112
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS OF 
REGULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed under 
paragraph (1) of subsection (a) on any interest-
related dividend (as defined in section 871(k)(1)) 
received from a regulated investment company. 
‘‘(B) EXCEPTION.—Subparagraph (A) shall 
not apply—
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and 
‘‘(ii) to any interest-related dividend 
received by a controlled foreign corporation 
(within the meaning of section 957(a)) to 
the extent such dividend is attributable to 
interest received by the regulated investment 
company from a person who is a related 
person (within the meaning of section 
864(d)(4)) with respect to such controlled 
foreign corporation. 
‘‘(C) TREATMENT OF DIVIDENDS RECEIVED 
BY CONTROLLED FOREIGN CORPORATIONS.—The 
rules of subsection (c)(5)(A) shall apply to any 
interest-related dividend received by a controlled
113
foreign corporation (within the meaning of sec-
tion 957(a)) to the extent such dividend is attrib-
utable to interest received by the regulated in-
vestment company which is described in clause 
(ii) of section 871(k)(1)(E) (and not described in 
clause (i) or (iii) of such section). 
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend 
(as defined in section 871(k)(2)) received from a regu-
lated investment company.’’
(3) WITHHOLDING TAXES.—
(A) Section 1441(c) (relating to exceptions) 
is amended by adding at the end the following 
new paragraph: 
‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM REG-
ULATED INVESTMENT COMPANIES.—
‘‘(A) IN
GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the 
tax imposed by section 871(a)(1)(A) by reason of 
section 871(k). 
‘‘(B) SPECIAL RULE.—For purposes of sub-
paragraph (A), clause (i) of section 871(k)(1)(B) 
shall not apply to any dividend unless the regu-
114
lated investment company knows that such divi-
dend is a dividend referred to in such clause. A 
similar rule shall apply with respect to the ex-
ception contained in section 871(k)(2)(B).’’ 
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is amend-
ed—
(i) by striking ‘‘and the reference in 
section 1441(c)(10)’’ and inserting ‘‘the ref-
erence in section 1441(c)(10)’’, and
(ii) by inserting before the period at 
the end the following: ‘‘, and the references 
in section 1441(c)(12) to sections 871(a) 
and 871(k) shall be treated as referring to 
sections 881(a) and 881(e) (except that for 
purposes of applying subparagraph (A) of 
section 1441(c)(12), as so modified, clause
(ii) of section 881(e)(1)(B) shall not apply 
to any dividend unless the regulated invest-
ment company knows that such dividend is 
a dividend referred to in such clause)’’. 
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN REGULATED INVESTMENT COMPANIES.—Section 2105 
(relating to property without the United States for estate
115
tax purposes) is amended by adding at the end the following 
new subsection: 
‘‘(d) STOCK IN A RIC.—
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company (as 
defined in section 851) owned by a nonresident not 
a citizen of the United States shall not be deemed 
property within the United States in the proportion 
that, at the end of the quarter of such investment 
company’s taxable year immediately preceding a de-
cedent’s date of death (or at such other time as the 
Secretary may designate in regulations), the assets of 
the investment company that were qualifying assets 
with respect to the decedent bore to the total assets of 
the investment company.
‘‘(2) QUALIFYING ASSETS.—For purposes of this 
subsection, qualifying assets with respect to a dece-
dent are assets that, if owned directly by the decedent, 
would have been—
‘‘(A) amounts, deposits, or debt obligations 
described in subsection (b) of this section, 
‘‘(B) debt obligations described in the last 
sentence of section 2104(c), or 
‘‘(C) other property not within the United 
States.’’
116
(c) TREATMENT OF REGULATED INVESTMENT COMPA-
NIES UNDER SECTION 897.—
(1) Paragraph (1) of section 897(h) is amended 
by striking ‘‘REIT’’ each place it appears and insert-
ing ‘‘qualified investment entity’’. 
