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‘‘(B) such interest shall be treated as a sep-
arate share in the trust, and
‘‘(C)(i) such separate share shall be treated
as a separate trust consisting of the assets allo-
cable to such share,
‘‘(ii) the separate trust shall be treated as
having sold its assets on the day before the expa-
triation date for their fair market value and as
having distributed all of its assets to the indi-
vidual as of such time, and
‘‘(iii) the individual shall be treated as hav-
ing recontributed the assets to the separate trust.
Subsection (a)(2) shall apply to any income, gain, or
loss of the individual arising from a distribution de-
scribed in subparagraph (C)(ii). In determining the
amount of such distribution, proper adjustments shall
be made for liabilities of the trust allocable to an in-
dividual’s share in the trust.
‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI-
FIED TRUSTS.—
‘‘(A) IN GENERAL.—If the trust interest de-
scribed in paragraph (1) is an interest in a
qualified trust—
‘‘(i) paragraph (1) and subsection (a)
shall not apply, and
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‘‘(ii) in addition to any other tax im-
posed by this title, there is hereby imposed
on each distribution with respect to such in-
terest a tax in the amount determined
under subparagraph (B).
‘‘(B) AMOUNT OF TAX.—The amount of tax
under subparagraph (A)(ii) shall be equal to the
lesser of—
‘‘(i) the highest rate of tax imposed by
section 1(e) for the taxable year which in-
cludes the day before the expatriation date,
multiplied by the amount of the distribu-
tion, or
‘‘(ii) the balance in the deferred tax ac-
count immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th
day preceding the distribution.
‘‘(C) DEFERRED TAX ACCOUNT.—For pur-
poses of subparagraph (B)(ii)—
‘‘(i) OPENING BALANCE.—The opening
balance in a deferred tax account with re-
spect to any trust interest is an amount
equal to the tax which would have been im-
posed on the allocable expatriation gain
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with respect to the trust interest if such
gain had been included in gross income
under subsection (a).
‘‘(ii) INCREASE
FOR
INTEREST.—The
balance in the deferred tax account shall be
increased by the amount of interest deter-
mined (on the balance in the account at the
time the interest accrues), for periods after
the 90th day after the expatriation date, by
using the rates and method applicable
under section 6621 for underpayments of
tax for such periods, except that section
6621(a)(2) shall be applied by substituting
‘5 percentage points’ for ‘3 percentage
points’ in subparagraph (B) thereof.
‘‘(iii) DECREASE
FOR
TAXES
PRE-
VIOUSLY PAID.—The balance in the tax de-
ferred account shall be reduced—
‘‘(I) by the amount of taxes im-
posed by subparagraph (A) on any dis-
tribution to the person holding the
trust interest, and
‘‘(II) in the case of a person hold-
ing a nonvested interest, to the extent
provided in regulations, by the amount
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of taxes imposed by subparagraph (A)
on distributions from the trust with re-
spect to nonvested interests not held by
such person.
‘‘(D) ALLOCABLE EXPATRIATION GAIN.—For
purposes of this paragraph, the allocable expa-
triation gain with respect to any beneficiary’s
interest in a trust is the amount of gain which
would be allocable to such beneficiary’s vested
and nonvested interests in the trust if the bene-
ficiary held directly all assets allocable to such
interests.
‘‘(E) TAX DEDUCTED AND WITHHELD.—
‘‘(i) IN GENERAL.—The tax imposed by
subparagraph (A)(ii) shall be deducted and
withheld by the trustees from the distribu-
tion to which it relates.
‘‘(ii) EXCEPTION WHERE FAILURE TO
WAIVE TREATY RIGHTS.—If an amount may
not be deducted and withheld under clause
(i) by reason of the distributee failing to
waive any treaty right with respect to such
distribution—
‘‘(I) the tax imposed by subpara-
graph (A)(ii) shall be imposed on the
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trust and each trustee shall be person-
ally liable for the amount of such tax,
and
‘‘(II) any other beneficiary of the
trust shall be entitled to recover from
the distributee the amount of such tax
imposed on the other beneficiary.
‘‘(F) DISPOSITION.—If a trust ceases to be
a qualified trust at any time, a covered expa-
triate disposes of an interest in a qualified trust,
or a covered expatriate holding an interest in a
qualified trust dies, then, in lieu of the tax im-
posed by subparagraph (A)(ii), there is hereby
imposed a tax equal to the lesser of—
‘‘(i) the tax determined under para-
graph (1) as if the day before the expatria-
tion date were the date of such cessation,
disposition, or death, whichever is applica-
ble, or
‘‘(ii) the balance in the tax deferred ac-
count immediately before such date.
Such tax shall be imposed on the trust and each
trustee shall be personally liable for the amount
of such tax and any other beneficiary of the trust
shall be entitled to recover from the covered expa-
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triate or the estate the amount of such tax im-
posed on the other beneficiary.
