24 with respect to any increase in income attributable to 
a disposition 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 op-
tions exercised after the date of the enactment of this Act. 
SEC. 1093. 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 
inserting ‘‘December 31, 2013’’. 
Subtitle J—Treatment of Active 
Income 
SEC. 1101. REPEAL OF CFC RULES ON FOREIGN BASE COM-
PANY SALES AND SERVICES INCOME. 
(a) IN GENERAL.—Subsection (a) of section 954 (re-
lating to foreign base company income) is amended by
striking paragraphs (2) and (3) and by redesignating 
paragraphs (4) and (5) as paragraphs (2) and (3), respec-
tively. 
(b) CERTAIN SALES.—Paragraph (1) of section 
954(c) is amended by adding at the end the following new 
subparagraph: 
‘‘(H) CERTAIN
SALES.—Income (whether 
in the form of profits, commissions, fees, or 
otherwise) derived in connection with the pur-
chase of personal property from a related per-
son and its sale to any person, the sale of per-
sonal property to any person on behalf of a re-
lated person, the purchase of personal property 
from any person and its sale to a related per-
son, or the purchase of personal property from 
any person on behalf of a related person if—
‘‘(i) the property which is purchased 
(or in the case of property sold on behalf 
of a related person, the property which is
sold) is manufactured, produced, grown, or 
extracted in the United States, and 
‘‘(ii) the property is sold for use, con-
sumption, or disposition in the United 
States, or, in the case of property pur-
chased on behalf of a related person, is
purchased for use, consumption, or disposi-
tion in the United States.’’
(c) CONFORMING AMENDMENTS.—
(1) Clause (iii) of section 952(c)(1)(B) is 
amended by striking subclauses (III) and (IV) and 
by redesignating subclauses (V) and (VI) as sub-
clauses (III) and (IV), respectively. 
(2) Section 953(c)(6)(A) is amended by striking 
‘‘section 
954(d)(3)’’ 
and 
inserting 
‘‘section 
954(b)(9)’’. 
(3) Subsection (b) of section 954 is amended by 
adding at the end the following new paragraph: 
‘‘(9) RELATED
PERSON
DEFINED.—For pur-
poses of this subsection, a person is a related person 
with respect to a controlled foreign corporation if—
‘‘(A) such person is an individual, corpora-
tion, partnership, trust, or estate which con-
trols, or is controlled by, the controlled foreign 
corporation, or 
‘‘(B) such person is a corporation, partner-
ship, trust, or estate which is controlled by the 
same person or persons which control the con-
trolled foreign corporation. 
For purposes of the preceding sentence, control 
means, with respect to a corporation, the ownership,
directly or indirectly, of stock possessing more than 
50 percent of the total voting power of all classes of 
stock entitled to vote or of the total value of stock 
of such corporation. In the case of a partnership, 
trust, or estate, control means the ownership, di-
rectly or indirectly, of more than 50 percent (by 
value) of the beneficial interests in such partnership, 
trust, or estate. For purposes of this paragraph, 
rules similar to the rules of section 958 shall apply.’’
(4) Paragraph (5) of section 954(b) is amended 
by striking ‘‘the foreign base company sales income, 
the foreign base company services income,’’. 
(5) Section 954 is amended by striking sub-
sections (d) and (e). 
(6) 
Sections 
552(c)(2), 
861(c)(2)(B), 
904(d)(2)(H), 
953(e), 
955(b), 
958(b), 
971(f), 
988(e)(3)(C), 
1297(b)(2), 
1298(d)(3), 
and 
1298(e)(2)(B) are each amended by striking 
‘‘954(d)(3)’’ each place it appears and inserting 
‘‘954(b)(9)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2005, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end.
SEC. 1102. EXTENSION OF EXCEPTION OF ACTIVE FINANC-
ING 
INCOME 
FROM 
FOREIGN 
PERSONAL 
HOLDING COMPANY INCOME. 
(a) INSURANCE
INCOME.—Section 953(e)(10) is 
amended—
(1) by striking ‘‘January 1, 2007’’ and insert-
ing ‘‘January 1, 2008’’, and 
(2) by striking ‘‘December 31, 2006’’ and in-
serting ‘‘December 31, 2007’’. 
(b) ACTIVE CONDUCT OF BANKING, FINANCING, OR 
SIMILAR BUSINESSES.—Paragraph (9) of section 954(h) 
(relating to special rule for income derived in the active 
conduct of banking, financing, or similar business) is 
amended by striking ‘‘January 1, 2007’’ and inserting 
‘‘January 1, 2008’’. 
SEC. 1103. LOOK-THRU TREATMENT OF PAYMENTS BE-
TWEEN 
RELATED 
CONTROLLED 
FOREIGN 
CORPORATIONS UNDER FOREIGN PERSONAL 
HOLDING COMPANY INCOME RULES. 
