109TH CONGRESS 
1ST SESSION 
H. R. 4297
AN ACT 
To provide for reconciliation pursuant to section 
201(b) of the concurrent resolution on the budget 
for fiscal year 2006.
109TH CONGRESS 
1ST SESSION H. R. 4297
AN ACT 
To provide for reconciliation pursuant to section 201(b) of 
the concurrent resolution on the budget for fiscal year 2006.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE, ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Tax Relief Extension Reconciliation Act of 2005’’. 
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents for 
this Act is as follows:
Sec. 1. Short title, etc. 
TITLE I—EXTENSIONS OF CERTAIN PROVISIONS THROUGH 2006
Sec. 101. Allowance of nonrefundable personal credits against regular and min-
imum tax liability. 
Sec. 102. Tax incentives for business activities on Indian reservations. 
Sec. 103. Work opportunity credit. 
Sec. 104. Welfare-to-work credit. 
Sec. 105. Deduction for corporate donations of computer technology and equip-
ment. 
Sec. 106. Availability of medical savings accounts. 
Sec. 107. 15-year cost recovery for leasehold improvements. 
Sec. 108. 15-year cost recovery for restaurant improvements. 
Sec. 109. Taxable income limit on percentage depletion for oil and natural gas 
produced from marginal properties. 
Sec. 110. District of Columbia Enterprise Zone. 
Sec. 111. Possession tax credit with respect to American Samoa. 
Sec. 112. Parity in the application of certain limits to mental health benefits. 
Sec. 113. Research credit. 
Sec. 114. Qualified Zone Academy Bonds. 
Sec. 115. Certain expenses of elementary and secondary school teachers. 
Sec. 116. Qualified tuition and related expenses. 
Sec. 117. State and local general sales taxes. 
TITLE II—EXTENSIONS OF CERTAIN PROVISIONS FOR 2 
ADDITIONAL YEARS AND OTHER MODIFICATIONS 
Sec. 201. Expensing of environmental remediation costs. 
Sec. 202. Controlled foreign corporations. 
Sec. 203. Capital gains and dividends rates. 
Sec. 204. Saver’s credit.
Sec. 205. Increased expensing for small business. 
TITLE III—OTHER PROVISIONS 
Sec. 301. Clarification of taxation of certain settlement funds. 
Sec. 302. Modification of active business definition under section 355. 
Sec. 303. Veterans’ mortgage bonds. 
Sec. 304. Capital gains treatment for certain self-created musical works. 
Sec. 305. Vessel tonnage limit. 
Sec. 306. Modification of special arbitrage rule for certain funds.
TITLE I—EXTENSIONS OF CER-
TAIN PROVISIONS THROUGH 
2006
SEC. 101. ALLOWANCE OF NONREFUNDABLE PERSONAL 
CREDITS AGAINST REGULAR AND MINIMUM 
TAX LIABILITY. 
(a) IN GENERAL.—Paragraph (2) of section 26(a) 
(relating to special rule for taxable years 2000 through 
2005) is amended—
(1) in the text by striking ‘‘or 2005’’ and in-
serting ‘‘2005, or 2006’’, and 
(2) in the heading by striking ‘‘2005’’ and in-
serting ‘‘2006’’. 
(b) CONFORMING PROVISIONS.—
(1) Subsection (i) of section 904 (relating to co-
ordination with nonrefundable personal credits) is 
amended by striking ‘‘or 2005’’ and inserting ‘‘2005, 
or 2006’’. 
(2) The amendments made by sections 201(b), 
202(f), and 618(b) of the Economic Growth and Tax
Relief Reconciliation Act of 2001 shall not apply to 
taxable years beginning during 2006. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 102. TAX INCENTIVES FOR BUSINESS ACTIVITIES ON 
INDIAN RESERVATIONS. 
(a) INDIAN EMPLOYMENT TAX CREDIT.—
(1) IN
GENERAL.—Subsection (f) of section 
45A (relating to termination) is amended by striking 
‘‘December 31, 2005’’ and inserting ‘‘December 31, 
2006’’. 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply to taxable years begin-
ning after December 31, 2005. 