‘‘(G) DEFINITIONS AND SPECIAL RULES.—
For purposes of this paragraph—
‘‘(i) QUALIFIED
TRUST.—The term
‘qualified trust’ means a trust which is de-
scribed in section 7701(a)(30)(E).
‘‘(ii) VESTED
INTEREST.—The term
‘vested interest’ means any interest which,
as of the day before the expatriation date, is
vested in the beneficiary.
‘‘(iii) 
NONVESTED
INTEREST.—The
term ‘nonvested interest’ means, with re-
spect to any beneficiary, any interest in a
trust which is not a vested interest. Such
interest shall be determined by assuming the
maximum exercise of discretion in favor of
the beneficiary and the occurrence of all
contingencies in favor of the beneficiary.
‘‘(iv) ADJUSTMENTS.—The Secretary
may provide for such adjustments to the
bases of assets in a trust or a deferred tax
account, and the timing of such adjust-
ments, in order to ensure that gain is taxed
only once.
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‘‘(v) COORDINATION WITH RETIREMENT
PLAN
RULES.—This subsection shall not
apply to an interest in a trust which is
part of a retirement plan to which sub-
section (d)(2) applies.
‘‘(3) DETERMINATION OF BENEFICIARIES’ INTER-
EST IN TRUST.—
‘‘(A) DETERMINATIONS UNDER PARAGRAPH
(1).—For purposes of paragraph (1), a bene-
ficiary’s interest in a trust shall be based upon
all relevant facts and circumstances, including
the terms of the trust instrument and any letter
of wishes or similar document, historical pat-
terns of trust distributions, and the existence of
and functions performed by a trust protector or
any similar adviser.
‘‘(B) OTHER DETERMINATIONS.—For pur-
poses of this section—
‘‘(i) CONSTRUCTIVE OWNERSHIP.—If a
beneficiary of a trust is a corporation, part-
nership, trust, or estate, the shareholders,
partners, or beneficiaries shall be deemed to
be the trust beneficiaries for purposes of this
section.
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‘‘(ii) TAXPAYER RETURN POSITION.—A
taxpayer shall clearly indicate on its in-
come tax return—
‘‘(I) the methodology used to de-
termine that taxpayer’s trust interest
under this section, and
‘‘(II) if the taxpayer knows (or
has reason to know) that any other
beneficiary of such trust is using a dif-
ferent methodology to determine such
beneficiary’s trust interest under this
section.
‘‘(g) TERMINATION OF DEFERRALS, ETC.—In the case
of any covered expatriate, notwithstanding any other provi-
sion of this title—
‘‘(1) any period during which recognition of in-
come or gain is deferred shall terminate on the day
before the expatriation date, and
‘‘(2) any extension of time for payment of tax
shall cease to apply on the day before the expatriation
date and the unpaid portion of such tax shall be due
and payable at the time and in the manner pre-
scribed by the Secretary.
‘‘(h) IMPOSITION OF TENTATIVE TAX.—
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‘‘(1) IN GENERAL.—If an individual is required
to include any amount in gross income under sub-
section (a) for any taxable year, there is hereby im-
posed, immediately before the expatriation date, a tax
in an amount equal to the amount of tax which
would be imposed if the taxable year were a short tax-
able year ending on the expatriation date.
‘‘(2) DUE DATE.—The due date for any tax im-
posed by paragraph (1) shall be the 90th day after the
expatriation date.
‘‘(3) TREATMENT OF TAX.—Any tax paid under
paragraph (1) shall be treated as a payment of the
tax imposed by this chapter for the taxable year to
which subsection (a) applies.
‘‘(4) DEFERRAL OF TAX.—The provisions of sub-
section (b) shall apply to the tax imposed by this sub-
section to the extent attributable to gain includible in
gross income by reason of this section.
‘‘(i) SPECIAL LIENS FOR DEFERRED TAX AMOUNTS.—
‘‘(1) IMPOSITION OF LIEN.—
‘‘(A) IN GENERAL.—If a covered expatriate
makes an election under subsection (a)(4) or (b)
which results in the deferral of any tax imposed
by reason of subsection (a), the deferred amount
(including any interest, additional amount, ad-
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dition to tax, assessable penalty, and costs at-
tributable to the deferred amount) shall be a lien
in favor of the United States on all property of
the expatriate located in the United States (with-
out regard to whether this section applies to the
property).
‘‘(B) DEFERRED AMOUNT.—For purposes of
this subsection, the deferred amount is the
amount of the increase in the covered expatri-
ate’s income tax which, but for the election under
subsection (a)(4) or (b), would have occurred by
reason of this section for the taxable year includ-
ing the expatriation date.
