185 
of United States shareholders with or within which such 
taxable years of foreign corporations end. 
SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART 
F FOR ACTIVE FINANCING. 
(a) IN GENERAL.—Section 954(h)(3) is amended by 
adding at the end the following: 
‘‘(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 
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
186 
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. 
TITLE IV—EXTENSION OF 
CERTAIN EXPIRING PROVISIONS 
SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL 
CREDITS AGAINST REGULAR AND MINIMUM 
TAX LIABILITY. 
(a) IN GENERAL.—Paragraph (2) of section 26(a) is 
amended— 
(1) by striking ‘‘RULE FOR 2000, 2001, 2002, AND 
2003.—’’ and inserting ‘‘RULE FOR TAXABLE YEARS 
2000 THROUGH 2005.—’’, and 
(2) by striking ‘‘or 2003,’’ and inserting ‘‘2003, 
2004, or 2005,’’. 
(b) CONFORMING PROVISIONS.— 
(1) Section 904(h) is amended by striking ‘‘or 
2003’’ and inserting ‘‘2003, 2004, or 2005’’. 
(2) The amendments made by sections 201(b), 
202(f), and 618(b) of the Economic Growth and Tax
187 
Relief Reconciliation Act of 2001 shall not apply to 
taxable years beginning during 2004 or 2005. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003. 
SEC. 402. EXTENSION OF RESEARCH CREDIT. 
(a) EXTENSION.— 
(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) EFFECTIVE DATE.—The amendments made by sub-
section (a) shall apply to amounts paid or incurred after 
June 30, 2004. 
SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRO-
DUCED 
FROM 
CERTAIN 
RENEWABLE 
RE-
SOURCES. 
(a) IN GENERAL.—Subparagraphs (A) and (B) of sec-
tion 45(c)(3) (defining qualified facility) are both amended 
by striking ‘‘2004’’ and inserting ‘‘2006’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to facilities placed in service after De-
cember 31, 2003.
188 
SEC. 404. INDIAN EMPLOYMENT TAX CREDIT. 
Section 45A(f) (relating to termination) is amended 
by striking ‘‘December 31, 2004’’ and inserting ‘‘December 
31, 2005’’. 
SEC. 405. WORK OPPORTUNITY CREDIT. 
(a) IN
GENERAL.—Subparagraph (B) of section 
51(c)(4) is amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to individuals who begin work for 
the employer after December 31, 2003. 
SEC. 406. WELFARE-TO-WORK CREDIT. 
(a) IN GENERAL.—Subsection (f) of section 51A is 
amended by striking ‘‘December 31, 2003’’ and inserting 
‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to individuals who begin work for 
the employer after December 31, 2003. 
SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SEC-
ONDARY SCHOOL TEACHERS. 
(a) IN
GENERAL.—Subparagraph (D) of section 
62(a)(2) (relating to certain trade and business deductions 
of employees) is amended by striking ‘‘or 2003’’ and insert-
ing ‘‘, 2003, 2004, or 2005’’.
189 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 2003. 
SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION 
BENEFIT FOR PROPERTY ON INDIAN RES-
ERVATIONS. 
Paragraph (8) of section 168(j) (relating to termi-
nation) is amended by striking ‘‘December 31, 2004’’ and 
inserting ‘‘December 31, 2005’’. 
SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER 
TECHNOLOGY AND EQUIPMENT USED FOR 
EDUCATIONAL PURPOSES. 
(a) IN
GENERAL.—Subparagraph (G) of section 
170(e)(6) (relating to special rule for contributions of com-
puter technology and equipment for educational purposes) 
is amended by striking ‘‘December 31, 2003’’ and inserting 
‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 2003. 
SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION 
COSTS. 
(a) IN GENERAL.—Subsection (h) of section 198 (relat-
ing to termination) is amended by striking ‘‘December 31, 
2003’’ and inserting ‘‘December 31, 2005’’.
190 
(b) EFFECTIVE DATE.—The amendments made by sub-
section (a) shall apply to expenditures paid or incurred 
after December 31, 2003. 
SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 
(a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec-
tion 220(i) (defining cut-off year) are each amended by 
striking ‘‘2003’’ each place it appears in the text and head-
ings and inserting ‘‘2005’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 220(j) is amend-
ed— 
(A) in the text by striking ‘‘or 2002’’ each 
place it appears and inserting ‘‘2002, or 2004’’, 
and 
(B) in the heading by striking ‘‘OR 2002’’ 
and inserting ‘‘2002, OR 2004’’. 
(2) Subparagraph (A) of section 220(j)(4) is 
amended by striking ‘‘and 2002’’ and inserting 
‘‘2002, and 2004’’. 
(3) Subparagraph (C) of section 220(j)(2) is 
amended to read as follows: 
‘‘(C) NO LIMITATION FOR 2000 OR 2003.— 
The numerical limitation shall not apply for 
2000 or 2003.’’.
191 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall take effect on January 1, 2004. 
(d) TIME FOR FILING REPORTS, ETC.— 
(1) The report required by section 220(j)(4) of 
the Internal Revenue Code of 1986 to be made on Au-
gust 1, 2004, shall be treated as timely if made before 
the close of the 90-day period beginning on the date 
of the enactment of this Act. 
(2) The determination and publication required 
by section 220(j)(5) of such Code with respect to cal-
endar year 2004 shall be treated as timely if made be-
fore the close of the 120-day period beginning on the 
date of the enactment of this Act. If the determination 
under the preceding sentence is that 2004 is a cut-off 
year under section 220(i) of such Code, the cut-off 
date under such section 220(i) shall be the last day 
of such 120-day period. 
SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE-
TION FOR OIL AND NATURAL GAS PRODUCED 
FROM MARGINAL PROPERTIES. 
(a) IN
GENERAL.—Subparagraph (H) of section 
613A(c)(6) is amended by striking ‘‘January 1, 2004’’ and 
inserting ‘‘January 1, 2006’’.
192 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to taxable years beginning after De-
cember 31, 2003. 
SEC. 413. QUALIFIED ZONE ACADEMY BONDS. 
(a) IN GENERAL.—Paragraph (1) of section 1397E(e) 
is amended by striking ‘‘and 2003’’ and inserting ‘‘2003, 
2004, and 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to obligations issued after the date 
of the enactment of this Act. 
SEC. 414. DISTRICT OF COLUMBIA. 
(a) DISTRICT OF COLUMBIA ENTERPRISE ZONE.— 
Subsection (f) of section 1400 is amended by striking ‘‘De-
cember 31, 2003’’ both places it appears and inserting ‘‘De-
cember 31, 2005’’. 
