IB 
Union Calendar No. 317 
108TH CONGRESS 
2D SESSION 
H. R. 4520 
[Report No. 108–548, Part I] 
To amend the Internal Revenue Code of 1986 to remove impediments in 
such Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at home 
and abroad. 
IN THE HOUSE OF REPRESENTATIVES 
JUNE 4, 2004 
Mr. THOMAS (for himself, Mr. CRANE, Mr. SHAW, Mrs. JOHNSON of Con-
necticut, Mr. HOUGHTON, Mr. HERGER, Mr. MCCRERY, Mr. CAMP, Mr. 
RAMSTAD, Mr. SAM JOHNSON of Texas, Ms. DUNN, Mr. COLLINS, Mr. 
PORTMAN, Mr. ENGLISH, Mr. HAYWORTH, Mr. HULSHOF, Mr. MCINNIS, 
Mr. LEWIS of Kentucky, Mr. FOLEY, Mr. BRADY of Texas, and Mr. 
RYAN of Wisconsin) introduced the following bill; which was referred to 
the Committee on Ways and Means, and in addition to the Committee 
on Agriculture, for a period to be subsequently determined by the Speak-
er, in each case for consideration of such provisions as fall within the ju-
risdiction of the committee concerned 
JUNE 16, 2004 
Additional sponsors: Mr. FEENEY, Mr. SESSIONS, Mr. BURR, Ms. HARRIS, 
Mrs. BLACKBURN, Mr. CANTOR, Mr. BROWN of South Carolina, Mr. 
JENKINS, Mr. ISAKSON, Mr. WAMP, Mr. WHITFIELD, Mr. DUNCAN, Mr. 
ROGERS of Kentucky, Mr. KINGSTON, Mr. SMITH of Texas, Mr. 
NEUGEBAUER, Mr. NETHERCUTT, Mr. CARTER, Ms. GRANGER, and Mr. 
CULBERSON 
JUNE 16, 2004 
Reported from the Committee on Ways and Means with an amendment 
[Strike out all after the enacting clause and insert the part printed in italic] 
JUNE 16, 2004 
Referral to the Committee on Agriculture extended for a period ending not 
later than June 16, 2004
JUNE 16, 2004 
The Committee on Agriculture discharged; committed to the Committee of the 
Whole House on the State of the Union and ordered to be printed 
[For text of introduced bill, see copy of bill as introduced on June 4, 2004] 
A BILL 
To amend the Internal Revenue Code of 1986 to remove 
impediments in such Code and make our manufacturing, 
service, and high-technology businesses and workers more 
competitive and productive both at home and abroad. 
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 
‘‘American Jobs Creation Act of 2004’’. 
(b) AMENDMENT OF 1986 CODE.—Except as otherwise 
expressly provided, whenever in this Act an amendment or 
repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents of this 
Act is as follows: 
Sec. 1. Short title; etc. 
TITLE I—END SANCTIONS AND REDUCE CORPORATE TAX RATES 
FOR DOMESTIC MANUFACTURING AND SMALL CORPORATIONS 
Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Reduced corporate income tax rate for domestic production activities in-
come. 
Sec. 103. Reduced corporate income tax rate for small corporations. 
TITLE II—JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, 
SMALL BUSINESSES, AND FARMERS 
Subtitle A—Small Business Expensing 
Sec. 201. 2-year extension of increased expensing for small business. 
Subtitle B—Depreciation 
Sec. 211. Recovery period for depreciation of certain leasehold improvements and 
restaurant property. 
Sec. 212. Modification of depreciation allowance for aircraft. 
Sec. 213. Modification of placed in service rule for bonus depreciation property. 
Subtitle C—S Corporation Reform and Simplification 
Sec. 221. Members of family treated as 1 shareholder. 
Sec. 222. Increase in number of eligible shareholders to 100. 
Sec. 223. Expansion of bank S corporation eligible shareholders to include IRAs. 
Sec. 224. Disregard of unexercised powers of appointment in determining poten-
tial current beneficiaries of ESBT. 
Sec. 225. Transfer of suspended losses incident to divorce, etc. 
Sec. 226. Use of passive activity loss and at-risk amounts by qualified subchapter 
S trust income beneficiaries. 
Sec. 227. Exclusion of investment securities income from passive income test for 
bank S corporations. 
Sec. 228. Treatment of bank director shares. 
Sec. 229. Relief from inadvertently invalid qualified subchapter S subsidiary elec-
tions and terminations. 
Sec. 230. Information returns for qualified subchapter S subsidiaries. 
Sec. 231. Repayment of loans for qualifying employer securities. 
Subtitle D—Alternative Minimum Tax Relief 
Sec. 241. Foreign tax credit under alternative minimum tax. 
Sec. 242. Expansion of exemption from alternative minimum tax for small cor-
porations. 
Sec. 243. Income averaging for farmers not to increase alternative minimum tax. 
Subtitle E—Restructuring of Incentives for Alcohol Fuels, Etc. 
Sec. 251. Reduced rates of tax on gasohol replaced with excise tax credit; repeal 
of other alcohol-based fuel incentives; etc. 
Sec. 252. Alcohol fuel subsidies borne by general fund. 
Subtitle F—Stock Options and Employee Stock Purchase Plan Stock Options 
Sec. 261. Exclusion of incentive stock options and employee stock purchase plan 
stock options from wages. 
Subtitle G—Incentives to Reinvest Foreign Earnings in United States 
Sec. 271. Incentives to reinvest foreign earnings in United States.
Subtitle H—Other Incentive Provisions 
Sec. 281. Special rules for livestock sold on account of weather-related conditions. 
Sec. 282. Payment of dividends on stock of cooperatives without reducing patron-
age dividends. 
Sec. 283. Capital gain treatment under section 631(b) to apply to outright sales 
by landowners. 
Sec. 284. Distributions from publicly traded partnerships treated as qualifying 
income of regulated investment companies. 
Sec. 285. Improvements related to real estate investment trusts. 
Sec. 286. Treatment of certain dividends of regulated investment companies. 
Sec. 287. Taxation of certain settlement funds. 
Sec. 288. Expansion of human clinical trials qualifying for orphan drug credit. 
Sec. 289. Simplification of excise tax imposed on bows and arrows. 
Sec. 290. Repeal of excise tax on fishing tackle boxes. 
Sec. 291. Sonar devices suitable for finding fish. 
Sec. 292. Income tax credit to distilled spirits wholesalers for cost of carrying 
Federal excise taxes on bottled distilled spirits. 
Sec. 293. Suspension of occupational taxes relating to distilled spirits, wine, and 
beer. 
Sec. 294. Modification of unrelated business income limitation on investment in 
certain small business investment companies. 
Sec. 295. Election to determine taxable income from certain international ship-
ping activities using per ton rate. 
Sec. 296. Charitable contribution deduction for certain expenses incurred in sup-
port of Native Alaskan subsistence whaling. 
TITLE III—TAX REFORM AND SIMPLIFICATION FOR UNITED 
STATES BUSINESSES 
Sec. 301. Interest expense allocation rules. 
Sec. 302. Recharacterization of overall domestic loss. 
Sec. 303. Reduction to 2 foreign tax credit baskets. 
Sec. 304. Look-thru rules to apply to dividends from noncontrolled section 902 
corporations. 
Sec. 305. Attribution of stock ownership through partnerships to apply in deter-
mining section 902 and 960 credits. 
Sec. 306. Clarification of treatment of certain transfers of intangible property. 
Sec. 307. United States property not to include certain assets of controlled foreign 
corporation. 
Sec. 308. Election not to use average exchange rate for foreign tax paid other 
than in functional currency. 
Sec. 309. Repeal of withholding tax on dividends from certain foreign corpora-
tions. 
Sec. 310. Provide equal treatment for interest paid by foreign partnerships and 
foreign corporations. 
Sec. 311. Look-thru treatment of payments between related controlled foreign cor-
porations under foreign personal holding company income rules. 
Sec. 312. Look-thru treatment for sales of partnership interests. 
Sec. 313. Repeal of foreign personal holding company rules and foreign invest-
ment company rules. 
Sec. 314. Determination of foreign personal holding company income with respect 
to transactions in commodities. 
Sec. 315. Modifications to treatment of aircraft leasing and shipping income. 
Sec. 316. Modification of exceptions under subpart F for active financing.
TITLE IV—EXTENSION OF CERTAIN EXPIRING PROVISIONS 
Sec. 401. Allowance of nonrefundable personal credits against regular and min-
imum tax liability. 
Sec. 402. Extension of research credit. 
Sec. 403. Extension of credit for electricity produced from certain renewable re-
sources. 
Sec. 404. Indian employment tax credit. 
Sec. 405. Work opportunity credit. 
Sec. 406. Welfare-to-work credit. 
Sec. 407. Certain expenses of elementary and secondary school teachers. 
Sec. 408. Extension of accelerated depreciation benefit for property on Indian res-
ervations. 
Sec. 409. Charitable contributions of computer technology and equipment used for 
educational purposes. 
Sec. 410. Expensing of environmental remediation costs. 
Sec. 411. Availability of medical savings accounts. 
Sec. 412. Taxable income limit on percentage depletion for oil and natural gas 
produced from marginal properties. 
Sec. 413. Qualified zone academy bonds. 
Sec. 414. District of Columbia. 
Sec. 415. Extension of certain New York Liberty Zone bond financing. 
Sec. 416. Disclosures relating to terrorist activities. 
Sec. 417. Disclosure of return information relating to student loans. 
Sec. 418. Cover over of tax on distilled spirits. 
Sec. 419. Joint review of strategic plans and budget for the Internal Revenue 
Service. 
Sec. 420. Parity in the application of certain limits to mental health benefits. 
Sec. 421. Combined employment tax reporting project. 
Sec. 422. Clean-fuel vehicles. 
TITLE V—DEDUCTION OF STATE AND LOCAL GENERAL SALES 
TAXES 
Sec. 501. Deduction of State and local general sales taxes in lieu of State and 
local income taxes. 
TITLE VI—REVENUE PROVISIONS 
Subtitle A—Provisions to Reduce Tax Avoidance Through Individual and 
Corporate Expatriation 
Sec. 601. Tax treatment of expatriated entities and their foreign parents. 
Sec. 602. Excise tax on stock compensation of insiders in expatriated corpora-
tions. 
Sec. 603. Reinsurance of United States risks in foreign jurisdictions. 
Sec. 604. Revision of tax rules on expatriation of individuals. 
Sec. 605. Reporting of taxable mergers and acquisitions. 
Sec. 606. Studies. 
Subtitle B—Provisions Relating to Tax Shelters 
PART I—TAXPAYER-RELATED PROVISIONS 
Sec. 611. Penalty for failing to disclose reportable transactions. 
Sec. 612. Accuracy-related penalty for listed transactions, other reportable trans-
actions having a significant tax avoidance purpose, etc.
Sec. 613. Tax shelter exception to confidentiality privileges relating to taxpayer 
communications. 
Sec. 614. Statute of limitations for taxable years for which required listed trans-
actions not reported. 
Sec. 615. Disclosure of reportable transactions. 
Sec. 616. Failure to furnish information regarding reportable transactions. 
Sec. 617. Modification of penalty for failure to maintain lists of investors. 
Sec. 618. Penalty on promoters of tax shelters. 
Sec. 619. Modifications of substantial understatement penalty for nonreportable 
transactions. 
Sec. 620. Modification of actions to enjoin certain conduct related to tax shelters 
and reportable transactions. 
Sec. 621. Penalty on failure to report interests in foreign financial accounts. 
Sec. 622. Regulation of individuals practicing before the Department of the 
Treasury. 
PART II—OTHER PROVISIONS 
Sec. 631. Treatment of stripped interests in bond and preferred stock funds, etc. 
Sec. 632. Minimum holding period for foreign tax credit on withholding taxes on 
income other than dividends. 
Sec. 633. Disallowance of certain partnership loss transfers. 
Sec. 634. No reduction of basis under section 734 in stock held by partnership 
in corporate partner. 
Sec. 635. Repeal of special rules for FASITs. 
Sec. 636. Limitation on transfer of built-in losses on REMIC residuals. 
Sec. 637. Clarification of banking business for purposes of determining invest-
ment of earnings in United States property. 
Sec. 638. Alternative tax for certain small insurance companies. 
Sec. 639. Denial of deduction for interest on underpayments attributable to non-
disclosed reportable transactions. 
Sec. 640. Clarification of rules for payment of estimated tax for certain deemed 
asset sales. 
Sec. 641. Recognition of gain from the sale of a principal residence acquired in 
a like-kind exchange within 5 years of sale. 
Sec. 642. Prevention of mismatching of interest and original issue discount de-
ductions and income inclusions in transactions with related for-
eign persons. 
Sec. 643. Exclusion from gross income for interest on overpayments of income tax 
by individuals. 
Sec. 644. Deposits made to suspend running of interest on potential underpay-
ments. 
Sec. 645. Partial payment of tax liability in installment agreements. 
Sec. 646. Affirmation of consolidated return regulation authority. 
PART III—LEASING 
Sec. 647. Reform of tax treatment of certain leasing arrangements. 
Sec. 648. Limitation on deductions allocable to property used by governments or 
other tax-exempt entities. 
Sec. 649. Effective date. 
Subtitle C—Reduction of Fuel Tax Evasion 
Sec. 651. Exemption from certain excise taxes for mobile machinery. 
Sec. 652. Taxation of aviation-grade kerosene.
Sec. 653. Dye injection equipment. 
Sec. 654. Authority to inspect on-site records. 
Sec. 655. Registration of pipeline or vessel operators required for exemption of 
bulk transfers to registered terminals or refineries. 
Sec. 656. Display of registration. 