(b) ACCELERATED DEPRECIATION
FOR BUSINESS 
PROPERTY ON INDIAN RESERVATIONS.—
(1) IN
GENERAL.—Paragraph (8) of section 
168(j) (relating to termination) is amended by strik-
ing ‘‘December 31, 2005’’ and inserting ‘‘December 
31, 2006’’. 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1) shall apply with respect to prop-
erty placed in service after December 31, 2005.
SEC. 103. WORK OPPORTUNITY CREDIT. 
(a) IN GENERAL.—Subparagraph (B) of section 
51(c)(4) (relating to termination) is amended by striking 
‘‘December 31, 2005’’ and inserting ‘‘December 31, 
2006’’. 
(b) INCREASE IN AGE LIMIT FOR FOOD STAMP RE-
CIPIENTS.—Clause (i) of section 51(d)(8)(A) (relating to 
qualified food stamp recipient) is amended by striking 
‘‘25’’ and inserting ‘‘35’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to individuals who begin work for 
the employer after December 31, 2005. 
SEC. 104. WELFARE-TO-WORK CREDIT. 
(a) IN GENERAL.—Subsection (f) of section 51A (re-
lating to termination) is amended by striking ‘‘December 
31, 2005’’ and inserting ‘‘December 31, 2006’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to individuals who begin work 
for the employer after December 31, 2005. 
SEC. 105. DEDUCTION FOR CORPORATE DONATIONS OF 
COMPUTER TECHNOLOGY AND EQUIPMENT. 
(a) IN GENERAL.—Subparagraph (G) of section 
170(e)(6) (relating to termination) is amended by striking 
‘‘December 31, 2005’’ and inserting ‘‘December 31, 
2006’’.
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to contributions made in taxable 
years beginning after December 31, 2005. 
SEC. 106. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 
(a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec-
tion 220(i) (defining cut-off year) are each amended by 
striking ‘‘2005’’ each place it appears in the text and 
headings and inserting ‘‘2006’’. 
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (2) of section 220(j) is amend-
ed—
(A) in the text by striking ‘‘or 2004’’ each 
place it appears and inserting ‘‘2004, or 2005’’, 
and 
(B) in the heading by striking ‘‘OR 2004’’ 
and inserting ‘‘2004, OR 2005’’. 
(2) Subparagraph (A) of section 220(j)(4) is 
amended by striking ‘‘and 2004’’ and inserting 
‘‘2004, and 2005’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act. 
(d) TIME FOR FILING REPORTS, ETC.—
(1) The report required by section 220(j)(4) of 
the Internal Revenue Code of 1986 to be made on
August 1, 2005, shall be treated as timely if made 
before the close of the 90-day period beginning on 
the date of the enactment of this Act. 
(2) The determination and publication required 
by section 220(j)(5) of such Code with respect to 
calendar year 2005 shall be treated as timely if 
made before the close of the 120-day period begin-
ning on the date of the enactment of this Act. If the 
determination under the preceding sentence is that 
2005 is a cut-off year under section 220(i) of such 
Code, the cut-off date under such section 220(i) 
shall be the last day of such 120-day period. 
SEC. 107. 15-YEAR COST RECOVERY FOR LEASEHOLD IM-
PROVEMENTS. 
(a) 
IN
GENERAL.—Clause 
(iv) 
of 
section 
168(e)(3)(E) (relating to 15-year property) is amended by 
striking ‘‘January 1, 2006’’ and inserting ‘‘January 1, 
2007’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to property placed in service 
after December 31, 2005.
SEC. 108. 15-YEAR COST RECOVERY FOR RESTAURANT IM-
PROVEMENTS. 
(a) IN GENERAL.—Clause (v) of section 168(e)(3)(E) 
(relating to 15-year property) is amended by striking 
‘‘January 1, 2006’’ and inserting ‘‘January 1, 2007’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to property placed in service 
after December 31, 2005. 
SEC. 109. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE-
TION FOR OIL AND NATURAL GAS PRODUCED 
FROM MARGINAL PROPERTIES. 
(a) IN GENERAL.—Subparagraph (H) of section 
613A(c)(6) (relating to oil and natural gas produced from 
marginal properties) is amended by striking ‘‘January 1, 
2006’’ and inserting ‘‘January 1, 2007’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 110. DISTRICT OF COLUMBIA ENTERPRISE ZONE. 