(b) TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.— 
Subsection (b) of section 1400A is amended by striking ‘‘De-
cember 31, 2003’’ and inserting ‘‘December 31, 2005’’. 
(c) ZERO PERCENT CAPITAL GAINS RATE.— 
(1) Section 1400B is amended by striking ‘‘Jan-
uary 1, 2004’’ each place it appears and inserting 
‘‘January 1, 2006’’. 
(2) Subsections (e)(2) and (g)(2) of section 
1400B are each amended by striking ‘‘2008’’ each
193 
place it appears in the headings and text and insert-
ing ‘‘2010’’. 
(3) Subsection (d) of section 1400F is amended 
by striking ‘‘December 31, 2008’’ and inserting ‘‘De-
cember 31, 2010’’. 
(d) FIRST-TIME HOMEBUYER CREDIT.—Subsection (i) 
of section 1400C is amended by striking ‘‘January 1, 2004’’ 
and inserting ‘‘January 1, 2006’’. 
(e) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as otherwise provided 
in this subsection, the amendments made by this sec-
tion shall take effect on the date of the enactment of 
this Act. 
(2) 
TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—The amendment made by subsection (b) 
shall apply to obligations issued after December 31, 
2003. 
SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY 
ZONE BOND FINANCING. 
Subparagraph (D) of section 1400L(d)(2) is amended 
by striking ‘‘2005’’ and inserting ‘‘2010’’. 
SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVI-
TIES. 
(a) IN GENERAL.—Clause (iv) of section 6103(i)(3)(C) 
and subparagraph (E) of section 6103(i)(7) are both
194 
amended by striking ‘‘December 31, 2003’’ and inserting 
‘‘December 31, 2005’’. 
(b) DISCLOSURE OF TAXPAYER IDENTITY TO LAW EN-
FORCEMENT AGENCIES INVESTIGATING TERRORISM.—Sub-
paragraph (A) of section 6103(i)(7) is amended by adding 
at the end the following new clause: 
‘‘(v) TAXPAYER
IDENTITY.—For pur-
poses of this subparagraph, a taxpayer’s 
identity shall not be treated as taxpayer re-
turn information.’’. 
(c) EFFECTIVE DATES.— 
(1) IN
GENERAL.—The amendments made by 
subsection (a) shall apply to disclosures on or after 
the date of the enactment of this Act. 
(2) SUBSECTION (b).—The amendment made by 
subsection (b) shall take effect as if included in section 
201 of the Victims of Terrorism Tax Relief Act of 
2001. 
SEC. 417. DISCLOSURE OF RETURN INFORMATION RELAT-
ING TO STUDENT LOANS. 
Section 6103(l)(13)(D) (relating to termination) is 
amended by striking ‘‘December 31, 2004’’ and inserting 
‘‘December 31, 2005’’.
195 
SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS. 
(a) IN GENERAL.—Paragraph (1) of section 7652(f) is 
amended by striking ‘‘January 1, 2004’’ and inserting 
‘‘January 1, 2006’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to articles brought into the United 
States after December 31, 2003. 
SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDG-
ET FOR THE INTERNAL REVENUE SERVICE. 
(a) IN GENERAL.—Paragraph (2) of section 8021(f) 
(relating to joint reviews) is amended by striking ‘‘2004’’ 
and inserting ‘‘2005’’. 
(b) REPORT.—Subparagraph (C) of section 8022(3) 
(regarding reports) is amended— 
(1) by striking ‘‘2004’’ and inserting ‘‘2005’’, 
and 
(2) by striking ‘‘with respect to—’’ and all that 
follows and inserting ‘‘with respect to the matters ad-
dressed in the joint review referred to in section 
8021(f)(2).’’. 
(c) TIME FOR JOINT REVIEW.—The joint review re-
quired by section 8021(f)(2) of the Internal Revenue Code 
of 1986 to be made before June 1, 2004, shall be treated 
as timely if made before June 1, 2005.
196 
SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS 
TO MENTAL HEALTH BENEFITS. 
(a) IN GENERAL.—Subsection (f) of section 9812 is 
amended by striking ‘‘and’’ at the end of paragraph (1), 
by striking paragraph (2), and by inserting after para-
graph (1) the following new paragraphs: 
‘‘(2) on or after January 1, 2004, and before the 
date of the enactment of American Jobs Creation Act 
of 2004, and 
‘‘(3) after December 31, 2005.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to benefits for services furnished on or 
after December 31, 2003. 
SEC. 
421. 
COMBINED 
EMPLOYMENT 
TAX 
REPORTING 
PROJECT. 
(a) IN GENERAL.—Paragraph (1) of section 976(b) of 
the Taxpayer Relief Act of 1997 (111 Stat. 898) is amended 
by striking ‘‘for a period ending with the date which is 5 
years after the date of the enactment of this Act’’ and insert-
ing ‘‘during the period ending on December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to disclosures on or after the date 
of the enactment of this Act.
197 
SEC. 422. CLEAN-FUEL VEHICLES. 
(a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.— 
Paragraph (2) of section 30(b) (relating to phaseout) is 
amended to read as follows: 
‘‘(2) PHASEOUT.—In the case of any qualified 
electric vehicle placed in service after December 31, 
2005, the credit otherwise allowable under subsection 
(a) (determined after the application of paragraph 
(1)) shall be reduced by 75 percent.’’. 
(b) DEDUCTION FOR QUALIFIED CLEAN-FUEL VEHI-
CLE PROPERTY.—Subparagraph (B) of section 179A(b)(1) 
(relating to phaseout) is amended to read as follows: 
‘‘(B) PHASEOUT.—In the case of any quali-
fied clean-fuel vehicle property placed in service 
after December 31, 2005, the limit otherwise ap-
plicable under subparagraph (A) shall be reduced 
by 75 percent.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to property placed in service after De-
cember 31, 2003.
198 
TITLE V—DEDUCTION OF STATE 
AND LOCAL GENERAL SALES 
TAXES 
SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL 
SALES TAXES IN LIEU OF STATE AND LOCAL 
INCOME TAXES. 
(a) IN GENERAL.—Subsection (b) of section 164 (relat-
ing to definitions and special rules) is amended by adding 
at the end the following: 
‘‘(5) GENERAL SALES TAXES.—For purposes of 
subsection (a)— 
‘‘(A) ELECTION
TO
DEDUCT
STATE
AND 
LOCAL
SALES
TAXES
IN
LIEU
OF
STATE
AND 
LOCAL INCOME TAXES.— 
‘‘(i) IN GENERAL.—At the election of 
the taxpayer for the taxable year, subsection 
(a) shall be applied— 
‘‘(I) without regard to the ref-
erence to State and local income taxes, 
and 
‘‘(II) as if State and local general 
sales taxes were referred to in a para-
graph thereof. 