‘‘(2) PERIOD OF LIEN.—The lien imposed by this
subsection shall arise on the expatriation date and
continue until—
‘‘(A) the liability for tax by reason of this
section is satisfied or has become unenforceable
by reason of lapse of time, or
‘‘(B) it is established to the satisfaction of
the Secretary that no further tax liability may
arise by reason of this section.
‘‘(3) CERTAIN RULES APPLY.—The rules set forth
in paragraphs (1), (3), and (4) of section 6324A(d)
shall apply with respect to the lien imposed by this
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subsection as if it were a lien imposed by section
6324A.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(b) INCLUSION IN INCOME OF GIFTS AND BEQUESTS
RECEIVED BY UNITED STATES CITIZENS AND RESIDENTS
FROM EXPATRIATES.—Section 102 (relating to gifts, etc.
not included in gross income) is amended by adding at the
end the following new subsection:
‘‘(d) GIFTS AND INHERITANCES FROM COVERED EX-
PATRIATES.—
‘‘(1) IN GENERAL.—Subsection (a) shall not ex-
clude from gross income the value of any property ac-
quired by gift, bequest, devise, or inheritance from a
covered expatriate after the expatriation date. For
purposes of this subsection, any term used in this sub-
section which is also used in section 877A shall have
the same meaning as when used in section 877A.
‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE
SUBJECT TO ESTATE OR GIFT TAX.—Paragraph (1)
shall not apply to any property if either—
‘‘(A) the gift, bequest, devise, or inheritance
is—
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‘‘(i) shown on a timely filed return of
tax imposed by chapter 12 as a taxable gift
by the covered expatriate, or
‘‘(ii) included in the gross estate of the
covered expatriate for purposes of chapter
11 and shown on a timely filed return of
tax imposed by chapter 11 of the estate of
the covered expatriate, or
‘‘(B) no such return was timely filed but no
such return would have been required to be filed
even if the covered expatriate were a citizen or
long-term resident of the United States.’’.
(c) DEFINITION OF TERMINATION OF UNITED STATES
CITIZENSHIP.—Section 7701(a) is amended by adding at
the end the following new paragraph:
‘‘(48) TERMINATION OF UNITED STATES CITIZEN-
SHIP.—
‘‘(A) IN GENERAL.—An individual shall not
cease to be treated as a United States citizen be-
fore the date on which the individual’s citizen-
ship is treated as relinquished under section
877A(e)(3).
‘‘(B) DUAL
CITIZENS.—Under regulations
prescribed by the Secretary, subparagraph (A)
shall not apply to an individual who became at
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birth a citizen of the United States and a citizen
of another country.’’.
(d) INELIGIBILITY
FOR
VISA
OR
ADMISSION
TO
UNITED STATES.—
(1) IN GENERAL.—Section 212(a)(10)(E) of the
Immigration 
and 
Nationality 
Act 
(8 
U.S.C.
1182(a)(10)(E)) is amended to read as follows:
‘‘(E) FORMER
CITIZENS
NOT
IN
COMPLI-
ANCE
WITH
EXPATRIATION
REVENUE
PROVI-
SIONS.—Any alien who is a former citizen of the
United States who relinquishes United States
citizenship (within the meaning of section
877A(e)(3) of the Internal Revenue Code of 1986)
and who is not in compliance with section 877A
of such Code (relating to expatriation).’’.
(2) AVAILABILITY OF INFORMATION.—
(A) IN GENERAL.—Section 6103(l) (relating
to disclosure of returns and return information
for purposes other than tax administration) is
amended by adding at the end the following new
paragraph:
‘‘(19) DISCLOSURE TO DENY VISA OR ADMISSION
TO CERTAIN EXPATRIATES.—Upon written request of
the Attorney General or the Attorney General’s dele-
gate, the Secretary shall disclose whether an indi-
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vidual is in compliance with section 877A (and if not
in compliance, any items of noncompliance) to offi-
cers and employees of the Federal agency responsible
for administering section 212(a)(10)(E) of the Immi-
gration and Nationality Act solely for the purpose of,
and to the extent necessary in, administering such
section 212(a)(10)(E).’’.
(B) SAFEGUARDS.—
(i) TECHNICAL
AMENDMENTS.—Para-
graph (4) of section 6103(p) of the Internal
Revenue Code of 1986, as amended by sec-
tion 202(b)(2)(B) of the Trade Act of 2002
(Public Law 107–210; 116 Stat. 961), is
amended by striking ‘‘or (17)’’ after ‘‘any
other person described in subsection (l)(16)’’
each place it appears and inserting ‘‘or
(18)’’.
(ii) CONFORMING AMENDMENTS.—Sec-
tion 6103(p)(4) (relating to safeguards), as
amended by clause (i), is amended by strik-
ing ‘‘or (18)’’ after ‘‘any other person de-
scribed in subsection (l)(16)’’ each place it
appears and inserting ‘‘(18), or (19)’’.