Sec. 657. Penalties for failure to register and failure to report. 
Sec. 658. Collection from customs bond where importer not registered. 
Sec. 659. Modifications of tax on use of certain vehicles. 
Sec. 660. Modification of ultimate vendor refund claims with respect to farming. 
Sec. 661. Dedication of revenues from certain penalties to the Highway Trust 
Fund. 
Sec. 662. Taxable fuel refunds for certain ultimate vendors. 
Sec. 663. Two-party exchanges. 
Sec. 664. Simplification of tax on tires. 
Subtitle D—Nonqualified Deferred Compensation Plans 
Sec. 671. Treatment of nonqualified deferred compensation plans. 
Subtitle E—Other Revenue Provisions 
Sec. 681. Qualified tax collection contracts. 
Sec. 682. Treatment of charitable contributions of patents and similar property. 
Sec. 683. Increased reporting for noncash charitable contributions. 
Sec. 684. Donations of motor vehicles, boats, and aircraft. 
Sec. 685. Extension of amortization of intangibles to sports franchises. 
Sec. 686. Modification of continuing levy on payments to Federal venders. 
Sec. 687. Modification of straddle rules. 
Sec. 688. Addition of vaccines against hepatitis A to list of taxable vaccines. 
Sec. 689. Addition of vaccines against influenza to list of taxable vaccines. 
Sec. 690. Extension of IRS user fees. 
Sec. 691. COBRA fees. 
TITLE VII—MARKET REFORM FOR TOBACCO GROWERS 
Sec. 701. Short title. 
Sec. 702. Effective date. 
Subtitle A—Termination of Federal Tobacco Quota and Price Support 
Programs 
Sec. 711. Termination of tobacco quota program and related provisions. 
Sec. 712. Termination of tobacco price support program and related provisions. 
Sec. 713. Liability. 
Subtitle B—Transitional Payments to Tobacco Quota Holders and Active 
Producers of Tobacco 
Sec. 721. Definitions of active tobacco producer and quota holder. 
Sec. 722. Payments to tobacco quota holders. 
Sec. 723. Transition payments for active producers of quota tobacco. 
Sec. 724. Resolution of disputes. 
Sec. 725. Source of funds for payments. 
TITLE VIII—TRADE PROVISIONS 
Sec. 801. Ceiling fans.
Sec. 802. Certain steam generators, and certain reactor vessel heads, used in nu-
clear facilities. 
TITLE I—END SANCTIONS AND 
REDUCE 
CORPORATE 
TAX 
RATES FOR DOMESTIC MANU-
FACTURING AND SMALL COR-
PORATIONS 
SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL 
INCOME. 
(a) IN GENERAL.—Section 114 is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Subpart E of part III of subchapter N of 
chapter 1 (relating to qualifying foreign trade in-
come) is hereby repealed. 
(2) The table of subparts for such part III is 
amended by striking the item relating to subpart E. 
(3) The table of sections for part III of sub-
chapter B of chapter 1 is amended by striking the 
item relating to section 114. 
(4) The second sentence of section 56(g)(4)(B)(i) 
is amended by striking ‘‘114 or’’. 
(5) Section 275(a) is amended— 
(A) by inserting ‘‘or’’ at the end of para-
graph (4)(A), by striking ‘‘or’’ at the end of 
paragraph (4)(B) and inserting a period, and by 
striking subparagraph (C), and
(B) by striking the last sentence. 
(6) Paragraph (3) of section 864(e) is amend-
ed— 
(A) by striking: 
‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO AC-
COUNT.— 
‘‘(A) IN GENERAL.—For purposes of’’; and 
inserting: 
‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO AC-
COUNT.—For purposes of’’, and 
(B) by striking subparagraph (B). 
(7) Section 903 is amended by striking ‘‘114, 
164(a),’’ and inserting ‘‘164(a)’’. 
(8) Section 999(c)(1) is amended by striking 
‘‘941(a)(5),’’. 
(c) EFFECTIVE DATE.—Except as provided in sub-
section (d), the amendments made by this section shall 
apply to transactions after December 31, 2004. 
(d) TRANSITIONAL RULE FOR 2005 AND 2006.— 
(1) IN GENERAL.—In the case of transactions 
during 2005 or 2006, the amount includible in gross 
income by reason of the amendments made by this 
section shall not exceed the applicable percentage of 
the amount which would have been so included but for 
this subsection.
(2) APPLICABLE PERCENTAGE.—For purposes of 
paragraph (1), the applicable percentage shall be as 
follows: 
(A) For 2005, the applicable percentage 
shall be 20 percent. 
(B) For 2006, the applicable percentage 
shall be 40 percent. 
(e) REVOCATION OF ELECTION TO BE TREATED AS 
DOMESTIC CORPORATION.—If, during the 1-year period be-
ginning on the date of the enactment of this Act, a corpora-
tion for which an election is in effect under section 943(e) 
of the Internal Revenue Code of 1986 revokes such election, 
no gain or loss shall be recognized with respect to property 
treated as transferred under clause (ii) of section 
943(e)(4)(B) of such Code to the extent such property— 
(1) was treated as transferred under clause (i) 
thereof, or 
(2) was acquired during a taxable year to which 
such election applies and before May 1, 2003, in the 
ordinary course of its trade or business. 
The Secretary of the Treasury (or such Secretary’s delegate) 
may prescribe such regulations as may be necessary to pre-
vent the abuse of the purposes of this subsection. 
(f) BINDING CONTRACTS.—The amendments made by 
this section shall not apply to any transaction in the ordi-
nary course of a trade or business which occurs pursuant 
to a binding contract— 
(1) which is between the taxpayer and a person 
who is not a related person (as defined in section 
943(b)(3) of such Code, as in effect on the day before 
the date of the enactment of this Act), and 
(2) which is in effect on January 14, 2002, and 
at all times thereafter. 
For purposes of this subsection, a binding contract shall in-
clude a purchase option, renewal option, or replacement op-
tion which is included in such contract and which is en-
forceable against the seller or lessor. 
SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR 
DOMESTIC PRODUCTION ACTIVITIES INCOME. 
(a) LIMITATION ON TAX ON QUALIFIED PRODUCTION 
ACTIVITIES INCOME.—Section 11 is amended by redesig-
nating subsections (c) and (d) as subsections (d) and (e), 
respectively, and by inserting after subsection (b) the fol-
lowing new subsection: 
‘‘(c) LIMITATION ON TAX ON QUALIFIED PRODUCTION 
ACTIVITIES INCOME.— 
‘‘(1) IN GENERAL.—If a corporation has quali-
fied production activities income for any taxable 
year, the tax imposed by this section shall not exceed 
the sum of—
‘‘(A) a tax computed at the rates and in the 
manner as if this subsection had not been en-
acted on the taxable income reduced by the 
amount of qualified production activities income, 
plus 
‘‘(B) a tax equal to 32 percent (34 percent 
in the case of taxable years beginning before 
January 1, 2007) of the qualified production ac-
tivities income (or, if less, taxable income). 
‘‘(2) QUALIFIED
PRODUCTION
ACTIVITIES
IN-
COME.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
production activities income’ for any taxable 
year means an amount equal to the excess (if 
any) of— 
‘‘(i) the taxpayer’s domestic production 
gross receipts for such taxable year, over 
‘‘(ii) the sum of— 
‘‘(I) the cost of goods sold that are 
allocable to such receipts, 
‘‘(II) other deductions, expenses, 
or losses directly allocable to such re-
ceipts, and 
‘‘(III) a ratable portion of other 
deductions, expenses, and losses that
are not directly allocable to such re-
ceipts or another class of income. 
‘‘(B) ALLOCATION METHOD.—The Secretary 
shall prescribe rules for the proper allocation of 
items of income, deduction, expense, and loss for 
purposes of determining income attributable to 
domestic production activities. 
‘‘(3) DOMESTIC PRODUCTION GROSS RECEIPTS.— 
For purposes of this subsection, the term ‘domestic 
production gross receipts’ means the gross receipts of 
the taxpayer which are derived from— 
‘‘(A) any lease, rental, license, sale, ex-
change, or other disposition of— 
‘‘(i) qualifying production property 
which was manufactured, produced, grown, 
or extracted in whole or in significant part 
by the taxpayer within the United States, 
or 
‘‘(ii) any qualified film produced by 
the taxpayer, or 
‘‘(B) construction, engineering, or architec-
tural services performed in the United States for 
construction projects in the United States.
‘‘(4) QUALIFYING PRODUCTION PROPERTY.—For 
purposes of this subsection, the term ‘qualifying pro-
duction property’ means— 
‘‘(A) tangible personal property, 
‘‘(B) any computer software, and 
‘‘(C) any property described in section 
168(f)(4). 
‘‘(5) QUALIFIED
FILM.—For purposes of this 
subsection— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
film’ means any property described in section 
168(f)(3) if not less than 50 percent of the total 
compensation relating to the production of such 
property is compensation for services performed 
in the United States by actors, production per-
sonnel, directors, and producers. 
‘‘(B) EXCEPTION.—Such term does not in-
clude property with respect to which records are 
required to be maintained under section 2257 of 
title 18, United States Code. 
‘‘(6) RELATED PERSONS.—For purposes of this 
subsection— 
‘‘(A) IN GENERAL.—The term ‘domestic pro-
duction gross receipts’ shall not include any 
gross receipts of the taxpayer derived from prop-
erty leased, licensed, or rented by the taxpayer 
for use by any related person. 
‘‘(B) RELATED PERSON.—For purposes of 
subparagraph (A), a person shall be treated as 
related to another person if such persons are 
treated as a single employer under subsection (a) 
or (b) of section 52 or subsection (m) or (o) of 
section 414, except that determinations under 
subsections (a) and (b) of section 52 shall be 
made without regard to section 1563(b).’’. 
(b) SPECIAL RULE RELATING TO ELECTION TO TREAT 
CUTTING OF TIMBER AS A SALE OR EXCHANGE.—In the 
case of a corporation, any election under section 631(a) of 
the Internal Revenue Code of 1986 made for a taxable year 
ending on or before the date of the enactment of this Act 
may be revoked by the taxpayer for any taxable year ending 
after such date. For purposes of determining whether such 
taxpayer may make a further election under such section, 
such election (and any revocation under this section) shall 
not be taken into account. 
(c) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004.
SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR 
SMALL CORPORATIONS. 
(a) IN GENERAL.—Subsection (b) of section 11 (relat-
ing to tax imposed on corporations) is amended by redesig-
nating paragraph (2) as paragraph (6) and by striking 
paragraph (1) and inserting the following new paragraphs: 
‘‘(1) FOR
TAXABLE
YEARS
BEGINNING
AFTER 
2012.—In the case of taxable years beginning after 
2012, the amount of the tax imposed by subsection (a) 
shall be determined in accordance with the following 
table: 
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000 
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$20,000,000.
$13,750, plus 32% of the excess over 
$75,000. 
Over $20,000,000 ..............................
$6,389,750, plus 35% of the excess over 
$20,000,000. 
‘‘(2) FOR TAXABLE YEARS BEGINNING IN 2011 OR 
2012.—In the case of taxable years beginning in 2011 
or 2012, the amount of the tax imposed by subsection 
(a) shall be determined in accordance with the fol-
lowing table: 
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000 
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$5,000,000.
$13,750, plus 32% of the excess over 
$75,000. 
Over 
$5,000,000 
but 
not 
over 
$10,000,000.
$1,589,750, plus 34% of the excess over 
$5,000,000. 
Over $10,000,000 ..............................
$3,289,750, plus 35% of the excess over 
$10,000,000.
‘‘(3) FOR TAXABLE YEARS BEGINNING IN 2008, 
2009, OR 2010.—In the case of taxable years beginning 
in 2008, 2009, or 2010, the amount of the tax im-
posed by subsection (a) shall be determined in accord-
ance with the following table: 
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000 
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$1,000,000.
$13,750, plus 32% of the excess over 
$75,000. 
Over 
$1,000,000 
but 
not 
over 
$10,000,000.
$309,750, plus 34% of the excess over 
$1,000,000. 
Over $10,000,000 ..............................
$3,369,750, plus 35% of the excess over 
$10,000,000. 
‘‘(4) FOR TAXABLE YEARS BEGINNING IN 2005, 
2006, OR 2007.—In the case of taxable years beginning 
in 2005, 2006, or 2007, the amount of the tax im-
posed by subsection (a) shall be determined in accord-
ance with the following table: 
‘‘If taxable income is: 
The tax is: 
Not over $50,000 ..............................
15% of taxable income. 
Over $50,000 but not over $75,000 
$7,500, plus 25% of the excess over 
$50,000. 
Over 
$75,000 
but 
not 
over 
$1,000,000.
$13,750, plus 33% of the excess over 
$75,000. 
Over 
$1,000,000 
but 
not 
over 
$10,000,000.
$319,000, plus 34% of the excess over 
$1,000,000. 
Over $10,000,000 ..............................
$3,379,000, plus 35% of the excess over 
$10,000,000. 
‘‘(5) PHASEOUT OF LOWER RATES FOR CERTAIN 
TAXPAYERS.— 
‘‘(A) GENERAL RULE FOR YEARS BEFORE 
2013.—
‘‘(i) IN GENERAL.—In the case of tax-
able years beginning before 2013 with re-
spect to a corporation which has taxable in-
come in excess of the applicable amount for 
any taxable year, the amount of tax deter-
mined under paragraph (1), (2), (3) or (4) 
for such taxable year shall be increased by 
the lesser of (I) 5 percent of such excess, or 
(II) the maximum increase amount. 