‘‘(B) DEFINITION
OF
GENERAL
SALES 
TAX.—The term ‘general sales tax’ means a tax
199 
imposed at one rate with respect to the sale at 
retail of a broad range of classes of items. 
‘‘(C) SPECIAL RULES FOR FOOD, ETC.—In 
the case of items of food, clothing, medical sup-
plies, and motor vehicles— 
‘‘(i) the fact that the tax does not 
apply with respect to some or all of such 
items shall not be taken into account in de-
termining whether the tax applies with re-
spect to a broad range of classes of items, 
and 
‘‘(ii) the fact that the rate of tax appli-
cable with respect to some or all of such 
items is lower than the general rate of tax 
shall not be taken into account in deter-
mining whether the tax is imposed at one 
rate. 
‘‘(D) 
ITEMS
TAXED
AT
DIFFERENT 
RATES.—Except in the case of a lower rate of tax 
applicable with respect to an item described in 
subparagraph (C), no deduction shall be allowed 
under this paragraph for any general sales tax 
imposed with respect to an item at a rate other 
than the general rate of tax.
200 
‘‘(E) COMPENSATING USE TAXES.—A com-
pensating use tax with respect to an item shall 
be treated as a general sales tax. For purposes of 
the preceding sentence, the term ‘compensating 
use tax’ means, with respect to any item, a tax 
which— 
‘‘(i) is imposed on the use, storage, or 
consumption of such item, and 
‘‘(ii) is complementary to a general 
sales tax, but only if a deduction is allow-
able under this paragraph with respect to 
items sold at retail in the taxing jurisdic-
tion which are similar to such item. 
‘‘(F) SPECIAL
RULE
FOR
MOTOR
VEHI-
CLES.—In the case of motor vehicles, if the rate 
of tax exceeds the general rate, such excess shall 
be disregarded and the general rate shall be 
treated as the rate of tax. 
‘‘(G) SEPARATELY STATED GENERAL SALES 
TAXES.—If the amount of any general sales tax 
is separately stated, then, to the extent that the 
amount so stated is paid by the consumer (other 
than in connection with the consumer’s trade or 
business) to the seller, such amount shall be
201 
treated as a tax imposed on, and paid by, such 
consumer. 
‘‘(H) AMOUNT OF DEDUCTION TO BE DE-
TERMINED UNDER TABLES.— 
‘‘(i) IN GENERAL.—The amount of the 
deduction allowed under this paragraph 
shall be determined under tables prescribed 
by the Secretary. 
‘‘(ii) REQUIREMENTS
FOR
TABLES.— 
The tables prescribed under clause (i)— 
‘‘(I) shall reflect the provisions of 
this paragraph, 
‘‘(II) shall be based on the average 
consumption by taxpayers on a State- 
by-State basis, as determined by the 
Secretary, taking into account filing 
status, number of dependents, adjusted 
gross income, and rates of State and 
local general sales taxation, and 
‘‘(III) need only be determined 
with respect to adjusted gross incomes 
up to the applicable amount (as deter-
mined under section 68(b)). 
‘‘(I) APPLICATION
OF
PARAGRAPH.—This 
paragraph shall apply to taxable years begin-
203 
‘‘(2) EXPATRIATED
ENTITY.—For purposes of 
this subsection— 
‘‘(A) IN GENERAL.—The term ‘expatriated 
entity’ means— 
‘‘(i) the domestic corporation or part-
nership referred to in subparagraph (B)(i) 
with respect to which a foreign corporation 
is a surrogate foreign corporation, and 
‘‘(ii) any United States person who is 
related (within the meaning of section 
267(b) or 707(b)(1)) to a domestic corpora-
tion or partnership described in clause (i). 
‘‘(B) SURROGATE FOREIGN CORPORATION.— 
A foreign corporation shall be treated as a surro-
gate foreign corporation if, pursuant to a plan 
(or a series of related transactions)— 
‘‘(i) the entity completes after March 4, 
2003, the direct or indirect acquisition of 
substantially all of the properties held di-
rectly or indirectly by a domestic corpora-
tion or substantially all of the properties 
constituting a trade or business of a domes-
tic partnership,
204 
‘‘(ii) after the acquisition at least 60 
percent of the stock (by vote or value) of the 
entity is held— 
‘‘(I) in the case of an acquisition 
with respect to a domestic corporation, 
by former shareholders of the domestic 
corporation by reason of holding stock 
in the domestic corporation, or 
‘‘(II) in the case of an acquisition 
with respect to a domestic partnership, 
by former partners of the domestic 
partnership by reason of holding a 
capital or profits interest in the domes-
tic partnership, and 
‘‘(iii) after the acquisition the ex-
panded affiliated group which includes the 
entity does not have substantial business ac-
tivities in the foreign country in which, or 
under the law of which, the entity is created 
or organized, when compared to the total 
business activities of such expanded affili-
ated group. 
An entity otherwise described in clause (i) with 
respect to any domestic corporation or partner-
ship trade or business shall be treated as not so
205 
described if, on or before March 4, 2003, such en-
tity acquired directly or indirectly more than 
half of the properties held directly or indirectly 
by such corporation or more than half of the 
properties constituting such partnership trade or 
business, as the case may be. 
‘‘(b) DEFINITIONS AND SPECIAL RULES.— 
‘‘(1) EXPANDED AFFILIATED GROUP.—The term 
‘expanded affiliated group’ means an affiliated group 
as defined in section 1504(a) but without regard to 
section 1504(b)(3), except that section 1504(a) shall 
be applied by substituting ‘more than 50 percent’ for 
‘at least 80 percent’ each place it appears. 
‘‘(2) CERTAIN
STOCK
DISREGARDED.—There 
shall not be taken into account in determining owner-
ship under subsection (a)(2)(B)(ii)— 
‘‘(A) stock held by members of the expanded 
affiliated group which includes the foreign cor-
poration, or 
‘‘(B) stock of such foreign corporation which 
is sold in a public offering related to the acquisi-
tion described in subsection (a)(2)(B)(i). 
‘‘(3) PLAN DEEMED IN CERTAIN CASES.—If a 
foreign corporation acquires directly or indirectly 
substantially all of the properties of a domestic cor-
206 
poration or partnership during the 4-year period be-
ginning on the date which is 2 years before the owner-
ship requirements of subsection (a)(2)(B)(ii) are met, 
such actions shall be treated as pursuant to a plan. 
