In the Senate of the United States,
July 15, 2004.
Resolved, That the bill from the House of Representa-
tives (H.R. 4520) entitled ‘‘An Act to amend the Internal
Revenue Code of 1986 to comply with the World Trade Orga-
nization rulings on the FSC/ETI benefit in a manner that
preserves jobs and production activities in the United States,
to reform and simplify the international taxation rules of the
United States, and for other purposes.’’, do pass with the fol-
lowing
AMENDMENT:
Strike out all after the enacting clause and insert:
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE;
TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Jumpstart Our Business Strength (JOBS) Act’’.
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HR 4520 EAS
(b) AMENDMENT OF 1986 CODE.—Except as otherwise
expressly provided, whenever in this Act an amendment or
repeal is expressed in terms of an amendment to, or repeal
of, a section or other provision, the reference shall be consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I—PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME
Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Deduction relating to income attributable to United States production
activities.
Sec. 103. Deduction for United States production activities includes income re-
lated to certain architectural and engineering services.
TITLE II—INTERNATIONAL TAX PROVISIONS
Subtitle A—International Tax Reform
Sec. 201. 20-year foreign tax credit carryover; 1-year foreign tax credit
carryback.
Sec. 202. Look-thru rules to apply to dividends from noncontrolled section 902
corporations.
Sec. 203. Foreign tax credit under alternative minimum tax.
Sec. 204. Recharacterization of overall domestic loss.
Sec. 205. Interest expense allocation rules.
Sec. 206. Determination of foreign personal holding company income with respect
to transactions in commodities.
Subtitle B—International Tax Simplification
Sec. 211. Repeal of foreign personal holding company rules and foreign invest-
ment company rules.
Sec. 212. Expansion of de minimis rule under subpart F.
Sec. 213. Attribution of stock ownership through partnerships to apply in deter-
mining section 902 and 960 credits.
Sec. 214. Application of uniform capitalization rules to foreign persons.
Sec. 215. Repeal of withholding tax on dividends from certain foreign corpora-
tions.
Sec. 216. Repeal of special capital gains tax on aliens present in the United
States for 183 days or more.
Subtitle C—Additional International Tax Provisions
Sec. 221. Active leasing income from aircraft and vessels.
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Sec. 222. Look-thru treatment of payments between related controlled foreign cor-
porations under foreign personal holding company income rules.
Sec. 223. Look-thru treatment for sales of partnership interests.
Sec. 224. Election not to use average exchange rate for foreign tax paid other
than in functional currency.
Sec. 225. Treatment of income tax base differences.
Sec. 226. Modification of exceptions under subpart F for active financing.
Sec. 227. United States property not to include certain assets of controlled foreign
corporation.
Sec. 228. Provide equal treatment for interest paid by foreign partnerships and
foreign corporations.
Sec. 229. Clarification of treatment of certain transfers of intangible property.
Sec. 230. Modification of the treatment of certain REIT distributions attributable
to gain from sales or exchanges of United States real property
interests.
Sec. 231. Toll tax on excess qualified foreign distribution amount.
Sec. 232. Exclusion of income derived from certain wagers on horse races and dog
races from gross income of nonresident alien individuals.
Sec. 233. Limitation of withholding tax for Puerto Rico corporations.
Sec. 234. Report on WTO dispute settlement panels and the appellate body.
Sec. 235. Study of impact of international tax laws on taxpayers other than large
corporations.
Sec. 236. Delay in effective date of final regulations governing exclusion of in-
come from international operation of ships or aircraft.
Sec. 237. Interest payments deductible where disqualified guarantee has no eco-
nomic effect.
TITLE III—DOMESTIC MANUFACTURING AND BUSINESS PROVISIONS
Subtitle A—General Provisions
Sec. 301. Expansion of qualified small-issue bond program.
Sec. 302. Expensing of broadband Internet access expenditures.
Sec. 303. Exemption of natural aging process in determination of production pe-
riod for distilled spirits under section 263A.
Sec. 304. Modification of active business definition under section 355.
Sec. 305. Modified taxation of imported archery products.
Sec. 306. Modification to cooperative marketing rules to include value added
processing involving animals.
Sec. 307. Extension of declaratory judgment procedures to farmers’ cooperative
organizations.
Sec. 308. Temporary suspension of personal holding company tax.
Sec. 309. Increase in section 179 expensing.
Sec. 310. Five-year carryback of net operating losses.
Sec. 311. Extension and modification of research credit.
Sec. 312. Expansion of research credit.
Sec. 313. Manufacturer’s jobs credit.
Sec. 314. Brownfields Demonstration Program for qualified green building and
sustainable design projects.
Subtitle B—Manufacturing Relating to Films
Sec. 321. Special rules for certain film and television productions.
Sec. 322. Modification of application of income forecast method of depreciation.
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Subtitle C—Manufacturing Relating to Timber
Sec. 331. Expensing of certain reforestation expenditures.
Sec. 332. Election to treat cutting of timber as a sale or exchange.
Sec. 333. Capital gain treatment under section 631(b) to apply to outright sales
by landowners.
Sec. 334. Modification of safe harbor rules for timber REITS.
TITLE IV—ADDITIONAL PROVISIONS
Subtitle A—Provisions Designed To Curtail Tax Shelters
Sec. 401. Clarification of economic substance doctrine.
Sec. 402. Penalty for failing to disclose reportable transaction.
Sec. 403. Accuracy-related penalty for listed transactions and other reportable
transactions having a significant tax avoidance purpose.
Sec. 404. Penalty for understatements attributable to transactions lacking eco-
nomic substance, etc.
Sec. 405. Modifications of substantial understatement penalty for nonreportable
transactions.
Sec. 406. Tax shelter exception to confidentiality privileges relating to taxpayer
communications.
Sec. 407. Disclosure of reportable transactions.
Sec. 408. Modifications to penalty for failure to register tax shelters.
Sec. 409. Modification of penalty for failure to maintain lists of investors.
Sec. 410. Modification of actions to enjoin certain conduct related to tax shelters
and reportable transactions.
Sec. 411. Understatement of taxpayer’s liability by income tax return preparer.
Sec. 412. Penalty on failure to report interests in foreign financial accounts.
Sec. 413. Frivolous tax submissions.
Sec. 414. Regulation of individuals practicing before the Department of Treasury.
Sec. 415. Penalty for promoting abusive tax shelters.
Sec. 416. Statute of limitations for taxable years for which required listed trans-
actions not reported.
Sec. 417. Denial of deduction for interest on underpayments attributable to non-
disclosed reportable and noneconomic substance transactions.
Sec. 418. Authorization of appropriations for tax law enforcement.
Sec. 419. Penalty for aiding and abetting the understatement of tax liability.
Sec. 420. Study on information sharing among law enforcement agencies.
Subtitle B—Other Corporate Governance Provisions
Sec. 421. Affirmation of consolidated return regulation authority.
Sec. 422. Declaration by chief executive officer relating to Federal annual income
tax return of a corporation.
Sec. 423. Denial of deduction for certain fines, penalties, and other amounts.
Sec. 424. Disallowance of deduction for punitive damages.
Sec. 425. Increase in criminal monetary penalty limitation for the underpayment
or overpayment of tax due to fraud.
Subtitle C—Enron-Related Tax Shelter Provisions
Sec. 431. Limitation on transfer or importation of built-in losses.
Sec. 432. No reduction of basis under section 734 in stock held by partnership
in corporate partner.
Sec. 433. Repeal of special rules for FASITs.
Sec. 434. Expanded disallowance of deduction for interest on convertible debt.
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Sec. 435. Expanded authority to disallow tax benefits under section 269.
Sec. 436. Modification of interaction between subpart F and passive foreign in-
vestment company rules.
Subtitle D—Provisions To Discourage Expatriation
Sec. 441. Tax treatment of inverted corporate entities.
Sec. 442. Imposition of mark-to-market tax on individuals who expatriate.
Sec. 443. Excise tax on stock compensation of insiders of inverted corporations.
Sec. 444. Reinsurance of United States risks in foreign jurisdictions.
Sec. 445. Reporting of taxable mergers and acquisitions.
Subtitle E—International Tax
Sec. 451. Clarification of banking business for purposes of determining invest-
ment of earnings in United States property.
Sec. 452. Prohibition on nonrecognition of gain through complete liquidation of
holding company.
Sec. 453. Prevention of mismatching of interest and original issue discount de-
ductions and income inclusions in transactions with related for-
eign persons.
Sec. 454. Effectively connected income to include certain foreign source income.
Sec. 455. Recapture of overall foreign losses on sale of controlled foreign corpora-
tion.
Sec. 456. Minimum holding period for foreign tax credit on withholding taxes on
income other than dividends.
Subtitle F—Other Revenue Provisions
PART I—FINANCIAL INSTRUMENTS
Sec. 461. Treatment of stripped interests in bond and preferred stock funds, etc.
Sec. 462. Application of earnings stripping rules to partners which are C cor-
porations.
Sec. 463. Recognition of cancellation of indebtedness income realized on satisfac-
tion of debt with partnership interest.
Sec. 464. Modification of straddle rules.
Sec. 465. Denial of installment sale treatment for all readily tradeable debt.
PART II—CORPORATIONS AND PARTNERSHIPS
Sec. 466. Modification of treatment of transfers to creditors in divisive reorga-
nizations.
Sec. 467. Clarification of definition of nonqualified preferred stock.
Sec. 468. Modification of definition of controlled group of corporations.
Sec. 469. Mandatory basis adjustments in connection with partnership distribu-
tions and transfers of partnership interests.
PART III—DEPRECIATION AND AMORTIZATION
Sec. 471. Extension of amortization of intangibles to sports franchises.
Sec. 472. Class lives for utility grading costs.
Sec. 473. Expansion of limitation on depreciation of certain passenger auto-
mobiles.
Sec. 474. Consistent amortization of periods for intangibles.
Sec. 475. Reform of tax treatment of leasing operations.
Sec. 476. Limitation on deductions allocable to property used by governments or
other tax-exempt entities.
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PART IV—ADMINISTRATIVE PROVISIONS
Sec. 481. Clarification of rules for payment of estimated tax for certain deemed
asset sales.
Sec. 482. Extension of IRS user fees.
Sec. 483. Doubling of certain penalties, fines, and interest on underpayments re-
lated to certain offshore financial arrangement.
Sec. 484. Partial payment of tax liability in installment agreements.
Sec. 485. Extension of customs user fees.
Sec. 486. Deposits made to suspend running of interest on potential underpay-
ments.
Sec. 487. Qualified tax collection contracts.
Sec. 488. Whistleblower reforms.
Sec. 489. Protection of overtime pay.
Sec. 490. Protection of overtime pay.
PART V—MISCELLANEOUS PROVISIONS
Sec. 491. Addition of vaccines against hepatitis A to list of taxable vaccines.
Sec. 492. Recognition of gain from the sale of a principal residence acquired in
a like-kind exchange within 5 years of sale.
Sec. 493. Modification of exemption from tax for small property and casualty in-
surance companies.
Sec. 494. Treatment of charitable contributions of patents and similar property.
Sec. 495. Increase in age of minor children whose unearned income is taxed as
if parent’s income.
Sec. 496. Holding period for preferred stock.
Sec. 497. Substantial presence test required to determine bona fide residence in
United States possessions.
TITLE V—PROTECTION OF UNITED STATES WORKERS FROM
COMPETITION OF FOREIGN WORKFORCES
Sec. 501. Limitations on off-shore performance of contracts.
Sec. 502. Repeal of superseded law.
Sec. 503. Effective date and applicability.
TITLE VI—OTHER PROVISIONS
Subtitle A—Provisions Relating to Housing
Sec. 601. Treatment of qualified mortgage bonds.
Sec. 602. Premiums for mortgage insurance.
Sec. 603. Increase in historic rehabilitation credit for certain low-income housing
for the elderly.
Subtitle B—Provisions Relating to Bonds
Sec. 611. Expansion of New York Liberty Zone tax benefits.
Sec. 612. Modifications of treatment of qualified zone academy bonds.
Sec. 613. Modifications of authority of Indian tribal governments to issue tax-ex-
empt bonds.
Sec. 614. Definition of manufacturing facility for small issue bonds.
Sec. 615. Conservation bonds.
Sec. 616. Indian school construction.
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Subtitle C—Provisions Relating to Depreciation
Sec. 621. Special placed in service rule for bonus depreciation property.
Sec. 622. Modification of depreciation allowance for aircraft.
Sec. 623. Modification of class life for certain track facilities.
Sec. 624. Minimum tax relief for certain taxpayers.
Subtitle D—Expansion of Business Credit
Sec. 631. New markets tax credit for Native American reservations.
Sec. 632. Ready Reserve-National Guard employee credit and Ready Reserve-Na-
tional Guard replacement employee credit.
Sec. 633. Rural investment tax credit.
Sec. 634. Qualified rural small business investment credit.
Sec. 635. Credit for maintenance of railroad track.
Sec. 636. Railroad revitalization and security investment credit.
Sec. 637. Modification of targeted areas designated for new markets tax credit.
Sec. 638. Modification of income requirement for census tracts within high mi-
gration rural counties.
Sec. 639. Credit for investment in technology to make motion pictures more acces-
sible to the deaf and hard of hearing.
Subtitle E—Miscellaneous Provisions
Sec. 641. Exclusion of gain or loss on sale or exchange of certain brownfield sites
from unrelated business taxable income.
Sec. 642. Modification of unrelated business income limitation on investment in
certain debt-financed properties.
Sec. 643. Civil rights tax relief.
Sec. 644. Exclusion for payments to individuals under National Health Service
Corps loan repayment program and certain State loan repay-
ment programs.
Sec. 645. Certain expenses of rural letter carriers.
Sec. 646. Method of accounting for naval shipbuilders.
Sec. 647. Suspension of policyholders surplus account provisions.
Sec. 648. Payment of dividends on stock of cooperatives without reducing patron-
age dividends.
Sec. 649. Special rules for livestock sold on account of weather-related conditions.
Sec. 650. Motor vehicle dealer transitional assistance.
Sec. 651. Expansion of designated renewal community area based on 2000 census
data.
Sec. 652. Reduction of holding period to 12 months for purposes of determining
whether horses are section 1231 assets.
Sec. 653. Blue Ribbon Commission on Comprehensive Tax Reform.
Sec. 654. Treatment of distributions by ESOPs with respect to S corporation
stock.
Sec. 655. Clarification of working capital for reasonably anticipated needs of a
business for purposes of accumulated earnings tax.
Sec. 656. Tax treatment of State ownership of railroad real estate investment
trust.
Sec. 657. Clarification of contribution in aid of construction for water and sewer-
age disposal utilities.
Sec. 658. Credit for purchase and installation of agricultural water conservation
systems.
Sec. 659. Modification of involuntary conversion rules for businesses affected by
the September 11th terrorist attacks.
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Sec. 660. Repeal of application of below-market loan rules to amounts paid to
certain continuing care facilities.
Sec. 661. Gold, silver, platinum, and palladium treated in the same manner as
stocks and bonds for maximum capital gains rate for individ-
uals.
Sec. 662. Inclusion of primary and secondary medical strategies for children and
adults with sickle cell disease as medical assistance under the
Medicaid program.
Subtitle F—Revenue Provisions
PART I—GENERAL REVENUE PROVISIONS
Sec. 661A. Treasury regulations on foreign tax credit.
Sec. 662B. Freeze of provisions regarding suspension of interest where Secretary
fails to contact taxpayer.
PART II—PENSION AND DEFERRED COMPENSATION
Sec. 671. Treatment of nonqualified deferred compensation plans.
Sec. 672. Prohibition on deferral of gain from the exercise of stock options and
restricted stock gains through deferred compensation arrange-
ments.
Sec. 673. Increase in withholding from supplemental wage payments in excess of
$1,000,000.
Sec. 674. Treatment of sale of stock acquired pursuant to exercise of stock options
to comply with conflict-of-interest requirements.
Sec. 675. Application of basis rules to employer and employee contributions on
behalf of nonresident aliens.
TITLE VII—EXTENSIONS OF CERTAIN EXPIRING PROVISIONS
Subtitle A—Extensions
Sec. 701. Parity in the application of certain limits to mental health benefits.
Sec. 702. Modifications to work opportunity credit and welfare-to-work credit.
Sec. 703. Consolidation of work opportunity credit with welfare-to-work credit.
Sec. 704. Qualified zone academy bonds.
Sec. 705. Cover over of tax on distilled spirits.
Sec. 706. Deduction for corporate donations of scientific property and computer
technology.
Sec. 707. Deduction for certain expenses of school teachers.
Sec. 708. Expensing of environmental remediation costs.
Sec. 709. Expansion of certain New York Liberty Zone benefits.
Sec. 710. Repeal of reduction of deductions for mutual life insurance companies.
Sec. 711. Tax incentives for investment in the District of Columbia.
Sec. 712.Disclosure of tax information to facilitate combined employment tax re-
porting.
Sec. 713. Allowance of nonrefundable personal credits against regular and min-
imum tax liability.
Sec. 714. Credit for electricity produced from certain renewable resources.
Sec. 715. Taxable income limit on percentage depletion for oil and natural gas
produced from marginal properties.
Sec. 716. Indian employment tax credit.
Sec. 717. Accelerated depreciation for business property on Indian reservation.
Sec. 718. Disclosure of return information relating to student loans.
Sec. 719. Extension of transfers of excess pension assets to retiree health accounts.
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Sec. 720. Elimination of phaseout of credit for qualified electric vehicles.
Sec. 721. Elimination of phaseout for deduction for clean-fuel vehicle property.
Subtitle B—Revenue Provisions
Sec. 731. Donations of motor vehicles, boats, and airplanes.
Sec. 732. Addition of vaccines against influenza to list of taxable vaccines.
Sec. 733. Treatment of contingent payment convertible debt instruments.
Sec. 734. Modification of continuing levy on payments to Federal venders.
TITLE VIII—ENERGY TAX INCENTIVES
Sec. 800. Short title.
Subtitle A—Renewable Electricity Production Tax Credit
Sec. 801. Extension and expansion of credit for electricity produced from certain
renewable resources.
Subtitle B—Alternative Motor Vehicles and Fuels Incentives
Sec. 811. Alternative motor vehicle credit.
Sec. 812. Modification of credit for qualified electric vehicles.
Sec. 813. Credit for installation of alternative fueling stations.
Sec. 814. Credit for retail sale of alternative fuels as motor vehicle fuel.
Sec. 815. Small ethanol producer credit.
Subtitle C—Conservation and Energy Efficiency Provisions
Sec. 821. Credit for construction of new energy efficient home.
Sec. 822. Credit for energy efficient appliances.
Sec. 823. Credit for residential energy efficient property.
Sec. 824. Credit for business installation of qualified fuel cells and stationary
microturbine power plants.
Sec. 825. Energy efficient commercial buildings deduction.
Sec. 826. Three-year applicable recovery period for depreciation of qualified en-
ergy management devices.
Sec. 827. Three-year applicable recovery period for depreciation of qualified water
submetering devices.
Sec. 828. Energy credit for combined heat and power system property.
Sec. 829. Credit for energy efficiency improvements to existing homes.
Subtitle D—Clean Coal Incentives
PART I—CREDIT FOR EMISSION REDUCTIONS AND EFFICIENCY IMPROVEMENTS
IN EXISTING COAL-BASED ELECTRICITY GENERATION FACILITIES
Sec. 831. Credit for production from a qualifying clean coal technology unit.
PART II—INCENTIVES FOR EARLY COMMERCIAL APPLICATIONS OF ADVANCED
CLEAN COAL TECHNOLOGIES
Sec. 832. Credit for investment in qualifying advanced clean coal technology.
Sec. 833. Credit for production from a qualifying advanced clean coal technology
unit.
PART III—TREATMENT OF PERSONS NOT ABLE TO USE ENTIRE CREDIT
Sec. 834. Treatment of persons not able to use entire credit.
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Subtitle E—Oil and Gas Provisions
Sec. 841. Oil and gas from marginal wells.
Sec. 842. Natural gas gathering lines treated as 7-year property.
Sec. 843. Expensing of capital costs incurred in complying with Environmental
Protection Agency sulfur regulations.
Sec. 844. Credit for production of low sulfur diesel fuel.
Sec. 845. Determination of small refiner exception to oil depletion deduction.
Sec. 846. Marginal production income limit extension.
Sec. 847. Amortization of delay rental payments.
Sec. 848. Amortization of geological and geophysical expenditures.
Sec. 849. Extension and modification of credit for producing fuel from a non-
conventional source.
Sec. 850. Natural gas distribution lines treated as 15-year property.
Sec. 851. Credit for Alaska natural gas.
