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(b) CONFORMING AMENDMENT.—Clause (i) of section 
1042(c)(4)(A) 
is 
amended 
by 
striking 
‘‘section 
1362(d)(3)(C)’’ and inserting ‘‘section 1362(d)(3)(B)’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 522. 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) or a depository institution holding com-
pany (as defined in section 3(w)(1) of the Federal De-
posit Insurance Act (12 U.S.C. 1813(w)(1)), if such 
stock— 
‘‘(A) is required to be held by an individual 
under applicable Federal or State law in order 
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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 respect 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.’’. 
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(c) EFFECTIVE DATES.— 
(1) IN
GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2006. 
(2) SPECIAL RULE FOR TREATMENT AS SECOND 
CLASS OF STOCK.—In the case of any taxable year be-
ginning after December 31, 1996, restricted bank di-
rector stock (as defined in section 1361(f) of the Inter-
nal Revenue Code of 1986, as added by this section) 
shall not be taken into account in determining wheth-
er an S corporation has more than 1 class of stock. 
SEC. 523. SPECIAL RULE FOR BANK REQUIRED TO CHANGE 
FROM THE RESERVE METHOD OF ACCOUNT-
ING ON BECOMING S CORPORATION. 
(a) IN GENERAL.—Section 1361, as amended by this 
Act, is amended by adding at the end the following new 
subsection: 
‘‘(g) SPECIAL RULE FOR BANK REQUIRED TO CHANGE 
FROM THE RESERVE METHOD OF ACCOUNTING ON BECOM-
ING S CORPORATION.—In the case of a bank which changes 
from the reserve method of accounting for bad debts de-
scribed in section 585 or 593 for its first taxable year for 
which an election under section 1362(a) is in effect, the 
bank may elect to take into account any adjustments under 
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section 481 by reason of such change for the taxable year 
immediately preceding such first taxable year.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2006. 
SEC. 524. TREATMENT OF THE SALE OF INTEREST IN A 
QUALIFIED SUBCHAPTER S SUBSIDIARY. 
(a) IN
GENERAL.—Subparagraph (C) of section 
1361(b)(3) (relating to treatment of terminations of quali-
fied subchapter S subsidiary status) is amended— 
(1) by striking ‘‘For purposes of this title,’’ and 
inserting the following: 
‘‘(i) IN
GENERAL.—For purposes of 
this title,’’, and 
(2) by inserting at the end the following new 
clause: 
‘‘(ii) TERMINATION
BY
REASON
OF 
SALE OF STOCK.—If the failure to meet the 
requirements of subparagraph (B) is by rea-
son of the sale of stock of a corporation 
which is a qualified subchapter S sub-
sidiary, the sale of such stock shall be treat-
ed as if— 
‘‘(I) the sale were a sale of an un-
divided interest in the assets of such 
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corporation (based on the percentage of 
the corporation’s stock sold), and 
‘‘(II) the sale were followed by an 
acquisition by such corporation of all 
of its assets (and the assumption by 
such corporation of all of its liabilities) 
in a transaction to which section 351 
applies.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2006 . 
SEC. 525. ELIMINATION OF ALL EARNINGS AND PROFITS AT-
TRIBUTABLE TO PRE-1983 YEARS FOR CER-
TAIN CORPORATIONS. 
In the case of a corporation which is— 
(1) described in section 1311(a)(1) of the Small 
Business Job Protection Act of 1996, and 
(2) not described in section 1311(a)(2) of such 
Act, 
the amount of such corporation’s accumulated earnings and 
profits (for the first taxable year beginning after the date 
of the enactment of this Act) shall be reduced by an amount 
equal to the portion (if any) of such accumulated earnings 
and profits which were accumulated in any taxable year 
beginning before January 1, 1983, for which such corpora-
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tion was an electing small business corporation under sub-
chapter S of the Internal Revenue Code of 1986. 
SEC. 526. EXPANSION OF QUALIFYING BENEFICIARIES OF 
AN ELECTING SMALL BUSINESS TRUST. 
(a) NO LOOK THROUGH
FOR ELIGIBILITY PUR-
POSES.—Clause (v) of section 1361(c)(2)(B) is amended by 
adding at the end the following new sentence: ‘‘This clause 
shall not apply for purposes of subsection (b)(1)(C).’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall take effect on the date of the enactment of this 
Act. 
SEC. 527. DEDUCTIBILITY OF INTEREST EXPENSE ON IN-
DEBTEDNESS INCURRED BY AN ELECTING 
SMALL BUSINESS TRUST TO ACQUIRE S COR-
PORATION STOCK. 