‘‘(4) CERTAIN TRANSFERS DISREGARDED.—The 
transfer of properties or liabilities (including by con-
tribution or distribution) shall be disregarded if such 
transfers are part of a plan a principal purpose of 
which is to avoid the purposes of this section. 
‘‘(5) SPECIAL
RULE
FOR
RELATED
PARTNER-
SHIPS.—For 
purposes 
of 
applying 
subsection 
(a)(2)(B)(ii) to the acquisition of a trade or business 
of a domestic partnership, except as provided in regu-
lations, all partnerships which are under common 
control (within the meaning of section 482) shall be 
treated as 1 partnership. 
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to de-
termine whether a corporation is a surrogate foreign 
corporation, including regulations— 
‘‘(A) to treat warrants, options, contracts to 
acquire stock, convertible debt interests, and 
other similar interests as stock, and 
‘‘(B) to treat stock as not stock.
207 
‘‘(c) OTHER DEFINITIONS.—For purposes of this sec-
tion— 
‘‘(1) APPLICABLE PERIOD.—The term ‘applicable 
period’ means the period— 
‘‘(A) beginning on the first date properties 
are acquired as part of the acquisition described 
in subsection (a)(2)(B)(i), and 
‘‘(B) ending on the date which is 10 years 
after the last date properties are acquired as 
part of such acquisition. 
‘‘(2) INVERSION
GAIN.—The term ‘inversion 
gain’ means the income or gain recognized by reason 
of the transfer during the applicable period of stock 
or other properties by an expatriated entity, and any 
income received or accrued during the applicable pe-
riod by reason of a license of any property by an ex-
patriated entity— 
‘‘(A) as part of the acquisition described in 
subsection (a)(2)(B)(i), or 
‘‘(B) after such acquisition if the transfer or 
license is to a foreign related person. 
Subparagraph (B) shall not apply to property de-
scribed in section 1221(a)(1) in the hands of the expa-
triated entity.
208 
‘‘(3) FOREIGN RELATED PERSON.—The term ‘for-
eign related person’ means, with respect to any expa-
triated entity, a foreign person which— 
‘‘(A) is related (within the meaning of sec-
tion 267(b) or 707(b)(1)) to such entity, or 
‘‘(B) is under the same common control 
(within the meaning of section 482) as such enti-
ty. 
‘‘(d) SPECIAL RULES.— 
‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON IN-
VERSION GAIN.—Credits (other than the credit allowed 
by section 901) shall be allowed against the tax im-
posed by this chapter on an expatriated entity for 
any taxable year described in subsection (a) only to 
the extent such tax exceeds the product of— 
‘‘(A) the amount of the inversion gain for 
the taxable year, and 
‘‘(B) the highest rate of tax specified in sec-
tion 11(b)(1). 
For purposes of determining the credit allowed by sec-
tion 901, inversion gain shall be treated as from 
sources within the United States. 
‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 
the case of an expatriated entity which is a partner-
ship—
209 
‘‘(A) subsection (a)(1) shall apply at the 
partner rather than the partnership level, 
‘‘(B) the inversion gain of any partner for 
any taxable year shall be equal to the sum of— 
‘‘(i) the partner’s distributive share of 
inversion gain of the partnership for such 
taxable year, plus 
‘‘(ii) gain recognized for the taxable 
year by the partner by reason of the trans-
fer during the applicable period of any 
partnership interest of the partner in such 
partnership to the surrogate foreign cor-
poration, and 
‘‘(C) the highest rate of tax specified in the 
rate schedule applicable to the partner under this 
chapter shall be substituted for the rate of tax re-
ferred to in paragraph (1). 
‘‘(3) COORDINATION WITH SECTION 172 AND MIN-
IMUM TAX.—Rules similar to the rules of paragraphs 
(3) and (4) of section 860E(a) shall apply for pur-
poses of subsection (a). 
‘‘(4) STATUTE OF LIMITATIONS.— 
‘‘(A) IN
GENERAL.—The statutory period 
for the assessment of any deficiency attributable 
to the inversion gain of any taxpayer for any
210 
pre-inversion year shall not expire before the ex-
piration of 3 years from the date the Secretary 
is notified by the taxpayer (in such manner as 
the Secretary may prescribe) of the acquisition 
described in subsection (a)(2)(B)(i) to which 
such gain relates and such deficiency may be as-
sessed before the expiration of such 3-year period 
notwithstanding the provisions of any other law 
or rule of law which would otherwise prevent 
such assessment. 
‘‘(B) PRE-INVERSION YEAR.—For purposes 
of subparagraph (A), the term ‘pre-inversion 
year’ means any taxable year if— 
‘‘(i) any portion of the applicable pe-
riod is included in such taxable year, and 
‘‘(ii) such year ends before the taxable 
year in which the acquisition described in 
subsection (a)(2)(B)(i) is completed. 
‘‘(e) SPECIAL RULE FOR TREATIES.—Nothing in sec-
tion 894 or 7852(d) or in any other provision of law shall 
be construed as permitting an exemption, by reason of any 
treaty obligation of the United States heretofore or hereafter 
entered into, from the provisions of this section. 
‘‘(f) REGULATIONS.—The Secretary shall provide such 
regulations as are necessary to carry out this section, in-
211 
cluding regulations providing for such adjustments to the 
application of this section as are necessary to prevent the 
avoidance of the purposes of this section, including the 
avoidance of such purposes through— 
‘‘(1) the use of related persons, pass-through or 
other noncorporate entities, or other intermediaries, 
or 
‘‘(2) transactions designed to have persons cease 
to be (or not become) members of expanded affiliated 
groups or related persons.’’. 
(b) CONFORMING AMENDMENT.—The table of sections 
for subchapter C of chapter 80 is amended by adding at 
the end the following new item: 
‘‘Sec. 7874. Rules relating to expatriated entities and their foreign 
parents.’’ 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years ending after March 4, 
2003. 
SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSID-
ERS IN EXPATRIATED CORPORATIONS. 
(a) IN GENERAL.—Subtitle D is amended by inserting 
after chapter 44 end the following new chapter: 
‘‘CHAPTER 45—PROVISIONS RELATING TO 
EXPATRIATED ENTITIES 
‘‘Sec. 4985. Stock compensation of insiders in expatriated corpora-
tions.
212 
‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA-
TRIATED CORPORATIONS. 
‘‘(a) IMPOSITION OF TAX.—In the case of an indi-
vidual who is a disqualified individual with respect to any 
expatriated corporation, there is hereby imposed on such 
person a tax equal to 15 percent of the value (determined 
under subsection (b)) of the specified stock compensation 
held (directly or indirectly) by or for the benefit of such 
individual or a member of such individual’s family (as de-
fined in section 267) at any time during the 12-month pe-
riod beginning on the date which is 6 months before the 
expatriation date. 
