644 
(2) RETIRED PARTNERS AND SUCCESSORS IN 
INTEREST
OF
DECEASED
PARTNERS
TREATED
AS 
PARTNERS UNTIL LIQUIDATION.—Section 761(d) is 
amended by adding at the end the following: ‘‘For 
purposes of this subchapter, any retired partner or 
a deceased partner’s successor in interest shall be 
treated as a partner until the complete liquidation of 
such interest.’’ 
(3) CONFORMING AMENDMENT.— 
(A) Section 357(c)(3)(A) is amended by 
striking ‘‘payment of which either—’’ and all 
that follows through ‘‘then, for purposes of’’ 
and inserting ‘‘payment of which would give 
rise to a deduction, then, for purposes of’’. 
(B) Section 731(d) is amended— 
(i) by striking ‘‘section 736 (relating 
to payments to a retiring partner or a de-
ceased partner’s successor in interest),’’, 
and 
(ii) by striking ‘‘items), and’’ and in-
serting ‘‘items) and’’. 
(C) Section 751(b)(2) is amended— 
(i) by striking subparagraph (B), and 
(ii) by striking ‘‘shall not apply to— 
’’ and all that follows through ‘‘a distribu-
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tion of property’’ and inserting the fol-
lowing: ‘‘shall not apply to a distribution of 
property’’. 
(D)(i) Section 753 is amended by striking 
‘‘The amount includible’’ and all that follows 
and inserting ‘‘For treatment of income in re-
spect of a decedent, see section 691.’’ 
(ii) Section 691 is amended by striking 
subsection (e). 
(4) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to partners retiring or 
dying after December 31, 2014. 
SEC. 3612. MANDATORY ADJUSTMENTS TO BASIS OF PART-
NERSHIP PROPERTY IN CASE OF TRANSFER 
OF PARTNERSHIP INTERESTS. 
(a) IN GENERAL.—Section 743 is amended— 
(1) by striking subsections (a), (c), (d), (e), and 
(f) and by redesignating subsection (b) as subsection 
(a), 
(2) in subsection (a) (as so redesignated) by 
striking ‘‘with respect to which the election provided 
in section 754 is in effect or which has a substantial 
built-in loss immediately after such transfer’’, and 
(3) by adding at the end the following new sub-
section: 
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‘‘(b) ALLOCATION OF BASIS.— 
‘‘(1) GENERAL
RULE.—Any increase or de-
crease in the adjusted basis of partnership property 
under subsection (a) shall, except as provided in 
paragraph (2), be allocated— 
‘‘(A) in a manner which has the effect of 
reducing the difference between the fair market 
value and the adjusted basis of partnership 
properties, or 
‘‘(B) in any other manner permitted by 
regulations prescribed by the Secretary. 
‘‘(2) SPECIAL RULE.—In applying the allocation 
rules provided in paragraph (1), increases or de-
creases in the adjusted basis of partnership property 
arising from a transfer of an interest attributable to 
property consisting of— 
‘‘(A) capital assets and property described 
in section 1231(b), or 
‘‘(B) any other property of the partner-
ship, 
shall be allocated to partnership property of a like 
character except that the basis of any such partner-
ship property shall not be reduced below zero.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 704(c)(1) is amended— 
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(A) by adding ‘‘and’’ at the end of sub-
paragraph (A), 
(B) by striking ‘‘, and’’ at the end of sub-
paragraph (B) and inserting a period, and 
(C) by striking all that follows subpara-
graph (B). 
(2) Section 732 is amended by striking sub-
section (d) and by redesignating subsections (e) and 
(f) as subsections (d) and (e), respectively. 
(3) Section 761(e)(2) is amended by striking 
‘‘optional’’. 
(4) Section 6031 is amended by striking sub-
section (f). 
(5) The heading for section 743 is amended to 
read as follows: ‘‘ADJUSTMENT
TO
BASIS
OF 
PARTNERSHIP PROPERTY.’’ 
(6) The heading for subsection (a) (as redesig-
nated by the preceding provisions of this Act) of sec-
tion 743 is amended by striking ‘‘ADJUSTMENT TO 
BASIS OF PARTNERSHIP PROPERTY’’ and inserting 
‘‘IN GENERAL’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transfers after December 31, 
2014. 
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SEC. 3613. MANDATORY ADJUSTMENTS TO BASIS OF UNDIS-
TRIBUTED PARTNERSHIP PROPERTY. 
(a) IN GENERAL.—Section 734 is amended to read 
as follows: 
‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY. 
‘‘(a) IN GENERAL.—In the case of any distribution 
to a partner, the partnership shall adjust the basis of part-
nership property such that each remaining partner’s net 
liquidation amount immediately after such distribution is 
equal to such partner’s net liquidation amount imme-
diately before such distribution. 
‘‘(b) DISTRIBUTIONS OTHER THAN IN LIQUIDATION 
OF A PARTNER’S INTEREST.—In the case of any distribu-
tion to a partner other than in liquidation of such part-
ner’s interest, proper adjustment shall be made under sub-
section (a) with respect to such partner to take into ac-
count— 
‘‘(1) the amount of any gain recognized by such 
partner with respect to such distribution under sec-
tion 731(a), and 
‘‘(2) the amount of any gain or loss which 
would be recognized by such partner if such partner 
sold the property distributed at fair market value 
immediately after such distribution. 
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‘‘(c) NET LIQUIDATION AMOUNT.—For purposes of 
this section, the term ‘net liquidation amount’ means, with 
respect to any partner, the net amount of gain or loss (if 
any) which would be taken into account by the partner 
under section 702 if the partnership sold all of its assets 
at fair market value (and no other amounts were taken 
into account under such section). 
‘‘(d) ALLOCATION OF BASIS.— 
‘‘(1) DECREASES IN BASIS.—Any decrease in 
the adjusted basis of partnership property which is 
required under this section— 
‘‘(A) shall be made in accordance with 
paragraph (3) of section 732(c), and 
‘‘(B) shall be made first with respect to 
property other than unrealized receivables (as 
defined in section 751(c)) and inventory (as de-
fined in section 751(d)) to the extent thereof. 
If any such decrease is prevented by the absence of 
sufficient adjusted basis of partnership property, 
each partner shall recognize gain in the amount of 
such partner’s distributive share of such prevented 
decrease. Such gain shall be treated as gain from 
the sale of the partner’s partnership interest. 
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‘‘(2) INCREASES IN BASIS.—Any increase in the 
adjusted basis of partnership property which is re-
quired under this section— 
‘‘(A) shall be made in accordance with 
paragraph (2) of section 732(c), and 
‘‘(B) shall be made only with respect to 
property other than unrealized receivables (as 
defined in section 751(c)) and inventory (as de-
fined in section 751(d)). 
If any such increase is prevented by the absence of 
property described in subparagraph (B), each part-
ners shall recognize a loss in the amount of such 
partner’s distributive share of such prevented in-
crease. Such loss shall be treated as a loss from the 
sale of the partner’s partnership interest. 
‘‘(e) NO ALLOCATION
OF BASIS DECREASE
TO 
STOCK OF CORPORATE PARTNER.—In making an alloca-
tion under subsection (d) of any decrease in the adjusted 
basis of partnership property required under subsection 
(a)— 
‘‘(1) no allocation may be made to stock in a 
corporation (or any person related (within the mean-
ing of section 267(b) or 707(b)(1)) to such corpora-
tion) which is a partner in the partnership, and 
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‘‘(2) any amount not allocable to stock by rea-
son of paragraph (1) shall be allocated under sub-
section (d) to other partnership property. 
Gain shall be recognized by the partnership to the extent 
that the amount required to be allocated to other partner-
ship property under subsection (e)(2) exceeds the aggre-
gate adjusted basis of such other property immediately be-
fore the allocation required by subsection (a).’’. 
(b) CONFORMING AMENDMENTS.— 
(1)(A) Subpart D of part II of subchapter K of 
chapter 1 is amended by striking sections 754 and 
755 (and by striking items relating to such sections 
in the table of sections of such subpart). 
(B) Clause (ii) of section 706(d)(2)(D) is 
amended by striking ‘‘section 755’’ and inserting 
‘‘section 743(b)’’. 
(2) Subsection (d) of section 1060 is amend-
ed— 
(A) by striking ‘‘section 755’’ in paragraph 
(1) and inserting ‘‘sections 734 and 743’’, and 
(B) by striking ‘‘section 755’’ in paragraph 
(2) and inserting ‘‘section 734 or 743’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions after December 31, 
2014. 
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SEC. 3614. CORRESPONDING ADJUSTMENTS TO BASIS OF 
PROPERTIES HELD BY PARTNERSHIP WHERE 
PARTNERSHIP BASIS ADJUSTED. 
(a) IN GENERAL.—Subpart B of part II of sub-
chapter K of chapter 1, as amended by the preceding pro-
visions of this Act, is amended by inserting after section 
735 the following new section: 
‘‘SEC. 736. CORRESPONDING ADJUSTMENT TO BASIS OF 
PROPERTIES HELD BY LOWER-TIER PART-
NERSHIP IN CASE OF UPPER-TIER PARTNER-
SHIP BASIS ADJUSTMENTS. 
‘‘(a) DISTRIBUTIONS
BY UPPER-TIER PARTNER-
SHIP.—In the case of any distribution of property to a 
partner by an upper-tier partnership, if such distribution 
results in an adjustment in the upper-tier partnership’s 
adjusted basis in an interest in a lower-tier partnership 
under section 734, then such lower-tier partnership shall 
make a corresponding adjustment to the adjusted basis 
of its partnership property. 
‘‘(b) DISTRIBUTIONS OF INTERESTS IN LOWER-TIER 
PARTNERSHIP.—In the case of any distribution of an in-
terest in a lower-tier partnership by an upper-tier partner-
ship— 
‘‘(1) if the adjusted basis of such interest in the 
hands of the upper-tier partnership (determined im-
mediately before such distribution) exceeds the ad-
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justed basis of such interest in the hands of the dis-
tributee partner (determined immediately after such 
distribution), then such lower-tier partnership shall 
decrease the adjusted basis of its partnership prop-
erty by the amount of such excess, or 
‘‘(2) if the adjusted basis of such interest in the 
hands of the distributee partner (determined imme-
diately after such distribution) exceeds the adjusted 
basis of such interest in the hands of the upper-tier 
partnership (determined immediately before such 
distribution), then such lower-tier partnership shall 
increase the adjusted basis of its partnership prop-
erty by the amount of such excess. 
‘‘(c) DISPOSITIONS OF INTERESTS IN UPPER-TIER 
PARTNERSHIP.—In the case of a disposition of an interest 
in an upper-tier partnership which holds an interest in a 
lower-tier partnership, if there is an adjustment to the ad-
justed basis of the lower-tier partnership under section 
743, then such lower-tier partnership shall make a cor-
responding adjustment to the adjusted basis of its part-
nership property. 
‘‘(d) MULTI-TIERED PARTNERSHIPS.—In the case of 
any adjustment under subsection (a), (b), or (c) in the 
adjusted basis of an interest in another partnership, such 
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other partnership shall make a corresponding adjustment 
in the adjusted basis of its partnership property. 
‘‘(e) ALLOCATION
OF
BASIS; RECOGNITION
OF 
GAIN.—In the case of any adjustment in the adjusted 
basis of partnership property— 
‘‘(1) under subsection (a), (b), (c), or (d), such 
adjustment shall be made only with respect to the 
upper-tier partnership’s proportionate share (as de-
termined under section 743(a)) of the adjusted basis 
of the lower-tier partnership’s property, 
‘‘(2) under subsection (a) or (b) (or so much of 
subsection (d) as relates to either such subsection), 
rules similar to the rules of section 734(d) shall 
apply, and 
‘‘(3) under subsection (c) (or so much of sub-
section (d) as relates to such subsection), rules simi-
lar to the rules of section 743(b) shall apply. 
‘‘(f) REPORTING.—In the case of any adjustment in 
the adjusted basis of partnership property by a lower-tier 
partnership under this section by reason of a distribution 
by, or a disposition of an interest in, an upper-tier part-
nership, such upper-tier partnership shall furnish (in such 
manner as the Secretary shall prescribe) to such lower- 
tier partnership such information as is necessary to enable 
such lower-tier partnership to make such adjustment. 
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‘‘(g) UPPER- AND LOWER-TIER PARTNERSHIPS.— 
For purposes of this section— 
‘‘(1) UPPER-TIER
PARTNERSHIP.—The term 
‘upper-tier partnership’ means a partnership owning 
an interest in another partnership. 
‘‘(2) LOWER-TIER
PARTNERSHIP.—The term 
‘lower-tier partnership’ means the partnership re-
ferred to in paragraph (1) an interest in which is 
owned by the upper-tier partnership.’’. 
(b) EFFECTIVE DATES.—The amendments made by 
this section shall apply to distributions and transfers after 
December 31, 2014. 
SEC. 3615. CHARITABLE CONTRIBUTIONS AND FOREIGN 
TAXES TAKEN INTO ACCOUNT IN DETER-
MINING 
LIMITATION 
ON 
ALLOWANCE 
OF 
PARTNER’S SHARE OF LOSS. 
(a) IN GENERAL.—Subsection (d) of section 704 is 
amended— 
(1) by striking ‘‘A partner’s distributive share’’ 
and inserting the following: 
‘‘(1) IN
GENERAL.—A partner’s distributive 
share’’, 
(2) by striking ‘‘Any excess of such loss’’ and 
inserting the following: 
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‘‘(2) CARRYOVER.—Any excess of such loss’’, 
and 
(3) by adding at the end the following new 
paragraph: 
‘‘(3) SPECIAL
RULES.—In determining the 
amount of any loss under paragraph (1), there shall 
be taken into account as a deduction the partner’s 
distributive share of— 
‘‘(A) the adjusted basis of charitable con-
tributions described in paragraph (4) of section 
702(a), and 
‘‘(B) the amount of taxes described in 
paragraph (6) of such section.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to partnership taxable years begin-
ning after December 31, 2014. 
SEC. 3616. REVISIONS RELATED TO UNREALIZED RECEIV-
ABLES AND INVENTORY ITEMS. 
(a) REPEAL OF REQUIREMENT THAT INVENTORY BE 
SUBSTANTIALLY APPRECIATED
IN CERTAIN PARTNER-
SHIP
DISTRIBUTIONS
TREATED
AS
SALE
OR
EX-
CHANGE.— 
(1) IN
GENERAL.—Clause (ii) of section 
751(b)(1)(A) is amended by striking ‘‘which have 
appreciated substantially in value’’. 
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(2) 
CONFORMING
AMENDMENT.—Section 
751(b) is amended by striking paragraph (3). 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to distributions after 
December 31, 2014. 
(b) REVISION
OF
REGULATIONS
RELATING
TO 
TREATMENT OF UNREALIZED RECEIVABLES AND INVEN-
TORY ITEMS.—The Secretary of the Treasury shall revise 
regulations issued under section 751(b) of the Internal 
Revenue Code of 1986 to take into account the partner’s 
share of income and gain rather than the partner’s share 
of partnership assets. 
(c) SIMPLIFICATION OF DEFINITION OF UNREALIZED 
RECEIVABLES.— 
(1) IN GENERAL.—Section 751(c) is amended 
by striking all that follows paragraph (2) and insert-
ing the following: 
‘‘For purposes of this section and sections 731, 732, 734, 
and 741, such term also includes any property other than 
inventory items, but only to the extent of the amount 
which would be treated as ordinary income if (at the time 
of the transaction described in the applicable section) such 
property had been sold by the partnership for its fair mar-
ket value.’’. 
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(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall apply to partnership taxable 
years beginning after December 31, 2014. 
SEC. 3617. REPEAL OF TIME LIMITATION ON TAXING 
PRECONTRIBUTION GAIN. 
(a) IN GENERAL.—Subparagraph (B) of section 
704(c)(1) is amended by striking ‘‘within 7 years of being 
contributed’’. 
(b) CONFORMING AMENDMENT.—Paragraph (1) of 
section 737(b) is amended by striking ‘‘within 7 years of 
the distribution’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property contributed to a part-
nership after December 31, 2014. 
SEC. 3618. PARTNERSHIP INTERESTS CREATED BY GIFT. 
(a) IN GENERAL.—Section 761(b) is amended by 
adding at the end the following: ‘‘In the case of a capital 
interest in a partnership in which capital is a material in-
come-producing factor, whether a person is a partner with 
respect to such interest shall be determined without regard 
to whether such interest was derived by gift from any 
other person.’’. 
(b) CONFORMING AMENDMENTS.—Section 704(e) is 
amended— 
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(1) by striking paragraph (1) and by redesig-
nating paragraphs (2) and (3) as paragraphs (1) 
and (2), respectively, 
(2) by striking ‘‘this section’’ in paragraph (2) 
(as so redesignated) and inserting ‘‘this subsection’’, 
and 
(3) by striking ‘‘FAMILY PARTNERSHIPS’’ in 
the heading and inserting ‘‘PARTNERSHIP INTER-
ESTS CREATED BY GIFT’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to partnership taxable years begin-
ning after December 31, 2014. 
SEC. 3619. REPEAL OF TECHNICAL TERMINATION. 
(a) IN GENERAL.—Paragraph (1) of section 708(b) 
is amended— 
(1) by striking ‘‘, or’’ and all that follows and 
inserting a period, and 
(2) by striking ‘‘only if—’’ and all that follows 
through ‘‘no part of any business’’ and inserting the 
following: ‘‘only if no part of any business’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to partnership taxable years begin-
ning after December 31, 2014. 
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SEC. 3620. PUBLICLY TRADED PARTNERSHIP EXCEPTION 
RESTRICTED TO MINING AND NATURAL RE-
SOURCES PARTNERSHIPS. 
(a) IN GENERAL.—Subsection (d) of section 7704 is 
amended to read as follows: 
‘‘(d) QUALIFYING INCOME.—For purposes of this 
section, the term ‘qualifying income’ means— 
‘‘(1) income and gains derived from the explo-
ration, development, mining or production, proc-
essing, refining, transportation (including pipelines 
transporting gas, oil, or products thereof), or the 
marketing of any mineral or natural resource (in-
cluding geothermal energy and excluding fertilizer 
and timber) or industrial source carbon dioxide, and 
‘‘(2) any gain from the sale or disposition of a 
capital asset (or property described in section 
1231(b)) held for the production of income described 
in paragraph (1). 
For purposes of this subsection, the term ‘mineral or nat-
ural resource’ means any product of a character with re-
spect to which a deduction for depletion is allowable under 
section 611 (other than minerals from sea water or the 
air (or similar inexhaustible sources), soil, sod, dirt, turf, 
water, or mosses).’’. 
(b) 
CONFORMING
AMENDMENTS.—Section 
988(c)(1)(E) is amended— 
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(1) by striking ‘‘income or gains described in 
subparagraph 
(A), 
(B), 
or 
(G) 
of 
section 
7704(d)(1)’’ in clause (iii)(III) and inserting ‘‘quali-
fying income or gains’’, 
(2) by striking subclause (III) of clause (vi) and 
by redesignating subclause (IV) as subclause (III), 
(3) by redesignating clause (vi) (as amended by 
this subparagraph) as clause (viii), and 
(4) by inserting after clause (v) the following 
new clauses: 
‘‘(vi) 
QUALIFYING
INCOME
OR 
GAINS.—The term ‘qualifying income or 
gains’ means— 
‘‘(I) interest, 
‘‘(II) dividends, and 
‘‘(III) in the case of a partner-
ship described in the second sentence 
of section 7704(c)(3), income and 
gains from commodities (not described 
in section 1221(a)(1)) or futures, for-
wards, and options with respect to 
commodities. 
‘‘(vii) 
INADVERTENT
TERMI-
NATIONS.—If— 
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‘‘(I) A partnership fails to meet 
the gross income requirements of this 
subparagraph, 
‘‘(II) the Secretary determines 
that such failure was inadvertent, 
‘‘(III) no later than a reasonable 
time after the discovery of such fail-
ure, steps are taken so that such part-
nership once more meets such gross 
income requirements, and 
‘‘(IV) such partnership agrees to 
make such adjustments (including ad-
justments with respect to the part-
ners) or to pay such amounts as may 
be required by the Secretary with re-
spect to such period, 
then, notwithstanding such failure, such 
entity shall be treated as continuing to 
meet such gross income requirements for 
such period.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2016. 
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SEC. 3621. ORDINARY INCOME TREATMENT IN THE CASE OF 
PARTNERSHIP INTERESTS HELD IN CONNEC-
TION WITH PERFORMANCE OF SERVICES. 
(a) IN GENERAL.—Part IV of subchapter O of chap-
ter 1 is amended— 
(1) by redesignating section 1061 as section 
1062, and 
(2) by inserting after section 1060 the following 
new section: 
‘‘SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNEC-
TION WITH PERFORMANCE OF SERVICES. 
‘‘(a) IN GENERAL.—If one or more applicable part-
nership interests are held by a taxpayer at any time during 
the taxable year, so much of— 
‘‘(1) the taxpayer’s net capital gain with respect 
to such interests for such taxable year, as does not 
exceed 
‘‘(2) the taxpayer’s recharacterization account 
balance for such taxable year, 
shall be treated as ordinary income. 
‘‘(b) NET CAPITAL GAIN.— 
‘‘(1) IN GENERAL.—For purposes of subsection 
(a)(1), net capital gain shall be determined under 
section 1222, except that such section shall be ap-
plied— 
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‘‘(A) without regard to the recharacteriza-
tion of any item as ordinary income under this 
section, 
‘‘(B) by only taking into account items of 
gain and loss— 
‘‘(i) taken into account by the tax-
payer under section 702 with respect to 
any applicable partnership interest, 
‘‘(ii) recognized by the taxpayer on 
the disposition of any such interest, or 
‘‘(iii) recognized by the taxpayer 
under paragraph (4) on a distribution of 
property with respect to such interest, and 
‘‘(C) in the case of a taxable year for 
which section 1231 gains (as defined in section 
1231(a)(3)(A)) exceed section 1231 losses (as 
defined in section 1231(a)(3)(B)), by treating 
property which is taken into account in deter-
mining such gains and losses as capital assets 
held for more than 1 year. 