(3) EFFECTIVE DATES.—
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(A) IN GENERAL.—Except as provided in
subparagraph (B), the amendments made by this
subsection shall apply to individuals who relin-
quish United States citizenship on or after the
date of the enactment of this Act.
(B) 
TECHNICAL
AMENDMENTS.—The
amendments made by paragraph (2)(B)(i) shall
take effect as if included in the amendments
made by section 202(b)(2)(B) of the Trade Act of
2002 (Public Law 107–210; 116 Stat. 961).
(e) CONFORMING AMENDMENTS.—
(1) Section 877 is amended by adding at the end
the following new subsection:
‘‘(g) APPLICATION.—This section shall not apply to an
expatriate (as defined in section 877A(e)) whose expatria-
tion date (as so defined) occurs on or after February 5,
2003.’’.
(2) Section 2107 is amended by adding at the
end the following new subsection:
‘‘(f) APPLICATION.—This section shall not apply to
any expatriate subject to section 877A.’’.
(3) Section 2501(a)(3) is amended by adding at
the end the following new subparagraph:
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‘‘(F) APPLICATION.—This paragraph shall
not apply to any expatriate subject to section
877A.’’.
(4)(A) Paragraph (1) of section 6039G(d) is
amended by inserting ‘‘or 877A’’ after ‘‘section 877’’.
(B) The second sentence of section 6039G(e) is
amended by inserting ‘‘or who relinquishes United
States citizenship (within the meaning of section
877A(e)(3))’’ after ‘‘877(a))’’.
(C) Section 6039G(f) is amended by inserting
‘‘or 877A(e)(2)(B)’’ after ‘‘877(e)(1)’’.
(f) CLERICAL AMENDMENT.—The table of sections for
subpart A of part II of subchapter N of chapter 1 is amend-
ed by inserting after the item relating to section 877 the
following new item:
‘‘Sec. 877A. Tax responsibilities of expatriation.’’.
(g) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in this
subsection, the amendments made by this section shall
apply to expatriates (within the meaning of section
877A(e) of the Internal Revenue Code of 1986, as
added by this section) whose expatriation date (as so
defined) occurs on or after February 5, 2003.
(2) GIFTS AND BEQUESTS.—Section 102(d) of
the Internal Revenue Code of 1986 (as added by sub-
section (b)) shall apply to gifts and bequests received
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if, pursuant to a plan (or a series of related trans-
actions)—
‘‘(A) the entity completes after March 20,
2002, the direct or indirect acquisition of sub-
stantially all of the properties held directly or
indirectly by a domestic corporation or substan-
tially all of the properties constituting a trade or
business of a domestic partnership,
‘‘(B) after the acquisition at least 80 per-
cent of the stock (by vote or value) of the entity
is held—
‘‘(i) in the case of an acquisition with
respect to a domestic corporation, by former
shareholders of the domestic corporation by
reason of holding stock in the domestic cor-
poration, or
‘‘(ii) in the case of an acquisition with
respect to a domestic partnership, by former
partners of the domestic partnership by rea-
son of holding a capital or profits interest
in the domestic partnership, and
‘‘(C) the expanded affiliated group which
after the acquisition includes the entity does not
have substantial business activities in the foreign
country in which or under the law of which the
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entity is created or organized when compared to
the total business activities of such expanded af-
filiated group.
Except as provided in regulations, an acquisition of
properties of a domestic corporation shall not be
treated as described in subparagraph (A) if none of
the corporation’s stock was readily tradeable on an es-
tablished securities market at any time during the 4-
year period ending on the date of the acquisition.
‘‘(b) PRESERVATION OF DOMESTIC TAX BASE IN CER-
TAIN INVERSION TRANSACTIONS TO WHICH SUBSECTION
(a) DOES NOT APPLY.—
‘‘(1) IN GENERAL.—If a foreign incorporated en-
tity would be treated as an inverted domestic corpora-
tion with respect to an acquired entity if either—
‘‘(A) subsection (a)(2)(A) were applied by
substituting ‘after December 31, 1996, and on or
before March 20, 2002’ for ‘after March 20, 2002’
and subsection (a)(2)(B) were applied by sub-
stituting ‘more than 50 percent’ for ‘at least 80
percent’, or
‘‘(B) subsection (a)(2)(B) were applied by
substituting ‘more than 50 percent’ for ‘at least
80 percent’,
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then the rules of subsection (c) shall apply to any in-
version gain of the acquired entity during the appli-
cable period and the rules of subsection (d) shall
apply to any related party transaction of the ac-
quired entity during the applicable period. This sub-
section shall not apply for any taxable year if sub-
section (a) applies to such foreign incorporated entity
for such taxable year.
