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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 
provide) on an obligation which is in reg-
istered 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 
corporation or partnership, and 
‘‘(II) any interest which is treat-
ed 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 invest-
ment 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-per-
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cent 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 regulated 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 reg-
ulated 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 des-
ignated with respect to dividends paid after the 
close of the taxable year described in section
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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 qualified 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 in-
vestment company for the taxable year over the 
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this 
subparagraph—
‘‘(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
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which an election under section 4982(e)(4) 
does not apply) shall be determined with-
out regard to any net capital loss or net 
short-term capital loss attributable to 
transactions 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 
company.’’
(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 
subsection: 
‘‘(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
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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 invest-
ment company from a person who is a re-
lated person (within the meaning of section 
864(d)(4)) with respect to such controlled 
foreign corporation. 
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall 
apply 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 which is de-
scribed in clause (ii) of section 871(k)(1)(E)
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(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 
regulated investment company.’’. 
(3) WITHHOLDING TAXES.—
(A) Section 1441(c) (relating to excep-
tions) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM 
REGULATED 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 
subparagraph 
(A), 
clause 
(i) 
of 
section 
871(k)(1)(B) shall not apply to any dividend 
unless the regulated investment company knows 
that such dividend is a dividend referred to in 
such clause. A similar rule shall apply with re-
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spect to the exception contained in section 
871(k)(2)(B).’’. 
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is 
amended—
(i) by striking ‘‘and the reference in 
section 1441(c)(10)’’ and inserting ‘‘the 
reference 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.—
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‘‘(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 in-
vestment company’s taxable year immediately pre-
ceding a decedent’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 
decedent are assets that, if owned directly by the de-
cedent, 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 COM-
PANIES UNDER SECTION 897.—
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(1) Paragraph (1) of section 897(h) is amended 
by striking ‘‘REIT’’ each place it appears and in-
serting ‘‘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 
interest 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 invest-
ment 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 regu-
lated investment company. 
‘‘(B) DOMESTICALLY
CONTROLLED.—The 
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
•HR 4520 IH1S 
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 
inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to dividends with respect to 
taxable years of regulated investment companies be-
ginning after December 31, 2004. 
(2) ESTATE
TAX
TREATMENT.—The amend-
ment made by subsection (b) shall apply to estates 
of decedents 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.
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SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS. 
(a) IN GENERAL.—Subsection (g) of section 468B 
(relating to clarification of taxation of certain funds) is 
amended to read as follows: 
‘‘(g) CLARIFICATION
OF TAXATION
OF CERTAIN 
FUNDS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), nothing in any provision of law shall be 
construed as providing that an escrow account, set-
tlement fund, or similar fund is not subject to cur-
rent income tax. The Secretary shall prescribe regu-
lations providing for the taxation of any such ac-
count or fund whether as a grantor trust or other-
wise. 
‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET-
TLEMENT FUNDS.—An escrow account, settlement 
fund, or similar fund shall be treated as beneficially 
owned by the United States and shall be exempt 
from taxation under this subtitle if—
‘‘(A) it is established pursuant to a con-
sent decree entered by a judge of a United 
States District Court, 
‘‘(B) it is created for the receipt of settle-
ment payments as directed by a government en-
tity for the sole purpose of resolving or satis-
fying one or more claims asserting liability
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•HR 4520 IH1S 
under the Comprehensive Environmental Re-
sponse, Compensation, and Liability Act of 
1980, 
‘‘(C) the authority and control over the ex-
penditure of funds therein (including the ex-
penditure of contributions thereto and any net 
earnings thereon) is with such government enti-
ty, and 
‘‘(D) upon termination, any remaining 
funds will be disbursed upon instructions by 
such government entity in accordance with ap-
plicable law. 
For purposes of this paragraph, the term ‘govern-
ment entity’ means the United States, any State or 
political subdivision thereof, the District of Colum-
bia, any possession of the United States, and any 
agency or instrumentality of any of the foregoing.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
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:
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•HR 4520 IH1S 
‘‘(C) TREATMENT OF CERTAIN EXPENSES 
INCURRED
BEFORE
DESIGNATION.—For pur-
poses of subparagraph (A)(ii)(I), if a drug is 
designated 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 tax-
able year in which the application for such des-
ignation 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 
subsection (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) (relat-
ing to bows) is amended to read as follows: 
‘‘(1) BOWS.—
‘‘(A) IN GENERAL.—There is hereby im-
posed on the sale by the manufacturer, pro-
ducer, 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.
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•HR 4520 IH1S 
‘‘(B) ARCHERY
EQUIPMENT.—There is 
hereby imposed on the sale by the manufac-
turer, producer, 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 (relat-
ing to bows and arrows, etc.) is amended by redesignating 
paragraph (3) as paragraph (4) and inserting after para-
graph (2) the following: 
‘‘(3) ARROWS.—
‘‘(A) IN GENERAL.—There is hereby im-
posed on the sale by the manufacturer, pro-
ducer, or importer of any arrow, a tax equal to 
12 percent of the price for which so sold. 
‘‘(B) EXCEPTION.—In the case of any 
arrow of which the shaft or any other compo-
nent has been previously taxed under paragraph 
(1) or (2)—
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•HR 4520 IH1S 
‘‘(i) section 6416(b)(3) shall not 
apply, and 
‘‘(ii) the tax imposed by subparagraph 
(A) shall be an amount equal to the excess 
(if any) of—
‘‘(I) the amount of tax imposed 
by this paragraph (determined with-
out regard to this subparagraph), over 
‘‘(II) the amount of tax paid with 
respect to the tax imposed under 
paragraph (1) or (2) on such shaft or 
component. 
‘‘(C) ARROW.—For purposes of this para-
graph, the term ‘arrow’ means any shaft de-
scribed in paragraph (2) to which additional 
components are attached.’’. 
(c) 
CONFORMING
AMENDMENTS.—Section 
4161(b)(2) is amended—
(1) by inserting ‘‘(other than broadheads)’’ 
after ‘‘point’’, and 
(2) by striking ‘‘ARROWS.—’’ in the heading 
and inserting ‘‘ARROW COMPONENTS.—’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to articles sold by the manufac-
turer, producer, or importer after December 31, 2004.
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•HR 4520 IH1S 
SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE 
BOXES. 
(a) REPEAL.—Paragraph (6) of section 4162(a) (de-
fining sport fishing equipment) is amended by striking 
subparagraph (C) and by redesignating subparagraphs 
(D) through (J) as subparagraphs (C) through (I), respec-
tively. 
(b) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004. 
SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH. 
(a) NOT TREATED
AS SPORT FISHING EQUIP-
MENT.—Subsection (a) of section 4162 (relating to sport 
fishing equipment defined) is amended by inserting ‘‘and’’ 
at the end of paragraph (8), by striking ‘‘, and’’ at the 
end of paragraph (9) and inserting a period, and by strik-
ing paragraph (10). 
(b) CONFORMING AMENDMENT.—Section 4162 is 
amended by striking subsection (b) and by redesignating 
subsection (c) as subsection (b). 
(c) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004.
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•HR 4520 IH1S 
SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS 
WHOLESALERS FOR COST OF CARRYING FED-
ERAL EXCISE TAXES ON BOTTLED DISTILLED 
SPIRITS. 
(a) IN GENERAL.—Subpart A of part I of subchapter 
A of chapter 51 (relating to gallonage and occupational 
taxes) is amended by adding at the end the following new 
section: 
‘‘SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER’S AV-
ERAGE COST OF CARRYING EXCISE TAX. 
‘‘(a) IN GENERAL.—For purposes of section 38, in 
the case of an eligible wholesaler, the amount of the dis-
tilled spirits wholesalers credit for any taxable year is the 
amount equal to the product of—
‘‘(1) the number of cases of bottled distilled 
spirits—
‘‘(A) which were bottled in the United 
States, and 
‘‘(B) which are purchased by such whole-
saler during the taxable year directly from the 
bottler of such spirits, and 
‘‘(2) the average tax-financing cost per case for 
the most recent calendar year ending before the be-
ginning of such taxable year. 
‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 
section, the term ‘eligible wholesaler’ means any person
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•HR 4520 IH1S 
who holds a permit under the Federal Alcohol Administra-
tion Act as a wholesaler of distilled spirits. 
‘‘(c) AVERAGE TAX-FINANCING COST.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the average tax-financing cost per case for any 
calendar year is the amount of interest which would 
accrue at the deemed financing rate during a 60-day 
period on an amount equal to the deemed Federal 
excise per case. 
‘‘(2) DEEMED FINANCING RATE.—For purposes 
of paragraph (1), the deemed financing rate for any 
calendar year is the average of the corporate over-
payment rates under paragraph (1) of section 
6621(a) (determined without regard to the last sen-
tence of such paragraph) for calendar quarters of 
such year. 
‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON 
CASE.—For purposes of paragraph (1), the deemed 
Federal excise tax per case of 12 80-proof 750ml 
bottles is $22.83. 
‘‘(4) NUMBER OF CASES IN LOT.—For purposes 
of this section, the number of cases in any lot of dis-
tilled spirits shall be determined by dividing the 
number of liters in such lot by 9.’’
(b) CONFORMING AMENDMENTS.—
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(1) Subsection (b) of section 38 is amended by 
striking ‘‘plus’’ at the end of paragraph (14), by 
striking the period at the end of paragraph (15) and 
inserting ‘‘, plus’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(16) in the case of an eligible wholesaler (as 
defined in section 5011(b)), the distilled spirits 
wholesalers 
credit 
determined 
under 
section 
5011(a).’’
(2) Subsection (d) of section 39 (relating to 
carryback and carryforward of unused credits) is 
amended by adding at the end the following new 
paragraph: 
‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT 
BEFORE JANUARY 1, 2005.—No portion of the un-
used business credit for any taxable year which is 
attributable to the credit determined under section 
5011(a) may be carried back to a taxable year be-
ginning before January 1, 2005.’’. 
(3) The table of sections for subpart A of part 
I of subchapter A of chapter 51 is amended by add-
ing at the end the following new item:
‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of car-
rying excise tax.’’.
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•HR 4520 IH1S 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELAT-
ING TO DISTILLED SPIRITS, WINE, AND BEER. 
(a) IN GENERAL.—Subpart G of part II of sub-
chapter A of chapter 51 is amended by redesignating sec-
tion 5148 as section 5149 and by inserting after section 
5147 the following new section: 
‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 
‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 
5091, 5111, 5121, and 5131, the rate of tax imposed 
under such sections for the suspension period shall be 
zero. During such period, persons engaged in or carrying 
on a trade or business covered by such sections shall reg-
ister under section 5141 and shall comply with the record-
keeping requirements under this part. 
‘‘(b) SUSPENSION PERIOD.—For purposes of sub-
section (a), the suspension period is the period beginning 
on July 1, 2004, and ending on June 30, 2007.’’. 
(b) CONFORMING AMENDMENT.—Section 5117 is 
amended by adding at the end the following new sub-
section: 
‘‘(d) SPECIAL
RULE
DURING
SUSPENSION
PE-
RIOD.—Except as provided by the Secretary, during the
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•HR 4520 IH1S 
suspension period (as defined in section 5148) it shall be 
unlawful for any dealer to purchase distilled spirits for re-
sale from any person other than a wholesale dealer in liq-
uors who is required to keep records under section 5114.’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart G of part II of subchapter A of chapter 51 
is amended by striking the last item and inserting the fol-
lowing new items:
‘‘Sec. 5148. Suspension of occupational tax. 
‘‘Sec. 5149. Cross references.’’.
(d) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act. 
TITLE 
III—TAX 
REFORM 
AND 
SIMPLIFICATION FOR UNITED 
STATES BUSINESSES 
SEC. 301. INTEREST EXPENSE ALLOCATION RULES. 
(a) ELECTION
TO
ALLOCATE
ON
WORLDWIDE 
BASIS.—Section 864 is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON 
WORLDWIDE BASIS.—For purposes of this subchapter, at 
the election of the worldwide affiliated group—
‘‘(1) ALLOCATION AND APPORTIONMENT OF IN-
TEREST EXPENSE.—
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•HR 4520 IH1S 
‘‘(A) IN GENERAL.—The taxable income of 
each domestic corporation which is a member of 
a worldwide affiliated group shall be determined 
by allocating and apportioning interest expense 
of each member as if all members of such group 
were a single corporation. 