‘‘(2) ALLOCATION
TO
ITEMS
OF
GAIN.—The 
amount treated as ordinary income under subsection 
(a) shall be allocated ratably among the items of 
long-term capital gain taken into account in deter-
mining net capital gain under paragraph (1). 
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‘‘(3) RECOGNITION OF GAIN ON DISPOSITION 
OF
APPLICABLE
PARTNERSHIP
INTERESTS.—Any 
gain on the disposition of any applicable partnership 
interest shall be recognized notwithstanding any 
other provision of this title. 
‘‘(4) RECOGNITION OF GAIN ON DISTRIBUTIONS 
OF PARTNERSHIP PROPERTY.— 
‘‘(A) IN GENERAL.—In the case of any dis-
tribution of property by a partnership with re-
spect to any applicable partnership interest, the 
partner receiving such property shall recognize 
gain equal to the excess (if any) of— 
‘‘(i) the fair market value of such 
property at the time of such distribution, 
over 
‘‘(ii) the adjusted basis of such prop-
erty in the hands of such partner (deter-
mined without regard to subparagraph 
(B)). 
‘‘(B) ADJUSTMENT OF BASIS.—In the case 
of a distribution to which subparagraph (A) ap-
plies, the basis of the distributed property in 
the hands of the distributee partner shall be the 
amount determined under subparagraph (A)(i). 
‘‘(c) RECHARACTERIZATION ACCOUNT BALANCE.— 
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‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘recharacterization account balance’ 
means, with respect to any taxpayer for any taxable 
year, the excess (if any) of— 
‘‘(A) the sum of— 
‘‘(i) the taxpayer’s aggregate annual 
recharacterization amounts with respect to 
applicable partnership interests for such 
taxable year, plus 
‘‘(ii) the taxpayer’s recharacterization 
account balance for the taxable year pre-
ceding such taxable year, over 
‘‘(B) the sum of— 
‘‘(i) the taxpayer’s net ordinary in-
come with respect to applicable partnership 
interests for such taxable year (determined 
without regard to this section), plus 
‘‘(ii) the amount treated as ordinary 
income of the taxpayer under this section 
for the taxable year preceding such taxable 
year. 
‘‘(2) 
ANNUAL
RECHARACTERIZATION 
AMOUNT.—For purposes of this subsection— 
‘‘(A) IN GENERAL.—The term ‘annual re-
characterization amount’ means, with respect to 
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any applicable partnership interest for any 
partnership taxable year, an amount equal to 
the product of— 
‘‘(i) the specified rate determined 
under subparagraph (B) for the calendar 
year in which such taxable year begins, 
multiplied by 
‘‘(ii) the excess (if any) of— 
‘‘(I) an amount equal to the ap-
plicable percentage of the partner-
ship’s aggregate invested capital for 
such taxable year, over 
‘‘(II) the specified capital con-
tribution of the partner with respect 
to the applicable partnership interest 
for such taxable year. 
If a taxpayer holds an applicable partnership 
interest for less than the entire taxable year, 
the amount determined under the preceding 
sentence shall be ratably reduced. 
‘‘(B) SPECIFIED RATE.—For purposes of 
subparagraph (A), the term ‘specified rate’ 
means, with respect to any calendar year, a per-
centage equal to— 
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‘‘(i) the Federal long-term rate deter-
mined under section 1274(d)(1) for the 
last month of the calendar year, plus 
‘‘(ii) 10 percentage points. 
‘‘(C) APPLICABLE PERCENTAGE.— 
‘‘(i) IN GENERAL.—The term ‘applica-
ble percentage’ means, with respect to any 
applicable partnership interest, the highest 
percentage of profits of the partnership 
that could be allocated with respect to such 
interest for the taxable year (consistent 
with the partnership agreement and as-
suming such facts and circumstances with 
respect to such taxable year as would re-
sult in such highest percentage). 
‘‘(ii) SECRETARIAL AUTHORITY.—The 
Secretary shall prescribe rules for the de-
termination of the applicable percentage in 
cases in which the percentage of profits of 
a partnership that are to be allocated with 
respect to an applicable partnership inter-
est varies on the basis of the aggregate 
amount of such profits. Such rules may 
provide a percentage which may be used in 
lieu of the highest percentage determined 
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under clause (i) in cases where such other 
percentage is consistent with the purposes 
of this section. 
‘‘(D) AGGREGATE INVESTED CAPITAL.— 
‘‘(i) IN GENERAL.—The term ‘aggre-
gate invested capital’ means, with respect 
to any taxable year, the average daily 
amount of invested capital of the partner-
ship for such taxable year. 
‘‘(ii) INVESTED CAPITAL.—The term 
‘invested capital’ means, with respect to 
any partnership as of any day, the total 
cumulative value, determined at the time 
of contribution, of all money or other prop-
erty contributed to the partnership on or 
before such day. 
‘‘(iii) REDUCTION
FOR
LIQUIDATION 
OF
PARTNERSHIP
INTERESTS.—The in-
vested capital of a partnership shall be re-
duced by the aggregate amount distributed 
in liquidation of interests in the partner-
ship. 
‘‘(iv) TREATMENT
OF
CERTAIN
IN-
DEBTEDNESS AS INVESTED CAPITAL.—The 
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following amounts shall be treated as in-
vested capital: 
‘‘(I) PARTNER LOANS.—The ag-
gregate value (determined as of the 
time of the loan) of money or other 
property which a partner loans to the 
partnership. 
‘‘(II) INDEBTEDNESS
ELIGIBLE 
TO SHARE IN EQUITY OF THE PART-
NERSHIP.—The face amount of any 
convertible debt of the partnership or 
any debt obligation providing equity 
participation in the partnership. 
‘‘(E) 
SPECIFIED
CAPITAL
CONTRIBU-
TION.— 
‘‘(i) IN GENERAL.—The term ‘speci-
fied capital contribution’ means, with re-
spect to any applicable partnership interest 
for any taxable year, the average daily 
amount of contributed capital with respect 
to such interest for such year. 
‘‘(ii) CONTRIBUTED
CAPITAL.—The 
term ‘contributed capital’ means, with re-
spect to applicable partnership interest as 
of any day, the excess (if any) of— 
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stituting ‘10 percent’ for ‘50 percent’ each 
place it appears. 
‘‘(F) MULTIPLE
INTERESTS.—If at any 
time during a taxable year a taxpayer holds di-
rectly or indirectly more than 1 applicable part-
nership interest in a single partnership, such in-
terests shall be treated as 1 applicable partner-
ship interest for purposes of applying this para-
graph. 
‘‘(3) NET ORDINARY INCOME.—For purposes of 
this subsection, the net ordinary income with respect 
to applicable partnership interests for any taxable 
year is the excess (if any) of— 
‘‘(A) the taxpayer’s distributive share of 
items of income and gain under section 702 
with respect to applicable partnership interests 
for such taxable year (determined without re-
gard to any items of gain taken into account in 
determining net capital gain under subsection 
(b)(1)), over 
‘‘(B) the taxpayer’s distributive share of 
items of deduction and loss under section 702 
with respect to such interests for such taxable 
year (determined without regard to any items of 
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loss taken into account in determining net cap-
ital gain under subsection (b)(1)). 
‘‘(d) APPLICABLE PARTNERSHIP INTEREST.—For 
purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘applicable part-
nership interest’ means any interest in a partnership 
which, directly or indirectly, is transferred to (or is 
held by) the taxpayer in connection with the per-
formance of services by the taxpayer, or any other 
person, in any applicable trade or business. 
‘‘(2) APPLICABLE TRADE OR BUSINESS.— 
‘‘(A) IN GENERAL.—The term ‘applicable 
trade or business’ means any trade or business 
conducted on a regular, continuous, and sub-
stantial basis which, regardless of whether the 
activities are conducted in one or more entities, 
consists, in whole or in part, of— 
‘‘(i) raising or returning capital, 
‘‘(ii) investing in (or disposing of) 
trades or businesses (or identifying trades 
or businesses for such investing or disposi-
tion), and 
‘‘(iii) developing such trades or busi-
nesses. 
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‘‘(B) TREATMENT OF RESEARCH AND EX-
PERIMENTATION ACTIVITIES.—Any activity in-
volving research or experimentation (within the 
meaning of section 469(c)(4)) shall be treated 
as a trade or business for purposes of clauses 
(ii) and (iii) of subparagraph (A). 
‘‘(e) TRANSFER OF APPLICABLE PARTNERSHIP IN-
TEREST TO RELATED PERSON.— 
‘‘(1) IN GENERAL.—If a taxpayer transfers any 
applicable partnership interest, directly or indirectly, 
to a person related to the taxpayer, the taxpayer 
shall include in gross income (as ordinary income) so 
much of the taxpayer’s recharacterization account 
balance for such taxable year as is allocable to such 
interest (determined in such manner as the Sec-
retary may provide and reduced by any amount 
treated as ordinary income under subsection (a) with 
respect to the transfer of such interest). 
‘‘(2) RELATED PERSON.—For purposes of this 
paragraph, a person is related to the taxpayer if— 
‘‘(A) the person is a member of the tax-
payer’s family within the meaning of section 
318(a)(1), or 
‘‘(B) the person performed a service within 
the current calendar year or the preceding three 
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calendar years in any applicable trade or busi-
ness in which or for which the taxpayer per-
formed a service. 
‘‘(f) REPORTING BY ENTITY OF TAXPAYER’S AN-
NUAL RECHARACTERIZATION AMOUNT.—A partnership 
shall report to the Secretary, and include with the infor-
mation required to be furnished under section 6031(b) to 
each partner, the amount of the partner’s annual re-
characterization amount for the taxable year, if any. A 
similar rule applies to any entity that receives a report 
of an annual recharacterization amount for the taxable 
year. 
‘‘(g) REGULATIONS.—The Secretary shall issue such 
regulations or other guidance as necessary to carry out 
this section, including regulations— 
‘‘(1) to prevent the abuse of the purposes of 
this section, including through— 
‘‘(A) the allocation of income to tax indif-
ferent parties, or 
‘‘(B) a reduction in the invested capital of 
the partnership (including attempts to under-
value contributed or loaned property), 
‘‘(2) which provide that partnership interests 
shall not fail to be treated as transferred or held in 
connection with the performance of services merely 
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because the taxpayer also made contributions to the 
partnership, 
‘‘(3) which provide for the application of this 
section in cases where the taxpayer has more than 
1 applicable interest in a partnership, and 
‘‘(4) which provide for the application of this 
section in cases of tiered structures of entities.’’. 
(b) COORDINATION WITH SECTION 83.—Subsection 
(e) of section 83 is amended by striking ‘‘or’’ at the end 
of paragraph (4), by striking the period at the end of para-
graph (5) and inserting ‘‘, or’’, and by adding at the end 
the following new paragraph: 
‘‘(6) a transfer of a partnership interest to 
which section 1061 applies.’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for part IV of subchapter O of chapter 1 is amended by 
striking the item relating to 1061 and inserting the fol-
lowing new items: 
‘‘Sec. 1061. Partnership interests held in connection with performance of serv-
ices. 
‘‘Sec. 1062. Cross references.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3622. PARTNERSHIP AUDITS AND ADJUSTMENTS. 
(a) REPEAL
OF
TEFRA PARTNERSHIP
AUDIT 
RULES.—Chapter 63 is amended by striking subchapter 
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C (and by striking the item relating to such subchapter 
in the table of subchapters for such chapter). 
(b) REPEAL
OF ELECTING LARGE PARTNERSHIP 
RULES.— 
(1) IN GENERAL.—Subchapter K of chapter 1 
is amended by striking part IV (and by striking the 
item relating to such part in the table of parts for 
such subchapter). 
(2) ASSESSMENT RULES RELATING TO ELECT-
ING LARGE PARTNERSHIPS.—Chapter 63 is amended 
by striking subchapter D (and by striking the item 
relating to such subchapter in the table of sub-
chapters for such chapter). 
(3) EFFECTIVE DATE.—The amendments made 
by this section shall apply to returns filed after De-
cember 31, 2014. 
(c) PARTNERSHIP AUDIT REFORM.— 
(1) IN GENERAL.—Chapter 63, as amended by 
the preceding provisions of this Act, is amended by 
inserting after subchapter B the following new sub-
chapter: 
‘‘Subchapter C—Treatment of Partnerships 
‘‘PART I—IN GENERAL 
‘‘PART II—PARTNERSHIP ADJUSTMENTS 
‘‘PART III—PROCEDURE 
‘‘PART IV—DEFINITIONS AND SPECIAL RULES 
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‘‘PART I—IN GENERAL 
‘‘Sec. 6221. Determination at partnership level. 
‘‘Sec. 6222. Partner’s return must be consistent with partnership return. 
‘‘Sec. 6223. Designation of partnership representative. 
‘‘SEC. 6221. DETERMINATION AT PARTNERSHIP LEVEL. 
‘‘(a) IN GENERAL.—Items of income, gain, loss, de-
duction, or credit of a partnership for a partnership tax-
able year (and any partner’s distributive share thereof) 
shall be audited, any tax attributable thereto shall be as-
sessed and collected, and the applicability of any penalty, 
addition to tax, or additional amount which relates to an 
adjustment to any such item or share shall be determined, 
at the partnership level pursuant to this subchapter. 
‘‘(b) ELECTION OUT FOR CERTAIN PARTNERSHIPS 
WITH 100 OR FEWER PARTNERS.—This subchapter shall 
not apply with respect to any partnership for any taxable 
year if— 
‘‘(1) the partnership elects the application of 
this subsection for such taxable year, 
‘‘(2) the partnership has 100 or fewer partners 
on the last day of such taxable year, 
‘‘(3) each of the partners of such partnership is 
an individual, a C corporation (other than a real es-
tate investment trust or a regulated investment com-
pany), any foreign entity that would be treated as a 
C corporation were it domestic, or an estate of a de-
ceased partner, 
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‘‘(4) the election— 
‘‘(A) is made with a timely filed return for 
such taxable year, and 
‘‘(B) includes (in the manner prescribed by 
the Secretary) a disclosure of the name and 
taxpayer identification number of each partner 
of such partnership, and 
‘‘(5) the partnership notifies each such partner 
of such election in the manner prescribed by the 
Secretary. 
For purposes of paragraph (4)(B), the Secretary may pro-
vide for alternative identification of any foreign partners. 
‘‘SEC. 6222. PARTNER’S RETURN MUST BE CONSISTENT 
WITH PARTNERSHIP RETURN. 
‘‘(a) IN GENERAL.—A partner of any partnership 
shall, on the partner’s return, treat each item of income, 
gain, loss, deduction, or credit attributable to such part-
nership in a manner which is consistent with the treat-
ment of such income, gain, loss, deduction, or credit on 
the partnership return. 
‘‘(b) UNDERPAYMENT
DUE
TO
INCONSISTENT 
TREATMENT ASSESSED AS MATH ERROR.—Any under-
payment of tax by a partner by reason of failing to comply 
with the requirements of subsection (a) shall be assessed 
and collected in the same manner as if such underpayment 
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were on account of a mathematical or clerical error ap-
pearing on the partner’s return. Paragraph (2) of section 
6213(b) shall not apply to any assessment of an under-
payment referred to in the preceding sentence. 
‘‘(c) ADDITION TO TAX FOR FAILURE TO COMPLY 
WITH SECTION.—For addition to tax in the case of part-
ner’s disregard of the requirements of this section, see 
part II of subchapter A of chapter 68. 
‘‘SEC. 6223. PARTNERS BOUND BY ACTIONS OF PARTNER-
SHIP. 
‘‘(a) DESIGNATION OF PARTNER.—Each partnership 
shall designate (in the manner prescribed by the Sec-
retary) a partner (or other person) as the partnership rep-
resentative who shall have the sole authority to act on be-
half of the partnership under this subchapter. In any case 
in which such a designation is not in effect, the Secretary 
may select any partner as the partnership representative. 
‘‘(b) BINDING EFFECT.—A partnership and all part-
ners of such partnership shall be bound— 
‘‘(1) by actions taken under this subchapter by 
the partnership, and 
‘‘(2) by any decision in a proceeding brought 
under this subchapter. 
‘‘PART II—PARTNERSHIP ADJUSTMENTS 
‘‘Sec. 6225. Partnership adjustment by Secretary. 
‘‘Sec. 6226. Administrative adjustment request by partnership. 
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‘‘SEC. 6225. PARTNERSHIP ADJUSTMENT BY SECRETARY. 
‘‘(a) IN GENERAL.—In the case of any adjustment 
by the Secretary in the amount of any item of income, 
gain, loss, deduction, or credit of a partnership, or any 
partner’s distributive share thereof— 
‘‘(1) the partnership shall pay any imputed un-
derpayment with respect to such adjustment in the 
adjustment year as provided in section 6232, and 
‘‘(2) any imputed overpayment shall be taken 
into account by the partnership in the adjustment 
year as a reduction in non-separately stated income 
or an increase in non-separately stated loss (which-
ever is appropriate) under section 702(a)(8). 
‘‘(b) DETERMINATION
OF
IMPUTED
UNDERPAY-
MENTS AND OVERPAYMENTS.—For purposes of this sub-
chapter— 
‘‘(1) IN GENERAL.—Except as provided in sub-
section (c), any imputed underpayment or imputed 
overpayment with respect to any partnership adjust-
ment for any reviewed year shall be determined— 
‘‘(A) by netting all adjustments of items of 
income, gain, loss, or deduction and multiplying 
such net amount by the highest rate of tax in 
effect for the reviewed year under section 1 or 
11, 
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‘‘(B) by treating any net increase or de-
crease in loss under subparagraph (A) as a de-
crease or increase, respectively, in income, and 
‘‘(C) by taking into account any adjust-
ments to items of credit as an increase or de-
crease, as the case may be, in the amount de-
termined under subparagraph (A). 
‘‘(2) ADJUSTMENTS TO DISTRIBUTIVE SHARES 
OF PARTNERS NOT NETTED.—In the case of any ad-
justment which reallocates the distributive share of 
any item from one partner to another, such adjust-
ment shall be taken into account under paragraph 
(1) by disregarding— 
‘‘(A) any decrease in any item of income or 
gain, and 
‘‘(B) any increase in any item of deduc-
tion, loss, or credit. 
‘‘(c) 
MODIFICATION
OF
IMPUTED
UNDERPAY-
MENTS.— 
‘‘(1) METHOD
IN
GENERAL.—The Secretary 
shall establish procedures under which the imputed 
underpayment amount may be modified consistent 
with the requirements of this subsection. 
‘‘(2) AMENDED RETURNS OF PARTNERS.—Such 
procedures shall provide that if— 
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‘‘(A) one or more partners file returns for 
the taxable year of the partners which includes 
the end of the reviewed year of the partnership, 
‘‘(B) such returns take into account all ad-
justments under subsection (a) properly allo-
cable to such partners (and for any other tax-
able year with respect to which any tax at-
tribute is affected by reason of such adjust-
ments), and 
‘‘(C) payment of any tax due is included 
with such return, 
then the imputed underpayment amount shall be de-
termined without regard to the portion of the adjust-
ments so taken into account. 
‘‘(3) 
REALLOCATION
OF
DISTRIBUTIVE 
SHARE.—In the case of any adjustment which reallo-
cates the distributive share of any item from one 
partner to another, paragraph (2) shall apply only if 
returns are filed by all partners affected by such ad-
justment. 
‘‘(4) YEAR AND DAY FOR SUBMISSION TO SEC-
RETARY.—Anything required to be submitted pursu-
ant to paragraph (1) shall be submitted to the Sec-
retary not later than the close the 180-day period 
beginning on the date on which the notice of a pro-
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posed partnership adjustment is mailed under sec-
tion 6231 unless such period is extended with the 
consent of the Secretary. 
‘‘(5) DECISION OF SECRETARY.—Any modifica-
tion of the imputed underpayment amount under 
this subsection shall be made only upon approval of 
such modification by the Secretary. 
‘‘(d) DEFINITIONS AND SPECIAL RULE.—For pur-
poses of this subchapter— 
‘‘(1) REVIEWED
YEAR.—The term ‘reviewed 
year’ means the partnership taxable year to which 
the item being adjusted relates. 
‘‘(2) ADJUSTMENT
YEAR.—The term ‘adjust-
ment year’ means the partnership taxable year in 
which— 
‘‘(A) in the case of an adjustment pursu-
ant to the decision of a court in a proceeding 
brought under section 6234, such decision be-
comes final, 
‘‘(B) in the case of an administrative ad-
justment request under section 6226, such ad-
ministrative adjustment request is made, or 
‘‘(C) in any other case, notice of the final 
partnership adjustment is mailed under section 
6231. 
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‘‘SEC. 6226. ADMINISTRATIVE ADJUSTMENT REQUEST BY 
PARTNERSHIP. 
‘‘(a) IN GENERAL.—A partnership may file a request 
for an administrative adjustment in the amount of any 
item of income, gain, loss, deduction, or credit of the part-
nership for any partnership taxable year, but only to the 
extent such adjustment results in an imputed under-
payment. 
‘‘(b) ADJUSTMENT.—Any adjustment under sub-
section (a) shall be determined and taken into account by 
the partnership under rules similar to the rules of section 
6225 (other than subsection (c) thereof) for the partner-
ship taxable year in which the administrative adjustment 
request is made. 
‘‘(c) PERIOD OF LIMITATIONS.—A partnership may 
not file such a request— 
‘‘(1) more than 3 years after the later of— 
‘‘(A) the date on which the partnership re-
turn for such year is filed, or 
‘‘(B) the last day for filing the partnership 
return for such year (determined without re-
gard to extensions), and 
‘‘(2) after any notice of an administrative pro-
ceeding with respect to the taxable year is mailed 
under section 6231. 
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‘‘PART III—PROCEDURE 
‘‘Sec. 6231. Notice of proceedings and adjustment. 
‘‘Sec. 6232. Assessment, collection, and payment. 
‘‘Sec. 6233. Penalties and interest. 
