(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to violations occurring after the 
date of the enactment of this Act. 
SEC. 113. FRIVOLOUS TAX SUBMISSIONS. 
(a) CIVIL PENALTIES.—Section 6702 is amended to 
read as follows: 
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if—
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which—
‘‘(A) does not contain information on 
which the substantial correctness of the self-as-
sessment may be judged, or 
‘‘(B) contains information that on its face 
indicates that the self-assessment is substan-
tially incorrect; and 
‘‘(2) the conduct referred to in paragraph (1)— 
‘‘(A) is based on a position which the Sec-
retary has identified as frivolous under sub-
section (c), or 
‘‘(B) reflects a desire to delay or impede 
the administration of Federal tax laws. 
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS 
SUBMISSIONS.—
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a 
specified frivolous submission shall pay a penalty of 
$5,000. 
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 
purposes of this section—
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission—
‘‘(i) is based on a position which the 
Secretary has identified as frivolous under 
subsection (c), or 
‘‘(ii) reflects a desire to delay or im-
pede the administration of Federal tax 
laws. 
‘‘(B) SPECIFIED SUBMISSION.—The term 
‘specified submission’ means—
‘‘(i) a request for a hearing under—
‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon 
filing of notice of lien), or 
‘‘(II) section 6330 (relating to 
notice and opportunity for hearing be-
fore levy), and
‘‘(ii) an application under— 
‘‘(I) section 6159 (relating to 
agreements for payment of tax liabil-
ity in installments), 
‘‘(II) section 7122 (relating to 
compromises), or 
‘‘(III) section 7811 (relating to 
taxpayer assistance orders). 
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission 
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission. 
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of po-
sitions which the Secretary has identified as being frivo-
lous for purposes of this subsection. The Secretary shall 
not include in such list any position that the Secretary 
determines 
meets 
the 
requirement 
of 
section 
6662(d)(2)(B)(ii)(II). 
‘‘(d) REDUCTION OF PENALTY.—The Secretary may 
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would
promote compliance with and administration of the Fed-
eral tax laws. 
‘‘(e) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be 
in addition to any other penalty provided by law.’’. 
(b) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS BEFORE LEVY.—
(1) FRIVOLOUS
REQUESTS
DISREGARDED.—
Section 6330 (relating to notice and opportunity for 
hearing before levy) is amended by adding at the 
end the following new subsection: 
‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.—
Notwithstanding any other provision of this section, if the 
Secretary determines that any portion of a request for a 
hearing under this section or section 6320 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’. 
(2) PRECLUSION
FROM
RAISING
FRIVOLOUS 
ISSUES AT HEARING.—Section 6330(c)(4) is amend-
ed—
(A) by striking ‘‘(A)’’ and inserting 
‘‘(A)(i)’’; 
(B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’;
(C) by striking the period at the end of the 
first sentence and inserting ‘‘; or’’; and 
(D) by inserting after subparagraph (A)(ii) 
(as so redesignated) the following: 
‘‘(B) the issue meets the requirement of 
clause (i) or (ii) of section 6702(b)(2)(A).’’. 
(3) 
STATEMENT
OF
GROUNDS.—Section 
6330(b)(1) is amended by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’. 
(c) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 
6320 is amended—
(1) in subsection (b)(1), by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’, and 
(2) in subsection (c), by striking ‘‘and (e)’’ and 
inserting ‘‘(e), and (g)’’. 
(d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR 
OFFERS-IN-COMPROMISE
AND
INSTALLMENT
AGREE-
MENTS.—Section 7122 is amended by adding at the end 
the following new subsection:
‘‘(e) FRIVOLOUS
SUBMISSIONS, ETC.—Notwith-
standing any other provision of this section, if the Sec-
retary determines that any portion of an application for 
an offer-in-compromise or installment agreement sub-
mitted under this section or section 6159 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’. 
(e) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by 
striking the item relating to section 6702 and inserting 
the following new item:
‘‘Sec. 6702. Frivolous tax submissions.’’.