(a) PERIOD
FOR WHICH DESIGNATION APPLICA-
BLE.—Subsection (f) of section 1400 (relating to time for 
which designation applicable) is amended by striking ‘‘De-
cember 31, 2005’’ both places it appears and inserting 
‘‘December 31, 2006’’. 
(b) 
TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—Subsection (b) of section 1400A (relating to pe-
riod of applicability) is amended by striking ‘‘December 
31, 2005’’ and inserting ‘‘December 31, 2006’’. 
(c) ZERO PERCENT CAPITAL GAINS RATE.—
(1) IN
GENERAL.—Subsection (b) of section 
1400B (relating to DC Zone Asset) is amended by 
striking ‘‘January 1, 2006’’ each place it appears 
and inserting ‘‘January 1, 2007’’. 
(2) CONFORMING AMENDMENTS.—
(A) Paragraph (2) of section 1400B(e) (re-
lating to gain before 1998 and after 2010 not 
qualified) is amended—
(i) by striking ‘‘December 31, 2010’’ 
and inserting ‘‘December 31, 2011’’, and 
(ii) by striking ‘‘2010’’ in the heading 
and inserting ‘‘2011’’. 
(B) Paragraph (2) of section 1400B(g) 
(relating to sales and exchanges of interests in 
partnerships and S corporations which are DC 
Zone businesses) is amended by striking ‘‘De-
cember 31, 2010’’ and inserting ‘‘December 31, 
2011’’. 
(C) Subsection (d) of section 1400F (relat-
ing to certain rules to apply) is amended by 
striking ‘‘December 31, 2010’’ and inserting 
‘‘December 31, 2011’’.
(d) FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT 
OF COLUMBIA.—Subsection (i) of section 1400C (relating 
to application of section) is amended by striking ‘‘January 
1, 2006’’ and inserting ‘‘January 1, 2007’’. 
(e) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall take effect on January 1, 2006. 
(2) TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—The amendment made by subsection (b) 
shall apply to obligations issued after the date of the 
enactment of this Act. 
SEC. 111. POSSESSION TAX CREDIT WITH RESPECT TO 
AMERICAN SAMOA. 
(a) IN GENERAL.—Subparagraph (A) of section 
936(j)(8) (relating to special rules for certain possessions) 
is amended by inserting before the period at the end the 
following: ‘‘(before January 1, 2007, in the case of Amer-
ican Samoa)’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2005.
SEC. 112. PARITY IN THE APPLICATION OF CERTAIN LIMITS 
TO MENTAL HEALTH BENEFITS. 
(a) IN GENERAL.—Paragraph (3) of section 9812(f) 
(relating to application of section) is amended by striking 
‘‘December 31, 2005’’ and inserting ‘‘December 31, 
2006’’. 
(b) EFFECTIVE DATES.—The amendment made by 
subsection (a) shall take effect on the date of the enact-
ment of this Act. 
SEC. 113. RESEARCH CREDIT. 
(a) EXTENSION.—
(1) IN GENERAL.—Subparagraph (B) of section 
41(h)(1) (relating to termination) is amended by 
striking ‘‘December 31, 2005’’ and inserting ‘‘De-
cember 31, 2006’’. 
(2) CONFORMING AMENDMENT.—Subparagraph 
(D) of section 45C(b)(1) (relating to special rule) is 
amended by striking ‘‘December 31, 2005’’ and in-
serting ‘‘December 31, 2006’’. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to amounts paid or in-
curred after December 31, 2005. 
(b) INCREASE IN RATES OF ALTERNATIVE INCRE-
MENTAL CREDIT.—
(1) IN GENERAL.—Subparagraph (A) of section 
41(c)(4) (relating to election of alternative incre-
mental credit) is amended—
(A) by striking ‘‘2.65 percent’’ and insert-
ing ‘‘3 percent’’, 
(B) by striking ‘‘3.2 percent’’ and inserting 
‘‘4 percent’’, and 
(C) by striking ‘‘3.75 percent’’ and insert-
ing ‘‘5 percent’’. 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years end-
ing after the date of the enactment of this Act. 
