF CFC RULES ON FOREIGN BASE COM-
PANY SHIPPING INCOME. 
(a) ELIMINATION OF FOREIGN BASE COMPANY SHIP-
PING INCOME.—Section 954 (relating to foreign base com-
pany 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 ACTIVI-
TIES.—Subparagraph (A) of section 954(c)(2) is amended 
by adding at the end the following new sentence: ‘‘For pur-
poses 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), re-
spectively. 
(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. 1078. MODIFICATION OF SUBPART F EXEMPTION 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 ac-
tivity 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 perform-
ance of the activity by its employees and 
such compensation is treated as earned by 
such person in its home country for pur-
poses of the home country’s tax laws.’’. 
(b) 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. 1079. PARTIAL EXCLUSION FOR INCOME ATTRIB-
UTABLE 
TO 
FILMS 
USED 
OUTSIDE 
THE 
UNITED STATES. 
(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 139 the following new 
section: 
‘‘SEC. 139A. INCOME ATTRIBUTABLE TO FILMS USED OUT-
SIDE THE UNITED STATES. 
‘‘(a) EXCLUSION.—
‘‘(1) IN GENERAL.—There shall be excluded from 
gross income an amount equal to the applicable per-
centage of qualified film income. 
‘‘(2) APPLICABLE
PERCENTAGE.—For purposes 
of paragraph (1), the applicable percentage shall be 
determined in accordance with the following table:
‘‘For taxable years ending 
The applicable 
in calendar year—
percentage is—
2007 ....................................................................................
2008 ....................................................................................
2009 ....................................................................................
2010 ....................................................................................
2011 ....................................................................................
2012 ....................................................................................
2013 or thereafter ..............................................................
10.
‘‘(b) QUALIFIED FILM INCOME.—For purposes of this 
section—
‘‘(1) IN GENERAL.—The term ‘qualified film in-
come’ means gross income from a license of a quali-
fied film in the ordinary course of a trade or business
for the exploitation or direct use outside the United 
States less any associated film costs. 
‘‘(2) EXCEPTIONS.—
‘‘(A) CERTAIN USES.—Such term does not 
include exploitation of characters, soundtracks, 
designs, scripts, scores, or any other ancillary in-
tangibles associated with the qualified film. 
‘‘(B) RELATED PERSON LICENSE.—
‘‘(i) IN GENERAL.—Such term does not 
include any amount from the license of a 
qualified film to a related person. 
‘‘(ii) EXCEPTION.—Clause (i) shall not 
apply if such film is held for license by such 
related person to an unrelated person for 
the direct use or exploitation by such unre-
lated person outside the United States. 
‘‘(iii) RELATED
PERSON.—For pur-
poses of this subparagraph, a person shall 
be related to another person if such persons
are treated as a single employer under sub-
section (a) or (b) of section 52 or subsection 
(m) or (o) of section 414, except that deter-
minations under subsections (a) and (b) of 
section 52 shall be made without regard to 
section 1563(b).
‘‘(c) OTHER DEFINITIONS.—For purposes of this sec-
tion—
‘‘(1) QUALIFIED
FILM.—The term ‘qualified 
film’ means property described in section 168(f)(3) 
the original use of which commences after December 
31, 2006, if not less than 50 percent of the total com-
pensation relating to the production of such property 
is compensation for services performed in the United 
States by actors, production personnel, directors, and 
producers. Such term does not include property with 
respect to which records are required to be main-
tained under section 2257 of title 18, United States 
Code. 
‘‘(2) ASSOCIATED FILM COSTS.—The term ‘asso-
ciated film costs’ means any expense properly appor-
tioned and allocated to income taken into account 
under subsection (b)(1), determined as provided under 
regulations prescribed by the Secretary. 
‘‘(d) ELECTION.—The taxpayer may elect not to apply 
this section to a qualified film. Such election shall be made 
by the due date (including extensions of time) for filing the 
return for the taxable year in which such film is placed 
in service, and, once made for such film, such election shall 
be irrevocable. 
‘‘(e) 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 exclud-
able portion of any qualified film income. No deduc-
tion shall be allowed under this chapter for any tax 
for which credit is not allowable by reason of the pre-
ceding sentence. 
‘‘(2) EXCLUDABLE
PORTION.—For purposes of 
paragraph (1), the taxes paid or accrued (or treated 
as paid or accrued) with respect to the excludable por-
tion is the amount which bears the same ratio to the 
amount of taxes paid or accrued (or treated as paid 
or accrued) with respect to qualified film income as 
the amount excluded under subsection (a) for the tax-
able year bears to the qualified film income for such 
year.’’. 
(b) CLERICAL AMENDMENT.—The table of sections for 
part III of subchapter B of chapter 1 is amended by insert-
ing after the item relating to section 139 the following new 
item:
‘‘Sec. 139A. Income attributable to films used outside the United 
States.’’.
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years ending after December 
31, 2006.
Subtitle H—Reduction of Double 
Taxation of Earnings 
SEC. 1081. INTEREST EXPENSE ALLOCATION RULES. 
(a) 
ELECTION
TO
ALLOCATE
ON
WORLDWIDE 
BASIS.—Section 864 is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (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 IN-
TEREST 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 AFFILI-
ATED GROUP.—The taxable income of the domes-
tic members of a worldwide affiliated group from 
sources outside the United States shall be deter-
mined by allocating and apportioning the inter-
est expense of such domestic members to such in-
come 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 cor-
porations would have been allocated and 
apportioned to foreign source income if this 
subsection were applied to a group con-
sisting 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 af-
filiated 
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 partner-
ships, 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 sub-
section; except that paragraph (4) shall be applied on 
worldwide affiliated group basis.
‘‘(4) TREATMENT OF CERTAIN FINANCIAL INSTI-
TUTIONS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), any corporation described in subpara-
graph (B) shall be treated as an includible cor-
poration for purposes of section 1504 only for 
purposes of applying this subsection separately 
to corporations so described. 
‘‘(B) DESCRIPTION.—A corporation is de-
scribed in this subparagraph if—
‘‘(i) such corporation is a financial in-
stitution described in section 581 or 591, 
‘‘(ii) the business of such financial in-
stitution is predominantly with persons 
other than related persons (within the 
meaning of subsection (d)(4)) or their cus-
tomers, and 
‘‘(iii) such financial institution is re-
quired by State or Federal law to be oper-
ated separately from any other entity which 
is not such an institution. 
‘‘(C) TREATMENT OF BANK HOLDING COM-
PANIES.—To the extent provided in regula-
tions—
‘‘(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 such 
Act), and 
‘‘(iii) any subsidiary of a financial in-
stitution described in section 581 or 591, or 
any such bank or financial holding com-
pany, 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 INSTITU-
TION GROUP OF WORLDWIDE GROUP.—
‘‘(A) IN GENERAL.—If a worldwide affili-
ated group elects the application of this sub-
section, all financial corporations which—
‘‘(i) are members of such worldwide af-
filiated 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) ap-
plies to the pre-election worldwide affiliated 
group of which such group is a part. 
‘‘(B) FINANCIAL CORPORATION.—For pur-
poses of this paragraph, the term ‘financial cor-
poration’ means any corporation if at least 80 
percent of its gross income is income described in 
section 904(d)(2)(D)(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 sen-
tence, there shall be disregarded any item of in-
come 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 fi-
nancial 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 para-
graph 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-tax-
able-year period ending with the tax-
able year preceding the taxable year, or 
‘‘(II) 25 percent of its average an-
nual 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 prin-
ciples similar to the principles of section 
482), 
an amount of indebtedness of the electing finan-
cial institution group equal to the excess dis-
tribution or the understatement or overstatement 
of income, as the case may be, shall be re-
characterized (for the taxable year and subse-
quent taxable years) for purposes of this para-
graph as indebtedness of the worldwide affiliated 
group (excluding the electing financial institu-
tion group). If a corporation has not been in ex-
istence 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 institu-
tion 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 in-
stitution 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
AF-
FILIATED
GROUP.—The term ‘pre-election 
worldwide affiliated group’ means, with re-
spect to a corporation, the worldwide affili-
ated group of which such corporation would 
(but for an election under this paragraph) 
be a member for purposes of applying para-
graph (1). 
‘‘(ii) ELECTING
FINANCIAL
INSTITU-
TION GROUP.—The term ‘electing financial 
institution group’ means the group of cor-
porations to which this subsection applies 
separately by reason of the application of 
paragraph (4)(A) and which includes finan-
cial 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 regula-
tions—
‘‘(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 ex-
pense from being taken into account more 
than once, and
‘‘(iii) dealing with changes in members 
of any group (through acquisitions or other-
wise) treated under this paragraph as an 
affiliated group for purposes of this sub-
section. 
‘‘(6) ELECTION.—An election to have this sub-
section 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 one foreign corporation. 
Such an election, once made, shall apply to such com-
mon 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.—Para-
graph (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
‘‘(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 do-
mestic 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 sen-
tence, 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 appor-
tioned or allocated thereto (determined without 
regard to any carryback from a subsequent tax-
able year).
‘‘(B) TAXPAYER MUST HAVE ELECTED FOR-
EIGN 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
IN-
COME.—
‘‘(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 in-
come 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 sub-
section 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 sustained for taxable years be-
ginning after December 31, 2005. 
SEC. 1083. REDUCTION TO 2 FOREIGN TAX CREDIT BAS-
KETS. 
(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 pas-
sive 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.—Sub-
paragraph (B) of section 904(d)(2), as so redesignated, is 
amended by adding at the end the following new clause: 
‘‘(v) SPECIFIED PASSIVE CATEGORY IN-
COME.—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 in-
come (within the meaning of section
923(b)) or interest or carrying charges 
(as defined in section 927(d)(1)) de-
rived from a transaction which results 
in foreign trade income (as defined in 
section 923(b)).’’
(d) TREATMENT
OF FINANCIAL SERVICES.—Para-
graph (2) of section 904(d) is amended by striking subpara-
graph (D), by redesignating subparagraph (C) as subpara-
graph (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 serv-
ices group, and 
‘‘(II) any other person if such per-
son 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 pre-
dominantly 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 corpora-
tions in which such United States cor-
porations own, directly or indirectly, 
at least 80 percent of the total voting 
power and value of the stock. 
‘‘(iii) PASS-THRU ENTITIES.—The Sec-
retary shall by regulation specify for pur-
poses of this subparagraph the treatment of 
financial services income received or ac-
crued by partnerships and by other pass-
thru entities which are not members of a fi-
nancial services group.’’
(e) CONFORMING AMENDMENTS.—
(1) Clause (iii) of section 904(d)(2)(B) (relating 
to exceptions from passive income), as so redesig-
nated, 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 insert-
ing 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 FOR-
EIGN 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 share-
holder shall not be treated as passive category in-
come.
‘‘(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 share-
holder shall be treated as passive category in-
come to the extent it is properly allocable (under 
regulations prescribed by the Secretary) to pas-
sive category income of the controlled foreign cor-
poration. 
‘‘(D) DIVIDENDS.—Any dividend paid out 
of the earnings and profits of any controlled for-
eign corporation in which the taxpayer is a 
United States shareholder shall be treated as pas-
sive category income in proportion to the ratio 
of—
‘‘(i) the portion of the earnings and 
profits attributable to passive category in-
come, to 
‘‘(ii) the total amount of earnings and 
profits.
‘‘(E) LOOK-THRU
APPLIES
ONLY
WHERE 
SUBPART F APPLIES.—If a controlled foreign cor-
poration 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 de-
fined in section 954(a) without regard to section 
954(b)(5)) and none of its gross insurance in-
come (as defined in section 954(b)(3)(C)) for 
such taxable year shall be treated as passive cat-
egory income, except that this sentence shall not 
apply to any income which (without regard to 
this sentence) would be treated as financial serv-
ices income. Solely for purposes of applying sub-
paragraph (D), passive income of a controlled 
foreign corporation shall not be treated as pas-
sive category income if the requirements of sec-
tion 954(b)(4) are met with respect to such in-
come.
‘‘(F) COORDINATION WITH HIGH-TAXED IN-
COME PROVISIONS.—
‘‘(i) In determining whether any in-
come 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 para-
graph (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 in-
come 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 FOR-
EIGN INVESTMENT COMPANY INCLUSION.—If—
‘‘(i) a passive foreign investment com-
pany is a controlled foreign corporation, 
and 
‘‘(ii) the taxpayer is a United States 
shareholder in such controlled foreign cor-
poration,
any amount included in gross income under sec-
tion 1293 shall be treated as income in a sepa-
rate category to the extent such amount is attrib-
utable to income in such category.’’
(5) TREATMENT
OF
INCOME
TAX
BASE
DIF-
FERENCES.—Paragraph (2) of section 904(d) is 
amended by redesignating subparagraphs (H) and (I) 
as subparagraphs (I) and (J), respectively, and by in-
serting after subparagraph (G) the following new sub-
paragraph: 
‘‘(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
2005 
CHANGES.—For purposes of paragraph (1)—
‘‘(i) taxes carried from any taxable 
year beginning before January 1, 2005, to 
any taxable year beginning on or after such 
date, with respect to any item of income,
shall be treated as described in the subpara-
graph of paragraph (1) in which such in-
come 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 ef-
fect for such taxable year.’’. 
(7) Section 904(j)(3)(A)(i) is amended by strik-
ing ‘‘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 Decem-
ber 31, 2004.
SEC. 1084. LOOK-THRU RULES TO APPLY TO DIVIDENDS 
FROM NONCONTROLLED SECTION 902 COR-
PORATIONS. 
(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 tax-
payer 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) SPECIAL RULES.—For purposes of this 
paragraph—
‘‘(i) EARNINGS AND PROFITS.—
‘‘(I) IN GENERAL.—The rules of 
section 316 shall apply. 
‘‘(II) REGULATIONS.—The Sec-
retary may prescribe regulations re-
garding 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 substan-
tiated, such dividend shall be treated as in-
come described in paragraph (1)(A). 
‘‘(iii) LOOK-THRU WITH RESPECT TO 
CARRYFORWARDS OF CREDIT.—Rules simi-
lar 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 corpora-
tion to such a taxable year for purposes of 
allocating such dividend among the separate 
categories in effect for such taxable year.
‘‘(iv) 
COORDINATION
WITH
HIGH-
TAXED INCOME PROVISIONS.—Rules similar 
to the rules of paragraph (3)(F) shall apply 
for purposes of this paragraph.’’. 
(b) CONFORMING AMENDMENTS.—
(1) 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). 
(2) Clause (i) of section 864(d)(5)(A) is amended 
to read as follows: 
‘‘(i) 
Subclause 
(I) 
of 
section 
904(d)(2)(B)(iii).’’
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2002. 
SEC. 1085. 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 consid-
ered to be owned by a person by reason of the pre-
ceding 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 para-
100
graph, including rules to account for special partner-
ship allocations of dividends, credits, and other inci-
dents of ownership of stock in determining propor-
tionate ownership.’’
(b) CLARIFICATION
OF COMPARABLE ATTRIBUTION 
UNDER SECTION 901(b)(5).—Paragraph (5) of section 
901(b) is amended by striking ‘‘any individual’’ and insert-
ing ‘‘any person’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxes of foreign corporations for tax-
able years of such corporations beginning after the date of 
the enactment of this Act. 
SEC. 1086. 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.
101
SEC. 1087. UNITED STATES PROPERTY NOT TO INCLUDE 
CERTAIN ASSETS ACQUIRED BY DEALERS IN 
ORDINARY COURSE OF TRADE OR BUSINESS. 
(a) IN GENERAL.—Section 956(c)(2) (relating to ex-
ceptions 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 ‘‘; and’’, and by adding at the end the fol-
lowing new subparagraph: 
‘‘(L) securities acquired and held by a con-
trolled foreign corporation in the ordinary course 
of its business as a dealer in securities if—
‘‘(i) the dealer accounts for the securi-
ties as securities held primarily for sale to 
customers in the ordinary course of busi-
ness, and 
‘‘(ii) the dealer disposes of the securi-
ties (or such securities mature while held by 
the dealer) within a period consistent with 
the holding of securities for sale to cus-
tomers in the ordinary course of business.’’
(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
102
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. 1088. 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 cor-
poration’s earnings and profits) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph: 
‘‘(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 li-
ability for which is denominated in any 
currency other than in the taxpayer’s func-
tional currency. 
‘‘(ii) 
APPLICATION
TO
QUALIFIED 
BUSINESS UNITS.—An election under this 
subparagraph may apply to foreign income 
taxes attributable to a qualified business
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unit in accordance with regulations pre-
scribed by the Secretary. 
‘‘(iii) ELECTION.—Any such election 
shall apply to the taxable year for which 
made and all subsequent taxable years un-
less revoked with the consent of the Sec-
retary.’’
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 1089. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 
FROM CERTAIN FOREIGN CORPORATIONS. 
(a) IN GENERAL.—Paragraph (2) of section 871(i) (re-
lating to tax not to apply to certain interest and dividends) 
is amended by adding at the end the following new subpara-
graph: 
‘‘(D) Dividends paid by a foreign corpora-
tion 
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.
104
SEC. 1090. PROVIDE EQUAL TREATMENT FOR INTEREST 
PAID BY FOREIGN PARTNERSHIPS AND FOR-
EIGN 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 in 
which United States persons do not hold directly 
or indirectly 20 percent or more of either the 
capital or profits interests, any interest not paid 
by a trade or business engaged in by the partner-
ship 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 Decem-
ber 31, 2003.
SEC. 1091. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED 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 sub-
105
section (l) and by inserting after subsection (j) the fol-
lowing new subsection:
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REGU-
LATED 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 inter-
est-related dividend received from a regulated in-
vestment company. 
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A) 
shall not apply—
‘‘(i) to any interest-related dividend re-
ceived from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than 
interest described in subparagraph (E) (i) 
or (iii)) received by such company on in-
debtedness issued by such person or by any 
corporation or partnership with respect to 
which such person is a 10-percent share-
holder, 
‘‘(ii) to any interest-related dividend 
with respect to stock of a regulated invest-
ment company unless the person who would
106
otherwise be required to deduct and with-
hold tax from such dividend under chapter 
3 receives a statement (which meets require-
ments similar to the requirements of sub-
section (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 coun-
try (or any interest-related dividend pay-
ment 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 Sec-
retary’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 com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later 
than 60 days after the close of its taxable year.
107
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year de-
scribed in section 855) is greater than the quali-
fied 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 quali-
fied interest income of the regulated investment 
company reduced by the deductions properly al-
locable to such income. 
‘‘(E) QUALIFIED
INTEREST
INCOME.—For 
purposes of subparagraph (D), the term ‘quali-
fied interest income’ means the sum of the fol-
lowing amounts derived by the regulated invest-
ment company from sources within the United 
States: 
‘‘(i) Any amount includible in gross 
income as original issue discount (within
108
the meaning of section 1273) on an obliga-
tion payable 183 days or less from the date 
of original issue (without regard to the pe-
riod 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 pro-
vide) 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 cor-
poration 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 sub-
section (i)(2)(A) (without regard to the 
trade or business of the regulated investment 
company).
109
‘‘(iv) Any interest-related dividend in-
cludable in gross income with respect to 
stock of another regulated investment com-
pany. 
‘‘(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 regu-
lated 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
DIVI-
DEND.—For purposes of this paragraph, a short-
term capital gain dividend is any dividend (or 
part thereof) which is designated by the regu-
lated investment company as a short-term cap-
ital gain dividend in a written notice mailed to
110
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 quali-
fied short-term gain bears to the aggregate 
amount so designated. 
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the net 
short-term capital gain of the regulated invest-
ment 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 sub-
paragraph—
‘‘(i) the net short-term capital gain of 
the regulated investment company shall be 
computed by treating any short-term cap-
ital gain dividend includible in gross in-
111
come with respect to stock of another regu-
lated 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 trans-
actions 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 com-
pany.’’
(2) FOREIGN CORPORATIONS.—Section 881 (re-
lating 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 sub-
section:
129
7701(a)(2)) shall not be considered a secu-
rity, 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 INTER-
EST 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 partner-
ship assets shall be the trust’s proportionate 
interest in any securities issued by the part-
nership (determined without regard to sub-
paragraph (A)(i) and paragraph (4), but
not including securities described in para-
graph (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 ap-
plying subclause (III) of subsection (c)(4)(B)(iii)—
‘‘(A) any debt instrument issued by a part-
nership and not described in paragraph (1) shall
184
‘‘SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS 
AND ACQUISITIONS. 
‘‘(a) IN GENERAL.—According to the forms or regula-
tions 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 share-
holder 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 regula-
tions 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 per-
son the information provided by the corporation 
under subsection (d).