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to submissions made and issues 
raised after the date on which the Secretary first pre-
scribes a list under section 6702(c) of the Internal Rev-
enue Code of 1986, as amended by subsection (a). 
SEC. 114. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF TREASURY. 
(a) CENSURE; IMPOSITION OF PENALTY.—
(1) IN GENERAL.—Section 330(b) of title 31, 
United States Code, is amended—
(A) by inserting ‘‘, or censure,’’ after ‘‘De-
partment’’, and
(B) by adding at the end the following new 
flush sentence: 
‘‘The Secretary may impose a monetary penalty on any 
representative described in the preceding sentence. If the 
representative was acting on behalf of an employer or any 
firm or other entity in connection with the conduct giving 
rise to such penalty, the Secretary may impose a monetary 
penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such pen-
alty shall not exceed the gross income derived (or to be 
derived) from the conduct giving rise to the penalty and 
may be in addition to, or in lieu of, any suspension, disbar-
ment, or censure of the representative.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to actions taken after 
the date of the enactment of this Act. 
(b) TAX SHELTER OPINIONS, ETC.—Section 330 of 
such title 31 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(d) Nothing in this section or in any other provision 
of law shall be construed to limit the authority of the Sec-
retary of the Treasury to impose standards applicable to 
the rendering of written advice with respect to any entity, 
transaction plan or arrangement, or other plan or arrange-
ment, which is of a type which the Secretary determines 
as having a potential for tax avoidance or evasion.’’. 
SEC. 115. PENALTY ON PROMOTERS OF TAX SHELTERS. 
(a) PENALTY ON PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700(a) is amended by adding at the end 
the following new sentence: ‘‘Notwithstanding the first 
sentence, if an activity with respect to which a penalty 
imposed under this subsection involves a statement de-
scribed in paragraph (2)(A), the amount of the penalty 
shall be equal to 50 percent of the gross income derived 
(or to be derived) from such activity by the person on 
which the penalty is imposed.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to activities after the date of the 
enactment of this Act. 
SEC. 116. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR 
WHICH 
REQUIRED 
LISTED 
TRANS-
ACTIONS NOT REPORTED. 
(a) IN GENERAL.—Section 6501(c) (relating to ex-
ceptions) is amended by adding at the end the following 
new paragraph: 
‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 
fails to include on any return or statement for any 
taxable year any information with respect to a listed 
transaction (as defined in section 6707A(c)(2))
which is required under section 6011 to be included 
with such return or statement, the time for assess-
ment of any tax imposed by this title with respect 
to such transaction shall not expire before the date 
which is 1 year after the earlier of—
‘‘(A) the date on which the Secretary is 
furnished the information so required; or 
‘‘(B) the date that a material advisor (as 
defined in section 6111) meets the requirements 
of section 6112 with respect to a request by the 
Secretary under section 6112(b) relating to 
such transaction with respect to such tax-
payer.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years with respect to 
which the period for assessing a deficiency did not expire 
before the date of the enactment of this Act. 
SEC. 117. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE AND NONECONOMIC 
SUBSTANCE TRANSACTIONS. 
(a) IN GENERAL.—Section 163 (relating to deduction 
for interest) is amended by redesignating subsection (m) 
as subsection (n) and by inserting after subsection (l) the 
following new subsection:
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE 
TO NONDISCLOSED REPORTABLE TRANSACTIONS
AND 
NONECONOMIC SUBSTANCE TRANSACTIONS.—No deduc-
tion shall be allowed under this chapter for any interest 
paid or accrued under section 6601 on any underpayment 
of tax which is attributable to—
‘‘(1) the portion of any reportable transaction 
understatement (as defined in section 6662A(b)) 
with respect to which the requirement of section 
6664(d)(2)(A) is not met, or 
‘‘(2) any noneconomic substance transaction 
understatement (as defined in section 6662B(c)).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions in taxable years 
beginning after the date of the enactment of this Act. 
SEC. 118. AUTHORIZATION OF APPROPRIATIONS FOR TAX 
LAW ENFORCEMENT. 