‘‘(ii) MAXIMUM INCREASE AMOUNT.— 
For purposes of clause (i)— 
‘‘In the case of any taxable year
beginning during: 
The applicable 
amount is: 
The maximum 
increase 
amount is: 
2005, 2006, or 2007 ...................................
$1,000,000 
$21,000
2008, 2009, or 2010 ...................................
$1,000,000 
$30,250
2011 or 2012 ...............................................
$5,000,000 
$110,250. 
‘‘(B) HIGHER INCOME CORPORATIONS.—In 
the case of a corporation which has taxable in-
come in excess of $20,000,000 ($15,000,000 in 
the case of taxable years beginning before 2013), 
the amount of the tax determined under the fore-
going provisions of this subsection shall be in-
creased by an additional amount equal to the 
lesser of (i) 3 percent of such excess, or (ii) 
$610,250 ($100,000 in the case of taxable years 
beginning before 2013).’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 904(b)(3)(D)(ii) is amended to read 
as follows: 
‘‘(ii) in the case of a corporation, sec-
tion 1201(a) applies to such taxable year.’’. 
(2) Section 1201(a) is amended by striking ‘‘the 
last 2 sentences of section 11(b)(1)’’ and inserting 
‘‘section 11(b)(5)’’. 
(3) Section 1561(a) is amended— 
(A) by striking ‘‘the last 2 sentences of sec-
tion 11(b)(1)’’ and inserting ‘‘section 11(b)(5)’’, 
and 
(B) by striking ‘‘such last 2 sentences’’ and 
inserting ‘‘section 11(b)(5)’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004.
TITLE II—JOB CREATION TAX IN-
CENTIVES FOR MANUFACTUR-
ERS, SMALL BUSINESSES, AND 
FARMERS 
Subtitle A—Small Business 
Expensing 
SEC. 201. 2-YEAR EXTENSION OF INCREASED EXPENSING 
FOR SMALL BUSINESS. 
Subsections (b), (c), and (d) of section 179 are each 
amended by striking ‘‘2006’’ each place it appears and in-
serting ‘‘2008’’. 
Subtitle B—Depreciation 
SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CER-
TAIN LEASEHOLD IMPROVEMENTS AND RES-
TAURANT PROPERTY. 
(a) 15-YEAR RECOVERY PERIOD.—Subparagraph (E) 
of section 168(e)(3) (relating to classification of certain 
property) is amended by striking ‘‘and’’ at the end of clause 
(ii), by striking the period at the end of clause (iii) and 
inserting a comma, and by adding at the end the following 
new clauses: 
‘‘(iv) any qualified leasehold improve-
ment property placed in service before Jan-
uary 1, 2006, and
‘‘(v) any qualified restaurant property 
placed in service before January 1, 2006.’’ 
(b) QUALIFIED LEASEHOLD IMPROVEMENT PROP-
ERTY.—Subsection (e) of section 168 is amended by adding 
at the end the following new paragraph: 
‘‘(6) 
QUALIFIED
LEASEHOLD
IMPROVEMENT 
PROPERTY.—The term ‘qualified leasehold improve-
ment property’ has the meaning given such term in 
section 168(k)(3) except that the following special 
rules shall apply: 
‘‘(A) IMPROVEMENTS MADE BY LESSOR.—In 
the case of an improvement made by the person 
who was the lessor of such improvement when 
such improvement was placed in service, such 
improvement shall be qualified leasehold im-
provement property (if at all) only so long as 
such improvement is held by such person. 
‘‘(B) EXCEPTION FOR CHANGES IN FORM OF 
BUSINESS.—Property shall not cease to be quali-
fied leasehold improvement property under sub-
paragraph (A) by reason of— 
‘‘(i) death, 
‘‘(ii) a transaction to which section 
381(a) applies,
‘‘(iii) a mere change in the form of 
conducting the trade or business so long as 
the property is retained in such trade or 
business as qualified leasehold improvement 
property and the taxpayer retains a sub-
stantial interest in such trade or business, 
‘‘(iv) the acquisition of such property 
in an exchange described in section 1031, 
1033, or 1038 to the extent that the basis of 
such property includes an amount rep-
resenting the adjusted basis of other prop-
erty owned by the taxpayer or a related 
person, or 
‘‘(v) the acquisition of such property 
by the taxpayer in a transaction described 
in section 332, 351, 361, 721, or 731 (or the 
acquisition of such property by the taxpayer 
from the transferee or acquiring corporation 
in a transaction described in such section), 
to the extent that the basis of the property 
in the hands of the taxpayer is determined 
by reference to its basis in the hands of the 
transferor or distributor.’’.
(c) QUALIFIED RESTAURANT PROPERTY.—Subsection 
(e) of section 168 (as amended by subsection (b)) is further 
amended by adding at the end the following new paragraph: 
‘‘(7) QUALIFIED RESTAURANT PROPERTY.—The 
term ‘qualified restaurant property’ means any sec-
tion 1250 property which is an improvement to a 
building if— 
‘‘(A) such improvement is placed in service 
more than 3 years after the date such building 
was first placed in service, and 
‘‘(B) more than 50 percent of the building’s 
square footage is devoted to preparation of, and 
seating for on-premises consumption of, prepared 
meals.’’. 
(d) REQUIREMENT TO USE STRAIGHT LINE METH-
OD.— 
(1) Paragraph (3) of section 168(b) is amended 
by adding at the end the following new subpara-
graphs: 
‘‘(G) Qualified leasehold improvement prop-
erty described in subsection (e)(6). 
‘‘(H) Qualified restaurant property de-
scribed in subsection (e)(7).’’.
(2) Subparagraph (A) of section 168(b)(2) is 
amended by inserting before the comma ‘‘not referred 
to in paragraph (3)’’. 
(e) ALTERNATIVE SYSTEM.—The table contained in 
section 168(g)(3)(B) is amended by adding at the end the 
following new items: 
‘‘(E)(iv) .......................................................................
‘‘(E)(v) ........................................................................
39’’.
(f) EFFECTIVE DATE.—The amendments made by this 
section shall apply to property placed in service after the 
date of the enactment of this Act. 
SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE 
FOR AIRCRAFT. 
(a) AIRCRAFT TREATED AS QUALIFIED PROPERTY.— 
(1) IN
GENERAL.—Paragraph (2) of section 
168(k) is amended by redesignating subparagraphs 
(C) through (F) as subparagraphs (D) through (G), 
respectively, and by inserting after subparagraph (B) 
the following new subparagraph: 
‘‘(C) CERTAIN AIRCRAFT.—The term ‘quali-
fied property’ includes property— 
‘‘(i) which meets the requirements of 
clauses (ii) and (iii) of subparagraph (A), 
‘‘(ii) which is an aircraft which is not 
a transportation property (as defined in
subparagraph (B)(iii)) other than for agri-
cultural or firefighting purposes, 
‘‘(iii) which is purchased and on which 
such purchaser, at the time of the contract 
for purchase, has made a nonrefundable de-
posit of the lesser of— 
‘‘(I) 10 percent of the cost, or 
‘‘(II) $100,000, and 
‘‘(iv) which has— 
‘‘(I) an estimated production pe-
riod exceeding 4 months, and 
‘‘(II) a cost exceeding $200,000.’’. 
(2) PLACED IN SERVICE DATE.—Clause (iv) of 
section 168(k)(2)(A) is amended by striking ‘‘sub-
paragraph (B)’’ and inserting ‘‘subparagraphs (B) 
and (C)’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 168(k)(2)(B) is amended by adding 
at the end the following new clause: 
‘‘(iv) 
APPLICATION
OF
SUBPARA-
GRAPH.—This 
subparagraph 
shall 
not 
apply to any property which is described in 
subparagraph (C).’’.
(2) Section 168(k)(4)(A)(ii) is amended by strik-
ing ‘‘paragraph (2)(C)’’ and inserting ‘‘paragraph 
(2)(D)’’. 
(3) Section 168(k)(4)(B)(iii) is amended by in-
serting ‘‘and paragraph (2)(C)’’ after ‘‘of this para-
graph)’’. 
(4) Section 168(k)(4)(C) is amended by striking 
‘‘subparagraphs (B) and (D)’’ and inserting ‘‘sub-
paragraphs (B), (C), and (E)’’. 
(5) Section 168(k)(4)(D) is amended by striking 
‘‘Paragraph 
(2)(E)’’ 
and 
inserting 
‘‘Paragraph 
(2)(F)’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall take effect as if included in the amendments 
made by section 101 of the Job Creation and Worker Assist-
ance Act of 2002. 
SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR 
BONUS DEPRECIATION PROPERTY. 
(a) IN GENERAL.—Section 168(k)(2)(D) (relating to 
special rules) is amended by adding at the end the following 
new clause: 
‘‘(iii) SYNDICATION.—For purposes of 
subparagraph (A)(ii), if—
‘‘(I) property is originally placed 
in service after September 10, 2001, by 
the lessor of such property, 
‘‘(II) such property is sold by 
such lessor or any subsequent pur-
chaser within 3 months after the date 
so placed in service (or, in the case of 
multiple units of property subject to 
the same lease, within 3 months after 
the date the final unit is placed in 
service, so long as the period between 
the time the first unit is placed in 
service and the time the last unit is 
placed in service does not exceed 12 
months), and 
‘‘(III) the user of such property 
after the last sale during such 3-month 
period remains the same as when such 
property was originally placed in serv-
ice, 
such property shall be treated as originally 
placed in service not earlier than the date 
of such last sale, so long as no previous 
owner of such property elects the applica-
tion of this subsection with respect to such 
property.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall take effect as if included in the amendments 
made by section 101 of the Job Creation and Worker Assist-
ance Act of 2002; except that the parenthetical material in 
section 168(k)(2)(D)(iii)(II) of the Internal Revenue Code 
of 1986, as added by this section, shall apply to property 
sold after June 4, 2004. 
Subtitle C—S Corporation Reform 
and Simplification 
SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER. 
(a) IN GENERAL.—Paragraph (1) of section 1361(c) 
(relating to special rules for applying subsection (b)) is 
amended to read as follows: 
‘‘(1) MEMBERS
OF
FAMILY
TREATED
AS
SHAREHOLDER.— 
‘‘(A) IN
GENERAL.—For purpose of sub-
section (b)(1)(A)— 
‘‘(i) except as provided in clause (ii), 
a husband and wife (and their estates) shall 
be treated as 1 shareholder, and 
‘‘(ii) in the case of a family with re-
spect to which an election is in effect under
subparagraph (D), all members of the fam-
ily shall be treated as 1 shareholder. 
‘‘(B) MEMBERS OF THE FAMILY.—For pur-
pose of subparagraph (A)(ii)— 
‘‘(i) IN GENERAL.—The term ‘members 
of the family’ means the common ancestor, 
lineal descendants of the common ancestor, 
and the spouses (or former spouses) of such 
lineal descendants or common ancestor. 
‘‘(ii) COMMON ANCESTOR.—For pur-
poses of this paragraph, an individual shall 
not be considered a common ancestor if, as 
of the later of the effective date of this para-
graph or the time the election under section 
1362(a) is made, the individual is more 
than 3 generations removed from the young-
est generation of shareholders who would 
(but for this clause) be members of the fam-
ily. For purposes of the preceding sentence, 
a spouse (or former spouse) shall be treated 
as being of the same generation as the indi-
vidual to which such spouse is (or was) 
married. 
‘‘(C) EFFECT OF ADOPTION, ETC.—In deter-
mining whether any relationship specified in
subparagraph (B) exists, the rules of section 
152(b)(2) shall apply. 
‘‘(D) ELECTION.—An election under sub-
paragraph (A)(ii)— 
‘‘(i) may, except as otherwise provided 
in regulations prescribed by the Secretary, 
be made by any member of the family, and 
‘‘(ii) shall remain in effect until termi-
nated as provided in regulations prescribed 
by the Secretary.’’. 
(b) RELIEF FROM INADVERTENT INVALID ELECTION 
OR TERMINATION.—Section 1362(f) (relating to inadvertent 
invalid elections or terminations), as amended by section 
229, is amended— 
(1) by inserting ‘‘or section 1361(c)(1)(A)(ii)’’ 
after ‘‘section 1361(b)(3)(B)(ii),’’ in paragraph (1), 
and 
(2) by inserting ‘‘or section 1361(c)(1)(D)(iii)’’ 
after ‘‘section 1361(b)(3)(C),’’ in paragraph (1)(B). 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendment made by 
subsection (a) shall apply to taxable years beginning 
after December 31, 2004.
(2) SUBSECTION (b).—The amendments made by 
subsection (b) shall apply to elections and termi-
nations made after December 31, 2004. 
SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHARE-
HOLDERS TO 100. 
(a) IN GENERAL.—Section 1361(b)(1)(A) (defining 
small business corporation) is amended by striking ‘‘75’’ 
and inserting ‘‘100’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 
SHAREHOLDERS TO INCLUDE IRAS. 
(a) IN GENERAL.—Section 1361(c)(2)(A) (relating to 
certain trusts permitted as shareholders) is amended by in-
serting after clause (v) the following new clause: 
‘‘(vi) In the case of a corporation 
which is a bank (as defined in section 581), 
a trust which constitutes an individual re-
tirement account under section 408(a), in-
cluding one designated as a Roth IRA 
under section 408A, but only to the extent 
of the stock held by such trust in such bank 
as of the date of the enactment of this 
clause.’’.
(b) 
TREATMENT
AS
SHAREHOLDER.—Section 
1361(c)(2)(B) (relating to treatment as shareholders) is 
amended by adding at the end the following new clause: 
‘‘(vi) In the case of a trust described in 
clause (vi) of subparagraph (A), the indi-
vidual for whose benefit the trust was cre-
ated shall be treated as a shareholder.’’. 