‘‘(b) VALUE.—For purposes of subsection (a)— 
‘‘(1) IN GENERAL.—The value of specified stock 
compensation shall be— 
‘‘(A) in the case of a stock option (or other 
similar right) or a stock appreciation right, the 
fair value of such option or right, and 
‘‘(B) in any other case, the fair market 
value of such compensation. 
‘‘(2) DATE FOR DETERMINING VALUE.—The de-
termination of value shall be made— 
‘‘(A) in the case of specified stock compensa-
tion held on the expatriation date, on such date, 
‘‘(B) in the case of such compensation which 
is canceled during the 6 months before the expa-
214 
‘‘(e) DEFINITIONS.—For purposes of this section— 
‘‘(1) DISQUALIFIED INDIVIDUAL.—The term ‘dis-
qualified individual’ means, with respect to a cor-
poration, any individual who, at any time during the 
12-month period beginning on the date which is 6 
months before the expatriation date— 
‘‘(A) is subject to the requirements of section 
16(a) of the Securities Exchange Act of 1934 
with respect to such corporation or any member 
of the expanded affiliated group which includes 
such corporation, or 
‘‘(B) would be subject to such requirements 
if such corporation or member were an issuer of 
equity securities referred to in such section. 
‘‘(2) EXPATRIATED CORPORATION; EXPATRIATION 
DATE.— 
‘‘(A) 
EXPATRIATED
CORPORATION.—The 
term ‘expatriated corporation’ means any cor-
poration which is an expatriated entity (as de-
fined in section 7874(a)(2)). Such term includes 
any predecessor or successor of such a corpora-
tion. 
‘‘(B) EXPATRIATION DATE.—The term ‘ex-
patriation date’ means, with respect to a cor-
215 
poration, the date on which the corporation first 
becomes an expatriated corporation. 
‘‘(3) SPECIFIED STOCK COMPENSATION.— 
‘‘(A) IN
GENERAL.—The term ‘specified 
stock compensation’ means payment (or right to 
payment) granted by the expatriated corporation 
(or by any member of the expanded affiliated 
group which includes such corporation) to any 
person in connection with the performance of 
services by a disqualified individual for such cor-
poration or member if the value of such payment 
or right is based on (or determined by reference 
to) the value (or change in value) of stock in 
such corporation (or any such member). 
‘‘(B) EXCEPTIONS.—Such term shall not in-
clude— 
‘‘(i) any option to which part II of 
subchapter D of chapter 1 applies, or 
‘‘(ii) any payment or right to payment 
from 
a 
plan 
referred 
to 
in 
section 
280G(b)(6). 
‘‘(4) EXPANDED AFFILIATED GROUP.—The term 
‘expanded affiliated group’ means an affiliated group 
(as defined in section 1504(a) without regard to sec-
tion 1504(b)(3)); except that section 1504(a) shall be
216 
applied by substituting ‘more than 50 percent’ for ‘at 
least 80 percent’ each place it appears. 
‘‘(f) SPECIAL RULES.—For purposes of this section— 
‘‘(1) CANCELLATION OF RESTRICTION.—The can-
cellation of a restriction which by its terms will never 
lapse shall be treated as a grant. 
‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY 
CORPORATION TREATED AS SPECIFIED STOCK COM-
PENSATION.—Any payment of the tax imposed by this 
section directly or indirectly by the expatriated cor-
poration or by any member of the expanded affiliated 
group which includes such corporation— 
‘‘(A) shall be treated as specified stock com-
pensation, and 
‘‘(B) shall not be allowed as a deduction 
under any provision of chapter 1. 
‘‘(3) CERTAIN RESTRICTIONS IGNORED.—Wheth-
er there is specified stock compensation, and the value 
thereof, shall be determined without regard to any re-
striction other than a restriction which by its terms 
will never lapse. 
‘‘(4) PROPERTY
TRANSFERS.—Any transfer of 
property shall be treated as a payment and any right 
to a transfer of property shall be treated as a right 
to a payment.
217 
‘‘(5) OTHER ADMINISTRATIVE PROVISIONS.—For 
purposes of subtitle F, any tax imposed by this sec-
tion shall be treated as a tax imposed by subtitle A. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section.’’ 
(b) DENIAL OF DEDUCTION.— 
(1) IN
GENERAL.—Paragraph (6) of section 
275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 
(2) $1,000,000 LIMIT
ON
DEDUCTIBLE
COM-
PENSATION REDUCED BY PAYMENT OF EXCISE TAX ON 
SPECIFIED STOCK COMPENSATION.—Paragraph (4) of 
section 162(m) is amended by adding at the end the 
following new subparagraph: 
‘‘(G) COORDINATION WITH EXCISE TAX ON 
SPECIFIED
STOCK
COMPENSATION.—The dollar 
limitation contained in paragraph (1) with re-
spect to any covered employee shall be reduced 
(but not below zero) by the amount of any pay-
ment (with respect to such employee) of the tax 
imposed by section 4985 directly or indirectly by 
the expatriated corporation (as defined in such 
section) or by any member of the expanded affili-
ated group (as defined in such section) which in-
cludes such corporation.’’
218 
(c) CONFORMING AMENDMENTS.— 
(1) The last sentence of section 3121(v)(2)(A) is 
amended by inserting before the period ‘‘or to any 
specified stock compensation (as defined in section 
4985) on which tax is imposed by section 4985’’. 
(2) The table of chapters for subtitle D is amend-
ed by inserting after the item relating to chapter 44 
the following new item: 
‘‘Chapter 45. Provisions relating to expatriated entities.’’ 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall take effect on March 4, 2003; except that peri-
ods before such date shall not be taken into account in ap-
plying the periods in subsections (a) and (e)(1) of section 
4985 of the Internal Revenue Code of 1986, as added by 
this section. 
SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOR-
EIGN JURISDICTIONS. 
(a) IN GENERAL.—Section 845(a) (relating to alloca-
tion in case of reinsurance agreement involving tax avoid-
ance or evasion) is amended by striking ‘‘source and char-
acter’’ and inserting ‘‘amount, source, or character’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to any risk reinsured after the date of 
the enactment of this Act.
219 
SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 
INDIVIDUALS. 
(a) EXPATRIATION TO AVOID TAX.— 
(1) IN GENERAL.—Subsection (a) of section 877 
(relating to treatment of expatriates) is amended to 
read as follows: 
‘‘(a) TREATMENT OF EXPATRIATES.— 
‘‘(1) IN GENERAL.—Every nonresident alien in-
dividual to whom this section applies and who, with-
in the 10-year period immediately preceding the close 
of the taxable year, lost United States citizenship 
shall be taxable for such taxable year in the manner 
provided in subsection (b) if the tax imposed pursu-
ant to such subsection (after any reduction in such 
tax under the last sentence of such subsection) exceeds 
the tax which, without regard to this section, is im-
posed pursuant to section 871. 