‘‘(B) TREATMENT OF WORLDWIDE AFFILI-
ATED GROUP.—The taxable income of the do-
mestic members of a worldwide affiliated group 
from sources outside the United States shall be 
determined by allocating and apportioning the 
interest expense of such domestic members to 
such income in an amount equal to the excess 
(if any) of—
‘‘(i) the total interest expense of the 
worldwide affiliated group multiplied by 
the ratio which the foreign assets of the 
worldwide affiliated group bears to all the 
assets of the worldwide affiliated group, 
over 
‘‘(ii) the interest expense of all foreign 
corporations which are members of the 
worldwide affiliated group to the extent 
such interest expense of such foreign cor-
porations would have been allocated and
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•HR 4520 IH1S 
apportioned to foreign source income if 
this subsection were applied to a group 
consisting of all the foreign corporations in 
such worldwide affiliated group. 
‘‘(C) WORLDWIDE AFFILIATED GROUP.—
For purposes of this paragraph, the term 
‘worldwide affiliated group’ means a group con-
sisting of—
‘‘(i) the includible members of an af-
filiated group (as defined in section 
1504(a), determined without regard to 
paragraphs 
(2) 
and 
(4) 
of 
section 
1504(b)), and 
‘‘(ii) all controlled foreign corpora-
tions in which such members in the aggre-
gate meet the ownership requirements of 
section 1504(a)(2) either directly or indi-
rectly through applying paragraph (2) of 
section 958(a) or through applying rules 
similar to the rules of such paragraph to 
stock owned directly or indirectly by do-
mestic partnerships, trusts, or estates. 
‘‘(2) ALLOCATION
AND
APPORTIONMENT
OF 
OTHER
EXPENSES.—Expenses other than interest 
which are not directly allocable or apportioned to
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•HR 4520 IH1S 
any specific income producing activity shall be allo-
cated and apportioned as if all members of the affili-
ated group were a single corporation. For purposes 
of the preceding sentence, the term ‘affiliated group’ 
has the meaning given such term by section 1504 
(determined without regard to paragraph (4) of sec-
tion 1504(b)). 
‘‘(3) TREATMENT
OF
TAX-EXEMPT
ASSETS; 
BASIS
OF
STOCK
IN
NONAFFILIATED
10-PERCENT 
OWNED
CORPORATIONS.—The rules of paragraphs 
(3) and (4) of subsection (e) shall apply for purposes 
of this subsection, except that paragraph (4) shall be 
applied on a worldwide affiliated group basis. 
‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN-
STITUTIONS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), any corporation described in sub-
paragraph (B) shall be treated as an includible 
corporation for purposes of section 1504 only 
for purposes of applying this subsection sepa-
rately to corporations so described. 
‘‘(B) DESCRIPTION.—A corporation is de-
scribed in this subparagraph if—
‘‘(i) such corporation is a financial in-
stitution described in section 581 or 591,
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•HR 4520 IH1S 
‘‘(ii) the business of such financial in-
stitution is predominantly with persons 
other than related persons (within the 
meaning of subsection (d)(4)) or their cus-
tomers, and 
‘‘(iii) such financial institution is re-
quired by State or Federal law to be oper-
ated separately from any other entity 
which is not such an institution. 
‘‘(C) TREATMENT OF BANK AND FINAN-
CIAL HOLDING COMPANIES.—To the extent pro-
vided in regulations—
‘‘(i) 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)), 
‘‘(ii) a financial holding company 
(within the meaning of section 2(p) of the 
Bank Holding Company Act of 1956 (12 
U.S.C. 1841(p)), and 
‘‘(iii) any subsidiary of a financial in-
stitution described in section 581 or 591, 
or of any such bank or financial holding 
company, if such subsidiary is predomi-
nantly engaged (directly or indirectly) in
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the active conduct of a banking, financing, 
or similar business, 
shall be treated as a corporation described in 
subparagraph (B). 
‘‘(5) ELECTION TO EXPAND FINANCIAL INSTI-
TUTION GROUP OF WORLDWIDE GROUP.—
‘‘(A) IN GENERAL.—If a worldwide affili-
ated group elects the application of this sub-
section, all financial corporations which—
‘‘(i) are members of such worldwide 
affiliated group, but 
‘‘(ii) are not corporations described in 
paragraph (4)(B), 
shall be treated as described in paragraph 
(4)(B) for purposes of applying paragraph 
(4)(A). This subsection (other than this para-
graph) shall apply to any such group in the 
same manner as this subsection (other than this 
paragraph) applies to the pre-election worldwide 
affiliated group of which such group is a part. 
‘‘(B) FINANCIAL CORPORATION.—For pur-
poses of this paragraph, the term ‘financial cor-
poration’ means any corporation if at least 80 
percent of its gross income is income described 
in section 904(d)(2)(C)(ii) and the regulations
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thereunder which is derived from transactions 
with persons who are not related (within the 
meaning of section 267(b) or 707(b)(1)) to the 
corporation. For purposes of the preceding sen-
tence, there shall be disregarded any item of in-
come or gain from a transaction or series of 
transactions a principal purpose of which is the 
qualification of any corporation as a financial 
corporation. 
‘‘(C) ANTIABUSE RULES.—In the case of a 
corporation which is a member of an electing fi-
nancial institution group, to the extent that 
such corporation—
‘‘(i) distributes dividends or makes 
other distributions with respect to its stock 
after the date of the enactment of this 
paragraph to any member of the pre-elec-
tion worldwide affiliated group (other than 
to a member of the electing financial insti-
tution group) in excess of the greater of—
‘‘(I) its average annual dividend 
(expressed as a percentage of current 
earnings and profits) during the 5-
taxable-year period ending with the
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taxable year preceding the taxable 
year, or 
‘‘(II) 25 percent of its average 
annual earnings and profits for such 
5-taxable-year period, or 
‘‘(ii) deals with any person in any 
manner not clearly reflecting the income of 
the corporation (as determined under prin-
ciples similar to the principles of section 
482), 
an amount of indebtedness of the electing fi-
nancial institution group equal to the excess 
distribution or the understatement or overstate-
ment of income, as the case may be, shall be re-
characterized (for the taxable year and subse-
quent taxable years) for purposes of this para-
graph as indebtedness of the worldwide affili-
ated group (excluding the electing financial in-
stitution group). If a corporation has not been 
in existence for 5 taxable years, this subpara-
graph shall be applied with respect to the pe-
riod it was in existence. 
‘‘(D) ELECTION.—An election under this 
paragraph with respect to any financial institu-
tion group may be made only by the common
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•HR 4520 IH1S 
paragraph (4)(A) and which includes fi-
nancial corporations by reason of an elec-
tion under subparagraph (A). 
‘‘(F) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be appro-
priate to carry out this subsection, including 
regulations—
‘‘(i) providing for the direct allocation 
of interest expense in other circumstances 
where such allocation would be appropriate 
to carry out the purposes of this sub-
section, 
‘‘(ii) preventing assets or interest ex-
pense from being taken into account more 
than once, and 
‘‘(iii) dealing with changes in mem-
bers of any group (through acquisitions or 
otherwise) treated under this paragraph as 
an affiliated group for purposes of this 
subsection. 
‘‘(6) ELECTION.—An election to have this sub-
section apply with respect to any worldwide affiliated 
group may be made only by the common parent of 
the domestic affiliated group referred to in para-
graph (1)(C) and may be made only for the first
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•HR 4520 IH1S 
taxable year beginning after December 31, 2008, in 
which a worldwide affiliated group exists which in-
cludes such affiliated group and at least 1 foreign 
corporation. Such an election, once made, shall apply 
to such common parent and all other corporations 
which are members of such worldwide affiliated 
group for such taxable year and all subsequent years 
unless revoked with the consent of the Secretary.’’. 
(b) EXPANSION
OF REGULATORY AUTHORITY.—
Paragraph (7) of section 864(e) is amended—
(1) by inserting before the comma at the end of 
subparagraph (B) ‘‘and in other circumstances 
where such allocation would be appropriate to carry 
out the purposes of this subsection’’, and 
(2) by striking ‘‘and’’ at the end of subpara-
graph (E), by redesignating subparagraph (F) as 
subparagraph (G), and by inserting after subpara-
graph (E) the following new subparagraph: 
‘‘(F) preventing assets or interest expense 
from being taken into account more than once, 
and’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2008.
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SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS. 
(a) GENERAL RULE.—Section 904 is amended by re-
designating subsections (g), (h), (i), (j), and (k) as sub-
sections (h), (i), (j), (k), and (l) respectively, and by in-
serting after subsection (f) the following new subsection: 
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS.—
‘‘(1) GENERAL
RULE.—For purposes of this 
subpart and section 936, in the case of any taxpayer 
who sustains an overall domestic loss for any taxable 
year beginning after December 31, 2006, that por-
tion of the taxpayer’s taxable income from sources 
within the United States for each succeeding taxable 
year which is equal to the lesser of—
‘‘(A) the amount of such loss (to the extent 
not used under this paragraph in prior taxable 
years), or 
‘‘(B) 50 percent of the taxpayer’s taxable 
income from sources within the United States 
for such succeeding taxable year, 
shall be treated as income from sources without the 
United States (and not as income from sources with-
in the United States). 
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 
purposes of this subsection—
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‘‘(A) IN GENERAL.—The term ‘overall do-
mestic loss’ means any domestic loss to the ex-
tent such loss offsets taxable income from 
sources without the United States for the tax-
able year or for any preceding taxable year by 
reason of a carryback. For purposes of the pre-
ceding sentence, the term ‘domestic loss’ means 
the amount by which the gross income for the 
taxable year from sources within the United 
States is exceeded by the sum of the deductions 
properly apportioned or allocated thereto (deter-
mined without regard to any carryback from a 
subsequent taxable year). 
‘‘(B) TAXPAYER
MUST
HAVE
ELECTED 
FOREIGN TAX CREDIT FOR YEAR OF LOSS.—
The term ‘overall domestic loss’ shall not in-
clude any loss for any taxable year unless the 
taxpayer chose the benefits of this subpart for 
such taxable year. 
‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN-
COME.—
‘‘(A) IN
GENERAL.—Any income from 
sources within the United States that is treated 
as income from sources without the United 
States under paragraph (1) shall be allocated
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•HR 4520 IH1S 
among and increase the income categories in 
proportion to the loss from sources within the 
United States previously allocated to those in-
come categories. 
‘‘(B) INCOME CATEGORY.—For purposes of 
this paragraph, the term ‘income category’ has 
the meaning given such term by subsection 
(f)(5)(E)(i). 
‘‘(4) COORDINATION WITH SUBSECTION (f).—
The Secretary shall prescribe such regulations as 
may be necessary to coordinate the provisions of this 
subsection with the provisions of subsection (f).’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 535(d)(2) is amended by striking 
‘‘section 
904(g)(6)’’ 
and 
inserting 
‘‘section 
904(h)(6)’’. 
(2) Subparagraph (A) of section 936(a)(2) is 
amended by striking ‘‘section 904(f)’’ and inserting 
‘‘subsections (f) and (g) of section 904’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to losses for taxable years begin-
ning after December 31, 2006. 
SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS. 
(a) IN GENERAL.—Paragraph (1) of section 904(d) 
(relating to separate application of section with respect to
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•HR 4520 IH1S 
certain categories of income) is amended to read as fol-
lows: 
‘‘(1) IN
GENERAL.—The provisions of sub-
sections (a), (b), and (c) and sections 902, 907, and 
960 shall be applied separately with respect to—
‘‘(A) passive category income, and 
‘‘(B) general category income.’’
(b) CATEGORIES.—Paragraph (2) of section 904(d) 
is amended by striking subparagraph (B), by redesig-
nating subparagraph (A) as subparagraph (B), and by in-
serting before subparagraph (B) (as so redesignated) the 
following new subparagraph: 
‘‘(A) CATEGORIES.—
‘‘(i) PASSIVE
CATEGORY
INCOME.—
The term ‘passive category income’ means 
passive income and specified passive cat-
egory income. 
