‘‘SEC. 977. APPLICATION OF SUBPART. 
‘‘This subpart— 
‘‘(1) shall be applied before subpart A, and 
‘‘(2) shall be applied separately with respect to 
the categories of income specified in section 
904(d)(1).’’. 
(b) CLERICAL AMENDMENT.—The table of subparts 
for part III of subpart N of chapter 1 of such Code is 
amended by inserting after the item relating to subpart 
G the following new item: 
‘‘SUBPART H. SPECIAL RULES FOR ALLOCATION OF FOREIGN-RELATED 
DEDUCTIONS AND FOREIGN TAX CREDITS.’’. 
(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. 402. EXCESS INCOME FROM TRANSFERS OF INTANGI-
BLES TO LOW-TAXED AFFILIATES TREATED 
AS SUBPART F INCOME. 
(a) IN GENERAL.—Subsection (a) of section 954 of 
such Code is amended by inserting after paragraph (3) 
the following new paragraph: 
‘‘(4) the foreign base company excess intangible 
income for the taxable year (determined under sub-
section (f) and reduced as provided in subsection 
(b)(5)), and’’. 
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(b) FOREIGN BASE COMPANY EXCESS INTANGIBLE 
INCOME.—Section 954 of such Code is amended by insert-
ing after subsection (e) the following new subsection: 
‘‘(f) FOREIGN BASE COMPANY EXCESS INTANGIBLE 
INCOME.—For purposes of subsection (a)(4) and this sub-
section: 
‘‘(1) FOREIGN BASE COMPANY EXCESS INTAN-
GIBLE INCOME DEFINED.— 
‘‘(A) IN
GENERAL.—The term ‘foreign 
base company excess intangible income’ means, 
with respect to any covered intangible, the ex-
cess of— 
‘‘(i) the sum of— 
‘‘(I) gross income from the sale, 
lease, license, or other disposition of 
property in which such covered intan-
gible is used directly or indirectly, and 
‘‘(II) gross income from the pro-
vision of services related to such cov-
ered intangible or in connection with 
property in which such covered intan-
gible is used directly or indirectly, 
over 
‘‘(ii) 150 percent of the costs properly 
allocated and apportioned to the gross in-
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come taken into account under clause (i) 
other than expenses for interest and taxes 
and any expenses which are not directly al-
locable to such gross income. 
‘‘(B) SAME COUNTRY INCOME NOT TAKEN 
INTO ACCOUNT.—If— 
‘‘(i) the sale, lease, license, or other 
disposition of the property referred to in 
subparagraph (A)(i)(I) is for use, con-
sumption, or disposition in the country 
under the laws of which the controlled for-
eign corporation is created or organized, or 
‘‘(ii) the services referred to in sub-
paragraph (A)(i)(II) are performed in such 
country, 
the gross income from such sale, lease, license, 
or other disposition, or provision of services, 
shall not be taken into account under subpara-
graph (A)(i). 
‘‘(2) EXCEPTION BASED ON EFFECTIVE FOR-
EIGN INCOME TAX RATE.— 
‘‘(A) IN GENERAL.—Foreign base company 
excess intangible income shall not include the 
applicable percentage of any item of income re-
ceived by a controlled foreign corporation if the 
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taxpayer establishes to the satisfaction of the 
Secretary that such income was subject to an 
effective rate of income tax imposed by a for-
eign country in excess of 5 percent. 
‘‘(B) 
APPLICABLE
PERCENTAGE.—For 
purposes of subparagraph (A), the term ‘appli-
cable percentage’ means the ratio (expressed as 
a percentage), not greater than 100 percent, 
of— 
‘‘(i) the number of percentage points 
by which the effective rate of income tax 
referred to in subparagraph (A) exceeds 5 
percentage points, over 
‘‘(ii) 10 percentage points. 
‘‘(C) TREATMENT OF LOSSES IN DETER-
MINING EFFECTIVE RATE OF FOREIGN INCOME 
TAX.—For purposes of determining the effective 
rate of income tax imposed by any foreign 
country— 
‘‘(i) such effective rate shall be deter-
mined without regard to any losses carried 
to the relevant taxable year, and 
‘‘(ii) to the extent the income with re-
spect to such intangible reduces losses in 
the relevant taxable year, such effective 
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rate shall be treated as being the effective 
rate which would have been imposed on 
such income without regard to such losses. 
‘‘(3) COVERED
INTANGIBLE.—The term ‘cov-
ered intangible’ means, with respect to any con-
trolled foreign corporation, any intangible property 
(as defined in section 936(h)(3)(B))— 
‘‘(A) which is sold, leased, licensed, or oth-
erwise transferred (directly or indirectly) to 
such controlled foreign corporation from a re-
lated person, or 
‘‘(B) with respect to which such controlled 
foreign corporation and one or more related 
persons has (directly or indirectly) entered into 
any shared risk or development agreement (in-
cluding any cost sharing agreement). 