(c) SALE OF BANK STOCK IN IRA RELATING TO S 
CORPORATION
ELECTION
EXEMPT
FROM
PROHIBITED 
TRANSACTION RULES.—Section 4975(d) (relating to ex-
emptions) is amended by striking ‘‘or’’ at the end of para-
graph (14), by striking the period at the end of paragraph 
(15) and inserting ‘‘; or’’, and by adding at the end the 
following new paragraph: 
‘‘(16) a sale of stock held by a trust which con-
stitutes an individual retirement account under sec-
tion 408(a) to the individual for whose benefit such 
account is established if— 
‘‘(A) such stock is in a bank (as defined in 
section 581), 
‘‘(B) such stock is held by such trust as of 
the date of the enactment of this paragraph, 
‘‘(C) such sale is pursuant to an election 
under section 1362(a) by such bank,
‘‘(D) such sale is for fair market value at 
the time of sale (as established by an inde-
pendent appraiser) and the terms of the sale are 
otherwise at least as favorable to such trust as 
the terms that would apply on a sale to an unre-
lated party, 
‘‘(E) such trust does not pay any commis-
sions, costs, or other expenses in connection with 
the sale, and 
‘‘(F) the stock is sold in a single transaction 
for cash not later than 120 days after the S cor-
poration election is made.’’. 
(d) CONFORMING AMENDMENT.—Section 512(e)(1) is 
amended by inserting ‘‘1361(c)(2)(A)(vi) or’’ before 
‘‘1361(c)(6)’’. 
(e) EFFECTIVE DATE.—The amendments made by this 
section shall take effect on the date of the enactment of this 
Act. 
SEC. 224. DISREGARD OF UNEXERCISED POWERS OF AP-
POINTMENT IN DETERMINING POTENTIAL 
CURRENT BENEFICIARIES OF ESBT. 
(a) IN GENERAL.—Section 1361(e)(2) (defining poten-
tial current beneficiary) is amended— 
(1) by inserting ‘‘(determined without regard to 
any power of appointment to the extent such power
remains unexercised at the end of such period)’’ after 
‘‘of the trust’’ in the first sentence, and 
(2) by striking ‘‘60-day’’ in the second sentence 
and inserting ‘‘1-year’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 
DIVORCE, ETC. 
(a) IN GENERAL.—Section 1366(d)(2) (relating to in-
definite carryover of disallowed losses and deductions) is 
amended to read as follows: 
‘‘(2) INDEFINITE
CARRYOVER
OF
DISALLOWED 
LOSSES AND DEDUCTIONS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), any loss or deduction which 
is disallowed for any taxable year by reason of 
paragraph (1) shall be treated as incurred by the 
corporation in the succeeding taxable year with 
respect to that shareholder. 
‘‘(B) TRANSFERS
OF
STOCK
BETWEEN 
SPOUSES OR INCIDENT TO DIVORCE.—In the case 
of any transfer described in section 1041(a) of 
stock of an S corporation, any loss or deduction 
described in subparagraph (A) with respect such
stock shall be treated as incurred by the corpora-
tion in the succeeding taxable year with respect 
to the transferee.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 
AMOUNTS BY QUALIFIED SUBCHAPTER S 
TRUST INCOME BENEFICIARIES. 
(a) IN GENERAL.—Section 1361(d)(1) (relating to spe-
cial rule for qualified subchapter S trust) is amended— 
(1) by striking ‘‘and’’ at the end of subpara-
graph (A), 
(2) by striking the period at the end of subpara-
graph (B) and inserting ‘‘, and’’, and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(C) for purposes of applying sections 465 
and 469 to the beneficiary of the trust, the dis-
position of the S corporation stock by the trust 
shall be treated as a disposition by such bene-
ficiary.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transfers made after December 31, 
2004.
SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME 
FROM PASSIVE INCOME TEST FOR BANK S 
CORPORATIONS. 
(a) IN GENERAL.—Section 1362(d)(3) (relating to 
where passive investment income exceeds 25 percent of gross 
receipts for 3 consecutive taxable years and corporation has 
accumulated earnings and profits) is amended by adding 
at the end the following new subparagraph: 
‘‘(F) EXCEPTION FOR BANKS; ETC.—In the 
case of a bank (as defined in section 581), a 
bank holding company (within the meaning of 
section 2(a) of the Bank Holding Company Act 
of 1956 (12 U.S.C. 1841(a))), or a financial 
holding company (within the meaning of section 
2(p) of such Act), the term ‘passive investment 
income’ shall not include— 
‘‘(i) interest income earned by such 
bank or company, or 
‘‘(ii) dividends on assets required to be 
held by such bank or company, including 
stock in the Federal Reserve Bank, the Fed-
eral Home Loan Bank, or the Federal Agri-
cultural Mortgage Bank or participation 
certificates issued by a Federal Intermediate 
Credit Bank.’’.
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 228. TREATMENT OF BANK DIRECTOR SHARES. 
(a) IN GENERAL.—Section 1361 (defining S corpora-
tion) is amended by adding at the end the following new 
subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.— 
‘‘(1) IN
GENERAL.—Restricted bank director 
stock shall not be taken into account as outstanding 
stock of the S corporation in applying this subchapter 
(other than section 1368(f)). 
‘‘(2) RESTRICTED BANK DIRECTOR STOCK.—For 
purposes of this subsection, the term ‘restricted bank 
director stock’ means stock in a bank (as defined in 
section 581), a bank holding company (within the 
meaning of section 2(a) of the Bank Holding Com-
pany Act of 1956 (12 U.S.C. 1841(a))), or a financial 
holding company (within the meaning of section 2(p) 
of such Act), registered with the Federal Reserve Sys-
tem, if such stock— 
‘‘(A) is required to be held by an individual 
under applicable Federal or State law in order 
to permit such individual to serve as a director, 
and
‘‘(B) is subject to an agreement with such 
bank or company (or a corporation which con-
trols (within the meaning of section 368(c)) such 
bank or company) pursuant to which the holder 
is required to sell back such stock (at the same 
price as the individual acquired such stock) upon 
ceasing to hold the office of director. 
‘‘(3) CROSS REFERENCE.— 
‘‘For treatment of certain distributions with re-
spect to restricted bank director stock, see section 
1368(f).’’. 
(b) DISTRIBUTIONS.—Section 1368 (relating to dis-
tributions) is amended by adding at the end the following 
new subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di-
rector receives a distribution (not in part or full payment 
in exchange for stock) from an S corporation with respect 
to any restricted bank director stock (as defined in section 
1361(f)), the amount of such distribution— 
‘‘(1) shall be includible in gross income of the di-
rector, and 
‘‘(2) shall be deductible by the corporation for the 
taxable year of such corporation in which or with 
which ends the taxable year in which such amount in 
included in the gross income of the director.’’.
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALI-
FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 
AND TERMINATIONS. 
(a) IN GENERAL.—Section 1362(f) (relating to inad-
vertent invalid elections or terminations) is amended— 
(1) by inserting ‘‘, section 1361(b)(3)(B)(ii),’’ 
after ‘‘subsection (a)’’ in paragraph (1), 
(2) by inserting ‘‘, section 1361(b)(3)(C),’’ after 
‘‘subsection (d)’’ in paragraph (1)(B), 
(3) by amending paragraph (3)(A) to read as 
follows: 
‘‘(A) so that the corporation for which the 
election was made is a small business corpora-
tion or a qualified subchapter S subsidiary, as 
the case may be, or’’, 
(4) by amending paragraph (4) to read as fol-
lows: 
‘‘(4) the corporation for which the election was 
made, and each person who was a shareholder in such 
corporation at any time during the period specified 
pursuant to this subsection, agrees to make such ad-
justments (consistent with the treatment of such cor-
‘‘(7) S CORPORATION REPAYMENT OF LOANS FOR 
QUALIFYING
EMPLOYER
SECURITIES.—A plan shall 
not be treated as violating the requirements of section 
401 or 409 or subsection (e)(7), or as engaging in a 
prohibited transaction for purposes of subsection 
(d)(3), merely by reason of any distribution (as de-
scribed in section 1368(a)) with respect to S corpora-
tion stock that constitutes qualifying employer securi-
ties, which in accordance with the plan provisions is 
used to make payments on a loan described in sub-
section (d)(3) the proceeds of which were used to ac-
quire such qualifying employer securities (whether or 
not allocated to participants). The preceding sentence 
shall not apply in the case of a distribution which is 
paid with respect to any employer security which is 
allocated to a participant unless the plan provides 
that employer securities with a fair market value of 
not less than the amount of such distribution are allo-
cated to such participant for the year which (but for 
the preceding sentence) such distribution would have 
been allocated to such participant.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to distributions with respect to S cor-
poration stock made after December 31, 2004.
Subtitle D—Alternative Minimum 
Tax Relief 
SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MIN-
IMUM TAX. 
(a) IN GENERAL.— 
(1) Subsection (a) of section 59 is amended by 
striking paragraph (2) and by redesignating para-
graphs (3) and (4) as paragraphs (2) and (3), respec-
tively. 
(2) Section 53(d)(1)(B)(i)(II) is amended by 
striking ‘‘and if section 59(a)(2) did not apply’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE 
MINIMUM TAX FOR SMALL CORPORATIONS. 
(a) IN GENERAL.—Subparagraphs (A) and (B) of sec-
tion 55(e)(1) are each amended by striking ‘‘$7,500,000’’ 
each place it appears and inserting ‘‘$20,000,000’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2005.
SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO IN-
CREASE ALTERNATIVE MINIMUM TAX. 
(a) IN GENERAL.—Subsection (c) of section 55 (defin-
ing regular tax) is amended by redesignating paragraph 
(2) as paragraph (3) and by inserting after paragraph (1) 
the following new paragraph: 
‘‘(2) COORDINATION
WITH
INCOME
AVERAGING 
FOR FARMERS.—Solely for purposes of this section, 
section 1301 (relating to averaging of farm income) 
shall not apply in computing the regular tax liabil-
ity.’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 2003. 
Subtitle E—Restructuring of 
Incentives for Alcohol Fuels, Etc. 
SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED 
WITH EXCISE TAX CREDIT; REPEAL OF OTHER 
ALCOHOL-BASED FUEL INCENTIVES; ETC. 
(a) EXCISE TAX CREDIT FOR ALCOHOL FUEL MIX-
TURES.— 
(1) IN GENERAL.—Subsection (f) of section 6427 
is amended to read as follows: 
‘‘(f) ALCOHOL FUEL MIXTURES.—
‘‘(1) IN GENERAL.—The amount of credit which 
would (but for section 40(c)) be determined under sec-
tion 40(a)(1) for any period— 
‘‘(A) shall, with respect to taxable events oc-
curring during such period, be treated— 
‘‘(i) as a payment of the taxpayer’s li-
ability for tax imposed by section 4081, and 
‘‘(ii) as received at the time of the tax-
able event, and 
‘‘(B) to the extent such amount of credit ex-
ceeds such liability for such period, shall (except 
as provided in subsection (k)) be paid subject to 
subsection (i)(3) by the Secretary without inter-
est. 
‘‘(2) SPECIAL RULES.— 
‘‘(A) ONLY CERTAIN ALCOHOL TAKEN INTO 
ACCOUNT.—For purposes of paragraph (1), sec-
tion 40 shall be applied— 
‘‘(i) by not taking into account alcohol 
with a proof of less than 190, and 
‘‘(ii) by treating as alcohol the alcohol 
gallon equivalent of ethyl tertiary butyl 
ether or other ethers produced from such al-
cohol.
‘‘(B) TREATMENT OF REFINERS.—For pur-
poses of paragraph (1), in the case of a mix-
ture— 
‘‘(i) the alcohol in which is described 
in subparagraph (A)(ii), and 
‘‘(ii) which is produced by any person 
at a refinery prior to any taxable event, 
section 40 shall be applied by treating such per-
son as having sold such mixture at the time of 
its removal from the refinery (and only at such 
time) to another person for use as a fuel. 
‘‘(3) MIXTURES
NOT
USED
AS
FUEL.—Rules 
similar to the rules of subparagraphs (A) and (D) of 
section 40(d)(3) shall apply for purposes of this sub-
section. 
‘‘(4) TERMINATION.—This section shall apply 
only to periods to which section 40 applies, deter-
mined by substituting in section 40(e)— 
‘‘(A) ‘December 31, 2010’ for ‘December 31, 
2007’, and 
‘‘(B) ‘January 1, 2011’ for ‘January 1, 
2008’.’’ 
(2) REVISION OF RULES FOR PAYMENT OF CRED-
IT.—Paragraph (3) of section 6427(i) is amended to 
read as follows:
‘‘(3) SPECIAL
RULE
FOR
ALCOHOL
MIXTURE 
CREDIT.— 
‘‘(A) IN GENERAL.—A claim may be filed 
under subsection (f)(1)(B) by any person for any 
period— 
‘‘(i) for which $200 or more is payable 
under such subsection (f)(1)(B), and 
‘‘(ii) which is not less than 1 week. 
In the case of an electronic claim, this subpara-
graph shall be applied without regard to clause 
(i). 
‘‘(B) 
PAYMENT
OF
CLAIM.—Notwith-
standing subsection (f)(1)(B), if the Secretary 
has not paid pursuant to a claim filed under 
this section within 45 days of the date of the fil-
ing of such claim (20 days in the case of an elec-
tronic claim), the claim shall be paid with inter-
est from such date determined by using the over-
payment rate and method under section 6621. 
‘‘(C) TIME FOR FILING CLAIM.—No claim 
filed under this paragraph shall be allowed un-
less filed on or before the last day of the first 
quarter following the earliest quarter included in 
the claim.’’