‘‘(ii) GENERAL CATEGORY INCOME.—
The term ‘general category income’ means 
income other than passive category in-
come.’’
(c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub-
paragraph (B) of section 904(d)(2), as so redesignated, 
is amended by adding at the end the following new clause:
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•HR 4520 IH1S 
‘‘(v) SPECIFIED
PASSIVE
CATEGORY 
INCOME.—The term ‘specified passive cat-
egory income’ means—
‘‘(I) dividends from a DISC or 
former DISC (as defined in section 
992(a)) to the extent such dividends 
are treated as income from sources 
without the United States, 
‘‘(II) taxable income attributable 
to foreign trade income (within the 
meaning of section 923(b)), and 
‘‘(III) distributions from a FSC 
(or a former FSC) out of earnings 
and profits attributable to foreign 
trade income (within the meaning of 
section 923(b)) or interest or carrying 
charges 
(as 
defined 
in 
section 
927(d)(1)) derived from a transaction 
which results in foreign trade income 
(as defined in section 923(b)).’’
(d) TREATMENT OF FINANCIAL SERVICES.—Para-
graph (2) of section 904(d) is amended by striking sub-
paragraph (D), by redesignating subparagraph (C) as sub-
paragraph (D), and by inserting before subparagraph (D) 
(as so redesignated) the following new subparagraph:
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•HR 4520 IH1S 
‘‘(II) controlled foreign corpora-
tions in which such United States cor-
porations own, directly or indirectly, 
at least 80 percent of the total voting 
power and value of the stock. 
‘‘(iii) 
PASS-THRU
ENTITIES.—The 
Secretary shall by regulation specify for 
purposes of this subparagraph the treat-
ment of financial services income received 
or accrued by partnerships and by other 
pass-thru entities which are not members 
of a financial services group.’’
(e) CONFORMING AMENDMENTS.—
(1) Clause (iii) of section 904(d)(2)(B) (relating 
to exceptions from passive income), as so redesig-
nated, is amended by striking subclause (I) and by 
redesignating subclauses (II) and (III) as subclauses 
(I) and (II), respectively. 
(2) Clause (i) of section 904(d)(2)(D) (defining 
financial services income), as so redesignated, is 
amended by adding ‘‘or’’ at the end of subclause (I) 
and by striking subclauses (II) and (III) and insert-
ing the following new subclause:
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•HR 4520 IH1S 
‘‘(II) passive income (determined 
without 
regard 
to 
subparagraph 
(B)(iii)(II)).’’
(3) Section 904(d)(2)(D) (defining financial 
services income), as so redesignated, is amended by 
striking clause (iii). 
(4) Paragraph (3) of section 904(d) is amended 
to read as follows: 
‘‘(3) LOOK-THRU
IN
CASE
OF
CONTROLLED 
FOREIGN CORPORATIONS.—
‘‘(A) IN GENERAL.—Except as otherwise 
provided in this paragraph, dividends, interest, 
rents, and royalties received or accrued by the 
taxpayer from a controlled foreign corporation 
in which the taxpayer is a United States share-
holder shall not be treated as passive category 
income. 
‘‘(B) 
SUBPART
F
INCLUSIONS.—Any 
amount included in gross income under section 
951(a)(1)(A) shall be treated as passive cat-
egory income to the extent the amount so in-
cluded is attributable to passive category in-
come. 
‘‘(C) INTEREST, 
RENTS, 
AND
ROYAL-
TIES.—Any interest, rent, or royalty which is
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•HR 4520 IH1S 
received or accrued from a controlled foreign 
corporation in which the taxpayer is a United 
States shareholder shall be treated as passive 
category income to the extent it is properly allo-
cable (under regulations prescribed by the Sec-
retary) to passive category income of the con-
trolled foreign corporation. 
‘‘(D) DIVIDENDS.—Any dividend paid out 
of the earnings and profits of any controlled 
foreign corporation in which the taxpayer is a 
United States shareholder shall be treated as 
passive category income in proportion to the 
ratio of—
‘‘(i) the portion of the earnings and 
profits attributable to passive category in-
come, to 
‘‘(ii) the total amount of earnings and 
profits. 
‘‘(E) LOOK-THRU APPLIES ONLY WHERE 
SUBPART F APPLIES.—If a controlled foreign 
corporation meets the requirements of section 
954(b)(3)(A) (relating to de minimis rule) for 
any taxable year, for purposes of this para-
graph, none of its foreign base company income 
(as defined in section 954(a) without regard to
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•HR 4520 IH1S 
section 954(b)(5)) and none of its gross insur-
ance 
income 
(as 
defined 
in 
section 
954(b)(3)(C)) for such taxable year shall be 
treated as passive category income, except that 
this sentence shall not apply to any income 
which (without regard to this sentence) would 
be treated as financial services income. Solely 
for purposes of applying subparagraph (D), 
passive income of a controlled foreign corpora-
tion shall not be treated as passive category in-
come if the requirements of section 954(b)(4) 
are met with respect to such income. 
‘‘(F) COORDINATION
WITH
HIGH-TAXED 
INCOME PROVISIONS.—
‘‘(i) In determining whether any in-
come of a controlled foreign corporation is 
passive category income, subclause (II) of 
paragraph (2)(B)(iii) shall not apply. 
‘‘(ii) Any income of the taxpayer 
which is treated as passive category income 
under this paragraph shall be so treated 
notwithstanding any provision of para-
graph (2); except that the determination of 
whether any amount is high-taxed income
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•HR 4520 IH1S 
shall be made after the application of this 
paragraph. 
‘‘(G) DIVIDEND.—For purposes of this 
paragraph, the term ‘dividend’ includes any 
amount included in gross income in section 
951(a)(1)(B). Any amount included in gross in-
come under section 78 to the extent attrib-
utable to amounts included in gross income in 
section 951(a)(1)(A) shall not be treated as a 
dividend but shall be treated as included in 
gross income under section 951(a)(1)(A). 
‘‘(H) LOOK-THRU
APPLIES
TO
PASSIVE 
FOREIGN INVESTMENT COMPANY INCLUSION.—
If—
‘‘(i) a passive foreign investment com-
pany is a controlled foreign corporation, 
and 
‘‘(ii) the taxpayer is a United States 
shareholder in such controlled foreign cor-
poration, 
any amount included in gross income under sec-
tion 1293 shall be treated as income in a sepa-
rate category to the extent such amount is at-
tributable to income in such category.’’
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•HR 4520 IH1S 
(5) TREATMENT
OF
INCOME
TAX
BASE
DIF-
FERENCES.—Paragraph (2) of section 904(d) is 
amended by redesignating subparagraphs (H) and 
(I) as subparagraphs (I) and (J), respectively, and 
by inserting after subparagraph (G) the following 
new subparagraph: 
‘‘(H) TREATMENT OF INCOME TAX BASE 
DIFFERENCES.—Tax imposed under the law of 
a foreign country or possession of the United 
States on an amount which does not constitute 
income under United States tax principles shall 
be treated as imposed on income described in 
paragraph (1)(B).’’
(6) Paragraph (2) of section 904(d) is amended 
by adding at the end the following new subpara-
graph: 
‘‘(K) TRANSITIONAL
RULES
FOR
2007 
CHANGES.—For purposes of paragraph (1)—
‘‘(i) taxes carried from any taxable 
year beginning before January 1, 2007, to 
any taxable year beginning on or after 
such date, with respect to any item of in-
come, shall be treated as described in the 
subparagraph of paragraph (1) in which 
such income would be described were such
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•HR 4520 IH1S 
payer shall be treated as income described in a 
subparagraph of paragraph (1) in proportion to 
the ratio of—
‘‘(i) the portion of earnings and prof-
its attributable to income described in such 
subparagraph, to 
‘‘(ii) the total amount of earnings and 
profits. 
‘‘(B) EARNINGS
AND
PROFITS
OF
CON-
TROLLED
FOREIGN
CORPORATIONS.—In the 
case of any distribution from a controlled for-
eign corporation to a United States share-
holder, rules similar to the rules of subpara-
graph (A) shall apply in determining the extent 
to which earnings and profits of the controlled 
foreign corporation which are attributable to 
dividends received from a noncontrolled section 
902 corporation may be treated as income in a 
separate category. 
‘‘(C) SPECIAL
RULES.—For purposes of 
this paragraph—
‘‘(i) EARNINGS AND PROFITS.—
‘‘(I) IN GENERAL.—The rules of 
section 316 shall apply.
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•HR 4520 IH1S 
‘‘(II) REGULATIONS.—The Sec-
retary may prescribe regulations re-
garding the treatment of distributions 
out of earnings and profits for periods 
before the taxpayer’s acquisition of 
the stock to which the distributions 
relate. 
‘‘(ii) 
INADEQUATE
SUBSTAN-
TIATION.—If the Secretary determines that 
the proper subparagraph of paragraph (1) 
in which a dividend is described has not 
been substantiated, such dividend shall be 
treated as income described in paragraph 
(1)(A). 
‘‘(iii) COORDINATION
WITH
HIGH-
TAXED INCOME PROVISIONS.—Rules simi-
lar to the rules of paragraph (3)(F) shall 
apply for purposes of this paragraph. 
‘‘(iv) LOOK-THRU WITH RESPECT TO 
CARRYOVER OF CREDIT.—Rules similar to 
subparagraph (A) also shall apply to any 
carryforward under subsection (c) from a 
taxable year beginning before January 1, 
2003, of tax allocable to a dividend from a 
noncontrolled section 902 corporation with
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•HR 4520 IH1S 
respect to the taxpayer. The Secretary may 
by regulations provide for the allocation of 
any carryback of tax allocable to a divi-
dend from a noncontrolled section 902 cor-
poration to such a taxable year for pur-
poses of allocating such dividend among 
the separate categories in effect for such 
taxable year.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (E) of section 904(d)(1) is 
hereby repealed. 
(2) Section 904(d)(2)(C)(iii) is amended by 
adding ‘‘and’’ at the end of subclause (I), by striking 
subclause (II), and by redesignating subclause (III) 
as subclause (II). 
(3) The last sentence of section 904(d)(2)(D) is 
amended to read as follows: ‘‘Such term does not in-
clude any financial services income.’’. 
(4) Section 904(d)(2)(E) is amended—
(A) by inserting ‘‘or (4)’’ after ‘‘paragraph 
(3)’’ in clause (i), and 
(B) by striking clauses (ii) and (iv) and by 
redesignating clause (iii) as clause (ii). 
(5) Section 904(d)(3)(F) is amended by strik-
ing ‘‘(D), or (E)’’ and inserting ‘‘or (D)’’.
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•HR 4520 IH1S 
(6) Section 864(d)(5)(A)(i) is amended by 
striking ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 
PARTNERSHIPS TO APPLY IN DETERMINING 
SECTION 902 AND 960 CREDITS. 
(a) IN GENERAL.—Subsection (c) of section 902 is 
amended by redesignating paragraph (7) as paragraph (8) 
and by inserting after paragraph (6) the following new 
paragraph: 
‘‘(7) CONSTRUCTIVE
OWNERSHIP
THROUGH 
PARTNERSHIPS.—Stock owned, directly or indirectly, 
by or for a partnership shall be considered as being 
owned proportionately by its partners. Stock consid-
ered to be owned by a person by reason of the pre-
ceding sentence shall, for purposes of applying such 
sentence, be treated as actually owned by such per-
son. The Secretary may prescribe such regulations 
as may be necessary to carry out the purposes of 
this paragraph, including rules to account for special 
partnership allocations of dividends, credits, and 
other incidents of ownership of stock in determining 
proportionate ownership.’’.
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•HR 4520 IH1S 
(b) CLARIFICATION OF COMPARABLE ATTRIBUTION 
UNDER SECTION 901(b)(5).—Paragraph (5) of section 
901(b) is amended by striking ‘‘any individual’’ and in-
serting ‘‘any person’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxes of foreign corporations 
for taxable years of such corporations beginning after the 
date of the enactment of this Act. 
SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN 
TRANSFERS OF INTANGIBLE PROPERTY. 
(a) IN GENERAL.—Subparagraph (C) of section 
367(d)(2) is amended by adding at the end the following 
new sentence: ‘‘For purposes of applying section 904(d), 
any such amount shall be treated in the same manner as 
if such amount were a royalty.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to amounts treated as received pur-
suant to section 367(d)(2) of the Internal Revenue Code 
of 1986 on or after August 5, 1997. 
SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE 
CERTAIN ASSETS OF CONTROLLED FOREIGN 
CORPORATION. 
(a) IN GENERAL.—Section 956(c)(2) (relating to ex-
ceptions from property treated as United States property) 
is amended by striking ‘‘and’’ at the end of subparagraph
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•HR 4520 IH1S 
(J), by striking the period at the end of subparagraph (K) 
and inserting a semicolon, and by adding at the end the 
following new subparagraphs: 
‘‘(L) securities acquired and held by a con-
trolled foreign corporation in the ordinary 
course of its business as a dealer in securities 
if—
‘‘(i) the dealer accounts for the securi-
ties as securities held primarily for sale to 
customers in the ordinary course of busi-
ness, and 
‘‘(ii) the dealer disposes of the securi-
ties (or such securities mature while held 
by the dealer) within a period consistent 
with the holding of securities for sale to 
customers in the ordinary course of busi-
ness; and 
‘‘(M) an obligation of a United States per-
son which—
‘‘(i) is not a domestic corporation, and 
‘‘(ii) is not—
‘‘(I) a United States shareholder 
(as defined in section 951(b)) of the 
controlled foreign corporation, or
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•HR 4520 IH1S 
‘‘(II) a partnership, estate, or 
trust in which the controlled foreign 
corporation, or any related person (as 
defined in section 954(d)(3)), is a 
partner, beneficiary, or trustee imme-
diately after the acquisition of any ob-
ligation of such partnership, estate, or 
trust by the controlled foreign cor-
poration.’’. 
(b) CONFORMING AMENDMENT.—Section 956(c)(2) 
is amended by striking ‘‘and (K)’’ in the last sentence and 
inserting ‘‘, (K), and (L)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE 
RATE FOR FOREIGN TAX PAID OTHER THAN 
IN FUNCTIONAL CURRENCY. 
(a) IN GENERAL.—Paragraph (1) of section 986(a) 
(relating to determination of foreign taxes and foreign cor-
poration’s earnings and profits) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
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•HR 4520 IH1S 
serting after subparagraph (C) the following new subpara-
graph: 
‘‘(D) ELECTIVE
EXCEPTION
FOR
TAXES 
PAID
OTHER
THAN
IN
FUNCTIONAL
CUR-
RENCY.—
‘‘(i) IN GENERAL.—At the election of 
the taxpayer, subparagraph (A) shall not 
apply to any foreign income taxes the li-
ability for which is denominated in any 
currency other than in the taxpayer’s func-
tional currency. 
‘‘(ii) APPLICATION
TO
QUALIFIED 
BUSINESS UNITS.—An election under this 
subparagraph may apply to foreign income 
taxes attributable to a qualified business 
unit in accordance with regulations pre-
scribed by the Secretary. 
‘‘(iii) ELECTION.—Any such election 
shall apply to the taxable year for which 
made and all subsequent taxable years un-
less revoked with the consent of the Sec-
retary.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004.
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•HR 4520 IH1S 
SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 
FROM CERTAIN FOREIGN CORPORATIONS. 
(a) IN GENERAL.—Paragraph (2) of section 871(i) 
(relating to tax not to apply to certain interest and divi-
dends) is amended by adding at the end the following new 
subparagraph: 
‘‘(D) Dividends paid by a foreign corpora-
tion 
which 
are 
treated 
under 
section 
861(a)(2)(B) as income from sources within the 
United States.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to payments made after December 
31, 2004. 
SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST 
PAID BY FOREIGN PARTNERSHIPS AND FOR-
EIGN CORPORATIONS. 
(a) IN GENERAL.—Paragraph (1) of section 861(a) 
is amended by striking ‘‘and’’ at the end of subparagraph 
(A), by striking the period at the end of subparagraph 
(B) and inserting ‘‘, and’’, and by adding at the end the 
following new subparagraph: 
‘‘(C) in the case of a foreign partnership, 
which is predominantly engaged in the active 
conduct of a trade or business outside the 
United States, any interest not paid by a trade 
or business engaged in by the partnership in
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the United States and not allocable to income 
which is effectively connected (or treated as ef-
fectively connected) with the conduct of a trade 
or business in the United States.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BE-
TWEEN 
RELATED 
CONTROLLED 
FOREIGN 
CORPORATIONS UNDER FOREIGN PERSONAL 
HOLDING COMPANY INCOME RULES. 
(a) IN GENERAL.—Subsection (c) of section 954, as 
amended by this Act, is amended by adding after para-
graph (4) the following new paragraph: 
‘‘(5) LOOK-THRU IN THE CASE OF RELATED 
CONTROLLED
FOREIGN
CORPORATIONS.—For pur-
poses of this subsection, dividends, interest, rents, 
and royalties received or accrued from a controlled 
foreign corporation which is a related person (as de-
fined in subsection (b)(9)) shall not be treated as 
foreign personal holding company income to the ex-
tent attributable or properly allocable (determined 
under rules similar to the rules of subparagraphs 
(C) and (D) of section 904(d)(3)) to income of the 
related person which is not subpart F income (as de-
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fined in section 952). For purposes of this para-
graph, interest shall include factoring income which 
is treated as income equivalent to interest for pur-
poses of paragraph (1)(E). The Secretary shall pre-
scribe such regulations as may be appropriate to 
prevent the abuse of the purposes of this para-
graph.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PART-
NERSHIP INTERESTS. 
(a) IN GENERAL.—Section 954(c) (defining foreign 
personal holding company income), as amended by this 
Act, is amended by adding after paragraph (5) the fol-
lowing new paragraph: 
‘‘(6) LOOK-THRU RULE FOR CERTAIN PARTNER-
SHIP SALES.—
‘‘(A) IN
GENERAL.—In the case of any 
sale by a controlled foreign corporation of an 
interest in a partnership with respect to which 
such corporation is a 25-percent owner, such 
corporation shall be treated for purposes of this
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subsection as selling the proportionate share of 
the assets of the partnership attributable to 
such interest. The Secretary shall prescribe 
such regulations as may be appropriate to pre-
vent abuse of the purposes of this paragraph, 
including regulations providing for coordination 
of this paragraph with the provisions of sub-
chapter K. 
‘‘(B) 25-PERCENT OWNER.—For purposes 
of this paragraph, the term ‘25-percent owner’ 
means a controlled foreign corporation which 
owns directly 25 percent or more of the capital 
or profits interest in a partnership. For pur-
poses of the preceding sentence, if a controlled 
foreign corporation is a shareholder or partner 
of a corporation or partnership, the controlled 
foreign corporation shall be treated as owning 
directly its proportionate share of any such cap-
ital or profits interest held directly or indirectly 
by such corporation or partnership’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end.
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SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COM-
PANY RULES AND FOREIGN INVESTMENT 
COMPANY RULES. 
(a) GENERAL RULE.—The following provisions are 
hereby repealed: 
(1) Part III of subchapter G of chapter 1 (re-
lating to foreign personal holding companies). 
(2) Section 1246 (relating to gain on foreign in-
vestment company stock). 
(3) Section 1247 (relating to election by foreign 
investment companies to distribute income cur-
rently). 
(b) EXEMPTION OF FOREIGN CORPORATIONS FROM 
PERSONAL HOLDING COMPANY RULES.—
(1) IN
GENERAL.—Subsection (c) of section 
542 (relating to exceptions) is amended—
(A) by striking paragraph (5) and insert-
ing the following: 
‘‘(5) a foreign corporation,’’, 
(B) by striking paragraphs (7) and (10) 
and by redesignating paragraphs (8) and (9) as 
paragraphs (7) and (8), respectively, 
(C) by inserting ‘‘and’’ at the end of para-
graph (7) (as so redesignated), and
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(D) by striking ‘‘; and’’ at the end of para-
graph (8) (as so redesignated) and inserting a 
period. 
(2) TREATMENT OF INCOME FROM PERSONAL 
SERVICE
CONTRACTS.—Paragraph (1) of section 
954(c) is amended by adding at the end the fol-
lowing new subparagraph: 
‘‘(I) PERSONAL SERVICE CONTRACTS.—
‘‘(i) Amounts received under a con-
tract under which the corporation is to fur-
nish personal services if—
‘‘(I) some person other than the 
corporation has the right to designate 
(by name or by description) the indi-
vidual who is to perform the services, 
or 
‘‘(II) the individual who is to per-
form the services is designated (by 
name or by description) in the con-
tract, and 
‘‘(ii) amounts received from the sale 
or other disposition of such a contract. 
This subparagraph shall apply with respect to 
amounts received for services under a particular 
contract only if at some time during the taxable
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year 25 percent or more in value of the out-
standing stock of the corporation is owned, di-
rectly or indirectly, by or for the individual who 
has performed, is to perform, or may be des-
ignated (by name or by description) as the one 
to perform, such services.’’. 
(c) CONFORMING AMENDMENTS.—
(1) Section 1(h) is amended—
(A) in paragraph (10), by inserting ‘‘and’’ 
at the end of subparagraph (F), by striking 
subparagraph (G), and by redesignating sub-
paragraph (H) as subparagraph (G), and 
(B) by striking ‘‘a foreign personal holding 
company (as defined in section 552), a foreign 
investment company (as defined in section 
1246(b)), or’’ in paragraph (11)(C)(iii). 
(2) Section 163(e)(3)(B), as amended by sec-
tion 642(a) of this Act, is amended by striking 
‘‘which is a foreign personal holding company (as 
defined in section 552), a controlled foreign corpora-
tion (as defined in section 957), or’’ and inserting 
‘‘which is a controlled foreign corporation (as de-
fined in section 957) or’’. 
(3) Paragraph (2) of section 171(c) is amend-
ed—
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(A) by striking ‘‘, or by a foreign personal 
holding company, as defined in section 552’’, 
and 
(B) by striking ‘‘, or foreign personal hold-
ing company’’. 
(4) Paragraph (2) of section 245(a) is amended 
by striking ‘‘foreign personal holding company or’’. 
(5) Section 267(a)(3)(B), as amended by sec-
tion 642(b) of this Act, is amended by striking ‘‘to 
a foreign personal holding company (as defined in 
section 552), a controlled foreign corporation (as de-
fined in section 957), or’’ and inserting ‘‘to a con-
trolled foreign corporation (as defined in section 
957) or’’. 
(6) Section 312 is amended by striking sub-
section (j). 
(7) Subsection (m) of section 312 is amended 
by striking ‘‘, a foreign investment company (within 
the meaning of section 1246(b)), or a foreign per-
sonal holding company (within the meaning of sec-
tion 552)’’. 
(8) Subsection (e) of section 443 is amended by 
striking paragraph (3) and by redesignating para-
graphs (4) and (5) as paragraphs (3) and (4), re-
spectively.
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(9) Subparagraph (B) of section 465(c)(7) is 
amended by adding ‘‘or’’ at the end of clause (i), by 
striking clause (ii), and by redesignating clause (iii) 
as clause (ii). 
(10) Paragraph (1) of section 543(b) is amend-
ed by inserting ‘‘and’’ at the end of subparagraph 
(A), by striking ‘‘, and’’ at the end of subparagraph 
(B) and inserting a period, and by striking subpara-
graph (C). 
(11) Paragraph (1) of section 562(b) is amend-
ed by striking ‘‘or a foreign personal holding com-
pany described in section 552’’. 
(12) Section 563 is amended—
(A) by striking subsection (c), 
(B) by redesignating subsection (d) as sub-
section (c), and 
(C) by striking ‘‘subsection (a), (b), or (c)’’ 
in subsection (c) (as so redesignated) and in-
serting ‘‘subsection (a) or (b)’’. 
