228
justed basis of such other property immediately before the 
allocation required by paragraph (2).’’
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to distributions after the date of the en-
actment of this Act. 
SEC. 3025. REPEAL OF SPECIAL RULES FOR FASITS. 
(a) IN GENERAL.—Part V of subchapter M of chapter 
1 (relating to financial asset securitization investment 
trusts) is hereby repealed. 
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (6) of section 56(g) is amended by 
striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 
REMIC’’. 
(2) Clause (ii) of section 382(l)(4)(B) is amended 
by striking ‘‘a REMIC to which part IV of subchapter 
M applies, or a FASIT to which part V of subchapter 
M applies,’’ and inserting ‘‘or a REMIC to which 
part IV of subchapter M applies,’’. 
(3) Paragraph (1) of section 582(c) is amended 
by striking ‘‘, and any regular interest in a FASIT,’’. 
(4) Subparagraph (E) of section 856(c)(5) is 
amended by striking the last sentence. 
(5)(A) Section 860G(a)(1) is amended by adding 
at the end the following new sentence: ‘‘An interest 
shall not fail to qualify as a regular interest solely be-
229
cause the specified principal amount of the regular 
interest (or the amount of interest accrued on the reg-
ular interest) can be reduced as a result of the non-
occurrence of 1 or more contingent payments with re-
spect to any reverse mortgage loan held by the 
REMIC if, on the startup day for the REMIC, the 
sponsor reasonably believes that all principal and in-
terest due under the regular interest will be paid at 
or prior to the liquidation of the REMIC.’’. 
(B) The last sentence of section 860G(a)(3) is 
amended by inserting ‘‘, and any reverse mortgage 
loan (and each balance increase on such loan meeting 
the requirements of subparagraph (A)(iii)) shall be 
treated as an obligation secured by an interest in real 
property’’ before the period at the end. 
(6) Paragraph (3) of section 860G(a) is amended 
by adding ‘‘and’’ at the end of subparagraph (B), by 
striking ‘‘, and’’ at the end of subparagraph (C) and 
inserting a period, and by striking subparagraph (D). 
(7) Section 860G(a)(3) is amended by adding at 
the end the following new sentence: ‘‘For purposes of 
subparagraph (A), if more than 50 percent of the obli-
gations transferred to, or purchased by, the REMIC 
are originated by the United States or any State (or 
any political subdivision, agency, or instrumentality
230
of the United States or any State) and are prin-
cipally secured by an interest in real property, then 
each obligation transferred to, or purchased by, the 
REMIC shall be treated as secured by an interest in 
real property.’’. 
(8)(A) Section 860G(a)(3)(A) is amended by 
striking ‘‘or’’ at the end of clause (i), by inserting 
‘‘or’’ at the end of clause (ii), and by inserting after 
clause (ii) the following new clause: 
‘‘(iii) represents an increase in the 
principal amount under the original terms 
of an obligation described in clause (i) or 
(ii) if— 
‘‘(I) such increase in the balance 
is attributable to an advance made to 
the obligor pursuant to the original 
terms of the obligation, 
‘‘(II) such increase in the balance 
occurs after the startup day, and 
‘‘(III) such increase in the balance 
is purchased by the REMIC pursuant 
to a fixed price contract in effect on 
the startup day.’’. 
(B) Section 860G(a)(7)(B) is amended to read as 
follows:
231
‘‘(B) QUALIFIED RESERVE FUND.—For pur-
poses of subparagraph (A), the term ‘qualified 
reserve fund’ means any reasonably required re-
serve to—
‘‘(i) provide for full payment of ex-
penses of the REMIC or amounts due on 
regular interests in the event of defaults on 
qualified mortgages or lower than expected 
returns on cash flow investments, or 
‘‘(ii) provide a source of funds for the 
purchase of obligations described in clause 
(ii) or (iii) of paragraph (3)(A). 
The aggregate fair market value of the assets held 
in any such reserve shall not exceed 50 percent 
of the aggregate fair market value of all of the 
assets of the REMIC on the startup day, and the 
amount of any such reserve shall be promptly 
and appropriately reduced to the extent the 
amount held in such reserve is no longer reason-
ably required for purposes specified in clause (i) 
or (ii) of paragraph (3)(A).’’. 