Sec. 852. Certain Alaska natural gas pipeline property treated as 7-year prop-
erty.
Sec. 853. Extension of enhanced oil recovery credit to certain Alaska facilities.
Sec. 854. Arbitrage rules not to apply to prepayments for natural gas.
Subtitle F—Electric Utility Restructuring Provisions
Sec. 855. Modifications to special rules for nuclear decommissioning costs.
Sec. 856. Treatment of certain income of cooperatives.
Sec. 857. Sales or dispositions to implement Federal Energy Regulatory Commis-
sion or State electric restructuring policy.
Subtitle G—Volumetric Ethanol Excise Tax Credit
Sec. 860. Short title.
Sec. 861. Alcohol and biodiesel excise tax credit and extension of alcohol fuels in-
come tax credit.
Sec. 862. Biodiesel income tax credit.
Subtitle H—Fuel Fraud Prevention
Sec. 870. Short title.
PART I—AVIATION JET FUEL
Sec. 871. Taxation of aviation-grade kerosene.
Sec. 872. Transfer of certain amounts from the Airport and Airway Trust Fund
to the Highway Trust Fund to reflect highway use of jet fuel.
PART II—DYED FUEL
Sec. 873. Dye injection equipment.
Sec. 874. Elimination of administrative review for taxable use of dyed fuel.
Sec. 875. Penalty on untaxed chemically altered dyed fuel mixtures.
Sec. 876. Termination of dyed diesel use by intercity buses.
PART III—MODIFICATION OF INSPECTION OF RECORDS PROVISIONS
Sec. 877. Authority to inspect on-site records.
Sec. 878. Assessable penalty for refusal of entry.
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PART IV—REGISTRATION AND REPORTING REQUIREMENTS
Sec. 879. Registration of pipeline or vessel operators required for exemption of
bulk transfers to registered terminals or refineries.
Sec. 880. Display of registration.
Sec. 881. Registration of persons within foreign trade zones.
Sec. 882. Penalties for failure to register and failure to report.
Sec. 883. Information reporting for persons claiming certain tax benefits.
PART V—IMPORTS
Sec. 884. Tax at point of entry where importer not registered.
Sec. 885. Reconciliation of on-loaded cargo to entered cargo.
PART VI—MISCELLANEOUS PROVISIONS
Sec. 886. Tax on sale of diesel fuel whether suitable for use or not in a diesel-
powered vehicle or train.
Sec. 887. Modification of ultimate vendor refund claims with respect to farming.
Sec. 888. Taxable fuel refunds for certain ultimate vendors.
Sec. 889. Two-party exchanges.
Sec. 890. Modifications of tax on use of certain vehicles.
Sec. 891. Dedication of revenues from certain penalties to the Highway Trust
Fund.
Sec. 892. Nonapplication of export exemption to delivery of fuel to motor vehicles
removed from United States.
PART VII—TOTAL ACCOUNTABILITY
Sec. 893. Total accountability.
Sec. 894. Excise tax reporting.
Sec. 895. Information reporting.
Subtitle I—Mobile Machinery
Sec. 896. Treatment of mobile machinery.
Subtitle J—Additional Provisions
Sec. 897. Study of effectiveness of certain provisions by GAO.
Sec. 898. Repeal of 4.3-cent motor fuel excise taxes on railroads and inland wa-
terway transportation which remain in general fund.
Sec. 899. Distributions from publicly traded partnerships treated as qualifying
income of regulated investment companies.
Sec. 899A. Certain business related credits allowed against regular and minimum
tax.
Sec. 899B. Credit for qualifying pollution control equipment.
Sec. 899C. Electric transmission property treated as 15-year property.
TITLE IX—HOMESTEAD PRESERVATION ACT
Sec. 901. Short Title.
Sec. 902. Mortgage payment assistance.
TITLE X—OFFICE OF FEDERAL PROCUREMENT POLICY ACT
IMPROVEMENTS
Sec. 1001. Report on acquisitions of goods from foreign sources.
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TITLE XI—PROVISIONS RELATING TO TOBACCO
Subtitle A—Family Smoking Prevention and Tobacco Control
Sec. 1101. Short title.
Sec. 1102. Findings.
Sec. 1103. Purpose.
Sec. 1104. Scope and effect.
Sec. 1105. Severability.
CHAPTER 1—AUTHORITY OF THE FOOD AND DRUG
ADMINISTRATION
Sec. 1111. Amendment of Federal Food, Drug, and Cosmetic Act.
Sec. 1112. Interim final rule.
Sec. 1113. Conforming and other amendments to general provisions.
CHAPTER 2—TOBACCO PRODUCT WARNINGS; CONSTITUENT AND
SMOKE CONSTITUENT DISCLOSURE
Sec. 1121. Cigarette label and advertising warnings.
Sec. 1122. Authority to revise cigarette warning label statements.
Sec. 1123. State regulation of cigarette advertising and promotion.
Sec. 1124. Smokeless tobacco labels and advertising warnings.
Sec. 1125. Authority to revise smokeless tobacco product warning label statements.
Sec. 1126. Tar, nicotine, and other smoke constituent disclosure to the public.
CHAPTER 3—PREVENTION OF ILLICIT TRADE IN TOBACCO
PRODUCTS
Sec. 1131. Labeling, recordkeeping, records inspection.
Sec. 1132. Study and report.
Subtitle B—Tobacco Market Transition
Sec. 1140. Short title of subtitle.
CHAPTER 1—TERMINATION OF CURRENT TOBACCO PROGRAMS
Sec. 1141. Termination of Tobacco Production Adjustment Programs.
Sec. 1142. Termination of Tobacco Price Support Program.
Sec. 1143. Liability.
CHAPTER 2—TOBACCO ASSISTANCE
Sec. 1151. Tobacco assistance.
Sec. 1152. Tobacco insurance research and development.
Sec. 1153. Conforming amendments.
CHAPTER 3—IMPLEMENTATION
Sec. 1161. Regulations.
Sec. 1162. Effective Date.
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TITLE I—PROVISIONS RELATING
TO REPEAL OF EXCLUSION
FOR EXTRATERRITORIAL IN-
COME
SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL
INCOME.
(a) IN GENERAL.—Section 114 is hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1)(A) Subpart E of part III of subchapter N of
chapter 1 (relating to qualifying foreign trade in-
come) is hereby repealed.
(B) The table of subparts for such part III is
amended by striking the item relating to subpart E.
(2) The table of sections for part III of sub-
chapter B of chapter 1 is amended by striking the
item relating to section 114.
(3) The second sentence of section 56(g)(4)(B)(i)
is amended by striking ‘‘114 or’’.
(4) Section 275(a) is amended—
(A) by inserting ‘‘or’’ at the end of para-
graph (4)(A), by striking ‘‘or’’ at the end of
paragraph (4)(B) and inserting a period, and by
striking subparagraph (C), and
(B) by striking the last sentence.
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(5) 
Paragraph 
(3) 
of 
section 
864(e) 
is
amended—
(A) by striking:
‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO AC-
COUNT.—
‘‘(A) IN GENERAL.—For purposes of’’; and
inserting:
‘‘(3) TAX-EXEMPT ASSETS NOT TAKEN INTO AC-
COUNT.—For purposes of’’, and
(B) by striking subparagraph (B).
(6) Section 903 is amended by striking ‘‘114,
164(a),’’ and inserting ‘‘164(a)’’.
(7) Section 999(c)(1) is amended by striking
‘‘941(a)(5),’’.
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to transactions occurring after
the date of the enactment of this Act.
(2) BINDING
CONTRACTS.—The amendments
made by this section shall not apply to any trans-
action in the ordinary course of a trade or business
which occurs pursuant to a binding contract—
(A) which is between the taxpayer and a
person who is not a related person (as defined in
section 943(b)(3) of the Internal Revenue Code of
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1986, as in effect on the day before the date of
the enactment of this Act), and
(B) which is in effect on September 17,
2003, and at all times thereafter.
(d) REVOCATION OF SECTION 943(e) ELECTIONS.—
(1) IN GENERAL.—In the case of a corporation
that elected to be treated as a domestic corporation
under section 943(e) of the Internal Revenue Code of
1986 (as in effect on the day before the date of the en-
actment of this Act)—
(A) the corporation may, during the 1-year
period beginning on the date of the enactment of
this Act, revoke such election, effective as of such
date of enactment, and
(B) if the corporation does revoke such
election—
(i) such corporation shall be treated as
a domestic corporation transferring (as of
such date of enactment) all of its property
to a foreign corporation in connection with
an exchange described in section 354 of such
Code, and
(ii) no gain or loss shall be recognized
on such transfer.
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(2) EXCEPTION.—Subparagraph (B)(ii) of para-
graph (1) shall not apply to gain on any asset held
by the revoking corporation if—
(A) the basis of such asset is determined in
whole or in part by reference to the basis of such
asset in the hands of the person from whom the
revoking corporation acquired such asset,
(B) the asset was acquired by transfer (not
as a result of the election under section 943(e) of
such Code) occurring on or after the 1st day on
which its election under section 943(e) of such
Code was effective, and
(C) a principal purpose of the acquisition
was the reduction or avoidance of tax (other
than a reduction in tax under section 114 of
such Code, as in effect on the day before the date
of the enactment of this Act).
(e) GENERAL TRANSITION.—
(1) IN GENERAL.—In the case of a taxable year
ending after the date of the enactment of this Act and
beginning before January 1, 2007, for purposes of
chapter 1 of such Code, a current FSC/ETI bene-
ficiary shall be allowed a deduction equal to the tran-
sition amount determined under this subsection with
respect to such beneficiary for such year.
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(2) CURRENT FSC/ETI BENEFICIARY.—The term
‘‘current FSC/ETI beneficiary’’ means any corpora-
tion which entered into one or more transactions dur-
ing its taxable year beginning in calendar year 2002
with respect to which FSC/ETI benefits were allow-
able.
(3) TRANSITION AMOUNT.—For purposes of this
subsection—
(A) IN GENERAL.—The transition amount
applicable to any current FSC/ETI beneficiary
for any taxable year is the phaseout percentage
of the base period amount.
(B) PHASEOUT PERCENTAGE.—
(i) IN GENERAL.—In the case of a tax-
payer using the calendar year as its taxable
year, the phaseout percentage shall be deter-
mined under the following table:
The phaseout
Years:
percentage is:
2005 ..........................
2006 ..........................
60.
(ii) SPECIAL
RULE
FOR
2004.—The
phaseout percentage for 2004 shall be the
amount that bears the same ratio to 80 per-
cent as the number of days after the date of
the enactment of this Act bears to 366.
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(iii) SPECIAL RULE FOR FISCAL YEAR
TAXPAYERS.—In the case of a taxpayer not
using the calendar year as its taxable year,
the phaseout percentage is the weighted av-
erage of the phaseout percentages deter-
mined under the preceding provisions of
this paragraph with respect to calendar
years any portion of which is included in
the taxpayer’s taxable year. The weighted
average shall be determined on the basis of
the respective portions of the taxable year in
each calendar year.
(C) SHORT TAXABLE YEAR.—The Secretary
shall prescribe guidance for the computation of
the transition amount in the case of a short tax-
able year.
(4) BASE PERIOD AMOUNT.—For purposes of this
subsection, the base period amount is the average
FSC/ETI benefit for the taxpayer’s taxable years be-
ginning in calendar years 2000, 2001, and 2002.
(5) FSC/ETI BENEFIT.—For purposes of this
subsection, the term ‘‘FSC/ETI benefit’’ means—
(A) amounts excludable from gross income
under section 114 of such Code, and
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(B) the exempt foreign trade income of re-
lated foreign sales corporations from property
acquired from the taxpayer (determined without
regard to section 923(a)(5) of such Code (relating
to special rule for military property), as in effect
on the day before the date of the enactment of the
FSC Repeal and Extraterritorial Income Exclu-
sion Act of 2000).
In determining the FSC/ETI benefit there shall be ex-
cluded any amount attributable to a transaction with
respect to which the taxpayer is the lessor unless the
leased property was manufactured or produced in
whole or in significant part by the taxpayer.
(6) SPECIAL
RULE
FOR
AGRICULTURAL
AND
HORTICULTURAL
COOPERATIVES.—Determinations
under this subsection with respect to an organization
described in section 943(g)(1) of such Code, as in ef-
fect on the day before the date of the enactment of this
Act, shall be made at the cooperative level and the
purposes of this subsection shall be carried out in a
manner similar to section 199(h)(2) of such Code, as
added by this Act. Such determinations shall be in
accordance with such requirements and procedures as
the Secretary may prescribe.
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(7) CERTAIN RULES TO APPLY.—Rules similar to
the rules of section 41(f) of such Code shall apply for
purposes of this subsection.
(8) COORDINATION
WITH
BINDING
CONTRACT
RULE.—The deduction determined under paragraph
(1) for any taxable year shall be reduced by the
phaseout percentage of any FSC/ETI benefit realized
for the taxable year by reason of subsection (c)(2) or
section 
5(c)(1)(B) 
of 
the 
FSC 
Repeal 
and
Extraterritorial Income Exclusion Act of 2000, except
that for purposes of this paragraph the phaseout per-
centage for 2004 shall be treated as being equal to 100
percent.
(9) SPECIAL RULE FOR TAXABLE YEAR WHICH
INCLUDES DATE OF ENACTMENT.—In the case of a
taxable year which includes the date of the enactment
of this Act, the deduction allowed under this sub-
section to any current FSC/ETI beneficiary shall in
no event exceed—
(A) 100 percent of such beneficiary’s base
period amount for calendar year 2004, reduced
by
(B) the FSC/ETI benefit of such beneficiary
with respect to transactions occurring during the
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portion of the taxable year ending on the date of
the enactment of this Act.
SEC. 102. DEDUCTION RELATING TO INCOME ATTRIB-
UTABLE TO UNITED STATES PRODUCTION AC-
TIVITIES.
(a) IN GENERAL.—Part VI of subchapter B of chapter
1 (relating to itemized deductions for individuals and cor-
porations) is amended by adding at the end the following
new section:
‘‘SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUC-
TION ACTIVITIES.
‘‘(a) ALLOWANCE OF DEDUCTION.—
‘‘(1) IN GENERAL.—There shall be allowed as a
deduction an amount equal to 9 percent of the quali-
fied production activities income of the taxpayer for
the taxable year.
‘‘(2) PHASEIN.—In the case of taxable years be-
ginning in 2004, 2005, 2006, 2007, or 2008, para-
graph (1) shall be applied by substituting for the per-
centage contained therein the transition percentage
determined under the following table:
‘‘Taxable years
The transition
beginning in:
percentage is:
2004, 2005, or 2006
2007 ..........................
2008 ..........................
7.
‘‘(b) DEDUCTION LIMITED TO WAGES PAID.—
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‘‘(1) IN GENERAL.—The amount of the deduction
allowable under subsection (a) for any taxable year
shall not exceed 50 percent of the W–2 wages of the
employer for the taxable year.
‘‘(2) W–2 WAGES.—For purposes of paragraph
(1), the term ‘W–2 wages’ means the sum of the aggre-
gate amounts the taxpayer is required to include on
statements under paragraphs (3) and (8) of section
6051(a) with respect to employment of employees of
the taxpayer during the taxpayer’s taxable year.
‘‘(3) SPECIAL RULES.—
‘‘(A) PASS-THRU ENTITIES.—In the case of
an S corporation, partnership, estate or trust, or
other pass-thru entity, the limitation under this
subsection shall apply at the entity level. The
preceding sentence shall not apply to any entity
all of the ownership interests of which are held
directly or indirectly by members of the same ex-
panded affiliated group.
‘‘(B) ACQUISITIONS
AND
DISPOSITIONS.—
The Secretary shall provide for the application
of this subsection in cases where the taxpayer ac-
quires, or disposes of, the major portion of a
trade or business or the major portion of a sepa-
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rate unit of a trade or business during the tax-
able year.
‘‘(c) QUALIFIED PRODUCTION ACTIVITIES INCOME.—
For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified produc-
tion activities income’ means an amount equal to the
portion of the modified taxable income of the taxpayer
which is attributable to domestic production activi-
ties.
‘‘(2) REDUCTION FOR TAXABLE YEARS BEGIN-
NING
BEFORE
2013.—The amount otherwise deter-
mined under paragraph (1) (the ‘unreduced amount’)
shall not exceed—
‘‘(A) in the case of taxable years beginning
before 2010, the product of the unreduced
amount and the domestic/worldwide fraction,
and
‘‘(B) in the case of taxable years beginning
in 2010, 2011, or 2012, an amount equal to the
sum of—
‘‘(i) the product of the unreduced
amount and the domestic/worldwide frac-
tion, plus
‘‘(ii) the applicable percentage of an
amount equal to the unreduced amount
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minus the amount determined under clause
(i).
For purposes of subparagraph (B)(ii), the applicable
percentage is 25 percent for 2010, 50 percent for
2011, and 75 percent for 2012.
‘‘(d) DETERMINATION OF INCOME ATTRIBUTABLE TO
DOMESTIC PRODUCTION ACTIVITIES.—For purposes of this
section—
‘‘(1) IN GENERAL.—The portion of the modified
taxable income which is attributable to domestic pro-
duction activities is so much of the modified taxable
income for the taxable year as does not exceed—
‘‘(A) the taxpayer’s domestic production
gross receipts for such taxable year, reduced by
‘‘(B) the sum of—
‘‘(i) the costs of goods sold that are al-
locable to such receipts,
‘‘(ii) other deductions, expenses, or
losses directly allocable to such receipts, and
‘‘(iii) a proper share of other deduc-
tions, expenses, and losses that are not di-
rectly allocable to such receipts or another
class of income.
‘‘(2) ALLOCATION METHOD.—The Secretary shall
prescribe rules for the proper allocation of items of in-
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come, deduction, expense, and loss for purposes of de-
termining income attributable to domestic production
activities.
‘‘(3) 
SPECIAL
RULES
FOR
DETERMINING
COSTS.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining costs under clause (i) of paragraph
(1)(B), any item or service brought into the
United States shall be treated as acquired by
purchase, and its cost shall be treated as not less
than its fair market value immediately after it
entered the United States. A similar rule shall
apply in determining the adjusted basis of leased
or rented property where the lease or rental gives
rise to domestic production gross receipts.
‘‘(B) EXPORTS
FOR
FURTHER
MANUFAC-
TURE.—In the case of any property described in
subparagraph (A) that had been exported by the
taxpayer for further manufacture, the increase in
cost or adjusted basis under subparagraph (A)
shall not exceed the difference between the value
of the property when exported and the value of
the property when brought back into the United
States after the further manufacture.
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‘‘(4) MODIFIED
TAXABLE
INCOME.—The term
‘modified taxable income’ means taxable income com-
puted without regard to the deduction allowable under
this section.
‘‘(e) DOMESTIC PRODUCTION GROSS RECEIPTS.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘domestic produc-
tion gross receipts’ means the gross receipts of the tax-
payer which are derived from—
‘‘(A) any sale, exchange, or other disposi-
tion of, or
‘‘(B) any lease, rental, or license of,
qualifying production property which was manufac-
tured, produced, grown, or extracted in whole or in
significant part by the taxpayer within the United
States.
‘‘(2) SPECIAL RULES FOR CERTAIN PROPERTY.—
In the case of any qualifying production property de-
scribed in subsection (f)(1)(C)—
‘‘(A) such property shall be treated for pur-
poses of paragraph (1) as produced in signifi-
cant part by the taxpayer within the United
States if more than 50 percent of the aggregate
development and production costs are incurred
by the taxpayer within the United States, and
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‘‘(B) if a taxpayer acquires such property
before such property begins to generate substan-
tial gross receipts, any development or produc-
tion costs incurred before the acquisition shall be
treated as incurred by the taxpayer for purposes
of subparagraph (A) and paragraph (1).
‘‘(3) GROSS RECEIPTS FROM USE OF FILMS AND
VIDEO TAPE.—In the case of any qualifying produc-
tion property which is property described in section
168(f)(3) produced in whole or in significant part by
the taxpayer within the United States (determined
after application of paragraph (2)), domestic produc-
tion gross receipts shall include gross receipts derived
by the taxpayer from the use of the property by the
taxpayer.
‘‘(f) QUALIFYING PRODUCTION PROPERTY.—For pur-
poses of this section—
‘‘(1) IN GENERAL.—Except as otherwise provided
in this paragraph, the term ‘qualifying production
property’ means—
‘‘(A) any tangible personal property,
‘‘(B) any computer software, and
‘‘(C) any property described in section
168(f) (3) or (4), including any underlying
copyright or trademark.