(2) Paragraphs (2) and (3) of section 897(h) are 
amended to read as follows:
‘‘(2) SALE
OF
STOCK
IN
DOMESTICALLY
CON-
TROLLED
ENTITY
NOT
TAXED.—The term ‘United 
States real property interest’ does not include any in-
terest in a domestically controlled qualified invest-
ment entity. 
‘‘(3) DISTRIBUTIONS
BY
DOMESTICALLY
CON-
TROLLED QUALIFIED INVESTMENT ENTITIES.—In the 
case of a domestically controlled qualified investment 
entity, rules similar to the rules of subsection (d) 
shall apply to the foreign ownership percentage of any 
gain.’’
(3) Subparagraphs (A) and (B) of section 
897(h)(4) are amended to read as follows: 
‘‘(A) QUALIFIED INVESTMENT ENTITY.—The 
term ‘qualified investment entity’ means any 
real estate investment trust and any regulated 
investment company.
117
‘‘(B) DOMESTICALLY
CONTROLLED.—The 
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock 
was held directly or indirectly by foreign per-
sons.’’
(4) Subparagraphs (C) and (D) of section 
897(h)(4) are each amended by striking ‘‘REIT’’ and 
inserting ‘‘qualified investment entity’’. 
(5) The subsection heading for subsection (h) of 
section 897 is amended by striking ‘‘REITS’’ and in-
serting ‘‘CERTAIN INVESTMENT ENTITIES’’. 
(d) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as otherwise provided 
in this subsection, the amendments made by this sec-
tion shall apply to dividends with respect to taxable 
years of regulated investment companies beginning 
after the date of the enactment of this Act. 
(2) ESTATE TAX TREATMENT.—The amendment 
made by subsection (b) shall apply to estates of dece-
dents dying after the date of the enactment of this 
Act. 
(3) CERTAIN OTHER PROVISIONS.—The amend-
ments made by subsection (c) (other than paragraph
118
(1) thereof) shall take effect on the date of the enact-
ment of this Act. 
Subtitle I—Other Provisions 
SEC. 1101. SPECIAL RULES FOR LIVESTOCK SOLD ON AC-
COUNT OF WEATHER-RELATED CONDITIONS. 
(a) RULES FOR REPLACEMENT OF INVOLUNTARILY 
CONVERTED LIVESTOCK.—Subsection (e) of section 1033 
(relating to involuntary conversions) is amended—
(1) by striking ‘‘CONDITIONS.—For purposes’’ 
and inserting ‘‘CONDITIONS.—
‘‘(1) IN GENERAL.—For purposes’’, and 
(2) by adding at the end the following new para-
graph: 
‘‘(2) EXTENSION OF REPLACEMENT PERIOD.—
‘‘(A) IN GENERAL.—In the case of drought, 
flood, or other weather-related conditions de-
scribed in paragraph (1) which result in the 
area being designated as eligible for assistance 
by the Federal Government, subsection (a)(2)(B) 
shall be applied with respect to any converted 
property by substituting ‘4 years’ for ‘2 years’. 
‘‘(B) 
FURTHER
EXTENSION
BY
SEC-
RETARY.—The Secretary may extend on a re-
gional basis the period for replacement under 
this section (after the application of subpara-
119
graph (A)) for such additional time as the Sec-
retary determines appropriate if the weather-re-
lated conditions which resulted in such applica-
tion continue for more than 3 years.’’. 
(b) INCOME INCLUSION RULES.—Subsection (e) of sec-
tion 451 (relating to special rule for proceeds from livestock 
sold on account of drought, flood, or other weather-related 
conditions) is amended by adding at the end the following 
new paragraph: 
‘‘(3) SPECIAL
ELECTION
RULES.—If section 
1033(e)(2) applies to a sale or exchange of livestock 
described in paragraph (1), the election under para-
graph (1) shall be deemed valid if made during the 
replacement period described in such section.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to any taxable year with respect to
which the due date (without regard to extensions) for the 
return is after December 31, 2002. 
SEC. 1102. PAYMENT OF DIVIDENDS ON STOCK OF CO-
OPERATIVES WITHOUT REDUCING PATRON-
AGE DIVIDENDS. 