(a) IN
GENERAL.—Subparagraph (C) of section 
641(c)(2) (relating to modifications) is amended by insert-
ing after clause (iii) the following new clause: 
‘‘(iv) Any interest expense paid or ac-
crued on indebtedness incurred to acquire 
stock in an S corporation.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2006. 
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PART II—REVENUE PROVISIONS 
SEC. 531. MODIFICATION OF EFFECTIVE DATE OF LEASING 
PROVISIONS OF THE AMERICAN JOBS CRE-
ATION ACT OF 2004. 
(a) LEASES TO FOREIGN ENTITIES.—Section 849(b) 
of the American Jobs Creation Act of 2004 is amended by 
adding at the end the following new paragraph: 
‘‘(5) LEASES TO FOREIGN ENTITIES.—In the case 
of tax-exempt use property leased to a tax-exempt en-
tity which is a foreign person or entity, the amend-
ments made by this part shall apply to taxable years 
beginning after December 31, 2006, with respect to 
leases entered into on or before March 12, 2004.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall take effect as if included in the enactment of 
the American Jobs Creation Act of 2004. 
SEC. 532. APPLICATION OF RULES TREATING INVERTED 
CORPORATIONS 
AS 
DOMESTIC 
CORPORA-
TIONS TO CERTAIN TRANSACTIONS OCCUR-
RING AFTER MARCH 20, 2002. 
(a) IN GENERAL.—Section 7874(b) (relating to in-
verted corporations treated as domestic corporations) is 
amended to read as follows: 
‘‘(b) INVERTED CORPORATIONS TREATED AS DOMES-
TIC CORPORATIONS.— 
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‘‘(1) IN
GENERAL.—Notwithstanding section 
7701(a)(4), a foreign corporation shall be treated for 
purposes of this title as a domestic corporation if such 
corporation would be a surrogate foreign corporation 
if subsection (a)(2) were applied by substituting ‘80 
percent’ for ‘60 percent’. 
‘‘(2) SPECIAL RULE FOR CERTAIN TRANSACTIONS 
OCCURRING AFTER MARCH 20, 2002.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) paragraph (1) does not apply to a 
foreign corporation, but 
‘‘(ii) paragraph (1) would apply to 
such corporation if, in addition to the sub-
stitution under paragraph (1), subsection 
(a)(2) were applied by substituting ‘March 
20, 2002’ for ‘March 4, 2003’ each place it 
appears, 
then paragraph (1) shall apply to such corpora-
tion but only with respect to taxable years of 
such corporation beginning after December 31, 
2006. 
‘‘(B) SPECIAL
RULES.—Subject to such 
rules as the Secretary may prescribe, in the case 
of a corporation to which paragraph (1) applies 
by reason of this paragraph— 
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‘‘(i) the corporation shall be treated, as 
of the close of its last taxable year beginning 
before January 1, 2007, as having trans-
ferred all of its assets, liabilities, and earn-
ings and profits to a domestic corporation 
in a transaction with respect to which no 
tax is imposed under this title, 
‘‘(ii) the bases of the assets transferred 
in the transaction to the domestic corpora-
tion shall be the same as the bases of the as-
sets in the hands of the foreign corporation, 
subject to any adjustments under this title 
for built-in losses, 
‘‘(iii) the basis of the stock of any 
shareholder in the domestic corporation 
shall be the same as the basis of the stock 
of the shareholder in the foreign corporation 
for which it is treated as exchanged, and 
‘‘(iv) the transfer of any earnings and 
profits by reason of clause (i) shall be dis-
regarded in determining any deemed divi-
dend or foreign tax creditable to the domes-
tic corporation with respect to such trans-
fer. 
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‘‘(C) REGULATIONS.—The Secretary may 
prescribe such regulations as may be necessary 
or appropriate to carry out this paragraph, in-
cluding regulations to prevent the avoidance of 
the purposes of this paragraph.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2006. 
SEC. 533. DENIAL 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— 
(A) by redesignating paragraphs (1) and 
(2) as subparagraphs (A) and (B), respectively, 
(B) by striking ‘‘If’’ and inserting: 
‘‘(1) TREBLE DAMAGES.—If’’, and 
(C) 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).’’. 
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(2) CONFORMING AMENDMENT.—The heading for 
section 162(g) is amended by inserting ‘‘OR PUNITIVE 
DAMAGES’’ 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 reason 
of the taxpayer’s liability (or agreement) to pay punitive 
damages.’’. 
(2) REPORTING REQUIREMENTS.—Section 6041 
(relating to information at source) is amended by 
adding at the end the following new subsection: 
‘‘(h) SECTION TO APPLY TO PUNITIVE DAMAGES COM-
PENSATION.—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 agree-
ment) to pay punitive damages.’’. 
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