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‘‘(2) EXCLUSIONS
FROM
QUALIFYING
PRODUC-
TION
PROPERTY.—The term ‘qualifying production
property’ shall not include—
‘‘(A) consumable property that is sold,
leased, or licensed by the taxpayer as an integral
part of the provision of services,
‘‘(B) oil or gas,
‘‘(C) electricity,
‘‘(D) water supplied by pipeline to the con-
sumer,
‘‘(E) utility services, or
‘‘(F) any film, tape, recording, book, maga-
zine, newspaper, or similar property the market
for which is primarily topical or otherwise essen-
tially transitory in nature.
Subparagraph (F) shall not apply to property described in
section 168(f)(3) to the extent of the gross receipts from the
use of the property to which subsection (e)(3) applies (deter-
mined after application of this sentence).
‘‘(g) DOMESTIC/WORLDWIDE FRACTION.—For pur-
poses of this section—
‘‘(1) IN
GENERAL.—The term ‘domestic/world-
wide fraction’ means a fraction (not greater than
1)—
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‘‘(A) the numerator of which is the value of
the domestic production of the taxpayer, and
‘‘(B) the denominator of which is the value
of the worldwide production of the taxpayer.
‘‘(2) VALUE
OF
DOMESTIC
PRODUCTION.—The
value of domestic production is the excess (if any)
of—
‘‘(A) the domestic production gross receipts,
over
‘‘(B) the cost of purchased inputs allocable
to such receipts that are deductible under this
chapter for the taxable year.
‘‘(3) PURCHASED INPUTS.—
‘‘(A) IN GENERAL.—Purchased inputs are
any of the following items acquired by purchase:
‘‘(i) Services (other than services of em-
ployees) used in manufacture, production,
growth, or extraction activities.
‘‘(ii) Items consumed in connection
with such activities.
‘‘(iii) Items incorporated as part of the
property being manufactured, produced,
grown, or extracted.
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‘‘(B) SPECIAL RULE.—Rules similar to the
rules of subsection (d)(3) shall apply for pur-
poses of this subsection.
‘‘(4) VALUE OF WORLDWIDE PRODUCTION.—
‘‘(A) IN GENERAL.—The value of worldwide
production shall be determined under the prin-
ciples of paragraph (2), except that—
‘‘(i) worldwide production gross re-
ceipts shall be taken into account, and
‘‘(ii) paragraph (3)(B) shall not apply.
‘‘(B) WORLDWIDE PRODUCTION GROSS RE-
CEIPTS.—The worldwide production gross re-
ceipts is the amount that would be determined
under subsection (e) if such subsection were ap-
plied without any reference to the United States.
‘‘(h) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) APPLICATION OF SECTION TO PASS-THRU
ENTITIES.—In the case of an S corporation, partner-
ship, estate or trust, or other pass-thru entity—
‘‘(A) subject to the provisions of paragraph
(2) and subsection (b)(3)(A), this section shall be
applied at the shareholder, partner, or similar
level, and
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‘‘(B) the Secretary shall prescribe rules for
the application of this section, including rules
relating to—
‘‘(i) restrictions on the allocation of the
deduction to taxpayers at the partner or
similar level, and
‘‘(ii) 
additional 
reporting 
require-
ments.
‘‘(2) PATRONS OF AGRICULTURAL AND HORTI-
CULTURAL COOPERATIVES.—
‘‘(A) IN
GENERAL.—If any amount de-
scribed in paragraph (1) or (3) of section 1385
(a)—
‘‘(i) is received by a person from an
organization to which part I of subchapter
T applies which is engaged—
‘‘(I) in the manufacturing, pro-
duction, growth, or extraction in whole
or significant part of any agricultural
or horticultural product, or
‘‘(II) in the marketing of agricul-
tural or horticultural products, and
‘‘(ii) is allocable to the portion of the
qualified production activities income of the
organization which, but for this paragraph,
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factured, produced, grown, or extracted in
whole or significant part any qualifying
production property marketed by the orga-
nization which its patrons have so manu-
factured, produced, grown, or extracted.
‘‘(3) SPECIAL RULE FOR AFFILIATED GROUPS.—
‘‘(A) IN GENERAL.—All members of an ex-
panded affiliated group shall be treated as a sin-
gle corporation for purposes of this section.
‘‘(B) EXPANDED AFFILIATED GROUP.—The
term ‘expanded affiliated group’ means an affili-
ated group as defined in section 1504(a),
determined—
‘‘(i) by substituting ‘50 percent’ for ‘80
percent’ each place it appears, and
‘‘(ii) without regard to paragraphs (2)
and (4) of section 1504(b).
For purposes of determining the domestic/world-
wide fraction under subsection (g), clause (ii)
shall be applied by also disregarding paragraphs
(3) and (8) of section 1504(b).
‘‘(4) COORDINATION WITH MINIMUM TAX.—The
deduction under this section shall be allowed for pur-
poses of the tax imposed by section 55; except that for
purposes of section 55, alternative minimum taxable
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income shall be taken into account in determining the
deduction under this section.
‘‘(5) ORDERING
RULE.—The amount of any
other deduction allowable under this chapter shall be
determined as if this section had not been enacted.
‘‘(6) TRADE OR BUSINESS REQUIREMENT.—This
section shall be applied by only taking into account
items which are attributable to the actual conduct of
a trade or business.
‘‘(7) POSSESSIONS, ETC.—
‘‘(A) IN GENERAL.—For purposes of sub-
sections (d) and (e), the term ‘United States’ in-
cludes the Commonwealth of Puerto Rico, Guam,
American Samoa, the Commonwealth of the
Northern Mariana Islands, and the Virgin Is-
lands of the United States.
‘‘(B) SPECIAL RULES FOR APPLYING WAGE
LIMITATION.—For purposes of applying the limi-
tation under subsection (b) for any taxable
year—
‘‘(i) the determination of W–2 wages of
a taxpayer shall be made without regard to
any exclusion under section 3401(a)(8) for
remuneration paid for services performed in
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a jurisdiction described in subparagraph
(A), and
‘‘(ii) in determining the amount of
any credit allowable under section 30A or
936 for the taxable year, there shall not be
taken into account any wages which are
taken into account in applying such limita-
tion.
‘‘(8) COORDINATION WITH TRANSITION RULES.—
For purposes of this section—
‘‘(A) domestic production gross receipts
shall not include gross receipts from any trans-
action if the binding contract transition relief of
section 101(c)(2) of the Jumpstart Our Business
Strength (JOBS) Act applies to such trans-
action, and
‘‘(B) any deduction allowed under section
101(e) of such Act shall be disregarded in deter-
mining the portion of the taxable income which
is attributable to domestic production gross re-
ceipts.
‘‘(9) SEPARATE APPLICATION TO FILMS AND VID-
EOTAPE.—
‘‘(A) IN GENERAL.—In the case of quali-
fying production property described in section
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168(f)(3), the deduction under this section shall
be determined separately with respect to quali-
fied production activities income of the taxpayer
allocable to each of the following markets with
respect to such property:
‘‘(i) Theatrical.
‘‘(ii) Broadcast television (including
cable, foreign, pay-per-view, and syndica-
tion).
‘‘(iii) Home video.
‘‘(B) RULES
FOR
SEPARATE
DETERMINA-
TION.—Except as provided in subparagraph
(C)—
‘‘(i) any computation required to de-
termine the amount of the deduction with
respect to any of the markets described in
subparagraph (A) shall be made by only
taking into account items properly allocable
to such market, including the computation
of qualified production activities income,
modified taxable income, and the domestic/
worldwide fraction, and
‘‘(ii) such items shall not be taken into
account in determining the deduction with
respect to either of the other 2 markets or
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with respect to qualified production activi-
ties income of the taxpayer not allocable to
any of such markets.
‘‘(C) WAGE
LIMITATION.—This paragraph
shall not apply for purposes of subsection (b)
and subsection (b) shall be applied after the ap-
plication of this paragraph.’’
(b) MINIMUM TAX.—Section 56(g)(4)(C) (relating to
disallowance of items not deductible in computing earnings
and profits) is amended by adding at the end the following
new clause:
‘‘(v) DEDUCTION FOR DOMESTIC PRO-
DUCTION.—Clause (i) shall not apply to
any amount allowable as a deduction under
section 199.’’.
(c) CLERICAL AMENDMENT.—The table of sections for
part VI of subchapter B of chapter 1 is amended by adding
at the end the following new item:
‘‘Sec. 199. Income attributable to domestic production activities.’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to taxable years ending after
the date of the enactment of this Act.
(2) APPLICATION OF SECTION 15.—Section 15 of
the Internal Revenue Code of 1986 shall apply to the
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amendments made by this section as if they were
changes in a rate of tax.
SEC. 103. DEDUCTION FOR UNITED STATES PRODUCTION
ACTIVITIES INCLUDES INCOME RELATED TO
CERTAIN ARCHITECTURAL AND ENGINEER-
ING SERVICES.
(a) IN GENERAL.—Paragraph (1) of section 199(e) (re-
lating to domestic production gross receipts), as added by
section 102, is amended to read as follows:
‘‘(1) IN GENERAL.—
‘‘(A) RECEIPTS FROM QUALIFYING PRODUC-
TION PROPERTY.—The term ‘domestic production
gross receipts’ means the gross receipts of the tax-
payer which are derived from—
‘‘(i) any sale, exchange, or other dis-
position of, or
‘‘(ii) any lease, rental, or license of,
qualifying production property which was man-
ufactured, produced, grown, or extracted in
whole or in significant part by the taxpayer
within the United States.
‘‘(B) RECEIPTS FROM CERTAIN SERVICES.—
‘‘(i) IN GENERAL.—Such term also in-
cludes the applicable percentage of gross re-
ceipts of the taxpayer which are derived
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from any engineering or architectural serv-
ices performed in the United States for con-
struction projects in the United States.
‘‘(ii) APPLICABLE PERCENTAGE.—For
purposes of clause (i), the applicable per-
centage shall be determined under the fol-
lowing table:
‘‘In the case of any taxable
year beginning in—
The applicable percentage is—
2004, 2005, 2006, 2007, or 2008 ..................................................
2009, 2010, 2011, or 2012 .............................................................
2013 or thereafter ..........................................................................
100.
(b) LIMITATION OF EMPLOYER DEDUCTION FOR CER-
TAIN ENTERTAINMENT EXPENSES WITH RESPECT TO COV-
ERED EMPLOYEES.—Paragraph (2) of section 274(e) (relat-
ing to expenses treated as compensation) is amended to read
as follows:
‘‘(2) EXPENSES TREATED AS COMPENSATION.—
Expenses for goods, services, and facilities—
‘‘(A) in the case of a covered employee
(within the meaning of section 162(m)(3)), to the
extent that the expenses do not exceed the amount
of the expenses treated by the taxpayer, with re-
spect to the recipient of the entertainment,
amusement, or recreation, as compensation to
such covered employee on the taxpayer’s return
of tax under this chapter and as wages to such
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covered employee for purposes of chapter 24 (re-
lating to withholding of income tax at source on
wages), and
‘‘(B) in the case of any other employee, to
the extent that the expenses are treated by the
taxpayer, with respect to the recipient of the en-
tertainment, amusement, or recreation, as com-
pensation to such employee on the taxpayer’s re-
turn of tax under this chapter and as wages to
such employee for purposes of chapter 24 (relat-
ing to withholding of income tax at source on
wages).’’.
(c) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made by
subsection (a) shall apply to taxable years ending
after the date of the enactment of this Act, and section
15 of the Internal Revenue Code of 1986 shall apply
to the amendment made by this subsection as if it
were a change in the rate of tax.
(2) SUBSECTION (b).—The amendment made by
subsection (b) shall apply to expenses incurred after
the date of the enactment of this Act and before Janu-
ary 1, 2006.
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TITLE II—INTERNATIONAL TAX
PROVISIONS
Subtitle A—International Tax
Reform
SEC. 201. 20-YEAR FOREIGN TAX CREDIT CARRYOVER; 1-
YEAR FOREIGN TAX CREDIT CARRYBACK.
(a) GENERAL RULE.—Section 904(c) (relating to
carryback and carryover of excess tax paid) is amended—
(1) by striking ‘‘in the second preceding taxable
year,’’, and
(2) by striking ‘‘, and in the first, second, third,
fourth, or fifth’’ and inserting ‘‘and in any of the first
20’’.
(b) EXCESS EXTRACTION TAXES.—Paragraph (1) of
section 907(f) is amended—
(1) by striking ‘‘in the second preceding taxable
year,’’,
(2) by striking ‘‘, and in the first, second, third,
fourth, or fifth’’ and inserting ‘‘and in any of the first
20’’, and
(3) by striking the last sentence.
(c) EFFECTIVE DATE.—
(1) CARRYBACK.—The amendments made by sub-
sections (a)(1) and (b)(1) shall apply to excess foreign
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taxes arising in taxable years beginning after the date
of the enactment of this Act.
(2) CARRYOVER.—The amendments made by sub-
sections (a)(2) and (b)(2) shall apply to excess foreign
taxes which (without regard to the amendments made
by this section) may be carried to any taxable year
ending after the date of the enactment of this Act.
SEC. 202. LOOK-THRU RULES TO APPLY TO DIVIDENDS
FROM NONCONTROLLED SECTION 902 COR-
PORATIONS.
(a) IN GENERAL.—Section 904(d)(4) (relating to look-
thru rules apply to dividends from noncontrolled section
902 corporations) is amended to read as follows:
‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM
NONCONTROLLED SECTION 902 CORPORATIONS.—
‘‘(A) IN
GENERAL.—For purposes of this
subsection, any dividend from a noncontrolled
section 902 corporation with respect to the tax-
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 profits
attributable to income described in such
subparagraph, to
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‘‘(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 foreign cor-
poration to a United States shareholder, rules
similar to the rules of subparagraph (A) shall
apply in determining the extent to which earn-
ings and profits of the controlled foreign corpora-
tion 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.
‘‘(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 SUBSTANTIATION.—
If the Secretary determines that the proper
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subparagraph of paragraph (1) in which a
dividend is described has not been substan-
tiated, such dividend shall be treated as in-
come described in paragraph (1)(A).
‘‘(iii) 
COORDINATION
WITH
HIGH-
TAXED INCOME PROVISIONS.—Rules similar
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
respect to the taxpayer. The Secretary may
by regulations provide for the allocation of
any carryback of tax allocable to a dividend
from a noncontrolled section 902 corpora-
tion to such a taxable year for purposes 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.
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(2) Section 904(d)(2)(C)(iii) is amended by add-
ing ‘‘and’’ at the end of subclause (I), by striking sub-
clause (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 striking
‘‘(D), or (E)’’ and inserting ‘‘or (D)’’.
(6) Section 864(d)(5)(A)(i) is amended by strik-
ing ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2002.
SEC. 203. FOREIGN TAX CREDIT UNDER ALTERNATIVE MIN-
IMUM TAX.
(a) IN GENERAL.—
(1) Subsection (a) of section 59 is amended by
striking paragraph (2) and by redesignating para-
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graphs (3) and (4) as paragraphs (2) and (3), respec-
tively.
(2) Section 53(d)(1)(B)(i)(II) is amended by
striking ‘‘and if section 59(a)(2) did not apply’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2004.
SEC. 204. 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 insert-
ing after subsection (f) the following new subsection:
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC
LOSS.—
‘‘(1) GENERAL RULE.—For purposes of this sub-
part 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 portion 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
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‘‘(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 within
the United States).
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For
purposes of this subsection—
‘‘(A) IN GENERAL.—The term ‘overall do-
mestic loss’ means any domestic loss to the extent
such loss offsets taxable income from sources
without the United States for the taxable year or
for any preceding taxable year by reason of a
carryback. For purposes of the preceding sen-
tence, 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 appor-
tioned or allocated thereto (determined without
regard to any carryback from a subsequent tax-
able year).
‘‘(B) TAXPAYER MUST HAVE ELECTED FOR-
EIGN TAX CREDIT FOR YEAR OF LOSS.—The term
‘overall domestic loss’ shall not include any loss
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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
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 sub-
section 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)’’.
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(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 beginning
after December 31, 2006.
SEC. 205. 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.—
‘‘(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 domes-
tic members of a worldwide affiliated group from
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sources outside the United States shall be deter-
mined by allocating and apportioning the inter-
est expense of such domestic members to such in-
come 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
apportioned to foreign source income if this
subsection were applied to a group con-
sisting 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 consisting of—
‘‘(i) the includible members of an af-
filiated 
group 
(as 
defined 
in 
section
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1504(a), determined without regard to
paragraphs (2) and (4) of section 1504(b)),
and
‘‘(ii) all controlled foreign corporations
in which such members in the aggregate
meet the ownership requirements of section
1504(a)(2) either directly or indirectly
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 domestic partner-
ships, trusts, or estates.
‘‘(2) ALLOCATION
AND
APPORTIONMENT
OF
OTHER
EXPENSES.—Expenses other than interest
which are not directly allocable or apportioned to any
specific income producing activity shall be allocated
and apportioned as if all members of the affiliated
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 section 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 sub-
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section, except that paragraph (4) shall be applied on
a worldwide affiliated group basis.
‘‘(4) TREATMENT OF CERTAIN FINANCIAL INSTI-
TUTIONS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), any corporation described in subpara-
graph (B) shall be treated as an includible cor-
poration for purposes of section 1504 only for
purposes of applying this subsection separately
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,
‘‘(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.
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‘‘(C) TREATMENT OF BANK AND FINANCIAL
HOLDING COMPANIES.—To the extent provided 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 com-
pany, if such subsidiary is predominantly
engaged (directly or indirectly) in 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 INSTITU-
TION GROUP OF WORLDWIDE GROUP.—
‘‘(A) IN GENERAL.—If a worldwide affili-
ated group elects the application of this sub-
section, all financial corporations which—
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‘‘(i) are members of such worldwide af-
filiated 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 paragraph) shall
apply to any such group in the same manner as
this subsection (other than this paragraph) ap-
plies 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
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.
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‘‘(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 para-
graph to any member of the pre-election
worldwide affiliated group (other than to a
member of the electing financial institution
group) in excess of the greater of—
‘‘(I) its average annual dividend
(expressed as a percentage of current
earnings and profits) during the 5-tax-
able-year period ending with the tax-
able year preceding the taxable year, or
‘‘(II) 25 percent of its average an-
nual 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),
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an amount of indebtedness of the electing finan-
cial institution group equal to the excess dis-
tribution or the understatement or overstatement
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 affiliated
group (excluding the electing financial institu-
tion group). If a corporation has not been in ex-
istence for 5 taxable years, this subparagraph
shall be applied with respect to the period 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
parent of the pre-election worldwide affiliated
group and may be made only for the first taxable
year beginning after December 31, 2008, in
which such affiliated group includes 1 or more
financial corporations. Such an election, once
made, shall apply to all financial corporations
which are members of the electing financial in-
stitution group for such taxable year and all
subsequent years unless revoked with the consent
of the Secretary.
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‘‘(E) DEFINITIONS RELATING TO GROUPS.—
For purposes of this paragraph—
‘‘(i) PRE-ELECTION
WORLDWIDE
AF-
FILIATED
GROUP.—The term ‘pre-election
worldwide affiliated group’ means, with re-
spect to a corporation, the worldwide affili-
ated group of which such corporation would
(but for an election under this paragraph)
be a member for purposes of applying para-
graph (1).
‘‘(ii) ELECTING
FINANCIAL
INSTITU-
TION GROUP.—The term ‘electing financial
institution group’ means the group of cor-
porations to which this subsection applies
separately by reason of the application of
paragraph (4)(A) and which includes finan-
cial corporations by reason of an election
under subparagraph (A).
‘‘(F) REGULATIONS.—The Secretary shall
prescribe such regulations as may be appropriate
to 
carry 
out 
this 
subsection, 
including
regulations—
‘‘(i) providing for the direct allocation
of interest expense in other circumstances
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where such allocation would be appropriate
to carry out the purposes of this subsection,
‘‘(ii) preventing assets or interest ex-
pense from being taken into account more
than once, and
‘‘(iii) dealing with changes in members
of any group (through acquisitions or other-
wise) treated under this paragraph as an
affiliated group for purposes of this sub-
section.
‘‘(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 paragraph
(1)(C) and may be made only for the first taxable
year beginning after December 31, 2008, in which a
worldwide affiliated group exists which includes such
affiliated group and at least 1 foreign corporation.
Such an election, once made, shall apply to such com-
mon 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.—Para-
graph (7) of section 864(e) is amended—
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(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 sub-
paragraph (G), and by inserting after subparagraph
(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 Decem-
ber 31, 2008.