‘‘(4) RELATED
PERSON.—The term ‘related 
person’ has the meaning given such term in sub-
section (d)(3).’’. 
(c) SEPARATE BASKET FOR FOREIGN TAX CRED-
IT.—Subsection (d) of section 904 of such Code is amend-
ed by redesignating paragraph (7) as paragraph (8) and 
by inserting after paragraph (6) the following new para-
graph: 
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‘‘(6) SEPARATE
APPLICATION
TO
FOREIGN 
BASE COMPANY EXCESS INTANGIBLE INCOME.— 
‘‘(A) IN GENERAL.—Subsections (a), (b), 
and (c) of this section and sections 902, 907, 
and 960 shall be applied separately with respect 
to each item of income which is taken into ac-
count under section 954(a)(4) as foreign base 
company excess intangible income. 
‘‘(B) REGULATIONS.—The Secretary may 
issue such regulations or other guidance as is 
necessary or appropriate to carry out the pur-
poses of this subsection, including regulations 
or other guidance which provides that related 
items of income may be aggregated for pur-
poses of this paragraph.’’. 
(d) CONFORMING AMENDMENTS.— 
(1) Paragraph (4) of section 954(b) of such 
Code is amended by inserting ‘‘foreign base company 
excess intangible income described in subsection 
(a)(4) or’’ before ‘‘foreign base company oil-related 
income’’ in the last sentence thereof. 
(2) Subsection (b) of section 954 of such Code 
is amended by adding at the end the following new 
paragraph: 
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‘‘(7) FOREIGN BASE COMPANY EXCESS INTAN-
GIBLE INCOME NOT TREATED AS ANOTHER KIND OF 
BASE COMPANY INCOME.—Income of a corporation 
which is foreign base company excess intangible in-
come shall not be considered foreign base company 
income of such corporation under paragraph (2), 
(3), or (5) of subsection (a).’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 403. LIMITATIONS ON INCOME SHIFTING THROUGH IN-
TANGIBLE PROPERTY TRANSFERS. 
(a) CLARIFICATION OF DEFINITION OF INTANGIBLE 
ASSET.—Clause (vi) of section 936(h)(3)(B) of such Code 
is amended by inserting ‘‘(including any section 197 intan-
gible described in subparagraph (A), (B), or (C)(i) of sub-
section (d)(1) of such section)’’ after ‘‘item’’. 
(b) CLARIFICATION
OF
ALLOWABLE
VALUATION 
METHODS.— 
(1) FOREIGN
CORPORATIONS.—Paragraph (2) 
of section 367(d) of such Code is amended by adding 
at the end the following new subparagraph: 
‘‘(D) REGULATORY AUTHORITY.—For pur-
poses of the last sentence of subparagraph (A), 
the Secretary may require— 
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‘‘(i) the valuation of transfers of in-
tangible property on an aggregate basis, or 
‘‘(ii) the valuation of such a transfer 
on the basis of the realistic alternatives to 
such a transfer, 
in any case in which the Secretary determines 
that such basis is the most reliable means of 
valuation of such transfers.’’. 
(2) ALLOCATION AMONG TAXPAYERS.—Section 
482 of such Code is amended by adding at the end 
the following: ‘‘For purposes of the preceding sen-
tence, the Secretary may require the valuation of 
transfers of intangible property on an aggregate 
basis or the valuation of such a transfer on the basis 
of the realistic alternatives to such a transfer, in any 
case in which the Secretary determines that such 
basis is the most reliable means of valuation of such 
transfers.’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to transfers in taxable years 
beginning after the date of the enactment of this 
Act. 
(2) NO INFERENCE.—Nothing in the amend-
ment made by subsection (a) shall be construed to 
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100 
create any inference with respect to the application 
of section 936(h)(3) of the Internal Revenue Code of 
1986, or the authority of the Secretary of the Treas-
ury to provide regulations for such application, on or 
before the date of the enactment of such amend-
ment. 
SEC. 404. LIMITATION ON EARNINGS STRIPPING BY EXPA-
TRIATED ENTITIES. 
(a) IN GENERAL.—Subsection (j) of section 163 of 
such Code is amended— 
(1) by redesignating paragraph (9) as para-
graph (10), and 
(2) by inserting after paragraph (8) the fol-
lowing new paragraph: 
‘‘(9) SPECIAL RULES FOR EXPATRIATED ENTI-
TIES.— 
‘‘(A) IN GENERAL.—In the case of a cor-
poration to which this subsection applies which 
is an expatriated entity, this subsection shall 
apply to such corporation with the following 
modifications: 
‘‘(i) Paragraph (2)(A) shall be applied 
without regard to clause (ii) thereof. 