(a) IN GENERAL.—Subsection (a) of section 1388 (re-
lating to patronage dividend defined) is amended by adding 
at the end the following: ‘‘For purposes of paragraph (3), 
net earnings shall not be reduced by amounts paid during
120
the year as dividends on capital stock or other proprietary 
capital interests of the organization to the extent that the 
articles of incorporation or bylaws of such organization or 
other contract with patrons provide that such dividends are 
in addition to amounts otherwise payable to patrons which 
are derived from business done with or for patrons during 
the taxable year.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to distributions in taxable years begin-
ning after the date of the enactment of this Act. 
SEC. 1103. VACCINE TAX TO APPLY TO HEPATITIS A VAC-
CINE. 
(a) IN GENERAL.—Paragraph (1) of section 4132(a) 
(defining taxable vaccine) is amended by redesignating sub-
paragraphs (I), (J), (K), and (L) as subparagraphs (J), 
(K), (L), and (M), respectively, and by inserting after sub-
paragraph (H) the following new subparagraph: 
‘‘(I) Any vaccine against hepatitis A.’’
(b) EFFECTIVE DATE.—
(1) SALES, ETC.—The amendments made by sub-
section (a) shall apply to sales and uses on or after 
the first day of the first month which begins more 
than 4 weeks after the date of the enactment of this 
Act.
121
(2) DELIVERIES.—For purposes of paragraph 
(1) and section 4131 of the Internal Revenue Code of 
1986, in the case of sales on or before the effective date 
described in such paragraph for which delivery is 
made after such date, the delivery date shall be con-
sidered the sale date. 
SEC. 1104. EXPANSION OF HUMAN CLINICAL TRIALS QUALI-
FYING FOR ORPHAN DRUG CREDIT. 
(a) IN GENERAL.—Paragraph (2) of section 45C(b) 
(relating to qualified clinical testing expenses) is amended 
by adding at the end the following new subparagraph: 
‘‘(C) TREATMENT
OF
CERTAIN
EXPENSES 
INCURRED BEFORE DESIGNATION.—For purposes 
of subparagraph (A)(ii)(I), if a drug is des-
ignated under section 526 of the Federal Food, 
Drug, and Cosmetic Act not later than the due 
date (including extensions) for filing the return 
of tax under this subtitle for the taxable year in 
which the application for such designation of 
such drug was filed, such drug shall be treated 
as having been designated on the date that such 
application was filed.’’. 
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to expenses incurred after the date 
of the enactment of this Act.
122
SEC. 1105. DISTRIBUTIONS FROM PUBLICLY TRADED PART-
NERSHIPS TREATED AS QUALIFYING INCOME 
OF REGULATED INVESTMENT COMPANIES. 
(a) IN GENERAL.—Paragraph (2) of section 851(b) 
(defining regulated investment company) is amended to 
read as follows: 
‘‘(2) at least 90 percent of its gross income is de-
rived from—
‘‘(A) dividends, interest, payments with re-
spect to securities loans (as defined in section 
512(a)(5)), and gains from the sale or other dis-
position of stock or securities (as defined in sec-
tion 2(a)(36) of the Investment Company Act of 
1940, as amended) or foreign currencies, or other 
income (including but not limited to gains from 
options, futures or forward contracts) derived 
with respect to its business of investing in such 
stock, securities, or currencies, and 
‘‘(B) distributions or other income derived 
from an interest in a qualified publicly traded 
partnership (as defined in subsection (h)); and’’. 
(b) SOURCE FLOW-THROUGH RULE NOT TO APPLY.—
The last sentence of section 851(b) is amended by inserting 
‘‘(other than a qualified publicly traded partnership as de-
fined in subsection (h))’’ after ‘‘derived from a partner-
ship’’.