SEC. 206. 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
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substantially all of the controlled foreign
corporation’s commodities are property de-
scribed in paragraph (1), (2), or (8) of sec-
tion 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 RELATING
TO COMMODITY TRANSACTIONS.—
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—For purposes of paragraph (1)(C)(i),
the term ‘commodity hedging transaction’ means
any transaction with respect to a commodity if
such transaction—
‘‘(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 ‘ordinary
property or property described in sec-
tion 1231(b)’ for ‘ordinary property’,
and
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‘‘(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
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 ‘‘(in-
cluding hedging transactions’’.
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(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to transactions entered into after Decem-
ber 31, 2004.
Subtitle B—International Tax
Simplification
SEC. 211. 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 (relat-
ing 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 currently).
(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 inserting
the following:
‘‘(5) a foreign corporation,’’,
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(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
(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 following
new subparagraph:
‘‘(I) PERSONAL SERVICE CONTRACTS.—
‘‘(i) Amounts received under a contract
under which the corporation is to furnish
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
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‘‘(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
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 sub-
paragraph (G), and by redesignating subpara-
graph (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 section
453(a) of this Act, is amended by striking ‘‘which is
a foreign personal holding company (as defined in
section 552), a controlled foreign corporation (as de-
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fined in section 957), or’’ and inserting ‘‘which is a
controlled foreign corporation (as defined in section
957) or’’.
(3) 
Paragraph 
(2) 
of 
section 
171(c) 
is
amended—
(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 section
453(a) of this Act, is amended by striking ‘‘to a for-
eign personal holding company (as defined in section
552), a controlled foreign corporation (as defined in
section 957), or’’ and inserting ‘‘to a controlled for-
eign 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 personal
holding company (within the meaning of section
552)’’.
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(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), respec-
tively.
(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 amended
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 subparagraph
(C).
(11) Paragraph (1) of section 562(b) is amended
by striking ‘‘or a foreign personal holding company
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 insert-
ing ‘‘subsection (a) or (b)’’.
(13) Subsection (d) of section 751 is amended by
adding ‘‘and’’ at the end of paragraph (2), by strik-
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ing paragraph (3), by redesignating paragraph (4) as
paragraph (3), and by striking ‘‘paragraph (1), (2),
or (3)’’ in paragraph (3) (as so redesignated) and in-
serting ‘‘paragraph (1) or (2)’’.
(14) Paragraph (2) of section 864(d) is amended
by striking subparagraph (A) and by redesignating
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 foreign
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 person insur-
ance income (as defined in section 953(c)(2)), the Sec-
retary may treat any person as a United States
shareholder for purposes of this section if such person
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is treated as a United States shareholder under sec-
tion 953(c)(1).’’.
(D) Subsection (c) of section 898 is amended to
read as follows:
‘‘(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 specified
foreign corporation may elect, in lieu of the taxable
year under paragraph (1)(A), a taxable year begin-
ning 1 month earlier than the majority U.S. share-
holder 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 de-
scribed in subsection (b)(2)(A), and
‘‘(ii) each United States shareholder
not described in clause (i) whose stock was
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treated as owned under subsection (b)(2)(B)
by any shareholder described in such clause.
‘‘(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 compa-
nies).’’.
(17)(A) Subparagraph (A) of section 904(g)(1),
as redesignated by section 204, is amended by adding
‘‘or’’ at the end of clause (i), by striking clause (ii),
and by redesignating clause (iii) as clause (ii).
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(B) The paragraph heading of paragraph (2) of
section 904(g), as so redesignated, is amended by
striking ‘‘FOREIGN PERSONAL HOLDING OR’’.
(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 amended
by striking ‘‘, 551(a),’’.
(20) Paragraph (5) of section 1014(b) is amend-
ed 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 investment
trust (as defined in section 856).’’.
(B) The amendment made by subparagraph (A)
shall apply to taxable years beginning after December
31, 2004.
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(23) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly.
(24) Subsection (d) of section 1248 is amended
by striking paragraph (5) and by redesignating para-
graphs (6) and (7) as paragraphs (5) and (6), respec-
tively.
(25) Paragraph (2) of section 1260(c) is amend-
ed by striking subparagraphs (H) and (I) and by re-
designating subparagraph (J) as subparagraph (H).
(26)(A) Subparagraph (F) of section 1291(b)(3)
is amended by striking ‘‘551(d), 959(a),’’ and insert-
ing ‘‘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 Jumpstart Our Business
Strength (JOBS) Act)’’ after ‘‘section 1246’’.
(27) Paragraph (2) of section 1294(a) is amend-
ed 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 qualified elect-
ing fund for the taxable year if any amount is in-
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cludible in the gross income of the taxpayer under sec-
tion 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 proceeding in court
for the collection of such tax may be done with-
out assessing, at any time within 6 years after
the return was filed.’’.
(31) Subsection (a) of section 6679 is amended—
(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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(33) The table of parts for subchapter G of chap-
ter 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 strik-
ing 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 begin-
ning 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 re-
turn or return information with respect to taxable
years beginning after December 31, 2004.
SEC. 212. EXPANSION OF DE MINIMIS RULE UNDER SUB-
PART F.
(a) IN GENERAL.—Clause (ii) of section 954(b)(3)(A)
(relating to de minimis, etc., rules) is amended by striking
‘‘$1,000,000’’ and inserting ‘‘$5,000,000’’.
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(b) TECHNICAL AMENDMENTS.—
(1) Clause (ii) of section 864(d)(5)(A) is amend-
ed 
by 
striking 
‘‘$1,000,000’’ 
and 
inserting
‘‘$5,000,000’’.
(2) Clause (i) of section 881(c)(5)(A) is amended
by striking ‘‘$1,000,000’’ and inserting ‘‘$5,000,000’’.
(c) EFFECTIVE DATE.—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.
SEC. 213. 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 person.
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The Secretary may prescribe such regulations as may
be necessary to carry out the purposes of this para-
graph, including rules to account for special partner-
ship allocations of dividends, credits, and other inci-
dents of ownership of stock in determining propor-
tionate ownership.’’.
(b) CLARIFICATION
OF COMPARABLE ATTRIBUTION
UNDER SECTION 901(b)(5).—Paragraph (5) of section
901(b) is amended by striking ‘‘any individual’’ and insert-
ing ‘‘any person’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxes of foreign corporations for tax-
able years of such corporations beginning after the date of
the enactment of this Act.
SEC. 214. APPLICATION OF UNIFORM CAPITALIZATION
RULES TO FOREIGN PERSONS.
(a) IN GENERAL.—Section 263A(c) (relating to excep-
tions) is amended by adding at the end the following new
paragraph:
‘‘(7) FOREIGN PERSONS.—Except for purposes of
applying sections 871(b)(1) and 882(a)(1), this sec-
tion shall not apply to any taxpayer who is not a
United States person if such taxpayer capitalizes
costs of produced property or property acquired for
resale by applying the method used to ascertain the
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income, profit, or loss for purposes of reports or state-
ments to shareholders, partners, other proprietors, or
beneficiaries, or for credit purposes.’’.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendment made by sub-
section (a) shall apply to taxable years beginning
after December 31, 2004.
(2) CHANGE IN METHOD OF ACCOUNTING.—In
the case of any taxpayer required by the amendment
made by this section to change its method of account-
ing for its first taxable year beginning after December
31, 2004—
(A) such change shall be treated as initiated
by the taxpayer,
(B) such change shall be treated as made
with the consent of the Secretary of the Treasury,
and
(C) the net amount of the adjustments re-
quired to be taken into account by the taxpayer
under section 481 of the Internal Revenue Code
of 1986 shall be taken into account in such first
year.
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SEC. 215. REPEAL OF WITHHOLDING TAX ON DIVIDENDS
FROM CERTAIN FOREIGN CORPORATIONS.
(a) IN GENERAL.—Paragraph (2) of section 871(i) (re-
lating to tax not to apply to certain interest and dividends)
is amended by adding at the end the following new subpara-
graph:
‘‘(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. 216. REPEAL OF SPECIAL CAPITAL GAINS TAX ON
ALIENS PRESENT IN THE UNITED STATES
FOR 183 DAYS OR MORE.
(a) IN GENERAL.—Subsection (a) of section 871 is
amended by striking paragraph (2) and by redesignating
paragraph (3) as paragraph (2).
(b) CONFORMING AMENDMENT.—Section 1441(g) is
amended is amended by striking ‘‘section 871(a)(3)’’ and
inserting ‘‘section 871(a)(2)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
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Subtitle C—Additional
International Tax Provisions
SEC. 221. ACTIVE LEASING INCOME FROM AIRCRAFT AND
VESSELS.
(a) IN GENERAL.—Section 954(c)(2) is amended by
adding at the end the following new subparagraph:
‘‘(D) CERTAIN RENTS, ETC.—
‘‘(i) IN
GENERAL.—Foreign personal
holding company income shall not include
qualified leasing income derived from or in
connection with the leasing or rental of any
aircraft or vessel.
‘‘(ii) QUALIFIED
LEASING
INCOME.—
For purposes of this subparagraph, the term
‘qualified leasing income’ means rents and
gains derived in the active conduct of a
trade or business of leasing with respect to
which the controlled foreign corporation
conducts substantial activity, but only if—
‘‘(I) the leased property is used by
the lessee or other end-user in foreign
commerce and predominantly outside
the United States, and
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‘‘(II) the lessee or other end-user
is not a related person (as defined in
subsection (d)(3)).
Any amount not treated as foreign personal
holding income under this subparagraph
shall not be treated as foreign base company
shipping income.’’.
(b) CONFORMING AMENDMENT.—Section 954(c)(1)(B)
is amended by inserting ‘‘or (2)(D)’’ after ‘‘paragraph
(2)(A)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years of foreign corporations
beginning after December 31, 2005, and to taxable years
of United States shareholders with or within which such
taxable years of foreign corporations end.
SEC. 222. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN
RELATED CONTROLLED FOREIGN CORPORA-
TIONS 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 CON-
TROLLED FOREIGN CORPORATIONS.—For purposes of
this subsection, dividends, interest, rents, and royal-
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ties received or accrued from a controlled foreign cor-
poration which is a related person (as defined in sub-
section (b)(9)) shall not be treated as foreign personal
holding company income to the extent 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 defined in section 952). For
purposes of this paragraph, interest shall include fac-
toring income which is treated as income equivalent
to interest for purposes of paragraph (1)(E). The Sec-
retary shall prescribe such regulations as may be ap-
propriate to prevent the abuse of the purposes of this
paragraph.’’.
(b) EFFECTIVE DATE.—The amendment 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.
SEC. 223. 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 following
new paragraph:
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‘‘(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 cor-
poration is a 25-percent owner, such corporation
shall be treated for purposes of this 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 prevent abuse of the pur-
poses of this paragraph, including regulations
providing for coordination of this paragraph
with the provisions of subchapter 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 purposes
of the preceding sentence, if a controlled foreign
corporation is a shareholder or partner of a cor-
poration or partnership, the controlled foreign
corporation shall be treated as owning directly
its proportionate share of any such capital or
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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 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.
SEC. 224. 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-
serting after subparagraph (C) the following new subpara-
graph:
‘‘(D) ELECTIVE
EXCEPTION
FOR
TAXES
PAID OTHER THAN IN FUNCTIONAL CURRENCY.—
‘‘(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.
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‘‘(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 Decem-
ber 31, 2004.
SEC. 225. TREATMENT OF INCOME TAX BASE DIFFERENCES.
(a) IN GENERAL.—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.—
‘‘(i) IN
GENERAL.—A taxpayer may
elect to treat tax imposed under the law of
a foreign country or possession of the
United States on an amount which does not
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constitute income under United States tax
principles as tax imposed on income de-
scribed in subparagraph (C) or (I) of para-
graph (1).
‘‘(ii) ELECTION
IRREVOCABLE.—Any
such election shall apply to the taxable year
for which made and all subsequent taxable
years unless revoked with the consent of the
Secretary.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years ending after the date
of the enactment of this Act.
SEC. 226. 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:
‘‘(E) DIRECT
CONDUCT
OF
ACTIVITIES.—
For purposes of subparagraph (A)(ii)(II), an ac-
tivity 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 related
person and—
‘‘(i) the related person is an eligible
controlled foreign corporation the home
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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 compensated
on an arm’s-length basis for the perform-
ance of the activity by its employees and
such compensation is treated as earned by
such person in its home country for pur-
poses of the home country’s tax laws.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years of such foreign corpora-
tions beginning after December 31, 2004, and to taxable
years of United States shareholders with or within which
such taxable years of such foreign corporations end.
SEC. 227. 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
(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:
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‘‘(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 cus-
tomers in the ordinary course of business;
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
‘‘(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-
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diately after the acquisition of any ob-
ligation of such partnership, estate, or
trust by the controlled foreign corpora-
tion.’’.
(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 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.
SEC. 228. PROVIDE EQUAL TREATMENT FOR INTEREST PAID
BY FOREIGN PARTNERSHIPS AND FOREIGN
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 busi-
ness engaged in by the partnership in the United
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States and not allocable to income which is effec-
tively connected (or treated as effectively con-
nected) 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 Decem-
ber 31, 2003.
SEC. 229. 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 pursuant
to section 367(d)(2) of the Internal Revenue Code of 1986
on or after August 5, 1997.
SEC. 230. MODIFICATION OF THE TREATMENT OF CERTAIN
REIT 
DISTRIBUTIONS 
ATTRIBUTABLE 
TO
GAIN 
FROM 
SALES 
OR 
EXCHANGES 
OF
UNITED STATES REAL PROPERTY INTERESTS.
(a) IN GENERAL.—Paragraph (1) of section 897(h)
(relating to look-through of distributions) is amended by
adding at the end the following new sentence: ‘‘Notwith-
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standing the preceding sentence, any distribution by a
REIT with respect to any class of stock which is regularly
traded on an established securities market located in the
United States shall not be treated as gain recognized from
the sale or exchange of a United States real property inter-
est if the shareholder did not own more than 5 percent of
such class of stock at any time during the taxable year.’’.
(b) CONFORMING AMENDMENT.—Paragraph (3) of sec-
tion 857(b) (relating to capital gains) is amended by add-
ing at the end the following new subparagraph:
‘‘(F) CERTAIN DISTRIBUTIONS.—In the case
of a shareholder of a real estate investment trust
to whom section 897 does not apply by reason of
the second sentence of section 897(h)(1), the
amount which would be included in computing
long-term capital gains for such shareholder
under subparagraph (B) or (D) (without regard
to this subparagraph)—
‘‘(i) shall not be included in computing
such shareholder’s long-term capital gains,
and
‘‘(ii) shall be included in such share-
holder’s gross income as a dividend from the
real estate investment trust.’’.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
SEC. 231. TOLL TAX ON EXCESS QUALIFIED FOREIGN DIS-
TRIBUTION AMOUNT.
(a) IN GENERAL.—Subpart F of part III of subchapter
N of chapter 1 is amended by adding at the end the fol-
lowing new section:
‘‘SEC. 965. TOLL TAX IMPOSED ON EXCESS QUALIFIED FOR-
EIGN DISTRIBUTION AMOUNT.
‘‘(a) TOLL TAX IMPOSED ON EXCESS QUALIFIED FOR-
EIGN DISTRIBUTION AMOUNT.—If a corporation elects the
application of this section, a tax shall be imposed on the
taxpayer in an amount equal to 5.25 percent of—
‘‘(1) the taxpayer’s excess qualified foreign dis-
tribution amount, and
‘‘(2) the amount determined under section 78
which is attributable to such excess qualified foreign
distribution amount.
Such tax shall be imposed in lieu of the tax imposed under
section 11 or 55 on the amounts described in paragraphs
(1) and (2) for the taxable year.
‘‘(b) EXCESS
QUALIFIED
FOREIGN
DISTRIBUTION
AMOUNT.—For purposes of this section—
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‘‘(1) IN GENERAL.—The term ‘excess qualified
foreign distribution amount’ means the excess (if any)
of—
‘‘(A) the aggregate dividends received by the
taxpayer during the taxable year which are—
‘‘(i) from 1 or more corporations which
are controlled foreign corporations in which
the taxpayer is a United States shareholder
on the date such dividends are paid, and
‘‘(ii) described in a domestic reinvest-
ment plan which—
‘‘(I) is approved by the taxpayer’s
president, chief executive officer, or
comparable official before the payment
of such dividends and subsequently ap-
proved by the taxpayer’s board of di-
rectors, management committee, execu-
tive committee, or similar body, and
‘‘(II) provides for the reinvestment
of such dividends in the United States
(other than as payment for executive
compensation), including as a source
for the funding of worker hiring and
training, infrastructure, research and
development, capital investments, or
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the financial stabilization of the cor-
poration for the purposes of job reten-
tion or creation, over
‘‘(B) the base dividend amount.
‘‘(2) BASE DIVIDEND AMOUNT.—The term ‘base
dividend amount’ means an amount designated under
subsection (c)(7), but not less than the average
amount of dividends received during the fixed base
period from 1 or more corporations which are con-
trolled foreign corporations in which the taxpayer is
a United States shareholder on the date such divi-
dends are paid.
‘‘(3) FIXED BASE PERIOD.—
‘‘(A) IN GENERAL.—The term ‘fixed base pe-
riod’ means each of 3 taxable years which are
among the 5 most recent taxable years of the tax-
payer ending on or before December 31, 2002,
determined by disregarding—
‘‘(i) the 1 taxable year for which the
taxpayer had the highest amount of divi-
dends from 1 or more corporations which
are controlled foreign corporations relative
to the other 4 taxable years, and
‘‘(ii) the 1 taxable year for which the
taxpayer had the lowest amount of divi-
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dends from such corporations relative to the
other 4 taxable years.
‘‘(B) SHORTER
PERIOD.—If the taxpayer
has fewer than 5 taxable years ending on or be-
fore December 31, 2002, then in lieu of applying
subparagraph (A), the fixed base period shall in-
clude all the taxable years of the taxpayer ending
on or before December 31, 2002.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) DIVIDENDS.—The term ‘dividend’ has the
meaning given such term by section 316, except that
the term shall include amounts described in section
951(a)(1)(B), but shall not include amounts described
in sections 78 and 959.
‘‘(2) CONTROLLED FOREIGN CORPORATIONS AND
UNITED
STATES
SHAREHOLDERS.—The term ‘con-
trolled foreign corporation’ has the meaning given
such term by section 957(a) and the term ‘United
States shareholder’ has the meaning given such term
by section 951(b).
‘‘(3) FOREIGN
TAX
CREDITS.—The amount of
any income, war, profits, or excess profit taxes paid
(or deemed paid under sections 902 and 960) or ac-
crued by the taxpayer with respect to the excess quali-
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fied foreign distribution amount for which a credit
would be allowable under section 901 in the absence
of this section, shall be reduced by 85 percent. No de-
duction shall be allowed under this chapter for the
portion of any tax for which credit is not allowable
by reason of the preceding sentence.
‘‘(4) FOREIGN
TAX
CREDIT
LIMITATION.—For
purposes of section 904, there shall be disregarded 85
percent of—
‘‘(A) the excess qualified foreign distribution
amount,
‘‘(B) the amount determined under section
78 which is attributable to such excess qualified
foreign distribution amount, and
‘‘(C) the amounts (including assets, gross
income, and other relevant bases of apportion-
ment) which are attributable to the excess quali-
fied foreign distribution amount which would,
determined without regard to this section, be
used to apportion the expenses, losses, and deduc-
tions of the taxpayer under section 861 and 864
in determining its taxable income from sources
without the United States.
For purposes of applying subparagraph (C), the prin-
ciples of section 864(e)(3)(A) shall apply.
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‘‘(5) TREATMENT OF ACQUISITIONS AND DISPOSI-
TIONS.—Rules similar to the rules of section 41(f)(3)
shall apply in the case of acquisitions or dispositions
of controlled foreign corporations occurring on or
after the first day of the earliest taxable year taken
into account in determining the fixed base period.
‘‘(6) TREATMENT OF CONSOLIDATED GROUPS.—
Members of an affiliated group of corporations filing
a consolidated return under section 1501 shall be
treated as a single taxpayer for purposes of this sec-
tion.
‘‘(7) DESIGNATION
OF
DIVIDENDS.—Subject to
subsection (b)(2), the taxpayer shall designate the
particular dividends received during the taxable year
from 1 or more corporations which are controlled for-
eign corporations in which it is a United States
shareholder which are dividends excluded from the ex-
cess qualified foreign distribution amount. The total
amount of such designated dividends shall equal the
base dividend amount.
‘‘(8) TREATMENT
OF
EXPENSES, LOSSES, AND
DEDUCTIONS.—Any expenses, losses, or deductions of
the taxpayer allowable under subchapter B—
‘‘(A) shall not be applied to reduce the
amounts described in subsection (a)(1), and
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‘‘(B) shall be applied to reduce other income
of the taxpayer (determined without regard to
the amounts described in subsection (a)(1)).