(c) ALTERNATIVE SIMPLIFIED CREDIT FOR QUALI-
FIED RESEARCH EXPENSES.—
(1) IN GENERAL.—Subsection (c) of section 41 
(relating to base amount) is amended by redesig-
nating paragraphs (5) and (6) as paragraphs (6) 
and (7), respectively, and by inserting after para-
graph (4) the following new paragraph: 
‘‘(5) ELECTION OF ALTERNATIVE SIMPLIFIED 
CREDIT.—
‘‘(A) IN GENERAL.—At the election of the 
taxpayer, the credit determined under sub-
section (a)(1) shall be equal to 12 percent of so 
much of the qualified research expenses for the
taxable year as exceeds 50 percent of the aver-
age qualified research expenses for the 3 tax-
able years preceding the taxable year for which 
the credit is being determined. 
‘‘(B) SPECIAL
RULE
IN
CASE
OF
NO 
QUALIFIED RESEARCH EXPENSES IN ANY OF 3 
PRECEDING TAXABLE YEARS.—
‘‘(i) TAXPAYERS TO WHICH SUBPARA-
GRAPH
APPLIES.—The credit under this 
paragraph shall be determined under this 
subparagraph if the taxpayer has no quali-
fied research expenses in any one of the 3 
taxable years preceding the taxable year 
for which the credit is being determined. 
‘‘(ii) CREDIT RATE.—The credit de-
termined under this subparagraph shall be 
equal to 6 percent of the qualified research 
expenses for the taxable year. 
‘‘(C) ELECTION.—An election under this 
paragraph shall apply to the taxable year for 
which made and all succeeding taxable years 
unless revoked with the consent of the Sec-
retary. An election under this paragraph may 
not be made for any taxable year to which an 
election under paragraph (4) applies.’’.
(2) COORDINATION WITH ELECTION OF ALTER-
NATIVE INCREMENTAL CREDIT.—
(A) IN
GENERAL.—Section 41(c)(4)(B) 
(relating to election) is amended by adding at 
the end the following: ‘‘An election under this 
paragraph may not be made for any taxable 
year to which an election under paragraph (5) 
applies.’’. 
(B) TRANSITION RULE.—In the case of an 
election under section 41(c)(4) of the Internal 
Revenue Code of 1986 which applies to the tax-
able year which includes the date of the enact-
ment of this Act, such election shall be treated 
as revoked with the consent of the Secretary of 
the Treasury if the taxpayer makes an election 
under section 41(c)(5) of such Code (as added 
by subsection (a)) for such year. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years end-
ing after the date of the enactment of this Act. 
SEC. 114. QUALIFIED ZONE ACADEMY BONDS. 
(a) 
IN
GENERAL.—Paragraph 
(1) 
of 
section 
1397E(e) (relating to national limit) is amended by strik-
ing ‘‘and 2005’’ and inserting ‘‘2005, and 2006’’.
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to obligations issued after De-
cember 31, 2005. 
SEC. 115. CERTAIN EXPENSES OF ELEMENTARY AND SEC-
ONDARY SCHOOL TEACHERS. 
(a) IN GENERAL.—Subparagraph (D) of section 
62(a)(2) (relating to certain expenses of elementary and 
secondary school teachers) is amended by striking ‘‘or 
2005’’ and inserting ‘‘2005, or 2006’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to expenses paid or incurred in 
taxable years beginning after December 31, 2005. 
SEC. 116. QUALIFIED TUITION AND RELATED EXPENSES. 
(a) IN GENERAL.—Subsection (e) of section 222 (re-
lating to termination) is amended by striking ‘‘December 
31, 2005’’ and inserting ‘‘December 31, 2006’’. 
(b) LIMITATIONS.—Paragraph (2) of section 222(b) 
(relating to applicable dollar limit) is amended by striking 
subparagraphs (A) and (B), by redesignating subpara-
graph (C) as subparagraph (B), and by inserting before 
subparagraph (B) (as so redesignated) the following: 
‘‘(A) 2006.—In the case of a taxable year 
beginning in 2006, the applicable dollar amount 
shall be equal to—
‘‘(i) in the case of a taxpayer whose 
adjusted gross income for the taxable year 
does not exceed $65,000 ($130,000 in the 
case of a joint return), $4,000, 
‘‘(ii) in the case of a taxpayer not de-
scribed in clause (i) whose adjusted gross 
income for the taxable year does not ex-
ceed $80,000 ($160,000 in the case of a 
joint return), $2,000, and 
‘‘(iii) in the case of any other tax-
payer, zero.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to payments made in taxable years 
beginning after December 31, 2005. 