123
(c) LIMITATION ON OWNERSHIP.—Subsection (c) of 
section 851 is amended by redesignating paragraph (5) as 
paragraph (6) and inserting after paragraph (4) the fol-
lowing new paragraph: 
‘‘(5) The term ‘outstanding voting securities of 
such issuer’ shall include the equity securities of a 
qualified publicly traded partnership (as defined in 
subsection (h)).’’. 
(d) DEFINITION
OF QUALIFIED PUBLICLY TRADED 
PARTNERSHIP.—Section 851 is amended by adding at the 
end the following new subsection: 
‘‘(h) QUALIFIED PUBLICLY TRADED PARTNERSHIP.—
For purposes of this section, the term ‘qualified publicly 
traded partnership’ means a publicly traded partnership 
described in section 7704(b) other than a partnership which 
would satisfy the gross income requirements of section 
7704(c)(2) if qualifying income included only income de-
scribed in subsection (b)(2)(A).’’. 
(e) DEFINITION
OF QUALIFYING INCOME.—Section 
7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ and 
inserting ‘‘section 851(b)(2)(A)’’. 
(f) LIMITATION ON COMPOSITION OF ASSETS.—Sub-
paragraph (B) of section 851(b)(3) is amended to read as 
follows:
124
‘‘(B) not more than 25 percent of the value 
of its total assets is invested in—
‘‘(i) the securities (other than Govern-
ment securities or the securities of other reg-
ulated investment companies) of any one 
issuer, 
‘‘(ii) the securities (other than the secu-
rities of other regulated investment compa-
nies) of two or more issuers which the tax-
payer controls and which are determined, 
under regulations prescribed by the Sec-
retary, to be engaged in the same or similar 
trades or businesses or related trades or 
businesses, or
‘‘(iii) the securities of one or more 
qualified publicly traded partnerships (as 
defined in subsection (h)).’’. 
(g) APPLICATION OF SPECIAL PASSIVE ACTIVITY RULE 
TO REGULATED INVESTMENT COMPANIES.—Subsection (k) 
of section 469 (relating to separate application of section 
in case of publicly traded partnerships) is amended by add-
ing at the end the following new paragraph: 
‘‘(4) APPLICATION TO REGULATED INVESTMENT 
COMPANIES.—For purposes of this section, a regulated 
investment company (as defined in section 851) hold-
125
ing an interest in a qualified publicly traded partner-
ship (as defined in section 851(h)) shall be treated as 
a taxpayer described in subsection (a)(2) with respect 
to items attributable to such interest.’’. 
(h) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 1106. IMPROVEMENTS RELATED TO REAL ESTATE IN-
VESTMENT TRUSTS. 
(a) EXPANSION OF STRAIGHT DEBT SAFE HARBOR.—
Section 856 (defining real estate investment trust) is 
amended—
(1) in subsection (c) by striking paragraph (7), 
and 
(2) by adding at the end the following new sub-
section: 
‘‘(m) SAFE
HARBOR
IN
APPLYING
SUBSECTION 
(c)(4).—
‘‘(1) IN GENERAL.—In applying subclause (III) 
of subsection (c)(4)(B)(iii), except as otherwise deter-
mined by the Secretary in regulations, the following 
shall not be considered securities held by the trust: 
‘‘(A) Straight debt securities of an issuer 
which meet the requirements of paragraph (2).
126
‘‘(B) Any loan to an individual or an es-
tate. 
‘‘(C) Any section 467 rental agreement (as 
defined in section 467(d)), other than with a per-
son described in subsection (d)(2)(B). 
‘‘(D) Any obligation to pay rents from real 
property (as defined in subsection (d)(1)). 
‘‘(E) Any security issued by a State or any 
political subdivision thereof, the District of Co-
lumbia, a foreign government or any political 
subdivision thereof, or the Commonwealth of 
Puerto Rico, but only if the determination of 
any payment received or accrued under such se-
curity does not depend in whole or in part on 
the profits of any entity not described in this 
subparagraph or payments on any obligation 
issued by such an entity, 
‘‘(F) Any security issued by a real estate 
investment trust. 
‘‘(G) Any other arrangement as determined 
by the Secretary. 