‘‘(d) ELECTION.—
‘‘(1) IN GENERAL.—An election under this sec-
tion shall be made on the taxpayer’s timely filed in-
come tax return for the first taxable year (determined
by taking extensions into account) ending 120 days or
more after the date of the enactment of this section,
and, once made, may be revoked only with the consent
of the Secretary.
‘‘(2) ALL
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The election shall apply to all corporations
which are controlled foreign corporations in which the
taxpayer is a United States shareholder during the
taxable year.
‘‘(3) CONSOLIDATED GROUPS.—If a taxpayer is
a member of an affiliated group of corporations filing
a consolidated return under section 1501 for the tax-
able year, an election under this section shall be made
by the common parent of the affiliated group which
includes the taxpayer and shall apply to all members
of the affiliated group.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary and appropriate to
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carry out the purposes of this section, including regulations
under section 55 and regulations addressing corporations
which, during the fixed base period or thereafter, join or
leave an affiliated group of corporations filing a consoli-
dated return.’’.
(b) CONFORMING AMENDMENT.—The table of sections
for subpart F of part III of subchapter N of chapter 1 is
amended by adding at the end the following new item:
‘‘Sec. 965. Toll tax imposed on excess qualified foreign distribution
amount.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply only to the first taxable year of the elect-
ing taxpayer ending 120 days or more after the date of the
enactment of this Act.
SEC. 232. EXCLUSION OF INCOME DERIVED FROM CERTAIN
WAGERS ON HORSE RACES AND DOG RACES
FROM 
GROSS 
INCOME 
OF 
NONRESIDENT
ALIEN INDIVIDUALS.
(a) IN GENERAL.—Subsection (b) of section 872 (relat-
ing to exclusions) is amended by redesignating paragraphs
(5), (6), and (7) as paragraphs (6), (7), and (8), respec-
tively, and inserting after paragraph (4) the following new
paragraph:
‘‘(5) INCOME DERIVED FROM WAGERING TRANS-
ACTIONS IN CERTAIN PARIMUTUEL POOLS.—Gross in-
come derived by a nonresident alien individual from
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a legal wagering transaction initiated outside the
United States in a parimutuel pool with respect to a
live horse race or dog race in the United States.’’.
(b) CONFORMING AMENDMENT.—Section 883(a)(4) is
amended by striking ‘‘(5), (6), and (7)’’ and inserting ‘‘(6),
(7), and (8)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to wagers made after the date of the en-
actment of this Act.
SEC. 233. LIMITATION OF WITHHOLDING TAX FOR PUERTO
RICO CORPORATIONS.
(a) IN GENERAL.—Subsection (b) of section 881 is
amended by redesignating paragraph (2) as paragraph (3)
and by inserting after paragraph (1) the following new
paragraph:
‘‘(2) COMMONWEALTH
OF
PUERTO
RICO.—If
dividends are received during a taxable year by a
corporation—
‘‘(A) created or organized in, or under the
law of, the Commonwealth of Puerto Rico, and
‘‘(B) with respect to which the requirements
of subparagraphs (A), (B), and (C) of paragraph
(1) are met for the taxable year,
subsection (a) shall be applied for such taxable year
by substituting ‘10 percent’ for ‘30 percent’.’’.
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(b) WITHHOLDING.—Subsection (c) of section 1442
(relating to withholding of tax on foreign corporations) is
amended—
(1) by striking ‘‘For purposes’’ and inserting the
following:
‘‘(1) GUAM, AMERICAN SAMOA, THE NORTHERN
MARIANA ISLANDS, AND THE VIRGIN ISLANDS.—For
purposes’’, and
(2) by adding at the end the following new para-
graph:
‘‘(2) COMMONWEALTH
OF
PUERTO
RICO.—If
dividends are received during a taxable year by a
corporation—
‘‘(A) created or organized in, or under the
law of, the Commonwealth of Puerto Rico, and
‘‘(B) with respect to which the requirements
of subparagraphs (A), (B), and (C) of section
881(b)(1) are met for the taxable year,
subsection (a) shall be applied for such taxable year
by substituting ‘10 percent’ for ‘30 percent’.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subsection (b) of section 881 is amended by
striking ‘‘GUAM
AND
VIRGIN
ISLANDS
CORPORA-
TIONS’’ in the heading and inserting ‘‘POSSESSIONS’’.
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(2) Paragraph (1) of section 881(b) is amended
by striking ‘‘IN GENERAL’’ in the heading and insert-
ing ‘‘GUAM, AMERICAN SAMOA, THE NORTHERN MAR-
IANA ISLANDS, AND THE VIRGIN ISLANDS’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to dividends paid after the date of the
enactment of this Act.
SEC. 234. REPORT ON WTO DISPUTE SETTLEMENT PANELS
AND THE APPELLATE BODY.
Not later than March 31, 2004, the Secretary of Com-
merce, in consultation with the United States Trade Rep-
resentative, shall transmit a report to the Committee on Fi-
nance of the Senate and the Committee on Ways and Means
of the House of Representatives, regarding whether dispute
settlement panels and the Appellate Body of the World
Trade Organization have—
(1) added to or diminished the rights of the
United States by imposing obligations or restrictions
on the use of antidumping, countervailing, and safe-
guard measures not agreed to under the Agreement on
Implementation of Article VI of the General Agree-
ment on Tariffs and Trade of 1994, the Agreement on
Subsidies and Countervailing Measures, and the
Agreement on Safeguards;
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(2) appropriately applied the standard of review
contained in Article 17.6 of the Agreement on Imple-
mentation of Article VI of the General Agreement on
Tariffs and Trade of 1994; or
(3) exceeded their authority or terms of reference
under the Agreements referred to in paragraph (1).
SEC. 235. STUDY OF IMPACT OF INTERNATIONAL TAX LAWS
ON TAXPAYERS OTHER THAN LARGE COR-
PORATIONS.
(a) STUDY.—The Secretary of the Treasury or the Sec-
retary’s delegate shall conduct a study of the impact of Fed-
eral international tax rules on taxpayers other than large
corporations, including the burdens placed on such tax-
payers in complying with such rules.
(b) REPORT.—Not later than 180 days after the date
of the enactment of this Act, the Secretary shall report to
the Committee on Finance of the Senate and the Committee
on Ways and Means of the House of Representatives the
results of the study conducted under subsection (a), includ-
ing any recommendations for legislative or administrative
changes to reduce the compliance burden on taxpayers other
than large corporations and for such other purposes as the
Secretary determines appropriate.
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SEC. 236. DELAY IN EFFECTIVE DATE OF FINAL REGULA-
TIONS GOVERNING EXCLUSION OF INCOME
FROM INTERNATIONAL OPERATION OF SHIPS
OR AIRCRAFT.
Notwithstanding the provisions of Treasury regulation
§ 1.883–5, the final regulations issued by the Secretary of
the Treasury relating to income derived by foreign corpora-
tions from the international operation of ships or aircraft
(Treasury regulations § 1.883–1 through § 1.883–5) shall
apply to taxable years of a foreign corporation seeking
qualified foreign corporation status beginning after Decem-
ber 31, 2004.
SEC. 237. INTEREST PAYMENTS DEDUCTIBLE WHERE DIS-
QUALIFIED GUARANTEE HAS NO ECONOMIC
EFFECT.
(a) IN GENERAL.—Section 163(j)(6)(D)(ii) (relating
to exceptions to disqualified guarantee) is amended—
(1) by striking ‘‘or’’ at the end of subclause (I),
(2) by striking the period at the end of subclause
(II) and inserting ‘‘, or’’,
(3) by inserting after subclause (II) the following
new subclause:
‘‘(III) in the case of a guarantee
by a foreign person, to the extent of the
amount that the taxpayer establishes to
the satisfaction of the Secretary that
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the taxpayer could have borrowed from
an unrelated person without the guar-
antee.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to guarantees issued on or after the date
of the enactment of this Act.
TITLE III—DOMESTIC MANUFAC-
TURING AND BUSINESS PRO-
VISIONS
Subtitle A—General Provisions
SEC. 301. EXPANSION OF QUALIFIED SMALL-ISSUE BOND
PROGRAM.
(a) IN
GENERAL.—Subparagraph (F) of section
144(a)(4) (relating to $10,000,000 limit in certain cases)
is amended to read as follows:
‘‘(F) ADDITIONAL CAPITAL EXPENDITURES
NOT TAKEN INTO ACCOUNT.—With respect to any
issue, in addition to any capital expenditure de-
scribed in subparagraph (C), capital expendi-
tures of not to exceed $10,000,000 shall not be
taken into account for purposes of applying sub-
paragraph (A)(ii).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to bonds issued after the date of the en-
actment of this Act.
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SEC. 302. EXPENSING OF BROADBAND INTERNET ACCESS
EXPENDITURES.
(a) IN GENERAL.—Part VI of subchapter B of chapter
1 (relating to itemized deductions for individuals and cor-
porations) is amended by inserting after section 190 the fol-
lowing new section:
‘‘SEC. 191. BROADBAND EXPENDITURES.
‘‘(a) TREATMENT OF EXPENDITURES.—
‘‘(1) IN
GENERAL.—A taxpayer may elect to
treat any qualified broadband expenditure which is
paid or incurred by the taxpayer as an expense which
is not chargeable to capital account. Any expenditure
which is so treated shall be allowed as a deduction.
‘‘(2) ELECTION.—An election under paragraph
(1) shall be made at such time and in such manner
as the Secretary may prescribe by regulation.
‘‘(b) QUALIFIED BROADBAND EXPENDITURES.—For
purposes of this section—
‘‘(1) 
IN
GENERAL.—The 
term 
‘qualified
broadband expenditure’ means, with respect to any
taxable year, any direct or indirect costs incurred
and properly taken into account with respect to—
‘‘(A) the purchase or installation of quali-
fied equipment (including any upgrades thereto),
and
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‘‘(B) the connection of such qualified equip-
ment to any qualified subscriber.
‘‘(2) CERTAIN
SATELLITE
EXPENDITURES
EX-
CLUDED.—Such term shall not include any costs in-
curred with respect to the launching of any satellite
equipment.
‘‘(3) LEASED EQUIPMENT.—Such term shall in-
clude so much of the purchase price paid by the lessor
of qualified equipment subject to a lease described in
subsection (c)(2)(B) as is attributable to expenditures
incurred by the lessee which would otherwise be de-
scribed in paragraph (1).
‘‘(c) WHEN EXPENDITURES TAKEN INTO ACCOUNT.—
For purposes of this section—
‘‘(1) IN GENERAL.—Qualified broadband expend-
itures with respect to qualified equipment shall be
taken into account with respect to the first taxable
year in which—
‘‘(A) current generation broadband services
are provided through such equipment to qualified
subscribers, or
‘‘(B) next generation broadband services are
provided through such equipment to qualified
subscribers.
‘‘(2) LIMITATION.—
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‘‘(A) IN GENERAL.—Qualified expenditures
shall be taken into account under paragraph (1)
only with respect to qualified equipment—
‘‘(i) the original use of which com-
mences with the taxpayer, and
‘‘(ii) which is placed in service, after
the date of the enactment of this Act.
‘‘(B) SALE-LEASEBACKS.—For purposes of
subparagraph (A), if property—
‘‘(i) is originally placed in service
after the date of the enactment of this Act
by any person, and
‘‘(ii) sold and leased back by such per-
son within 3 months after the date such
property was originally placed in service,
such property shall be treated as originally
placed in service not earlier than the date on
which such property is used under the leaseback
referred to in clause (ii).
‘‘(d) SPECIAL ALLOCATION RULES.—
‘‘(1) CURRENT GENERATION BROADBAND SERV-
ICES.—For purposes of determining the amount of
qualified broadband expenditures under subsection
(a)(1) with respect to qualified equipment through
which current generation broadband services are pro-
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vided, if the qualified equipment is capable of serving
both qualified subscribers and other subscribers, the
qualified broadband expenditures shall be multiplied
by a fraction—
‘‘(A) the numerator of which is the sum of
the number of potential qualified subscribers
within the rural areas and the underserved areas
which the equipment is capable of serving with
current generation broadband services, and
‘‘(B) the denominator of which is the total
potential subscriber population of the area which
the equipment is capable of serving with current
generation broadband services.
‘‘(2) NEXT
GENERATION
BROADBAND
SERV-
ICES.—For purposes of determining the amount of
qualified broadband expenditures under subsection
(a)(1) with respect to qualified equipment through
which next generation broadband services are pro-
vided, if the qualified equipment is capable of serving
both qualified subscribers and other subscribers, the
qualified expenditures shall be multiplied by a
fraction—
‘‘(A) the numerator of which is the sum
of—
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‘‘(i) the number of potential qualified
subscribers within the rural areas and un-
derserved areas, plus
‘‘(ii) the number of potential qualified
subscribers within the area consisting only
of residential subscribers not described in
clause (i),
which the equipment is capable of serving with
next generation broadband services, and
‘‘(B) the denominator of which is the total
potential subscriber population of the area which
the equipment is capable of serving with next
generation broadband services.
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) ANTENNA.—The term ‘antenna’ means any
device used to transmit or receive signals through the
electromagnetic spectrum, including satellite equip-
ment.
‘‘(2) CABLE OPERATOR.—The term ‘cable oper-
ator’ has the meaning given such term by section
602(5) of the Communications Act of 1934 (47 U.S.C.
522(5)).
‘‘(3) COMMERCIAL MOBILE SERVICE CARRIER.—
The term ‘commercial mobile service carrier’ means
any person authorized to provide commercial mobile
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radio service as defined in section 20.3 of title 47,
Code of Federal Regulations.
‘‘(4) CURRENT GENERATION BROADBAND SERV-
ICE.—The term ‘current generation broadband serv-
ice’ means the transmission of signals at a rate of at
least 1,000,000 bits per second to the subscriber and
at least 128,000 bits per second from the subscriber.
‘‘(5) MULTIPLEXING OR DEMULTIPLEXING.—The
term ‘multiplexing’ means the transmission of 2 or
more signals over a single channel, and the term
‘demultiplexing’ means the separation of 2 or more
signals previously combined by compatible multi-
plexing equipment.
‘‘(6) NEXT GENERATION BROADBAND SERVICE.—
The term ‘next generation broadband service’ means
the transmission of signals at a rate of at least
22,000,000 bits per second to the subscriber and at
least 5,000,000 bits per second from the subscriber.
‘‘(7) NONRESIDENTIAL SUBSCRIBER.—The term
‘nonresidential subscriber’ means any person who
purchases broadband services which are delivered to
the permanent place of business of such person.
‘‘(8) OPEN VIDEO SYSTEM OPERATOR.—The term
‘open video system operator’ means any person au-
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thorized to provide service under section 653 of the
Communications Act of 1934 (47 U.S.C. 573).
‘‘(9) OTHER
WIRELESS
CARRIER.—The term
‘other wireless carrier’ means any person (other than
a telecommunications carrier, commercial mobile
service carrier, cable operator, open video system op-
erator, or satellite carrier) providing current genera-
tion broadband services or next generation broadband
service to subscribers through the radio transmission
of energy.
‘‘(10) PACKET
SWITCHING.—The term ‘packet
switching’ means controlling or routing the path of
any digitized transmission signal which is assembled
into packets or cells.
‘‘(11) PROVIDER.—The term ‘provider’ means,
with respect to any qualified equipment—
‘‘(A) a cable operator,
‘‘(B) a commercial mobile service carrier,
‘‘(C) an open video system operator,
‘‘(D) a satellite carrier,
‘‘(E) a telecommunications carrier, or
‘‘(F) any other wireless carrier,
providing current generation broadband services or
next generation broadband services to subscribers
through such qualified equipment.
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‘‘(12) PROVISION
OF
SERVICES.—A provider
shall be treated as providing services to 1 or more
subscribers if—
‘‘(A) such a subscriber has been passed by
the provider’s equipment and can be connected to
such equipment for a standard connection fee,
‘‘(B) the provider is physically able to de-
liver current generation broadband services or
next generation broadband services, as applica-
ble, to such a subscriber without making more
than an insignificant investment with respect to
such subscriber,
‘‘(C) the provider has made reasonable ef-
forts to make such subscribers aware of the avail-
ability of such services,
‘‘(D) such services have been purchased by
1 or more such subscribers, and
‘‘(E) such services are made available to
such subscribers at average prices comparable to
those at which the provider makes available
similar services in any areas in which the pro-
vider makes available such services.
‘‘(13) QUALIFIED EQUIPMENT.—
‘‘(A) IN
GENERAL.—The term ‘qualified
equipment’ means equipment which provides
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current generation broadband services or next
generation broadband services—
‘‘(i) at least a majority of the time
during periods of maximum demand to
each subscriber who is utilizing such serv-
ices, and
‘‘(ii) in a manner substantially the
same as such services are provided by the
provider to subscribers through equipment
with respect to which no deduction is al-
lowed under subsection (a)(1).
‘‘(B) ONLY
CERTAIN
INVESTMENT
TAKEN
INTO ACCOUNT.—Except as provided in subpara-
graph (C) or (D), equipment shall be taken into
account under subparagraph (A) only to the ex-
tent it—
‘‘(i) extends from the last point of
switching to the outside of the unit, build-
ing, dwelling, or office owned or leased by
a subscriber in the case of a telecommuni-
cations carrier,
‘‘(ii) extends from the customer side of
the mobile telephone switching office to a
transmission/receive 
antenna 
(including
such antenna) owned or leased by a sub-
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scriber in the case of a commercial mobile
service carrier,
‘‘(iii) extends from the customer side of
the headend to the outside of the unit, build-
ing, dwelling, or office owned or leased by
a subscriber in the case of a cable operator
or open video system operator, or
‘‘(iv) extends from a transmission/re-
ceive antenna (including such antenna)
which transmits and receives signals to or
from multiple subscribers, to a trans-
mission/receive antenna (including such an-
tenna) on the outside of the unit, building,
dwelling, or office owned or leased by a sub-
scriber in the case of a satellite carrier or
other wireless carrier, unless such other
wireless carrier is also a telecommuni-
cations carrier.
‘‘(C) PACKET
SWITCHING
EQUIPMENT.—
Packet switching equipment, regardless of loca-
tion, shall be taken into account under subpara-
graph (A) only if it is deployed in connection
with equipment described in subparagraph (B)
and is uniquely designed to perform the function
of packet switching for current generation
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broadband services or next generation broadband
services, but only if such packet switching is the
last in a series of such functions performed in
the transmission of a signal to a subscriber or
the first in a series of such functions performed
in the transmission of a signal from a sub-
scriber.
‘‘(D) MULTIPLEXING AND DEMULTIPLEXING
EQUIPMENT.—Multiplexing and demultiplexing
equipment shall be taken into account under sub-
paragraph (A) only to the extent it is deployed
in connection with equipment described in sub-
paragraph (B) and is uniquely designed to per-
form 
the 
function 
of 
multiplexing 
and
demultiplexing packets or cells of data and mak-
ing associated application adaptions, but only if
such multiplexing or demultiplexing equipment
is located between packet switching equipment
described in subparagraph (C) and the sub-
scriber’s premises.
‘‘(14) 
QUALIFIED
SUBSCRIBER.—The 
term
‘qualified subscriber’ means—
‘‘(A) with respect to the provision of current
generation broadband services—
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‘‘(i) 
any 
nonresidential 
subscriber
maintaining a permanent place of business
in a rural area or underserved area, or
‘‘(ii) any residential subscriber resid-
ing in a dwelling located in a rural area or
underserved area which is not a saturated
market, and
‘‘(B) with respect to the provision of next
generation broadband services—
‘‘(i) 
any 
nonresidential 
subscriber
maintaining a permanent place of business
in a rural area or underserved area, or
‘‘(ii) any residential subscriber.
‘‘(15) RESIDENTIAL
SUBSCRIBER.—The term
‘residential subscriber’ means any individual who
purchases broadband services which are delivered to
such individual’s dwelling.
‘‘(16) RURAL
AREA.—The term ‘rural area’
means any census tract which—
‘‘(A) is not within 10 miles of any incor-
porated or census designated place containing
more than 25,000 people, and
‘‘(B) is not within a county or county
equivalent which has an overall population den-
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sity of more than 500 people per square mile of
land.
‘‘(17) RURAL
SUBSCRIBER.—The term ‘rural
subscriber’ means any residential subscriber residing
in a dwelling located in a rural area or nonresiden-
tial subscriber maintaining a permanent place of
business located in a rural area.
‘‘(18) SATELLITE CARRIER.—The term ‘satellite
carrier’ means any person using the facilities of a
satellite or satellite service licensed by the Federal
Communications Commission and operating in the
Fixed-Satellite Service under part 25 of title 47 of the
Code of Federal Regulations or the Direct Broadcast
Satellite Service under part 100 of title 47 of such
Code to establish and operate a channel of commu-
nications for distribution of signals, and owning or
leasing a capacity or service on a satellite in order
to provide such point-to-multipoint distribution.