There is authorized to be appropriated $300,000,000 
for each fiscal year beginning after September 30, 2003, 
for the purpose of carrying out tax law enforcement to 
combat tax avoidance transactions and other tax shelters, 
including the use of offshore financial accounts to conceal 
taxable income.
TITLE II—OTHER CORPORATE 
GOVERNANCE PROVISIONS 
SEC. 201. AFFIRMATION OF CONSOLIDATED RETURN REGU-
LATION AUTHORITY. 
(a) IN GENERAL.—Section 1502 (relating to consoli-
dated return regulations) is amended by adding at the end 
the following new sentence: ‘‘In prescribing such regula-
tions, the Secretary may prescribe rules applicable to cor-
porations filing consolidated returns under section 1501 
that are different from other provisions of this title that 
would apply if such corporations filed separate returns.’’. 
(b) RESULT NOT OVERTURNED.—Notwithstanding 
subsection (a), the Internal Revenue Code of 1986 shall 
be construed by treating Treasury regulation § 1.1502–
20(c)(1)(iii) (as in effect on January 1, 2001) as being 
inapplicable to the type of factual situation in 255 F.3d 
1357 (Fed. Cir. 2001). 
(c) EFFECTIVE DATE.—The provisions of this section 
shall apply to taxable years beginning before, on, or after 
the date of the enactment of this Act. 
SEC. 202. SIGNING OF CORPORATE TAX RETURNS BY CHIEF 
EXECUTIVE OFFICER. 
(a) IN GENERAL.—Section 6062 (relating to signing 
of corporation returns) is amended by inserting after the 
first sentence the following new sentences: ‘‘The return
of a corporation with respect to income shall also include 
a declaration signed by the chief executive officer of such 
corporation (or other such officer of the corporation as 
the Secretary may designate if the corporation does not 
have a chief executive officer), under penalties of perjury, 
that the chief executive officer ensures that such return 
complies with this title and that the chief executive officer 
was provided reasonable assurance of the accuracy of all 
material aspects of such return. The preceding sentence 
shall not apply to any return of a regulated investment 
company (within the meaning of section 851).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to returns filed after the date of 
the enactment of this Act. 
SEC. 203. DENIAL OF DEDUCTION FOR CERTAIN FINES, 
PENALTIES, AND OTHER AMOUNTS. 
(a) IN GENERAL.—Subsection (f) of section 162 (re-
lating to trade or business expenses) is amended to read 
as follows: 
‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), no deduction otherwise allowable shall be 
allowed under this chapter for any amount paid or 
incurred (whether by suit, agreement, or otherwise) 
to, or at the direction of, a government or entity de-
scribed in paragraph (4) in relation to the violation 
of any law or the investigation or inquiry by such 
government or entity into the potential violation of 
any law. 
‘‘(2) EXCEPTION FOR AMOUNTS CONSTITUTING 
RESTITUTION.—Paragraph (1) shall not apply to 
any amount which the taxpayer establishes con-
stitutes restitution for damage or harm caused by 
the violation of any law or the potential violation of 
any law. This paragraph shall not apply to any 
amount paid or incurred as reimbursement to the 
government or entity for the costs of any investiga-
tion or litigation. 
‘‘(3) EXCEPTION FOR AMOUNTS PAID OR IN-
CURRED AS THE RESULT OF CERTAIN COURT OR-
DERS.—Paragraph (1) shall not apply to any 
amount paid or incurred by order of a court in a 
suit in which no government or entity described in 
paragraph (4) is a party. 
‘‘(4) 
CERTAIN
NONGOVERNMENTAL
REGU-
LATORY ENTITIES.—An entity is described in this 
paragraph if it is—
‘‘(A) a nongovernmental entity which exer-
cises self-regulatory powers (including imposing 
sanctions) in connection with a qualified board
or exchange (as defined in section 1256(g)(7)), 
or 
‘‘(B) to the extent provided in regulations, 
a nongovernmental entity which exercises self-
regulatory powers (including imposing sanc-
tions) as part of performing an essential gov-
ernmental function.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to amounts paid or incurred after 
April 27, 2003, except that such amendment shall not 
apply to amounts paid or incurred under any binding 
order or agreement entered into on or before April 27, 
2003. Such exception shall not apply to an order or agree-
ment requiring court approval unless the approval was ob-
tained on or before April 27, 2003. 