‘‘Sec. 6234. Judicial review of partnership adjustment. 
‘‘Sec. 6235. Period of limitations on making adjustments. 
‘‘SEC. 6231. NOTICE OF PROCEEDINGS AND ADJUSTMENT. 
‘‘(a) IN GENERAL.—The Secretary shall mail to the 
partnership and the partnership representative— 
‘‘(1) notice of any administrative proceeding 
initiated at the partnership level with respect to an 
adjustment of any item of income, gain, loss, deduc-
tion, or credit of a partnership for a partnership tax-
able year, or any partner’s distributive share thereof, 
‘‘(2) notice of any proposed partnership adjust-
ment resulting from such proceeding, and 
‘‘(3) notice of any final partnership adjustment 
resulting from such proceeding. 
Any notice of a final partnership adjustment shall not be 
mailed earlier than 180 days after the date on which the 
notice of the proposed partnership adjustment is mailed. 
Such notices shall be sufficient if mailed to the last known 
address of the partnership representative or the partner-
ship (even if the partnership has terminated its existence). 
The first sentence shall apply to any proceeding with re-
spect to an administrative adjustment request filed by a 
partnership under section 6226. 
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‘‘(b) FURTHER NOTICES RESTRICTED.—If the Sec-
retary mails a notice of a final partnership adjustment to 
any partnership for any partnership taxable year and the 
partnership files a petition under section 6234 with re-
spect to such notice, in the absence of a showing of fraud, 
malfeasance, or misrepresentation of a material fact, the 
Secretary shall not mail another such notice to such part-
nership with respect to such taxable year. 
‘‘(c) AUTHORITY TO RESCIND NOTICE WITH PART-
NERSHIP CONSENT.—The Secretary may, with the con-
sent of the partnership, rescind any notice of a partner-
ship adjustment mailed to such partnership. Any notice 
so rescinded shall not be treated as a notice of a partner-
ship adjustment for purposes of this subchapter, and the 
taxpayer shall have no right to bring a proceeding under 
section 6234 with respect to such notice. 
‘‘SEC. 6232. ASSESSMENT, COLLECTION, AND PAYMENT. 
‘‘(a) IN GENERAL.—Any imputed underpayment— 
‘‘(1) shall be assessed and collected in the same 
manner as if it were a tax imposed for the adjust-
ment year by subtitle A, and 
‘‘(2) shall be paid on or before the return due 
date for the adjustment year. 
‘‘(b) LIMITATION ON ASSESSMENT.—Except as oth-
erwise provided in this chapter, no assessment of a defi-
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ciency may be made (and no levy or proceeding in any 
court for the collection of any amount resulting from such 
adjustment may be made, begun or prosecuted) before— 
‘‘(1) the close of the 90th day after the day on 
which a notice of a final partnership adjustment was 
mailed, and 
‘‘(2) if a petition is filed under section 6234 
with respect to such notice, the decision of the court 
has become final. 
‘‘(c) PREMATURE ACTION MAY BE ENJOINED.—Not-
withstanding section 7421(a), any action which violates 
subsection (b) may be enjoined in the proper court, includ-
ing the Tax Court. The Tax Court shall have no jurisdic-
tion to enjoin any action under this subsection unless a 
timely petition has been filed under section 6234 and then 
only in respect of the adjustments that are the subject 
of such petition. 
‘‘(d) EXCEPTIONS TO RESTRICTIONS ON ADJUST-
MENTS.— 
‘‘(1) ADJUSTMENTS ARISING OUT OF MATH OR 
CLERICAL ERRORS.— 
‘‘(A) IN GENERAL.—If the partnership is 
notified that, on account of a mathematical or 
clerical error appearing on the partnership re-
turn, an adjustment to a partnership item is re-
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quired, rules similar to the rules of paragraphs 
(1) and (2) of section 6213(b) shall apply to 
such adjustment. 
‘‘(B) SPECIAL RULE.—If a partnership is 
a partner in another partnership, any adjust-
ment on account of such partnership’s failure to 
comply with the requirements of section 
6222(a) with respect to its interest in such 
other partnership shall be treated as an adjust-
ment referred to in subparagraph (A), except 
that paragraph (2) of section 6213(b) shall not 
apply to such adjustment. 
‘‘(2) 
PARTNERSHIP
MAY
WAIVE
RESTRIC-
TIONS.—The partnership may at any time (whether 
or not any notice of partnership adjustment has 
been issued), by a signed notice in writing filed with 
the Secretary, waive the restrictions provided in sub-
section (b) on the making of any partnership adjust-
ment. 
‘‘(e) LIMIT WHERE NO PROCEEDING BEGUN.—If no 
proceeding under section 6234 is begun with respect to 
any notice of a final partnership adjustment during the 
90-day period described in subsection (b) thereof, the 
amount for which the partnership is liable under section 
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6225 shall not exceed the amount determined in accord-
ance with such notice. 
‘‘SEC. 6233. PENALTIES AND INTEREST. 
‘‘(a) PENALTIES AND INTEREST DETERMINED FROM 
REVIEWED YEAR.— 
‘‘(1) IN GENERAL.—In the case of an imputed 
underpayment with respect to a partnership adjust-
ment for a reviewed year, the partnership— 
‘‘(A) shall pay to the Secretary interest 
computed under paragraph (2), and 
‘‘(B) shall be liable for any penalty, addi-
tion to tax, or additional amount as provided in 
paragraph (3). 
‘‘(2) DETERMINATION OF AMOUNT OF INTER-
EST.—The interest computed under this paragraph 
with respect to any partnership adjustment is the in-
terest which would be determined under chapter 
67— 
‘‘(A) on the imputed underpayment deter-
mined with respect to such adjustment, 
‘‘(B) for the period beginning on the day 
after the return due date for the reviewed year 
and ending on the return due date for the ad-
justment year (or, if earlier, the date payment 
of the imputed underpayment is made). 
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Proper adjustments in the amount determined under 
the preceding sentence shall be made for adjust-
ments required for partnership taxable years after 
the reviewed year and before the adjustment year by 
reason of such partnership adjustment. 
‘‘(3) PENALTIES.—A partnership shall be liable 
for any penalty, addition to tax, or additional 
amount for which it would have been liable if such 
partnership had been an individual subject to tax 
under chapter 1 for the reviewed year and the im-
puted underpayment were an actual underpayment 
(or understatement) for such year. 
‘‘(b) INTEREST AND PENALTIES WITH RESPECT TO 
ADJUSTMENT YEAR RETURN.— 
‘‘(1) IN GENERAL.—In the case of any failure 
to pay an imputed underpayment on the date pre-
scribed therefor, the partnership shall be liable— 
‘‘(A) for interest as determined under 
paragraph (2), and 
‘‘(B) for any penalty, addition to tax, or 
additional amount as determined under para-
graph (3). 
‘‘(2) INTEREST.—Interest determined under 
this paragraph is the interest that would be deter-
mined by treating the imputed underpayment as an 
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underpayment of tax imposed in the adjustment 
year. 
‘‘(3) PENALTIES.—Penalties, additions to tax, 
or additional amounts determined under this para-
graph are the penalties, additions to tax, or addi-
tional amounts that would be determined— 
‘‘(A) by applying section 6651(a)(2) to 
such failure to pay. 
‘‘(B) by treating the imputed under-
payment as an underpayment of tax for pur-
poses of part II of subchapter A of chapter 68. 
‘‘SEC. 6234. JUDICIAL REVIEW OF PARTNERSHIP ADJUST-
MENT. 
‘‘(a) IN GENERAL.—Within 90 days after the date 
on which a notice of a final partnership adjustment is 
mailed under section 6231 with respect to any partnership 
taxable year, the partnership may file a petition for a re-
adjustment for such taxable year with— 
‘‘(1) the Tax Court, 
‘‘(2) the district court of the United States for 
the district in which the partnership’s principal place 
of business is located, or 
‘‘(3) the Claims Court. 
‘‘(b) JURISDICTIONAL REQUIREMENT FOR BRINGING 
ACTION IN DISTRICT COURT OR CLAIMS COURT.— 
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‘‘(1) IN
GENERAL.—A readjustment petition 
under this section may be filed in a district court of 
the United States or the Claims Court only if the 
partnership filing the petition deposits with the Sec-
retary, on or before the date the petition is filed, the 
amount of the imputed underpayment (as of the 
date of the filing of the petition) if the partnership 
adjustment was made as provided by the notice of 
final partnership adjustment. The court may by 
order provide that the jurisdictional requirements of 
this paragraph are satisfied where there has been a 
good faith attempt to satisfy such requirement and 
any shortfall of the amount required to be deposited 
is timely corrected. 
‘‘(2) INTEREST PAYABLE.—Any amount depos-
ited under paragraph (1), while deposited, shall not 
be treated as a payment of tax for purposes of this 
title (other than chapter 67). 
‘‘(c) SCOPE OF JUDICIAL REVIEW.—A court with 
which a petition is filed in accordance with this section 
shall have jurisdiction to determine all items of income, 
gain, loss, deduction, or credit of the partnership for the 
partnership taxable year to which the notice of final part-
nership adjustment relates, the proper allocation of such 
items among the partners, and the applicability of any 
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penalty, addition to tax, or additional amount for which 
the partnership may be liable under this subchapter. 
‘‘(d) DETERMINATION
OF COURT REVIEWABLE.— 
Any determination by a court under this section shall have 
the force and effect of a decision of the Tax Court or a 
final judgment or decree of the district court or the Claims 
Court, as the case may be, and shall be reviewable as such. 
The date of any such determination shall be treated as 
being the date of the court’s order entering the decision. 
‘‘(e) EFFECT OF DECISION DISMISSING ACTION.—If 
an action brought under this section is dismissed other 
than by reason of a rescission under section 6231(c), the 
decision of the court dismissing the action shall be consid-
ered as its decision that the notice of final partnership 
adjustment is correct, and an appropriate order shall be 
entered in the records of the court. 
‘‘SEC. 6235. PERIOD OF LIMITATIONS ON MAKING ADJUST-
MENTS. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this section, no adjustment under this subpart for any 
partnership taxable year may be made after the date 
which is 3 years after the latest of— 
‘‘(1) the date on which the partnership return 
for such taxable year was filed, 
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‘‘(2) the return due date for the taxable year, 
or 
‘‘(3) the date on which the partnership filed an 
administrative adjustment request with respect to 
such year under section 6226. 
‘‘(b) EXTENSION BY AGREEMENT.—The period de-
scribed in subsection (a) (including an extension period 
under this subsection) may be extended by an agreement 
entered into by the Secretary and the partnership before 
the expiration of such period. 
‘‘(c) SPECIAL RULE IN CASE OF FRAUD, ETC.— 
‘‘(1) FALSE RETURN.—In the case of a false or 
fraudulent partnership return with intent to evade 
tax, the adjustment may be made at any time. 
‘‘(2) SUBSTANTIAL OMISSION OF INCOME.—If 
any partnership omits from gross income an amount 
properly includible therein and such amount is de-
scribed in section 6501(e)(1)(A), subsection (a) shall 
be applied by substituting ‘6 years’ for ‘3 years’. 
‘‘(3) NO RETURN.—In the case of a failure by 
a partnership to file a return for any taxable year, 
the adjustment may be made at any time. 
‘‘(4) RETURN FILED BY SECRETARY.—For pur-
poses of this section, a return executed by the Sec-
retary under subsection (b) of section 6020 on be-
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half of the partnership shall not be treated as a re-
turn of the partnership. 
‘‘(d) SUSPENSION WHEN SECRETARY MAILS NOTICE 
OF ADJUSTMENT.—If notice of a final partnership adjust-
ment with respect to any taxable year is mailed under sec-
tion 6231, the running of the period specified in sub-
section (a) (as modified by the other provisions of this sec-
tion) shall be suspended— 
‘‘(1) for the period during which an action may 
be brought under section 6234 (and, if a petition is 
filed under such section with respect to such notice, 
until the decision of the court becomes final), and 
‘‘(2) for 1 year thereafter. 
‘‘PART IV—DEFINITIONS AND SPECIAL RULES 
‘‘Sec. 6241. Definitions and special rules. 
‘‘SEC. 6241. DEFINITIONS AND SPECIAL RULES. 
‘‘(a) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this subchapter— 
‘‘(1) PARTNERSHIP.—The term ‘partnership’ 
means any partnership required to file a return 
under section 6031(a). 
‘‘(2) PARTNER.—The term ‘partner’ means— 
‘‘(A) a partner in the partnership, and 
‘‘(B) any other person whose income tax li-
ability under subtitle A is determined in whole 
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or in part by taking into account directly or in-
directly income, gain, deduction, or loss of the 
partnership. 
‘‘(b) PARTNERSHIP ADJUSTMENT.—The term ‘part-
nership adjustment’ means any adjustment in the amount 
of any item of income, gain, loss, deduction, or credit of 
a partnership, or any partner’s distributive share thereof. 
‘‘(c) RETURN DUE DATE.—The term ‘return due 
date’ means, with respect to the taxable year, the date 
prescribed for filing the partnership return for such tax-
able year (determined without regard to extensions). 
‘‘(d) JOINT AND SEVERAL LIABILITY.— 
‘‘(1) IN GENERAL.—The partnership and any 
partner of the partnership shall be jointly and sever-
ally liable for any imputed underpayment and any 
penalty, addition to tax, or additional amount attrib-
utable thereto. 
‘‘(2) PERIOD
FOR
ASSESSMENT
OF
PART-
NERS.—The period for assessment of an imputed 
underpayment with respect to a partner of a part-
nership shall not expire earlier than 3 years after 
the date on which an assessment of such imputed 
underpayment was made with respect to the partner-
ship. 
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‘‘(3) DETERMINING PARTNERS.—A person shall 
be treated as partner of the partnership if such per-
son is a partner of such partnership at any time 
during the reviewed or adjustment year. 
‘‘(e) PAYMENTS NONDEDUCTIBLE.—No deduction 
shall be allowed under subtitle A for any payment required 
to be made by a partnership under this subchapter. 
‘‘(f) SPECIAL RULE FOR DEDUCTIONS, LOSSES, AND 
CREDITS OF FOREIGN PARTNERSHIPS.—Except to the ex-
tent otherwise provided in regulations, in the case of any 
partnership the partnership representative of which re-
sides outside the United States or the books of which are 
maintained outside the United States, no deduction, loss, 
or credit shall be allowable to any partner unless section 
6031 is complied with for the partnership’s taxable year 
in which such deduction, loss, or credit arose at such time 
as the Secretary prescribes by regulations. 
‘‘(g) PARTNERSHIPS HAVING PRINCIPAL PLACE OF 
BUSINESS OUTSIDE UNITED STATES.—For purposes of 
sections 6234, a principal place of business located outside 
the United States shall be treated as located in the Dis-
trict of Columbia. 
‘‘(h) PARTNERSHIPS IN CASES UNDER TITLE 11 OF 
UNITED STATES CODE.— 
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‘‘(1) SUSPENSION OF PERIOD OF LIMITATIONS 
ON MAKING ADJUSTMENT, ASSESSMENT, OR COLLEC-
TION.—The running of any period of limitations pro-
vided in this subchapter on making a partnership 
adjustment (or provided by section 6501 or 6502 on 
the assessment or collection of any imputed under-
payment determined under this subchapter) shall, in 
a case under title 11 of the United States Code, be 
suspended during the period during which the Sec-
retary is prohibited by reason of such case from 
making the adjustment (or assessment or collection) 
and— 
‘‘(A) for adjustment or assessment, 60 
days thereafter, and 
‘‘(B) for collection, 6 months thereafter. 
A rule similar to the rule of section 6213(f)(2) shall 
apply for purposes of section 6232(b). 
‘‘(2) SUSPENSION OF PERIOD OF LIMITATION 
FOR FILING FOR JUDICIAL REVIEW.—The running 
of the period specified in section 6234 shall, in a 
case under title 11 of the United States Code, be 
suspended during the period during which the part-
nership is prohibited by reason of such case from fil-
ing a petition under section 6234 and for 60 days 
thereafter.’’. 
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(2) CLERICAL AMENDMENT.—The table of sub-
chapters for chapter 63 is amended by inserting 
after the item relating to subchapter B the following 
new items: 
‘‘SUBCHAPTER C. TREATMENT OF PARTNERSHIPS.’’. 
(d) CONFORMING AMENDMENTS.— 
(1) Section 6422 is amended by striking para-
graph (12). 
(2) Section 6501(n) is amended by striking 
paragraphs (2) and (3) and by striking ‘‘CROSS 
REFERENCES’’ and all that follows through ‘‘For pe-
riod of limitations’’ and inserting ‘‘CROSS REF-
ERENCE.—For period of limitations’’. 
(3) Section 6503(a)(1) is amended by striking 
‘‘(or section 6229’’ and all that follows through ‘‘of 
section 6230(a))’’. 
(4) Section 6504 is amended by striking para-
graph (11). 
(5) Section 6511 is amended by striking sub-
section (g). 
(6) Section 6512(b)(3) is amended by striking 
the second sentence. 
(7) Section 6515 is amended by striking para-
graph (6). 
(8) Section 6601(c) is amended by striking the 
last sentence. 
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(9) Section 7421(a) is amended by striking 
‘‘6225(b), 6246(b)’’ and inserting ‘‘6232(c)’’. 
(10) Section 7422 is amended by striking sub-
section (h). 
(11) Section 7459(c) is amended by striking 
‘‘section 6226’’ and all that follows through ‘‘or 
6252’’ and inserting ‘‘section 6234’’. 
(12) Section 7482(b)(1) is amended— 
(A) in subparagraph (E), by striking ‘‘sec-
tion 6226, 6228, 6247, or 6252’’ and inserting 
‘‘section 6234’’, 
(B) by striking subparagraph (F), by strik-
ing ‘‘or’’ at the end of subparagraph (E) and 
inserting a period, and by inserting ‘‘or’’ at the 
end of subparagraph (D), and 
(C) in the last sentence, by striking ‘‘sec-
tion 6226, 6228(a), or 6234(c)’’ and inserting 
‘‘section 6234’’. 
(13) Section 7485(b) is amended by striking 
‘‘section 6226, 6228(a), 6247, or 6252’’ and insert-
ing ‘‘section 6234’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to returns filed for partnership tax-
able years ending after December 31, 2014, except that 
a partnership may elect (at such time and in such form 
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and manner as the Secretary of the Treasury may pre-
scribe) for such amendments to apply to any return of the 
partnership filed for partnership taxable years ending 
after the date of the enactment of this Act and before Jan-
uary 1, 2015. 
PART 3—REITS AND RICS 
SEC. 3631. PREVENTION OF TAX-FREE SPINOFFS INVOLV-
ING REITS. 
(a) IN GENERAL.—Section 355 is amended by adding 
at the end the following new subsection: 
‘‘(h) SECTION NOT TO APPLY TO DISTRIBUTIONS IN-
VOLVING REAL ESTATE INVESTMENT TRUSTS.—This sec-
tion (and so much of section 356 as relates to this section) 
shall not apply to any distribution if either the distributing 
corporation or controlled corporation is a real estate in-
vestment trust.’’. 
(b) PREVENTION OF REIT ELECTION FOLLOWING 
TAX-FREE SPIN OFF.—Section 856(c) is amended by re-
designating paragraph (8) as paragraph (9) and by insert-
ing after paragraph (7) the following new paragraph: 
‘‘(8) ELECTION AFTER TAX-FREE REORGANIZA-
TION.—If a corporation was a distributing corpora-
tion or a controlled corporation with respect to any 
distribution to which section 355 applied, such cor-
poration (and any successor corporation) shall not 
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be eligible to make any election under subsection 
(c)(1) for any taxable year prior to the 10th taxable 
year which begins after the taxable year in which 
such distribution was made.’’. 
(c) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to distributions on or after 
February 26, 2014. 
(2) 
TRANSITION
RULE.—The 
amendments 
made by this section shall not apply to any distribu-
tion made pursuant to an agreement which was 
binding on February 26, 2014, and at all times 
thereafter. 
SEC. 3632. EXTENSION OF PERIOD FOR PREVENTION OF 
REIT ELECTION FOLLOWING REVOCATION 
OR TERMINATION. 
(a) IN GENERAL.—Section 856(g)(3) is amended by 
striking ‘‘fifth’’ and inserting ‘‘10th’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to terminations and revocations 
after December 31, 2014. 
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SEC. 3633. CERTAIN SHORT-LIFE PROPERTY NOT TREATED 
AS REAL PROPERTY FOR PURPOSES OF REIT 
PROVISIONS. 
(a) IN GENERAL.—Section 856(c)(5) is amended by 
adding at the end the following new subparagraph: 
‘‘(L) REAL
PROPERTY.—The term ‘real 
property’ shall not include any tangible prop-
erty with a class life of less than 27.5 years. 
For purposes of the preceding sentence, class 
life of tangible property for any taxable year 
shall be the greater of— 
‘‘(i) the class life of such property in 
the hands of the real estate investment 
trust, or 
‘‘(ii) the class life which would be ap-
plicable to such property if such property 
was placed in service in the taxable year.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2016. 
SEC. 3634. REPEAL OF SPECIAL RULES FOR TIMBER HELD 
BY REITS. 
(a) IN GENERAL.—Section 856(c)(5)(L), as added by 
this Act, is amended by inserting ‘‘timber or’’ after ‘‘shall 
not include’’. 
(b) CONFORMING AMENDMENTS.— 
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(1) Section 856(c)(2) is amended by inserting 
‘‘and’’ at the end of subparagraph (G), by striking 
‘‘and’’ at the end of subparagraph (H), and by strik-
ing subparagraph (I). 
(2) Section 856(c)(5), as amended by the pre-
ceding provisions of this Act, is amended by striking 
subparagraphs (H) and (I) and by redesignating 
subparagraphs (J), (K), and (L) as subparagraphs 
(H), (I) and (J), respectively. 
(3) Section 856(c), as amended by the pre-
ceding provisions of this Act, is amended by striking 
paragraph (9). 