Subsection (c) of section 954 is amended by adding 
after paragraph (3) the following new paragraph: 
‘‘(4) LOOK-THRU IN THE CASE OF RELATED 
CONTROLLED
FOREIGN
CORPORATIONS.—For pur-
poses of this subsection, dividends, interest, rents, 
and royalties received or accrued from a controlled 
foreign corporation which is a related person (as de-
fined in subsection (b)(9)) shall not be treated as 
foreign personal holding company income to the ex-
tent 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 de-
fined in section 952). The Secretary shall prescribe 
such regulations as may be appropriate to prevent 
the abuse of the purposes of this paragraph.’’
SEC. 1104. LOOK-THRU TREATMENT FOR SALES OF PART-
NERSHIP INTERESTS. 
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 corporation is a 25-percent owner, such 
corporation shall be treated for purposes of this 
subsection as selling the proportionate share of 
the assets of the partnership attributable to 
such interest.
‘‘(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.’’
SEC. 1105. 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 (re-
lating 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 cur-
rently). 
(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 insert-
ing 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 fol-
lowing new subparagraph: 
‘‘(I) PERSONAL SERVICE CONTRACTS.—
‘‘(i) Amounts received under a con-
tract under which the corporation is to fur-
nish 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 amend-
ed 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 hold-
ing 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 per-
sonal holding company (within the meaning of sec-
tion 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), re-
spectively. 
(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 in-
serting ‘‘subsection (a) or (b)’’. 
(11) Subsection (d) of section 751 is amended 
by adding ‘‘and’’ at the end of paragraph (2), by 
striking paragraph (3), by redesignating paragraph 
(4) as paragraph (3), and by striking ‘‘paragraph 
(1), (2), or (3)’’ in paragraph (3) (as so redesig-
nated) and inserting ‘‘paragraph (1) or (2)’’. 
(12) Paragraph (2) of section 864(d) is amend-
ed by striking subparagraph (A) and by redesig-
nating 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 for-
eign 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 per-
son insurance income (as defined in section 
953(c)(2)), the Secretary may treat any person as a 
United States shareholder for purposes of this sec-
tion if such person is treated as a United States 
shareholder under section 953(c)(1).’’
(D) Subsection (c) of section 898 is amended to 
read as follows:
‘‘(c) DETERMINATION OF REQUIRED YEAR.—
‘‘(1) IN GENERAL.—The required year is—
‘‘(A) the majority U.S. shareholder year, 
or 
‘‘(B) if there is no majority U.S. share-
holder year, the taxable year prescribed under 
regulations. 
‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci-
fied foreign corporation may elect, in lieu of the tax-
able year under paragraph (1)(A), a taxable year be-
ginning 1 month earlier than the majority U.S. 
shareholder year. 
‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the term ‘majority U.S. shareholder 
year’ means the taxable year (if any) which, on 
each testing day, constituted the taxable year 
of—
‘‘(i) each United States shareholder 
described in subsection (b)(2)(A), and 
‘‘(ii) each United States shareholder 
not described in clause (i) whose stock was 
treated 
as 
owned 
under 
subsection 
(b)(2)(B) by any shareholder described in 
such clause. 
‘‘(B) TESTING
DAY.—The testing days 
shall be—
‘‘(i) the first day of the corporation’s 
taxable year (determined without regard to 
this section), or 
‘‘(ii) the days during such representa-
tive period as the Secretary may pre-
scribe.’’ 
(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 com-
panies).’’
(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 
PERSONAL 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 amend-
ed by striking ‘‘, 551(a),’’. 
(18) Paragraph (5) of section 1014(b) is 
amended by inserting ‘‘and before January 1, 
2004,’’ 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 invest-
ment trust (as defined in section 856).’’
(B) The amendment made by subparagraph (A) 
shall apply to taxable years beginning after Decem-
ber 31, 2005. 
(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 
paragraphs (6) and (7) as paragraphs (5) and (6), 
respectively. 
(23) Paragraph (2) of section 1260(c) is 
amended by striking subparagraphs (H) and (I) and 
by redesignating subparagraph (J) as subparagraph 
(H). 
(24)(A) 
Subparagraph 
(F) 
of 
section 
1291(b)(3) is amended by striking ‘‘551(d), 959(a),’’ 
and inserting ‘‘959(a)’’.
(B) Subsection (e) of section 1291 is amended 
by inserting ‘‘(as in effect on the day before the date 
of the enactment of the American Jobs Creation Act 
of 2003)’’ after ‘‘section 1246’’. 