SEC. 204. DISALLOWANCE OF DEDUCTION FOR PUNITIVE 
DAMAGES. 
(a) DISALLOWANCE OF DEDUCTION.—
(1) IN GENERAL.—Section 162(g) (relating to 
treble damage payments under the antitrust laws) is 
amended by adding at the end the following new 
paragraph: 
‘‘(2) PUNITIVE DAMAGES.—No deduction shall 
be allowed under this chapter for any amount paid 
or incurred for punitive damages in connection with
any judgment in, or settlement of, any action. This 
paragraph shall not apply to punitive damages de-
scribed in section 104(c).’’. 
(2) CONFORMING AMENDMENTS.—
(A) Section 162(g) is amended—
(i) by striking ‘‘If’’ and inserting: 
‘‘(1) TREBLE DAMAGES.—If’’, and 
(ii) by redesignating paragraphs (1) 
and (2) as subparagraphs (A) and (B), re-
spectively. 
(B) The heading for section 162(g) is 
amended by inserting ‘‘OR PUNITIVE DAM-
AGES’’ after ‘‘LAWS’’. 
(b) INCLUSION IN INCOME OF PUNITIVE DAMAGES 
PAID BY INSURER OR OTHERWISE.—
(1) IN GENERAL.—Part II of subchapter B of 
chapter 1 (relating to items specifically included in 
gross income) is amended by adding at the end the 
following new section: 
‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR-
ANCE OR OTHERWISE. 
‘‘Gross income shall include any amount paid to or 
on behalf of a taxpayer as insurance or otherwise by rea-
son of the taxpayer’s liability (or agreement) to pay puni-
tive damages.’’.
(2) REPORTING REQUIREMENTS.—Section 6041 
(relating to information at source) is amended by 
adding at the end the following new subsection: 
‘‘(f) SECTION TO APPLY TO PUNITIVE DAMAGES 
COMPENSATION.—This section shall apply to payments by 
a person to or on behalf of another person as insurance 
or otherwise by reason of the other person’s liability (or 
agreement) to pay punitive damages.’’. 
(3) CONFORMING AMENDMENT.—The table of 
sections for part II of subchapter B of chapter 1 is 
amended by adding at the end the following new 
item:
‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to damages paid or incurred on 
or after the date of the enactment of this Act. 
SEC. 205. INCREASE IN CRIMINAL MONETARY PENALTY 
LIMITATION FOR THE UNDERPAYMENT OR 
OVERPAYMENT OF TAX DUE TO FRAUD. 
(a) IN GENERAL.—Section 7206 (relating to fraud 
and false statements) is amended—
(1) by striking ‘‘Any person who—’’ and insert-
ing ‘‘(a) IN GENERAL.—Any person who—’’, and 
(2) by adding at the end the following new sub-
section:
‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN-
DERPAYMENT
OR
OVERPAYMENT
OF
TAX
DUE
TO 
FRAUD.—If any portion of any underpayment (as defined 
in section 6664(a)) or overpayment (as defined in section 
6401(a)) of tax required to be shown on a return is attrib-
utable to fraudulent action described in subsection (a), the 
applicable dollar amount under subsection (a) shall in no 
event be less than an amount equal to such portion. A 
rule similar to the rule under section 6663(b) shall apply 
for purposes of determining the portion so attributable.’’. 
(b) INCREASE IN PENALTIES.—
(1) ATTEMPT TO EVADE OR DEFEAT TAX.—
Section 7201 is amended—
(A) by striking ‘‘$100,000’’ and inserting 
‘‘$250,000’’, 
(B) by striking ‘‘$500,000’’ and inserting 
‘‘$1,000,000’’, and 
(C) by striking ‘‘5 years’’ and inserting 
‘‘10 years’’. 