(13) Subsection (d) of section 751 is amended 
by adding ‘‘and’’ at the end of paragraph (2), by 
striking paragraph (3), by redesignating paragraph 
(4) as paragraph (3), and by striking ‘‘paragraph 
(1), (2), or (3)’’ in paragraph (3) (as so redesig-
nated) and inserting ‘‘paragraph (1) or (2)’’.
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(14) Paragraph (2) of section 864(d) is amend-
ed by striking subparagraph (A) and by redesig-
nating subparagraphs (B) and (C) as subparagraphs 
(A) and (B), respectively. 
(15)(A) Subparagraph (A) of section 898(b)(1) 
is amended to read as follows: 
‘‘(A) which is treated as a controlled for-
eign corporation for any purpose under subpart 
F of part III of this subchapter, and’’. 
(B) Subparagraph (B) of section 898(b)(2) is 
amended by striking ‘‘and sections 551(f) and 554, 
whichever are applicable,’’. 
(C) Paragraph (3) of section 898(b) is amended 
to read as follows: 
‘‘(3) UNITED
STATES
SHAREHOLDER.—The 
term ‘United States shareholder’ has the meaning 
given to such term by section 951(b), except that, in 
the case of a foreign corporation having related per-
son insurance income (as defined in section 
953(c)(2)), the Secretary may treat any person as a 
United States shareholder for purposes of this sec-
tion if such person is treated as a United States 
shareholder under section 953(c)(1).’’. 
(D) Subsection (c) of section 898 is amended to 
read as follows:
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‘‘(c) DETERMINATION OF REQUIRED YEAR.—
‘‘(1) IN GENERAL.—The required year is—
‘‘(A) the majority U.S. shareholder year, 
or 
‘‘(B) if there is no majority U.S. share-
holder year, the taxable year prescribed under 
regulations. 
‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A speci-
fied foreign corporation may elect, in lieu of the tax-
able year under paragraph (1)(A), a taxable year be-
ginning 1 month earlier than the majority U.S. 
shareholder year. 
‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.—
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the term ‘majority U.S. shareholder 
year’ means the taxable year (if any) which, on 
each testing day, constituted the taxable year 
of—
‘‘(i) each United States shareholder 
described in subsection (b)(2)(A), and 
‘‘(ii) each United States shareholder 
not described in clause (i) whose stock was 
treated 
as 
owned 
under 
subsection 
(b)(2)(B) by any shareholder described in 
such clause.
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‘‘(B) TESTING
DAY.—The testing days 
shall be—
‘‘(i) the first day of the corporation’s 
taxable year (determined without regard to 
this section), or 
‘‘(ii) the days during such representa-
tive period as the Secretary may pre-
scribe.’’. 
(16) Clause (ii) of section 904(d)(2)(A) is 
amended to read as follows: 
‘‘(ii) CERTAIN AMOUNTS INCLUDED.—
Except as provided in clause (iii), the term 
‘passive income’ includes, except as pro-
vided in subparagraph (E)(iii) or para-
graph (3)(I), any amount includible in 
gross income under section 1293 (relating 
to certain passive foreign investment com-
panies).’’. 
(17)(A) Subparagraph (A) of section 904(h)(1), 
as redesignated by section 302, is amended by add-
ing ‘‘or’’ at the end of clause (i), by striking clause 
(ii), and by redesignating clause (iii) as clause (ii). 
(B) The paragraph heading of paragraph (2) of 
section 904(h), as so redesignated, is amended by 
striking ‘‘FOREIGN PERSONAL HOLDING OR’’.
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•HR 4520 IH1S 
(18) Section 951 is amended by striking sub-
sections (c) and (d) and by redesignating subsections 
(e) and (f) as subsections (c) and (d), respectively. 
(19) Paragraph (3) of section 989(b) is amend-
ed by striking ‘‘, 551(a),’’. 
(20) Paragraph (5) of section 1014(b) is 
amended by inserting ‘‘and before January 1, 
2005,’’ after ‘‘August 26, 1937,’’. 
(21) Subsection (a) of section 1016 is amended 
by striking paragraph (13). 
(22)(A) Paragraph (3) of section 1212(a) is 
amended to read as follows: 
‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net 
capital loss of a corporation shall not be carried 
back under paragraph (1)(A) to a taxable year—
‘‘(A) for which it is a regulated investment 
company (as defined in section 851), or 
‘‘(B) for which it is a real estate invest-
ment trust (as defined in section 856).’’. 
(B) The amendment made by subparagraph (A) 
shall apply to taxable years beginning after Decem-
ber 31, 2004. 
(23) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly.
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•HR 4520 IH1S 
(24) Subsection (d) of section 1248 is amended 
by striking paragraph (5) and by redesignating 
paragraphs (6) and (7) as paragraphs (5) and (6), 
respectively. 
(25) Paragraph (2) of section 1260(c) is 
amended by striking subparagraphs (H) and (I) and 
by redesignating subparagraph (J) as subparagraph 
(H). 
(26)(A) 
Subparagraph 
(F) 
of 
section 
1291(b)(3) is amended by striking ‘‘551(d), 959(a),’’ 
and inserting ‘‘959(a)’’. 
(B) Subsection (e) of section 1291 is amended 
by inserting ‘‘(as in effect on the day before the date 
of the enactment of the American Jobs Creation Act 
of 2004)’’ after ‘‘section 1246’’. 
(27) Paragraph (2) of section 1294(a) is 
amended to read as follows: 
‘‘(2) 
ELECTION
NOT
PERMITTED
WHERE 
AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION 
951.—The taxpayer may not make an election under 
paragraph (1) with respect to the undistributed 
PFIC earnings tax liability attributable to a quali-
fied electing fund for the taxable year if any amount 
is includible in the gross income of the taxpayer
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•HR 4520 IH1S 
under section 951 with respect to such fund for such 
taxable year.’’. 
(28) Section 6035 is hereby repealed. 
(29) Subparagraph (D) of section 6103(e)(1) is 
amended by striking clause (iv) and redesignating 
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively. 
(30) Subparagraph (B) of section 6501(e)(1) is 
amended to read as follows: 
‘‘(B) CONSTRUCTIVE
DIVIDENDS.—If the 
taxpayer omits from gross income an amount 
properly 
includible 
therein 
under 
section 
951(a), the tax may be assessed, or a pro-
ceeding in court for the collection of such tax 
may be done without assessing, at any time 
within 6 years after the return was filed.’’. 
(31) Subsection (a) of section 6679 is amend-
ed—
(A) by striking ‘‘6035, 6046, and 6046A’’ 
in paragraph (1) and inserting ‘‘6046 and 
6046A’’, and 
(B) by striking paragraph (3). 
(32) Sections 170(f)(10)(A), 508(d), 4947, and 
4948(c)(4) 
are 
each 
amended 
by 
striking 
‘‘556(b)(2),’’ each place it appears.
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•HR 4520 IH1S 
(33) The table of parts for subchapter G of 
chapter 1 is amended by striking the item relating 
to part III. 
(34) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the 
items relating to sections 1246 and 1247. 
(35) The table of sections for subpart A of part 
III of subchapter A of chapter 61 is amended by 
striking the item relating to section 6035. 
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within 
which such taxable years of foreign corporations 
end. 
(2) SUBSECTION
(c)(29).—The amendments 
made by subsection (c)(29) shall apply to disclosures 
of return or return information with respect to tax-
able years beginning after December 31, 2004.
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•HR 4520 IH1S 
SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLD-
ING COMPANY INCOME WITH RESPECT TO 
TRANSACTIONS IN COMMODITIES. 
(a) IN GENERAL.—Clauses (i) and (ii) of section 
954(c)(1)(C) (relating to commodity transactions) are 
amended to read as follows: 
‘‘(i) arise out of commodity hedging 
transactions (as defined in paragraph 
(4)(A)), 
‘‘(ii) are active business gains or 
losses from the sale of commodities, but 
only if substantially all of the controlled 
foreign 
corporation’s 
commodities 
are 
property described in paragraph (1), (2), 
or (8) of section 1221(a), or’’. 
(b) DEFINITION AND SPECIAL RULES.—Subsection 
(c) of section 954 is amended by adding after paragraph 
(3) the following new paragraph: 
‘‘(4) DEFINITION AND SPECIAL RULES RELAT-
ING TO COMMODITY TRANSACTIONS.—
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—For 
purposes 
of 
paragraph 
(1)(C)(i), the term ‘commodity hedging trans-
action’ means any transaction with respect to a 
commodity if such transaction—
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•HR 4520 IH1S 
‘‘(i) is a hedging transaction as de-
fined in section 1221(b)(2), determined—
‘‘(I) without regard to subpara-
graph (A)(ii) thereof, 
‘‘(II) by applying subparagraph 
(A)(i) thereof by substituting ‘ordi-
nary property or property described in 
section 1231(b)’ for ‘ordinary prop-
erty’, and 
‘‘(III) by substituting ‘controlled 
foreign corporation’ for ‘taxpayer’ 
each place it appears, and 
‘‘(ii) is clearly identified as such in ac-
cordance with section 1221(a)(7). 
‘‘(B) TREATMENT OF DEALER ACTIVITIES 
UNDER PARAGRAPH (1)(C).—Commodities with 
respect to which gains and losses are not taken 
into account under paragraph (2)(C) in com-
puting a controlled foreign corporation’s foreign 
personal holding company income shall not be 
taken into account in applying the substantially 
all test under paragraph (1)(C)(ii) to such cor-
poration. 
‘‘(C) REGULATIONS.—The Secretary shall 
prescribe such regulations as are appropriate to
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•HR 4520 IH1S 
carry out the purposes of paragraph (1)(C) in 
the case of transactions involving related par-
ties.’’. 
(c) MODIFICATION OF EXCEPTION FOR DEALERS.—
Clause (i) of section 954(c)(2)(C) is amended by inserting 
‘‘and transactions involving physical settlement’’ after 
‘‘(including hedging transactions’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
December 31, 2004. 
SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT 
LEASING AND SHIPPING INCOME. 
(a) ELIMINATION OF FOREIGN BASE COMPANY SHIP-
PING INCOME.—Section 954 (relating to foreign base com-
pany income) is amended—
(1) by striking paragraph (4) of subsection (a) 
(relating to foreign base company shipping income), 
and 
(2) by striking subsection (f) (relating to for-
eign base company shipping income). 
(b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI-
TIES.—Subparagraph (A) of section 954(c)(2) is amended 
by adding at the end the following new sentence: ‘‘For 
purposes of the preceding sentence, rents derived from 
leasing an aircraft or vessel in foreign commerce shall not
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•HR 4520 IH1S 
fail to be treated as derived in the active conduct of a 
trade or business if, as determined under regulations pre-
scribed by the Secretary, the active leasing expenses are 
not less than 10 percent of the profit on the lease.’’
(c) CONFORMING AMENDMENTS.—
(1) Section 952(c)(1)(B)(iii) is amended by 
striking subclause (I) and redesignating subclauses 
(II) through (VI) as subclauses (I) through (V), re-
spectively. 
(2) Subsection (b) of section 954 is amended—
(A) by striking ‘‘the foreign base company 
shipping income,’’ in paragraph (5), 
(B) by striking paragraphs (6) and (7), 
and 
(C) by redesignating paragraph (8) as 
paragraph (6). 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART 
F FOR ACTIVE FINANCING. 
(a) IN GENERAL.—Section 954(h)(3) is amended by 
adding at the end the following:
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•HR 4520 IH1S 
‘‘(E) DIRECT CONDUCT OF ACTIVITIES.—
For purposes of subparagraph (A)(ii)(II), an 
activity shall be treated as conducted directly by 
an eligible controlled foreign corporation or 
qualified business unit in its home country if 
the activity is performed by employees of a re-
lated person and—
‘‘(i) the related person is an eligible 
controlled foreign corporation the home 
country of which is the same as the home 
country of the corporation or unit to which 
subparagraph (A)(ii)(II) is being applied, 
‘‘(ii) the activity is performed in the 
home country of the related person, and 
‘‘(iii) the related person is com-
pensated on an arm’s-length basis for the 
performance of the activity by its employ-
ees and such compensation is treated as 
earned by such person in its home country 
for purposes of the home country’s tax 
laws.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of such foreign 
corporations beginning after December 31, 2004, and to
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•HR 4520 IH1S 
taxable years of United States shareholders with or within 
which such taxable years of such foreign corporations end. 