‘‘(2) SPECIAL
RULES
RELATING
TO
STRAIGHT 
DEBT SECURITIES.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1)(A), securities meet the requirements of
127
this paragraph if such securities are straight 
debt, as defined in section 1361(c)(5) (without 
regard to subparagraph (B)(iii) thereof). 
‘‘(B) SPECIAL RULES RELATING TO CERTAIN 
CONTINGENCIES.—For purposes of subparagraph 
(A), any interest or principal shall not be treat-
ed as failing to satisfy section 1361(c)(5)(B)(i) 
solely by reason of the fact that the time of pay-
ment of such interest or principal is subject to 
a contingency, but only if—
‘‘(i) any such contingency does not 
have the effect of changing the effective yield 
to maturity, as determined under section 
1272, other than a change in the annual 
yield to maturity which either—
‘‘(I) does not exceed the greater of 
1⁄4 of 1 percent or 5 percent of the an-
nual yield to maturity, or 
‘‘(II) results solely from a default 
or the exercise of a prepayment right 
by the issuer of the debt, or 
‘‘(ii) neither the aggregate issue price 
nor the aggregate face amount of the issuer’s 
debt instruments held by the trust exceeds 
$1,000,000 and not more than 12 months of
128
unaccrued interest can be required to be 
prepaid thereunder. 
‘‘(C) SPECIAL
RULES
RELATING
TO
COR-
PORATE OR PARTNERSHIP ISSUERS.—In the case 
of an issuer which is a corporation or a partner-
ship, securities that otherwise would be described 
in paragraph (1)(A) shall be considered not to be 
so described if the trust holding such securities 
and any of its controlled taxable REIT subsidi-
aries (as defined in subsection (d)(8)(A)(iv)) 
hold any securities of the issuer which—
‘‘(i) are not described in paragraph (1) 
(prior to the application of this subpara-
graph), and 
‘‘(ii) have an aggregate value greater 
than 1 percent of the issuer’s outstanding 
securities determined without regard to 
paragraph (3)(A)(i). 
‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP 
SECURITIES.—
‘‘(A) IN GENERAL.—For purposes of apply-
ing subclause (III) of subsection (c)(4)(B)(iii)—
‘‘(i) a trust’s interest as a partner in 
a partnership (as defined in section
130
not be considered a security to the extent of the 
trust’s interest as a partner in the partnership, 
and 
‘‘(B) any debt instrument issued by a part-
nership and not described in paragraph (1) shall 
not be considered a security if at least 75 percent 
of the partnership’s gross income (excluding 
gross income from prohibited transactions) is de-
rived from sources referred to in subsection 
(c)(3). 
‘‘(5) SECRETARIAL GUIDANCE.—The Secretary is 
authorized to provide guidance (including through the 
issuance of a written determination, as defined in sec-
tion 6110(b)) that an arrangement shall not be con-
sidered a security held by the trust for purposes of ap-
plying subclause (III) of subsection (c)(4)(B)(iii) not-
withstanding that such arrangement otherwise could 
be considered a security under subparagraph (F) of 
subsection (c)(5).’’. 
(b) CLARIFICATION
OF APPLICATION
OF LIMITED 
RENTAL
EXCEPTION.—Subparagraph 
(A) 
of 
section 
856(d)(8) (relating to special rules for taxable REIT sub-
sidiaries) is amended to read as follows: 
‘‘(A) LIMITED RENTAL EXCEPTION.—
131
‘‘(i) IN
GENERAL.—The requirements 
of this subparagraph are met with respect 
to any property if at least 90 percent of the 
leased space of the property is rented to per-
sons other than taxable REIT subsidiaries 
of such trust and other than persons de-
scribed in paragraph (2)(B). 
‘‘(ii) RENTS MUST BE SUBSTANTIALLY 
COMPARABLE.—Clause (i) shall apply only 
to the extent that the amounts paid to the 
trust as rents from real property (as defined 
in paragraph (1) without regard to para-
graph (2)(B)) from such property are sub-
stantially comparable to such rents paid by 
the other tenants of the trust’s property for 
comparable space. 