‘‘(ii) Paragraph (1)(B) shall be ap-
plied— 
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101 
‘‘(I) without regard to the par-
enthetical, and 
‘‘(II) by substituting ‘in the 1st 
succeeding taxable year and in the 
2nd through 10th succeeding taxable 
years to the extent not previously 
taken into account under this sub-
paragraph’ for ‘in the succeeding tax-
able year’. 
‘‘(iii) Paragraph (2)(B) shall be ap-
plied— 
‘‘(I) without regard to clauses (ii) 
and (iii), and 
‘‘(II) by substituting ‘25 percent 
of the adjusted taxable income of the 
corporation for such taxable year’ for 
the matter of clause (i)(II) thereof. 
‘‘(B) EXPATRIATED
ENTITY.—For pur-
poses of this paragraph— 
‘‘(i) IN GENERAL.—With respect to a 
corporation and a taxable year, the term 
‘expatriated entity’ has the meaning given 
such term by section 7874(a)(2), deter-
mined as if such section and the regula-
tions under such section as in effect on the 
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102 
first day of such taxable year applied to all 
taxable years of the corporation beginning 
after July 10, 1989. 
‘‘(ii) EXCEPTION
FOR
SURROGATES 
TREATED AS A DOMESTIC CORPORATION.— 
The term ‘expatriated entity’ does not in-
clude a surrogate foreign corporation 
which is treated as a domestic corporation 
by reason of section 7874(b).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 405. PREVENTION OF AVOIDANCE OF TAX THROUGH 
REINSURANCE WITH NON-TAXED AFFILIATES. 
(a) IN GENERAL.—Part III of subchapter L of chap-
ter 1 of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new section: 
‘‘SEC. 849. SPECIAL RULES FOR REINSURANCE OF NON- 
LIFE CONTRACTS WITH NON-TAXED AFFILI-
ATES. 
‘‘(a) IN GENERAL.—The taxable income under sec-
tion 831(a) or the life insurance company taxable income 
under section 801(b) (as the case may be) of an insurance 
company shall be determined by not taking into account— 
‘‘(1) any non-taxed reinsurance premium, 
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103 
‘‘(2) any additional amount paid by such insur-
ance company with respect to the reinsurance for 
which such non-taxed reinsurance premium is paid, 
to the extent such additional amount is properly al-
locable to such non-taxed reinsurance premium, and 
‘‘(3) any return premium, ceding commission, 
reinsurance recovered, or other amount received by 
such insurance company with respect to the reinsur-
ance for which such non-taxed reinsurance premium 
is paid, to the extent such return premium, ceding 
commission, reinsurance recovered, or other amount 
is properly allocable to such non-taxed reinsurance 
premium. 
‘‘(b) NON-TAXED REINSURANCE PREMIUMS.—For 
purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘non-taxed rein-
surance premium’ means any reinsurance premium 
paid directly or indirectly to an affiliated corporation 
with respect to reinsurance of risks (other than ex-
cepted risks), to the extent that the income attrib-
utable to the premium is not subject to tax under 
this subtitle (either as the income of the affiliated 
corporation or as amounts included in gross income 
by a United States shareholder under section 951). 
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104 
‘‘(2) EXCEPTED
RISKS.—The term ‘excepted 
risks’ means any risk with respect to which reserves 
described in section 816(b)(1) are established. 
‘‘(c) AFFILIATED CORPORATIONS.—For purposes of 
this section, a corporation shall be treated as affiliated 
with an insurance company if both corporations would be 
members of the same controlled group of corporations (as 
defined in section 1563(a)) if section 1563 were applied— 
‘‘(1) by substituting ‘at least 50 percent’ for ‘at 
least 80 percent’ each place it appears in subsection 
(a)(1), and 
‘‘(2) without regard to subsections (a)(4), 
(b)(2)(C), (b)(2)(D), and (e)(3)(C). 
‘‘(d) ELECTION TO TREAT REINSURANCE INCOME AS 
EFFECTIVELY CONNECTED.— 
‘‘(1) IN GENERAL.—A specified affiliated cor-
poration may elect for any taxable year to treat 
specified reinsurance income as— 
‘‘(A) income effectively connected with the 
conduct of a trade or business in the United 
States, and 
‘‘(B) for purposes of any treaty between 
the United States and any foreign country, in-
come attributable to a permanent establishment 
in the United States. 
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105 
‘‘(2) EFFECT OF ELECTION.—In the case of 
any specified reinsurance income with respect to 
which the election under this subsection applies— 
‘‘(A) DEDUCTION ALLOWED FOR REINSUR-
ANCE
PREMIUMS.—For exemption from sub-
section (a), see definition of non-taxed reinsur-
ance premiums in subsection (b). 
‘‘(B) EXCEPTION FROM EXCISE TAX.—The 
tax imposed by section 4371 shall not apply 
with respect to any income treated as effectively 
connected with the conduct of a trade or busi-
ness in the United States under paragraph (1). 