(b) REPEAL OF OTHER INCENTIVES FOR FUEL MIX-
TURES.— 
(1) Subsection (b) of section 4041 is amended to 
read as follows: 
‘‘(b) EXEMPTION
FOR
OFF-HIGHWAY
BUSINESS 
USE.— 
‘‘(1) IN GENERAL.—No tax shall be imposed by 
subsection (a) or (d)(1) on liquids sold for use or used 
in an off-highway business use. 
‘‘(2) TAX WHERE OTHER USE.—If a liquid on 
which no tax was imposed by reason of paragraph (1) 
is used otherwise than in an off-highway business use, 
a tax shall be imposed by paragraph (1)(B), (2)(B), 
or (3)(A)(ii) of subsection (a) (whichever is appro-
priate) and by the corresponding provision of sub-
section (d)(1) (if any). 
‘‘(3) OFF-HIGHWAY BUSINESS USE DEFINED.— 
For purposes of this subsection, the term ‘off-highway 
business use’ has the meaning given to such term by 
section 6421(e)(2); except that such term shall not, for 
purposes of subsection (a)(1), include use in a diesel- 
powered train.’’ 
(2) Section 4041(k) is hereby repealed. 
(3) Section 4081(c) is hereby repealed. 
(4) Section 4091(c) is hereby repealed.
(c) TRANSFERS TO HIGHWAY TRUST FUND.—Para-
graph (4) of section 9503(b) is amended by adding ‘‘or’’ 
at the end of subparagraph (B), by striking the comma at 
the end of subparagraph (C) and inserting a period, and 
by striking subparagraphs (D), (E), and (F). 
(d) CONFORMING AMENDMENTS.— 
(1) Subsection (c) of section 40 is amended to 
read as follows: 
‘‘(c) COORDINATION WITH EXCISE TAX BENEFITS.— 
The amount of the credit determined under this section with 
respect to any alcohol shall, under regulations prescribed 
by the Secretary, be properly reduced to take into account 
the benefit provided with respect to such alcohol under sec-
tion 6427(f).’’ 
(2) Subparagraph (B) of section 40(d)(4) is 
amended by striking ‘‘under section 4041(k) or 
4081(c)’’ and inserting ‘‘under section 6427(f)’’. 
(e) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided by para-
graph (2), the amendments made by this section shall 
apply to fuel sold or used after September 30, 2004. 
(2) SUBSECTION (c).—The amendments made by 
subsection (c) shall apply to taxes imposed after Sep-
tember 30, 2003.
SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL 
FUND. 
(a) TRANSFERS
TO FUND.—Section 9503(b)(1) is 
amended by adding at the end the following new flush sen-
tence: 
‘‘For purposes of this paragraph, the amount of taxes 
received under section 4081 shall include any amount 
treated as a payment under section 6427(f)(1)(A) and 
shall not be reduced by the amount paid under section 
6427(f)(1)(B).’’. 
(b) TRANSFERS FROM FUND.—Subparagraph (A) of 
section 9503(c)(2) is amended by adding at the end the fol-
lowing new sentence: ‘‘Clauses (i)(III) and (ii) shall not 
apply to claims under section 6427(f)(1)(B).’’ 
(c) EFFECTIVE DATE.— 
(1) SUBSECTION (a).—The amendment made by 
subsection (a) shall apply to taxes received after Sep-
tember 30, 2004. 
(2) SUBSECTION (b).—The amendment made by 
subsection (b) shall apply to amounts paid after Sep-
tember 30, 2004, and (to the extent related to section 
34 of the Internal Revenue Code of 1986) to fuel used 
after such date.
Subtitle F—Stock Options and Em-
ployee 
Stock 
Purchase 
Plan 
Stock Options 
SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 
EMPLOYEE STOCK PURCHASE PLAN STOCK 
OPTIONS FROM WAGES. 
(a) EXCLUSION FROM EMPLOYMENT TAXES.— 
(1) SOCIAL SECURITY TAXES.— 
(A) Section 3121(a) (relating to definition 
of wages) is amended by striking ‘‘or’’ at the end 
of paragraph (20), by striking the period at the 
end of paragraph (21) and inserting ‘‘; or’’, and 
by inserting after paragraph (21) the following 
new paragraph: 
‘‘(22) remuneration on account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) or 
under an employee stock purchase plan (as de-
fined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(B) Section 209(a) of the Social Security 
Act is amended by striking ‘‘or’’ at the end of 
paragraph (17), by striking the period at the end
of paragraph (18) and inserting ‘‘; or’’, and by 
inserting after paragraph (18) the following new 
paragraph: 
‘‘(19) Remuneration on account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b) of 
the Internal Revenue Code of 1986) or under an 
employee stock purchase plan (as defined in sec-
tion 423(b) of such Code), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(2) RAILROAD RETIREMENT TAXES.—Subsection 
(e) of section 3231 is amended by adding at the end 
the following new paragraph: 
‘‘(12) QUALIFIED
STOCK
OPTIONS.—The term 
‘compensation’ shall not include any remuneration on 
account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) or 
under an employee stock purchase plan (as de-
fined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’.
(3) UNEMPLOYMENT
TAXES.—Section 3306(b) 
(relating to definition of wages) is amended by strik-
ing ‘‘or’’ at the end of paragraph (17), by striking the 
period at the end of paragraph (18) and inserting ‘‘; 
or’’, and by inserting after paragraph (18) the fol-
lowing new paragraph: 
‘‘(19) remuneration on account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) or 
under an employee stock purchase plan (as de-
fined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(b) WAGE WITHHOLDING NOT REQUIRED ON DIS-
QUALIFYING DISPOSITIONS.—Section 421(b) (relating to ef-
fect of disqualifying dispositions) is amended by adding at 
the end the following new sentence: ‘‘No amount shall be 
required to be deducted and withheld under chapter 24 with 
respect to any increase in income attributable to a disposi-
tion described in the preceding sentence.’’. 
(c) WAGE WITHHOLDING NOT REQUIRED ON COM-
PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER-
CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 
423(c) (relating to special rule where option price is be-
tween 85 percent and 100 percent of value of stock) is 
amended by adding at the end the following new sentence: 
‘‘No amount shall be required to be deducted and withheld 
under chapter 24 with respect to any amount treated as 
compensation under this subsection.’’. 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to stock acquired pursuant to options 
exercised after the date of the enactment of this Act. 
Subtitle G—Incentives to Reinvest 
Foreign Earnings in United States 
SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN 
UNITED STATES. 
(a) IN GENERAL.—Subpart F of part III of subchapter 
N of chapter 1 (relating to controlled foreign corporations) 
is amended by adding at the end the following new section: 
‘‘SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION. 
‘‘(a) DEDUCTION.— 
‘‘(1) IN GENERAL.—In the case of a corporation 
which is a United States shareholder, there shall be 
allowed as a deduction an amount equal to 85 percent 
of the dividends which are received by such share-
holder from controlled foreign corporations during the 
election period. 
‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON-
TROLLED
FOREIGN
CORPORATIONS.—If, within the
election period, a United States shareholder receives a 
distribution from a controlled foreign corporation 
which is excluded from gross income under section 
959(a), such distribution shall be treated for purposes 
of this section as a dividend to the extent of any 
amount included in income by such United States 
shareholder under section 951(a)(1)(A) as a result of 
any dividend paid during the election period to— 
‘‘(A) such controlled foreign corporation 
from another controlled foreign corporation that 
is in a chain of ownership described in section 
958(a), or 
‘‘(B) any other controlled foreign corpora-
tion in such chain of ownership, but only to the 
extent of distributions described in section 959(b) 
which are made during the election period to the 
controlled foreign corporation from which such 
United States shareholder received such distribu-
tion. 
‘‘(b) LIMITATIONS.— 
‘‘(1) IN
GENERAL.—The amount of dividends 
taken into account under subsection (a) shall not ex-
ceed the greater of— 
‘‘(A) $500,000,000,
‘‘(B) the amount shown on the applicable fi-
nancial statement as earnings permanently rein-
vested outside the United States, or 
‘‘(C) in the case of an applicable financial 
statement which fails to show a specific amount 
of earnings permanently reinvested outside the 
United States and which shows a specific 
amount of tax liability attributable to such earn-
ings, the amount of such earnings determined in 
such manner as the Secretary may prescribe. 
Except as provided in subparagraph (C), if there is 
no statement or such statement fails to show a specific 
amount of such earnings or liability, such amount 
shall be treated as being zero for purposes of this 
paragraph. 
‘‘(2) DIVIDENDS
MUST
BE
EXTRAORDINARY.— 
The amount of dividends taken into account under 
subsection (a) shall not exceed the excess (if any) of— 
‘‘(A) the dividends received during the tax-
able year by such shareholder from controlled 
foreign corporations, over 
‘‘(B) the annual average for the base period 
years of—
‘‘(i) the dividends received during each 
base period year by such shareholder from 
such corporations, 
‘‘(ii) the amounts includible in such 
shareholder’s gross income for each base pe-
riod year under section 951(a)(1)(B) with 
respect to such corporations, and 
‘‘(iii) the amounts that would have 
been included for each base period year but 
for section 959(a) with respect to such cor-
porations. 
The amount taken into account under clause 
(iii) for any base period year shall not include 
any amount which is not includible in gross in-
come by reason of an amount described in clause 
(ii) with respect to a prior taxable year. 
‘‘(3) REQUIREMENT
TO
INVEST
IN
UNITED 
STATES.—Subsection (a) shall not apply to any divi-
dend received by a United States shareholder unless 
the amount of the dividend is invested in the United 
States pursuant to a plan describing the expenditures 
to be made with such amount— 
‘‘(A) which, before the dividend is received, 
is approved by the president or chief executive of-
ficer of such shareholder, and
‘‘(B) which is approved by the Board of Di-
rectors (or management committee) of such 
shareholder no later than its first meeting on or 
after the date the dividend is received. 
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section— 
‘‘(1) ELECTION PERIOD.—The term ‘election pe-
riod’ means— 
‘‘(A) if this section applies to the taxpayer’s 
last taxable year beginning before the date of the 
enactment of this section, any 6-month or shorter 
period during such year which is after the date 
of the enactment of this section and which is se-
lected by the taxpayer, and 
‘‘(B) if this section applies to the taxpayer’s 
first taxable year beginning on or after such 
date, the 1st 6 months of such taxable year. 
‘‘(2) APPLICABLE FINANCIAL STATEMENT.—The 
term ‘applicable financial statement’ means the most 
recently audited financial statement (including notes 
and other documents which accompany such state-
ment)— 
‘‘(A) which is certified on or before March 
31, 2003, as being prepared in accordance with 
generally accepted accounting principles, and
‘‘(B) which is used for the purposes of a 
statement or report— 
‘‘(i) to creditors, 
‘‘(ii) to shareholders, or 
‘‘(iii) for any other substantial nontax 
purpose. 
In the case of a corporation required to file a finan-
cial statement with the Securities and Exchange 
Commission, such term means the most recent such 
statement filed on or before March 31, 2003. 
‘‘(3) BASE
PERIOD
YEARS.—The base period 
years are the 3 taxable years— 
‘‘(A) which are among the 5 most recent 
taxable years ending on or before March 31, 
2003, and 
‘‘(B) 
which 
are 
determined 
by 
dis-
regarding— 
‘‘(i) 1 taxable year for which the sum 
of the amounts described in clauses (i), (ii), 
and (iii) of subsection (b)(2)(B) is the larg-
est, and 
‘‘(ii) 1 taxable year for which such 
sum is the smallest.
Rules similar to the rules of subparagraphs (A) and 
(B) of section 41(f)(3) shall apply for purposes of this 
paragraph. 
‘‘(4) COORDINATION WITH DIVIDENDS RECEIVED 
DEDUCTION.—No deduction shall be allowed under 
section 243 or 245 for any dividend for which a de-
duction is allowed under this section. 
‘‘(d) DENIAL OF FOREIGN TAX CREDIT.— 
‘‘(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 the deduct-
ible portion of any dividend or of any amount de-
scribed in subsection (a)(2). No deduction shall be al-
lowed under this chapter for any tax for which credit 
is not allowable by reason of the preceding sentence. 
‘‘(2) DEDUCTIBLE
PORTION.—For purposes of 
paragraph (1), unless the taxpayer otherwise specifies, 
the deductible portion of any dividend is the amount 
which bears the same ratio to the amount of such div-
idend as the amount allowed as a deduction under 
subsection (a) for the taxable year bears to the 
amount described in subsection (b)(2)(A) for such 
year. 
‘‘(e) INCREASE IN TAX ON INCLUDED AMOUNTS NOT 
REDUCED BY CREDITS, ETC.—
‘‘(1) IN GENERAL.—Any tax under this chapter 
by reason of nondeductible CFC dividends shall not be 
treated as tax imposed by this chapter for purposes 
of determining— 
‘‘(A) the amount of any credit allowable 
under this chapter, or 
‘‘(B) the amount of the tax imposed by sec-
tion 55. 
Subparagraph (A) shall not apply to the credit under 
section 53 or to the credit under section 27(a) with 
respect to taxes attributable to such dividends. 
‘‘(2) INCLUSIONS MAY NOT BE OFFSET BY NET 
OPERATING LOSSES.— 
‘‘(A) IN GENERAL.—The taxable income of 
any United States shareholder for any taxable 
year shall in no event be less than the amount 
of nondeductible CFC dividends received during 
such year. 
‘‘(B) COORDINATION WITH SECTION 172.— 
The nondeductible CFC dividends for any tax-
able year shall not be taken into account— 
‘‘(i) in determining under section 172 
the amount of any net operating loss for 
such taxable year, and
‘‘(ii) in determining taxable income for 
such taxable year for purposes of the 2nd 
sentence of section 172(b)(2). 