(9) Subparagraph (C) of section 1202(e)(4) is 
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’.
232
(10) Section 1272(a)(6)(B) is amended by add-
ing at the end the following new flush sentence: 
‘‘For purposes of clause (iii), the Secretary shall 
prescribe regulations permitting the use of a cur-
rent prepayment assumption, determined as of 
the close of the accrual period (or such other time 
as the Secretary may prescribe during the tax-
able year in which the accrual period ends).’’. 
(11) Subparagraph (C) of section 7701(a)(19) is 
amended by adding ‘‘and’’ at the end of clause (ix), 
by striking ‘‘, and’’ at the end of clause (x) and in-
serting a period, and by striking clause (xi). 
(12) The table of parts for subchapter M of chap-
ter 1 is amended by striking the item relating to part 
V. 
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to taxable years beginning after December 31, 
2003. 
(2) EXCEPTION FOR EXISTING FASITS.—
(A) IN GENERAL.—Paragraph (1) shall not 
apply to any FASIT in existence on the date of 
the enactment of this Act to the extent that reg-
ular interests issued by the FASIT before such
233
date continue to remain outstanding in accord-
ance with the original terms of issuance. 
(B) TRANSFER OF ADDITIONAL ASSETS NOT 
PERMITTED.—Except as provided in regulations 
prescribed by the Secretary of the Treasury or 
the Secretary’s delegate, subparagraph (A) shall 
cease to apply as of the earliest date after the 
date of the enactment of this Act that any prop-
erty is transferred to the FASIT. 
SEC. 3026. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 
ON REMIC RESIDUALS. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the following 
new subsection: 
‘‘(e) LIMITATION ON TRANSFER OF BUILT-IN LOSSES 
ON REMIC RESIDUALS IN SECTION 351 TRANSACTIONS.—
If—
‘‘(1) a residual interest (as defined in section 
860G(a)(2)) in a REMIC is transferred in any trans-
action which is described in subsection (a), and 
‘‘(2) the transferee’s adjusted basis in such resid-
ual interest would (but for this paragraph) exceed its 
fair market value immediately after such transaction, 
then, notwithstanding subsection (a), the transferee’s ad-
justed basis in such residual interest shall not exceed its
234
fair market value (whether or not greater than zero) imme-
diately after such transaction.’’ 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to transactions after the date of the en-
actment of this Act.
SEC. 3027. CLARIFICATION OF BANKING BUSINESS FOR 
PURPOSES OF DETERMINING INVESTMENT 
OF EARNINGS IN UNITED STATES PROPERTY. 
(a) IN
GENERAL.—Subparagraph (A) of section 
956(c)(2) is amended to read as follows: 
‘‘(A) obligations of the United States, 
money, or deposits with any corporation with re-
spect to which a bank holding company (within 
the meaning of section 2(a) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1841(a))) or fi-
nancial holding company (within the meaning of 
section 2(p) of such Act) owns directly or indi-
rectly more than 80 percent by vote or value of 
the stock of such corporation;’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall take effect on the date of the enactment of this 
Act.
235
SEC. 3028. MODIFICATIONS RELATED TO CERTAIN SMALL 
INSURANCE COMPANIES. 
(a) EXEMPTION FOR SMALL PROPERTY AND CASUALTY 
INSURANCE COMPANIES.—
(1) IN
GENERAL.—Section 501(c)(15)(A) is 
amended to read as follows: 
‘‘(A) Insurance companies (as defined in 
section 816(a)) other than life (including inter-
insurers and reciprocal underwriters) if—
‘‘(i) the gross receipts for the taxable 
year do not exceed $600,000, and 
‘‘(ii) more than 50 percent of such 
gross receipts consist of premiums.’’. 