‘‘(2) INDIVIDUALS SUBJECT TO THIS SECTION.— 
This section shall apply to any individual if— 
‘‘(A) the average annual net income tax (as 
defined in section 38(c)(1)) of such individual 
for the period of 5 taxable years ending before 
the date of the loss of United States citizenship 
is greater than $124,000, 
‘‘(B) the net worth of the individual as of 
such date is $2,000,000 or more, or
220 
‘‘(C) such individual fails to certify under 
penalty of perjury that he has met the require-
ments of this title for the 5 preceding taxable 
years or fails to submit such evidence of such 
compliance as the Secretary may require. 
In the case of the loss of United States citizenship in 
any calendar year after 2004, such $124,000 amount 
shall be increased by an amount equal to such dollar 
amount multiplied by the cost-of-living adjustment 
determined under section 1(f)(3) for such calendar 
year by substituting ‘2003’ for ‘1992’ in subpara-
graph (B) thereof. Any increase under the preceding 
sentence shall be rounded to the nearest multiple of 
$1,000.’’. 
(2) REVISION
OF
EXCEPTIONS
FROM
ALTER-
NATIVE TAX.—Subsection (c) of section 877 (relating 
to tax avoidance not presumed in certain cases) is 
amended to read as follows: 
‘‘(c) EXCEPTIONS.— 
‘‘(1) IN GENERAL.—Subparagraphs (A) and (B) 
of subsection (a)(2) shall not apply to an individual 
described in paragraph (2) or (3). 
‘‘(2) DUAL CITIZENS.— 
‘‘(A) IN GENERAL.—An individual is de-
scribed in this paragraph if—
221 
‘‘(i) the individual became at birth a 
citizen of the United States and a citizen of 
another country and continues to be a cit-
izen of such other country, and 
‘‘(ii) the individual has had no sub-
stantial contacts with the United States. 
‘‘(B) SUBSTANTIAL
CONTACTS.—An indi-
vidual shall be treated as having no substantial 
contacts with the United States only if the indi-
vidual— 
‘‘(i) was never a resident of the United 
States (as defined in section 7701(b)), 
‘‘(ii) has never held a United States 
passport, and 
‘‘(iii) was not present in the United 
States for more than 30 days during any 
calendar year which is 1 of the 10 calendar 
years preceding the individual’s loss of 
United States citizenship. 
‘‘(3) CERTAIN
MINORS.—An individual is de-
scribed in this paragraph if— 
‘‘(A) the individual became at birth a cit-
izen of the United States,
222 
‘‘(B) neither parent of such individual was 
a citizen of the United States at the time of such 
birth, 
‘‘(C) the individual’s loss of United States 
citizenship occurs before such individual attains 
age 181⁄2, and 
‘‘(D) the individual was not present in the 
United States for more than 30 days during any 
calendar year which is 1 of the 10 calendar 
years preceding the individual’s loss of United 
States citizenship.’’. 
(3) CONFORMING AMENDMENT.—Section 2107(a) 
is amended to read as follows: 
‘‘(a) TREATMENT OF EXPATRIATES.—A tax computed 
in accordance with the table contained in section 2001 is 
hereby imposed on the transfer of the taxable estate, deter-
mined as provided in section 2106, of every decedent non-
resident not a citizen of the United States if the date of 
death occurs during a taxable year with respect to which 
the decedent is subject to tax under section 877(b).’’. 
(b) SPECIAL RULES FOR DETERMINING WHEN AN IN-
DIVIDUAL IS NO LONGER A UNITED STATES CITIZEN OR 
LONG-TERM RESIDENT.—Section 7701 (relating to defini-
tions) is amended by redesignating subsection (n) as sub-
223 
section (o) and by inserting after subsection (m) the fol-
lowing new subsection: 
‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN IN-
DIVIDUAL IS NO LONGER A UNITED STATES CITIZEN OR 
LONG-TERM RESIDENT.—An individual who would (but 
for this subsection) cease to be treated as a citizen or resi-
dent of the United States shall continue to be treated as 
a citizen or resident of the United States, as the case may 
be, until such individual— 
‘‘(1) gives notice of an expatriating act or termi-
nation of residency (with the requisite intent to relin-
quish citizenship or terminate residency) to the Sec-
retary of State or the Secretary of Homeland Secu-
rity, and 
‘‘(2) provides a statement in accordance with 
section 6039G.’’. 
(c) PHYSICAL PRESENCE IN THE UNITED STATES FOR 
MORE THAN 30 DAYS.—Section 877 (relating to expatria-
tion to avoid tax) is amended by adding at the end the 
following new subsection: 
‘‘(g) PHYSICAL PRESENCE.— 
‘‘(1) IN GENERAL.—This section shall not apply 
to any individual to whom this section would other-
wise apply for any taxable year during the 10-year 
period referred to in subsection (a) in which such in-
224 
dividual is physically present in the United States at 
any time on more than 30 days in the calendar year 
ending in such taxable year, and such individual 
shall be treated for purposes of this title as a citizen 
or resident of the United States, as the case may be, 
for such taxable year. 
‘‘(2) EXCEPTION.— 
‘‘(A) IN GENERAL.—In the case of an indi-
vidual described in any of the following subpara-
graphs of this paragraph, a day of physical pres-
ence in the United States shall be disregarded if 
the individual is performing services in the 
United States on such day for an employer. The 
preceding sentence shall not apply if— 
‘‘(i) such employer is related (within 
the meaning of section 267 and 707) to such 
individual, or 
‘‘(ii) such employer fails to meet such 
requirements as the Secretary may prescribe 
by regulations to prevent the avoidance of 
the purposes of this paragraph. 
Not more than 30 days during any calendar 
year may be disregarded under this subpara-
graph.
225 
‘‘(B) INDIVIDUALS
WITH
TIES
TO
OTHER 
COUNTRIES.—An individual is described in this 
subparagraph if— 
‘‘(i) the individual becomes (not later 
than the close of a reasonable period after 
loss of United States citizenship or termi-
nation of residency) a citizen or resident of 
the country in which— 
‘‘(I) such individual was born, 
‘‘(II) if such individual is mar-
ried, such individual’s spouse was 
born, or 
‘‘(III) either of such individual’s 
parents were born, and 
‘‘(ii) the individual becomes fully liable 
for income tax in such country. 