‘‘(3) NONDEDUCTIBLE
CFC
DIVIDENDS.—For 
purposes of this subsection, the term ‘nondeductible 
CFC dividends’ means the excess of the amount of 
dividends taken into account under subsection (a) 
over the deduction allowed under subsection (a) for 
such dividends. 
‘‘(f) ELECTION.—This section shall apply for the tax-
payer’s first taxable year beginning on or after the date 
of the enactment of this section if the taxpayer elects its 
application for such taxable year. The taxpayer may elect 
to apply this section to the taxpayer’s last taxable year be-
ginning before the date of the enactment of this section in 
lieu of such first taxable year.’’ 
(b) ALTERNATIVE MINIMUM TAX.—Subparagraph (C) 
of section 56(g)(4) is amended by adding at the end the 
following new clause: 
‘‘(v) SPECIAL RULE FOR CERTAIN DIS-
TRIBUTIONS
FROM
CONTROLLED
FOREIGN 
CORPORATIONS.—Clause (i) shall not apply 
to any deduction allowable under section 
965.’’.
(c) CLERICAL AMENDMENT.—The table of sections for 
subpart F of part III of subchapter N of chapter 1 is 
amended by adding at the end the following new item: 
‘‘Sec. 965. Temporary dividends received deduction.’’. 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years ending on or after the 
date of the enactment of this Act. 
Subtitle H—Other Incentive 
Provisions 
SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON AC-
COUNT OF WEATHER-RELATED CONDITIONS. 
(a) RULES FOR REPLACEMENT OF INVOLUNTARILY 
CONVERTED LIVESTOCK.—Subsection (e) of section 1033 
(relating to involuntary conversions) is amended— 
(1) by striking ‘‘CONDITIONS.—For purposes’’ 
and inserting ‘‘CONDITIONS.— 
‘‘(1) IN GENERAL.—For purposes’’, and 
(2) by adding at the end the following new para-
graph: 
‘‘(2) EXTENSION OF REPLACEMENT PERIOD.— 
‘‘(A) IN GENERAL.—In the case of drought, 
flood, or other weather-related conditions de-
scribed in paragraph (1) which result in the 
area being designated as eligible for assistance 
by the Federal Government, subsection (a)(2)(B)
shall be applied with respect to any converted 
property by substituting ‘4 years’ for ‘2 years’. 
‘‘(B) 
FURTHER
EXTENSION
BY
SEC-
RETARY.—The Secretary may extend on a re-
gional basis the period for replacement under 
this section (after the application of subpara-
graph (A)) for such additional time as the Sec-
retary determines appropriate if the weather-re-
lated conditions which resulted in such applica-
tion continue for more than 3 years.’’. 
(b) INCOME INCLUSION RULES.—Subsection (e) of sec-
tion 451 (relating to special rule for proceeds from livestock 
sold on account of drought, flood, or other weather-related 
conditions) is amended by adding at the end the following 
new paragraph: 
‘‘(3) SPECIAL
ELECTION
RULES.—If section 
1033(e)(2) applies to a sale or exchange of livestock 
described in paragraph (1), the election under para-
graph (1) shall be deemed valid if made during the 
replacement period described in such section.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to any taxable year with respect to 
which the due date (without regard to extensions) for the 
return is after December 31, 2002.
SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA-
TIVES WITHOUT REDUCING PATRONAGE DIVI-
DENDS. 
(a) IN GENERAL.—Subsection (a) of section 1388 (re-
lating to patronage dividend defined) is amended by adding 
at the end the following: ‘‘For purposes of paragraph (3), 
net earnings shall not be reduced by amounts paid during 
the year as dividends on capital stock or other proprietary 
capital interests of the organization to the extent that the 
articles of incorporation or bylaws of such organization or 
other contract with patrons provide that such dividends are 
in addition to amounts otherwise payable to patrons which 
are derived from business done with or for patrons during 
the taxable year.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to distributions in taxable years begin-
ning after the date of the enactment of this Act. 
SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 
631(b) TO APPLY TO OUTRIGHT SALES BY 
LANDOWNERS. 
(a) IN GENERAL.—The first sentence of section 631(b) 
(relating to disposal of timber with a retained economic in-
terest) is amended by striking ‘‘retains an economic interest 
in such timber’’ and inserting ‘‘either retains an economic 
interest in such timber or makes an outright sale of such 
timber’’.
(b) CONFORMING AMENDMENTS.— 
(1) The third sentence of section 631(b) is 
amended by striking ‘‘The date of disposal’’ and in-
serting ‘‘In the case of disposal of timber with a re-
tained economic interest, the date of disposal’’. 
(2) The heading for section 631(b) is amended by 
striking ‘‘WITH A RETAINED ECONOMIC INTEREST’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to sales after December 31, 2004. 
SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PART-
NERSHIPS TREATED AS QUALIFYING INCOME 
OF REGULATED INVESTMENT COMPANIES. 
(a) IN GENERAL.—Paragraph (2) of section 851(b) 
(defining regulated investment company) is amended to 
read as follows: 
‘‘(2) at least 90 percent of its gross income is de-
rived from— 
‘‘(A) dividends, interest, payments with re-
spect to securities loans (as defined in section 
512(a)(5)), and gains from the sale or other dis-
position of stock or securities (as defined in sec-
tion 2(a)(36) of the Investment Company Act of 
1940, as amended) or foreign currencies, or other 
income (including but not limited to gains from 
options, futures or forward contracts) derived
with respect to its business of investing in such 
stock, securities, or currencies, and 
‘‘(B) distributions or other income derived 
from an interest in a qualified publicly traded 
partnership (as defined in subsection (h)); and’’. 
(b) SOURCE FLOW-THROUGH RULE NOT TO APPLY.— 
The last sentence of section 851(b) is amended by inserting 
‘‘(other than a qualified publicly traded partnership as de-
fined in subsection (h))’’ after ‘‘derived from a partner-
ship’’. 
(c) LIMITATION ON OWNERSHIP.—Subsection (c) of 
section 851 is amended by redesignating paragraph (5) as 
paragraph (6) and inserting after paragraph (4) the fol-
lowing new paragraph: 
‘‘(5) The term ‘outstanding voting securities of 
such issuer’ shall include the equity securities of a 
qualified publicly traded partnership (as defined in 
subsection (h)).’’. 
(d) DEFINITION
OF QUALIFIED PUBLICLY TRADED 
PARTNERSHIP.—Section 851 is amended by adding at the 
end the following new subsection: 
‘‘(h) QUALIFIED PUBLICLY TRADED PARTNERSHIP.— 
For purposes of this section, the term ‘qualified publicly 
traded partnership’ means a publicly traded partnership 
described in section 7704(b) other than a partnership which
would satisfy the gross income requirements of section 
7704(c)(2) if qualifying income included only income de-
scribed in subsection (b)(2)(A).’’. 
(e) DEFINITION
OF QUALIFYING INCOME.—Section 
7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ and 
inserting ‘‘section 851(b)(2)(A)’’. 
(f) LIMITATION ON COMPOSITION OF ASSETS.—Sub-
paragraph (B) of section 851(b)(3) is amended to read as 
follows: 
‘‘(B) not more than 25 percent of the value 
of its total assets is invested in— 
‘‘(i) the securities (other than Govern-
ment securities or the securities of other reg-
ulated investment companies) of any one 
issuer, 
‘‘(ii) the securities (other than the secu-
rities of other regulated investment compa-
nies) of two or more issuers which the tax-
payer controls and which are determined, 
under regulations prescribed by the Sec-
retary, to be engaged in the same or similar 
trades or businesses or related trades or 
businesses, or
‘‘(iii) the securities of one or more 
qualified publicly traded partnerships (as 
defined in subsection (h)).’’. 
(g) APPLICATION OF SPECIAL PASSIVE ACTIVITY RULE 
TO REGULATED INVESTMENT COMPANIES.—Subsection (k) 
of section 469 (relating to separate application of section 
in case of publicly traded partnerships) is amended by add-
ing at the end the following new paragraph: 
‘‘(4) APPLICATION TO REGULATED INVESTMENT 
COMPANIES.—For purposes of this section, a regulated 
investment company (as defined in section 851) hold-
ing an interest in a qualified publicly traded partner-
ship (as defined in section 851(h)) shall be treated as 
a taxpayer described in subsection (a)(2) with respect 
to items attributable to such interest.’’. 
(h) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE IN-
VESTMENT TRUSTS. 
(a) EXPANSION OF STRAIGHT DEBT SAFE HARBOR.— 
Section 856 (defining real estate investment trust) is 
amended— 
(1) in subsection (c) by striking paragraph (7), 
and
(2) by adding at the end the following new sub-
section: 
‘‘(m) SAFE
HARBOR
IN
APPLYING
SUBSECTION 
(c)(4).— 
‘‘(1) IN GENERAL.—In applying subclause (III) 
of subsection (c)(4)(B)(iii), except as otherwise deter-
mined by the Secretary in regulations, the following 
shall not be considered securities held by the trust: 
‘‘(A) Straight debt securities of an issuer 
which meet the requirements of paragraph (2). 
‘‘(B) Any loan to an individual or an es-
tate. 
‘‘(C) Any section 467 rental agreement (as 
defined in section 467(d)), other than with a per-
son described in subsection (d)(2)(B). 
‘‘(D) Any obligation to pay rents from real 
property (as defined in subsection (d)(1)). 
‘‘(E) Any security issued by a State or any 
political subdivision thereof, the District of Co-
lumbia, a foreign government or any political 
subdivision thereof, or the Commonwealth of 
Puerto Rico, but only if the determination of 
any payment received or accrued under such se-
curity does not depend in whole or in part on 
the profits of any entity not described in this
subparagraph or payments on any obligation 
issued by such an entity. 
‘‘(F) Any security issued by a real estate 
investment trust. 
‘‘(G) Any other arrangement as determined 
by the Secretary. 
‘‘(2) SPECIAL
RULES
RELATING
TO
STRAIGHT 
DEBT SECURITIES.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (1)(A), securities meet the requirements of 
this paragraph if such securities are straight 
debt, as defined in section 1361(c)(5) (without 
regard to subparagraph (B)(iii) thereof). 
‘‘(B) SPECIAL RULES RELATING TO CERTAIN 
CONTINGENCIES.—For purposes of subparagraph 
(A), any interest or principal shall not be treat-
ed as failing to satisfy section 1361(c)(5)(B)(i) 
solely by reason of the fact that— 
‘‘(i) the time of payment of such inter-
est or principal is subject to a contingency, 
but only if— 
‘‘(I) any such contingency does 
not have the effect of changing the ef-
fective yield to maturity, as deter-
mined under section 1272, other than a
change in the annual yield to maturity 
which does not exceed the greater of 1⁄4 
of 1 percent or 5 percent of the annual 
yield to maturity, or 
‘‘(II) neither the aggregate issue price 
nor the aggregate face amount of the issuer’s 
debt instruments held by the trust exceeds 
$1,000,000 and not more than 12 months of 
unaccrued interest can be required to be 
prepaid thereunder, or 
‘‘(ii) the time or amount of payment is 
subject to a contingency upon a default or 
the exercise of a prepayment right by the 
issuer of the debt, but only if such contin-
gency is consistent with customary commer-
cial practice. 
‘‘(C) SPECIAL
RULES
RELATING
TO
COR-
PORATE OR PARTNERSHIP ISSUERS.—In the case 
of an issuer which is a corporation or a partner-
ship, securities that otherwise would be described 
in paragraph (1)(A) shall be considered not to be 
so described if the trust holding such securities 
and any of its controlled taxable REIT subsidi-
aries (as defined in subsection (d)(8)(A)(iv)) 
hold any securities of the issuer which—
‘‘(i) are not described in paragraph (1) 
(prior to the application of this subpara-
graph), and 
‘‘(ii) have an aggregate value greater 
than 1 percent of the issuer’s outstanding 
securities determined without regard to 
paragraph (3)(A)(i). 
‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP 
SECURITIES.— 
‘‘(A) IN GENERAL.—For purposes of apply-
ing subclause (III) of subsection (c)(4)(B)(iii)— 
‘‘(i) a trust’s interest as a partner in 
a partnership (as defined in section 
7701(a)(2)) shall not be considered a secu-
rity, and 
‘‘(ii) the trust shall be deemed to own 
its proportionate share of each of the assets 
of the partnership. 
‘‘(B) DETERMINATION OF TRUST’S INTER-
EST IN PARTNERSHIP ASSETS.—For purposes of 
subparagraph (A), with respect to any taxable 
year beginning after the date of the enactment of 
this subparagraph— 
‘‘(i) the trust’s interest in the partner-
ship assets shall be the trust’s proportionate
interest in any securities issued by the part-
nership (determined without regard to sub-
paragraph (A)(i) and paragraph (4), but 
not including securities described in para-
graph (1)), and 
‘‘(ii) the value of any debt instrument 
shall be the adjusted issue price thereof, as 
defined in section 1272(a)(4). 
‘‘(4) CERTAIN PARTNERSHIP DEBT INSTRUMENTS 
NOT TREATED AS A SECURITY.—For purposes of ap-
plying subclause (III) of subsection (c)(4)(B)(iii)— 
‘‘(A) any debt instrument issued by a part-
nership and not described in paragraph (1) shall 
not be considered a security to the extent of the 
trust’s interest as a partner in the partnership, 
and 
‘‘(B) any debt instrument issued by a part-
nership and not described in paragraph (1) shall 
not be considered a security if at least 75 percent 
of the partnership’s gross income (excluding 
gross income from prohibited transactions) is de-
rived from sources referred to in subsection 
(c)(3). 