(25) Paragraph (2) of section 1294(a) is 
amended to read as follows: 
‘‘(2) 
ELECTION
NOT
PERMITTED
WHERE 
AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION 
951.—The taxpayer may not make an election under 
paragraph (1) with respect to the undistributed 
PFIC earnings tax liability attributable to a quali-
fied electing fund for the taxable year if any amount 
is includible in the gross income of the taxpayer 
under section 951 with respect to such fund for such 
taxable year.’’
(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 pro-
ceeding in court for the collection of such tax 
may be done without assessing, at any time 
within 6 years after the return was filed.’’ 
(29) Subsection (a) of section 6679 is amend-
ed—
(A) by striking ‘‘6035, 6046, and 6046A’’ 
in paragraph (1) and inserting ‘‘6046 and 
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 
chapter 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 
striking the item relating to section 6035.
SEC. 1106. CLARIFICATION OF TREATMENT OF PIPELINE 
TRANSPORTATION INCOME. 
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 subparagraph: 
‘‘(C) the pipeline transportation of oil or 
gas within such foreign country.’’
SEC. 1107. 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 described in paragraph (1), (2), 
or (8) of section 1221(a), or’’.
(b) DEFINITION AND SPECIAL RULES.—Subsection 
(c) of section 954 is amended by adding after paragraph 
(5) the following new paragraph: 
‘‘(6) DEFINITION AND SPECIAL RULES RELAT-
ING TO COMMODITY TRANSACTIONS.—
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—For 
purposes 
of 
paragraph 
(1)(C)(i), the term ‘commodity hedging trans-
action’ 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 ‘ordi-
nary property or property described in 
section 1231(b)’ for ‘ordinary prop-
erty’, 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 par-
ties.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
December 31, 2004. 
SEC. 1108. 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), as amended by section 1101, is amended—
(1) by striking paragraph (2) of subsection (a) 
(relating to foreign base company shipping income), 
and 
(2) by striking subsection (f) (relating to for-
eign 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 
purposes of the preceding sentence, rents derived from 
leasing an aircraft or vessel in foreign commerce shall not 
fail to be treated as derived in the active conduct of a 
trade or business if, as determined under regulations pre-
scribed 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 shipping 
income,’’ in paragraph (5), 
(B) by striking paragraphs (6) and (7), 
and 
(C) by redesignating paragraph (8) as 
paragraph (6). 
SEC. 1109. EFFECTIVE DATE. 
Except as otherwise provided in this subtitle, the 
amendments made by this subtitle shall apply to taxable 
years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States share-
holders with or within which such taxable years of foreign 
corporations end.
Subtitle K—Reduction of Double 
Taxation of Corporate Earnings 
SEC. 1111. 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 do-
mestic members of a worldwide affiliated group 
from sources outside the United States shall be 
determined by allocating and apportioning the 
interest expense of such domestic members to
such income in an amount equal to the excess 
(if any) of—
‘‘(i) the total interest expense of the 
worldwide affiliated group multiplied by 
the ratio which the foreign assets of the 
worldwide affiliated group bears to all the 
assets of the worldwide affiliated group, 
over 
‘‘(ii) the interest expense of all foreign 
corporations which are members of the 
worldwide affiliated group to the extent 
such interest expense of such foreign cor-
porations would have been allocated and 
apportioned to foreign source income if 
this subsection were applied to a group 
consisting of all the foreign corporations in 
such worldwide affiliated group. 
‘‘(C) WORLDWIDE AFFILIATED GROUP.—
For purposes of this paragraph, the term 
‘worldwide affiliated group’ means a group con-
sisting 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 corpora-
tions in which such members in the aggre-
gate meet the ownership requirements of 
section 1504(a)(2) either directly or indi-
rectly 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 do-
mestic partnerships, trusts, or estates. 
‘‘(2) ALLOCATION
AND
APPORTIONMENT
OF 
OTHER
EXPENSES.—Expenses other than interest 
which are not directly allocable or apportioned to 
any specific income producing activity shall be allo-
cated and apportioned as if all members of the affili-
ated 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 sec-
tion 1504(b)). 
‘‘(3) TREATMENT
OF
TAX-EXEMPT
ASSETS; 
BASIS
OF
STOCK
IN
NONAFFILIATED
10-PERCENT 
OWNED
CORPORATIONS.—The rules of paragraphs 
(3) and (4) of subsection (e) shall apply for purposes
of this subsection; except that paragraph (4) shall be 
applied on worldwide affiliated group basis. 
‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN-
STITUTIONS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), any corporation described in sub-
paragraph (B) shall be treated as an includible 
corporation for purposes of section 1504 only 
for purposes of applying this subsection sepa-
rately 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), and 
‘‘(ii) any subsidiary of a financial in-
stitution described in section 581 or 591 or 
of any bank holding company if such sub-
sidiary 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 INSTI-
TUTION 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 
affiliated group, but
‘‘(ii) are not corporations described in 
paragraph (4)(B), 
shall be treated as described in paragraph 
(4)(B) for purposes of applying paragraph
(4)(A). This subsection (other than this para-
graph) shall apply to any such group in the 
same manner as this subsection (other than this 
paragraph) applies to the pre-election worldwide 
affiliated group of which such group is a part. 