TITLE IV—EXTENSION OF 
CERTAIN EXPIRING PROVISIONS 
SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL 
CREDITS AGAINST REGULAR AND MINIMUM 
TAX LIABILITY. 
(a) IN GENERAL.—Paragraph (2) of section 26(a) is 
amended—
(1) by striking ‘‘RULE FOR 2000, 2001, 2002, AND 
2003.—’’ and inserting ‘‘RULE FOR TAXABLE YEARS 
2000 THROUGH 2005.—’’, and 
(2) by striking ‘‘or 2003,’’ and inserting ‘‘2003, 
2004, or 2005,’’. 
(b) CONFORMING PROVISIONS.—
(1) Section 904(h) is amended by striking ‘‘or 
2003’’ and inserting ‘‘2003, 2004, or 2005’’. 
(2) The amendments made by sections 201(b), 
202(f), and 618(b) of the Economic Growth and Tax 
Relief Reconciliation Act of 2001 shall not apply to 
taxable years beginning during 2004 or 2005. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
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SEC. 405. WORK OPPORTUNITY CREDIT. 
(a) IN GENERAL.—Subparagraph (B) of section 
51(c)(4) is amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to individuals who begin work 
for the employer after December 31, 2003. 
SEC. 406. WELFARE-TO-WORK CREDIT. 
(a) IN GENERAL.—Subsection (f) of section 51A is 
amended by striking ‘‘December 31, 2003’’ and inserting 
‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to individuals who begin work 
for the employer after December 31, 2003. 
SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SEC-
ONDARY SCHOOL TEACHERS. 
(a) IN GENERAL.—Subparagraph (D) of section 
62(a)(2) (relating to certain trade and business deductions 
of employees) is amended by striking ‘‘or 2003’’ and in-
serting ‘‘, 2003, 2004, or 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003.
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•HR 4520 IH1S 
SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION 
BENEFIT FOR PROPERTY ON INDIAN RES-
ERVATIONS. 
Paragraph (8) of section 168(j) (relating to termi-
nation) is amended by striking ‘‘December 31, 2004’’ and 
inserting ‘‘December 31, 2005’’. 
SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER 
TECHNOLOGY AND EQUIPMENT USED FOR 
EDUCATIONAL PURPOSES. 
(a) IN GENERAL.—Subparagraph (G) of section 
170(e)(6) (relating to special rule for contributions of 
computer technology and equipment for educational pur-
poses) is amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION 
COSTS. 
(a) IN GENERAL.—Subsection (h) of section 198 (re-
lating to termination) is amended by striking ‘‘December 
31, 2003’’ and inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to expenditures paid or incurred 
after December 31, 2003.
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•HR 4520 IH1S 
SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 
(a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec-
tion 220(i) (defining cut-off year) are each amended by 
striking ‘‘2003’’ each place it appears in the text and 
headings and inserting ‘‘2004’’. 
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (A) of section 220(j)(4) is 
amended by striking ‘‘and 2002’’ and inserting 
‘‘2002, and 2004’’. 
(2) Subparagraph (C) of section 220(j)(2) is 
amended to read as follows: 
‘‘(C) NO LIMITATION FOR 2000 OR 2003.—
The numerical limitation shall not apply for 
2000 or 2003.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1, 2004. 
(d) TIME FOR FILING REPORTS.—The report re-
quired by section 220(j)(4) of the Internal Revenue Code 
of 1986 to be made on August 1, 2004, shall be treated 
as timely if made before the close of the 90-day period 
beginning on the date of the enactment of this Act.
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•HR 4520 IH1S 
SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE-
TION FOR OIL AND NATURAL GAS PRODUCED 
FROM MARGINAL PROPERTIES. 
(a) IN GENERAL.—Subparagraph (H) of section 
613A(c)(6) is amended by striking ‘‘January 1, 2004’’ and 
inserting ‘‘January 1, 2006’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 413. QUALIFIED ZONE ACADEMY BONDS. 
(a) 
IN
GENERAL.—Paragraph 
(1) 
of 
section 
1397E(e) is amended by striking ‘‘and 2003’’ and insert-
ing ‘‘2003, 2004, and 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to obligations issued after the 
date of the enactment of this Act. 
SEC. 414. DISTRICT OF COLUMBIA. 
(a) DISTRICT OF COLUMBIA ENTERPRISE ZONE.—
Subsection (f) of section 1400 is amended by striking 
‘‘December 31, 2003’’ both places it appears and inserting 
‘‘December 31, 2005’’. 
(b) 
TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—Subsection (b) of section 1400A is amended by 
striking ‘‘December 31, 2003’’ and inserting ‘‘December 
31, 2005’’. 
(c) ZERO PERCENT CAPITAL GAINS RATE.—
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(1) Section 1400B is amended by striking 
‘‘January 1, 2004’’ each place it appears and insert-
ing ‘‘January 1, 2006’’. 
(2) Subsections (e)(2) and (g)(2) of section 
1400B are each amended by striking ‘‘2008’’ each 
place it appears in the headings and text and insert-
ing ‘‘2010’’. 
(3) Subsection (d) of section 1400F is amended 
by striking ‘‘December 31, 2008’’ and inserting 
‘‘December 31, 2010’’. 
(d) FIRST-TIME HOMEBUYER CREDIT.—Subsection 
(i) of section 1400C is amended by striking ‘‘January 1, 
2004’’ and inserting ‘‘January 1, 2006’’. 
(e) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall take effect on the date of the en-
actment of this Act. 
(2) TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—The amendment made by subsection (b) 
shall apply to obligations issued after December 31, 
2003.
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SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY 
ZONE BOND FINANCING. 
Subparagraph (D) of section 1400L(d)(2) is amend-
ed by striking ‘‘2005’’ and inserting ‘‘2009’’. 
SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVI-
TIES. 
(a) 
IN
GENERAL.—Clause 
(iv) 
of 
section 
6103(i)(3)(C) and subparagraph (E) of section 6103(i)(7) 
are both amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) DISCLOSURE OF TAXPAYER IDENTITY TO LAW 
ENFORCEMENT AGENCIES INVESTIGATING TERRORISM.—
Subparagraph (A) of section 6103(i)(7) is amended by 
adding at the end the following new clause: 
‘‘(v) TAXPAYER IDENTITY.—For pur-
poses of this subparagraph, a taxpayer’s 
identity shall not be treated as taxpayer 
return information.’’. 
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by 
subsection (a) shall apply to disclosures on or after 
the date of the enactment of this Act. 
(2) SUBSECTION (b).—The amendment made 
by subsection (b) shall take effect as if included in 
section 201 of the Victims of Terrorism Tax Relief 
Act of 2001.
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SEC. 417. DISCLOSURE OF RETURN INFORMATION RELAT-
ING TO STUDENT LOANS. 
Section 6103(l)(13)(D) (relating to termination) is 
amended by striking ‘‘December 31, 2004’’ and inserting 
‘‘December 31, 2005’’. 
SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS. 
(a) IN GENERAL.—Paragraph (1) of section 7652(f) 
is amended by striking ‘‘January 1, 2004’’ and inserting 
‘‘January 1, 2006’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to articles brought into the 
United States after December 31, 2003. 
SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDG-
ET FOR THE INTERNAL REVENUE SERVICE. 
(a) IN GENERAL.—Paragraph (2) of section 8021(f) 
(relating to joint reviews) is amended by striking ‘‘2004’’ 
and inserting ‘‘2005’’. 
(b) REPORT.—Subparagraph (C) of section 8022(3) 
(regarding reports) is amended—
(1) by striking ‘‘2004’’ and inserting ‘‘2005’’, 
and 
(2) by striking ‘‘with respect to—’’ and all that 
follows and inserting ‘‘with respect to the matters 
addressed in the joint review referred to in section 
8021(f)(2).’’.
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(c) TIME FOR JOINT REVIEW.—The joint review re-
quired by section 8021(f)(2) of the Internal Revenue Code 
of 1986 to be made before June 1, 2004, shall be treated 
as timely if made before June 1, 2005. 
SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS 
TO MENTAL HEALTH BENEFITS. 
(a) IN GENERAL.—Subsection (f) of section 9812 is 
amended by striking ‘‘and’’ at the end of paragraph (1), 
by striking paragraph (2), and by inserting after para-
graph (1) the following new paragraphs: 
‘‘(2) on or after January 1, 2004, and before 
the date of the enactment of American Jobs Cre-
ation Act of 2004, and 
‘‘(3) after December 31, 2005.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to benefits for services furnished 
on or after December 31, 2003. 
SEC. 
421. 
COMBINED 
EMPLOYMENT 
TAX 
REPORTING 
PROJECT. 
(a) IN GENERAL.—Paragraph (1) of section 976(b) 
of the Taxpayer Relief Act of 1997 (111 Stat. 898) is 
amended by striking ‘‘for a period ending with the date 
which is 5 years after the date of the enactment of this 
Act’’ and inserting ‘‘during the period ending on Decem-
ber 31, 2005’’.
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(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to disclosures on or after the 
date of the enactment of this Act. 
SEC. 422. CLEAN-FUEL VEHICLES. 
(a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.—
Paragraph (2) of section 30(b) (relating to phaseout) is 
amended to read as follows: 
‘‘(2) PHASEOUT.—In the case of any qualified 
electric vehicle placed in service after December 31, 
2005, the credit otherwise allowable under sub-
section (a) (determined after the application of para-
graph (1)) shall be reduced by 75 percent.’’. 
(b) DEDUCTION FOR QUALIFIED CLEAN-FUEL VEHI-
CLE
PROPERTY.—Subparagraph 
(B) 
of 
section 
179A(b)(1) (relating to phaseout) is amended to read as 
follows: 
‘‘(B) PHASEOUT.—In the case of any 
qualified clean-fuel vehicle property placed in 
service after December 31, 2005, the limit oth-
erwise applicable under subparagraph (A) shall 
be reduced by 75 percent.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
December 31, 2003.
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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. 
(a) IN GENERAL.—Subsection (b) of section 164 (re-
lating to definitions and special rules) is amended by add-
ing at the end the following: 
‘‘(5) GENERAL SALES TAXES.—For purposes of 
subsection (a)—
‘‘(A) ELECTION TO DEDUCT STATE AND 
LOCAL SALES TAXES IN LIEU OF STATE AND 
LOCAL INCOME TAXES.—
‘‘(i) IN GENERAL.—At the election of 
the taxpayer for the taxable year, sub-
section (a) shall be applied—
‘‘(I) without regard to the ref-
erence to State and local income 
taxes, and 
‘‘(II) as if State and local general 
sales taxes were referred to in a para-
graph thereof. 
‘‘(B) DEFINITION
OF
GENERAL
SALES 
TAX.—The term ‘general sales tax’ means a tax
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•HR 4520 IH1S 
imposed at one rate with respect to the sale at 
retail of a broad range of classes of items. 
‘‘(C) SPECIAL RULES FOR FOOD, ETC.—In 
the case of items of food, clothing, medical sup-
plies, and motor vehicles—
‘‘(i) the fact that the tax does not 
apply with respect to some or all of such 
items shall not be taken into account in 
determining whether the tax applies with 
respect to a broad range of classes of 
items, and 
‘‘(ii) the fact that the rate of tax ap-
plicable with respect to some or all of such 
items is lower than the general rate of tax 
shall not be taken into account in deter-
mining whether the tax is imposed at one 
rate. 
‘‘(D) 
ITEMS
TAXED
AT
DIFFERENT 
RATES.—Except in the case of a lower rate of 
tax applicable with respect to an item described 
in subparagraph (C), no deduction shall be al-
lowed under this paragraph for any general 
sales tax imposed with respect to an item at a 
rate other than the general rate of tax.