‘‘(5) SECRETARIAL GUIDANCE.—The Secretary is 
authorized to provide guidance (including through the
issuance of a written determination, as defined in sec-
tion 6110(b)) that an arrangement shall not be con-
sidered a security held by the trust for purposes of ap-
plying subclause (III) of subsection (c)(4)(B)(iii) not-
withstanding that such arrangement otherwise could 
be considered a security under subparagraph (F) of 
subsection (c)(5).’’. 
(b) CLARIFICATION
OF APPLICATION
OF LIMITED 
RENTAL
EXCEPTION.—Subparagraph 
(A) 
of 
section 
856(d)(8) (relating to special rules for taxable REIT sub-
sidiaries) is amended to read as follows: 
‘‘(A) LIMITED RENTAL EXCEPTION.— 
‘‘(i) IN
GENERAL.—The requirements 
of this subparagraph are met with respect 
to any property if at least 90 percent of the 
leased space of the property is rented to per-
sons other than taxable REIT subsidiaries 
of such trust and other than persons de-
scribed in paragraph (2)(B). 
‘‘(ii) RENTS MUST BE SUBSTANTIALLY 
COMPARABLE.—Clause (i) shall apply only 
to the extent that the amounts paid to the 
trust as rents from real property (as defined 
in paragraph (1) without regard to para-
graph (2)(B)) from such property are sub-
stantially comparable to such rents paid by 
the other tenants of the trust’s property for 
comparable space. 
‘‘(iii) TIMES FOR TESTING RENT COM-
PARABILITY.—The 
substantial 
com-
parability requirement of clause (ii) shall be 
treated as met with respect to a lease to a 
taxable REIT subsidiary of the trust if such 
requirement is met under the terms of the 
lease— 
‘‘(I) at the time such lease is en-
tered into, 
‘‘(II) at the time of each extension 
of the lease, including a failure to exer-
cise a right to terminate, and 
‘‘(III) at the time of any modi-
fication of the lease between the trust 
and the taxable REIT subsidiary if the 
rent under such lease is effectively in-
creased pursuant to such modification. 
With respect to subclause (III), if the tax-
able REIT subsidiary of the trust is a con-
trolled taxable REIT subsidiary of the trust, 
the term ‘rents from real property’ shall not 
in any event include rent under such lease
to the extent of the increase in such rent on 
account of such modification. 
‘‘(iv) 
CONTROLLED
TAXABLE
REIT 
SUBSIDIARY.—For purposes of clause (iii), 
the term ‘controlled taxable REIT sub-
sidiary’ means, with respect to any real es-
tate investment trust, any taxable REIT 
subsidiary of such trust if such trust owns 
directly or indirectly— 
‘‘(I) stock possessing more than 50 
percent of the total voting power of the 
outstanding stock of such subsidiary, 
or 
‘‘(II) stock having a value of more 
than 50 percent of the total value of the 
outstanding stock of such subsidiary. 
‘‘(v) 
CONTINUING
QUALIFICATION 
BASED ON THIRD PARTY ACTIONS.—If the 
requirements of clause (i) are met at a time 
referred to in clause (iii), such requirements 
shall continue to be treated as met so long 
as there is no increase in the space leased 
to any taxable REIT subsidiary of such 
trust or to any person described in para-
graph (2)(B).
‘‘(vi) CORRECTION PERIOD.—If there is 
an increase referred to in clause (v) during 
any calendar quarter with respect to any 
property, the requirements of clause (iii) 
shall be treated as met during the quarter 
and the succeeding quarter if such require-
ments are met at the close of such suc-
ceeding quarter.’’. 
(c) DELETION
OF CUSTOMARY SERVICES EXCEP-
TION.—Subparagraph (B) of section 857(b)(7) (relating to 
redetermined rents) is amended by striking clause (ii) and 
by redesignating clauses (iii), (iv), (v), (vi), and (vii) as 
clauses (ii), (iii), (iv), (v), and (vi), respectively. 
(d) CONFORMITY WITH GENERAL HEDGING DEFINI-
TION.—Subparagraph (G) of section 856(c)(5) (relating to 
treatment of certain hedging instruments) is amended to 
read as follows: 
‘‘(G) TREATMENT OF CERTAIN HEDGING IN-
STRUMENTS.—Except to the extent provided by 
regulations, any income of a real estate invest-
ment trust from a hedging transaction (as de-
fined 
in 
clause 
(ii) 
or 
(iii) 
of 
section 
1221(b)(2)(A)) which is clearly identified pursu-
ant to section 1221(a)(7), including gain from 
the sale or disposition of such a transaction,
shall not constitute gross income under para-
graph (2) to the extent that the transaction 
hedges any indebtedness incurred or to be in-
curred by the trust to acquire or carry real estate 
assets.’’. 
(e) CONFORMITY
WITH
REGULATED
INVESTMENT 
COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re-
lating to imposition of tax in case of failure to meet certain 
requirements) is amended by striking ‘‘90 percent’’ and in-
serting ‘‘95 percent’’. 
(f) SAVINGS PROVISIONS.— 
(1) RULES OF APPLICATION FOR FAILURE TO 
SATISFY SECTION 856(c)(4).—Section 856(c) (relating 
to definition of real estate investment trust) is amend-
ed by inserting after paragraph (6) the following new 
paragraph: 
‘‘(7) RULES OF APPLICATION FOR FAILURE TO 
SATISFY PARAGRAPH (4).— 
‘‘(A) DE MINIMIS FAILURE.—A corporation, 
trust, or association that fails to meet the re-
quirements of paragraph (4)(B)(iii) for a par-
ticular quarter shall nevertheless be considered to 
have satisfied the requirements of such para-
graph for such quarter if—
‘‘(i) such failure is due to the owner-
ship of assets the total value of which does 
not exceed the lesser of— 
‘‘(I) 1 percent of the total value of 
the trust’s assets at the end of the quar-
ter for which such measurement is 
done, and 
‘‘(II) $10,000,000, and 
‘‘(ii)(I) the corporation, trust, or asso-
ciation, following the identification of such 
failure, disposes of assets in order to meet 
the requirements of such paragraph within 
6 months after the last day of the quarter 
in which the corporation, trust or associa-
tion’s identification of the failure to satisfy 
the requirements of such paragraph oc-
curred or such other time period prescribed 
by the Secretary and in the manner pre-
scribed by the Secretary, or 
‘‘(II) the requirements of such para-
graph are otherwise met within the time pe-
riod specified in subclause (I). 
‘‘(B) FAILURES
EXCEEDING
DE
MINIMIS 
AMOUNT.—A corporation, trust, or association 
that fails to meet the requirements of paragraph
(4) for a particular quarter shall nevertheless be 
considered to have satisfied the requirements of 
such paragraph for such quarter if— 
‘‘(i) such failure involves the ownership 
of assets the total value of which exceeds the 
de minimis standard described in subpara-
graph (A)(i) at the end of the quarter for 
which such measurement is done, 
‘‘(ii) following the corporation, trust, 
or association’s identification of the failure 
to satisfy the requirements of such para-
graph for a particular quarter, a descrip-
tion of each asset that causes the corpora-
tion, trust, or association to fail to satisfy 
the requirements of such paragraph at the 
close of such quarter of any taxable year is 
set forth in a schedule for such quarter filed 
in accordance with regulations prescribed 
by the Secretary, 
‘‘(iii) the failure to meet the require-
ments of such paragraph for a particular 
quarter is due to reasonable cause and not 
due to willful neglect,
‘‘(iv) the corporation, trust, or associa-
tion pays a tax computed under subpara-
graph (C), and 
‘‘(v)(I) the corporation, trust, or asso-
ciation disposes of the assets set forth on the 
schedule specified in clause (ii) within 6 
months after the last day of the quarter in 
which the corporation, trust or association’s 
identification of the failure to satisfy the re-
quirements of such paragraph occurred or 
such other time period prescribed by the 
Secretary and in the manner prescribed by 
the Secretary, or 
‘‘(II) the requirements of such para-
graph are otherwise met within the time pe-
riod specified in subclause (I). 
‘‘(C) TAX.—For purposes of subparagraph 
(B)(iv)— 
‘‘(i) TAX IMPOSED.—If a corporation, 
trust, or association elects the application of 
this subparagraph, there is hereby imposed 
a tax on the failure described in subpara-
graph (B) of such corporation, trust, or as-
sociation. Such tax shall be paid by the cor-
poration, trust, or association.
‘‘(ii) TAX COMPUTED.—The amount of 
the tax imposed by clause (i) shall be the 
greater of— 
‘‘(I) $50,000, or 
‘‘(II) 
the 
amount 
determined 
(pursuant to regulations promulgated 
by the Secretary) by multiplying the 
net income generated by the assets de-
scribed in the schedule specified in sub-
paragraph (B)(ii) for the period speci-
fied in clause (iii) by the highest rate 
of tax specified in section 11. 
‘‘(iii) PERIOD.—For purposes of clause 
(ii)(II), the period described in this clause 
is the period beginning on the first date 
that the failure to satisfy the requirements 
of such paragraph (4) occurs as a result of 
the ownership of such assets and ending on 
the earlier of the date on which the trust 
disposes of such assets or the end of the first 
quarter when there is no longer a failure to 
satisfy such paragraph (4). 
‘‘(iv) ADMINISTRATIVE
PROVISIONS.— 
For purposes of subtitle F, the taxes im-
posed by this subparagraph shall be treated
as excise taxes with respect to which the de-
ficiency procedures of such subtitle apply.’’. 
(2) MODIFICATION OF RULES OF APPLICATION 
FOR
FAILURE
TO
SATISFY
SECTIONS
856(c)(2) OR 
856(c)(3).—Paragraph (6) of section 856(c) (relating 
to definition of real estate investment trust) is amend-
ed by striking subparagraphs (A) and (B), by redesig-
nating subparagraph (C) as subparagraph (B), and 
by inserting before subparagraph (B) (as so redesig-
nated) the following new subparagraph: 
‘‘(A) following the corporation, trust, or as-
sociation’s identification of the failure to meet 
the requirements of paragraph (2) or (3), or of 
both such paragraphs, for any taxable year, a 
description of each item of its gross income de-
scribed in such paragraphs is set forth in a 
schedule for such taxable year filed in accordance 
with regulations prescribed by the Secretary, 
and’’. 
(3) REASONABLE CAUSE EXCEPTION TO LOSS OF 
REIT
STATUS
IF
FAILURE
TO
SATISFY
REQUIRE-
MENTS.—Subsection (g) of section 856 (relating to 
termination of election) is amended—
(A) in paragraph (1) by inserting before the 
period at the end of the first sentence the fol-
lowing: ‘‘unless paragraph (5) applies’’, and 
(B) by adding at the end the following new 
paragraph: 
‘‘(5) ENTITIES
TO
WHICH
PARAGRAPH
AP-
PLIES.—This paragraph applies to a corporation, 
trust, or association— 
‘‘(A) which is not a real estate investment 
trust to which the provisions of this part apply 
for the taxable year due to one or more failures 
to comply with one or more of the provisions of 
this part (other than subsection (c)(6) or (c)(7) 
of section 856), 
‘‘(B) such failures are due to reasonable 
cause and not due to willful neglect, and 
‘‘(C) if such corporation, trust, or associa-
tion pays (as prescribed by the Secretary in reg-
ulations and in the same manner as tax) a pen-
alty of $50,000 for each failure to satisfy a pro-
vision of this part due to reasonable cause and 
not willful neglect.’’. 
(4) DEDUCTION OF TAX PAID FROM AMOUNT RE-
QUIRED TO BE DISTRIBUTED.—Subparagraph (E) of 
section 857(b)(2) is amended by striking ‘‘(7)’’ and
inserting 
‘‘(7) 
of 
this 
subsection, 
section 
856(c)(7)(B)(iii), and section 856(g)(1).’’. 
(5) EXPANSION OF DEFICIENCY DIVIDEND PRO-
CEDURE.—Subsection (e) of section 860 is amended 
by striking ‘‘or’’ at the end of paragraph (2), by strik-
ing the period at the end of paragraph (3) and insert-
ing ‘‘; or’’, and by adding at the end the following 
new paragraph: 
‘‘(4) a statement by the taxpayer attached to its 
amendment or supplement to a return of tax for the 
relevant tax year.’’. 
(g) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to taxable years beginning after December 31, 
2000. 
(2) 
SUBSECTIONS
(c) 
THROUGH
(f).—The 
amendments made by subsections (c), (d), (e), and (f) 
shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES. 
(a) TREATMENT OF CERTAIN DIVIDENDS.— 
(1) NONRESIDENT ALIEN INDIVIDUALS.—Section 
871 (relating to tax on nonresident alien individuals)
is amended by redesignating subsection (k) as sub-
section (l) and by inserting after subsection (j) the fol-
lowing new subsection: 
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES.— 
‘‘(1) INTEREST-RELATED DIVIDENDS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed under 
paragraph (1)(A) of subsection (a) on any inter-
est-related dividend received from a regulated in-
vestment company. 
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A) 
shall not apply— 
‘‘(i) to any interest-related dividend re-
ceived from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than 
interest described in subparagraph (E) (i) 
or (iii)) received by such company on in-
debtedness issued by such person or by any 
corporation or partnership with respect to 
which such person is a 10-percent share-
holder, 
‘‘(ii) to any interest-related dividend 
with respect to stock of a regulated invest-
ment company unless the person who would 
otherwise be required to deduct and with-
hold tax from such dividend under chapter 
3 receives a statement (which meets require-
ments similar to the requirements of sub-
section (h)(5)) that the beneficial owner of 
such stock is not a United States person, 
and 
‘‘(iii) to any interest-related dividend 
paid to any person within a foreign coun-
try (or any interest-related dividend pay-
ment addressed to, or for the account of, 
persons within such foreign country) during 
any period described in subsection (h)(6) 
with respect to such country. 