‘‘(19) SATURATED
MARKET.—The term ‘satu-
rated market’ means any census tract in which, as of
the date of the enactment of this section—
‘‘(A) current generation broadband services
have been provided by a single provider to 85
percent or more of the total number of potential
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residential subscribers residing in dwellings lo-
cated within such census tract, and
‘‘(B) such services can be utilized—
‘‘(i) at least a majority of the time
during periods of maximum demand by
each such subscriber who is utilizing such
services, and
‘‘(ii) in a manner substantially the
same as such services are provided by the
provider to subscribers through equipment
with respect to which no deduction is al-
lowed under subsection (a)(1).
‘‘(20) 
SUBSCRIBER.—The 
term 
‘subscriber’
means any person who purchases current generation
broadband services or next generation broadband serv-
ices.
‘‘(21) 
TELECOMMUNICATIONS
CARRIER.—The
term ‘telecommunications carrier’ has the meaning
given such term by section 3(44) of the Communica-
tions Act of 1934 (47 U.S.C. 153(44)), but—
‘‘(A) includes all members of an affiliated
group of which a telecommunications carrier is
a member, and
‘‘(B) does not include a commercial mobile
service carrier.
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‘‘(22) TOTAL
POTENTIAL
SUBSCRIBER
POPU-
LATION.—The term ‘total potential subscriber popu-
lation’ means, with respect to any area and based on
the most recent census data, the total number of po-
tential residential subscribers residing in dwellings
located in such area and potential nonresidential sub-
scribers maintaining permanent places of business lo-
cated in such area.
‘‘(23) UNDERSERVED AREA.—The term ‘under-
served area’ means—
‘‘(A) any census tract which is located in—
‘‘(i) an empowerment zone or enter-
prise community designated under section
1391, or
‘‘(ii) the District of Columbia Enter-
prise Zone established under section 1400,
or
‘‘(B) any census tract—
‘‘(i) the poverty level of which is at
least 30 percent (based on the most recent
census data), and
‘‘(ii) the median family income of
which does not exceed—
‘‘(I) in the case of a census tract
located in a metropolitan statistical
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area, 70 percent of the greater of the
metropolitan area median family in-
come or the statewide median family
income, and
‘‘(II) in the case of a census tract
located in a nonmetropolitan statis-
tical area, 70 percent of the nonmetro-
politan statewide median family in-
come.
‘‘(24) UNDERSERVED
SUBSCRIBER.—The term
‘underserved subscriber’ means any residential sub-
scriber residing in a dwelling located in an under-
served area or nonresidential subscriber maintaining
a permanent place of business located in an under-
served area.
‘‘(f) SPECIAL RULES.—
‘‘(1) PROPERTY
USED
OUTSIDE
THE
UNITED
STATES, 
ETC., 
NOT
QUALIFIED.—No expenditures
shall be taken into account under subsection (a)(1)
with respect to the portion of the cost of any property
referred to in section 50(b) or with respect to the por-
tion of the cost of any property specified in an elec-
tion under section 179.
‘‘(2) BASIS REDUCTION.—
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‘‘(A) IN
GENERAL.—For purposes of this
title, the basis of any property shall be reduced
by the portion of the cost of such property taken
into account under subsection (a)(1).
‘‘(B) ORDINARY INCOME RECAPTURE.—For
purposes of section 1245, the amount of the de-
duction allowable under subsection (a)(1) with
respect to any property which is of a character
subject to the allowance for depreciation shall be
treated as a deduction allowed for depreciation
under section 167.
‘‘(3) COORDINATION WITH SECTION 38.—No cred-
it shall be allowed under section 38 with respect to
any amount for which a deduction is allowed under
subsection (a)(1).’’.
(b) SPECIAL RULE FOR MUTUAL OR COOPERATIVE
TELEPHONE
COMPANIES.—Section 512(b) (relating to
modifications) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(18) SPECIAL RULE FOR MUTUAL OR COOPERA-
TIVE TELEPHONE COMPANIES.—A mutual or coopera-
tive telephone company which for the taxable year
satisfies the requirements of section 501(c)(12)(A)
may elect to reduce its unrelated business taxable in-
come for such year, if any, by an amount that does
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not exceed the qualified broadband expenditures which
would be taken into account under section 191 for
such year by such company if such company was not
exempt from taxation. Any amount which is allowed
as a deduction under this paragraph shall not be al-
lowed as a deduction under section 191 and the basis
of any property to which this paragraph applies shall
be reduced under section 1016(a)(29).’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 263(a)(1) (relating to capital ex-
penditures) is amended by striking ‘‘or’’ at the end of
subparagraph (G), by striking the period at the end
of subparagraph (H) and inserting ‘‘, or’’, and by
adding at the end the following new subparagraph:
‘‘(I) expenditures for which a deduction is
allowed under section 191.’’.
(2) Section 1016(a) of such Code is amended by
striking ‘‘and’’ at the end of paragraph (27), by strik-
ing the period at the end of paragraph (28) and in-
serting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph:
‘‘(29) 
to 
the 
extent 
provided 
in 
section
191(f)(2).’’.
(3) The table of sections for part VI of sub-
chapter A of chapter 1 of such Code is amended by
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inserting after the item relating to section 190 the fol-
lowing new item:
‘‘Sec. 191. Broadband expenditures.’’.
(d) DESIGNATION OF CENSUS TRACTS.—
(1) IN GENERAL.—The Secretary of the Treasury
shall, not later than 90 days after the date of the en-
actment of this Act, designate and publish those cen-
sus tracts meeting the criteria described in para-
graphs (16), (22), and (23) of section 191(e) of the In-
ternal Revenue Code of 1986 (as added by this sec-
tion). In making such designations, the Secretary of
the Treasury shall consult with such other depart-
ments and agencies as the Secretary determines ap-
propriate.
(2) SATURATED MARKET.—
(A) IN GENERAL.—For purposes of desig-
nating and publishing those census tracts meet-
ing the criteria described in subsection (e)(19) of
such section 191—
(i) the Secretary of the Treasury shall
prescribe not later than 30 days after the
date of the enactment of this Act the form
upon which any provider which takes the
position that it meets such criteria with re-
spect to any census tract shall submit a list
of such census tracts (and any other infor-
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mation required by the Secretary) not later
than 60 days after the date of the publica-
tion of such form, and
(ii) the Secretary of the Treasury shall
publish an aggregate list of such census
tracts and the applicable providers not later
than 30 days after the last date such sub-
missions are allowed under clause (i).
(B) NO SUBSEQUENT LISTS REQUIRED.—
The Secretary of the Treasury shall not be re-
quired to publish any list of census tracts meet-
ing such criteria subsequent to the list described
in subparagraph (A)(ii).
(e) OTHER REGULATORY MATTERS.—
(1) PROHIBITION.—No Federal or State agency
or instrumentality shall adopt regulations or rate-
making procedures that would have the effect of elimi-
nating or reducing any deduction or portion thereof
allowed under section 191 of the Internal Revenue
Code of 1986 (as added by this section) or otherwise
subverting the purpose of this section.
(2) TREASURY REGULATORY AUTHORITY.—It is
the intent of Congress in providing the election to de-
duct qualified broadband expenditures under section
191 of the Internal Revenue Code of 1986 (as added
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by this section) to provide incentives for the purchase,
installation, and connection of equipment and facili-
ties offering expanded broadband access to the Inter-
net for users in certain low income and rural areas
of the United States, as well as to residential users
nationwide, in a manner that maintains competitive
neutrality among the various classes of providers of
broadband services. Accordingly, the Secretary of the
Treasury shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of
section 191 of such Code, including—
(A) regulations to determine how and when
a taxpayer that incurs qualified broadband ex-
penditures satisfies the requirements of section
191 of such Code to provide broadband services,
and
(B) regulations describing the information,
records, and data taxpayers are required to pro-
vide the Secretary to substantiate compliance
with the requirements of section 191 of such
Code.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to expenditures incurred after the date
of the enactment of this Act and before the date which is
12 months after the date of the enactment of this Act.
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SEC. 303. EXEMPTION OF NATURAL AGING PROCESS IN DE-
TERMINATION OF PRODUCTION PERIOD FOR
DISTILLED SPIRITS UNDER SECTION 263A.
(a) IN GENERAL.—Section 263A(f) of the Internal
Revenue Code of 1986 (relating to general exceptions) is
amended by adding at the end the following new paragraph:
‘‘(5) EXEMPTION OF NATURAL AGING PROCESS IN
DETERMINATION OF PRODUCTION PERIOD FOR DIS-
TILLED SPIRITS.—For purposes of this subsection, the
production period for distilled spirits shall be deter-
mined without regard to any period allocated to the
natural aging process.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to production periods beginning after
the date of the enactment of this Act.
SEC. 304. MODIFICATION OF ACTIVE BUSINESS DEFINITION
UNDER SECTION 355.
(a) IN GENERAL.—Section 355(b) (defining active con-
duct of a trade or business) is amended by adding at the
end the following new paragraph:
‘‘(3) SPECIAL RULES RELATING TO ACTIVE BUSI-
NESS REQUIREMENT.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining whether a corporation meets the require-
ment of paragraph (2)(A), all members of such
corporation’s separate affiliated group shall be
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treated as one corporation. For purposes of the
preceding sentence, a corporation’s separate af-
filiated group is the affiliated group which would
be determined under section 1504(a) if such cor-
poration were the common parent and section
1504(b) did not apply.
‘‘(B) CONTROL.—For purposes of para-
graph (2)(D), all distributee corporations which
are members of the same affiliated group (as de-
fined in section 1504(a) without regard to sec-
tion 1504(b)) shall be treated as one distributee
corporation.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (A) of section 355(b)(2) is
amended to read as follows:
‘‘(A) it is engaged in the active conduct of
a trade or business,’’.
(2) Section 355(b)(2) is amended by striking the
last sentence.
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—The amendments made by
this section shall apply—
(A) to distributions after the date of the en-
actment of this Act, and
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(B) for purposes of determining the contin-
ued qualification under section 355(b)(2)(A) of
the Internal Revenue Code of 1986 (as amended
by subsection (b)(1)) of distributions made before
such date, as a result of an acquisition, disposi-
tion, or other restructuring after such date.
(2) TRANSITION RULE.—The amendments made
by this section shall not apply to any distribution
pursuant to a transaction which is—
(A) made pursuant to an agreement which
was binding on such date of enactment and at
all times thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before such
date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission.
(3) ELECTION TO HAVE AMENDMENTS APPLY.—
Paragraph (2) shall not apply if the distributing cor-
poration elects not to have such paragraph apply to
distributions of such corporation. Any such election,
once made, shall be irrevocable.
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SEC. 305. MODIFIED TAXATION OF IMPORTED ARCHERY
PRODUCTS.
(a) BOWS.—Paragraph (1) of section 4161(b) (relating
to bows) is amended to read as follows:
‘‘(1) BOWS.—
‘‘(A) IN
GENERAL.—There is hereby im-
posed on the sale by the manufacturer, producer,
or importer of any bow which has a peak draw
weight of 30 pounds or more, a tax equal to 11
percent of the price for which so sold.
‘‘(B) ARCHERY EQUIPMENT.—There is here-
by imposed on the sale by the manufacturer, pro-
ducer, or importer—
‘‘(i) of any part or accessory suitable
for inclusion in or attachment to a bow de-
scribed in subparagraph (A), and
‘‘(ii) of any quiver or broadhead suit-
able for use with an arrow described in
paragraph (2),
a tax equal to 11 percent of the price for which
so sold.’’.
(b) ARROWS.—Subsection (b) of section 4161 (relating
to bows and arrows, etc.) is amended by redesignating para-
graph (3) as paragraph (4) and inserting after paragraph
(2) the following:
‘‘(3) ARROWS.—
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‘‘(A) IN
GENERAL.—There is hereby im-
posed on the sale by the manufacturer, producer,
or importer of any arrow, a tax equal to 12 per-
cent of the price for which so sold.
‘‘(B) EXCEPTION.—In the case of any arrow
of which the shaft or any other component has
been previously taxed under paragraph (1) or
(2)—
‘‘(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 without re-
gard to this subparagraph), over
‘‘(II) the amount of tax paid with
respect to the tax imposed under para-
graph (1) or (2) on such shaft or com-
ponent.
‘‘(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.’’.
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(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 manufacturer,
producer, or importer after the date which is 30 days after
the date of the enactment of this Act.
SEC. 306. MODIFICATION TO COOPERATIVE MARKETING
RULES TO INCLUDE VALUE ADDED PROC-
ESSING INVOLVING ANIMALS.
(a) IN GENERAL.—Section 1388 (relating to defini-
tions and special rules) is amended by adding at the end
the following new subsection:
‘‘(k) COOPERATIVE MARKETING INCLUDES VALUE-
ADDED PROCESSING INVOLVING ANIMALS.—For purposes
of section 521 and this subchapter, the marketing of the
products of members or other producers shall include the
feeding of such products to cattle, hogs, fish, chickens, or
other animals and the sale of the resulting animals or ani-
mal products.’’.
(b) CONFORMING AMENDMENT.—Section 521(b) is
amended by adding at the end the following new paragraph:
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‘‘(7) CROSS REFERENCE.—
‘‘For treatment of value-added processing involv-
ing animals, see section 1388(k).’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
SEC. 307. EXTENSION OF DECLARATORY JUDGMENT PROCE-
DURES TO FARMERS’ COOPERATIVE ORGANI-
ZATIONS.
(a) IN GENERAL.—Section 7428(a)(1) (relating to de-
claratory judgments of tax exempt organizations) is amend-
ed by striking ‘‘or’’ at the end of subparagraph (B) and
by adding at the end the following new subparagraph:
‘‘(D) with respect to the initial classifica-
tion or continuing classification of a cooperative
as an organization described in section 521(b)
which is exempt from tax under section 521(a),
or’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to pleadings filed after the
date of the enactment of this Act.
SEC. 308. TEMPORARY SUSPENSION OF PERSONAL HOLD-
ING COMPANY TAX.
(a) IN GENERAL.—Section 541 (relating to imposition
of personal holding company tax) is amended by adding
at the end the following new sentence: ‘‘The preceding sen-
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tence shall not apply with respect to any taxable year to
which section 1(h)(11) (as in effect on the date of the enact-
ment of this sentence) applies.’’.
(b) COORDINATION WITH ACCUMULATED EARNINGS
TAX.—Section 532(b) is amended by adding at the end the
following flush sentence:
‘‘Paragraph (1) shall not apply to any taxable year to
which section 541 does not apply.’’
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 309. INCREASE IN SECTION 179 EXPENSING.
(a) IN GENERAL.—Section 179(b)(2) (relating to re-
duction in limitation) is amended by inserting ‘‘50 percent
of’’ before ‘‘the amount’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2002.
SEC. 310. FIVE-YEAR CARRYBACK OF NET OPERATING
LOSSES.
(a) IN
GENERAL.—Subparagraph (H) of section
172(b)(1) is amended—
(1) by inserting ‘‘5-YEAR CARRYBACK OF CER-
TAIN LOSSES.—’’ after ‘‘(H)’’, and
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(2) by striking ‘‘or 2002’’ and inserting ‘‘, 2002,
or 2003’’.
(b) RULES RELATING TO CERTAIN EXTENDED NET
OPERATING LOSSES.—Section 172 is amended by redesig-
nating subsection (k) as subsection (l) and by inserting
after subsection (j) the following new subsection:
‘‘(k) RULES RELATING TO CERTAIN EXTENDED NET
OPERATING LOSSES.—In the case of a taxpayer which has
a net operating loss for any taxable year ending during
2003 and does not make an election under subsection (j),
such taxpayer shall be treated as having made an election
under paragraphs (4)(E) and (2)(C)(iii) of section 168(k)
with respect to all classes of property for such taxable year.
(c) TEMPORARY SUSPENSION OF 90 PERCENT LIMIT
ON
CERTAIN
NOL 
CARRYOVERS.—Section
56(d)(1)(A)(ii)(I) (relating to general rule defining alter-
native tax net operating loss deduction) is amended—
(1) by striking ‘‘or 2002’’ and inserting ‘‘, 2002,
or 2003’’, and
(2) by striking ‘‘and 2002’’ and inserting ‘‘,
2002, and 2003’’.
(d) TECHNICAL CORRECTIONS.—
(1) Subparagraph (H) of section 172(b)(1) is
amended by striking ‘‘a taxpayer which has’’.
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(2) Section 102(c)(2) of the Job Creation and
Worker Assistance Act of 2002 (Public Law 107–147)
is amended by striking ‘‘before January 1, 2003’’ and
inserting ‘‘after December 31, 1990’’.
(3)(A) Subclause (I) of section 56(d)(1)(A)(i) is
amended by striking ‘‘attributable to carryovers’’.
(B) Subclause (I) of section 56(d)(1)(A)(ii) is
amended—
(i) by striking ‘‘for taxable years’’ and in-
serting ‘‘from taxable years’’, and
(ii) by striking ‘‘carryforwards’’ and insert-
ing ‘‘carryovers’’.
(e) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
apply to net operating losses for taxable years ending
after December 31, 2002.
(2) TECHNICAL
CORRECTIONS.—The amend-
ments made by subsection (d) shall take effect as if
included in the amendments made by section 102 of
the Job Creation and Worker Assistance Act of 2002.
(3) ELECTION.—In the case of a net operating
loss for a taxable year ending during 2003—
(A) any election made under section
172(b)(3) of such Code may (notwithstanding
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such section) be revoked before November 15,
2004, and
(B) any election made under section 172(j)
of such Code shall (notwithstanding such section)
be treated as timely made if made before Novem-
ber 15, 2004.
(4) SPECIAL RULE FOR TAXPAYERS WITH TAX-
ABLE
YEARS
ENDING
DURING
JANUARY.—Any tax-
payer which has a taxable year ending during Janu-
ary may elect under this paragraph to apply section
172(b)(1)(H) of the Internal Revenue Code of 1986
(as amended by this section) to its taxable year end-
ing in 2004 rather than its taxable year ending in
2003. If such election is made, then section 172(k) of
such Code (as added by this section) shall be applied
to the taxpayer’s taxable year ending in 2004. Such
election shall be made in such manner and at such
time as may be prescribed by the Secretary of the
Treasury. Such election, once made, shall be irrev-
ocable.
SEC. 311. EXTENSION AND MODIFICATION OF RESEARCH
CREDIT.
(a) EXTENSION.—
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(1) IN GENERAL.—Section 41(h)(1)(B) (relating
to termination) is amended by striking ‘‘June 30,
2004’’ and inserting ‘‘December 31, 2005’’.
(2) 
CONFORMING
AMENDMENT.—Section
45C(b)(1)(D) is amended by striking ‘‘June 30, 2004’’
and inserting ‘‘December 31, 2005’’.
(b) INCREASE
IN RATES
OF ALTERNATIVE INCRE-
MENTAL CREDIT.—Subparagraph (A) of section 41(c)(4)
(relating to election of alternative incremental credit) is
amended—
(1) by striking ‘‘2.65 percent’’ and inserting ‘‘3
percent’’,
(2) by striking ‘‘3.2 percent’’ and inserting ‘‘4
percent’’, and
(3) by striking ‘‘3.75 percent’’ and inserting ‘‘5
percent’’.
(c) ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED
RESEARCH EXPENSES.—
(1) IN GENERAL.—Subsection (c) of section 41
(relating to base amount) is amended by redesig-
nating paragraphs (5) and (6) as paragraphs (6) and
(7), respectively, and by inserting after paragraph (4)
the following new paragraph:
‘‘(5) ELECTION
OF
ALTERNATIVE
SIMPLIFIED
CREDIT.—
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‘‘(A) IN GENERAL.—At the election of the
taxpayer, the credit determined under subsection
(a)(1) shall be equal to 12 percent of so much of
the qualified research expenses for the taxable
year as exceeds 50 percent of the average quali-
fied research expenses for the 3 taxable years pre-
ceding the taxable year for which the credit is
being determined.
‘‘(B) SPECIAL RULE IN CASE OF NO QUALI-
FIED RESEARCH EXPENSES IN ANY OF 3 PRE-
CEDING TAXABLE YEARS.—
‘‘(i) TAXPAYERS TO WHICH SUBPARA-
GRAPH
APPLIES.—The credit under this
paragraph shall be determined under this
subparagraph if the taxpayer has no quali-
fied research expenses in any 1 of the 3 tax-
able years preceding the taxable year for
which the credit is being determined.