‘‘(2) ACQUIRED ENTITY.—For purposes of this
section—
‘‘(A) IN GENERAL.—The term ‘acquired en-
tity’ means the domestic corporation or partner-
ship substantially all of the properties of which
are directly or indirectly acquired in an acquisi-
tion described in subsection (a)(2)(A) to which
this subsection applies.
‘‘(B) AGGREGATION RULES.—Any domestic
person bearing a relationship described in sec-
tion 267(b) or 707(b) to an acquired entity shall
be treated as an acquired entity with respect to
the acquisition described in subparagraph (A).
‘‘(3) APPLICABLE PERIOD.—For purposes of this
section—
‘‘(A) IN
GENERAL.—The term ‘applicable
period’ means the period—
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‘‘(i) beginning on the first date prop-
erties are acquired as part of the acquisi-
tion described in subsection (a)(2)(A) to
which this subsection applies, and
‘‘(ii) ending on the date which is 10
years after the last date properties are ac-
quired as part of such acquisition.
‘‘(B) SPECIAL RULE FOR INVERSIONS OC-
CURRING BEFORE MARCH 21, 2002.—In the case
of any acquired entity to which paragraph
(1)(A) applies, the applicable period shall be the
10-year period beginning on January 1, 2003.
‘‘(c) TAX ON INVERSION GAINS MAY NOT BE OFF-
SET.—If subsection (b) applies—
‘‘(1) IN GENERAL.—The taxable income of an ac-
quired entity (or any expanded affiliated group which
includes such entity) for any taxable year which in-
cludes any portion of the applicable period shall in
no event be less than the inversion gain of the entity
for the taxable year.
‘‘(2) CREDITS NOT ALLOWED AGAINST TAX ON IN-
VERSION GAIN.—Credits shall be allowed against the
tax imposed by this chapter on an acquired entity for
any taxable year described in paragraph (1) only to
the extent such tax exceeds the product of—
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‘‘(A) the amount of the inversion gain for
the taxable year, and
‘‘(B) the highest rate of tax specified in sec-
tion 11(b)(1).
For purposes of determining the credit allowed by sec-
tion 901 inversion gain shall be treated as from
sources within the United States.
‘‘(3) SPECIAL RULES FOR PARTNERSHIPS.—In
the case of an acquired entity which is a
partnership—
‘‘(A) the limitations of this subsection 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) income or gain required to be rec-
ognized for the taxable year by the partner
under section 367(a), 741, or 1001, or
under any other provision of chapter 1, by
reason of the transfer during the applicable
period of any partnership interest of the
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partner in such partnership to the foreign
incorporated entity, and
‘‘(C) the highest rate of tax specified in the
rate schedule applicable to the partner under
chapter 1 shall be substituted for the rate of tax
under paragraph (2)(B).
‘‘(4) INVERSION GAIN.—For purposes of this sec-
tion, the term ‘inversion gain’ means any income or
gain required to be recognized under section 304,
311(b), 367, 1001, or 1248, or under any other provi-
sion of chapter 1, by reason of the transfer during the
applicable period of stock or other properties by an
acquired entity—
‘‘(A) as part of the acquisition described in
subsection (a)(2)(A) to which subsection (b) ap-
plies, or
‘‘(B) after such acquisition to a foreign re-
lated person.
The Secretary may provide that income or gain from
the sale of inventories or other transactions in the or-
dinary course of a trade or business shall not be treat-
ed as inversion gain under subparagraph (B) to the
extent the Secretary determines such treatment would
not be inconsistent with the purposes of this section.
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‘‘(5) COORDINATION WITH SECTION 172 AND MIN-
IMUM TAX.—Rules similar to the rules of paragraphs
(3) and (4) of section 860E(a) shall apply for pur-
poses of this section.
‘‘(6) STATUTE OF LIMITATIONS.—
‘‘(A) IN
GENERAL.—The statutory period
for the assessment of any deficiency attributable
to the inversion gain of any taxpayer for any
pre-inversion year shall not expire before the ex-
piration of 3 years from the date the Secretary
is notified by the taxpayer (in such manner as
the Secretary may prescribe) of the acquisition
described in subsection (a)(2)(A) to which such
gain relates and such deficiency may be assessed
before the expiration of such 3-year period not-
withstanding the provisions of any other law or
rule of law which would otherwise 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
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‘‘(ii) such year ends before the taxable
year in which the acquisition described in
subsection (a)(2)(A) is completed.
‘‘(d) SPECIAL
RULES
APPLICABLE
TO
RELATED
PARTY TRANSACTIONS.—
‘‘(1) ANNUAL APPLICATION FOR AGREEMENTS ON
RETURN POSITIONS.—
‘‘(A) IN GENERAL.—Each acquired entity to
which subsection (b) applies shall file with the
Secretary an application for an approval agree-
ment under subparagraph (D) for each taxable
year which includes a portion of the applicable
period. Such application shall be filed at such
time and manner, and shall contain such infor-
mation, as the Secretary may prescribe.