Clause (iii) shall not apply to any dividend with 
respect to any stock which was acquired on or 
before the date of the publication of the Sec-
retary’s determination under subsection (h)(6). 
‘‘(C) INTEREST-RELATED
DIVIDEND.—For 
purposes of this paragraph, an interest-related 
dividend is any dividend (or part thereof) which 
is designated by the regulated investment com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later
than 60 days after the close of its taxable year. 
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year de-
scribed in section 855) is greater than the quali-
fied net interest income of the company for such 
taxable year, the portion of each distribution 
which shall be an interest-related dividend shall 
be only that portion of the amounts so designated 
which such qualified net interest income bears to 
the aggregate amount so designated. 
‘‘(D) QUALIFIED NET INTEREST INCOME.— 
For purposes of subparagraph (C), the term 
‘qualified net interest income’ means the quali-
fied interest income of the regulated investment 
company reduced by the deductions properly al-
locable to such income. 
‘‘(E) QUALIFIED
INTEREST
INCOME.—For 
purposes of subparagraph (D), the term ‘quali-
fied interest income’ means the sum of the fol-
lowing amounts derived by the regulated invest-
ment company from sources within the United 
States:
‘‘(i) Any amount includible in gross 
income as original issue discount (within 
the meaning of section 1273) on an obliga-
tion payable 183 days or less from the date 
of original issue (without regard to the pe-
riod held by the company). 
‘‘(ii) Any interest includible in gross 
income (including amounts recognized as 
ordinary income in respect of original issue 
discount or market discount or acquisition 
discount under part V of subchapter P and 
such other amounts as regulations may pro-
vide) on an obligation which is in registered 
form; except that this clause shall not apply 
to— 
‘‘(I) any interest on an obligation 
issued by a corporation or partnership 
if the regulated investment company is 
a 10-percent shareholder in such cor-
poration or partnership, and 
‘‘(II) any interest which is treated 
as not being portfolio interest under 
the rules of subsection (h)(4). 
‘‘(iii) Any interest referred to in sub-
section (i)(2)(A) (without regard to the
trade or business of the regulated investment 
company). 
‘‘(iv) Any interest-related dividend in-
cludable in gross income with respect to 
stock of another regulated investment com-
pany. 
‘‘(F) 
10-PERCENT
SHAREHOLDER.—For 
purposes of this paragraph, the term ‘10-percent 
shareholder’ has the meaning given such term by 
subsection (h)(3)(B). 
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed under 
paragraph (1)(A) of subsection (a) on any short- 
term capital gain dividend received from a regu-
lated investment company. 
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE 
UNDER SUBSECTION (a)(2).—Subparagraph (A) 
shall not apply in the case of any nonresident 
alien individual subject to tax under subsection 
(a)(2). 
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a short- 
term capital gain dividend is any dividend (or 
part thereof) which is designated by the regu-
lated investment company as a short-term cap-
ital gain dividend in a written notice mailed to 
its shareholders not later than 60 days after the 
close of its taxable year. If the aggregate amount 
so designated with respect to a taxable year of 
the company (including amounts so designated 
with respect to dividends paid after the close of 
the taxable year described in section 855) is 
greater than the qualified short-term gain of the 
company for such taxable year, the portion of 
each distribution which shall be a short-term 
capital gain dividend shall be only that portion 
of the amounts so designated which such quali-
fied short-term gain bears to the aggregate 
amount so designated. 
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the net 
short-term capital gain of the regulated invest-
ment company for the taxable year over the net 
long-term capital loss (if any) of such company 
for such taxable year. For purposes of this sub-
paragraph— 
‘‘(i) the net short-term capital gain of 
the regulated investment company shall be
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to stock of another regu-
lated investment company as a short-term 
capital gain, and 
‘‘(ii) the excess of the net short-term 
capital gain for a taxable year over the net 
long-term capital loss for a taxable year (to 
which an election under section 4982(e)(4) 
does not apply) shall be determined without 
regard to any net capital loss or net short- 
term capital loss attributable to trans-
actions after October 31 of such year, and 
any such net capital loss or net short-term 
capital loss shall be treated as arising on 
the 1st day of the next taxable year. 
To the extent provided in regulations, clause (ii) 
shall apply also for purposes of computing the 
taxable income of the regulated investment com-
pany.’’ 
(2) FOREIGN CORPORATIONS.—Section 881 (re-
lating to tax on income of foreign corporations not 
connected with United States business) is amended by 
redesignating subsection (e) as subsection (f) and by
inserting after subsection (d) the following new sub-
section: 
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS OF 
REGULATED INVESTMENT COMPANIES.— 
‘‘(1) INTEREST-RELATED DIVIDENDS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed under 
paragraph (1) of subsection (a) on any interest- 
related dividend (as defined in section 871(k)(1)) 
received from a regulated investment company. 
‘‘(B) EXCEPTION.—Subparagraph (A) shall 
not apply— 
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and 
‘‘(ii) to any interest-related dividend 
received by a controlled foreign corporation 
(within the meaning of section 957(a)) to 
the extent such dividend is attributable to 
interest received by the regulated investment 
company from a person who is a related 
person (within the meaning of section 
864(d)(4)) with respect to such controlled 
foreign corporation. 
‘‘(C) TREATMENT OF DIVIDENDS RECEIVED 
BY CONTROLLED FOREIGN CORPORATIONS.—The
rules of subsection (c)(5)(A) shall apply to any 
interest-related dividend received by a controlled 
foreign corporation (within the meaning of sec-
tion 957(a)) to the extent such dividend is attrib-
utable to interest received by the regulated in-
vestment company which is described in clause 
(ii) of section 871(k)(1)(E) (and not described in 
clause (i) or (iii) of such section). 
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.— 
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend 
(as defined in section 871(k)(2)) received from a regu-
lated investment company.’’. 
(3) WITHHOLDING TAXES.— 
(A) Section 1441(c) (relating to exceptions) 
is amended by adding at the end the following 
new paragraph: 
‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM REG-
ULATED INVESTMENT COMPANIES.— 
‘‘(A) IN
GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the 
tax imposed by section 871(a)(1)(A) by reason of 
section 871(k).
‘‘(B) SPECIAL RULE.—For purposes of sub-
paragraph (A), clause (i) of section 871(k)(1)(B) 
shall not apply to any dividend unless the regu-
lated investment company knows that such divi-
dend is a dividend referred to in such clause. A 
similar rule shall apply with respect to the ex-
ception contained in section 871(k)(2)(B).’’. 
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is amend-
ed— 
(i) by striking ‘‘and the reference in 
section 1441(c)(10)’’ and inserting ‘‘the ref-
erence in section 1441(c)(10)’’, and 
(ii) by inserting before the period at 
the end the following: ‘‘, and the references 
in section 1441(c)(12) to sections 871(a) 
and 871(k) shall be treated as referring to 
sections 881(a) and 881(e) (except that for 
purposes of applying subparagraph (A) of 
section 1441(c)(12), as so modified, clause 
(ii) of section 881(e)(1)(B) shall not apply 
to any dividend unless the regulated invest-
ment company knows that such dividend is 
a dividend referred to in such clause)’’.
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN REGULATED INVESTMENT COMPANIES.—Section 2105 
(relating to property without the United States for estate 
tax purposes) is amended by adding at the end the following 
new subsection: 
‘‘(d) STOCK IN A RIC.— 
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company (as 
defined in section 851) owned by a nonresident not 
a citizen of the United States shall not be deemed 
property within the United States in the proportion 
that, at the end of the quarter of such investment 
company’s taxable year immediately preceding a de-
cedent’s date of death (or at such other time as the 
Secretary may designate in regulations), the assets of 
the investment company that were qualifying assets 
with respect to the decedent bore to the total assets of 
the investment company. 
‘‘(2) QUALIFYING ASSETS.—For purposes of this 
subsection, qualifying assets with respect to a dece-
dent are assets that, if owned directly by the decedent, 
would have been— 
‘‘(A) amounts, deposits, or debt obligations 
described in subsection (b) of this section,
‘‘(B) debt obligations described in the last 
sentence of section 2104(c), or 
‘‘(C) other property not within the United 
States.’’ 
(c) TREATMENT OF REGULATED INVESTMENT COMPA-
NIES UNDER SECTION 897.— 
(1) Paragraph (1) of section 897(h) is amended 
by striking ‘‘REIT’’ each place it appears and insert-
ing ‘‘qualified investment entity’’. 
(2) Paragraphs (2) and (3) of section 897(h) are 
amended to read as follows: 
‘‘(2) SALE
OF
STOCK
IN
DOMESTICALLY
CON-
TROLLED
ENTITY
NOT
TAXED.—The term ‘United 
States real property interest’ does not include any in-
terest in a domestically controlled qualified invest-
ment entity. 
‘‘(3) DISTRIBUTIONS
BY
DOMESTICALLY
CON-
TROLLED QUALIFIED INVESTMENT ENTITIES.—In the 
case of a domestically controlled qualified investment 
entity, rules similar to the rules of subsection (d) 
shall apply to the foreign ownership percentage of any 
gain.’’ 
(3) Subparagraphs (A) and (B) of section 
897(h)(4) are amended to read as follows:
‘‘(A) QUALIFIED INVESTMENT ENTITY.—The 
term ‘qualified investment entity’ means any 
real estate investment trust and any regulated 
investment company. 
‘‘(B) DOMESTICALLY
CONTROLLED.—The 
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock 
was held directly or indirectly by foreign per-
sons.’’ 
(4) Subparagraphs (C) and (D) of section 
897(h)(4) are each amended by striking ‘‘REIT’’ and 
inserting ‘‘qualified investment entity’’. 
(5) The subsection heading for subsection (h) of 
section 897 is amended by striking ‘‘REITS’’ and in-
serting ‘‘CERTAIN INVESTMENT ENTITIES’’. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as otherwise provided 
in this subsection, the amendments made by this sec-
tion shall apply to dividends with respect to taxable 
years of regulated investment companies beginning 
after December 31, 2004.
(2) ESTATE TAX TREATMENT.—The amendment 
made by subsection (b) shall apply to estates of dece-
dents dying after December 31, 2004. 
(3) CERTAIN OTHER PROVISIONS.—The amend-
ments made by subsection (c) (other than paragraph 
(1) thereof) shall take effect after December 31, 2004. 
SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS. 
(a) IN GENERAL.—Subsection (g) of section 468B (re-
lating 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, settle-
ment fund, or similar fund is not subject to current 
income tax. The Secretary shall prescribe regulations 
providing for the taxation of any such account or 
fund whether as a grantor trust or otherwise. 
‘‘(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—
100 
‘‘(A) it is established pursuant to a consent 
decree entered by a judge of a United States Dis-
trict 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 satisfying 
one or more claims asserting liability under the 
Comprehensive Environmental Response, Com-
pensation, and Liability Act of 1980, 
‘‘(C) the authority and control over the ex-
penditure of funds therein (including the expend-
iture of contributions thereto and any net earn-
ings thereon) is with such government entity, 
and 
‘‘(D) upon termination, any remaining 
funds will be disbursed to such government enti-
ty for use in accordance with applicable law. 
For purposes of this paragraph, the term ‘government 
entity’ means the United States, any State or polit-
ical subdivision thereof, the District of Columbia, any 
possession of the United States, and any agency or 
instrumentality of any of the foregoing.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004.
101 
SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALI-
FYING FOR ORPHAN DRUG CREDIT. 
(a) IN GENERAL.—Paragraph (2) of section 45C(b) 
(relating to qualified clinical testing expenses) is amended 
by adding at the end the following new subparagraph: 
‘‘(C) TREATMENT
OF
CERTAIN
EXPENSES 
INCURRED BEFORE DESIGNATION.—For purposes 
of subparagraph (A)(ii)(I), if a drug is des-
ignated under section 526 of the Federal Food, 
Drug, and Cosmetic Act not later than the due 
date (including extensions) for filing the return 
of tax under this subtitle for the taxable year in 
which the application for such designation of 
such drug was filed, such drug shall be treated 
as having been designated on the date that such 
application was filed.’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to expenses incurred after the date 
of the enactment of this Act. 
SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 
BOWS AND ARROWS. 
(a) BOWS.—Paragraph (1) of section 4161(b) (relating 
to bows) is amended to read as follows: 
‘‘(1) BOWS.— 
‘‘(A) IN
GENERAL.—There is hereby im-
posed on the sale by the manufacturer, producer,
102 
or importer of any bow which has a peak draw 
weight of 30 pounds or more, a tax equal to 11 
percent of the price for which so sold. 
‘‘(B) ARCHERY EQUIPMENT.—There is here-
by imposed on the sale by the manufacturer, pro-
ducer, or importer— 
‘‘(i) of any part or accessory suitable 
for inclusion in or attachment to a bow de-
scribed in subparagraph (A), and 
‘‘(ii) of any quiver or broadhead suit-
able for use with an arrow described in 
paragraph (2), 
a tax equal to 11 percent of the price for which 
so sold.’’. 
(b) ARROWS.—Subsection (b) of section 4161 (relating 
to bows and arrows, etc.) is amended by redesignating para-
graph (3) as paragraph (4) and inserting after paragraph 
(2) the following: 
‘‘(3) ARROWS.— 
‘‘(A) IN
GENERAL.—There is hereby im-
posed on the sale by the manufacturer, producer, 
or importer of any arrow, a tax equal to 12 per-
cent of the price for which so sold. 
‘‘(B) EXCEPTION.—In the case of any arrow 
of which the shaft or any other component has