SEC. 117. STATE AND LOCAL GENERAL SALES TAXES. 
(a) IN
GENERAL.—Subparagraph (I) of section 
164(b)(5) (relating to application of paragraph) is amend-
ed by striking ‘‘January 1, 2006’’ and inserting ‘‘January 
1, 2007’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2005.
TITLE II—EXTENSIONS OF CER-
TAIN PROVISIONS FOR 2 AD-
DITIONAL YEARS AND OTHER 
MODIFICATIONS 
SEC. 201. EXPENSING OF ENVIRONMENTAL REMEDIATION 
COSTS. 
(a) EXTENSION
OF
TERMINATION
DATE.—Sub-
section (h) of section 198 (relating to termination) is 
amended by striking ‘‘December 31, 2005’’ and inserting 
‘‘December 31, 2007’’. 
(b) PETROLEUM
PRODUCTS
TREATED
AS
HAZ-
ARDOUS SUBSTANCE.—Paragraph (1) of section 198(d) 
(relating to hazardous substance) is amended by striking 
‘‘and’’ at the end of subparagraph (A), by striking the 
period at the end of subparagraph (B) and inserting ‘‘, 
and’’, and by adding at the end the following new subpara-
graph: 
‘‘(C) any petroleum product (as defined in 
section 4612(a)(3)).’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to expenditures paid or incurred 
after December 31, 2005. 
SEC. 202. CONTROLLED FOREIGN CORPORATIONS. 
(a) SUBPART F EXCEPTION FOR ACTIVE FINANC-
ING.—
(1) EXEMPT INSURANCE INCOME.—Paragraph 
(10) of section 953(e) (relating to application) is 
amended—
(A) by striking ‘‘January 1, 2007’’ and in-
serting ‘‘January 1, 2009’’, and 
(B) by striking ‘‘December 31, 2006’’ and 
inserting ‘‘December 31, 2008’’. 
(2) EXCEPTION
TO
TREATMENT
AS
FOREIGN 
PERSONAL HOLDING COMPANY INCOME.—Paragraph 
(9) of section 954(h) (relating to application) is 
amended by striking ‘‘January 1, 2007’’ and insert-
ing ‘‘January 1, 2009’’. 
(b) LOOK-THROUGH TREATMENT OF PAYMENTS BE-
TWEEN RELATED CONTROLLED FOREIGN CORPORATIONS 
UNDER THE FOREIGN PERSONAL HOLDING COMPANY 
RULES.—Subsection (c) of section 954 (relating to foreign 
personal holding company income) is amended by adding 
at the end the following new paragraph: 
‘‘(6) LOOK-THRU
RULE
FOR
RELATED
CON-
TROLLED FOREIGN CORPORATIONS.—
‘‘(A) IN GENERAL.—For purposes of this 
subsection, dividends, interest, rents, and royal-
ties received or accrued from a controlled for-
eign corporation which is a related person shall 
not be treated as foreign personal holding com-
pany income to the extent attributable or prop-
erly allocable (determined under rules similar to 
the rules of subparagraphs (C) and (D) of sec-
tion 904(d)(3)) to income of the related person 
which is not subpart F income. For purposes of 
this subparagraph, interest shall include fac-
toring income which is treated as income equiv-
alent to interest for purposes of paragraph 
(1)(E). The Secretary shall prescribe such regu-
lations as may be appropriate to prevent the 
abuse of the purposes of this paragraph. 
‘‘(B) APPLICATION.—Subparagraph (A) 
shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2005, and 
before January 1, 2009, and to taxable years of 
United States shareholders with or within which 
such taxable years of foreign corporations 
end.’’. 
SEC. 203. CAPITAL GAINS AND DIVIDENDS RATES. 
Section 303 of the Jobs and Growth Tax Relief Rec-
onciliation Act of 2003 is amended by striking ‘‘December 
31, 2008’’ and inserting ‘‘December 31, 2010’’. 
SEC. 204. SAVER’S CREDIT. 
Subsection (h) of section 25B (relating to elective de-
ferrals and IRA contributions by certain individuals) is
amended by striking ‘‘December 31, 2006’’ and inserting 
‘‘December 31, 2008’’. 