‘‘(B) SECRETARIAL
ACTION.—Within 90
days of receipt of an application under subpara-
graph (A) (or such longer period as the Secretary
and entity may agree upon), the Secretary
shall—
‘‘(i) enter into an agreement described
in subparagraph (D) for the taxable year
covered by the application,
‘‘(ii) notify the entity that the Sec-
retary has determined that the application
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was filed in good faith and substantially
complies with the requirements for the ap-
plication under subparagraph (A), or
‘‘(iii) notify the entity that the Sec-
retary has determined that the application
was not filed in good faith or does not sub-
stantially comply with such requirements.
If the Secretary fails to act within the time pre-
scribed under the preceding sentence, the entity
shall be treated for purposes of this paragraph as
having received notice under clause (ii).
‘‘(C) FAILURES
TO
COMPLY.—If an ac-
quired entity fails to file an application under
subparagraph (A), or the acquired entity receives
a notice under subparagraph (B)(iii), for any
taxable year, then for such taxable year—
‘‘(i) there shall not be allowed any de-
duction, or addition to basis or cost of goods
sold, for amounts paid or incurred, or losses
incurred, by reason of a transaction between
the acquired entity and a foreign related
person,
‘‘(ii) any transfer or license of intan-
gible property (as defined in section
936(h)(3)(B)) between the acquired entity
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and a foreign related person shall be dis-
regarded, and
‘‘(iii) any cost-sharing arrangement
between the acquired entity and a foreign
related person shall be disregarded.
‘‘(D) APPROVAL
AGREEMENT.—For pur-
poses of subparagraph (A), the term ‘approval
agreement’ means a prefiling, advance pricing,
or other agreement specified by the Secretary
which contains such provisions as the Secretary
determines necessary to ensure that the require-
ments of sections 163(j), 267(a)(3), 482, and 845,
and any other provision of this title applicable
to transactions between related persons and spec-
ified by the Secretary, are met.
‘‘(E) TAX COURT REVIEW.—
‘‘(i) IN
GENERAL.—The Tax Court
shall have jurisdiction over any action
brought by an acquired entity receiving a
notice under subparagraph (B)(iii) to deter-
mine whether the issuance of the notice was
an abuse of discretion, but only if the action
is brought within 30 days after the date of
the mailing (determined under rules similar
to section 6213) of the notice.
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‘‘(ii) COURT ACTION.—The Tax Court
shall issue its decision within 30 days after
the filing of the action under clause (i) and
may order the Secretary to issue a notice
described in subparagraph (B)(ii).
‘‘(iii) REVIEW.—An order of the Tax
Court under this subparagraph shall be re-
viewable in the same manner as any other
decision of the Tax Court.
‘‘(2) MODIFICATIONS OF LIMITATION ON INTER-
EST DEDUCTION.—In the case of an acquired entity
to which subsection (b) applies, section 163(j) shall be
applied—
‘‘(A) without regard to paragraph (2)(A)(ii)
thereof, and
‘‘(B) by substituting ‘25 percent’ for ‘50
percent’ each place it appears in paragraph
(2)(B) thereof.
‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—For
purposes of this section—
‘‘(1) RULES FOR APPLICATION OF SUBSECTION
(a)(2).—In applying subsection (a)(2) for purposes of
subsections (a) and (b), the following rules shall
apply:
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‘‘(A) 
CERTAIN
STOCK
DISREGARDED.—
There shall not be taken into account in deter-
mining ownership for purposes of subsection
(a)(2)(B)—
‘‘(i) stock held by members of the ex-
panded affiliated group which includes the
foreign incorporated entity, or
‘‘(ii) stock of such entity which is sold
in a public offering or private placement re-
lated to the acquisition described in sub-
section (a)(2)(A).
‘‘(B) PLAN DEEMED IN CERTAIN CASES.—If
a foreign incorporated entity acquires directly or
indirectly substantially all of the properties of a
domestic corporation or partnership during the
4-year period beginning on the date which is 2
years before the ownership requirements of sub-
section (a)(2)(B) are met with respect to such do-
mestic corporation or partnership, such actions
shall be treated as pursuant to a plan.
‘‘(C) CERTAIN TRANSFERS DISREGARDED.—
The transfer of properties or liabilities (includ-
ing by contribution or distribution) shall be dis-
regarded if such transfers are part of a plan a
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principal purpose of which is to avoid the pur-
poses of this section.
‘‘(D) SPECIAL RULE FOR RELATED PART-
NERSHIPS.—For purposes of applying subsection
(a)(2) to the acquisition of a domestic partner-
ship, except as provided in regulations, all part-
nerships which are under common control (with-
in the meaning of section 482) shall be treated
as 1 partnership.