‘‘(ii) CREDIT RATE.—The credit deter-
mined under this subparagraph shall be
equal to 6 percent of the qualified research
expenses for the taxable year.
‘‘(C) ELECTION.—An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years un-
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less revoked with the consent of the Secretary. An
election under this paragraph may not be made
for any taxable year to which an election under
paragraph (4) applies.’’
(2) COORDINATION WITH ELECTION OF ALTER-
NATIVE INCREMENTAL CREDIT.—
(A) IN GENERAL.—Section 41(c)(4)(B) (re-
lating to election) is amended by adding at the
end the following: ‘‘An election under this para-
graph may not be made for any taxable year to
which an election under paragraph (5) applies.’’
(B) TRANSITION RULE.—In the case of an
election under section 41(c)(4) of the Internal
Revenue Code of 1986 which applies to the tax-
able year which includes the date of the enact-
ment of this Act, such election shall be treated as
revoked with the consent of the Secretary of the
Treasury if the taxpayer makes an election
under section 41(c)(5) of such Code (as added by
paragraph (1)) for such year.
(f) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendments made by
subsection (a) shall apply to amounts paid or in-
curred after the date of the enactment of this Act.
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(2) SUBSECTIONS (b) AND (c).—The amendments
made by subsections (b) and (c) shall apply to taxable
years beginning after December 31, 2004.
SEC. 312. EXPANSION OF RESEARCH CREDIT.
(a) CREDIT FOR EXPENSES ATTRIBUTABLE TO CER-
TAIN COLLABORATIVE RESEARCH CONSORTIA.—
(1) IN
GENERAL.—Section 41(a) (relating to
credit for increasing research activities) is amended
by striking ‘‘and’’ at the end of paragraph (1), by
striking the period at the end of paragraph (2) and
inserting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph:
‘‘(3) 20 percent of the amounts paid or incurred
by the taxpayer in carrying on any trade or business
of the taxpayer during the taxable year (including as
contributions) to a research consortium.’’.
(2) RESEARCH CONSORTIUM DEFINED.—Section
41(f) (relating to special rules) is amended by adding
at the end the following new paragraph:
‘‘(6) RESEARCH CONSORTIUM.—
‘‘(A) IN GENERAL.—The term ‘research con-
sortium’ means any organization—
‘‘(i) which is—
‘‘(I) described in section 501(c)(3)
or 501(c)(6) and is exempt from tax
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under section 501(a) and is organized
and operated primarily to conduct re-
search, or
‘‘(II) organized and operated pri-
marily to conduct research in the pub-
lic interest (within the meaning of sec-
tion 501(c)(3)),
‘‘(ii) which is not a private founda-
tion,
‘‘(iii) to which at least 5 unrelated
persons paid or incurred during the cal-
endar year in which the taxable year of the
organization begins amounts (including as
contributions) to such organization for re-
search, and
‘‘(iv) to which no single person paid or
incurred (including as contributions) dur-
ing such calendar year an amount equal to
more than 50 percent of the total amounts
received by such organization during such
calendar year for research.
‘‘(B) TREATMENT
OF
PERSONS.—All per-
sons treated as a single employer under sub-
section (a) or (b) of section 52 shall be treated
as related persons for purposes of subparagraph
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(A)(iii) and as a single person for purposes of
subparagraph (A)(iv).’’.
(3) 
CONFORMING
AMENDMENT.—Section
41(b)(3)(C) is amended by inserting ‘‘(other than a
research consortium)’’ after ‘‘organization’’.
(b) REPEAL OF LIMITATION ON CONTRACT RESEARCH
EXPENSES PAID TO SMALL BUSINESSES, UNIVERSITIES,
AND FEDERAL LABORATORIES.—Section 41(b)(3) (relating
to contract research expenses) is amended by adding at the
end the following new subparagraph:
‘‘(D) AMOUNTS PAID TO ELIGIBLE SMALL
BUSINESSES, UNIVERSITIES, AND FEDERAL LAB-
ORATORIES.—
‘‘(i) IN
GENERAL.—In the case of
amounts paid by the taxpayer to—
‘‘(I) an eligible small business,
‘‘(II) an institution of higher edu-
cation (as defined in section 3304(f)),
or
‘‘(III) an organization which is a
Federal laboratory,
for qualified research, subparagraph (A)
shall be applied by substituting ‘100 per-
cent’ for ‘65 percent’.
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‘‘(ii) ELIGIBLE SMALL BUSINESS.—For
purposes of this subparagraph, the term ‘eli-
gible small business’ means a small business
with respect to which the taxpayer does not
own (within the meaning of section 318) 50
percent or more of—
‘‘(I) in the case of a corporation,
the outstanding stock of the corpora-
tion (either by vote or value), and
‘‘(II) in the case of a small busi-
ness which is not a corporation, the
capital and profits interests of the
small business.
‘‘(iii) SMALL BUSINESS.—For purposes
of this subparagraph—
‘‘(I) 
IN
GENERAL.—The 
term
‘small business’ means, with respect to
any calendar year, any person if the
annual average number of employees
employed by such person during either
of the 2 preceding calendar years was
500 or fewer. For purposes of the pre-
ceding sentence, a preceding calendar
year may be taken into account only if
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the person was in existence throughout
the year.
‘‘(II) 
STARTUPS, 
CONTROLLED
GROUPS, AND
PREDECESSORS.—Rules
similar to the rules of subparagraphs
(B) and (D) of section 220(c)(4) shall
apply for purposes of this clause.
‘‘(iv) 
FEDERAL
LABORATORY.—For
purposes of this subparagraph, the term
‘Federal laboratory’ has the meaning given
such term by section 4(6) of the Stevenson-
Wydler Technology Innovation Act of 1980
(15 U.S.C. 3703(6)), as in effect on the date
of the enactment of the Jumpstart Our
Business Strength (JOBS) Act.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred after De-
cember 31, 2004.
SEC. 313. MANUFACTURER’S JOBS CREDIT.
(a) IN GENERAL.—Subpart D of part IV of subchapter
A of chapter 1 (relating to business-related credits), as
amended by this Act, is amended by adding at the end the
following:
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‘‘SEC. 45S. MANUFACTURER’S JOBS CREDIT.
‘‘(a) GENERAL RULE.—For purposes of section 38, in
the case of an eligible taxpayer, the manufacturer’s jobs
credit determined under this section is an amount equal
to 50 percent of the lesser of the following:
‘‘(1) The excess of the W–2 wages paid by the
taxpayer during the taxable year over the W–2 wages
paid by the taxpayer during the preceding taxable
year.
‘‘(2) The W–2 wages paid by the taxpayer dur-
ing the taxable year to any employee who is an eligi-
ble TAA recipient (as defined in section 35(c)(2)) for
any month during such taxable year.
‘‘(3) 22.4 percent of the W–2 wages paid by the
taxpayer during the taxable year.
‘‘(b) LIMITATION.—
‘‘(1) IN
GENERAL.—If there is an excess de-
scribed in paragraph (2)(A) for any taxable year, the
amount of credit determined under subsection (a)
(without regard to this subsection)—
‘‘(A) if the value of domestic production de-
termined under section 199(g)(2) for the taxable
year does not exceed such value for the preceding
taxable year, shall be zero, and
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‘‘(B) if subparagraph (A) does not apply,
shall be reduced (but not below zero) by the ap-
plicable percentage of such amount.
‘‘(2) APPLICABLE
PERCENTAGE.—For purposes
of paragraph (1), the term ‘applicable percentage’
means, with respect to any taxable year, the percent-
age equal to a fraction—
‘‘(A) the numerator of which is the excess (if
any) of the modified value of worldwide produc-
tion of the taxpayer for the taxable year over
such modified value for the preceding taxable
year, and
‘‘(B) the denominator of which is the excess
(if any) of the value of worldwide production of
the taxpayer for the taxable year over such value
for the preceding taxable year.
‘‘(3) 
DEFINITIONS.—For 
purposes 
of 
this
subsection—
‘‘(A) VALUE
OF
WORLDWIDE
PRODUC-
TION.—The value of worldwide production for
any taxable year shall be determined under sec-
tion 199(g)(4).
‘‘(B) MODIFIED VALUE.—The term ‘modi-
fied value of worldwide production’ means the
value of worldwide production determined by not
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taking into account any item taken into account
in determining the value of domestic production
under section 199(g)(2).
‘‘(c) ELIGIBLE TAXPAYER.—For purposes of this sec-
tion, the term ‘eligible taxpayer’ means any taxpayer—
‘‘(1) which has domestic production gross re-
ceipts for the taxable year and the preceding taxable
year, and
‘‘(2) which is not treated at any time during the
taxable year as an inverted domestic corporation
under section 7874.
‘‘(d) DEFINITIONS AND SPECIAL RULE.—For purposes
of this section—
‘‘(1) IN GENERAL.—Any term used in this sec-
tion which is also used in section 199 shall have the
meaning given such term by section 199.
‘‘(2) SPECIAL RULE FOR W–2 WAGES.—Notwith-
standing paragraph (1), the amount of W–2 wages
taken into account with respect to any employee for
any taxable year shall not exceed $50,000.
‘‘(e) CERTAIN RULES MADE APPLICABLE.—For pur-
poses of this section, rules similar to the rules of section
52 shall apply.
‘‘(f) TERMINATION.—This section shall not apply to
any taxable year beginning after December 31, 2005.’’.
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(b) CREDIT TO BE PART OF GENERAL BUSINESS
CREDIT.—Section 38(b) (relating to current year business
credit), as amended by this Act, is amended by striking
‘‘plus’’ at the end of paragraph (29), by striking the period
at the end of paragraph (30) and inserting ‘‘, plus’’, and
by adding at the end the following:
‘‘(31) the manufacturer’s jobs credit determined
under section 45S.’’.
(c) CLERICAL AMENDMENT.—The table of sections for
subpart D of part IV of subchapter A of chapter 1, as
amended by this Act, is amended by adding at the end the
following:
‘‘Sec. 45S. Manufacturer’s jobs credit.’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 314. BROWNFIELDS DEMONSTRATION PROGRAM FOR
QUALIFIED GREEN BUILDING AND SUSTAIN-
ABLE DESIGN PROJECTS.
(a) TREATMENT AS EXEMPT FACILITY BOND.—Sub-
section (a) of section 142 (relating to the definition of ex-
empt facility bond) is amended by striking ‘‘or’’ at the end
of paragraph (12), by striking the period at the end of para-
graph (13) and inserting ‘‘, or’’, and by inserting at the
end the following new paragraph:
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‘‘(14) qualified green building and sustainable
design projects.’’.
(b) QUALIFIED GREEN BUILDING AND SUSTAINABLE
DESIGN PROJECTS.—Section 142 (relating to exempt facil-
ity bonds) is amended by adding at the end thereof the fol-
lowing new subsection:
‘‘(l) QUALIFIED GREEN BUILDING AND SUSTAINABLE
DESIGN PROJECTS.—
‘‘(1) IN GENERAL.—For purposes of subsection
(a)(14), the term ‘qualified green building and sus-
tainable design project’ means any project which is
designated by the Secretary, after consultation with
the Administrator of the Environmental Protection
Agency, as a qualified green building and sustainable
design project and which meets the requirements of
clauses (i), (ii), (iii), and (iv) of paragraph (4)(A).
‘‘(2) DESIGNATIONS.—
‘‘(A) IN GENERAL.—Within 60 days after
the end of the application period described in
paragraph (3)(A), the Secretary, after consulta-
tion with the Administrator of the Environ-
mental Protection Agency, shall designate quali-
fied green building and sustainable design
projects. At least one of the projects designated
shall be located in, or within a 10-mile radius
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of, an empowerment zone as designated pursuant
to section 1391, and at least one of the projects
designated shall be located in a rural State. No
more than one project shall be designated in a
State. A project shall not be designated if such
project includes a stadium or arena for profes-
sional sports exhibitions or games.
‘‘(B) MINIMUM CONSERVATION AND TECH-
NOLOGY
INNOVATION
OBJECTIVES.—The Sec-
retary, after consultation with the Administrator
of the Environmental Protection Agency, shall
ensure that, in the aggregate, the projects des-
ignated shall—
‘‘(i) reduce electric consumption by
more than 150 megawatts annually as com-
pared to conventional generation,
‘‘(ii) reduce daily sulfur dioxide emis-
sions by at least 10 tons compared to coal
generation power,
‘‘(iii) expand by 75 percent the domes-
tic solar photovoltaic market in the United
States (measured in megawatts) as com-
pared to the expansion of that market from
2001 to 2002, and
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‘‘(iv) use at least 25 megawatts of fuel
cell energy generation.
‘‘(3) LIMITED
DESIGNATIONS.—A project may
not be designated under this subsection unless—
‘‘(A) the project is nominated by a State or
local government within 180 days of the enact-
ment of this subsection, and
‘‘(B) such State or local government pro-
vides written assurances that the project will sat-
isfy the eligibility criteria described in para-
graph (4).
‘‘(4) APPLICATION.—
‘‘(A) IN GENERAL.—A project may not be
designated under this subsection unless the appli-
cation for such designation includes a project
proposal which describes the energy efficiency,
renewable energy, and sustainable design fea-
tures of the project and demonstrates that the
project satisfies the following eligibility criteria:
‘‘(i) GREEN BUILDING AND SUSTAIN-
ABLE DESIGN.—At least 75 percent of the
square footage of commercial buildings
which are part of the project is registered
for United States Green Building Council’s
LEED certification and is reasonably ex-
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pected (at the time of the designation) to re-
ceive such certification. For purposes of de-
termining LEED certification as required
under this clause, points shall be credited by
using the following:
‘‘(I) For wood products, certifi-
cation under the Sustainable Forestry
Initiative Program and the American
Tree Farm System.
‘‘(II) For renewable wood prod-
ucts, as credited for recycled content
otherwise provided under LEED cer-
tification.
‘‘(III) For composite wood prod-
ucts, certification under standards es-
tablished by the American National
Standards Institute, or such other vol-
untary standards as published in the
Federal Register by the Administrator
of the Environmental Protection Agen-
cy.
‘‘(ii) 
BROWNFIELD
REDEVELOP-
MENT.—The project includes a brownfield
site as defined by section 101(39) of the
Comprehensive 
Environmental 
Response,
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Compensation, and Liability Act of 1980
(42 U.S.C. 9601), including a site described
in subparagraph (D)(ii)(II)(aa) thereof.
‘‘(iii) STATE AND LOCAL SUPPORT.—
The project receives specific State or local
government resources which will support the
project in an amount equal to at least
$5,000,000. For purposes of the preceding
sentence, the term ‘resources’ includes tax
abatement benefits and contributions in
kind.
‘‘(iv) SIZE.—The project includes at
least one of the following:
‘‘(I) At least 1,000,000 square feet
of building.
‘‘(II) At least 20 acres.
‘‘(v) USE
OF
TAX
BENEFIT.—The
project proposal includes a description of
the net benefit of the tax-exempt financing
provided under this subsection which will be
allocated for financing of one or more of the
following:
‘‘(I) The purchase, construction,
integration, or other use of energy effi-
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ciency, renewable energy, and sustain-
able design features of the project.
‘‘(II) Compliance with certifi-
cation standards cited under clause (i).
‘‘(III) The purchase, remediation,
and foundation construction and prep-
aration of the brownfields site.
‘‘(vi) 
PROHIBITED
FACILITIES.—An
issue shall not be treated as an issue de-
scribed in subsection (a)(14) if any proceeds
of such issue are used to provide any facil-
ity the principal business of which is the
sale of food or alcoholic beverages for con-
sumption on the premises.
‘‘(vii) EMPLOYMENT.—The project is
projected to provide permanent employment
of at least 1,500 full time equivalents (150
full time equivalents in rural States) when
completed and construction employment of
at least 1,000 full time equivalents (100 full
time equivalents in rural States).
The application shall include an independent
analysis which describes the project’s economic
impact, including the amount of projected em-
ployment.
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‘‘(B) PROJECT DESCRIPTION.—Each appli-
cation described in subparagraph (A) shall con-
tain for each project a description of—
‘‘(i) the amount of electric consump-
tion reduced as compared to conventional
construction,
‘‘(ii) the amount of sulfur dioxide
daily emissions reduced compared to coal
generation,
‘‘(iii) the amount of the gross installed
capacity of the project’s solar photovoltaic
capacity measured in megawatts, and
‘‘(iv) the amount, in megawatts, of the
project’s fuel cell energy generation.
‘‘(5) CERTIFICATION OF USE OF TAX BENEFIT.—
No later than 30 days after the completion of the
project, each project must certify to the Secretary that
the net benefit of the tax-exempt financing was used
for the purposes described in paragraph (4).
‘‘(6) 
DEFINITIONS.—For 
purposes 
of 
this
subsection—
‘‘(A) RURAL STATE.—The term ‘rural State’
means any State which has—
‘‘(i) 
a 
population 
of 
less 
than
4,500,000 according to the 2000 census,
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‘‘(ii) a population density of less than
150 people per square mile according to the
2000 census, and
‘‘(iii) increased in population by less
than half the rate of the national increase
between the 1990 and 2000 censuses.
‘‘(B) LOCAL GOVERNMENT.—The term ‘local
government’ has the meaning given such term by
section 1393(a)(5).
‘‘(C) NET BENEFIT OF TAX-EXEMPT FINANC-
ING.—The term ‘net benefit of tax-exempt financ-
ing’ means the present value of the interest sav-
ings (determined by a calculation established by
the Secretary) which result from the tax-exempt
status of the bonds.
‘‘(7) AGGREGATE FACE AMOUNT OF TAX-EXEMPT
FINANCING.—
‘‘(A) IN GENERAL.—An issue shall not be
treated as an issue described in subsection
(a)(14) if the aggregate face amount of bonds
issued by the State or local government pursuant
thereto for a project (when added to the aggre-
gate face amount of bonds previously so issued
for such project) exceeds an amount designated
by the Secretary as part of the designation.
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‘‘(B) LIMITATION ON AMOUNT OF BONDS.—
The Secretary may not allocate authority to
issue qualified green building and sustainable
design project bonds in an aggregate face amount
exceeding $2,000,000,000.
‘‘(8) TERMINATION.—Subsection (a)(14) shall
not apply with respect to any bond issued after Sep-
tember 30, 2009.
‘‘(9) TREATMENT
OF
CURRENT
REFUNDING
BONDS.—Paragraphs (7)(B) and (8) shall not apply
to any bond (or series of bonds) issued to refund a
bond issued under subsection (a)(14) before October 1,
2009, if—
‘‘(A) the average maturity date of the issue
of which the refunding bond is a part is not later
than the average maturity date of the bonds to
be refunded by such issue,
‘‘(B) the amount of the refunding bond does
not exceed the outstanding amount of the re-
funded bond, and
‘‘(C) the net proceeds of the refunding bond
are used to redeem the refunded bond not later
than 90 days after the date of the issuance of the
refunding bond.
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For purposes of subparagraph (A), average maturity shall
be determined in accordance with section 147(b)(2)(A).’’.
(c) EXEMPTION FROM GENERAL STATE VOLUME
CAPS.—Paragraph (3) of section 146(g) (relating to excep-
tion for certain bonds) is amended—
(1) by striking ‘‘or (13)’’ and inserting ‘‘(13), or
(14)’’, and
(2) by striking ‘‘and qualified public educational
facilities’’ and inserting ‘‘qualified public educational
facilities, and qualified green building and sustain-
able design projects’’.
(d) ACCOUNTABILITY.—Each issuer shall maintain, on
behalf of each project, an interest bearing reserve account
equal to 1 percent of the net proceeds of any bond issued
under this section for such project. Not later than 5 years
after the date of issuance, the Secretary of the Treasury,
after consultation with the Administrator of the Environ-
mental Protection Agency, shall determine whether the
project financed with such bonds has substantially complied
with the terms and conditions described in section 142(l)(4)
of the Internal Revenue Code of 1986 (as added by this sec-
tion). If the Secretary, after such consultation, certifies that
the project has substantially complied with such terms and
conditions and meets the commitments set forth in the ap-
plication for such project described in section 142(l)(4) of
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such Code, amounts in the reserve account, including all
interest, shall be released to the project. If the Secretary de-
termines that the project has not substantially complied
with such terms and conditions, amounts in the reserve ac-
count, including all interest, shall be paid to the United
States Treasury.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to bonds issued after December 31, 2004.
Subtitle B—Manufacturing
Relating to Films
SEC. 321. SPECIAL RULES FOR CERTAIN FILM AND TELE-
VISION PRODUCTIONS.
(a) IN GENERAL.—Part VI of subchapter B of chapter
1 is amended by inserting after section 180 the following
new section:
‘‘SEC. 181. TREATMENT OF QUALIFIED FILM AND TELE-
VISION PRODUCTIONS.