SEC. 205. INCREASED EXPENSING FOR SMALL BUSINESS. 
Subsections (b)(1), (b)(2), (b)(5), (c)(2), and 
(d)(1)(A)(ii) of section 179(b) (relating to election to ex-
pense certain depreciable business assets) are each amend-
ed by striking ‘‘2008’’ and inserting ‘‘2010’’. 
TITLE III—OTHER PROVISIONS 
SEC. 301. CLARIFICATION OF TAXATION OF CERTAIN SET-
TLEMENT FUNDS. 
(a) IN GENERAL.—Subsection (g) of section 468B 
(relating to clarification of taxation of certain funds) is 
amended to read as follows: 
‘‘(g) CLARIFICATION
OF TAXATION
OF CERTAIN 
FUNDS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), nothing in any provision of law shall be 
construed as providing that an escrow account, set-
tlement fund, or similar fund is not subject to cur-
rent income tax. The Secretary shall prescribe regu-
lations providing for the taxation of any such ac-
count or fund whether as a grantor trust or other-
wise. 
‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET-
TLEMENT FUNDS.—An escrow account, settlement
fund, or similar fund shall be treated as beneficially 
owned by the United States and shall be exempt 
from taxation under this subtitle if—
‘‘(A) it is established pursuant to a con-
sent decree entered by a judge of a United 
States District Court, 
‘‘(B) it is created for the receipt of settle-
ment payments as directed by a government en-
tity for the sole purpose of resolving or satis-
fying one or more claims asserting liability 
under the Comprehensive Environmental Re-
sponse, Compensation, and Liability Act of 
1980, 
‘‘(C) the authority and control over the ex-
penditure of funds therein (including the ex-
penditure of contributions thereto and any net 
earnings thereon) is with such government enti-
ty, and 
‘‘(D) upon termination, any remaining 
funds will be disbursed to such government en-
tity for use in accordance with applicable law. 
For purposes of this paragraph, the term ‘govern-
ment entity’ means the United States, any State or 
political subdivision thereof, the District of Colum-
bia, any possession of the United States, and any 
agency or instrumentality of any of the foregoing. 
‘‘(3) TERMINATION.—Paragraph (2) shall not 
apply to accounts and funds established after De-
cember 31, 2010.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to accounts and funds estab-
lished after the date of the enactment of this Act. 
SEC. 302. MODIFICATION OF ACTIVE BUSINESS DEFINITION 
UNDER SECTION 355. 
Subsection (b) of section 355 (defining active conduct 
of a trade or business) is amended by adding at the end 
the following new paragraph: 
‘‘(3) SPECIAL RULE RELATING TO ACTIVE BUSI-
NESS REQUIREMENT.—
‘‘(A) IN GENERAL.—In the case of any dis-
tribution made after the date of the enactment 
of this paragraph and before December 31, 
2010, a corporation shall be treated as meeting 
the requirement of paragraph (2)(A) if and only 
if such corporation is engaged in the active con-
duct of a trade or business. 
‘‘(B) AFFILIATED GROUP RULE.—For pur-
poses of subparagraph (A), all members of such 
corporation’s separate affiliated group shall be
treated as one corporation. For purposes of the 
preceding sentence, a corporation’s separate af-
filiated group is the affiliated group which 
would be determined under section 1504(a) if 
such corporation were the common parent and 
section 1504(b) did not apply. 
‘‘(C) TRANSITION
RULE.—Subparagraph 
(A) shall not apply to any distribution pursuant 
to a transaction which is—
‘‘(i) made pursuant to an agreement 
which was binding on the date of the en-
actment of this paragraph and at all times 
thereafter, 
‘‘(ii) described in a ruling request sub-
mitted to the Internal Revenue Service on 
or before such date, or 
‘‘(iii) described on or before such date 
in a public announcement or in a filing 
with the Securities and Exchange Commis-
sion. 
The preceding sentence shall not apply if the 
distributing corporation elects not to have such 
sentence apply to distributions of such corpora-
tion. Any such election, once made, shall be ir-
revocable.