‘‘(C) 
TAXATION
UNDER
THIS
SUB-
CHAPTER.—Such income shall be subject to tax 
under this subchapter to the same extent and 
in the same manner as if such income were the 
income of a domestic insurance company. 
‘‘(D) COORDINATION WITH FOREIGN TAX 
CREDIT PROVISIONS.—For purposes of subpart 
A of part III of subchapter N and sections 78 
and 960— 
‘‘(i) such specified reinsurance income 
shall be treated as derived from sources 
without the United States, and 
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106 
‘‘(ii) subsections (a), (b), and (c) of 
section 904 and sections 902, 907, and 
960 shall be applied separately with re-
spect to each item of such income. 
The Secretary may issue regulations or other 
guidance which provide that related items of 
specified reinsurance income may be aggregated 
for purposes of applying clause (ii). 
‘‘(3) SPECIFIED AFFILIATED CORPORATION.— 
For purposes of this subsection, the term ‘specified 
affiliated corporation’ means any affiliated corpora-
tion which is a foreign corporation and which meets 
such requirements as the Secretary shall prescribe to 
ensure that tax on the specified reinsurance income 
of such corporation is properly determined and paid. 
‘‘(4) SPECIFIED
REINSURANCE
INCOME.—For 
purposes of this paragraph, the term ‘specified rein-
surance income’ means all income of a specified af-
filiated corporation which is attributable to reinsur-
ance with respect to which subsection (a) would (but 
for the election under this subsection) apply. 
‘‘(5) RULES
RELATED
TO
ELECTION.—Any 
election under paragraph (1) shall— 
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107 
‘‘(A) be made at such time and in such 
form and manner as the Secretary may provide, 
and 
‘‘(B) apply for the taxable year for which 
made and all subsequent taxable years unless 
revoked with the consent of the Secretary. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations or other guidance as may be appropriate 
to carry out, or to prevent the avoidance of the purposes 
of, this section, including regulations or other guidance 
which provide for the application of this section to alter-
native reinsurance transactions, fronting transactions, 
conduit and reciprocal transactions, and any economically 
equivalent transactions.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part III of subchapter L of chapter 1 of such Code 
is amended by adding at the end the following new item: 
‘‘Sec. 849. Special rules for reinsurance of non-life contracts with non-taxed af-
filiates.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2012. 
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108 
Subtitle B—Reinsurance 
SEC. 411. PREVENTION OF AVOIDANCE OF TAX THROUGH 
REINSURANCE WITH NON-TAXED AFFILIATES. 
(a) IN GENERAL.—Part III of subchapter L of chap-
ter 1 of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new section: 
‘‘SEC. 849. SPECIAL RULES FOR REINSURANCE OF NON- 
LIFE CONTRACTS WITH NON-TAXED AFFILI-
ATES. 
‘‘(a) IN GENERAL.—The taxable income under sec-
tion 831(a) or the life insurance company taxable income 
under section 801(b) (as the case may be) of an insurance 
company shall be determined by not taking into account— 
‘‘(1) any non-taxed reinsurance premium, 
‘‘(2) any additional amount paid by such insur-
ance company with respect to the reinsurance for 
which such non-taxed reinsurance premium is paid, 
to the extent such additional amount is properly al-
locable to such non-taxed reinsurance premium, and 
‘‘(3) any return premium, ceding commission, 
reinsurance recovered, or other amount received by 
such insurance company with respect to the reinsur-
ance for which such non-taxed reinsurance premium 
is paid, to the extent such return premium, ceding 
commission, reinsurance recovered, or other amount 
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109 
is properly allocable to such non-taxed reinsurance 
premium. 
‘‘(b) NON-TAXED REINSURANCE PREMIUMS.—For 
purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘non-taxed rein-
surance premium’ means any reinsurance premium 
paid directly or indirectly to an affiliated corporation 
with respect to reinsurance of risks (other than ex-
cepted risks), to the extent that the income attrib-
utable to the premium is not subject to tax under 
this subtitle (either as the income of the affiliated 
corporation or as amounts included in gross income 
by a United States shareholder under section 951). 
‘‘(2) EXCEPTED
RISKS.—The term ‘excepted 
risks’ means any risk with respect to which reserves 
described in section 816(b)(1) are established. 
‘‘(c) AFFILIATED CORPORATIONS.—For purposes of 
this section, a corporation shall be treated as affiliated 
with an insurance company if both corporations would be 
members of the same controlled group of corporations (as 
defined in section 1563(a)) if section 1563 were applied— 
‘‘(1) by substituting ‘at least 50 percent’ for ‘at 
least 80 percent’ each place it appears in subsection 
(a)(1), and 
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110 
‘‘(2) without regard to subsections (a)(4), 
(b)(2)(C), (b)(2)(D), and (e)(3)(C). 