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‘‘(E) COMPENSATING USE TAXES.—A com-
pensating use tax with respect to an item shall 
be treated as a general sales tax. For purposes 
of the preceding sentence, the term ‘compen-
sating use tax’ means, with respect to any item, 
a tax which—
‘‘(i) is imposed on the use, storage, or 
consumption of such item, and 
‘‘(ii) is complementary to a general 
sales tax, but only if a deduction is allow-
able under this paragraph with respect to 
items sold at retail in the taxing jurisdic-
tion which are similar to such item. 
‘‘(F) SPECIAL
RULE
FOR
MOTOR
VEHI-
CLES.—In the case of motor vehicles, if the rate 
of tax exceeds the general rate, such excess 
shall be disregarded and the general rate shall 
be treated as the rate of tax. 
‘‘(G) 
SEPARATELY
STATED
GENERAL 
SALES TAXES.—If the amount of any general 
sales tax is separately stated, then, to the ex-
tent that the amount so stated is paid by the 
consumer (other than in connection with the 
consumer’s trade or business) to the seller, such
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amount shall be treated as a tax imposed on, 
and paid by, such consumer. 
‘‘(H) AMOUNT OF DEDUCTION TO BE DE-
TERMINED UNDER TABLES.—
‘‘(i) IN
GENERAL.—The amount of 
the deduction allowed under this para-
graph shall be determined under tables 
prescribed by the Secretary. 
‘‘(ii) REQUIREMENTS FOR TABLES.—
The tables prescribed under clause (i)—
‘‘(I) shall reflect the provisions of 
this paragraph, 
‘‘(II) shall be based on the aver-
age consumption by taxpayers on a 
State-by-State basis, as determined by 
the Secretary, taking into account fil-
ing status, number of dependents, ad-
justed gross income, and rates of 
State and local general sales taxation, 
and 
‘‘(III) need only be determined 
with respect to adjusted gross incomes 
up to the applicable amount (as deter-
mined under section 68(b)).
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‘‘(I) APPLICATION OF PARAGRAPH.—This 
paragraph shall apply to taxable years begin-
ning after December 31, 2003, and before Jan-
uary 1, 2006.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
TITLE VI—REVENUE 
PROVISIONS 
Subtitle A—Provisions to Reduce 
Tax Avoidance Through Indi-
vidual and Corporate Expatria-
tion 
SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND 
THEIR FOREIGN PARENTS. 
(a) IN GENERAL.—Subchapter C of chapter 80 (re-
lating to provisions affecting more than one subtitle) is 
amended by adding at the end the following new section: 
‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 
AND THEIR FOREIGN PARENTS. 
‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED EN-
TITIES.—
‘‘(1) IN GENERAL.—The taxable income of an 
expatriated entity for any taxable year which in-
cludes any portion of the applicable period shall in
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no event be less than the inversion gain of the entity 
for the taxable year. 
‘‘(2) EXPATRIATED ENTITY.—For purposes of 
this subsection—
‘‘(A) IN GENERAL.—The term ‘expatriated 
entity’ means—
‘‘(i) the domestic corporation or part-
nership referred to in subparagraph (B)(i) 
with respect to which a foreign corporation 
is a surrogate foreign corporation, and 
‘‘(ii) any United States person who is 
related (within the meaning of section 
267(b) or 707(b)(1)) to a domestic cor-
poration or partnership described in clause 
(i). 
‘‘(B) 
SURROGATE
FOREIGN
CORPORA-
TION.—A foreign corporation shall be treated 
as a surrogate foreign corporation if, pursuant 
to a plan (or a series of related transactions)—
‘‘(i) the entity completes after March 
4, 2003, the direct or indirect acquisition 
of substantially all of the properties held 
directly or indirectly by a domestic cor-
poration or substantially all of the prop-
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erties constituting a trade or business of a 
domestic partnership, 
‘‘(ii) after the acquisition at least 60 
percent of the stock (by vote or value) of 
the entity is held—
‘‘(I) in the case of an acquisition 
with respect to a domestic corpora-
tion, by former shareholders of the 
domestic corporation by reason of 
holding stock in the domestic corpora-
tion, or 
‘‘(II) in the case of an acquisition 
with respect to a domestic partner-
ship, by former partners of the do-
mestic partnership by reason of hold-
ing a capital or profits interest in the 
domestic partnership, and 
‘‘(iii) after the acquisition the ex-
panded affiliated group which includes the 
entity does not have substantial business 
activities in the foreign country in which, 
or under the law of which, the entity is 
created or organized, when compared to 
the total business activities of such ex-
panded affiliated group.
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An entity otherwise described in clause (i) with 
respect to any domestic corporation or partner-
ship trade or business shall be treated as not so 
described if, on or before March 4, 2003, such 
entity acquired directly or indirectly more than 
half of the properties held directly or indirectly 
by such corporation or more than half of the 
properties constituting such partnership trade 
or business, as the case may be. 
‘‘(b) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) EXPANDED
AFFILIATED
GROUP.—The 
term ‘expanded affiliated group’ means an affiliated 
group as defined in section 1504(a) but without re-
gard to section 1504(b)(3), except that section 
1504(a) shall be applied by substituting ‘more than 
50 percent’ for ‘at least 80 percent’ each place it ap-
pears. 
‘‘(2) CERTAIN
STOCK
DISREGARDED.—There 
shall not be taken into account in determining own-
ership under subsection (a)(2)(B)(ii)—
‘‘(A) stock held by members of the ex-
panded affiliated group which includes the for-
eign corporation, or
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‘‘(B) stock of such foreign corporation 
which is sold in a public offering related to the 
acquisition described in subsection (a)(2)(B)(i). 
‘‘(3) PLAN DEEMED IN CERTAIN CASES.—If a 
foreign corporation acquires directly or indirectly 
substantially all of the properties of a domestic cor-
poration or partnership during the 4-year period be-
ginning on the date which is 2 years before the own-
ership requirements of subsection (a)(2)(B)(ii) are 
met, such actions shall be treated as pursuant to a 
plan. 
‘‘(4) CERTAIN TRANSFERS DISREGARDED.—The 
transfer of properties or liabilities (including by con-
tribution or distribution) shall be disregarded if such 
transfers are part of a plan a principal purpose of 
which is to avoid the purposes of this section. 
‘‘(5) SPECIAL RULE FOR RELATED PARTNER-
SHIPS.—For 
purposes 
of 
applying 
subsection 
(a)(2)(B)(ii) to the acquisition of a trade or business 
of a domestic partnership, except as provided in reg-
ulations, all partnerships which are under common 
control (within the meaning of section 482) shall be 
treated as 1 partnership. 
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to de-
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•HR 4520 IH1S 
‘‘(B) after such acquisition if the transfer 
or license is to a foreign related person. 
Subparagraph (B) shall not apply to property de-
scribed in section 1221(a)(1) in the hands of the ex-
patriated entity. 
‘‘(3) FOREIGN
RELATED
PERSON.—The term 
‘foreign related person’ means, with respect to any 
expatriated entity, a foreign person which—
‘‘(A) is related (within the meaning of sec-
tion 267(b) or 707(b)(1)) to such entity, or 
‘‘(B) is under the same common control 
(within the meaning of section 482) as such en-
tity. 
‘‘(d) SPECIAL RULES.—
‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON 
INVERSION GAIN.—Credits (other than the credit al-
lowed by section 901) shall be allowed against the 
tax imposed by this chapter on an expatriated entity 
for any taxable year described in subsection (a) only 
to the extent such tax exceeds the product of—
‘‘(A) the amount of the inversion gain for 
the taxable year, and 
‘‘(B) the highest rate of tax specified in 
section 11(b)(1).
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For purposes of determining the credit allowed by 
section 901, inversion gain shall be treated as from 
sources within the United States. 
‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 
the case of an expatriated entity which is a partner-
ship—
‘‘(A) subsection (a)(1) shall apply at the 
partner rather than the partnership level, 
‘‘(B) the inversion gain of any partner for 
any taxable year shall be equal to the sum of—
‘‘(i) the partner’s distributive share of 
inversion gain of the partnership for such 
taxable year, plus 
‘‘(ii) gain recognized for the taxable 
year by the partner by reason of the trans-
fer during the applicable period of any 
partnership interest of the partner in such 
partnership to the surrogate foreign cor-
poration, and 
‘‘(C) the highest rate of tax specified in 
the rate schedule applicable to the partner 
under this chapter shall be substituted for the 
rate of tax referred to in paragraph (1). 
‘‘(3) COORDINATION
WITH
SECTION
172
AND 
MINIMUM TAX.—Rules similar to the rules of para-
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graphs (3) and (4) of section 860E(a) shall apply 
for purposes of subsection (a). 
‘‘(4) STATUTE OF LIMITATIONS.—
‘‘(A) IN GENERAL.—The statutory period 
for the assessment of any deficiency attrib-
utable to the inversion gain of any taxpayer for 
any pre-inversion year shall not expire before 
the expiration of 3 years from the date the Sec-
retary is notified by the taxpayer (in such man-
ner as the Secretary may prescribe) of the ac-
quisition described in subsection (a)(2)(B)(i) to 
which such gain relates and such deficiency 
may be assessed before the expiration of such 
3-year period notwithstanding the provisions of 
any other law or rule of law which would other-
wise prevent such assessment. 
‘‘(B) PRE-INVERSION YEAR.—For purposes 
of subparagraph (A), the term ‘pre-inversion 
year’ means any taxable year if—
‘‘(i) any portion of the applicable pe-
riod is included in such taxable year, and 
‘‘(ii) such year ends before the taxable 
year in which the acquisition described in 
subsection (a)(2)(B)(i) is completed.
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‘‘(e) SPECIAL RULE FOR TREATIES.—Nothing in sec-
tion 894 or 7852(d) or in any other provision of law shall 
be construed as permitting an exemption, by reason of any 
treaty obligation of the United States heretofore or here-
after entered into, from the provisions of this section. 
‘‘(f) REGULATIONS.—The Secretary shall provide 
such regulations as are necessary to carry out this section, 
including regulations providing for such adjustments to 
the application of this section as are necessary to prevent 
the avoidance of the purposes of this section, including the 
avoidance of such purposes through—
‘‘(1) the use of related persons, pass-through or 
other noncorporate entities, or other intermediaries, 
or 
‘‘(2) transactions designed to have persons 
cease to be (or not become) members of expanded 
affiliated groups or related persons.’’. 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subchapter C of chapter 80 is amended by adding 
at the end the following new item:
‘‘Sec. 7874. Rules relating to expatriated entities and their for-
eign parents.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after 
March 4, 2003.
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SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSID-
ERS IN EXPATRIATED CORPORATIONS. 
(a) IN GENERAL.—Subtitle D is amended by insert-
ing after chapter 44 end the following new chapter: 
‘‘CHAPTER 45—PROVISIONS RELATING TO 
EXPATRIATED ENTITIES
‘‘Sec. 4985. Stock compensation of insiders in expatriated cor-
porations.
‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA-
TRIATED CORPORATIONS. 
‘‘(a) IMPOSITION OF TAX.—In the case of an indi-
vidual who is a disqualified individual with respect to any 
expatriated corporation, there is hereby imposed on such 
person a tax equal to 15 percent of the value (determined 
under subsection (b)) of the specified stock compensation 
held (directly or indirectly) by or for the benefit of such 
individual or a member of such individual’s family (as de-
fined in section 267) at any time during the 12-month 
period beginning on the date which is 6 months before 
the expatriation date. 
‘‘(b) VALUE.—For purposes of subsection (a)—
‘‘(1) IN GENERAL.—The value of specified stock 
compensation shall be—
‘‘(A) in the case of a stock option (or other 
similar right) or a stock appreciation right, the 
fair value of such option or right, and
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‘‘(B) in any other case, the fair market 
value of such compensation. 
‘‘(2) DATE
FOR
DETERMINING
VALUE.—The 
determination of value shall be made—
‘‘(A) in the case of specified stock com-
pensation held on the expatriation date, on such 
date, 
‘‘(B) in the case of such compensation 
which is canceled during the 6 months before 
the expatriation date, on the day before such 
cancellation, and 
‘‘(C) in the case of such compensation 
which is granted after the expatriation date, on 
the date such compensation is granted. 
‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN 
RECOGNIZED.—Subsection (a) shall apply to any disquali-
fied individual with respect to an expatriated corporation 
only if gain (if any) on any stock in such corporation is 
recognized in whole or part by any shareholder by reason 
of the acquisition referred to in section 7874(a)(2)(B)(i) 
with respect to such corporation. 
‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED
ON 
COMPENSATION.—Subsection (a) shall not apply to—
‘‘(1) any stock option which is exercised on the 
expatriation date or during the 6-month period be-
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•HR 4520 IH1S 
fore such date and to the stock acquired in such ex-
ercise, if income is recognized under section 83 on 
or before the expatriation date with respect to the 
stock acquired pursuant to such exercise, and 
‘‘(2) any other specified stock compensation 
which is exercised, sold, exchanged, distributed, 
cashed-out, or otherwise paid during such period in 
a transaction in which income, gain, or loss is recog-
nized in full. 
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) DISQUALIFIED
INDIVIDUAL.—The term 
‘disqualified individual’ means, with respect to a cor-
poration, any individual who, at any time during the 
12-month period beginning on the date which is 6 
months before the expatriation date—
‘‘(A) is subject to the requirements of sec-
tion 16(a) of the Securities Exchange Act of 
1934 with respect to such corporation or any 
member of the expanded affiliated group which 
includes such corporation, or 
‘‘(B) would be subject to such require-
ments if such corporation or member were an 
issuer of equity securities referred to in such 
section.
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•HR 4520 IH1S 
‘‘(2) EXPATRIATED
CORPORATION; EXPATRIA-
TION DATE.—
‘‘(A) EXPATRIATED
CORPORATION.—The 
term ‘expatriated corporation’ means any cor-
poration which is an expatriated entity (as de-
fined in section 7874(a)(2)). Such term in-
cludes any predecessor or successor of such a 
corporation. 
‘‘(B) EXPATRIATION DATE.—The term ‘ex-
patriation date’ means, with respect to a cor-
poration, the date on which the corporation 
first becomes an expatriated corporation. 
‘‘(3) SPECIFIED STOCK COMPENSATION.—
‘‘(A) IN
GENERAL.—The term ‘specified 
stock compensation’ means payment (or right 
to payment) granted by the expatriated cor-
poration (or by any member of the expanded af-
filiated group which includes such corporation) 
to any person in connection with the perform-
ance of services by a disqualified individual for 
such corporation or member if the value of such 
payment or right is based on (or determined by 
reference to) the value (or change in value) of 
stock in such corporation (or any such mem-
ber).
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•HR 4520 IH1S 
‘‘(B) EXCEPTIONS.—Such term shall not 
include—
‘‘(i) any option to which part II of 
subchapter D of chapter 1 applies, or 
‘‘(ii) any payment or right to payment 
from a plan referred to in section 
280G(b)(6). 
‘‘(4) EXPANDED
AFFILIATED
GROUP.—The 
term ‘expanded affiliated group’ means an affiliated 
group (as defined in section 1504(a) without regard 
to section 1504(b)(3)); except that section 1504(a) 
shall be applied by substituting ‘more than 50 per-
cent’ for ‘at least 80 percent’ each place it appears. 
‘‘(f) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) CANCELLATION
OF
RESTRICTION.—The 
cancellation of a restriction which by its terms will 
never lapse shall be treated as a grant. 
‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY 
CORPORATION TREATED AS SPECIFIED STOCK COM-
PENSATION.—Any payment of the tax imposed by 
this section directly or indirectly by the expatriated 
corporation or by any member of the expanded affili-
ated group which includes such corporation—
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•HR 4520 IH1S 
‘‘(A) shall be treated as specified stock 
compensation, and 
‘‘(B) shall not be allowed as a deduction 
under any provision of chapter 1. 
‘‘(3) 
CERTAIN
RESTRICTIONS
IGNORED.—
Whether there is specified stock compensation, and 
the value thereof, shall be determined without regard 
to any restriction other than a restriction which by 
its terms will never lapse. 
‘‘(4) PROPERTY TRANSFERS.—Any transfer of 
property shall be treated as a payment and any right 
to a transfer of property shall be treated as a right 
to a payment. 
‘‘(5) OTHER
ADMINISTRATIVE
PROVISIONS.—
For purposes of subtitle F, any tax imposed by this 
section shall be treated as a tax imposed by subtitle 
A. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section.’’
(b) DENIAL OF DEDUCTION.—
(1) IN
GENERAL.—Paragraph (6) of section 
275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 
(2) $1,000,000 LIMIT
ON
DEDUCTIBLE
COM-
PENSATION REDUCED BY PAYMENT OF EXCISE TAX
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ON SPECIFIED STOCK COMPENSATION.—Paragraph 
(4) of section 162(m) is amended by adding at the 
end the following new subparagraph: 
‘‘(G) COORDINATION WITH EXCISE TAX ON 
SPECIFIED STOCK COMPENSATION.—The dollar 
limitation contained in paragraph (1) with re-
spect to any covered employee shall be reduced 
(but not below zero) by the amount of any pay-
ment (with respect to such employee) of the tax 
imposed by section 4985 directly or indirectly 
by the expatriated corporation (as defined in 
such section) or by any member of the ex-
panded affiliated group (as defined in such sec-
tion) which includes such corporation.’’
(c) CONFORMING AMENDMENTS.—
(1) The last sentence of section 3121(v)(2)(A) 
is amended by inserting before the period ‘‘or to any 
specified stock compensation (as defined in section 
4985) on which tax is imposed by section 4985’’. 
(2) The table of chapters for subtitle D is 
amended by inserting after the item relating to 
chapter 44 the following new item:
‘‘Chapter 45. Provisions relating to expatriated entities.’’
(d) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on March 4, 2003; except that 
periods before such date shall not be taken into account
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in applying the periods in subsections (a) and (e)(1) of 
section 4985 of the Internal Revenue Code of 1986, as 
added by this section. 
SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOR-
EIGN JURISDICTIONS. 
(a) IN GENERAL.—Section 845(a) (relating to alloca-
tion in case of reinsurance agreement involving tax avoid-
ance or evasion) is amended by striking ‘‘source and char-
acter’’ and inserting ‘‘amount, source, or character’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to any risk reinsured after the date 
of the enactment of this Act. 
SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 
INDIVIDUALS. 
(a) EXPATRIATION TO AVOID TAX.—
(1) IN
GENERAL.—Subsection (a) of section 
877 (relating to treatment of expatriates) is amend-
ed to read as follows: 
‘‘(a) TREATMENT OF EXPATRIATES.—
‘‘(1) IN GENERAL.—Every nonresident alien in-
dividual to whom this section applies and who, with-
in the 10-year period immediately preceding the 
close of the taxable year, lost United States citizen-
ship shall be taxable for such taxable year in the 
manner provided in subsection (b) if the tax imposed
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pursuant to such subsection (after any reduction in 
such tax under the last sentence of such subsection) 
exceeds the tax which, without regard to this section, 
is imposed pursuant to section 871. 
‘‘(2) INDIVIDUALS
SUBJECT
TO
THIS
SEC-
TION.—This section shall apply to any individual 
if—
‘‘(A) the average annual net income tax 
(as defined in section 38(c)(1)) of such indi-
vidual for the period of 5 taxable years ending 
before the date of the loss of United States citi-
zenship is greater than $124,000, 
‘‘(B) the net worth of the individual as of 
such date is $2,000,000 or more, or 
‘‘(C) such individual fails to certify under 
penalty of perjury that he has met the require-
ments of this title for the 5 preceding taxable 
years or fails to submit such evidence of such 
compliance as the Secretary may require. 
In the case of the loss of United States citizenship 
in any calendar year after 2004, such $124,000 
amount shall be increased by an amount equal to 
such dollar amount multiplied by the cost-of-living 
adjustment determined under section 1(f)(3) for 
such calendar year by substituting ‘2003’ for ‘1992’
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in subparagraph (B) thereof. Any increase under the 
preceding sentence shall be rounded to the nearest 
multiple of $1,000.’’. 
(2) REVISION
OF
EXCEPTIONS
FROM
ALTER-
NATIVE TAX.—Subsection (c) of section 877 (relat-
ing to tax avoidance not presumed in certain cases) 
is amended to read as follows: 
‘‘(c) EXCEPTIONS.—
‘‘(1) IN
GENERAL.—Subparagraphs (A) and 
(B) of subsection (a)(2) shall not apply to an indi-
vidual described in paragraph (2) or (3). 
‘‘(2) DUAL CITIZENS.—
‘‘(A) IN GENERAL.—An individual is de-
scribed in this paragraph if—
‘‘(i) the individual became at birth a 
citizen of the United States and a citizen 
of another country and continues to be a 
citizen of such other country, and 
‘‘(ii) the individual has had no sub-
stantial contacts with the United States. 
‘‘(B) SUBSTANTIAL CONTACTS.—An indi-
vidual shall be treated as having no substantial 
contacts with the United States only if the indi-
vidual—
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‘‘(i) was never a resident of the 
United States (as defined in section 
7701(b)), 
‘‘(ii) has never held a United States 
passport, and 
‘‘(iii) was not present in the United 
States for more than 30 days during any 
calendar year which is 1 of the 10 calendar 
years preceding the individual’s loss of 
United States citizenship. 
‘‘(3) CERTAIN MINORS.—An individual is de-
scribed in this paragraph if—
‘‘(A) the individual became at birth a cit-
izen of the United States, 
‘‘(B) neither parent of such individual was 
a citizen of the United States at the time of 
such birth, 
‘‘(C) the individual’s loss of United States 
citizenship occurs before such individual attains 
age 181⁄2, and 
‘‘(D) the individual was not present in the 
United States for more than 30 days during 
any calendar year which is 1 of the 10 calendar 
years preceding the individual’s loss of United 
States citizenship.’’.
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(3) 
CONFORMING
AMENDMENT.—Section 
2107(a) is amended to read as follows: 
‘‘(a) TREATMENT OF EXPATRIATES.—A tax com-
puted in accordance with the table contained in section 
2001 is hereby imposed on the transfer of the taxable es-
tate, determined as provided in section 2106, of every de-
cedent nonresident not a citizen of the United States if 
the date of death occurs during a taxable year with respect 
to which the decedent is subject to tax under section 
877(b).’’. 
(b) SPECIAL RULES FOR DETERMINING WHEN AN 
INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN 
OR LONG-TERM RESIDENT.—Section 7701 (relating to 
definitions) is amended by redesignating subsection (n) as 
subsection (o) and by inserting after subsection (m) the 
following new subsection: 
‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN 
INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN 
OR LONG-TERM RESIDENT.—An individual who would 
(but for this subsection) cease to be treated as a citizen 
or resident of the United States shall continue to be treat-
ed as a citizen or resident of the United States, as the 
case may be, until such individual—
‘‘(1) gives notice of an expatriating act or ter-
mination of residency (with the requisite intent to
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relinquish citizenship or terminate residency) to the 
Secretary of State or the Secretary of Homeland Se-
curity, and 
‘‘(2) provides a statement in accordance with 
section 6039G.’’. 
(c) PHYSICAL PRESENCE IN THE UNITED STATES 
FOR MORE THAN 30 DAYS.—Section 877 (relating to ex-
patriation to avoid tax) is amended by adding at the end 
the following new subsection: 
‘‘(g) PHYSICAL PRESENCE.—
‘‘(1) IN GENERAL.—This section shall not apply 
to any individual to whom this section would other-
wise apply for any taxable year during the 10-year 
period referred to in subsection (a) in which such in-
dividual is physically present in the United States at 
any time on more than 30 days in the calendar year 
ending in such taxable year, and such individual 
shall be treated for purposes of this title as a citizen 
or resident of the United States, as the case may be, 
for such taxable year. 
‘‘(2) EXCEPTION.—
‘‘(A) IN GENERAL.—In the case of an indi-
vidual described in any of the following sub-
paragraphs of this paragraph, a day of physical 
presence in the United States shall be dis-