(2) 
CONTROLLED
GROUP
RULE.—Section 
501(c)(15)(C) is amended by inserting ‘‘, except that 
in applying section 1563 for purposes of section 
831(b)(2)(B)(ii), subparagraphs (B) and (C) of sec-
tion 1563(b)(2) shall be disregarded’’ before the period 
at the end. 
(3) CONFORMING
AMENDMENT.—Clause (i) of 
section 831(b)(2)(A) is amended by striking ‘‘exceed 
$350,000 but’’. 
(b) ALTERNATIVE TAX FOR CERTAIN SMALL INSUR-
ANCE COMPANIES.—
236
(1) INCREASED LIMITATION.—Clause (i) of sec-
tion 
831(b)(2)(A) 
is 
amended 
by 
striking 
‘‘$1,200,000’’ and inserting ‘‘$1,890,000’’. 
(2) INFLATION ADJUSTMENT.—Paragraph (2) of 
section 831(b) is amended by adding at the end the 
following new subparagraph: 
‘‘(C) INFLATION ADJUSTMENT.—In the case 
of any taxable year beginning in a calendar year 
after 2004, the $1,890,000 amount in subpara-
graph (A) shall be increased by an amount equal 
to—
‘‘(i) $1,890,000, multiplied by 
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such cal-
endar year by substituting ‘calendar year 
2003’ for ‘calendar year 1992’ in subpara-
graph (B) thereof. 
If the amount as adjusted under the preceding 
sentence is not a multiple of $1,000, such 
amount shall be rounded to the next lowest mul-
tiple of $1,000.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
237
SEC. 3029. DEFINITION OF INSURANCE COMPANY FOR SEC-
TION 831. 
(a) IN GENERAL.—Section 831 is amended by redesig-
nating subsection (c) as subsection (d) and by inserting 
after subsection (b) the following new subsection: 
‘‘(c) INSURANCE COMPANY DEFINED.—For purposes of 
this section, the term ‘insurance company’ has the meaning 
given to such term by section 816(a).’’
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003. 
SEC. 3030. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 163 (relating to deduction 
for interest) is amended by redesignating subsection (m) as 
subsection (n) and by inserting after subsection (l) the fol-
lowing new subsection: 
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO 
NONDISCLOSED REPORTABLE TRANSACTIONS.—No deduc-
tion shall be allowed under this chapter for any interest 
paid or accrued under section 6601 on any underpayment 
of tax which is attributable to the portion of any reportable 
transaction 
understatement 
(as 
defined 
in 
section 
6662A(b)) with respect to which the requirement of section 
6664(d)(2)(A) is not met.’’.
238
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transactions in taxable years begin-
ning after the date of the enactment of this Act. 
SEC. 3031. CLARIFICATION OF RULES FOR PAYMENT OF ES-
TIMATED TAX FOR CERTAIN DEEMED ASSET 
SALES. 
(a) IN GENERAL.—Paragraph (13) of section 338(h) 
(relating to tax on deemed sale not taken into account for 
estimated tax purposes) is amended by adding at the end 
the following: ‘‘The preceding sentence shall not apply with 
respect to a qualified stock purchase for which an election 
is made under paragraph (10).’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to transactions occurring after the 
date of the enactment of this Act. 
SEC. 3032. RECOGNITION OF GAIN FROM THE SALE OF A 
PRINCIPAL RESIDENCE ACQUIRED IN A LIKE-
KIND EXCHANGE WITHIN 5 YEARS OF SALE. 
(a) IN GENERAL.—Section 121(d) (relating to special 
rules for exclusion of gain from sale of principal residence) 
is amended by adding at the end the following new para-
graph: 
‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX-
CHANGE.—If a taxpayer acquired property in an ex-
change to which section 1031 applied, subsection (a)
239
shall not apply to the sale or exchange of such prop-
erty if it occurs during the 5-year period beginning 
with the date of the acquisition of such property.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to sales or exchanges after the date of 
the enactment of this Act. 
SEC. 3033. PREVENTION OF MISMATCHING OF INTEREST 
AND ORIGINAL ISSUE DISCOUNT DEDUC-
TIONS AND INCOME INCLUSIONS IN TRANS-
ACTIONS WITH RELATED FOREIGN PERSONS. 