(4) Section 857(b)(6) is amended by striking 
subparagraphs (D), (G), and (H), and by redesig-
nating subparagraphs (E) and (F) as subparagraphs 
(D) and (E), respectively. 
(5) Section 857(b)(6)(D), as redesignated by 
paragraph (4), is amended by striking ‘‘subpara-
graphs (C) and (D)’’ and inserting ‘‘subparagraph 
(C)’’. 
(6) Section 857(b)(6)(E), as redesignated by 
paragraph (4), is amended— 
(A) by striking ‘‘subparagraph (C) or (D)’’ 
and inserting ‘‘subparagraph (C)’’, and 
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(B) by striking ‘‘subparagraphs (C), (D), 
and (E)’’ and inserting ‘‘subparagraphs (C) and 
(D)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2016. 
SEC. 3635. LIMITATION ON FIXED PERCENTAGE RENT AND 
INTEREST EXCEPTIONS FOR REIT INCOME 
TESTS. 
(a) IN GENERAL.—Section 856 is amended by adding 
at the end the following new subsection: 
‘‘(o) LIMITATION ON FIXED PERCENTAGE RENT AND 
INTEREST EXCEPTIONS.— 
‘‘(1) IN GENERAL.—If the fixed percentage rent 
and interest income received or accrued by a real es-
tate investment trust from a single C corporation 
(other than a taxable REIT subsidiary of such real 
estate investment trust) for any taxable year exceeds 
either— 
‘‘(A) 25 percent of the fixed percentage 
rent income received or accrued by such real es-
tate investment trust for such taxable year, or 
‘‘(B) 25 percent of the fixed percentage in-
terest income received or accrued by such real 
estate investment trust for such taxable year, 
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then, notwithstanding subsection (d)(2), none of the 
fixed percentage rent income received or accrued 
from such corporation which is attributable to leases 
entered into after December 31, 2014, shall be 
treated as rents from real property and, notwith-
standing subsection (f), none of the fixed percentage 
interest income received or accrued from such cor-
poration which is attributable to debt instruments 
acquired after December 31, 2014, shall be treated 
as interest. 
‘‘(2) FIXED PERCENTAGE RENT AND INTEREST 
INCOME.—For purposes of this subsection— 
‘‘(A) FIXED PERCENTAGE RENT AND IN-
TEREST INCOME.—The term ‘fixed percentage 
rent and interest income’ means the sum of the 
fixed percentage rent income plus the fixed per-
centage interest income. 
‘‘(B) 
FIXED
PERCENTAGE
RENT
IN-
COME.—The term ‘fixed percentage rent in-
come’ means amounts described in subsection 
(d)(2)(A) which are based on a fixed percentage 
or percentages of receipts or sales. 
‘‘(C) FIXED
PERCENTAGE
INTEREST
IN-
COME.—The term ‘fixed percentage interest in-
come’ means amounts described in subsection 
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(f)(1) which are based on a fixed percentage or 
percentages of receipts or sales. 
‘‘(3) AGGREGATION
RULE.—Members of the 
same affiliated group (as defined in section 1504, 
applied by substituting ‘50 percent’ for ‘80 percent’ 
each place it appears therein) shall be treated as 1 
corporation for purposes of paragraph (1). 
‘‘(4) TREATMENT
OF
MODIFICATIONS.—For 
purposes of paragraph (1), any material modifica-
tion (including any extension of the term) of a lease 
or debt instrument shall be treated as a new lease 
or debt instrument, as the case may be, entered into 
on the date of such modification.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years ending after De-
cember 31, 2014. 
SEC. 3636. REPEAL OF PREFERENTIAL DIVIDEND RULE FOR 
PUBLICLY OFFERED REITS. 
(a) IN GENERAL.—Paragraph (1) of section 562(c), 
as amended by the preceding provisions of this Act, is 
amended by inserting ‘‘or a publicly offered REIT’’ after 
‘‘a publicly offered regulated investment company’’. 
(b) PUBLICLY OFFERED REIT.—Subsection (c) of 
section 562, as so amended, is amended by adding at the 
end the following new paragraph: 
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‘‘(3) PUBLICLY OFFERED REIT.—For purposes 
of this subsection, the term ‘publicly offered REIT’ 
means a real estate investment trust which is re-
quired to file annual and periodic reports with the 
Securities and Exchange Commission under the Se-
curities Exchange Act of 1934.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to distributions in taxable years 
beginning after December 31, 2014. 
SEC. 3637. AUTHORITY FOR ALTERNATIVE REMEDIES TO 
ADDRESS CERTAIN REIT DISTRIBUTION FAIL-
URES. 
(a) IN GENERAL.—Subsection (e) of section 562 is 
amended— 
(1) by striking ‘‘In the case of a real estate in-
vestment trust’’ and inserting the following: 
‘‘(1) DETERMINATION OF EARNINGS AND PROF-
ITS
FOR
PURPOSES
OF
DIVIDENDS
PAID
DEDUC-
TION.—In the case of a real estate investment 
trust’’, and 
(2) by adding at the end the following new 
paragraph: 
‘‘(2) AUTHORITY
TO
PROVIDE
ALTERNATIVE 
REMEDIES FOR CERTAIN FAILURES.—In the case of 
a failure of a distribution by a real estate investment 
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trust to comply with the requirements of subsection 
(c), the Secretary may provide an appropriate rem-
edy to cure such failure in lieu of not considering 
the distribution to be a dividend for purposes of 
computing the dividends paid deduction if— 
‘‘(A) the Secretary determines that such 
failure is inadvertent or is due to reasonable 
cause and not due to willful neglect, or 
‘‘(B) such failure is of a type of failure 
which the Secretary has identified for purposes 
of this paragraph as being described in sub-
paragraph (A).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions in taxable years 
beginning after December 31, 2014. 
SEC. 3638. LIMITATIONS ON DESIGNATION OF DIVIDENDS 
BY REITS. 
(a) IN GENERAL.—Section 857 is amended by redes-
ignating subsection (g) as subsection (h) and by inserting 
after subsection (f) the following new subsection: 
‘‘(g) LIMITATIONS
ON
DESIGNATION
OF
DIVI-
DENDS.— 
‘‘(1) OVERALL
LIMITATION.—The aggregate 
amount of dividends designated by a real estate in-
vestment trust under subsections (b)(3)(C) and 
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(c)(2)(A) with respect to any taxable year may not 
exceed the dividends paid by such trust with respect 
to such year. For purposes of the preceding sen-
tence, dividends paid after the close of the taxable 
year described in section 858 shall be treated as 
paid with respect to such year. 
‘‘(2) PROPORTIONALITY.—The Secretary may 
prescribe regulations or other guidance requiring the 
proportionality of the designation of particular types 
of dividends among shares or beneficial interests of 
a real estate investment trust.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions in taxable years 
beginning after December 31, 2014. 
SEC. 3639. NON-REIT EARNINGS AND PROFITS REQUIRED 
TO BE DISTRIBUTED BY REIT IN CASH. 
(a) IN GENERAL.—Section 857, as amended by the 
preceding provisions of this Act, is amended by redesig-
nating subsection (h) as subsection (i) and by inserting 
after subsection (g) the following new subsection: 
‘‘(h) DETERMINATION OF EARNINGS AND PROFITS 
ACCUMULATED IN NON-REIT YEARS.— 
‘‘(1) IN GENERAL.—For purposes of subsection 
(a)(2)(B), distributions during the transition period 
shall be taken into account in determining accumu-
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lated earning and profits only if such distributions 
are made in cash. 
‘‘(2) TRANSITION
PERIOD.—For purposes of 
this subsection, the term ‘transition period’ means 
the period of taxable years beginning with the last 
taxable year (other than a short taxable year) which 
was a non-REIT year (as defined in subsection (a)) 
and ending with the first taxable year to which the 
provisions of this part apply.’’. 
(b) 
CONFORMING
AMENDMENT.—Section 
857(a)(2)(B) is amended by inserting ‘‘(determined as 
provided in subsection (h))’’ before the period at the end. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to distributions made on or after 
February 26, 2014. 
SEC. 3640. DEBT INSTRUMENTS OF PUBLICLY OFFERED 
REITS AND MORTGAGES TREATED AS REAL 
ESTATE ASSETS. 
(a) DEBT INSTRUMENTS
OF PUBLICLY OFFERED 
REITS TREATED AS REAL ESTATE ASSETS.— 
(1) IN GENERAL.—Subparagraph (B) of section 
856(c)(5) is amended— 
(A) by striking ‘‘and shares’’ and inserting 
‘‘, shares’’, and 
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(B) by inserting ‘‘, and debt instruments 
issued by publicly offered REITs’’ before the 
period at the end of the first sentence. 
(2) INCOME
FROM
NONQUALIFIED
DEBT
IN-
STRUMENTS
OF
PUBLICLY
OFFERED
REITS
NOT 
QUALIFIED FOR PURPOSES OF SATISFYING THE 75 
PERCENT GROSS INCOME TEST.—Subparagraph (H) 
of section 856(c)(3) is amended by inserting ‘‘(other 
than a nonqualified publicly offered REIT debt in-
strument)’’ after ‘‘real estate asset’’. 
(3) 25 PERCENT ASSET LIMITATION ON HOLD-
ING OF NONQUALIFIED DEBT INSTRUMENTS OF PUB-
LICLY OFFERED REITS.—Subparagraph (B) of sec-
tion 856(c)(4) is amended by redesignating clause 
(iii) as clause (iv) and by inserting after clause (ii) 
the following new clause: 
‘‘(iii) not more than 25 percent of the 
value of its total assets is represented by 
nonqualified publicly offered REIT debt in-
struments, and’’. 
(4) DEFINITIONS RELATED TO DEBT INSTRU-
MENTS OF PUBLICLY OFFERED REITS.—Paragraph 
(5) of section 856(c), as amended by the preceding 
provisions of this Act, is amended by adding at the 
end the following new subparagraph: 
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‘‘(K) DEFINITIONS RELATED TO DEBT IN-
STRUMENTS OF PUBLICLY OFFERED REITS.— 
‘‘(i) PUBLICLY OFFERED REIT.—The 
term ‘publicly offered REIT’ has the 
meaning given such term by section 
562(c)(3). 
‘‘(ii) NONQUALIFIED
PUBLICLY
OF-
FERED
REIT
DEBT
INSTRUMENT.—The 
term ‘nonqualified publicly offered REIT 
debt instrument’ means any real estate 
asset which would cease to be a real estate 
asset if subparagraph (B) were applied 
without regard to the reference to ‘debt in-
struments 
issued 
by 
publicly 
offered 
REITs’.’’. 
(b) INTERESTS IN MORTGAGES ON INTERESTS IN 
REAL PROPERTY TREATED AS REAL ESTATE ASSETS.— 
Subparagraph (B) of section 856(c)(5) is amended by in-
serting ‘‘or on interests in real property’’ after ‘‘interests 
in mortgages on real property’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
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SEC. 3641. ASSET AND INCOME TEST CLARIFICATION RE-
GARDING ANCILLARY PERSONAL PROPERTY. 
(a) IN GENERAL.—Subsection (c) of section 856 is 
amended by adding at the end the following new para-
graph: 
‘‘(9) SPECIAL RULES FOR CERTAIN PERSONAL 
PROPERTY
WHICH
IS
ANCILLARY
TO
REAL
PROP-
ERTY.— 
‘‘(A) 
CERTAIN
PERSONAL
PROPERTY 
LEASED
IN
CONNECTION
WITH
REAL
PROP-
ERTY.—Personal property shall be treated as a 
real estate asset for purposes of paragraph 
(4)(A) to the extent that rents attributable to 
such personal property are treated as rents 
from real property under subsection (d)(1)(C). 
‘‘(B) 
CERTAIN
PERSONAL
PROPERTY 
MORTGAGED IN CONNECTION WITH REAL PROP-
ERTY.—In the case of an obligation secured by 
a mortgage on both real property and personal 
property, if the fair market value of such per-
sonal property does not exceed 15 percent of 
the total fair market value of all such property, 
such personal property shall be treated as real 
property for purposes of applying paragraphs 
(3)(B) and (4)(A). For purposes of the pre-
ceding sentence, the fair market value of all 
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such property shall be determined in the same 
manner as the fair market value of real prop-
erty is determined for purposes of apportioning 
interest income between real property and per-
sonal property under paragraph (3)(B).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3642. HEDGING PROVISIONS. 
(a) MODIFICATION TO PERMIT THE TERMINATION 
OF A HEDGING TRANSACTION USING AN ADDITIONAL 
HEDGING INSTRUMENT.—Subparagraph (G) of section 
856(c)(5) is amended by striking ‘‘and’’ at the end of 
clause (i), by striking the period at the end of clause (ii) 
and inserting ‘‘, and’’, and by adding at the end the fol-
lowing new clause: 
‘‘(iii) if— 
‘‘(I) a real estate investment 
trust enters into one or more positions 
described in clause (i) with respect to 
indebtedness described in clause (i) or 
one or more positions described in 
clause (ii) with respect to property 
which generates income or gain de-
scribed in paragraph (2) or (3), 
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‘‘(II) any portion of such indebt-
edness is extinguished or any portion 
of such property is disposed of, and 
‘‘(III) in connection with such ex-
tinguishment 
or 
disposition, 
such 
trust enters into one or more trans-
actions which would be hedging trans-
actions described in subparagraph (B) 
or (C) of section 1221(b)(2) with re-
spect to any position referred to in 
subclause (I) if such position were or-
dinary property, 
any income of such trust from any position 
referred to in subclause (I) and from any 
transaction referred to in subclause (III) 
(including gain from the termination of 
any such position or transaction) shall not 
constitute gross income under paragraphs 
(2) and (3) to the extent that such trans-
action hedges such position.’’. 
(b) IDENTIFICATION REQUIREMENTS.— 
(1) IN GENERAL.—Subparagraph (G) of section 
856(c)(5), as amended by subsection (a), is amended 
by striking ‘‘and’’ at the end of clause (ii), by strik-
ing the period at the end of clause (iii) and inserting 
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‘‘, and’’, and by adding at the end the following new 
clause: 
‘‘(iv) clauses (i), (ii), and (iii) shall 
not apply with respect to any transaction 
unless such transaction satisfies the identi-
fication requirement described in section 
1221(b)(3)(A) (determined after taking 
into account any curative provisions pro-
vided under the regulations referred to 
therein).’’. 
(2) 
CONFORMING
AMENDMENTS.—Subpara-
graph (G) of section 856(c)(5) is amended— 
(A) by striking ‘‘which is clearly identified 
pursuant to section 1221(a)(7)’’ in clause (i), 
and 
(B) by striking ‘‘, but only if such trans-
action is clearly identified as such before the 
close of the day on which it was acquired, origi-
nated, or entered into (or such other time as 
the Secretary may prescribe)’’ in clause (ii). 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
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SEC. 3643. MODIFICATION OF REIT EARNINGS AND PROF-
ITS CALCULATION TO AVOID DUPLICATE TAX-
ATION. 
(a) EARNINGS AND PROFITS NOT INCREASED BY 
AMOUNTS ALLOWED IN COMPUTING TAXABLE INCOME IN 
PRIOR YEARS.— 
(1) IN
GENERAL.—Paragraph (1) of section 
857(d) is amended to read as follows: 
‘‘(1) IN GENERAL.—The earnings and profits of 
a real estate investment trust for any taxable year 
(but not its accumulated earnings) shall not be re-
duced by any amount which— 
‘‘(A) is not allowable in computing its tax-
able income for such taxable year, and 
‘‘(B) was not allowable in computing its 
taxable income for any prior taxable year.’’. 
(2) EXCEPTION
FOR
PURPOSES
OF
DETER-
MINING
DIVIDENDS
PAID
DEDUCTION.—Paragraph 
(1) of section 562(e), as amended by the preceding 
provisions of this Act, is amended— 
(A) by striking ‘‘deduction, the earnings’’ 
and inserting the following: ‘‘deduction— 
‘‘(A) the earnings’’, 
(B) by striking the period at the end and 
inserting ‘‘, and’’, and 
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(C) by adding at the end the following new 
subparagraph: 
‘‘(B) section 857(d)(1) shall be applied 
without regard to subparagraph (B) thereof.’’. 
(3) CONFORMING
AMENDMENTS.—Subsection 
(d) of section 857 is amended by adding at the end 
the following new paragraphs: 
‘‘(4) REAL ESTATE INVESTMENT TRUST.—For 
purposes of this subsection, the term ‘real estate in-
vestment trust’ includes a domestic corporation, 
trust, or association which is a real estate invest-
ment trust determined without regard to the require-
ments of subsection (a). 
‘‘(5) SPECIAL RULES FOR DETERMINING EARN-
INGS AND PROFITS FOR PURPOSES OF THE DEDUC-
TION FOR DIVIDENDS PAID.—For special rules for 
determining the earnings and profits of a real estate 
investment trust for purposes of the deduction for 
dividends paid, see section 562(e)(1).’’. 
(b) TREATMENT OF GAIN ON SALES OF REAL PROP-
ERTY.—Subparagraph (A) of section 562(e)(1), as amend-
ed by the preceding provisions of this Act, is amended to 
read as follows: 
‘‘(A) the earnings and profits of such trust 
for any taxable year (but not its accumulated 
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earnings) shall be increased by the amount of 
gain (if any) on the sale or exchange of real 
property which is taken into account in deter-
mining the taxable income of such trust for 
such taxable year (and not otherwise taken into 
account in determining such earnings and prof-
its), and’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3644. REDUCTION IN PERCENTAGE LIMITATION ON AS-
SETS OF REIT WHICH MAY BE TAXABLE REIT 
SUBSIDIARIES. 
(a) 
IN
GENERAL.—Section 
856(c)(4)(B)(ii) 
is 
amended by striking ‘‘25 percent’’ and inserting ‘‘20 per-
cent’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2016. 
SEC. 3645. TREATMENT OF CERTAIN SERVICES PROVIDED 
BY TAXABLE REIT SUBSIDIARIES. 
(a) TAXABLE REIT SUBSIDIARIES TREATED
IN 
SAME MANNER
AS INDEPENDENT CONTRACTORS
FOR 
CERTAIN PURPOSES.— 
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(1) MARKETING AND DEVELOPMENT EXPENSES 
UNDER RENTAL PROPERTY SAFE HARBOR.—Clause 
(v) of section 857(b)(6)(C) is amended by inserting 
‘‘or by a taxable REIT subsidiary’’ before the period 
at the end. 
(2) FORECLOSURE PROPERTY GRACE PERIOD.— 
Subparagraph (C) of section 856(e)(4) is amended 
by inserting ‘‘or through a taxable REIT subsidiary’’ 
after ‘‘receive any income’’. 
(b) TAX
ON REDETERMINED TRS SERVICE IN-
COME.— 
(1) IN GENERAL.—Subparagraph (A) of section 
857(b)(7) is amended by striking ‘‘and excess inter-
est’’ and inserting ‘‘excess interest, and redeter-
mined TRS service income’’. 
(2) REDETERMINED
TRS
SERVICE
INCOME.— 
Paragraph (7) of section 857(b) is amended by re-
designating subparagraphs (E) and (F) as subpara-
graphs (F) and (G), respectively, and inserting after 
subparagraph (D) the following new subparagraph: 
‘‘(E) REDETERMINED
TRS
SERVICE
IN-
COME.— 
‘‘(i) IN GENERAL.—The term ‘redeter-
mined TRS service income’ means gross 
income of a taxable REIT subsidiary of a 
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real estate investment trust attributable to 
services provided to, or on behalf of, such 
trust (less deductions properly allocable 
thereto) to the extent the amount of such 
income (less such deductions) would (but 
for subparagraph (F)) be increased on dis-
tribution, apportionment, or allocation 
under section 482. 
‘‘(ii) COORDINATION WITH REDETER-
MINED RENTS.—Clause (i) shall not apply 
with respect to gross income attributable 
to services furnished or rendered to a ten-
ant of the real estate investment trust (or 
to deductions properly allocable thereto).’’. 
(3) 
CONFORMING
AMENDMENTS.—Subpara-
graphs (B)(i) and (C) of section 857(b)(7) are each 
amended by striking ‘‘subparagraph (E)’’ and insert-
ing ‘‘subparagraph (F)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3646. STUDY RELATING TO TAXABLE REIT SUBSIDI-
ARIES. 
The Secretary of the Treasury (or the Secretary’s 
designee) shall, biannually— 
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(1) conduct a study to determine— 
(A) how many taxable REIT subsidiaries 
are in existence and the aggregate amount of 
taxes paid by such subsidiaries, and 
(B) the amount by which transactions be-
tween a REIT and a taxable REIT subsidiary 
reduce taxable income of the taxable REIT sub-
sidiary (whether or not such transactions are 
conducted at arms length), and 
(2) submit a report to the Committee on Ways 
and Means of the House of Representatives and the 
Committee on Finance of the Senate describing the 
results of such study. 
SEC. 3647. C CORPORATION ELECTION TO BECOME, OR 
TRANSFER ASSETS TO, A RIC OR REIT. 
(a) IN GENERAL.—Part IV of subchapter O of chap-
ter 1, as amended by the preceding provisions of this Act, 
is amended by redesignating section 1062 as section 1063 
and by inserting after section 1061 the following new sec-
tion: 
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‘‘SEC. 1062. RECOGNITION OF GAIN OR LOSS UPON C COR-
PORATION ELECTION TO BECOME, OR TRANS-
FER ASSETS TO, A REGULATED INVESTMENT 
COMPANY OR A REAL ESTATE INVESTMENT 
TRUST. 
‘‘(a) IN GENERAL.—If a C corporation elects to be-
come a regulated investment company or a real estate in-
vestment trust for a taxable year, such corporation shall 
recognize gain or loss as if all its assets were sold by such 
corporation at their fair market value immediately before 
the close of the last taxable year before such corporation 
becomes a regulated investment company or real estate in-
vestment trust (as the case may be). 