‘‘(B) FINANCIAL CORPORATION.—For 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 
paragraph to any member of the pre-elec-
tion worldwide affiliated group (other than 
to a member of the electing financial insti-
tution group) in excess of the greater of—
‘‘(I) its average annual dividend 
(expressed as a percentage of current 
earnings and profits) during the 5-
taxable-year period ending with the 
taxable year preceding the taxable 
year, or 
‘‘(II) 25 percent of its average 
annual earnings and profits for such 
5-taxable-year period, or 
‘‘(ii) deals with any person in any 
manner not clearly reflecting the income of 
the corporation (as determined under prin-
ciples similar to the principles of section 
482), 
an amount of indebtedness of the electing fi-
nancial institution group equal to the excess 
distribution or the understatement or overstate-
ment 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 affili-
ated group (excluding the electing financial in-
stitution group). If a corporation has not been 
in existence for 5 taxable years, this subpara-
graph shall be applied with respect to the pe-
riod 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 tax-
able year beginning after December 31, 2005, 
in which such affiliated group includes 1 or 
more financial corporations. Such an election, 
once made, shall apply to all financial corpora-
tions which are members of the electing finan-
cial institution group for such taxable year and 
all subsequent years unless revoked with the 
consent of the Secretary. 
‘‘(E) 
DEFINITIONS
RELATING
TO 
GROUPS.—For purposes of this paragraph—
‘‘(i) PRE-ELECTION WORLDWIDE 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 para-
graph) be a member for purposes of apply-
ing paragraph (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 fi-
nancial corporations by reason of an elec-
tion under subparagraph (A). 
‘‘(F) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be appro-
priate to carry out this subsection, including 
regulations—
‘‘(i) providing for the direct allocation 
of interest expense in other circumstances 
where such allocation would be appropriate 
to carry out the purposes of this sub-
section, 
‘‘(ii) preventing assets or interest ex-
pense from being taken into account more 
than once, and
‘‘(iii) dealing with changes in mem-
bers of any group (through acquisitions or 
otherwise) treated under this paragraph as 
an affiliated group for purposes of this 
subsection. 
‘‘(6) ELECTION.—An election to have this 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 para-
graph (1)(C) and may be made only for the first 
taxable year beginning after December 31, 2005, in 
which a worldwide affiliated group exists which in-
cludes such affiliated group and at least one foreign 
corporation. Such an election, once made, shall apply 
to such common parent and all other corporations 
which are members of such worldwide affiliated 
group for such taxable year and all subsequent years 
unless revoked with the consent of the Secretary.’’. 
(b) EXPANSION
OF REGULATORY AUTHORITY.—
Paragraph (7) of section 864(e) is amended—
(1) by inserting before the comma at the end of 
subparagraph (B) ‘‘and in other circumstances
where such allocation would be appropriate to carry 
out the purposes of this subsection’’, and
(2) by striking ‘‘and’’ at the end of subpara-
graph (E), by redesignating subparagraph (F) as 
subparagraph (G), and by inserting after subpara-
graph (E) the following new subparagraph: 
‘‘(F) preventing assets or interest expense 
from being taken into account more than once, 
and’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 1112. RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS. 
(a) GENERAL RULE.—Section 904 is amended by re-
designating subsections (g), (h), (i), (j), and (k) as sub-
sections (h), (i), (j), (k), and (l) respectively, and by in-
serting after subsection (f) the following new subsection:
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS.—
‘‘(1) GENERAL
RULE.—For purposes of this 
subpart and section 936, in the case of any taxpayer 
who sustains an overall domestic loss for any taxable 
year beginning after December 31, 2004, that por-
tion of the taxpayer’s taxable income from sources 
within the United States for each succeeding taxable 
year which is equal to the lesser of—
‘‘(A) the amount of such loss (to the extent 
not used under this paragraph in prior taxable 
years), or 
‘‘(B) 50 percent of the taxpayer’s taxable 
income from sources within the United States 
for such succeeding taxable year, 
shall be treated as income from sources without the 
United States (and not as income from sources with-
in 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 ex-
tent such loss offsets taxable income from 
sources without the United States for the tax-
able year or for any preceding taxable year by 
reason of a carryback. For purposes of the pre-
ceding sentence, the term ‘domestic loss’ means 
the amount by which the gross income for the 
taxable year from sources within the United 
States is exceeded by the sum of the deductions 
properly apportioned or allocated thereto (deter-
mined without regard to any carryback from a 
subsequent taxable year).