‘‘(C) MINIMAL PRIOR PHYSICAL PRESENCE 
IN THE UNITED STATES.—An individual is de-
scribed in this subparagraph if, for each year in 
the 10-year period ending on the date of loss of 
United States citizenship or termination of resi-
dency, the individual was physically present in 
the United States for 30 days or less. The rule 
of section 7701(b)(3)(D)(ii) shall apply for pur-
poses of this subparagraph.’’.
226 
(d) TRANSFERS SUBJECT TO GIFT TAX.— 
(1) IN GENERAL.—Subsection (a) of section 2501 
(relating to taxable transfers) is amended by striking 
paragraph (4), by redesignating paragraph (5) as 
paragraph (4), and by striking paragraph (3) and 
inserting the following new paragraph: 
‘‘(3) EXCEPTION.— 
‘‘(A) CERTAIN
INDIVIDUALS.—Paragraph 
(2) shall not apply in the case of a donor to 
whom section 877(b) applies for the taxable year 
which includes the date of the transfer. 
‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.— 
The tax imposed by this section solely by reason 
of this paragraph shall be credited with the 
amount of any gift tax actually paid to any for-
eign country in respect of any gift which is tax-
able under this section solely by reason of this 
paragraph.’’ 
(2) TRANSFERS OF CERTAIN STOCK.—Subsection 
(a) of section 2501 is amended by adding at the end 
the following new paragraph: 
‘‘(5) TRANSFERS OF CERTAIN STOCK.— 
‘‘(A) IN GENERAL.—In the case of a trans-
fer of stock in a foreign corporation described in 
subparagraph (B) by a donor to whom section
227 
877(b) applies for the taxable year which in-
cludes the date of the transfer— 
‘‘(i) section 2511(a) shall be applied 
without regard to whether such stock is situ-
ated within the United States, and 
‘‘(ii) the value of such stock for pur-
poses of this chapter shall be its U.S.-asset 
value determined under subparagraph (C). 
‘‘(B) FOREIGN CORPORATION DESCRIBED.— 
A foreign corporation is described in this sub-
paragraph with respect to a donor if— 
‘‘(i) the donor owned (within the 
meaning of section 958(a)) at the time of 
such transfer 10 percent or more of the total 
combined voting power of all classes of stock 
entitled to vote of the foreign corporation, 
and 
‘‘(ii) such donor owned (within the 
meaning of section 958(a)), or is considered 
to have owned (by applying the ownership 
rules of section 958(b)), at the time of such 
transfer, more than 50 percent of— 
‘‘(I) the total combined voting 
power of all classes of stock entitled to 
vote of such corporation, or
228 
‘‘(II) the total value of the stock of 
such corporation. 
‘‘(C) U.S.-ASSET VALUE.—For purposes of 
subparagraph (A), the U.S.-asset value of stock 
shall be the amount which bears the same ratio 
to the fair market value of such stock at the time 
of transfer as— 
‘‘(i) the fair market value (at such 
time) of the assets owned by such foreign 
corporation and situated in the United 
States, bears to 
‘‘(ii) the total fair market value (at 
such time) of all assets owned by such for-
eign corporation.’’ 
(e) ENHANCED INFORMATION REPORTING FROM INDI-
VIDUALS LOSING UNITED STATES CITIZENSHIP.— 
(1) IN
GENERAL.—Subsection (a) of section 
6039G is amended to read as follows: 
‘‘(a) IN GENERAL.—Notwithstanding any other provi-
sion of law, any individual to whom section 877(b) applies 
for any taxable year shall provide a statement for such tax-
able year which includes the information described in sub-
section (b).’’. 
(2) INFORMATION TO BE PROVIDED.—Subsection 
(b) of section 6039G is amended to read as follows:
229 
‘‘(b) INFORMATION TO BE PROVIDED.—Information 
required under subsection (a) shall include— 
‘‘(1) the taxpayer’s TIN, 
‘‘(2) the mailing address of such individual’s 
principal foreign residence, 
‘‘(3) the foreign country in which such indi-
vidual is residing, 
‘‘(4) the foreign country of which such individual 
is a citizen, 
‘‘(5) information detailing the income, assets, 
and liabilities of such individual, 
‘‘(6) the number of days during any portion of 
which that the individual was physically present in 
the United States during the taxable year, and 
‘‘(7) such other information as the Secretary 
may prescribe.’’. 
(3) INCREASE IN PENALTY.—Subsection (d) of 
section 6039G is amended to read as follows: 
‘‘(d) PENALTY.—If— 
‘‘(1) an individual is required to file a statement 
under subsection (a) for any taxable year, and 
‘‘(2) fails to file such a statement with the Sec-
retary on or before the date such statement is required 
to be filed or fails to include all the information re-
230 
quired to be shown on the statement or includes incor-
rect information, 
such individual shall pay a penalty of $10,000 unless it 
is shown that such failure is due to reasonable cause and 
not to willful neglect.’’. 
(4) CONFORMING AMENDMENT.—Section 6039G 
is amended by striking subsections (c), (f), and (g) 
and by redesignating subsections (d) and (e) as sub-
section (c) and (d), respectively. 
(f) EFFECTIVE DATE.—The amendments made by this 
section shall apply to individuals who expatriate after June 
3, 2004. 
SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISI-
TIONS. 
(a) IN GENERAL.—Subpart B of part III of subchapter 
A of chapter 61 is amended by inserting after section 6043 
the following new section: 
‘‘SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS 
AND ACQUISITIONS. 
‘‘(a) IN GENERAL.—According to the forms or regula-
tions prescribed by the Secretary, the acquiring corporation 
in any taxable acquisition shall make a return setting 
forth— 
‘‘(1) a description of the acquisition,
231 
‘‘(2) the name and address of each shareholder of 
the acquired corporation who is required to recognize 
gain (if any) as a result of the acquisition, 
‘‘(3) the amount of money and the fair market 
value of other property transferred to each such share-
holder as part of such acquisition, and 
‘‘(4) such other information as the Secretary 
may prescribe. 
To the extent provided by the Secretary, the requirements 
of this section applicable to the acquiring corporation shall 
be applicable to the acquired corporation and not to the 
acquiring corporation. 
‘‘(b) NOMINEES.—According to the forms or regula-
tions prescribed by the Secretary— 
‘‘(1) REPORTING.—Any person who holds stock 
as a nominee for another person shall furnish in the 
manner prescribed by the Secretary to such other per-
son the information provided by the corporation 
under subsection (d). 
‘‘(2) REPORTING TO NOMINEES.—In the case of 
stock held by any person as a nominee, references in 
this section (other than in subsection (c)) to a share-
holder shall be treated as a reference to the nominee. 