‘‘(d) ELECTION TO TREAT REINSURANCE INCOME AS 
EFFECTIVELY CONNECTED.— 
‘‘(1) IN GENERAL.—A specified affiliated cor-
poration may elect for any taxable year to treat 
specified reinsurance income as— 
‘‘(A) income effectively connected with the 
conduct of a trade or business in the United 
States, and 
‘‘(B) for purposes of any treaty between 
the United States and any foreign country, in-
come attributable to a permanent establishment 
in the United States. 
‘‘(2) EFFECT OF ELECTION.—In the case of 
any specified reinsurance income with respect to 
which the election under this subsection applies— 
‘‘(A) DEDUCTION ALLOWED FOR REINSUR-
ANCE
PREMIUMS.—For exemption from sub-
section (a), see definition of non-taxed reinsur-
ance premiums in subsection (b). 
‘‘(B) EXCEPTION FROM EXCISE TAX.—The 
tax imposed by section 4371 shall not apply 
with respect to any income treated as effectively 
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111 
connected with the conduct of a trade or busi-
ness in the United States under paragraph (1). 
‘‘(C) 
TAXATION
UNDER
THIS
SUB-
CHAPTER.—Such income shall be subject to tax 
under this subchapter to the same extent and 
in the same manner as if such income were the 
income of a domestic insurance company. 
‘‘(D) COORDINATION WITH FOREIGN TAX 
CREDIT PROVISIONS.—For purposes of subpart 
A of part III of subchapter N and sections 78 
and 960— 
‘‘(i) such specified reinsurance income 
shall be treated as derived from sources 
without the United States, and 
‘‘(ii) subsections (a), (b), and (c) of 
section 904 and sections 902, 907, and 
960 shall be applied separately with re-
spect to each item of such income. 
The Secretary may issue regulations or other 
guidance which provide that related items of 
specified reinsurance income may be aggregated 
for purposes of applying clause (ii). 
‘‘(3) SPECIFIED AFFILIATED CORPORATION.— 
For purposes of this subsection, the term ‘specified 
affiliated corporation’ means any affiliated corpora-
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112 
tion which is a foreign corporation and which meets 
such requirements as the Secretary shall prescribe to 
ensure that tax on the specified reinsurance income 
of such corporation is properly determined and paid. 
‘‘(4) SPECIFIED
REINSURANCE
INCOME.—For 
purposes of this paragraph, the term ‘specified rein-
surance income’ means all income of a specified af-
filiated corporation which is attributable to reinsur-
ance with respect to which subsection (a) would (but 
for the election under this subsection) apply. 
‘‘(5) RULES
RELATED
TO
ELECTION.—Any 
election under paragraph (1) shall— 
‘‘(A) be made at such time and in such 
form and manner as the Secretary may provide, 
and 
‘‘(B) apply for the taxable year for which 
made and all subsequent taxable years unless 
revoked with the consent of the Secretary. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations or other guidance as may be appropriate 
to carry out, or to prevent the avoidance of the purposes 
of, this section, including regulations or other guidance 
which provide for the application of this section to alter-
native reinsurance transactions, fronting transactions, 
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113 
conduit and reciprocal transactions, and any economically 
equivalent transactions.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part III of subchapter L of chapter 1 of such Code 
is amended by adding at the end the following new item: 
‘‘Sec. 849. Special rules for reinsurance of non-life contracts with non-taxed af-
filiates.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2012. 
Subtitle C—Close Loophole for 
Corporate Jet Depreciation 
SEC. 421. GENERAL AVIATION AIRCRAFT TREATED AS 7- 
YEAR PROPERTY. 
(a) IN GENERAL.—Subparagraph (C) of section 
168(e)(3) of the Internal Revenue Code of 1986 (relating 
to classification of certain property) is amended by strik-
ing ‘‘and’’ at the end of clause (iv), by redesignating clause 
(v) as clause (vi), and by inserting after clause (iv) the 
following new clause: 
‘‘(v) any general aviation aircraft, and’’. 
(b) CLASS LIFE.—Paragraph (3) of section 168(g) 
Internal Revenue Code of 1986 is amended by inserting 
after subparagraph (E) the following new subparagraph: 
‘‘(F) General aviation aircraft. In the case 
of any general aviation aircraft, the recovery 
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114 
period used for purposes of paragraph (2) shall 
be 12 years.’’. 
(c) GENERAL AVIATION AIRCRAFT.—Subsection (i) 
of section 168 Internal Revenue Code of 1986 is amended 
by inserting after paragraph (19) the following new para-
graph: 
‘‘(20) GENERAL
AVIATION
AIRCRAFT.—The 
term ‘general aviation aircraft’ means any airplane 
or helicopter (including airframes and engines) not 
used in commercial or contract carrying of pas-
sengers or freight, but which primarily engages in 
the carrying of passengers.’’. 