‘‘(b) APPLICATION TO TRANSFERS OF ASSETS.—In 
the case of a C corporation which transfers to a regulated 
investment company or a real estate investment trust one 
or more assets the basis of which is determined (in whole 
or in part) by reference to the basis of such asset or assets 
in the hands of the C corporation, such corporation shall 
recognize gain or loss as if such assets were sold by such 
corporation at their fair market value as of the end of 
the day before the day of the transfer. 
‘‘(c) NONAPPLICATION TO NET LOSS.—Subsections 
(a) and (b) shall not apply if their application would result 
in the recognition of a net loss. For purposes of the pre-
ceding sentence, the term ‘net loss’ means the excess of 
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aggregate losses over aggregate gains (including items of 
income) without regard to character. 
‘‘(d) BASIS ADJUSTMENT.—If any asset is treated as 
sold under subsection (a) or (b), the basis of such asset 
immediately after such deemed sale shall be equal to the 
fair market value of such asset as determined under such 
subsection. 
‘‘(e) C CORPORATION.—For purposes of this section, 
the term ‘C corporation’ does not include a regulated in-
vestment company or a real estate investment trust.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part IV of subchapter O of chapter 1 is amended by 
redesignating the item relating to section 1062 as an item 
relating to section 1063 and by inserting after the item 
relating to section 1061 the following new item: 
‘‘Sec. 1062. Recognition of gain or loss upon C corporation election to become, 
or transfer assets to, a regulated investment company or a real 
estate investment trust.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to elections and transfers on or 
after February 26, 2014. 
SEC. 3648. INTERESTS IN RICS AND REITS NOT EXCLUDED 
FROM DEFINITION OF UNITED STATES REAL 
PROPERTY INTERESTS. 
(a) IN GENERAL.—Section 897(c)(1)(B) is amended 
by striking ‘‘and’’ at the end of clause (i), by striking the 
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period at the end of clause (ii)(II) and inserting ‘‘, and’’, 
and by adding at the end the following new clause: 
‘‘(iii) neither such corporation nor any 
predecessor of such corporation was a reg-
ulated investment company or a real estate 
investment company at any time during 
the period described in subparagraph 
(A)(ii).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to dispositions after December 31, 
2014. 
SEC. 3649. DIVIDENDS DERIVED FROM RICS AND REITS IN-
ELIGIBLE 
FOR 
DEDUCTION 
FOR 
UNITED 
STATES SOURCE PORTION OF DIVIDENDS 
FROM CERTAIN FOREIGN CORPORATIONS. 
(a) IN GENERAL.—Section 245(a) is amended by 
adding at the end the following new paragraph: 
‘‘(12) DIVIDENDS
DERIVED
FROM
RICS
AND 
REITS INELIGIBLE FOR DEDUCTION.—Regulated in-
vestment companies and real estate investment 
trusts shall not be treated as domestic corporations 
for purposes of paragraph (5)(B).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to dividends received from regu-
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lated investment companies and real estate investment 
trusts on or after February 26, 2014. 
PART 4—PERSONAL HOLDING COMPANIES 
SEC. 3661. EXCLUSION OF DIVIDENDS FROM CONTROLLED 
FOREIGN CORPORATIONS FROM THE DEFINI-
TION OF PERSONAL HOLDING COMPANY IN-
COME FOR PURPOSES OF THE PERSONAL 
HOLDING COMPANY RULES. 
(a) IN GENERAL.—Paragraph (1) of section 543(a) 
is amended— 
(1) by redesignating subparagraphs (C) and 
(D) as subparagraphs (D) and (E), respectively, and 
(2) by inserting after subparagraph (B) the fol-
lowing: 
‘‘(C) dividends received by a United States 
shareholder (as defined in section 951(b)) from 
a controlled foreign corporation (as defined in 
section 957(a)),’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this Act shall apply to taxable years beginning after De-
cember 31, 2014. 
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Subtitle H—Taxation of Foreign 
Persons 
SEC. 3701. PREVENTION OF AVOIDANCE OF TAX THROUGH 
REINSURANCE WITH NON-TAXED AFFILIATES. 
(a) IN GENERAL.—Part III of subchapter L of chap-
ter 1 is amended by adding at the end the following new 
section: 
‘‘SEC. 849. SPECIAL RULES FOR REINSURANCE OF NON- 
LIFE CONTRACTS WITH NON-TAXED AFFILI-
ATES. 
‘‘(a) IN GENERAL.—The taxable income under sec-
tion 831(a) or the life insurance company taxable income 
under section 801(b) (as the case may be) of an insurance 
company shall be determined by not taking into account— 
‘‘(1) any non-taxed reinsurance premium, 
‘‘(2) any additional amount paid by such insur-
ance company with respect to the reinsurance for 
which such non-taxed reinsurance premium is paid, 
to the extent such additional amount is properly al-
locable to such non-taxed reinsurance premium, and 
‘‘(3) any return premium, ceding commission, 
reinsurance recovered, or other amount received by 
such insurance company with respect to the reinsur-
ance for which such non-taxed reinsurance premium 
is paid, to the extent such return premium, ceding 
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commission, reinsurance recovered, or other amount 
is properly allocable to such non-taxed reinsurance 
premium. 
‘‘(b) NON-TAXED REINSURANCE PREMIUMS.—For 
purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘non-taxed rein-
surance premium’ means any reinsurance premium 
paid directly or indirectly to an affiliated corporation 
with respect to reinsurance of risks (other than ex-
cepted risks), to the extent that the income attrib-
utable to the premium is not subject to tax under 
this subtitle (either as the income of the affiliated 
corporation or as amounts included in gross income 
by a United States shareholder under section 951). 
‘‘(2) EXCEPTED
RISKS.—The term ‘excepted 
risks’ means any risk with respect to which reserves 
described in section 816(b)(1) are established. 
‘‘(c) AFFILIATED CORPORATIONS.—For purposes of 
this section, a corporation shall be treated as affiliated 
with an insurance company if both corporations would be 
members of the same controlled group of corporations (as 
defined in section 1563(a)) if section 1563 were applied— 
‘‘(1) by substituting ‘at least 50 percent’ for ‘at 
least 80 percent’ each place it appears in subsection 
(a)(1), and 
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‘‘(2) without regard to subsections (a)(4), 
(b)(2)(C), (b)(2)(D), and (e)(3)(C). 
‘‘(d) ELECTION TO TREAT REINSURANCE INCOME AS 
EFFECTIVELY CONNECTED.— 
‘‘(1) IN GENERAL.—A specified affiliated cor-
poration may elect for any taxable year to treat 
specified reinsurance income as— 
‘‘(A) income effectively connected with the 
conduct of a trade or business in the United 
States, and 
‘‘(B) for purposes of any treaty between 
the United States and any foreign country, in-
come attributable to a permanent establishment 
in the United States. 
‘‘(2) EFFECT OF ELECTION.—In the case of 
any specified reinsurance income with respect to 
which the election under this subsection applies— 
‘‘(A) DEDUCTION ALLOWED FOR REINSUR-
ANCE
PREMIUMS.—For exemption from sub-
section (a), see definition of non-taxed reinsur-
ance premiums in subsection (b). 
‘‘(B) EXCEPTION FROM EXCISE TAX.—The 
tax imposed by section 4371 shall not apply 
with respect to any income treated as effectively 
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connected with the conduct of a trade or busi-
ness in the United States under paragraph (1). 
‘‘(C) 
TAXATION
UNDER
THIS
SUB-
CHAPTER.—Such income shall be subject to tax 
under this subchapter to the same extent and 
in the same manner as if such income were the 
income of a domestic insurance company. 
‘‘(D) COORDINATION WITH FOREIGN TAX 
CREDIT PROVISIONS.—For purposes of subpart 
A of part III of subchapter N and sections 78 
and 960— 
‘‘(i) such specified reinsurance income 
shall be treated as derived from sources 
without the United States, and 
‘‘(ii) subsections (a), (b), and (c) of 
section 904, and section 960, shall be ap-
plied separately with respect to each item 
of such income. 
The Secretary may issue regulations or other 
guidance which provide that related items of 
specified reinsurance income may be aggregated 
for purposes of applying clause (ii). 
‘‘(3) SPECIFIED AFFILIATED CORPORATION.— 
For purposes of this subsection, the term ‘specified 
affiliated corporation’ means any affiliated corpora-
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tion which is a foreign corporation and which meets 
such requirements as the Secretary shall prescribe to 
ensure that tax on the specified reinsurance income 
of such corporation is properly determined and paid. 
‘‘(4) SPECIFIED
REINSURANCE
INCOME.—For 
purposes of this paragraph, the term ‘specified rein-
surance income’ means all income of a specified af-
filiated corporation which is attributable to reinsur-
ance with respect to which subsection (a) would (but 
for the election under this subsection) apply. 
‘‘(5) RULES
RELATED
TO
ELECTION.—Any 
election under paragraph (1) shall— 
‘‘(A) be made at such time and in such 
form and manner as the Secretary may provide, 
and 
‘‘(B) apply for the taxable year for which 
made and all subsequent taxable years unless 
revoked with the consent of the Secretary. 
‘‘(e) EXCEPTION FOR AMOUNTS SUBJECT TO FOR-
EIGN TAX.—An amount shall not be treated as described 
in paragraph (1), (2), or (3) of subsection (a) if the tax-
payer demonstrates to the satisfaction of the Secretary 
that such amount was subject to an effective rate of in-
come tax imposed by a foreign country which is not less 
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than 100 percent of the maximum rate of tax specified 
in section 11. 
‘‘(f) REGULATIONS.—The Secretary shall prescribe 
such regulations or other guidance as may be appropriate 
to carry out, or to prevent the avoidance of the purposes 
of, this section, including regulations or other guidance 
which provide for the application of this section to alter-
native reinsurance transactions, fronting transactions, 
conduit and reciprocal transactions, and any economically 
equivalent transactions.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part III of subchapter L of chapter 1 is amended by 
adding at the end the following new item: 
‘‘Sec. 849. Special rules for reinsurance of non-life contracts with non-taxed af-
filiates.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3702. TAXATION OF PASSENGER CRUISE GROSS IN-
COME 
OF 
FOREIGN 
CORPORATIONS 
AND 
NONRESIDENT ALIEN INDIVIDUALS. 
(a) IN GENERAL.—Section 882 is amended by redes-
ignating subsection (f) as subsection (g) and by inserting 
after subsection (e) the following new subsection: 
‘‘(f) TREATMENT OF PASSENGER CRUISE GROSS IN-
COME.— 
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‘‘(1) IN GENERAL.—For purposes of this title, 
the effectively connected passenger cruise gross in-
come of a foreign corporation shall be treated as 
gross income which is effectively connected with the 
conduct of a trade or business in the United States. 
‘‘(2) EFFECTIVELY
CONNECTED
PASSENGER 
CRUISE GROSS INCOME.—For purposes of this sub-
section, the term ‘effectively connected passenger 
cruise gross income’ means, with respect to the oper-
ation of any ship in a covered voyage, the United 
States territorial waters percentage of the gross in-
come 
(determined 
without 
regard 
to 
section 
883(a)(1)) derived from such operation, including 
any amount received with respect to the provision of 
any on- or off-board activities, services, or sales, 
with respect to passengers incidental to such oper-
ation (or with respect to any agreement with any 
person with respect to the provision of any such ac-
tivities, services, or sales). 
‘‘(3) UNITED
STATES
TERRITORIAL
WATERS 
PERCENTAGE.—For purposes of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘United 
States territorial waters percentage’ means, 
with respect to the operation of any ship in any 
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covered voyage, the ratio (expressed as a per-
centage) of— 
‘‘(i) the number of days during such 
voyage such ship was operated in the terri-
torial waters of the United States, divided 
by 
‘‘(ii) the total number of days of such 
voyage. 
‘‘(B) CALENDAR DAY RULE.—If a ship— 
‘‘(i) is operated in a covered voyage, 
or 
‘‘(ii) is operated in the territorial 
waters of the United States during a cov-
ered voyage, 
for any portion of a calendar day, such ship 
shall be treated as having operated in a covered 
voyage, or as having operated in such territorial 
waters, respectively, for the entirety of such 
day. 
‘‘(C) TERRITORIAL
WATERS.—The terri-
torial waters of the United States shall be 
treated as consisting of those waters which 
are— 
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‘‘(i) within the international boundary 
line between the United States and any 
contiguous foreign country, or 
‘‘(ii) within 12 nautical miles from low 
tide on the coastline of the United States. 
‘‘(4) COVERED VOYAGE.—For purposes of this 
subsection— 
‘‘(A) IN
GENERAL.—The term ‘covered 
voyage’ has the meaning given such term by 
section 4472(1). 
‘‘(B) ANTI-ABUSE RULE.—Except as oth-
erwise provided by the Secretary, if passengers 
embark a ship in the United States and more 
than 10 percent of such passengers disembark 
in the United States, the operation of such ship 
at all times between such events shall be treat-
ed as a covered voyage. Nothing in the pre-
ceding sentence shall preclude any operation of 
a ship (including any operation of a ship before 
or after such events) which would otherwise be 
treated as part of a covered voyage from being 
so treated. 
‘‘(5) TREATMENT OF OTHERWISE EFFECTIVELY 
CONNECTED INCOME.—Gross income which would, 
without regard to this subsection, be gross income 
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which is effectively connected with the conduct of a 
trade or business in the United States— 
‘‘(A) shall be so treated, and 
‘‘(B) shall not be taken into account as 
gross income under paragraph (2).’’. 
(b) APPLICATION TO NONRESIDENT ALIEN INDIVID-
UALS.—Section 871 is amended by redesignating sub-
section (n) as subsection (o) and by inserting after sub-
section (m) the following new subsection: 
‘‘(n) TREATMENT OF PASSENGER CRUISE GROSS IN-
COME.— 
‘‘(1) IN GENERAL.—For purposes of this title, 
the effectively connected passenger cruise gross in-
come of a nonresident alien individual shall be treat-
ed as gross income which is effectively connected 
with the conduct of a trade or business in the 
United States. 
‘‘(2) DEFINITIONS AND SPECIAL RULES.—For 
purposes of this subsection— 
‘‘(A) DEFINITIONS.—Terms used in this 
subsection which are also used in section 882(f) 
shall have the same meaning as when used in 
such section, except that section 882(f)(2) shall 
be applied by substituting ‘section 872(b)(1)’ 
for ‘section 883(a)(1)’. 
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‘‘(B) TREATMENT OF OTHERWISE EFFEC-
TIVELY CONNECTED INCOME.—Rules similar to 
the rules of section 882(f)(5) shall apply for 
purposes of this subsection.’’. 
(c) COORDINATION WITH RECIPROCAL EXEMPTIONS 
FOR SHIPPING INCOME.— 
(1) IN GENERAL.—Section 883(a)(1) is amend-
ed by striking ‘‘Gross income’’ and inserting ‘‘Ex-
cept as provided in section 882(f), gross income’’. 
(2) NONRESIDENT ALIEN INDIVIDUALS.—Sec-
tion 872(b)(1) is amended by striking ‘‘Gross in-
come’’ and inserting ‘‘Except as provided in section 
871(n), gross income’’. 
(d) COORDINATION WITH TAX ON GROSS TRANSPOR-
TATION INCOME.—Section 887(b)(4) is amended by add-
ing at the end the following new flush text: 
‘‘The preceding sentence shall not apply to any 
United States source gross transportation income 
which is effectively connected passenger cruise gross 
income (within the meaning of section 871(n) or 
882(f)).’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
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SEC. 3703. RESTRICTION ON INSURANCE BUSINESS EXCEP-
TION TO PASSIVE FOREIGN INVESTMENT 
COMPANY RULES. 
(a) IN GENERAL.—Section 1297(b)(2)(B) is amend-
ed to read as follows: 
‘‘(B) derived in the active conduct of an in-
surance business by a corporation if— 
‘‘(i) such corporation would be subject 
to tax under subchapter L if such corpora-
tion were a domestic corporation, 
‘‘(ii) more than 50 percent of such 
corporation’s gross receipts for the taxable 
year consist of premiums, and 
‘‘(iii) the applicable insurance liabil-
ities of such corporation constitute more 
than 35 percent of its total assets as re-
ported on the corporation’s applicable fi-
nancial statement for the year with which 
or in which the taxable year ends,’’. 
(b) APPLICABLE INSURANCE LIABILITIES; APPLICA-
BLE FINANCIAL STATEMENT.— 
(1) IN GENERAL.—Section 1297(b) is amended 
by adding at the end the following new paragraph: 
‘‘(3) DEFINITIONS.—For purposes of this sub-
section— 
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‘‘(A) APPLICABLE
INSURANCE
LIABIL-
ITIES.—The term ‘applicable insurance liabil-
ities’ means, with respect to any life or property 
and casualty insurance business— 
‘‘(i) loss and loss adjustment ex-
penses, 
‘‘(ii) unearned premiums, and 
‘‘(iii) reserves (other than deficiency 
or contingency reserves) for life and health 
insurance risks and life and health insur-
ance claims with respect to contracts pro-
viding coverage for mortality or morbidity 
risks (not to exceed the amount of such re-
serve that is required to be reported to the 
home country insurance regulatory body). 
‘‘(B) 
APPLICABLE
FINANCIAL
STATE-
MENT.—The term ‘applicable financial state-
ment’ means a statement for financial reporting 
purposes which— 
‘‘(i) is made on the basis of generally 
accepted accounting principles, 
‘‘(ii) is made on the basis of inter-
national financial reporting standards, but 
only if there is no statement that meets 
the requirement of clause (i), or 
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‘‘(iii) except as otherwise provided by 
the Secretary in regulations, is the annual 
statement which is required to be filed 
with the home country insurance regu-
latory body, but only if there is no state-
ment which meets the requirements of 
clause (i) or (ii).’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
1297(b) is amended— 
(A) by striking the last sentence in para-
graph (2) thereof, and 
(B) by adding at the end of paragraph (3) 
thereof (as added by paragraph (1)), the fol-
lowing new subparagraph: 
‘‘(C) RELATED
PERSON.—The term ‘re-
lated person’ has the meaning given such term 
by section 954(d)(3) determined by substituting 
‘foreign corporation’ for ‘controlled foreign cor-
poration’ each place it appears therein.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
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SEC. 3704. MODIFICATION OF LIMITATION ON EARNINGS 
STRIPPING. 
(a) IN GENERAL.—Section 163(j)(2)(B)(i)(II) is 
amended by striking ‘‘50 percent’’ and inserting ‘‘40 per-
cent’’. 
(b) 
NO
NEW
EXCESS
LIMITATION 
CARRYFORWARDS.—Section 163(j)(2)(B)(ii) is amended 
by striking ‘‘for any taxable year’’ and inserting ‘‘for any 
taxable year beginning before January 1, 2015’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3705. LIMITATION ON TREATY BENEFITS FOR CERTAIN 
DEDUCTIBLE PAYMENTS. 
(a) IN GENERAL.—Section 894 of the Internal Rev-
enue Code of 1986 (relating to income affected by treaty) 
is amended by adding at the end the following new sub-
section: 
‘‘(d) LIMITATION ON TREATY BENEFITS FOR CER-
TAIN DEDUCTIBLE PAYMENTS.— 
‘‘(1) IN GENERAL.—In the case of any deduct-
ible related-party payment, any withholding tax im-
posed under chapter 3 (and any tax imposed under 
subpart A or B of this part) with respect to such 
payment may not be reduced under any treaty of the 
United States unless any such withholding tax would 
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be reduced under a treaty of the United States if 
such payment were made directly to the foreign par-
ent corporation. 
‘‘(2) 
DEDUCTIBLE
RELATED-PARTY
PAY-
MENT.—For purposes of this subsection, the term 
‘deductible related-party payment’ means any pay-
ment made, directly or indirectly, by any person to 
any other person if the payment is allowable as a de-
duction under this chapter and both persons are 
members of the same foreign controlled group of en-
tities. 
‘‘(3) FOREIGN CONTROLLED GROUP OF ENTI-
TIES.—For purposes of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘foreign 
controlled group of entities’ means a controlled 
group of entities the common parent of which 
is a foreign corporation. 
‘‘(B) CONTROLLED GROUP OF ENTITIES.— 
The term ‘controlled group of entities’ means a 
controlled group of corporations as defined in 
section 1563(a)(1), except that— 
‘‘(i) ‘more than 50 percent’ shall be 
substituted for ‘at least 80 percent’ each 
place it appears therein, and 
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‘‘(ii) the determination shall be made 
without regard to subsections (a)(4) and 
(b)(2) of section 1563. 
A partnership or any other entity (other than a 
corporation) shall be treated as a member of a 
controlled group of entities if such entity is con-
trolled 
(within 
the 
meaning 
of 
section 
954(d)(3)) by members of such group (includ-
ing any entity treated as a member of such 
group by reason of this sentence). 
‘‘(4) FOREIGN
PARENT
CORPORATION.—For 
purposes of this subsection, the term ‘foreign parent 
corporation’ means, with respect to any deductible 
related-party payment, the common parent of the 
foreign controlled group of entities referred to in 
paragraph (3)(A). 
‘‘(5) REGULATIONS.—The Secretary may pre-
scribe such regulations or other guidance as are nec-
essary or appropriate to carry out the purposes of 
this subsection, including regulations or other guid-
ance which provide for— 
‘‘(A) the treatment of two or more persons 
as members of a foreign controlled group of en-
tities if such persons would be the common par-
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ent of such group if treated as one corporation, 
and 
‘‘(B) the treatment of any member of a 
foreign controlled group of entities as the com-
mon parent of such group if such treatment is 
appropriate taking into account the economic 
relationships among such entities.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to payments made after the date 
of the enactment of this Act. 
Subtitle I—Provisions Related to 
Compensation 
PART 1—EXECUTIVE COMPENSATION 
SEC. 3801. NONQUALIFIED DEFERRED COMPENSATION. 
(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. 409B. NONQUALIFIED DEFERRED COMPENSATION. 
‘‘(a) IN GENERAL.—Any compensation which is de-
ferred under a nonqualified deferred compensation plan 
shall be includible in gross income when there is no sub-
stantial risk of forfeiture of the rights to such compensa-
tion. 
‘‘(b) DEFINITIONS.—For purposes of this section— 
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‘‘(1) SUBSTANTIAL RISK OF FORFEITURE.—The 
rights of a person to compensation shall be treated 
as subject to a substantial risk of forfeiture only if 
such person’s rights to such compensation are condi-
tioned upon the future performance of substantial 
services by any individual. 
‘‘(2) NONQUALIFIED
DEFERRED
COMPENSA-
TION PLAN.—For purposes of this section: 
‘‘(A) NONQUALIFIED
DEFERRED
COM-
PENSATION PLAN.—The term ‘nonqualified de-
ferred compensation plan’ means any plan that 
provides for the deferral of compensation, other 
than— 
‘‘(i) a qualified employer plan, 
‘‘(ii) any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or 
death benefit plan, and 
‘‘(iii) any other plan or arrangement 
designated by the Secretary consistent with 
the purposes of this section. 
‘‘(B) 
EQUITY-BASED
COMPENSATION.— 
The term ‘nonqualified deferred compensation 
plan’ shall include any plan that provides a 
right to compensation based on the appreciation 
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in value of a specified number of equity units 
of the service recipient or stock options. 
‘‘(3) QUALIFIED EMPLOYER PLAN.—The term 
‘qualified employer plan’ means any plan, contract, 
pension, 
account, 
or 
trust 
described 
in 
408(p)(2)(D)(ii). 
‘‘(4) PLAN INCLUDES ARRANGEMENTS, ETC.— 
The term ‘plan’ includes any agreement or arrange-
ment, including an agreement or arrangement that 
includes one person. 
‘‘(5) EXCEPTION.—Compensation shall not be 
treated as deferred for purposes of this section if the 
service provider receives payment of such compensa-
tion not later than 6 months after the end of the 
taxable year of the service recipient during which the 
right to the payment of such compensation is no 
longer subject to a substantial risk of forfeiture. 
‘‘(6) 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. 
‘‘(7) AGGREGATION
RULES.—Except as pro-
vided by the Secretary, rules similar to the rules of 
subsections (b) and (c) of section 414 shall apply. 
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‘‘(c) NO INFERENCE ON EARLIER INCOME INCLU-
SION OR REQUIREMENT OF LATER INCLUSION.—Nothing 
in this section shall be construed to prevent the inclusion 
of amounts in gross income under any other provision of 
this chapter or any other rule of law earlier than the time 
provided in this section. Any amount included in gross in-
come under this section shall not be required to be in-
cluded in gross income under any other provision of this 
chapter or any other rule of law later than the time pro-
vided in this section. 
‘‘(d) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section, including regula-
tions disregarding a substantial risk of forfeiture in cases 
where necessary to carry out the purposes of this sec-
tion.’’. 
(b) TERMINATION
OF
CERTAIN
OTHER
NON-
QUALIFIED DEFERRED COMPENSATION RULES.— 
(1) NONQUALIFIED
DEFERRED
COMPENSA-
TION.— 
(A) IN GENERAL.—Subpart A of part I of 
subchapter D of chapter 1 is amended by strik-
ing section 409A (and by striking the item re-
lating to such section in the table of sections 
for such subpart). 
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(B) CONFORMING AMENDMENTS.— 
(i) Section 26(b)(2) is amended by 
striking subparagraph (V). 
(ii) Section 3401(a) is amended by 
striking the flush sentence at the end. 
(iii) Section 6041 is amended by 
striking subsection (g). 
(iv) Section 6051(a), as amended by 
the preceding provisions of this Act, is 
amended by striking paragraph (12), by 
inserting ‘‘and’’ at the end of paragraph 
(11), and by redesignating paragraph (13) 
as paragraph (12). 
(2) 457(b) PLANS OF TAX EXEMPT ORGANIZA-
TIONS.—Section 457 is amended by adding at the 
end the following new subsection: 
‘‘(h) TERMINATION OF CERTAIN PLANS.— 
‘‘(1) TAX-EXEMPT
ORGANIZATION
PLANS.— 
This section shall not apply to amounts deferred 
which are attributable to services performed after 
December 31, 2014, under a plan maintained by an 
employer described in subsection (e)(1)(B). 
‘‘(2) INELIGIBLE
DEFERRED
COMPENSATION 
PLANS.—Subsection (f) shall not apply to amounts 
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deferred which are attributable to services performed 
after December 31, 2014.’’. 
(3) NONQUALIFIED DEFERRED COMPENSATION 
FROM CERTAIN TAX INDIFFERENT PARTIES.— 
(A) IN GENERAL.—Subpart B of part II of 
subchapter E of chapter 1 is amended by strik-
ing section 457A (and by striking the item re-
lating to such section in the table of sections 
for such subpart). 
(B) CONFORMING
AMENDMENT.—Section 
26(b)(2) is amended by striking subparagraph 
(X). 
(c) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter D of chapter 1 is amended by 
adding at the end the following new item: 
‘‘Sec. 409B. Nonqualified deferred compensation.’’. 
(d) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to amounts which are attrib-
utable to services performed after December 31, 
2014. 
(2) APPLICATION TO EXISTING DEFERRALS.— 
In the case of any amount deferred to which the 
amendments made by this section do no apply solely 
by reason of the fact that the amount is attributable 
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to services performed before January 1, 2015, to the 
extent such amount is not includible in gross income 
in a taxable year beginning before 2023, such 
amounts shall be includible in gross income in the 
later of— 
(A) the last taxable year beginning before 
2023, or 
(B) the taxable year in which there is no 
substantial risk of forfeiture of the rights to 
such compensation (determined in the same 
manner as determined for purposes of section 
409B of the Internal Revenue Code of 1986, as 
added by this section). 
(3) ACCELERATED PAYMENTS.—No later than 
120 days after the date of the enactment of this Act, 
the Secretary shall issue guidance providing a lim-
ited period of time during which a nonqualified de-
ferred compensation arrangement attributable to 
services performed on or before December 31, 2014, 
may, without violating the requirements of section 
409A of the Internal Revenue Code of 1986, be 
amended to conform the date of distribution to the 
date the amounts are required to be included in in-
come. 
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(4) CERTAIN BACK-TO-BACK ARRANGEMENTS.— 
If the taxpayer is also a service recipient and main-
tains one or more nonqualified deferred compensa-
tion arrangements for its service providers under 
which any amount is attributable to services per-
formed on or before December 31, 2014, the guid-
ance issued under paragraph (3) shall permit such 
arrangements to be amended to conform the dates of 
distribution under such arrangement to the date 
amounts are required to be included in the income 
of such taxpayer under this subsection. 
(5) ACCELERATED PAYMENT NOT TREATED AS 
MATERIAL
MODIFICATION.—Any amendment to a 
nonqualified deferred compensation arrangement 
made pursuant to paragraph (3) or (4) shall not be 
treated as a material modification of the arrange-
ment for purposes of section 409A of the Internal 
Revenue Code of 1986. 
SEC. 3802. MODIFICATION OF LIMITATION ON EXCESSIVE 
EMPLOYEE REMUNERATION. 
(a) REPEAL OF PERFORMANCE-BASED COMPENSA-
TION AND COMMISSION EXCEPTIONS FOR LIMITATION ON 
EXCESSIVE EMPLOYEE REMUNERATION.— 
(1) IN
GENERAL.—Paragraph (4) of section 
162(m) is amended by striking subparagraphs (B) 
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and (C) and by redesignating subparagraphs (D), 
(E), (F), and (G) as subparagraphs (B), (C), (D), 
and (E), respectively. 
(2) CONFORMING AMENDMENTS.— 
(A) Paragraphs (5)(E) and (6)(D) of sec-
tion 162(m) are each amended by striking 
‘‘subparagraphs (B), (C), and (D)’’ and insert-
ing ‘‘subparagraph (B)’’. 
(B) Paragraphs (5)(G) and (6)(G) of sec-
tion 162(m) are each amended by striking ‘‘(F) 
and (G)’’ and inserting ‘‘(D) and (E)’’. 
(b) MODIFICATION OF DEFINITION OF COVERED EM-
PLOYEES.—Paragraph (3) of section 162(m) is amend-
ed— 
(1) in subparagraph (A), by striking ‘‘as of the 
close of the taxable year, such employee is the chief 
executive officer of the taxpayer or is’’ and inserting 
‘‘such employee is the chief executive officer or the 
chief financial officer of the taxpayer at any time 
during the taxable year, or was’’, 
(2) in subparagraph (B)— 
(A) by striking ‘‘4’’ and inserting ‘‘3’’, and 
(B) by striking ‘‘(other than the chief exec-
utive officer)’’ and inserting ‘‘(other than any 
individual described in subparagraph (A))’’, and 
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(3) by striking ‘‘or’’ at the end of subparagraph 
(A), by striking the period at the end of subpara-
graph (B) and inserting ‘‘, or’’, and by adding at the 
end the following: 
‘‘(C) was a covered employee of the tax-
payer (or any predecessor) for any preceding 
taxable year beginning after December 31, 
2013.’’. 
(c) SPECIAL RULE FOR REMUNERATION PAID TO 
BENEFICIARIES, ETC.—Paragraph (4) of section 162(m), 
as amended by subsection (a), is amended by adding at 
the end the following new subparagraph: 
‘‘(F) SPECIAL RULE FOR REMUNERATION 
PAID TO BENEFICIARIES, ETC.—Remuneration 
shall not fail to be applicable employee remu-
neration merely because it is includible in the 
income of, or paid to, a person other than the 
covered employee, including after the death of 
the covered employee.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
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SEC. 3803. EXCISE TAX ON EXCESS TAX-EXEMPT ORGANIZA-
TION EXECUTIVE COMPENSATION. 
(a) IN GENERAL.—Subchapter D of chapter 42 is 
amended by adding at the end the following new section: 
‘‘SEC. 4960. TAX ON EXCESS TAX-EXEMPT ORGANIZATION 
EXECUTIVE COMPENSATION. 
‘‘(a) TAX IMPOSED.—There is hereby imposed a tax 
equal to 25 percent of the sum of— 
‘‘(1) so much of the remuneration paid (other 
than any excess parachute payment) by an applica-
ble tax-exempt organization for the taxable year with 
respect to employment of any covered employee in 
excess of $1,000,000, plus 
‘‘(2) any excess parachute payment paid by 
such an organization to any covered employee. 
‘‘(b) LIABILITY FOR TAX.—The employer shall be lia-
ble for the tax imposed under subsection (a). 
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section— 
‘‘(1) 
APPLICABLE
TAX-EXEMPT
ORGANIZA-
TION.—The term ‘applicable tax-exempt organiza-
tion’ means any organization that for the taxable 
year— 
‘‘(A) is exempt from taxation under section 
501(a), 
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‘‘(B) is a farmers’ cooperative organization 
described in section 521(b)(1), or 
‘‘(C) has income excluded from taxation 
under section 115(1). 
‘‘(2) COVERED
EMPLOYEE.—For purposes of 
this section, the term ‘covered employee’ means any 
employee (including any former employee) of an ap-
plicable tax-exempt organization if the employee— 
‘‘(A) is one of the 5 highest compensated 
employees of the organization for the taxable 
year, or 
‘‘(B) was a covered employee of the organi-
zation (or any predecessor) for any preceding 
taxable year beginning after December 31, 
2013. 
‘‘(3) REMUNERATION.—For purposes of this 
section, the term ‘remuneration’ means wages (as 
defined in section 3401(a)), except that such term 
shall not include any designated Roth contribution 
(as defined in section 402A(c)). 
‘‘(4) REMUNERATION FROM RELATED ORGANI-
ZATIONS.— 
‘‘(A) IN
GENERAL.—Remuneration of a 
covered employee by an applicable tax-exempt 
organization shall include any remuneration 
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paid with respect to employment of such em-
ployee by any related person or governmental 
entity. 
‘‘(B) RELATED
ORGANIZATIONS.—A per-
son or governmental entity shall be treated as 
related to an applicable tax-exempt organization 
if such person or governmental entity— 
‘‘(i) controls, or is controlled by, the 
organization, 
‘‘(ii) is controlled by one or more per-
sons that control the organization, 
‘‘(iii) is a supported organization (as 
defined in section 509(f)(2)) during the 
taxable year with respect to the organiza-
tion, 
‘‘(iv) is a supporting organization de-
scribed in section 509(a)(3) during the 
taxable year with respect to the organiza-
tion, or 
‘‘(v) in the case of an organization 
that is a voluntary employees’ beneficiary 
association described in section 501(a)(9), 
establishes, maintains, or makes contribu-
tions to such voluntary employees’ bene-
ficiary association. 
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‘‘(C) LIABILITY FOR TAX.—In any case in 
which remuneration from more than one em-
ployer is taken into account under this para-
graph in determining the tax imposed by sub-
section (a), each such employer shall be liable 
for such tax in an amount which bears the 
same ratio to the total tax determined under 
subsection (a) with respect to such remunera-
tion as— 
‘‘(i) the amount of remuneration paid 
by such employer with respect to such em-
ployee, bears to 
‘‘(ii) the amount of remuneration paid 
by all such employers to such employee. 
‘‘(5) EXCESS PARACHUTE PAYMENT.—For pur-
poses determining the tax imposed by subsection 
(a)(2)— 
‘‘(A) IN
GENERAL.—The term ‘excess 
parachute payment’ means an amount equal to 
the excess of any parachute payment over the 
portion of the base amount allocated to such 
payment. 
‘‘(B) PARACHUTE
PAYMENT.—The term 
‘parachute payment’ means any payment in the 
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nature of compensation to (or for the benefit 
of) a covered employee if— 
‘‘(i) such payment is contingent on 
such employee’s separation from employ-
ment with the employer, and 
‘‘(ii) the aggregate present value of 
the payments in the nature of compensa-
tion to (or for the benefit of) such indi-
vidual which are contingent on such sepa-
ration equals or exceeds an amount equal 
to 3 times the base amount. 
Such term does not include any payment de-
scribed in section 280G(b)(6) (relating to ex-
emption for payments under qualified plans) or 
any payment made under or to an annuity con-
tract described in section 403(b) or a plan de-
scribed in section 457(b). 
‘‘(C) BASE AMOUNT.—Rules similar to the 
rules of 280G(b)(3) shall apply for purposes of 
determining the base amount. 
‘‘(D) PROPERTY
TRANSFERS; 
PRESENT 
VALUE.—Rules similar to the rules of para-
graphs (3) and (4) of section 280G(d) shall 
apply. 
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‘‘(6) COORDINATION WITH DEDUCTION LIMITA-
TION.—Remuneration the deduction for which is not 
allowed by reason of section 162(m) shall not be 
taken into account for purposes of this section.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for subchapter D of chapter 42 is amended by adding at 
the end the following new item: 
‘‘Sec. 4960. Tax on excess exempt organization executive compensation.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2014. 
SEC. 3804. DENIAL OF DEDUCTION AS RESEARCH EXPENDI-
TURE FOR STOCK TRANSFERRED PURSUANT 
TO AN INCENTIVE STOCK OPTION. 
(a) IN GENERAL.—Paragraph (2) of section 421(a) 
is amended by striking ‘‘under section 162 (relating to 
trade or business expenses)’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to stock transferred on or after 
February 26, 2014. 
PART 2—WORKER CLASSIFICATION 
SEC. 3811. DETERMINATION OF WORKER CLASSIFICATION. 
(a) IN GENERAL.—Chapter 79, as amended by the 
preceding provisions of this Act, is amended by adding at 
the end the following new section: 
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‘‘SEC. 7707. DETERMINATION OF WORKER CLASSIFICATION. 
‘‘(a) IN GENERAL.—For purposes of this title (and 
notwithstanding any provision of this title not contained 
in this section to the contrary), if the requirements of sub-
sections (b), (c), and (d) are met with respect to any serv-
ice performed by a service provider, then with respect to 
such service— 
‘‘(1) the service provider shall not be treated as 
an employee, 
‘‘(2) the service recipient shall not be treated as 
an employer, 
‘‘(3) any payor shall not be treated as an em-
ployer, and 
‘‘(4) the compensation paid or received for such 
service shall not be treated as paid or received with 
respect to employment. 
‘‘(b) 
GENERAL
SERVICE
PROVIDER
REQUIRE-
MENTS.— 
‘‘(1) IN GENERAL.—The requirements of this 
subsection are met with respect to any service if the 
service provider either— 
‘‘(A) meets the requirements of paragraph 
(2) with respect to such service, or 
‘‘(B) in the case a service provider engaged 
in the trade or business of selling (or soliciting 
the sale of) goods or services, meets the re-
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quirements of paragraph (3) with respect to 
such service. 
‘‘(2) GENERAL REQUIREMENTS.—The require-
ments of this paragraph are met with respect to any 
service if the service provider, in connection with 
performing the service— 
‘‘(A) incurs significant unreimbursed ex-
penses, 
‘‘(B) agrees to perform the service for a 
particular amount of time, to achieve a specific 
result, or to complete a specific task, 
‘‘(C) is primarily compensated on a basis 
not tied to the number of hours worked, and 
‘‘(D) at least one of the following: 
‘‘(i) has a significant investment in 
assets or training, 
‘‘(ii) is not required to perform serv-
ices exclusively for the service recipient, or 
‘‘(iii) has not performed services for 
the service recipient as an employee during 
the 1-year period ending with the date of 
the commencement of services under the 
contract described in subsection (d). 
‘‘(3) ALTERNATIVE REQUIREMENTS WITH RE-
SPECT TO SALES PERSONS.—In the case of a service 
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provider engaged in the trade or business of selling 
(or soliciting the sale of) goods or services, the re-
quirements of this paragraph are met with respect 
to any service provided in the ordinary course of 
such trade or business if— 
‘‘(A) the service provider is compensated 
primarily on a commission basis, and 
‘‘(B) substantially all the compensation for 
such service is directly related to sales of goods 
or services rather than to the number of hours 
worked. 
‘‘(c) PLACE OF BUSINESS OR OWN EQUIPMENT RE-
QUIREMENT.—The requirement of this subsection is met 
with respect to any service if the service provider— 
‘‘(1) has a principal place of business, 
‘‘(2) does not primarily provide the service in 
the service recipient’s place of business, 
‘‘(3) pays a fair market rent for use of the serv-
ice recipient’s place of business, or 
‘‘(4) provides the service primarily using equip-
ment supplied by the service provider. 
‘‘(d) WRITTEN CONTRACT REQUIREMENT.—The re-
quirements of this subsection are met with respect to any 
service if such service is performed pursuant to a written 
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contract between the service provider and the service re-
cipient (or payor) which meets the following requirements: 
‘‘(1) The contract includes each of the fol-
lowing: 
‘‘(A) The service provider’s name, taxpayer 
identification number, and address. 
‘‘(B) A statement that the service provider 
will not be treated as an employee with respect 
to the services provided pursuant to the con-
tract for purposes of this title. 
‘‘(C) A statement that the service recipient 
(or the payor) will withhold upon and report to 
the Internal Revenue Service the compensation 
payable pursuant to the contract consistent 
with the requirements of this title. 
‘‘(D) A statement that the service provider 
is responsible for payment of Federal, State, 
and local taxes, including self-employment 
taxes, on compensation payable pursuant to the 
contract. 
‘‘(E) A statement that the contract is in-
tended to be considered a contract described in 
this subsection. 
‘‘(2) The term of the contract does not exceed 
1 year. The preceding sentence shall not prevent one 
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or more subsequent written renewals of the contract 
from satisfying the requirements of this subsection 
if the term of each such renewal does not exceed 1 
year and if the information required under para-
graph (1)(A) is updated in connection with each 
such renewal. 
‘‘(3) The contract (or renewal) is signed by 
both the service recipient (or payor) and the service 
provider not later than the date on which the aggre-
gate payments made by the service recipient to the 
service provider exceeds $600 for the year covered 
by the contract (or renewal). 
‘‘(e) REPORTING REQUIREMENTS.—If any service re-
cipient or payor fails to meet the applicable reporting re-
quirements of section 6041(a) or 6041A(a) for any taxable 
year with respect to any service provider, this section shall 
not apply for purposes of making any determination with 
respect to the liability of such service recipient or payor 
for any tax with respect to such service provider for such 
period. For purposes of the preceding sentence, such re-
porting requirements shall be treated as met if the failure 
to satisfy such requirements is due to reasonable cause 
and not willful neglect. 
‘‘(f) EXCEPTION
FOR
SERVICES
PROVIDED
BY 
OWNER.—This section shall not apply with respect to any 
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service provided by a service provider to a service recipient 
if the service provider owns any interest in the service re-
cipient or any payor with respect to the service provided. 
The preceding sentence shall not apply in the case of a 
service recipient the stock of which is regularly traded on 
an established securities market. 
‘‘(g) EXCEPTION FOR SERVICES NOT RECEIVED IN 
COURSE OF A TRADE OR BUSINESS.—This section shall 
not apply with respect to any service unless such service 
is performed in the ordinary course of a trade or business 
of the service recipient. 
‘‘(h) LIMITATION
ON RECLASSIFICATION
BY SEC-
RETARY.—For purposes of this title— 
‘‘(1) EFFECT OF RECLASSIFICATION ON RECIPI-
ENTS AND PAYORS.—A determination by the Sec-
retary that a service recipient or a payor should 
have treated a service provider as an employee shall 
be effective with respect to the service recipient or 
payor no earlier than the notice date if— 
‘‘(A) the service recipient or the payor en-
tered into a written contract with the service 
provider which meets the requirements of sub-
section (d), 
‘‘(B) the service recipient or the payor sat-
isfied the applicable reporting requirements of 
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section 6041(a) or 6041A(a) for all relevant 
taxable years with respect to the service pro-
vider, 
‘‘(C) the service recipient or the payor col-
lected and paid over all applicable taxes im-
posed under subtitle C for all relevant taxable 
years with respect to the service provider, 
‘‘(D) the service recipient or the payor 
demonstrates a reasonable basis for having de-
termined that the service provider should not be 
treated as an employee under this section and 
that such determination was made in good 
faith. 
‘‘(2) EFFECT OF RECLASSIFICATION ON SERV-
ICE PROVIDERS.—A determination by the Secretary 
that a service provider should have been treated as 
an employee shall be effective with respect to the 
service provider no earlier than the notice date if— 
‘‘(A) the service provider entered into a 
written contract with the service recipient or 
payor which meets the requirements of sub-
section (d), 
‘‘(B) the service provider satisfied the ap-
plicable reporting requirements of sections 
6012(a) and 6017 for all relevant taxable years 
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with respect to the service recipient or payor, 
and 
‘‘(C) the service provider demonstrates a 
reasonable basis for determining that the serv-
ice provider is not an employee under this sec-
tion and that such determination was made in 
good faith. 
‘‘(3) NOTICE DATE.—For purposes of this sub-
section, the term ‘notice date’ means the 30th day 
after the earliest of— 
‘‘(A) the date on which the first letter of 
proposed deficiency which allows the service 
provider, the service recipient, or the payor an 
opportunity for administrative review in the In-
ternal Revenue Service Office of Appeals is 
sent, 
‘‘(B) the date on which a deficiency notice 
under section 6212 is sent, or 
‘‘(C) the date on which a notice of deter-
mination under section 7436(b)(2) is sent. 
‘‘(4) REASONABLE CAUSE EXCEPTION.—The re-
quirements of paragraphs (1)(B) and (2)(B) shall be 
treated as met if the failure to satisfy such require-
ments is due to reasonable cause and not willful ne-
glect. 
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‘‘(5) NO RESTRICTION ON ADMINISTRATIVE OR 
JUDICIAL REVIEW.—Nothing in this subsection shall 
be construed as limiting any provision of law which 
provides an opportunity for administrative or judi-
cial review of a determination by the Secretary. 
‘‘(i) DEFINITIONS.—For purposes of this section— 
‘‘(1) SERVICE PROVIDER.— 
‘‘(A) IN GENERAL.—The term ‘service pro-
vider’ means any qualified person who performs 
service for another person. 
‘‘(B) 
QUALIFIED
PERSON.—The 
term 
‘qualified person’ means— 
‘‘(i) any natural person, and 
‘‘(ii) any entity if any of the services 
referred to in subparagraph (A) are per-
formed by one or more natural persons 
who directly own interests in such entity. 
‘‘(2) SERVICE RECIPIENT.—The term ‘service 
recipient’ means the person for whom the service 
provider performs such service. 
‘‘(3) PAYOR.—The term ‘payor’ means any per-
son who pays the service provider for performing 
such service. 
‘‘(j) REGULATIONS.—Notwithstanding section 530(d) 
of the Revenue Act of 1978, the Secretary shall issue such 
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regulations as the Secretary determines are necessary to 
carry out the purposes of this section.’’. 
(b) WITHHOLDING BY PAYOR IN CASE OF CERTAIN 
PERSONS CLASSIFIED
AS NOT EMPLOYEES.—Section 
3402 is amended by redesignating subsection (s) as sub-
section (t) and inserting after subsection (r) the following 
new subsection: 
‘‘(s) EXTENSION OF WITHHOLDING TO PAYMENTS 
TO CERTAIN PERSONS CLASSIFIED
AS NOT EMPLOY-
EES.— 
‘‘(1) IN GENERAL.—For purposes of this chap-
ter and so much of subtitle F as relates to this chap-
ter, compensation paid pursuant to a contract de-
scribed in section 7707(d) shall be treated as if it 
were a payment of wages by an employer to an em-
ployee. 
‘‘(2) AMOUNT WITHHELD.—Except as otherwise 
provided under subsection (i), the amount to be de-
ducted and withheld pursuant to paragraph (1) with 
respect to compensation paid pursuant to any such 
contract during any calendar year shall be an 
amount equal to 5 percent of so much of the amount 
of such compensation as does not exceed $10,000.’’. 
(c) REPORTING.—Section 6041A is amended by add-
ing at the end the following new subsection: 
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‘‘(g) SPECIAL RULES FOR CERTAIN PERSONS CLAS-
SIFIED AS NOT EMPLOYEES.—In the case of any service 
recipient required to make a return under subsection (a) 
with respect to compensation to which section 7707(a) ap-
plies— 
‘‘(1) such return shall include— 
‘‘(A) the aggregate amount of such com-
pensation paid to each person whose name is 
required to be included on such return, 
‘‘(B) the aggregate amount deducted and 
withheld under section 3402(s) with respect to 
such compensation, and 
‘‘(C) an indication of whether a copy of the 
contract described in section 7707(d) is on file 
with the service recipient or payor, and 
‘‘(2) the statement required to be furnished 
under subsection (e) shall include the information 
described in paragraph (1) with respect to the serv-
ice provider to whom such statement is furnished. 
Terms used in this subsection which are also used in sec-
tion 7707 shall have the same meaning as when used in 
such section.’’. 
(d) CLERICAL AMENDMENT.—The table of sections 
for chapter 79, as amended by the preceding provisions 
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of this Act, is amended by adding at the end the following 
new item: 
‘‘Sec. 7707. Determination of worker classification.’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to services performed after Decem-
ber 31, 2014 (and to payments made for such services 
after such date). 
Subtitle J—Zones and Short-Term 
Regional Benefits 
SEC. 3821. REPEAL OF PROVISIONS RELATING TO EM-
POWERMENT ZONES AND ENTERPRISE COM-
MUNITIES. 
(a) IN GENERAL.—Chapter 1 is amended by striking 
subchapter U (and by striking the item relating to such 
subchapter in the table of subchapters for such chapter). 
(b) CONFORMING AMENDMENTS.— 
(1)(A) Section 38(b) is amended by striking 
paragraph (9). 
(B) Section 280C(a) is amended by striking 
‘‘1396(a),’’. 
(2) Section 179(e) is amended by striking para-
graph (3) and by redesignating paragraph (4) as 
paragraph (3). 
(3) Section 1202(a)(2)(A) is amended by insert-
ing ‘‘(as in effect before its repeal by the Tax Re-
form Act of 2014)’’ after ‘‘section 1397C(b)’’. 
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(c) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendment made by 
this section shall take effect on the date of the en-
actment of this Act. 
(2) ROLLOVERS.—So much of subsection (a) as 
relates to the repeal of section 1397B of the Internal 
Revenue Code of 1986 shall apply to sales after the 
date of the enactment of this Act. 
(3) SAVINGS
PROVISION.—The amendments 
made by this section shall not apply to obligations 
described in section 1394 of the Internal Revenue 
Code of 1986 (as in effect before its repeal) which 
were issued before January 1, 2014. 
SEC. 3822. REPEAL OF DC ZONE PROVISIONS. 
(a) IN GENERAL.—Chapter 1 is amended by striking 
subchapter W (and by striking the item relating to such 
subchapter in the table of subchapters for such chapter). 
(b) CONFORMING AMENDMENTS.— 
(1)(A) Section 1202(a)(2)(B) is amended by in-
serting ‘‘(as in effect before its repeal by the Tax 
Reform Act of 2014)’’ after ‘‘1400B(b)’’. 
(2) Section 25(e)(1)(C) is amended by striking 
‘‘sections 23, 25D, and 1400C’’ and inserting ‘‘sec-
tion 23’’. 
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(3) Section 1016(a) is amended by striking 
paragraph (27). 
(c) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in paragraph (2), the amendments made by 
this section shall take effect on the date of the en-
actment of this Act. 
(2) SAVINGS
PROVISION.—The amendments 
made by this section shall not apply to— 
(A) in the case of the repeal of section 
1400A of the Internal Revenue Code of 1986, 
obligations described in section 1394 of such 
Code (as in effect before its repeal) which were 
issued before January 1, 2012, 
(B) in the case of the repeal of section 
1400B of such Code, DC Zone assets (as de-
fined in such section, as in effect before its re-
peal) which were acquired by the taxpayer be-
fore January 1, 2012, and 
(C) in the case of the repeal of section 
1400C of such Code, principal residences ac-
quired before January 1, 2012. 
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SEC. 3823. REPEAL OF PROVISIONS RELATING TO RE-
NEWAL COMMUNITIES. 
(a) IN GENERAL.—Chapter 1 is amended by striking 
subchapter X (and by striking the item relating to such 
subchapter in the table of subchapters for such chapter). 
(b) CONFORMING AMENDMENTS.— 
(1)(A) Section 469(i)(3), as amended by the 
preceding provisions of this Act, is amended by 
striking subparagraph (C) and by redesignating sub-
paragraphs (D), (E), and (F) as subparagraphs (B), 
(C), and (D). 
(B) Section 469(i)(3)(C), as so redesignated, is 
amended to read as follows: 
‘‘(C) ORDERING
RULE.—If subparagraph 
(B) applies for a taxable year, paragraph (1) 
shall be applied— 
‘‘(i) first to the portion of the passive 
activity loss to which such subparagraph 
does not apply, and 
‘‘(ii) then to the portion of such loss 
to which such subparagraph does apply.’’. 
(C) Section 469(i)(6)(B), as amended by the 
preceding provisions of this Act, is amended— 
(i) by striking ‘‘COMMERCIAL REVITALIZA-
TION DEDUCTION’’ in the heading, 
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(ii) by striking ‘‘in the case of—’’ and all 
that follows through ‘‘any credit’’ in clause (i), 
(iii) by striking ‘‘year, or’’ in clause (i) and 
inserting ‘‘year.’’, and 
(iv) by striking clause (iii). 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall take effect on the date of the enactment of this 
Act. 
(2) SAVINGS
PROVISION.—The amendments 
made by this section shall not apply to— 
(A) in the case of the repeal of section 
1400F of the Internal Revenue Code of 1986, 
qualified community assets (as defined in such 
section, as in effect before its repeal) which 
were acquired by the taxpayer before January 
1, 2010, 
(B) in the case of the repeal section 
1400H of such Code, wages paid or incurred 
before January 1, 2010, 
(C) in the case of the repeal of section 
1400I of such Code, qualified revitalization 
buildings (as defined in such section, as in ef-
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fect before its repeal) which were placed in 
service before January 1, 2010, and 
(D) in the case of the repeal of section 
1400J of such Code, property acquired before 
January 1, 2010. 
SEC. 3824. REPEAL OF VARIOUS SHORT-TERM REGIONAL 
BENEFITS. 
(a) IN GENERAL.—Chapter 1 is amended by striking 
subchapter Y (and by striking the item relating to such 
subchapter in the table of subchapters for such chapter). 
(b) CONFORMING AMENDMENTS.—Section 38(b) is 
amended by striking paragraphs (27), (28), (29) and (30). 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall take effect on the date of the enactment of this 
Act. 
(2) SAVINGS
PROVISION.—The amendments 
made by this section shall not apply to— 
(A) in the case of the repeal of section 
1400L(a) of the Internal Revenue Code of 
1986, qualified wages (as defined in such sec-
tion, as in effect before its repeal) which were 
paid or incurred before January 1, 2004, 
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(B) in the case of the repeal of subsections 
(b) and (f) of section 1400L of such Code, 
qualified New York Liberty Zone property (as 
defined in section 1400L(b) of such Code, as in 
effect before its repeal) placed in service before 
January 1, 2010, 
(C) in the case of the repeal of section 
1400L(c) of such Code, qualified New York 
Liberty Zone leasehold improvement property 
(as defined in such section, as in effect before 
its repeal) placed in service before January 1, 
2007, 
(D) in the case of the repeal of section 
1400L(d) of such Code, qualified New York 
Liberty bonds (as defined in such section, as in 
effect before its repeal) issued before January 
1, 2014, 
(E) in the case of the repeal of section 
1400L(e) of such Code, advanced refundings 
before January 1, 2006, 
(F) in the case of the repeal of section 
1400L(g) of such Code, property which is 
compulsorily or involuntarily converted as a re-
sult of the terrorist attacks on September 11, 
2001, 
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(G) in the case of the repeal of section 
1400N(a) of such Code, obligations issued be-
fore January 1, 2012, 
(H) in the case of the repeal of section 
1400N(b) of such Code, advanced refundings 
before January 1, 2011, 
(I) in the case of the repeal of section 
1400N(d) of such Code, property placed in 
service before January 1, 2012, 
(J) in the case of the repeal of section 
1400N(e) of such Code, property placed in serv-
ice before January 1, 2009, 
(K) in the case of the repeal of subsections 
(f) and (g) of section 1400N of such Code, 
amounts paid or incurred before January 1, 
2008, 
(L) in the case of the repeal of section 
1400N(h) of such Code, amounts paid or in-
curred before January 1, 2012, 
(M) in the case of the repeal of section 
1400N(l) of such Code, bonds issued before 
January 1, 2007, 
(N) in the case of the repeal of section 
1400Q(a) of such Code, distributions before 
January 1, 2007, 
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(O) in the case of the repeal of section 
1400Q(b) of such Code, contributions before 
March 1, 2006, 
(P) in the case of the repeal of section 
1400Q(c) of such Code, loans made before Jan-
uary 1, 2007, 
(Q) in the case of the repeal of section 
1400R of such Code, wages paid or incurred be-
fore January 1, 2006, 
(R) in the case of the repeal of section 
1400S(a) of such Code, contributions paid be-
fore January 1, 2006, 
(S) in the case of the repeal of section 
1400T of such Code, financing provided before 
January 1, 2011, and 
(T) in the case of the repeal of part III of 
subchapter Y of chapter 1 of such Code, obliga-
tions issued before January 1, 2011. 
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TITLE 
IV—PARTICIPATION 
EX-
EMPTION SYSTEM FOR THE 
TAXATION OF FOREIGN IN-
COME 
Subtitle A—Establishment of 
Exemption System 
SEC. 4001. DEDUCTION FOR DIVIDENDS RECEIVED BY DO-
MESTIC CORPORATIONS FROM CERTAIN FOR-
EIGN CORPORATIONS. 
(a) IN GENERAL.—Part VIII of subchapter B of 
chapter 1 is amended by inserting after section 245 the 
following new section: 
‘‘SEC. 245A. DIVIDENDS RECEIVED BY DOMESTIC CORPORA-
TIONS FROM CERTAIN FOREIGN CORPORA-
TIONS. 
‘‘(a) IN GENERAL.—In the case of any dividend re-
ceived from a specified 10-percent owned foreign corpora-
tion by a domestic corporation which is a United States 
shareholder with respect to such foreign corporation, there 
shall be allowed as a deduction an amount equal to 95 
percent of the foreign-source portion of such dividend. 
‘‘(b) SPECIFIED 10-PERCENT OWNED FOREIGN COR-
PORATION.—For purposes of this section, the term ‘speci-
fied 10-percent owned foreign corporation’ means any for-
eign corporation if any domestic corporation owns directly, 
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or indirectly through a chain of ownership described under 
section 958(a), 10 percent or more of the voting stock of 
such foreign corporation. 
‘‘(c) FOREIGN-SOURCE PORTION.—For purposes of 
this section— 
‘‘(1) IN GENERAL.—The foreign-source portion 
of any dividend is an amount which bears the same 
ratio to such dividends as— 
‘‘(A) the post-1986 undistributed foreign 
earnings, bears to 
‘‘(B) the total post-1986 undistributed 
earnings. 
‘‘(2) POST-1986
UNDISTRIBUTED
EARNINGS.— 
The term ‘post-1986 undistributed earnings’ means 
the amount of the earnings and profits of the speci-
fied 10-percent owned foreign corporation (computed 
in accordance with sections 964(a) and 986) accu-
mulated in taxable years beginning after December 
31, 1986— 
‘‘(A) as of the close of the taxable year of 
the specified 10-percent owned foreign corpora-
tion in which the dividend is distributed, and 
‘‘(B) without diminution by reason of divi-
dends distributed during such taxable year. 
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‘‘(3) 
POST-1986
UNDISTRIBUTED
FOREIGN 
EARNINGS.—The term ‘post-1986 undistributed for-
eign earnings’ means the portion of the post-1986 
undistributed earnings which is attributable to nei-
ther— 
‘‘(A) income described in subparagraph (A) 
of section 245(a)(5), nor 
‘‘(B) dividends described in subparagraph 
(B) of such section (determined without regard 
to section 245(a)(12)). 
‘‘(4) TREATMENT
OF
DISTRIBUTIONS
FROM 
EARNINGS BEFORE 1987.— 
‘‘(A) IN GENERAL.—In the case of any div-
idend paid out of earnings and profits of the 
specified 10-percent owned foreign corporation 
(computed in accordance with sections 964(a) 
and 986) accumulated in taxable years begin-
ning before January 1, 1987— 
‘‘(i) paragraphs (1), (2), and (3) shall 
be applied without regard to the phrase 
‘post-1986’ each place it appears, and 
‘‘(ii) paragraph (2) shall be applied 
without regard to the phrase ‘in taxable 
years beginning after December 31, 1986’. 
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‘‘(B) DIVIDENDS
PAID
FIRST
OUT
OF 
POST-1986 EARNINGS.—Dividends shall be treat-
ed as paid out of post-1986 undistributed earn-
ings to the extent thereof. 
‘‘(d) DISALLOWANCE
OF FOREIGN TAX CREDIT, 
ETC.— 
‘‘(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 any divi-
dend for which a deduction is allowed under this sec-
tion. 
‘‘(2) DENIAL
OF
DEDUCTION.—No deduction 
shall be allowed under this chapter for any tax for 
which credit is not allowable under section 901 by 
reason of paragraph (1) (determined by treating the 
taxpayer as having elected the benefits of subpart A 
of part III of subchapter N). 
‘‘(e) REGULATIONS.—The Secretary may prescribe 
such regulations or other guidance as may be necessary 
or appropriate to carry out the provisions of this section.’’. 
(b) APPLICATION OF HOLDING PERIOD REQUIRE-
MENT.—Subsection (c) of section 246 is amended— 
(1) by striking ‘‘or 245’’ in paragraph (1) and 
inserting ‘‘245, or 245A’’, and 
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(2) by adding at the end the following new 
paragraph: 
‘‘(5) SPECIAL
RULES
FOR
FOREIGN
SOURCE 
PORTION OF DIVIDENDS RECEIVED FROM SPECIFIED 
10-PERCENT OWNED FOREIGN CORPORATIONS.— 
‘‘(A) 6-MONTH HOLDING PERIOD REQUIRE-
MENT.—For purposes of section 245A— 
‘‘(i) paragraph (1)(A) shall be ap-
plied— 
‘‘(I) by substituting ‘180 days’ 
for ‘45 days’each place it appears, and 
‘‘(II) by substituting ‘361-day pe-
riod’ for ‘91-day period’, and 
‘‘(ii) paragraph (2) shall not apply. 
‘‘(B) STATUS MUST BE MAINTAINED DUR-
ING HOLDING PERIOD.—For purposes of section 
245A, the holding period requirement of this 
subsection shall be treated as met only if— 
‘‘(i) the specified 10-percent owned 
corporation referred to in section 245A(a) 
is a specified 10-percent owned corporation 
at all times during such period, and 
‘‘(ii) the taxpayer is a United States 
shareholder with respect to such specified 
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10-percent owned corporation at all times 
during such period.’’. 
(c) APPLICATION OF RULES GENERALLY APPLICA-
BLE TO DEDUCTIONS FOR DIVIDENDS RECEIVED.— 
(1) TREATMENT OF DIVIDENDS FROM CERTAIN 
CORPORATIONS.—Paragraph (1) of section 246(a) is 
amended by striking ‘‘and 245’’ and inserting ‘‘245, 
and 245A’’. 
(2) ASSETS GENERATING TAX-EXEMPT PORTION 
OF DIVIDEND NOT TAKEN INTO ACCOUNT IN ALLO-
CATING
AND
APPORTIONING
DEDUCTIBLE
EX-
PENSES.—Paragraph (3) of section 864(e) is amend-
ed by striking ‘‘or 245(a)’’ and inserting ‘‘, 245(a), 
or 245A’’. 
(3) COORDINATION WITH SECTION 1059.—Sub-
paragraph (B) of section 1059(b)(2) is amended by 
striking ‘‘or 245’’ and inserting ‘‘245, or 245A’’. 
(d) COORDINATION WITH FOREIGN TAX CREDIT 
LIMITATION.—Subsection (b) of section 904, as amended 
by the preceding provisions of this Act, is amended by re-
designating paragraph (2) as paragraph (1) and by adding 
at the end the following new paragraph: 
‘‘(2) TREATMENT OF DIVIDENDS FOR WHICH 
DEDUCTION IS ALLOWED UNDER SECTION 245A.— 
For purposes of subsection (a), in the case of a do-
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mestic corporation which is a United States share-
holder with respect to a specified 10-percent owned 
foreign corporation, such domestic corporation’s tax-
able income from sources without the United States 
shall be determined without regard to— 
‘‘(A) the foreign-source portion of any divi-
dend received from such foreign corporation, 
and 
‘‘(B) any deductions properly allocable to 
such portion. 
Any term which is used in section 245A and in this 
paragraph shall have the same meaning for purposes 
of this paragraph as when used in such section.’’. 
(e) CONFORMING AMENDMENTS.— 
(1) Paragraph (4) of section 245(a) is amended 
by striking ‘‘section 902(c)(1)’’ and inserting ‘‘sec-
tion 245A(c)(2)’’. 
(2) Subsection (b) of section 951 is amended by 
striking ‘‘subpart’’ and inserting ‘‘title’’. 
(3) Subsection (a) of section 957 is amended by 
striking ‘‘subpart’’ in the matter preceding para-
graph (1) and inserting ‘‘title’’. 
(4) The table of sections for part VIII of sub-
chapter B of chapter 1 is amended by inserting after 
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the item relating to section 245 the following new 
item: 
‘‘Sec. 245A. Dividends received by domestic corporations from certain foreign 
corporations.’’. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2014, and to taxable 
years of United States shareholders in which or with which 
such taxable years of foreign corporations end. 
SEC. 4002. LIMITATION ON LOSSES WITH RESPECT TO 
SPECIFIED 
10-PERCENT 
OWNED 
FOREIGN 
CORPORATIONS. 