‘‘(c) TAXABLE ACQUISITION.—For purposes of this sec-
tion, the term ‘taxable acquisition’ means any acquisition
232 
by a corporation of stock in or property of another corpora-
tion if any shareholder of the acquired corporation is re-
quired to recognize gain (if any) as a result of such acquisi-
tion. 
‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE-
HOLDERS.—According to the forms or regulations pre-
scribed by the Secretary, every person required to make a 
return under subsection (a) shall furnish to each share-
holder whose name is required to be set forth in such return 
a written statement showing— 
‘‘(1) the name, address, and phone number of the 
information contact of the person required to make 
such return, 
‘‘(2) the information required to be shown on 
such return with respect to such shareholder, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
The written statement required under the preceding sen-
tence shall be furnished to the shareholder on or before Jan-
uary 31 of the year following the calendar year during 
which the taxable acquisition occurred.’’ 
(b) ASSESSABLE PENALTIES.— 
(1) Subparagraph (B) of section 6724(d)(1) (re-
lating to definitions) is amended by redesignating 
clauses (ii) through (xviii) as clauses (iii) through
233 
(xix), respectively, and by inserting after clause (i) 
the following new clause: 
‘‘(ii) section 6043A(a) (relating to re-
turns relating to taxable mergers and acqui-
sitions),’’. 
(2) Paragraph (2) of section 6724(d) is amended 
by redesignating subparagraphs (F) through (BB) as 
subparagraphs (G) through (CC), respectively, and by 
inserting after subparagraph (E) the following new 
subparagraph: 
‘‘(F) subsections (b) and (d) of section 
6043A (relating to returns relating to taxable 
mergers and acquisitions).’’. 
(c) CLERICAL AMENDMENT.—The table of sections for 
subpart B of part III of subchapter A of chapter 61 is 
amended by inserting after the item relating to section 6043 
the following new item: 
‘‘Sec. 6043A. Returns relating to taxable mergers and acquisi-
tions.’’. 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to acquisitions after the date of the en-
actment of this Act. 
SEC. 606. STUDIES. 
(a) TRANSFER PRICING RULES.—The Secretary of the 
Treasury or the Secretary’s delegate shall conduct a study 
regarding the effectiveness of current transfer pricing rules
234 
and compliance efforts in ensuring that cross-border trans-
fers and other related-party transactions, particularly 
transactions involving intangible assets, service contracts, 
or leases cannot be used improperly to shift income out of 
the United States. The study shall include a review of the 
contemporaneous documentation and penalty rules under 
section 6662 of the Internal Revenue Code of 1986, a review 
of the regulatory and administrative guidance imple-
menting the principles of section 482 of such Code to trans-
actions involving intangible property and services and to 
cost-sharing arrangements, and an examination of whether 
increased disclosure of cross-border transactions should be 
required. The study shall set forth specific recommendations 
to address all abuses identified in the study. Not later than 
June 30, 2005, such Secretary or delegate shall submit to 
the Congress a report of such study. 
(b) INCOME TAX TREATIES.—The Secretary of the 
Treasury or the Secretary’s delegate shall conduct a study 
of United States income tax treaties to identify any inap-
propriate reductions in United States withholding tax that 
provide opportunities for shifting income out of the United 
States, and to evaluate whether existing anti-abuse mecha-
nisms are operating properly. The study shall include spe-
cific recommendations to address all inappropriate uses of 
tax treaties. Not later than June 30, 2005, such Secretary
235 
or delegate shall submit to the Congress a report of such 
study. 
(c) IMPACT
OF CORPORATE EXPATRIATION PROVI-
SIONS.—The Secretary of the Treasury or the Secretary’s 
delegate shall conduct a study of the impact of the provi-
sions of this title on corporate expatriation. The study shall 
include such recommendations as such Secretary or delegate 
may have to improve the impact of such provisions in car-
rying out the purposes of this title. Not later than December 
31, 2005, such Secretary or delegate shall submit to the Con-
gress a report of such study. 
Subtitle B—Provisions Relating to 
Tax Shelters 
PART I—TAXPAYER-RELATED PROVISIONS 
SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORT-
ABLE TRANSACTIONS. 
(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: 
‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT-
ABLE TRANSACTION INFORMATION WITH RE-
TURN. 
‘‘(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
241 
such transaction is the avoidance or evasion of 
Federal income tax. 
‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS-
ACTIONS.—Subsection (a) shall be applied by substituting 
‘30 percent’ for ‘20 percent’ with respect to the portion of 
any reportable transaction understatement with respect to 
which the requirement of section 6664(d)(2)(A) is not met. 
‘‘(d) DEFINITIONS
OF
REPORTABLE
AND
LISTED 
TRANSACTIONS.—For purposes of this section, the terms ‘re-
portable transaction’ and ‘listed transaction’ have the re-
spective meanings given to such terms by section 6707A(c). 
‘‘(e) SPECIAL RULES.— 
‘‘(1) COORDINATION WITH PENALTIES, ETC., ON 
OTHER UNDERSTATEMENTS.—In the case of an under-
statement (as defined in section 6662(d)(2))— 
‘‘(A) the amount of such understatement 
(determined without regard to this paragraph) 
shall be increased by the aggregate amount of re-
portable transaction understatements for pur-
poses of determining whether such understate-
ment is a substantial understatement under sec-
tion 6662(d)(1), and 
‘‘(B) the addition to tax under section 
6662(a) shall apply only to the excess of the 
amount of the substantial understatement (if
242 
any) after the application of subparagraph (A) 
over the aggregate amount of reportable trans-
action understatements. 
‘‘(2) COORDINATION WITH OTHER PENALTIES.— 
‘‘(A) APPLICATION OF FRAUD PENALTY.— 
References to an underpayment in section 6663 
shall be treated as including references to a re-
portable transaction understatement. 
‘‘(B) NO DOUBLE PENALTY.—This section 
shall not apply to any portion of an understate-
ment on which a penalty is imposed under sec-
tion 6663. 
‘‘(3) SPECIAL RULE FOR AMENDED RETURNS.— 
Except as provided in regulations, in no event shall 
any tax treatment included with an amendment or 
supplement to a return of tax be taken into account 
in determining the amount of any reportable trans-
action understatement if the amendment or supple-
ment is filed after the earlier of the date the taxpayer 
is first contacted by the Secretary regarding the ex-
amination of the return or such other date as is speci-
fied by the Secretary.’’ 
(b) 
DETERMINATION
OF
OTHER
UNDERSTATE-
MENTS.—Subparagraph (A) of section 6662(d)(2) is 
amended by adding at the end the following flush sentence: