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cluding highways, mass transit systems, railroads,
airports, ports, and waterways, in or connecting with
the New York Liberty Zone (as defined in section
1400L(h)), which is designated as a qualifying project
under this section jointly by the Governor of the State
of New York and the Mayor of the City of New York,
New York.
‘‘(2) DOLLAR LIMITATION.—
‘‘(A) IN
GENERAL.—The Governor of the
State of New York and the Mayor of the City of
New York, New York, shall jointly allocate to a
governmental unit the amount of expenditures
which may be taken into account under sub-
section (a) for any calendar year in the credit
period with respect to a qualifying project.
‘‘(B) AGGREGATE
LIMIT.—The aggregate
amount which may be allocated under subpara-
graph (A) for all calendar years in the credit pe-
riod shall not exceed $2,000,000,000.
‘‘(C) 
ANNUAL
LIMIT.—The 
aggregate
amount which may be allocated under subpara-
graph (A) for any calendar year in the credit pe-
riod shall not exceed the sum of—
‘‘(i) $200,000,000, plus
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‘‘(ii) the aggregate amount authorized
to be allocated under this paragraph for all
preceding calendar years in the credit pe-
riod which was not so allocated.
‘‘(D) UNALLOCATED AMOUNTS AT END OF
CREDIT PERIOD.—If, as of the close of the credit
period, the amount under subparagraph (B) ex-
ceeds the aggregate amount allocated under sub-
paragraph (A) for all calendar years in the cred-
it period, the Governor of the State of New York
and the Mayor of the City of New York, New
York, may jointly allocate for any calendar year
following the credit period for expenditures with
respect to qualifying projects which may be taken
into account under subsection (a) an amount
equal to such excess, reduced by the aggregate
amount allocated under this subparagraph for
all preceding calendar years.
‘‘(c) CARRYOVER OF UNUSED ALLOCATIONS.—
‘‘(1) IN
GENERAL.—If the amount allocated
under subsection (b)(2) to a governmental unit for
any calendar year exceeds the total expenditures for
such year by such governmental unit for qualifying
projects, the allocation of such governmental unit for
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the succeeding calendar year shall be increased by the
amount of such excess.
‘‘(2) REALLOCATION.—If a governmental unit
does not use an amount allocated to it under sub-
section (b)(2) within the time prescribed by the Gov-
ernor of the State of New York and the Mayor of the
City of New York, New York, then such amount shall
after such time be treated for purposes of subsection
(b)(2) in the same manner as if it had never been al-
located.
‘‘(d) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) CREDIT PERIOD.—The term ‘credit period’
means the 10-year period beginning on January 1,
2006.
‘‘(2) TREATMENT OF FUNDS.—Any expenditure
for a qualifying project taken into account for pur-
poses of the credit under this section shall be consid-
ered State and local funds for the purpose of any Fed-
eral program.
‘‘(e) REGULATIONS.—The Secretary may prescribe
such regulations as are necessary to ensure compliance with
the purposes of this section.’’.
(b) TERMINATION OF CERTAIN NEW YORK LIBERTY
ZONE BENEFITS.—
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(1) SPECIAL ALLOWANCE AND EXPENSING.—Sec-
tion 1400L(b)(2)(A)(v) is amended by striking ‘‘the
termination date’’ and inserting ‘‘the date of the en-
actment of the Tax Relief Act of 2005 or the termi-
nation date if pursuant to a binding contract in effect
on such enactment date’’.
(2) LEASEHOLD.—Section 1400L(c)(2)(B) is
amended by striking ‘‘before January 1, 2007’’ and
inserting ‘‘on or before the date of the enactment of
the Tax Relief Act of 2005 or before January 1, 2007,
if pursuant to a binding contract in effect on such en-
actment date’’.
SEC. 302. MODIFICATION TO S CORPORATION PASSIVE IN-
VESTMENT INCOME RULES.
(a) INCREASED PERCENTAGE LIMIT.—Paragraph (2)
of section 1375(a) is amended by striking ‘‘25 percent’’ and
inserting ‘‘60 percent’’.
(b) OTHER PROVISIONS.—
(1) REPEAL OF EXCESSIVE PASSIVE INCOME AS
A TERMINATION EVENT.—Section 1362(d) is amended
by striking paragraph (3).
(2) CAPITAL GAIN NOT TREATED AS PASSIVE IN-
VESTMENT INCOME.—Subsection (b) of section 1375 is
amended by striking paragraphs (3) and (4) and in-
serting the following new paragraph:
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‘‘(3) PASSIVE INVESTMENT INCOME DEFINED.—
‘‘(A) Except as otherwise provided in this
paragraph, the term ‘passive investment income’
means gross receipts derived from royalties,
rents, dividends, interest, and annuities.
‘‘(B) EXCEPTION FOR INTEREST ON NOTES
FROM SALES OF INVENTORY.—The term ‘passive
investment income’ shall not include interest on
any obligation acquired in the ordinary course
of the corporation’s trade or business from its
sale of property described in section 1221(a)(1).
‘‘(C) TREATMENT OF CERTAIN LENDING OR
FINANCE
COMPANIES.—If the S corporation
meets the requirements of section 542(c)(6) for
the taxable year, the term ‘passive investment in-
come’ shall not include gross receipts for the tax-
able year which are derived directly from the ac-
tive and regular conduct of a lending or finance
business (as defined in section 542(d)(1)).
‘‘(D) 
TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in a C
corporation meeting the requirements of section
1504(a)(2), the term ‘passive investment income’
shall not include dividends from such C corpora-
tion to the extent such dividends are attributable