(a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 
(relating to special rule for original issue discount on obli-
gation held by related foreign person) is amended by redes-
ignating subparagraph (B) as subparagraph (C) and by in-
serting after subparagraph (A) the following new subpara-
graph: 
‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN 
ENTITIES.—
‘‘(i) IN GENERAL.—In the case of any 
debt instrument having original issue dis-
count which is held by a related foreign per-
son which is a foreign personal holding 
company (as defined in section 552), a con-
trolled foreign corporation (as defined in 
section 957), or a passive foreign investment
240
company (as defined in section 1297), a de-
duction shall be allowable to the issuer with 
respect to such original issue discount for 
any taxable year before the taxable year in 
which paid only to the extent such original 
issue discount is included during such prior 
taxable year in the gross income of a United 
States person who owns (within the mean-
ing of section 958(a)) stock in such corpora-
tion. 
‘‘(ii) SECRETARIAL
AUTHORITY.—The 
Secretary may by regulation exempt trans-
actions from the application of clause (i), 
including any transaction which is entered 
into by a payor in the ordinary course of 
a trade or business in which the payor is 
predominantly engaged.’’. 
(b) INTEREST AND OTHER DEDUCTIBLE AMOUNTS.—
Section 267(a)(3) is amended—
(1) by striking ‘‘The Secretary’’ and inserting: 
‘‘(A) IN GENERAL.—The Secretary’’, and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(B) SPECIAL RULE FOR CERTAIN FOREIGN 
ENTITIES.—
241
‘‘(i) IN
GENERAL.—Notwithstanding 
subparagraph (A), in the case of any 
amount payable to a foreign personal hold-
ing company (as defined in section 552), a 
controlled foreign corporation (as defined in 
section 957), or a passive foreign investment 
company (as defined in section 1297), a de-
duction shall be allowable to the payor with 
respect to such amount for any taxable year 
before the taxable year in which paid only 
to the extent such amount is included dur-
ing such prior taxable year in the gross in-
come of a United States person who owns 
(within the meaning of section 958(a)) stock 
in such corporation. 
‘‘(ii) SECRETARIAL
AUTHORITY.—The 
Secretary may by regulation exempt trans-
actions from the application of clause (i), 
including any transaction which is entered 
into by a payor in the ordinary course of 
a trade or business in which the payor is 
predominantly engaged and in which the 
payment of the accrued amounts occurs 
within 81⁄2 months after accrual or within
242
such other period as the Secretary may pre-
scribe.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to payments accrued on or after the date 
of the enactment of this Act. 
SEC. 3034. EXCLUSION FROM GROSS INCOME FOR INTER-
EST ON OVERPAYMENTS OF INCOME TAX BY 
INDIVIDUALS. 
(a) IN GENERAL.—Part III of subchapter B of chapter 
1 (relating to items specifically excluded from gross income) 
is amended by inserting after section 139A the following 
new section: 
‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER-
EST ON OVERPAYMENTS OF INCOME TAX BY 
INDIVIDUALS. 
‘‘(a) IN GENERAL.—In the case of an individual, gross 
income shall not include interest paid under section 6611 
on any overpayment of tax imposed by this subtitle. 
‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 
the case of a failure to claim items resulting in the overpay-
ment on the original return if the Secretary determines that 
the principal purpose of such failure is to take advantage 
of subsection (a). 
‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED AD-
JUSTED GROSS INCOME.—For purposes of this title, interest
243
not included in gross income under subsection (a) shall not 
be treated as interest which is exempt from tax for purposes 
of sections 32(i)(2)(B) and 6012(d) or any computation in 
which interest exempt from tax under this title is added 
to adjusted gross income.’’.
(b) CLERICAL AMENDMENT.—The table of sections for 
part III of subchapter B of chapter 1 is amended by insert-
ing after the item relating to section 139A the following 
new item:
‘‘Sec. 139B. Exclusion from gross income for interest on overpay-
ments of income tax by individuals.’’.
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to interest received in calendar years 
beginning after the date of the enactment of this Act. 