‘‘(D) SPECIAL RULE FOR CERTAIN PRE-
ENACTMENT DISTRIBUTIONS.—For purposes of 
determining the continued qualification under 
paragraph (2)(A) of distributions made before 
the date of the enactment of this paragraph as 
a result of an acquisition, disposition, or other 
restructuring after such date and before De-
cember 31, 2010, such distribution shall be 
treated as made after the date of the enactment 
of this paragraph for purposes of applying sub-
paragraphs (A) through (C) of this para-
graph.’’. 
SEC. 303. VETERANS’ MORTGAGE BONDS. 
(a) ALL VETERANS ELIGIBLE FOR STATE HOME 
LOAN PROGRAMS FUNDED
BY QUALIFIED VETERANS’ 
MORTGAGE BONDS.—
(1) IN
GENERAL.—Paragraph (4) of section 
143(l) (defining qualified veteran) is amended—
(A) by striking ‘‘at some time before Janu-
ary 1, 1977’’ in subparagraph (A), and 
(B) by striking subparagraph (B) and in-
serting the following: 
‘‘(B) who applied for the financing before 
the date 25 years after the last date on which 
such veteran left active service.’’.
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to financing provided 
after the date of the enactment of this Act. 
(b) REVISION OF STATE VETERANS LIMIT.—
(1) IN GENERAL.—Subparagraph (B) of section 
143(l)(3) (relating to volume limitation) is amended 
to read as follows: 
‘‘(B) STATE VETERANS LIMIT.—
‘‘(i) IN GENERAL.—A State veterans 
limit for any calendar year is the amount 
equal to—
‘‘(I) $53,750,000 for the State of 
Texas, 
‘‘(II) $66,250,000 for the State 
of California, 
‘‘(III) $25,000,000 for the State 
of Oregon, 
‘‘(IV) $25,000,000 for the State 
of Wisconsin, and 
‘‘(V) $25,000,000 for the State 
of Alaska. 
‘‘(ii) PHASEIN.—In the case of cal-
endar years beginning before 2010, clause 
(i) shall be applied by substituting for each 
of the dollar amounts therein by the appli-
cable percentage. For purposes of the pre-
ceding sentence, the applicable percentage 
shall be determined in accordance with the 
following table:
Applicable 
‘‘Calendar Year: 
percentage is: 
2006 .........................................................................................
20 percent
2007 .........................................................................................
40 percent
2008 .........................................................................................
60 percent
2009 .........................................................................................
80 percent.
‘‘(iii) TERMINATION.—The State vet-
erans limit for any calendar year after 
2010 is zero.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall apply to bonds issued after 
December 31, 2005. 
SEC. 304. CAPITAL GAINS TREATMENT FOR CERTAIN SELF-
CREATED MUSICAL WORKS. 
(a) IN GENERAL.—Subsection (b) of section 1221 
(relating to capital asset defined) is amended by redesig-
nating paragraph (3) as paragraph (4) and by inserting 
after paragraph (2) the following new paragraph: 
‘‘(3) SALE
OR
EXCHANGE
OF
SELF-CREATED 
MUSICAL WORKS.—At the election of the taxpayer, 
paragraphs (1) and (3) of subsection (a) shall not 
apply with respect to any sale or exchange before 
January 1, 2011, of musical compositions or copy-
rights in musical works by a taxpayer described in 
subsection (a)(3).’’. 
(b) LIMITATION ON CHARITABLE CONTRIBUTIONS.—
Subparagraph (A) of section 170(e)(1) is amended by in-
serting 
‘‘(determined 
without 
regard 
to 
section 
1221(b)(3))’’ after ‘‘long-term capital gain’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales and exchanges in taxable 
years beginning after the date of the enactment of this 
Act. 
SEC. 305. VESSEL TONNAGE LIMIT. 
(a) IN GENERAL.—Paragraph (4) of section 1355(a) 
(relating to qualifying vessel) is amended by inserting 
‘‘(6,000, in the case of taxable years beginning after De-
cember 31, 2005, and ending before January 1, 2011)’’ 
after ‘‘10,000’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2005. 
SEC. 306. MODIFICATION OF SPECIAL ARBITRAGE RULE 
FOR CERTAIN FUNDS. 
In the case of bonds issued after the date of the en-
actment of this Act and before August 31, 2009—
(1) the requirement of paragraph (1) of section 
648 of the Deficit Reduction Act of 1984 (98 Stat.