(a) BASIS IN SPECIFIED 10-PERCENT OWNED FOR-
EIGN CORPORATION REDUCED BY NONTAXED PORTION 
OF DIVIDEND FOR PURPOSES OF DETERMINING LOSS.— 
(1) IN GENERAL.—Section 961 is amended by 
adding at the end the following new subsection: 
‘‘(d) BASIS IN SPECIFIED 10-PERCENT OWNED FOR-
EIGN CORPORATION REDUCED BY NONTAXED PORTION 
OF DIVIDEND FOR PURPOSES OF DETERMINING LOSS.— 
If a domestic corporation received a dividend from a speci-
fied 10-percent owned foreign corporation (as defined in 
section 245A) in any taxable year, solely for purposes of 
determining loss on any disposition in such taxable year 
or any subsequent taxable year, the basis of such domestic 
corporation in the stock of such foreign corporation shall 
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be reduced by the amount of any deduction allowable to 
such domestic corporation under section 245A with re-
spect to such stock.’’. 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to dividends received 
in taxable years beginning after December 31, 2014. 
(b) TREATMENT
OF
FOREIGN
BRANCH
LOSSES 
TRANSFERRED TO SPECIFIED 10-PERCENT OWNED FOR-
EIGN CORPORATIONS.— 
(1) IN GENERAL.—Part II of subchapter B of 
chapter 1, as amended by the preceding provisions 
of this Act, is amended by adding at the end the fol-
lowing new section: 
‘‘SEC. 92. CERTAIN FOREIGN BRANCH LOSSES TRANS-
FERRED TO SPECIFIED 10-PERCENT OWNED 
FOREIGN CORPORATIONS. 
‘‘(a) IN GENERAL.—If a domestic corporation trans-
fers substantially all of the assets of a foreign branch 
(within the meaning of section 367(a)(3)(C)) to a specified 
10-percent owned foreign corporation (as defined in sec-
tion 245A) with respect to which it is a United States 
shareholder after such transfer, such domestic corporation 
shall include in gross income for the taxable year which 
includes such transfer an amount equal to the transferred 
loss amount with respect to such transfer. 
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‘‘(b) LIMITATION AND CARRYFORWARD BASED ON 
FOREIGN-SOURCE DIVIDENDS RECEIVED.— 
‘‘(1) IN
GENERAL.—The amount included in 
the gross income of the taxpayer under subsection 
(a) for any taxable year shall not exceed the amount 
allowed as a deduction under section 245A for such 
taxable year (taking into account dividends received 
from all specified 10-percent owned foreign corpora-
tions with respect to which the taxpayer is a United 
States shareholder). 
‘‘(2) AMOUNTS NOT INCLUDED CARRIED FOR-
WARD.—Any amount not included in gross income 
for any taxable year by reason of paragraph (1) 
shall, subject to the application of paragraph (1) to 
the succeeding taxable year, be included in gross in-
come for the succeeding taxable year. 
‘‘(c) TRANSFERRED LOSS AMOUNT.—For purposes 
of this section, the term ‘transferred loss amount’ means, 
with respect to any transfer of substantially all of the as-
sets of a foreign branch, the excess (if any) of— 
‘‘(1) the sum of losses— 
‘‘(A) which were incurred by the foreign 
branch after December 31, 2014, and before 
the transfer, and 
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‘‘(B) with respect to which a deduction was 
allowed to the taxpayer, over 
‘‘(2) the sum of— 
‘‘(A) any taxable income of such branch 
for a taxable year after the taxable year in 
which the loss was incurred and through the 
close of the taxable year of the transfer, and 
‘‘(B) any amount which is recognized 
under section 904(f)(3) on account of the trans-
fer. 
‘‘(d) REDUCTION FOR RECOGNIZED GAINS.— 
‘‘(1) IN GENERAL.—In the case of a transfer 
not described in section 367(a)(3)(C), the trans-
ferred loss amount shall be reduced (but not below 
zero) by the amount of gain recognized by the tax-
payer on account of the transfer (other than 
amounts taken into account under subsection 
(c)(2)(B)). 
‘‘(2) 
COORDINATION
WITH
RECOGNITION 
UNDER SECTION 367.—In the case of a transfer de-
scribed in section 367(a)(3)(C), the transferred loss 
amount shall not exceed the excess (if any) of— 
‘‘(A) the excess of the amount described in 
section 367(a)(3)(C)(i) over the amount de-
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scribed in section 367(a)(3)(C)(ii) with respect 
to such transfer, over 
‘‘(B) the amount of gain recognized under 
section 367(a)(3)(C) with respect to such trans-
fer. 
‘‘(e) SOURCE
OF INCOME.—Amounts included in 
gross income under this section shall be treated as derived 
from sources within the United States. 
‘‘(f) BASIS ADJUSTMENTS.—Consistent with such 
regulations or other guidance as the Secretary may pre-
scribe, proper adjustments shall be made in the adjusted 
basis of the taxpayer’s stock in the specified 10-percent 
owned foreign corporation to which the transfer is made, 
and in the transferee’s adjusted basis in the property 
transferred, to reflect amounts included in gross income 
under this section.’’. 
(2) AMOUNTS RECOGNIZED UNDER SECTION 367 
ON
TRANSFER
OF
FOREIGN
BRANCH
WITH
PRE-
VIOUSLY DEDUCTED LOSSES TREATED AS UNITED 
STATES
SOURCE.—Subparagraph (C) of section 
367(a)(3) is amended by striking ‘‘outside’’ in the 
last sentence and inserting ‘‘within’’. 
(3) CLERICAL AMENDMENT.—The table of sub-
parts for such part, as amended by the preceding 
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provisions of this Act, is amended by adding at the 
end the following new item: 
‘‘Sec. 92. Certain foreign branch losses transferred to specified 10-percent 
owned foreign corporations.’’. 
(4) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to transfers after De-
cember 31, 2014. 
SEC. 4003. TREATMENT OF DEFERRED FOREIGN INCOME 
UPON TRANSITION TO PARTICIPATION EX-
EMPTION SYSTEM OF TAXATION. 
(a) IN GENERAL.—Section 965 is amended to read 
as follows: 
‘‘SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME 
UPON TRANSITION TO PARTICIPATION EX-
EMPTION SYSTEM OF TAXATION. 
‘‘(a) TREATMENT OF DEFERRED FOREIGN INCOME 
AS SUBPART F INCOME.—In the case of the last taxable 
year of a deferred foreign income corporation which begins 
before January 1, 2015, the subpart F income of such 
foreign corporation (as otherwise determined for such tax-
able year under section 952) shall be increased by the ac-
cumulated post-1986 deferred foreign income of such cor-
poration determined as of the close of such taxable year. 
‘‘(b) REDUCTION IN AMOUNTS INCLUDED IN GROSS 
INCOME OF UNITED STATES SHAREHOLDERS OF SPECI-
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FIED FOREIGN CORPORATIONS WITH DEFICITS IN EARN-
INGS AND PROFITS.— 
‘‘(1) IN GENERAL.—In the case of a taxpayer 
which is a United States shareholder with respect to 
at least one deferred foreign income corporation and 
at least one E&P deficit foreign corporation, the 
amount which would (but for this subsection) be 
taken into account under section 951(a)(1) by rea-
son of subsection (a) as such United States share-
holder’s pro rata share of the subpart F income of 
each deferred foreign income corporation shall be re-
duced (but not below zero) by the amount of such 
United States shareholder’s aggregate foreign E&P 
deficit which is allocated under paragraph (2) to 
such deferred foreign income corporation. 
‘‘(2) ALLOCATION OF AGGREGATE FOREIGN E&P 
DEFICIT.—The aggregate foreign E&P deficit of any 
United States shareholder shall be allocated among 
the deferred foreign income corporations of such 
United States shareholder in an amount which bears 
the same proportion to such aggregate as— 
‘‘(A) such United States shareholder’s pro 
rata share of the accumulated post-1986 de-
ferred foreign income of each such deferred for-
eign income corporation, bears to 
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‘‘(B) the aggregate of such United States 
shareholder’s pro rata share of the accumulated 
post-1986 deferred foreign income of all de-
ferred foreign income corporations of such 
United States shareholder. 
‘‘(3) DEFINITIONS
RELATED
TO
E&P
DEFI-
CITS.—For purposes of this subsection— 
‘‘(A) AGGREGATE
FOREIGN
E&P
DEF-
ICIT.—The term ‘aggregate foreign E&P deficit’ 
means, with respect to any United States share-
holder, the aggregate of such shareholder’s pro 
rata shares of the specified E&P deficits of the 
E&P deficit foreign corporations of such share-
holder. 
‘‘(B) E&P DEFICIT
FOREIGN
CORPORA-
TION.—The term ‘E&P deficit foreign corpora-
tion’ means, with respect to any taxpayer, any 
specified foreign corporation with respect to 
which such taxpayer is a United States share-
holder, if— 
‘‘(i) such specified foreign corporation 
has a deficit in post-1986 earnings and 
profits, and 
‘‘(ii) as of February 26, 2014— 
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‘‘(I) such corporation was a spec-
ified foreign corporation, and 
‘‘(II) such taxpayer was a United 
States shareholder of such corpora-
tion. 
‘‘(C) SPECIFIED E&P DEFICIT.—The term 
‘specified E&P deficit’ means, with respect to 
any E&P deficit foreign corporation, the 
amount of the deficit referred to in subpara-
graph (B). 
‘‘(c) APPLICATION OF PARTICIPATION EXEMPTION 
TO INCLUDED INCOME.— 
‘‘(1) IN GENERAL.—In the case of a United 
States shareholder of a deferred foreign income cor-
poration, there shall be allowed as a deduction for 
the taxable year in which an amount is included in 
the gross income of such United States shareholder 
under section 951(a)(1) by reason of this section an 
amount equal to the sum of— 
‘‘(A) 90 percent of the excess (if any) of— 
‘‘(i) the amount so included as gross 
income, over 
‘‘(ii) the amount of such United 
States shareholder’s aggregate foreign cash 
position, plus 
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‘‘(B) 75 percent of so much of the amount 
described in subparagraph (A)(ii) as does not 
exceed the amount described in subparagraph 
(A)(i). 
‘‘(2) AGGREGATE FOREIGN CASH POSITION.— 
For purposes of this subsection— 
‘‘(A) IN GENERAL.—The term ‘aggregate 
foreign cash position’ means, with respect to 
any United States shareholder, the greater of— 
‘‘(i) the aggregate of such United 
States shareholder’s pro rata share of the 
cash position of each specified foreign cor-
poration of such United States shareholder 
determined as of the close of the last tax-
able year of such specified foreign corpora-
tion which begins before January 1, 2015, 
or 
‘‘(ii) one half of the sum of— 
‘‘(I) the aggregate described in 
clause (i) determined as of the close of 
the last taxable year of each such 
specified foreign corporation which 
ends before February 26, 2014, plus 
‘‘(II) the aggregate described in 
clause (i) determined as of the close of 
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the taxable year of each such specified 
foreign corporation which precedes the 
taxable year referred to in subclause 
(I). 
‘‘(B) CASH
POSITION.—For purposes of 
this paragraph, the cash position of any speci-
fied foreign corporation is the sum of— 
‘‘(i) cash and foreign currency held by 
such foreign corporation, 
‘‘(ii) the net accounts receivable of 
such foreign corporation, plus 
‘‘(iii) the fair market value of the fol-
lowing assets held by such corporation: 
‘‘(I) Actively traded personal 
property for which there is an estab-
lished financial market. 
‘‘(II) Commercial paper, certifi-
cates of deposit, the securities of the 
Federal government and of any State 
or foreign government 
‘‘(III) Any obligation with a term 
of less than one year. 
‘‘(IV) Any asset which the Sec-
retary identifies as being economically 
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equivalent to any asset described in 
this subparagraph. 
‘‘(C) NET
ACCOUNTS
RECEIVABLE.—For 
purposes of this paragraph, the term ‘net ac-
counts receivable’ means, with respect to any 
specified foreign corporation, the excess (if any) 
of— 
‘‘(i) such corporation’s accounts re-
ceivable, over 
‘‘(ii) such corporation’s accounts pay-
able (determined consistent with the rules 
of section 461). 
‘‘(D) PREVENTION
OF
DOUBLE
COUNT-
ING.—Cash positions of a specified foreign cor-
poration described in clause (ii) or (iii)(III) of 
subparagraph (B) shall not be taken into ac-
count by a United States shareholder under 
subparagraph (A) to the extent that such 
United States shareholder demonstrates to the 
satisfaction of the Secretary that such amount 
is so taken into account by such United States 
shareholder with respect to another specified 
foreign corporation. 
‘‘(E) CASH POSITIONS OF FOREIGN PASS- 
THRU ENTITIES TAKEN INTO ACCOUNT.—Any 
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foreign entity which would be a specified for-
eign corporation of a United States shareholder 
if such entity were a corporation shall be treat-
ed as a specified foreign corporation of such 
United States shareholder for purposes of de-
termining such United States shareholder’s ag-
gregate foreign cash position. 
‘‘(F) ANTI-ABUSE.—If the Secretary deter-
mines that the principal purpose of any trans-
action was to reduce the aggregate foreign cash 
position taken into account under this sub-
section, such transaction shall be disregarded 
for purposes of this subsection. 
‘‘(d) DEFERRED FOREIGN INCOME CORPORATION; 
ACCUMULATED
POST-1986 DEFERRED
FOREIGN
IN-
COME.—For purposes of this section— 
‘‘(1) DEFERRED
FOREIGN
INCOME
CORPORA-
TION.—The term ‘deferred foreign income corpora-
tion’ means, with respect to any United States 
shareholder, any specified foreign corporation of 
such United States shareholder which has accumu-
lated post-1986 deferred foreign income (as of the 
close of the taxable year referred to in subsection 
(a)) greater than zero. 
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‘‘(2) ACCUMULATED POST-1986 DEFERRED FOR-
EIGN
INCOME.—The term ‘accumulated post-1986 
deferred foreign income’ means the post-1986 earn-
ings and profits except to the extent such earnings— 
‘‘(A) are attributable to income of the 
specified foreign corporation which is effectively 
connected with the conduct of a trade or busi-
ness within the United States and subject to 
tax under this chapter, 
‘‘(B) if distributed, would— 
‘‘(i) in the case of a controlled foreign 
corporation, be excluded from the gross in-
come of a United States shareholder under 
section 959, or 
‘‘(ii) in the case of any passive foreign 
investment company (as defined in section 
1297) other than a controlled foreign cor-
poration, be treated as a distribution which 
is not a dividend, or 
‘‘(C) in the case of any passive foreign in-
vestment company (as so defined), is properly 
attributable to an unreversed inclusion of a 
United States person under section 1296. 
To the extent provided in regulations or other guid-
ance prescribed by the Secretary, in the case of any 
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controlled foreign corporation which has share-
holders which are not United States shareholders, 
accumulated post-1986 deferred foreign income shall 
be appropriately reduced by amounts which would be 
described in subparagraph (B)(i) is such share-
holders were United States shareholders. Such regu-
lations or other guidance may provide a similar rule 
for purposes of subparagraph (B)(ii) and (C). 
‘‘(3) POST-1986 EARNINGS AND PROFITS.—The 
term ‘post-1986 earnings and profits’ means the 
earnings and profits of the foreign corporation (com-
puted in accordance with sections 964(a) and 986) 
accumulated in taxable years beginning after Decem-
ber 31, 1986, and determined— 
‘‘(A) as of the close the taxable year re-
ferred to in subsection (a), and 
‘‘(B) without diminution by reason of divi-
dends distributed during such taxable year. 
‘‘(e) SPECIFIED FOREIGN CORPORATION.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, 
the 
term 
‘specified 
foreign 
corporation’ 
means— 
‘‘(A) any controlled foreign corporation, 
and 
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‘‘(B) any section 902 corporation (as de-
fined in section 909(d)(5) as in effect before the 
date of the enactment of the Tax Reform Act 
of 2014). 
‘‘(2) APPLICATION TO SECTION 902 CORPORA-
TIONS.—For purposes of section 951, a section 902 
corporation (as so defined) shall be treated as a con-
trolled foreign corporation solely for purposes of tak-
ing into account the subpart F income of such cor-
poration under subsection (a) (and for purposes of 
applying subsection (f)). 
‘‘(f) DETERMINATIONS OF PRO RATA SHARE.—For 
purposes of this section, the determination of any United 
States shareholder’s pro rata share of any amount with 
respect to any specified foreign corporation shall be deter-
mined under rules similar to the rules of section 951(a)(2) 
by treating such amount in the same manner as subpart 
F income (and by treating such specified foreign corpora-
tion as a controlled foreign corporation). 
‘‘(g) DISALLOWANCE
OF FOREIGN TAX CREDIT, 
ETC.— 
‘‘(1) IN GENERAL.—No credit shall be allowed 
under section 901 for the applicable percentage of 
any taxes paid or accrued (or treated as paid or ac-
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crued) with respect to any amount for which a de-
duction is allowed under this section. 
‘‘(2) APPLICABLE PERCENTAGE.—For purposes 
of this subsection, the term ‘applicable percentage’ 
means the amount (expressed as a percentage) equal 
to the sum of— 
‘‘(A) 0.9 multiplied by the ratio of— 
‘‘(i) the excess to which subsection 
(c)(1)(A) applies, divided by 
‘‘(ii) the sum of such excess plus the 
amount to which subsection (c)(1)(B) ap-
plies, plus 
‘‘(B) 0.75 multiplied by the ratio of— 
‘‘(i) the amount to which subsection 
(c)(1)(B) applies, divided by 
‘‘(ii) the sum described in subpara-
graph (A)(ii). 
‘‘(3) DENIAL
OF
DEDUCTION.—No deduction 
shall be allowed under this chapter for any tax for 
which credit is not allowable under section 901 by 
reason of paragraph (1) (determined by treating the 
taxpayer as having elected the benefits of subpart A 
of part III of subchapter N). 
‘‘(4) COORDINATION WITH SECTION 78.—Sec-
tion 78 shall not apply to any tax for which credit 
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is not allowable under section 901 by reason of para-
graph (1). 
‘‘(h) ELECTION TO PAY LIABILITY
IN INSTALL-
MENTS.— 
‘‘(1) IN GENERAL.—In the case of a United 
States shareholder of a deferred foreign income cor-
poration, such United States shareholder may elect 
to pay the net tax liability under this section in 8 
installments of the following amounts: 
‘‘(A) 8 percent of the net tax liability in 
the case of each of the first 5 of such install-
ments, 
‘‘(B) 15 percent of the net tax liability in 
the case of the 6th such installment, 
‘‘(C) 20 percent of the net tax liability in 
the case of the 7th such installment, and 
‘‘(D) 25 percent of the net tax liability in 
the case of the 8th such installment. 
‘‘(2) DATE FOR PAYMENT OF INSTALLMENTS.— 
If an election is made under paragraph (1), the first 
installment shall be paid on the due date (deter-
mined without regard to any extension of time for 
filing the return) for the return of tax for the tax-
able year described in subsection (b) and each suc-
ceeding installment shall be paid on the due date (as 
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so determined) for the return of tax for the taxable 
year following the taxable year with respect to which 
the preceding installment was made. 
‘‘(3) ACCELERATION OF PAYMENT.—If there is 
an addition to tax for failure to pay timely assessed 
with respect to any installment required under this 
subsection, a liquidation or sale of substantially all 
the assets of the taxpayer (including in a title 11 or 
similar case), a cessation of business by the tax-
payer, or any similar circumstance, then the unpaid 
portion of all remaining installments shall be due on 
the date of such event (or in the case of a title 11 
or similar case, the day before the petition is filed). 
The preceding sentence shall not apply to the sale 
of substantially all the assets of a taxpayer to a 
buyer if such buyer enters into an agreement with 
the Secretary under which such buyer is liable for 
the remaining installments due under this subsection 
in the same manner as if such buyer were the tax-
payer. 
‘‘(4) PRORATION OF DEFICIENCY TO INSTALL-
MENTS.—If an election is made under paragraph (1) 
to pay the net tax liability under this section in in-
stallments and a deficiency has been assessed with 
respect to such net tax liability, the deficiency shall 
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be prorated to the installments payable under para-
graph (1). The part of the deficiency so prorated to 
any installment the date for payment of which has 
not arrived shall be collected at the same time as, 
and as a part of, such installment. The part of the 
deficiency so prorated to any installment the date 
for payment of which has arrived shall be paid upon 
notice and demand from the Secretary. This sub-
section shall not apply if the deficiency is due to 
negligence, to intentional disregard of rules and reg-
ulations, or to fraud with intent to evade tax. 
‘‘(5) ELECTION.—Any election under paragraph 
(1) shall be made not later than the due date for the 
return of tax for the taxable year described in sub-
section (a) and shall be made in such manner as the 
Secretary may provide. 
‘‘(6) NET
TAX
LIABILITY
UNDER
THIS
SEC-
TION.—For purposes of this subsection— 
‘‘(A) IN GENERAL.—The net tax liability 
under this section with respect to any United 
States shareholder is the excess (if any) of— 
‘‘(i) such taxpayer’s net income tax 
for the taxable year described in subsection 
(a), over 
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‘‘(ii) such taxpayer’s net income tax 
for such taxable year determined without 
regard to this section. 
‘‘(B) NET INCOME TAX.—The term ‘net 
income tax’ means the regular tax liability re-
duced by the credits allowed under subparts A, 
B, and D of part IV of subchapter A. 
‘‘(i) SPECIAL RULES FOR S CORPORATION SHARE-
HOLDERS.— 
‘‘(1) IN GENERAL.—In the case of any S cor-
poration which is a United States shareholder of a 
deferred foreign income corporation, each share-
holder of such S corporation may elect to defer pay-
ment of such shareholder’s net tax liability under 
this section with respect to such S corporation until 
the shareholder’s taxable year which includes the 
triggering event with respect to such liability. 
‘‘(2) TRIGGERING EVENT.— 
‘‘(A) IN
GENERAL.—In the case of any 
shareholder’s net tax liability under this section 
with respect to any S corporation, the trig-
gering event with respect to such liability is 
whichever of the following occurs first: 
‘‘(i) Such corporation ceases to be an 
S corporation (determined as of the first 
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