(2) WILLFUL FAILURE TO FILE RETURN, SUP-
PLY INFORMATION, OR PAY TAX.—Section 7203 is 
amended—
(A) in the first sentence—
(i) by striking ‘‘misdemeanor’’ and in-
serting ‘‘felony’’, and
(ii) by striking ‘‘1 year’’ and inserting 
‘‘10 years’’, and 
(B) by striking the third sentence. 
(3) FRAUD AND FALSE STATEMENTS.—Section 
7206(a) (as redesignated by subsection (a)) is 
amended—
(A) by striking ‘‘$100,000’’ and inserting 
‘‘$250,000’’, 
(B) by striking ‘‘$500,000’’ and inserting 
‘‘$1,000,000’’, and 
(C) by striking ‘‘3 years’’ and inserting ‘‘5 
years’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to underpayments and overpay-
ments attributable to actions occurring after the date of 
the enactment of this Act.
TITLE III—ENRON-RELATED TAX 
SHELTER PROVISIONS 
SEC. 301. LIMITATION ON TRANSFER OR IMPORTATION OF 
BUILT-IN LOSSES. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—
‘‘(1) LIMITATION ON IMPORTATION OF BUILT-
IN LOSSES.—
‘‘(A) IN GENERAL.—If in any transaction 
described in subsection (a) or (b) there would 
(but for this subsection) be an importation of a 
net built-in loss, the basis of each property de-
scribed in subparagraph (B) which is acquired 
in such transaction shall (notwithstanding sub-
sections (a) and (b)) be its fair market value 
immediately after such transaction. 
‘‘(B) PROPERTY
DESCRIBED.—For pur-
poses of subparagraph (A), property is de-
scribed in this subparagraph if—
‘‘(i) gain or loss with respect to such 
property is not subject to tax under this 
subtitle in the hands of the transferor im-
mediately before the transfer, and 
‘‘(ii) gain or loss with respect to such 
property is subject to such tax in the 
hands of the transferee immediately after 
such transfer. 
In any case in which the transferor is a part-
nership, the preceding sentence shall be applied 
by treating each partner in such partnership as
holding such partner’s proportionate share of 
the property of such partnership. 
‘‘(C) IMPORTATION
OF
NET
BUILT-IN 
LOSS.—For purposes of subparagraph (A), 
there is an importation of a net built-in loss in 
a transaction if the transferee’s aggregate ad-
justed bases of property described in subpara-
graph (B) which is transferred in such trans-
action would (but for this paragraph) exceed 
the fair market value of such property imme-
diately after such transaction.’’. 
‘‘(2) LIMITATION ON TRANSFER OF BUILT-IN 
LOSSES IN SECTION 351 TRANSACTIONS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) property is transferred by a 
transferor in any transaction which is de-
scribed in subsection (a) and which is not 
described in paragraph (1) of this sub-
section, and 
‘‘(ii) the transferee’s aggregate ad-
justed bases of such property so trans-
ferred would (but for this paragraph) ex-
ceed the fair market value of such property 
immediately after such transaction,
then, notwithstanding subsection (a), the trans-
feree’s aggregate adjusted bases of the property 
so transferred shall not exceed the fair market 
value of such property immediately after such 
transaction. 
‘‘(B) ALLOCATION
OF
BASIS
REDUC-
TION.—The aggregate reduction in basis by 
reason of subparagraph (A) shall be allocated 
among the property so transferred in proportion 
to their respective built-in losses immediately 
before the transaction. 
‘‘(C) EXCEPTION FOR TRANSFERS WITHIN 
AFFILIATED
GROUP.—Subparagraph (A) shall 
not apply to any transaction if the transferor 
owns stock in the transferee meeting the re-
quirements of section 1504(a)(2). In the case of 
property to which subparagraph (A) does not 
apply by reason of the preceding sentence, the 
transferor’s basis in the stock received for such 
property shall not exceed its fair market value 
immediately after the transfer.’’. 
(b) COMPARABLE TREATMENT WHERE LIQUIDA-
TION.—Paragraph (1) of section 334(b) (relating to liq-
uidation of subsidiary) is amended to read as follows:
‘‘(1) IN GENERAL.—If property is received by a 
corporate distributee in a distribution in a complete 
liquidation to which section 332 applies (or in a 
transfer described in section 337(b)(1)), the basis of 
such property in the hands of such distributee shall 
be the same as it would be in the hands of the trans-
feror; except that the basis of such property in the 
hands of such distributee shall be the fair market 
value of the property at the time of the distribu-
tion—
‘‘(A) in any case in which gain or loss is 
recognized by the liquidating corporation with 
respect to such property, or 
‘‘(B) in any case in which the liquidating 
corporation is a foreign corporation, the cor-
porate distributee is a domestic corporation, 
and the corporate distributee’s aggregate ad-
justed bases of property described in section 
362(e)(1)(B) which is distributed in such liq-
uidation would (but for this subparagraph) ex-
ceed the fair market value of such property im-
mediately after such liquidation.’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after February 13, 
2003.
SEC. 302. NO REDUCTION OF BASIS UNDER SECTION 734 IN 
STOCK HELD BY PARTNERSHIP IN COR-
PORATE PARTNER. 
(a) IN GENERAL.—Section 755 is amended by adding 
at the end the following new subsection: 
‘‘(c) NO ALLOCATION
OF BASIS DECREASE
TO 
STOCK OF CORPORATE PARTNER.—In making an alloca-
tion under subsection (a) of any decrease in the adjusted 
basis of partnership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a 
corporation (or any person which is related (within 
the meaning of section 267(b) or 707(b)(1)) to such 
corporation) which is a partner in the partnership, 
and 
‘‘(2) any amount not allocable to stock by rea-
son of paragraph (1) shall be allocated under sub-
section (a) to other partnership property in such 
manner as the Secretary may prescribe. 
Gain shall be recognized to the partnership to the extent 
that the amount required to be allocated under paragraph 
(2) to other partnership property exceeds the aggregate 
adjusted basis of such other property immediately before 
the allocation required by paragraph (2).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to distributions after February 13, 
2003.
SEC. 303. REPEAL OF SPECIAL RULES FOR FASITS. 
(a) IN GENERAL.—Part V of subchapter M of chap-
ter 1 (relating to financial asset securitization investment 
trusts) is hereby repealed. 
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (6) of section 56(g) is amended 
by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 
REMIC’’. 
(2) Clause (ii) of section 382(l)(4)(B) is amend-
ed by striking ‘‘a REMIC to which part IV of sub-
chapter M applies, or a FASIT to which part V of 
subchapter M applies,’’ and inserting ‘‘or a REMIC 
to which part IV of subchapter M applies,’’. 
(3) Paragraph (1) of section 582(c) is amended 
by striking ‘‘, and any regular interest in a 
FASIT,’’. 
(4) Subparagraph (E) of section 856(c)(5) is 
amended by striking the last sentence. 
(5)(A) Section 860G(a)(1) is amended by add-
ing at the end the following new sentence: ‘‘An inter-
est shall not fail to qualify as a regular interest sole-
ly because the specified principal amount of the reg-
ular interest (or the amount of interest accrued on 
the regular interest) can be reduced as a result of 
the nonoccurrence of 1 or more contingent payments 
with respect to any reverse mortgage loan held by
the REMIC if, on the startup day for the REMIC, 
the sponsor reasonably believes that all principal and 
interest due under the regular interest will be paid 
at or prior to the liquidation of the REMIC.’’. 
(B) The last sentence of section 860G(a)(3) is 
amended by inserting ‘‘, and any reverse mortgage 
loan (and each balance increase on such loan meet-
ing the requirements of subparagraph (A)(iii)) shall 
be treated as an obligation secured by an interest in 
real property’’ before the period at the end. 
(6) Paragraph (3) of section 860G(a) is amend-
ed by adding ‘‘and’’ at the end of subparagraph (B), 
by striking ‘‘, and’’ at the end of subparagraph (C) 
and inserting a period, and by striking subparagraph 
(D). 