(d) EFFECTIVE DATE.—This section shall be effec-
tive for property placed in service after December 31, 
2012. 
TITLE V—CLOSE ESTATE TAX 
LOOPHOLES 
SEC. 501. VALUATION RULES FOR CERTAIN TRANSFERS OF 
NONBUSINESS ASSETS; LIMITATION ON MI-
NORITY DISCOUNTS. 
(a) IN GENERAL.—Section 2031 of the Internal Rev-
enue Code of 1986 is amended by redesignating subsection 
(d) as subsection (f) and by inserting after subsection (c) 
the following new subsections: 
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115 
‘‘(d) VALUATION RULES FOR CERTAIN TRANSFERS 
OF NONBUSINESS ASSETS.—For purposes of this chapter 
and chapter 12— 
‘‘(1) IN GENERAL.—In the case of the transfer 
of any interest in an entity other than an interest 
which is actively traded (within the meaning of sec-
tion 1092)— 
‘‘(A) the value of any nonbusiness assets 
held by the entity shall be determined as if the 
transferor had transferred such assets directly 
to the transferee (and no valuation discount 
shall be allowed with respect to such nonbusi-
ness assets), and 
‘‘(B) the nonbusiness assets shall not be 
taken into account in determining the value of 
the interest in the entity. 
‘‘(2) NONBUSINESS ASSETS.—For purposes of 
this subsection— 
‘‘(A) IN
GENERAL.—The term ‘nonbusi-
ness asset’ means any asset which is not used 
in the active conduct of 1 or more trades or 
businesses. 
‘‘(B) EXCEPTION
FOR
CERTAIN
PASSIVE 
ASSETS.—Except as provided in subparagraph 
(C), a passive asset shall not be treated for pur-
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116 
poses of subparagraph (A) as used in the active 
conduct of a trade or business unless— 
‘‘(i) the asset is property described in 
paragraph (1) or (4) of section 1221(a) or 
is a hedge with respect to such property, 
or 
‘‘(ii) the asset is real property used in 
the active conduct of 1 or more real prop-
erty trades or businesses (within the mean-
ing of section 469(c)(7)(C)) in which the 
transferor materially participates and with 
respect to which the transferor meets the 
requirements of section 469(c)(7)(B)(ii). 
For purposes of clause (ii), material participa-
tion shall be determined under the rules of sec-
tion 469(h), except that section 469(h)(3) shall 
be applied without regard to the limitation to 
farming activity. 
‘‘(C) EXCEPTION
FOR
WORKING
CAP-
ITAL.—Any asset (including a passive asset) 
which is held as a part of the reasonably re-
quired working capital needs of a trade or busi-
ness shall be treated as used in the active con-
duct of a trade or business. 
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117 
‘‘(3) PASSIVE
ASSET.—For purposes of this 
subsection, the term ‘passive asset’ means any— 
‘‘(A) cash or cash equivalents, 
‘‘(B) except to the extent provided by the 
Secretary, stock in a corporation or any other 
equity, profits, or capital interest in any entity, 
‘‘(C) evidence of indebtedness, option, for-
ward or futures contract, notional principal con-
tract, or derivative, 
‘‘(D) asset described in clause (iii), (iv), or 
(v) of section 351(e)(1)(B), 
‘‘(E) annuity, 
‘‘(F) real property used in 1 or more real 
property trades or businesses (as defined in sec-
tion 469(c)(7)(C)), 
‘‘(G) asset (other than a patent, trade-
mark, or copyright) which produces royalty in-
come, 
‘‘(H) commodity, 
‘‘(I) collectible (within the meaning of sec-
tion 401(m)), or 
‘‘(J) any other asset specified in regula-
tions prescribed by the Secretary. 
‘‘(4) LOOK-THRU RULES.— 
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118 
‘‘(A) IN GENERAL.—If a nonbusiness asset 
of an entity consists of a 10-percent interest in 
any other entity, this subsection shall be ap-
plied by disregarding the 10-percent interest 
and by treating the entity as holding directly its 
ratable share of the assets of the other entity. 
This subparagraph shall be applied successively 
to any 10-percent interest of such other entity 
in any other entity. 
‘‘(B) 10-PERCENT
INTEREST.—The term 
‘10-percent interest’ means— 
‘‘(i) in the case of an interest in a cor-
poration, ownership of at least 10 percent 
(by vote or value) of the stock in such cor-
poration, 
‘‘(ii) in the case of an interest in a 
partnership, ownership of at least 10 per-
cent of the capital or profits interest in the 
partnership, and 
‘‘(iii) in any other case, ownership of 
at least 10 percent of the beneficial inter-
ests in the entity. 
‘‘(C) EXCEPTION FOR ACTIVELY TRADED 
INTERESTS.—Subparagraph (A) shall not apply 
to any nonbusiness asset which consists of an 
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119 
interest which is actively traded (within the 
meaning of section 1092). 