SEC. 3035. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS. 
(a) IN GENERAL.—Subchapter A of chapter 67 (relat-
ing to interest on underpayments) is amended by adding 
at the end the following new section: 
‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS, 
ETC. 
‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN 
AS PAYMENT OF TAX.—A taxpayer may make a cash de-
posit with the Secretary which may be used by the Sec-
retary to pay any tax imposed under subtitle A or B or
244
chapter 41, 42, 43, or 44 which has not been assessed at 
the time of the deposit. Such a deposit shall be made in 
such manner as the Secretary shall prescribe. 
‘‘(b) NO INTEREST IMPOSED.—To the extent that such 
deposit is used by the Secretary to pay tax, for purposes 
of section 6601 (relating to interest on underpayments), the 
tax shall be treated as paid when the deposit is made. 
‘‘(c) RETURN OF DEPOSIT.—Except in a case where 
the Secretary determines that collection of tax is in jeop-
ardy, the Secretary shall return to the taxpayer any 
amount of the deposit (to the extent not used for a payment 
of tax) which the taxpayer requests in writing. 
‘‘(d) PAYMENT OF INTEREST.—
‘‘(1) IN GENERAL.—For purposes of section 6611 
(relating to interest on overpayments), a deposit 
which is returned to a taxpayer shall be treated as a 
payment of tax for any period to the extent (and only 
to the extent) attributable to a disputable tax for such 
period. Under regulations prescribed by the Secretary, 
rules similar to the rules of section 6611(b)(2) shall 
apply. 
‘‘(2) DISPUTABLE TAX.—
‘‘(A) IN
GENERAL.—For purposes of this 
section, the term ‘disputable tax’ means the 
amount of tax specified at the time of the deposit
245
as the taxpayer’s reasonable estimate of the max-
imum amount of any tax attributable to disput-
able items. 
‘‘(B) SAFE HARBOR BASED ON 30-DAY LET-
TER.—In the case of a taxpayer who has been 
issued a 30-day letter, the maximum amount of 
tax under subparagraph (A) shall not be less 
than the amount of the proposed deficiency speci-
fied in such letter. 
‘‘(3) OTHER
DEFINITIONS.—For purposes of 
paragraph (2)—
‘‘(A) DISPUTABLE ITEM.—The term ‘disput-
able item’ means any item of income, gain, loss, 
deduction, or credit if the taxpayer—
‘‘(i) has a reasonable basis for its 
treatment of such item, and 
‘‘(ii) reasonably believes that the Sec-
retary also has a reasonable basis for dis-
allowing the taxpayer’s treatment of such 
item. 
‘‘(B) 30-DAY
LETTER.—The term ‘30-day 
letter’ means the first letter of proposed defi-
ciency which allows the taxpayer an opportunity 
for administrative review in the Internal Rev-
enue Service Office of Appeals.
246
‘‘(4) RATE OF INTEREST.—The rate of interest 
allowable under this subsection shall be the Federal 
short-term rate determined under section 6621(b), 
compounded daily. 
‘‘(e) USE OF DEPOSITS.—
‘‘(1) PAYMENT
OF
TAX.—Except as otherwise 
provided by the taxpayer, deposits shall be treated as 
used for the payment of tax in the order deposited. 
‘‘(2) RETURNS OF DEPOSITS.—Deposits shall be 
treated as returned to the taxpayer on a last-in, first-
out basis.’’. 
(b) CLERICAL AMENDMENT.—The table of sections for 
subchapter A of chapter 67 is amended by adding at the 
end the following new item:
‘‘Sec. 6603. Deposits made to suspend running of interest on poten-
tial underpayments, etc.’’.
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by 
this section shall apply to deposits made after the 
date of the enactment of this Act. 
(2) COORDINATION WITH DEPOSITS MADE UNDER 
REVENUE
PROCEDURE
84–58.—In the case of an 
amount held by the Secretary of the Treasury or his 
delegate on the date of the enactment of this Act as 
a deposit in the nature of a cash bond deposit pursu-
ant to Revenue Procedure 84–58, the date that the