‘‘(E) TREATMENT
OF
CERTAIN
RIGHTS.—
The Secretary shall prescribe such regulations as
may be necessary—
‘‘(i) to treat warrants, options, con-
tracts to acquire stock, convertible debt in-
struments, and other similar interests as
stock, and
‘‘(ii) to treat stock as not stock.
‘‘(2) EXPANDED AFFILIATED GROUP.—The term
‘expanded affiliated group’ means an affiliated group
as defined in section 1504(a) but without regard 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 appears.
‘‘(3) FOREIGN
INCORPORATED
ENTITY.—The
term ‘foreign incorporated entity’ means any entity
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which is, or but for subsection (a)(1) would be, treated
as a foreign corporation for purposes of this title.
‘‘(4) FOREIGN RELATED PERSON.—The term ‘for-
eign related person’ means, with respect to any ac-
quired entity, a foreign person which—
‘‘(A) bears a relationship to such entity de-
scribed in section 267(b) or 707(b), or
‘‘(B) is under the same common control
(within the meaning of section 482) as such enti-
ty.
‘‘(5) SUBSEQUENT ACQUISITIONS BY UNRELATED
DOMESTIC CORPORATIONS.—
‘‘(A) IN GENERAL.—Subject to such condi-
tions, limitations, and exceptions as the Sec-
retary may prescribe, if, after an acquisition de-
scribed in subsection (a)(2)(A) to which sub-
section (b) applies, a domestic corporation stock
of which is traded on an established securities
market acquires directly or indirectly any prop-
erties of one or more acquired entities in a
transaction with respect to which the require-
ments of subparagraph (B) are met, this section
shall cease to apply to any such acquired entity
with respect to which such requirements are met.
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‘‘(B) REQUIREMENTS.—The requirements of
the subparagraph are met with respect to a
transaction involving any acquisition described
in subparagraph (A) if—
‘‘(i) before such transaction the domes-
tic corporation did not have a relationship
described in section 267(b) or 707(b), and
was not under common control (within the
meaning of section 482), with the acquired
entity, or any member of an expanded af-
filiated group including such entity, and
‘‘(ii) after such transaction, such ac-
quired entity—
‘‘(I) is a member of the same ex-
panded affiliated group which includes
the domestic corporation or has such a
relationship or is under such common
control with any member of such
group, and
‘‘(II) is not a member of, and does
not have such a relationship and is not
under such common control with any
member of, the expanded affiliated
group which before such acquisition in-
cluded such entity.
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‘‘(f) REGULATIONS.—The Secretary shall provide such
regulations as are necessary to carry out this section, in-
cluding 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) TREATMENT OF AGREEMENTS.—
(1) CONFIDENTIALITY.—
(A) TREATMENT
AS
RETURN
INFORMA-
TION.—Section 6103(b)(2) (relating to return in-
formation) is amended by striking ‘‘and’’ at the
end of subparagraph (C), by inserting ‘‘and’’ at
the end of subparagraph (D), and by inserting
after subparagraph (D) the following new sub-
paragraph:
‘‘(E) any approval agreement under section
7874(d)(1) to which any preceding subparagraph
does not apply and any background information
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related to the agreement or any application for
the agreement,’’.
(B) EXCEPTION FROM PUBLIC INSPECTION
AS
WRITTEN
DETERMINATION.—Section
6110(b)(1)(B) is amended by striking ‘‘or (D)’’
and inserting ‘‘, (D), or (E)’’.
(2) REPORTING.—The Secretary of the Treasury
shall include with any report on advance pricing
agreements required to be submitted after the date of
the enactment of this Act under section 521(b) of the
Ticket to Work and Work Incentives Improvement Act
of 1999 (Public Law 106–170) a report regarding ap-
proval agreements under section 7874(d)(1) of the In-
ternal Revenue Code of 1986. Such report shall in-
clude information similar to the information required
with respect to advance pricing agreements and shall
be treated for confidentiality purposes in the same
manner as the reports on advance pricing agreements
are treated under section 521(b)(3) of such Act.
(c) INFORMATION REPORTING.—The Secretary of the
Treasury shall exercise the Secretary’s authority under the
Internal Revenue Code of 1986 to require entities involved
in transactions to which section 7874 of such Code (as
added by subsection (a)) applies to report to the Secretary,
shareholders, partners, and such other persons as the Sec-
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retary may prescribe such information as is necessary to
ensure the proper tax treatment of such transactions.
(d) CONFORMING AMENDMENT.—The table of sections
for subchapter C of chapter 80 is amended by adding at
the end the following new item:
‘‘Sec. 7874. Rules relating to inverted corporate entities.’’.