‘‘(a) ELECTION TO TREAT CERTAIN COSTS OF QUALI-
FIED
FILM
AND
TELEVISION
PRODUCTIONS
AS
EX-
PENSES.—
‘‘(1) IN
GENERAL.—A taxpayer may elect to
treat the cost of any qualified film or television pro-
duction as an expense which is not chargeable to cap-
ital account. Any cost so treated shall be allowed as
a deduction.
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‘‘(2) DOLLAR LIMITATION.—
‘‘(A) IN
GENERAL.—The aggregate cost
which may be taken into account under para-
graph (1) with respect to each qualified film or
television 
production 
shall 
not 
exceed
$15,000,000.
‘‘(B) HIGHER
DOLLAR
LIMITATION
FOR
PRODUCTIONS IN CERTAIN AREAS.—In the case
of any qualified film or television production the
aggregate cost of which is significantly incurred
in an area eligible for designation as—
‘‘(i) a low-income community under
section 45D, or
‘‘(ii) a distressed county or isolated
area of distress by the Delta Regional Au-
thority established under section 2009aa–1
of title 7, United States Code,
subparagraph (A) shall be applied by sub-
stituting ‘$20,000,000’ for ‘$15,000,000’.
‘‘(b) AMORTIZATION OF REMAINING COSTS.—
‘‘(1) IN GENERAL.—If an election is made under
subsection (a) with respect to any qualified film or
television production, that portion of the basis of such
production in excess of the amount taken into account
under subsection (a) shall be allowed as a deduction
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ratably over the 36-month period beginning with the
month in which such production is placed in service.
‘‘(2) NO OTHER DEDUCTION OR AMORTIZATION
DEDUCTION ALLOWABLE.—With respect to the basis of
any qualified film or television production described
in paragraph (1), no other depreciation or amortiza-
tion deduction shall be allowable.
‘‘(c) ELECTION.—
‘‘(1) IN GENERAL.—An election under subsection
(a) with respect to any qualified film or television
production shall be made in such manner as pre-
scribed by the Secretary and by the due date (includ-
ing extensions) for filing the taxpayer’s return of tax
under this chapter for the taxable year in which costs
of the production are first incurred.
‘‘(2) REVOCATION OF ELECTION.—Any election
made under subsection (a) may not be revoked with-
out the consent of the Secretary.
‘‘(d) QUALIFIED FILM OR TELEVISION PRODUCTION.—
For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified film or
television production’ means any production described
in paragraph (2) if 75 percent of the total compensa-
tion of the production is qualified compensation.
‘‘(2) PRODUCTION.—
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‘‘(A) IN
GENERAL.—A production is de-
scribed in this paragraph if such production is
property described in section 168(f)(3). For pur-
poses of a television series, only the first 44 epi-
sodes of such series may be taken into account.
‘‘(B) EXCEPTION.—A production is not de-
scribed in this paragraph if records are required
under section 2257 of title 18, United States
Code, to be maintained with respect to any per-
former in such production.
‘‘(3) QUALIFIED COMPENSATION.—For purposes
of paragraph (1)—
‘‘(A) IN
GENERAL.—The term ‘qualified
compensation’ means compensation for services
performed in the United States by actors, direc-
tors, producers, and other relevant production
personnel.
‘‘(B) PARTICIPATIONS AND RESIDUALS EX-
CLUDED.—The term ‘compensation’ does not in-
clude participations and residuals (as defined in
section 167(g)(7)(B)).
‘‘(e) APPLICATION OF CERTAIN OTHER RULES.—For
purposes of this section, rules similar to the rules of sub-
sections (b)(2) and (c)(4) of section 194 shall apply.
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‘‘(f) TERMINATION.—This section shall not apply to
qualified film and television productions commencing after
December 31, 2008.’’.
(b) CONFORMING AMENDMENT.—The table of sections
for part VI of subchapter B of chapter 1 is amended by
inserting after the item relating to section 180 the following
new item:
‘‘Sec. 181. Treatment of qualified film and television productions.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to qualified film and television produc-
tions (as defined in section 181(d)(1) of the Internal Rev-
enue Code of 1986, as added by this section) commencing
after the date of the enactment of this Act.
SEC. 322. MODIFICATION OF APPLICATION OF INCOME
FORECAST METHOD OF DEPRECIATION.
(a) IN GENERAL.—Section 167(g) (relating to depre-
ciation under income forecast method) is amended by add-
ing at the end the following new paragraph:
‘‘(7) TREATMENT OF PARTICIPATIONS AND RE-
SIDUALS.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the depreciation deduction allowable
with respect to a property under this subsection,
the taxpayer may include participations and re-
siduals with respect to such property in the ad-
justed basis of such property for the taxable year
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in which the property is placed in service, but
only to the extent that such participations and
residuals relate to income estimated (for pur-
poses of this subsection) to be earned in connec-
tion with the property before the close of the 10th
taxable year referred to in paragraph (1)(A).
‘‘(B) PARTICIPATIONS
AND
RESIDUALS.—
For purposes of this paragraph, the term ‘par-
ticipations and residuals’ means, with respect to
any property, costs the amount of which by con-
tract varies with the amount of income earned in
connection with such property.
‘‘(C) SPECIAL
RULES
RELATING
TO
RE-
COMPUTATION YEARS.—If the adjusted basis of
any property is determined under this para-
graph, paragraph (4) shall be applied by sub-
stituting ‘for each taxable year in such period’
for ‘for such period’.
‘‘(D) OTHER SPECIAL RULES.—
‘‘(i) PARTICIPATIONS
AND
RESIDU-
ALS.—Notwithstanding subparagraph (A),
the taxpayer may exclude participations
and residuals from the adjusted basis of
such property and deduct such participa-
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tions and residuals in the taxable year that
such participations and residuals are paid.
‘‘(ii) 
COORDINATION
WITH
OTHER
RULES.—Deductions computed in accord-
ance with this paragraph shall be allowable
notwithstanding paragraph (1)(B) or sec-
tions 263, 263A, 404, 419, or 461(h).
‘‘(E) 
AUTHORITY
TO
MAKE
ADJUST-
MENTS.—The Secretary shall prescribe appro-
priate adjustments to the basis of property and
to the look-back method for the additional
amounts allowable as a deduction solely by rea-
son of this paragraph.’’.
(b) DETERMINATION OF INCOME.—Section 167(g)(5)
(relating to special rules) is amended by redesignating sub-
paragraphs (E) and (F) as subparagraphs (F) and (G), re-
spectively, and inserting after subparagraph (D) the fol-
lowing new subparagraph:
‘‘(E) 
TREATMENT
OF
DISTRIBUTION
COSTS.—For purposes of this subsection, the in-
come with respect to any property shall be the
taxpayer’s gross income from such property.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to property placed in service after the
date of the enactment of this Act.
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Subtitle C—Manufacturing
Relating to Timber
SEC. 331. EXPENSING OF CERTAIN REFORESTATION EX-
PENDITURES.
(a) IN GENERAL.—So much of subsection (b) of section
194 (relating to amortization of reforestation expenditures)
as precedes paragraph (2) is amended to read as follows:
‘‘(b) TREATMENT AS EXPENSES.—
‘‘(1) ELECTION TO TREAT CERTAIN REFOREST-
ATION EXPENDITURES AS EXPENSES.—
‘‘(A) IN
GENERAL.—In the case of any
qualified timber property with respect to which
the taxpayer has made (in accordance with regu-
lations prescribed by the Secretary) an election
under this subsection, the taxpayer shall treat re-
forestation expenditures which are paid or in-
curred during the taxable year with respect to
such property as an expense which is not charge-
able to capital account. The reforestation expend-
itures so treated shall be allowed as a deduction.
‘‘(B) DOLLAR LIMITATION.—The aggregate
amount of reforestation expenditures which may
be taken into account under subparagraph (A)
with respect to each qualified timber property for
any taxable year shall not exceed $10,000
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($5,000 in the case of a separate return by a
married individual (as defined in section
7703)).’’.
(b) NET AMORTIZABLE BASIS.—Section 194(c)(2) (de-
fining amortizable basis) is amended by inserting ‘‘which
have not been taken into account under subsection (b)’’ after
‘‘expenditures’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 194(b) is amended by striking para-
graphs (3) and (4).
(2) Section 194(b)(2) is amended by striking
‘‘paragraph (1)’’ both places it appears and inserting
‘‘paragraph (1)(B)’’.
(3) Section 194(c) is amended by striking para-
graph (4) and inserting the following new para-
graphs:
‘‘(4) TREATMENT OF TRUSTS AND ESTATES.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), this section shall not apply to
trusts and estates.
‘‘(B) AMORTIZATION DEDUCTION ALLOWED
TO ESTATES.—The benefit of the deduction for
amortization provided by subsection (a) shall be
allowed to estates in the same manner as in the
case of an individual. The allowable deduction
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shall be apportioned between the income bene-
ficiary and the fiduciary under regulations pre-
scribed by the Secretary. Any amount so appor-
tioned to a beneficiary shall be taken into ac-
count for purposes of determining the amount al-
lowable as a deduction under subsection (a) to
such beneficiary.
‘‘(5) APPLICATION WITH OTHER DEDUCTIONS.—
No deduction shall be allowed under any other provi-
sion of this chapter with respect to any expenditure
with respect to which a deduction is allowed or allow-
able under this section to the taxpayer.’’.
(4) The heading for section 194 is amended by
striking ‘‘AMORTIZATION’’ and inserting ‘‘TREAT-
MENT’’.
(5) The item relating to section 194 in the table
of sections for part VI of subchapter B of chapter 1
is amended by striking ‘‘Amortization’’ and inserting
‘‘Treatment’’.
(d) REPEAL OF REFORESTATION CREDIT.—
(1) IN
GENERAL.—Section 46 (relating to
amount of credit) is amended—
(A) by adding ‘‘and’’ at the end of para-
graph (1),
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(B) by striking ‘‘, and’’ at the end of para-
graph (2) and inserting a period, and
(C) by striking paragraph (3).
(2) CONFORMING AMENDMENTS.—
(A) Section 48 is amended—
(i) by striking subsection (b),
(ii) by striking ‘‘this subsection’’ in
paragraph (5) of subsection (a) and insert-
ing ‘‘subsection (a)’’, and
(iii) by redesignating such paragraph
(5) as subsection (b).
(B) The heading for section 48 is amended
by striking ‘‘; REFORESTATION CREDIT’’.
(C) The item relating to section 48 in the
table of sections for subpart E of part IV of sub-
chapter A of chapter 1 is amended by striking ‘‘,
reforestation credit’’.
(D) Section 50(c)(3) is amended by striking
‘‘or reforestation credit’’.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply with respect to expenditures paid or in-
curred after the date of the enactment of this Act.
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SEC. 332. ELECTION TO TREAT CUTTING OF TIMBER AS A
SALE OR EXCHANGE.
Any election under section 631(a) of the Internal Rev-
enue Code of 1986 made for a taxable year ending on or
before the date of the enactment of this Act may be revoked
by the taxpayer for any taxable year ending after such date.
For purposes of determining whether the taxpayer may
make a further election under such section, such election
(and any revocation under this section) shall not be taken
into account.
SEC. 333. CAPITAL GAIN TREATMENT UNDER SECTION
631(b) TO APPLY TO OUTRIGHT SALES BY
LANDOWNERS.
(a) IN GENERAL.—The first sentence of section 631(b)
(relating to disposal of timber with a retained economic in-
terest) is amended by striking ‘‘retains an economic interest
in such timber’’ and inserting ‘‘either retains an economic
interest in such timber or makes an outright sale of such
timber’’.
(b) CONFORMING AMENDMENTS.—
(1) The third sentence of section 631(b) is
amended by striking ‘‘The date of disposal’’ and in-
serting ‘‘In the case of disposal of timber with a re-
tained economic interest, the date of disposal’’.
(2) The heading for section 631(b) is amended by
striking ‘‘WITH A RETAINED ECONOMIC INTEREST’’.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to sales after the date of the enactment
of this Act.
SEC. 334. MODIFICATION OF SAFE HARBOR RULES FOR TIM-
BER REITS.
(a) EXPANSION OF PROHIBITED TRANSACTION SAFE
HARBOR.—Section 857(b)(6) (relating to income from pro-
hibited transactions) is amended by redesignating subpara-
graphs (D) and (E) as subparagraphs (E) and (F), respec-
tively, and by inserting after subparagraph (C) the fol-
lowing new subparagraph:
‘‘(D) CERTAIN SALES NOT TO CONSTITUTE
PROHIBITED
TRANSACTIONS.—For purposes of
this part, the term ‘prohibited transaction’ does
not include a sale of property which is a real es-
tate asset (as defined in section 856(c)(5)(B))
if—
‘‘(i) the trust held the property for not
less than 4 years in connection with the
trade or business of producing timber,
‘‘(ii) the aggregate expenditures made
by the trust, or a partner of the trust, dur-
ing the 4-year period preceding the date of
sale which—
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‘‘(I) are includible in the basis of
the property (other than timberland
acquisition expenditures), and
‘‘(II) are directly related to oper-
ation of the property for the produc-
tion of timber or for the preservation of
the property for use as timberland,
do not exceed 30 percent of the net selling
price of the property,
‘‘(iii) the aggregate expenditures made
by the trust, or a partner of the trust, dur-
ing the 4-year period preceding the date of
sale which—
‘‘(I) are includible in the basis of
the property (other than timberland
acquisition expenditures), and
‘‘(II) are not directly related to
operation of the property for the pro-
duction of timber, or for the preserva-
tion of the property for use as
timberland,
do not exceed 5 percent of the net selling
price of the property,
‘‘(iv)(I) during the taxable year the
trust does not make more than 7 sales of
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property (other than sales of foreclosure
property or sales to which section 1033 ap-
plies), or
‘‘(II) the aggregate adjusted bases (as
determined for purposes of computing earn-
ings and profits) of property (other than
sales of foreclosure property or sales to
which section 1033 applies) sold during the
taxable year does not exceed 10 percent of
the aggregate bases (as so determined) of all
of the assets of the trust as of the beginning
of the taxable year,
‘‘(v) in the case that the requirement of
clause (iv)(I) is not satisfied, substantially
all of the marketing expenditures with re-
spect to the property were made through an
independent contractor (as defined in sec-
tion 856(d)(3)) from whom the trust itself
does not derive or receive any income, and
‘‘(vi) the sales price of the property
sold by the trust is not based in whole or in
part on income or profits, including income
or profits derived from the sale or operation
of such property.’’.
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(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
TITLE IV—ADDITIONAL
PROVISIONS
Subtitle A—Provisions Designed To
Curtail Tax Shelters
SEC. 401. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE.
(a) IN GENERAL.—Section 7701 is amended by redes-
ignating subsection (n) as subsection (o) and by inserting
after subsection (m) the following new subsection:
‘‘(n) CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE; ETC.—
‘‘(1) GENERAL RULES.—
‘‘(A) IN GENERAL.—In any case in which a
court determines that the economic substance
doctrine is relevant for purposes of this title to
a transaction (or series of transactions), such
transaction (or series of transactions) shall have
economic substance only if the requirements of
this paragraph are met.
‘‘(B) 
DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A)—
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‘‘(i) IN GENERAL.—A transaction has
economic substance only if—
‘‘(I) the transaction changes in a
meaningful way (apart from Federal
tax effects) the taxpayer’s economic po-
sition, and
‘‘(II) the taxpayer has a substan-
tial nontax purpose for entering into
such transaction and the transaction is
a reasonable means of accomplishing
such purpose.
In applying subclause (II), a purpose of
achieving a financial accounting benefit
shall not be taken into account in deter-
mining whether a transaction has a sub-
stantial nontax purpose if the origin of such
financial accounting benefit is a reduction
of income tax.
‘‘(ii) SPECIAL RULE WHERE TAXPAYER
RELIES ON PROFIT POTENTIAL.—A trans-
action shall not be treated as having eco-
nomic substance by reason of having a po-
tential for profit unless—
‘‘(I) the present value of the rea-
sonably expected pre-tax profit from
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the transaction is substantial in rela-
tion to the present value of the expected
net tax benefits that would be allowed
if the transaction were respected, and
‘‘(II) the reasonably expected pre-
tax profit from the transaction exceeds
a risk-free rate of return.
‘‘(C) TREATMENT OF FEES AND FOREIGN
TAXES.—Fees and other transaction expenses
and foreign taxes shall be taken into account as
expenses in determining pre-tax profit under
subparagraph (B)(ii).
‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH
TAX-INDIFFERENT PARTIES.—
‘‘(A) 
SPECIAL
RULES
FOR
FINANCING
TRANSACTIONS.—The form of a transaction
which is in substance the borrowing of money or
the acquisition of financial capital directly or
indirectly from a tax-indifferent party shall not
be respected if the present value of the deductions
to be claimed with respect to the transaction is
substantially in excess of the present value of the
anticipated economic returns of the person lend-
ing the money or providing the financial capital.
A public offering shall be treated as a borrowing,
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or an acquisition of financial capital, from a
tax-indifferent party if it is reasonably expected
that at least 50 percent of the offering will be
placed with tax-indifferent parties.
‘‘(B) ARTIFICIAL
INCOME
SHIFTING
AND
BASIS
ADJUSTMENTS.—The form of a trans-
action with a tax-indifferent party shall not be
respected if—
‘‘(i) it results in an allocation of in-
come or gain to the tax-indifferent party in
excess of such party’s economic income or
gain, or
‘‘(ii) it results in a basis adjustment or
shifting of basis on account of overstating
the income or gain of the tax-indifferent
party.
‘‘(3) DEFINITIONS
AND
SPECIAL
RULES.—For
purposes of this subsection—
‘‘(A) ECONOMIC
SUBSTANCE
DOCTRINE.—
The term ‘economic substance doctrine’ means
the common law doctrine under which tax bene-
fits under subtitle A with respect to a trans-
action are not allowable if the transaction does
not have economic substance or lacks a business
purpose.
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‘‘(B) TAX-INDIFFERENT PARTY.—The term
‘tax-indifferent party’ means any person or enti-
ty not subject to tax imposed by subtitle A. A
person shall be treated as a tax-indifferent party
with respect to a transaction if the items taken
into account with respect to the transaction have
no substantial impact on such person’s liability
under subtitle A.
‘‘(C) EXCEPTION
FOR
PERSONAL
TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an in-
dividual, this subsection shall apply only to
transactions entered into in connection with a
trade or business or an activity engaged in for
the production of income.
‘‘(D) TREATMENT OF LESSORS.—In apply-
ing paragraph (1)(B)(ii) to the lessor of tangible
property subject to a lease—
‘‘(i) the expected net tax benefits with
respect to the leased property shall not in-
clude the benefits of—
‘‘(I) depreciation,
‘‘(II) any tax credit, or
‘‘(III) any other deduction as pro-
vided in guidance by the Secretary,
and
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‘‘(ii) subclause (II) of paragraph
(1)(B)(ii) shall be disregarded in deter-
mining whether any of such benefits are al-
lowable.
‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF-
FECTED.—Except as specifically provided in this sub-
section, the provisions of this subsection shall not be
construed as altering or supplanting any other rule of
law, and the requirements of this subsection shall be
construed as being in addition to any such other rule
of law.
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or appro-
priate to carry out the purposes of this subsection.
Such regulations may include exemptions from the
application of this subsection.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to transactions entered into after the
date of the enactment of this Act.
SEC. 402. PENALTY FOR FAILING TO DISCLOSE REPORT-
ABLE TRANSACTION.
(a) IN GENERAL.—Part I of subchapter B of chapter
68 (relating to assessable penalties) is amended by inserting
after section 6707 the following new section:
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‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT-
ABLE TRANSACTION INFORMATION WITH RE-
TURN OR STATEMENT.
‘‘(a) IMPOSITION OF PENALTY.—Any person who fails
to include on any return or statement any information with
respect to a reportable transaction which is required under
section 6011 to be included with such return or statement
shall pay a penalty in the amount determined under sub-
section (b).
‘‘(b) AMOUNT OF PENALTY.—
‘‘(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amount of the penalty under
subsection (a) shall be $50,000.
‘‘(2) LISTED TRANSACTION.—The amount of the
penalty under subsection (a) with respect to a listed
transaction shall be $100,000.
‘‘(3) INCREASE IN PENALTY FOR LARGE ENTITIES
AND HIGH NET WORTH INDIVIDUALS.—
‘‘(A) IN GENERAL.—In the case of a failure
under subsection (a) by—
‘‘(i) a large entity, or
‘‘(ii) a high net worth individual,
the penalty under paragraph (1) or (2) shall be
twice the amount determined without regard to
this paragraph.