‘‘(5) COORDINATION WITH SUBSECTION (b).— 
Subsection (b) shall apply after the application of 
this subsection. 
‘‘(e) LIMITATION ON MINORITY DISCOUNTS.—For 
purposes of this chapter and chapter 12, in the case of 
the transfer of any interest in an entity other than an in-
terest which is actively traded (within the meaning of sec-
tion 1092), no discount shall be allowed by reason of the 
fact that the transferee does not have control of such enti-
ty if the transferee and members of the family (as defined 
in section 2032A(e)(2)) of the transferee have control of 
such entity (determined immediately after such trans-
fer).’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transfers after the date of the 
enactment of this Act. 
SEC. 502. CONSISTENT BASIS REPORTING BETWEEN ES-
TATE AND PERSON ACQUIRING PROPERTY 
FROM DECEDENT. 
(a) CONSISTENT USE OF BASIS.— 
(1) PROPERTY
ACQUIRED
FROM
A
DECE-
DENT.—Section 1014 of the Internal Revenue Code 
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120 
of 1986 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(f) BASIS MUST BE CONSISTENT WITH ESTATE 
TAX RETURN.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the value used to determine the basis of any in-
terest in property in the hands of the person acquir-
ing such property shall not exceed the value of such 
interest as finally determined for purposes of chap-
ter 11. 
‘‘(2) SPECIAL RULE WHERE NO FINAL DETER-
MINATION.—In any case in which the final value of 
property has not been determined under chapter 11 
and there has been a statement furnished under sec-
tion 6035(a), the value used to determine the basis 
of any interest in property in the hands of the per-
son acquiring such property shall not exceed the 
amount reported on any statement furnished under 
section 6035(a). 
‘‘(3) REGULATIONS.—The Secretary may by 
regulations provide exceptions to the application of 
this subsection.’’. 
(2) PROPERTY
ACQUIRED
BY
GIFTS
AND 
TRANSFERS IN TRUST.—Section 1015 of the Inter-
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121 
nal Revenue Code of 1986 is amended by adding at 
the end the following new subsection: 
‘‘(f) BASIS MUST BE CONSISTENT GIFT TAX RE-
TURN.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the value used to determine the basis of any in-
terest in property in the hands of the person acquir-
ing such property shall not exceed the value of such 
interest as finally determined for purposes of chap-
ter 12. 
‘‘(2) SPECIAL RULE WHERE NO FINAL DETER-
MINATION.—In any case in which the final value of 
property has not been determined under chapter 12 
and there has been a statement furnished under sec-
tion 6035(b), the value used to determine the basis 
of any interest in property in the hands of the per-
son acquiring such property shall not exceed the 
amount reported on any statement furnished under 
section 6035(b). 
‘‘(3) REGULATIONS.—The Secretary may by 
regulations provide exceptions to the application of 
this subsection.’’. 
(b) INFORMATION REPORTING.— 
(1) IN GENERAL.—Subpart A of part III of 
subchapter A of chapter 61 of the Internal Revenue 
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122 
Code of 1986 is amended by inserting after section 
6034A the following new section: 
‘‘SEC. 6035. BASIS INFORMATION TO PERSONS ACQUIRING 
PROPERTY FROM DECEDENT OR BY GIFT. 
‘‘(a) INFORMATION WITH RESPECT TO PROPERTY 
ACQUIRED FROM DECEDENTS.— 
‘‘(1) IN GENERAL.—The executor of any estate 
required to file a return under section 6018(a) shall 
furnish to the Secretary and to each person acquir-
ing any interest in property included in the dece-
dent’s gross estate for Federal estate tax purposes 
a statement identifying the value of each interest in 
such property as reported on such return and such 
other information with respect to such interest as 
the Secretary may prescribe. 
‘‘(2) STATEMENTS
BY
BENEFICIARIES.—Each 
person required to file a return under section 
6018(b) shall furnish to the Secretary and to each 
other person who holds a legal or beneficial interest 
in the property to which such return relates a state-
ment identifying the information described in para-
graph (1). 
‘‘(3) TIME FOR FURNISHING STATEMENT.— 
‘‘(A) IN
GENERAL.—Each statement re-
quired to be furnished under paragraph (1) or 
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123 
(2) shall be furnished at such time as the Sec-
retary may prescribe, but in no case at a time 
later than the earlier of— 
‘‘(i) the date which is 30 days after 
the date on which the return under section 
6018 was required to be filed (including 
extensions, if any), or 
‘‘(ii) the date which is 30 days after 
the date such return is filed. 
‘‘(B) ADJUSTMENTS.—In any case in 
which there is an adjustment to the information 
required to be included on a statement filed 
under paragraph (1) or (2) after such state-
ment has been filed, a supplemental statement 
under such paragraph shall be filed not later 
than the date which is 30 days after such ad-
justment is made. 