(7) Section 860G(a)(3), as amended by para-
graph (6), is amended by adding at the end the fol-
lowing new sentence: ‘‘For purposes of subparagraph 
(A), if more than 50 percent of the obligations 
transferred to, or purchased by, the REMIC are 
originated by the United States or any State (or any 
political subdivision, agency, or instrumentality of 
the United States or any State) and are principally 
secured by an interest in real property, then each 
obligation transferred to, or purchased by, the
REMIC shall be treated as secured by an interest in 
real property.’’. 
(8)(A) Section 860G(a)(3)(A) is amended by 
striking ‘‘or’’ at the end of clause (i), by inserting 
‘‘or’’ at the end of clause (ii), and by inserting after 
clause (ii) the following new clause: 
‘‘(iii) represents an increase in the 
principal amount under the original terms 
of an obligation described in clause (i) or 
(ii) if such increase— 
‘‘(I) is attributable to an advance 
made to the obligor pursuant to the 
original terms of the obligation, 
‘‘(II) occurs after the startup 
day, and 
‘‘(III) 
is 
purchased 
by 
the 
REMIC pursuant to a fixed price con-
tract in effect on the startup day.’’. 
(B) Section 860G(a)(7)(B) is amended to read 
as follows: 
‘‘(B) QUALIFIED
RESERVE
FUND.—For 
purposes of subparagraph (A), the term ‘quali-
fied reserve fund’ means any reasonably re-
quired reserve to—
‘‘(i) provide for full payment of ex-
penses of the REMIC or amounts due on 
regular interests in the event of defaults on 
qualified mortgages or lower than expected 
returns on cash flow investments, or 
‘‘(ii) provide a source of funds for the 
purchase of obligations described in clause 
(ii) or (iii) of paragraph (3)(A). 
The aggregate fair market value of the assets 
held in any such reserve shall not exceed 50 
percent of the aggregate fair market value of all 
of the assets of the REMIC on the startup day, 
and the amount of any such reserve shall be 
promptly and appropriately reduced to the ex-
tent the amount held in such reserve is no 
longer reasonably required for purposes speci-
fied in clause (i) or (ii) of paragraph (3)(A).’’. 
(9) Subparagraph (C) of section 1202(e)(4) is 
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’. 
(10) Section 1272(a)(6)(B) is amended by add-
ing at the end the following new flush sentence: 
‘‘For purposes of clause (iii), the Secretary 
shall prescribe regulations permitting the use of 
a current prepayment assumption, determined
as of the close of the accrual period (or such 
other time as the Secretary may prescribe dur-
ing the taxable year in which the accrual period 
ends).’’. 
(11) Subparagraph (C) of section 7701(a)(19) 
is amended by adding ‘‘and’’ at the end of clause 
(ix), by striking ‘‘, and’’ at the end of clause (x) and 
inserting a period, and by striking clause (xi). 
(12) The table of parts for subchapter M of 
chapter 1 is amended by striking the item relating 
to part V. 
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall take effect on February 14, 2003. 
(2) EXCEPTION FOR EXISTING FASITS.—
(A) IN GENERAL.—Paragraph (1) shall not 
apply to any FASIT in existence on the date of 
the enactment of this Act to the extent that 
regular interests issued by the FASIT before 
such date continue to remain outstanding in ac-
cordance with the original terms of issuance. 
(B) TRANSFER
OF
ADDITIONAL
ASSETS 
NOT PERMITTED.—Except as provided in regu-
lations prescribed by the Secretary of the
Treasury or the Secretary’s delegate, subpara-
graph (A) shall cease to apply as of the earliest 
date after the date of the enactment of this Act 
that any property is transferred to the FASIT. 
SEC. 304. EXPANDED DISALLOWANCE OF DEDUCTION FOR 
INTEREST ON CONVERTIBLE DEBT. 
(a) IN GENERAL.—Paragraph (2) of section 163(l) 
is amended by striking ‘‘or a related party’’ and inserting 
‘‘or equity held by the issuer (or any related party) in any 
other person’’. 
(b) CAPITALIZATION ALLOWED WITH RESPECT TO 
EQUITY OF PERSONS OTHER THAN ISSUER AND RE-
LATED PARTIES.—Section 163(l) is amended by redesig-
nating paragraphs (4) and (5) as paragraphs (5) and (6) 
and by inserting after paragraph (3) the following new 
paragraph: 
‘‘(4) CAPITALIZATION ALLOWED WITH RESPECT 
TO EQUITY OF PERSONS OTHER THAN ISSUER AND 
RELATED PARTIES.—If the disqualified debt instru-
ment of a corporation is payable in equity held by 
the issuer (or any related party) in any other person 
(other than a related party), the basis of such equity 
shall be increased by the amount not allowed as a 
deduction by reason of paragraph (1) with respect to 
the instrument.’’.
(c) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED 
BY DEALERS IN SECURITIES.—Section 163(l), as amend-
ed by subsection (b), is amended by redesignating para-
graphs (5) and (6) as paragraphs (6) and (7) and by in-
serting after paragraph (4) the following new paragraph: 
‘‘(5) EXCEPTION FOR CERTAIN INSTRUMENTS 
ISSUED BY DEALERS IN SECURITIES.—For purposes 
of this subsection, the term ‘disqualified debt instru-
ment’ does not include indebtedness issued by a 
dealer in securities (or a related party) which is pay-
able in, or by reference to, equity (other than equity 
of the issuer or a related party) held by such dealer 
in its capacity as a dealer in securities. For purposes 
of this paragraph, the term ‘dealer in securities’ has 
the meaning given such term by section 475.’’. 
(c) CONFORMING AMENDMENTS.—Paragraph (3) of 
section 163(l) is amended—
(1) by striking ‘‘or a related party’’ in the ma-
terial preceding subparagraph (A) and inserting ‘‘or 
any other person’’, and 
(2) by striking ‘‘or interest’’ each place it ap-
pears. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to debt instruments issued after 
February 13, 2003.
SEC. 305. EXPANDED AUTHORITY TO DISALLOW TAX BENE-
FITS UNDER SECTION 269. 
(a) IN GENERAL.—Subsection (a) of section 269 (re-
lating to acquisitions made to evade or avoid income tax) 
is amended to read as follows: 
‘‘(a) IN GENERAL.—If—
‘‘(1)(A) any person or persons acquire, directly 
or indirectly, control of a corporation, or 
‘‘(B) any corporation acquires, directly or indi-
rectly, property of another corporation and the basis 
of such property, in the hands of the acquiring cor-
poration, is determined by reference to the basis in 
the hands of the transferor corporation, and 
‘‘(2) the principal purpose for which such acqui-
sition was made is evasion or avoidance of Federal 
income tax, 
then the Secretary may disallow such deduction, credit, 
or other allowance. For purposes of paragraph (1)(A), 
control means the ownership of stock possessing at least 
50 percent of the total combined voting power of all class-
es of stock entitled to vote or at least 50 percent of the 
total value of all shares of all classes of stock of the cor-
poration.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to stock and property acquired 
after February 13, 2003.
SEC. 306. MODIFICATION OF INTERACTION BETWEEN SUB-
PART F AND PASSIVE FOREIGN INVESTMENT 
COMPANY RULES. 
(a) LIMITATION ON EXCEPTION FROM PFIC RULES 
FOR UNITED STATES SHAREHOLDERS OF CONTROLLED 
FOREIGN
CORPORATIONS.—Paragraph (2) of section 
1297(e) (relating to passive foreign investment company) 
is amended by adding at the end the following flush sen-
tence: 
‘‘Such term shall not include any period if the 
earning of subpart F income by such corpora-
tion during such period would result in only a 
remote likelihood of an inclusion in gross in-
come under section 951(a)(1)(A)(i).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of controlled for-
eign corporations beginning after February 13, 2003, and 
to taxable years of United States shareholders with or 
within which such taxable years of controlled foreign cor-
porations end.
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