(e) TRANSITION RULE FOR CERTAIN REGULATED IN-
VESTMENT COMPANIES AND UNIT INVESTMENT TRUSTS.—
Notwithstanding section 7874 of the Internal Revenue Code
of 1986 (as added by subsection (a)), a regulated investment
company, or other pooled fund or trust specified by the Sec-
retary of the Treasury, may elect to recognize gain by rea-
son of section 367(a) of such Code with respect to a trans-
action under which a foreign incorporated entity is treated
as an inverted domestic corporation under section 7874(a)
of such Code by reason of an acquisition completed after
March 20, 2002, and before January 1, 2004.
SEC. 342. EXCISE TAX ON STOCK COMPENSATION OF INSID-
ERS IN INVERTED CORPORATIONS.
(a) IN GENERAL.—Subtitle D is amended by adding
at the end the following new chapter:
‘‘CHAPTER 48—STOCK COMPENSATION OF
INSIDERS IN INVERTED CORPORATIONS
‘‘Sec. 5000A. Stock compensation of insiders in inverted corpora-
tions entities.
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‘‘SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN IN-
VERTED CORPORATIONS.
‘‘(a) IMPOSITION OF TAX.—In the case of an indi-
vidual who is a disqualified individual with respect to any
inverted corporation, there is hereby imposed on such per-
son a tax equal to 20 percent of the value (determined under
subsection (b)) of the specified stock compensation held (di-
rectly or indirectly) by or for the benefit of such individual
or a member of such individual’s family (as defined in sec-
tion 267) at any time during the 12-month period begin-
ning on the date which is 6 months before the inversion
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 any stock appreciation right,
the fair value of such option or right, and
‘‘(B) in any other case, the fair market
value of such compensation.
‘‘(2) DATE FOR DETERMINING VALUE.—The de-
termination of value shall be made—
‘‘(A) in the case of specified stock compensa-
tion held on the inversion date, on such date,
‘‘(B) in the case of such compensation which
is canceled during the 6 months before the inver-
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sion date, on the day before such cancellation,
and
‘‘(C) in the case of such compensation which
is granted after the inversion 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 inverted corporation only
if gain (if any) on any stock in such corporation is recog-
nized in whole or part by any shareholder by reason of the
acquisition referred to in section 7874(a)(2)(A) (determined
by substituting ‘July 10, 2002’ for ‘March 20, 2002’) with
respect to such corporation.
‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON COM-
PENSATION.—Subsection (a) shall not apply to—
‘‘(1) any stock option which is exercised on the
inversion date or during the 6-month period before
such date and to the stock acquired in such exercise,
and
‘‘(2) any specified stock compensation which is
sold, exchanged, or distributed during such period in
a transaction in which gain or loss is recognized in
full.
‘‘(e) DEFINITIONS.—For purposes of this section—
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‘‘(1) DISQUALIFIED INDIVIDUAL.—The term ‘dis-
qualified 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 inversion date—
‘‘(A) is subject to the requirements of section
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 requirements
if such corporation or member were an issuer of
equity securities referred to in such section.
‘‘(2) 
INVERTED
CORPORATION; 
INVERSION
DATE.—
‘‘(A) INVERTED
CORPORATION.—The term
‘inverted corporation’ means any corporation to
which subsection (a) or (b) of section 7874 ap-
plies determined—
‘‘(i) by substituting ‘July 10, 2002’ for
‘March 20, 2002’ in section 7874(a)(2)(A),
and
‘‘(ii) without regard to subsection
(b)(1)(A).
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Such term includes any predecessor or successor
of such a corporation.
‘‘(B) INVERSION
DATE.—The term ‘inver-
sion date’ means, with respect to a corporation,
the date on which the corporation first becomes
an inverted corporation.
‘‘(3) SPECIFIED STOCK COMPENSATION.—
‘‘(A) IN
GENERAL.—The term ‘specified
stock compensation’ means payment (or right to
payment) granted by the inverted corporation
(or by any member of the expanded affiliated
group which includes such corporation) to any
person in connection with the performance of
services by a disqualified individual for such cor-
poration 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 member).
‘‘(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).
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before the date on which the right to receive pay-
ment of such item arises, or
‘‘(B) to the extent that the recipient of the
item is under an obligation (whether pursuant to
a short sale or otherwise) to make related pay-
ments with respect to positions in substantially
similar or related property.
This paragraph shall not apply to any dividend to
which subsection (k) applies.
‘‘(2) EXCEPTION
FOR
TAXES
PAID
BY
DEAL-
ERS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any qualified tax with respect to
any property held in the active conduct in a for-
eign country of a business as a dealer in such
property.
‘‘(B) QUALIFIED TAX.—For purposes of sub-
paragraph (A), the term ‘qualified tax’ means a
tax paid to a foreign country (other than the for-
eign country referred to in subparagraph (A))
if—
‘‘(i) the item to which such tax is at-
tributable is subject to taxation on a net
basis by the country referred to in subpara-
graph (A), and