‘‘(b) INFORMATION WITH RESPECT TO PROPERTY 
ACQUIRED BY GIFT.— 
‘‘(1) IN
GENERAL.—Each person making a 
transfer by gift who is required to file a return 
under section 6019 with respect to such transfer 
shall furnish to the Secretary and to each person ac-
quiring any interest in property by reason of such 
transfer a statement identifying the value of each in-
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124 
terest in such property as reported on such return 
and such other information with respect to such in-
terest as the Secretary may prescribe. 
‘‘(2) TIME FOR FURNISHING STATEMENT.— 
‘‘(A) IN
GENERAL.—Each statement re-
quired to be furnished under paragraph (1) 
shall be furnished at such time as the Secretary 
may prescribe, but in no case at a time later 
than the earlier of— 
‘‘(i) the date which is 30 days after 
the date on which the return under section 
6019 was required to be filed (including 
extensions, if any), or 
‘‘(ii) the date which is 30 days after 
the date such return is filed. 
‘‘(B) ADJUSTMENTS.—In any case in 
which there is an adjustment to the information 
required to be included on a statement filed 
under paragraph (1) after such statement has 
been filed, a supplemental statement under 
such paragraph shall be filed not later than the 
date which is 30 days after such adjustment is 
made. 
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125 
‘‘(c) REGULATIONS.—The Secretary shall prescribe 
such regulations as necessary to carry out this section, in-
cluding regulations relating to— 
‘‘(1) the application of this section to property 
with regard to which no estate or gift tax return is 
required to be filed, and 
‘‘(2) situations in which the surviving joint ten-
ant or other recipient may have better information 
than the executor regarding the basis or fair market 
value of the property.’’. 
(2) PENALTY FOR FAILURE TO FILE.— 
(A) RETURN.—Section 6724(d)(1) of the 
Internal Revenue Code of 1986 is amended by 
striking ‘‘and’’ at the end of subparagraph (B), 
by striking the period at the end of subpara-
graph (C) and inserting ‘‘, and’’, and by adding 
at the end the following new subparagraph: 
‘‘(D) any statement required to be filed 
with the Secretary under section 6035.’’. 
(B) STATEMENT.—Section 6724(d)(2) of 
such Code is amended by striking ‘‘or’’ at the 
end of subparagraph (GG), by striking the pe-
riod at the end of subparagraph (HH) and in-
serting ‘‘, or’’, and by adding at the end the fol-
lowing new subparagraph: 
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126 
‘‘(II) section 6035 (other than a statement 
described in paragraph (1)(D)).’’. 
(3) CLERICAL AMENDMENT.—The table of sec-
tions for subpart A of part III of subchapter A of 
chapter 61 of the Internal Revenue Code of 1986 is 
amended by inserting after the item relating to sec-
tion 6034A the following new item: 
‘‘Sec. 6035. Basis information to persons acquiring property from decedent or 
by gift.’’. 
(c) PENALTY FOR INCONSISTENT REPORTING.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662 of the Internal Revenue Code of 1986 is 
amended by inserting after paragraph (7) the fol-
lowing new paragraph: 
‘‘(8) Any inconsistent estate or gift basis.’’. 
(2) INCONSISTENT BASIS REPORTING.—Section 
6662 of such Code is amended by adding at the end 
the following new subsection: 
‘‘(k) INCONSISTENT ESTATE OR GIFT BASIS RE-
PORTING.—For purposes of this section, the term ‘incon-
sistent estate or gift basis’ means the portion of the under-
statement which is attributable to— 
‘‘(1) in the case of property acquired from a de-
cedent, a basis determination with respect to such 
property which is not consistent with the value of 
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127 
such property as determined under section 1014(f), 
and 
‘‘(2) in the case of property acquired by gift, a 
basis determination with respect to such property 
which is not consistent with the value of such prop-
erty as determined under section 1015(f).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transfers for which returns are 
filed after the date of the enactment of this Act. 
SEC. 503. REQUIRED MINIMUM 10-YEAR TERM, ETC., FOR 
GRANTOR RETAINED ANNUITY TRUSTS. 
(a) IN GENERAL.—Subsection (b) of section 2702 of 
the Internal Revenue Code of 1986 is amended— 
(1) by redesignating paragraphs (1), (2) and 
(3) as subparagraphs (A), (B), and (C), respectively, 
and by moving such subparagraphs (as so redesig-
nated) 2 ems to the right; 
(2) by striking ‘‘For purposes of’’ and inserting 
the following: 
‘‘(1) IN GENERAL.—For purposes of’’; 
(3) by striking ‘‘paragraph (1) or (2)’’ in para-
graph (1)(C) (as so redesignated) and inserting 
‘‘subparagraph (A) or (B)’’; and 
(4) by adding at the end the following new 
paragraph: 
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