‘‘(iii) TIMES FOR TESTING RENT COM-
PARABILITY.—The 
substantial 
com-
parability requirement of clause (ii) shall be 
treated as met with respect to a lease to a 
taxable REIT subsidiary of the trust if such 
requirement is met under the terms of the 
lease—
‘‘(I) at the time such lease is en-
tered into,
132
‘‘(II) at the time of each extension 
of the lease, including a failure to exer-
cise a right to terminate, and 
‘‘(III) at the time of any modi-
fication of the lease between the trust 
and the taxable REIT subsidiary if the 
rent under such lease is effectively in-
creased pursuant to such modification. 
With respect to subclause (III), if the tax-
able REIT subsidiary of the trust is a con-
trolled taxable REIT subsidiary of the trust, 
the term ‘rents from real property’ shall not 
in any event include rent under such lease 
to the extent of the increase in such rent on 
account of such modification. 
‘‘(iv) 
CONTROLLED
TAXABLE
REIT 
SUBSIDIARY.—For purposes of clause (iii), 
the term ‘controlled taxable REIT sub-
sidiary’ means, with respect to any real es-
tate investment trust, any taxable REIT 
subsidiary of such trust if such trust owns 
directly or indirectly—
‘‘(I) stock possessing more than 50 
percent of the total voting power of the
133
outstanding stock of such subsidiary, 
or 
‘‘(II) stock having a value of more 
than 50 percent of the total value of the 
outstanding stock of such subsidiary. 
‘‘(v) 
CONTINUING
QUALIFICATION 
BASED ON THIRD PARTY ACTIONS.—If the 
requirements of clause (i) are met at a time 
referred to in clause (iii), such requirements 
shall continue to be treated as met so long 
as there is no increase in the space leased 
to any taxable REIT subsidiary of such 
trust or to any person described in para-
graph (2)(B). 
‘‘(vi) CORRECTION PERIOD.—If there is 
an increase referred to in clause (v) during 
any calendar quarter with respect to any 
property, the requirements of clause (iii) 
shall be treated as met during the quarter 
and the succeeding quarter if such require-
ments are met at the close of such suc-
ceeding quarter.’’. 
(c) DELETION
OF CUSTOMARY SERVICES EXCEP-
TION.—Subparagraph (B) of section 857(b)(7) (relating to 
redetermined rents) is amended by striking clause (ii) and
134
by redesignating clauses (iii), (iv), (v), (vi), and (vii) as 
clauses (ii), (iii), (iv), (v), and (vi), respectively. 
(d) CONFORMITY WITH GENERAL HEDGING DEFINI-
TION.—Subparagraph (G) of section 856(c)(5) (relating to 
treatment of certain hedging instruments) is amended to 
read as follows: 
‘‘(G) TREATMENT OF CERTAIN HEDGING IN-
STRUMENTS.—Except to the extent provided by 
regulations, any income of a real estate invest-
ment trust from a hedging transaction (as de-
fined 
in 
clause 
(ii) 
or 
(iii) 
of 
section 
1221(b)(2)(A)) which is clearly identified pursu-
ant to section 1221(a)(7), including gain from 
the sale or disposition of such a transaction, 
shall not constitute gross income under para-
graph (2) to the extent that the transaction 
hedges any indebtedness incurred or to be in-
curred by the trust to acquire or carry real estate 
assets.’’. 
(e) CONFORMITY
WITH
REGULATED
INVESTMENT 
COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re-
lating to imposition of tax in case of failure to meet certain 
requirements) is amended by striking ‘‘90 percent’’ and in-
serting ‘‘95 percent’’. 
(f) EFFECTIVE DATES.—
135
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to taxable years beginning after December 31, 
2000. 
(2) SUBPARAGRAPHS (c) THROUGH (e).—The 
amendments made by subsections (c), (d), and (e) 
shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 1107. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 
BOWS AND ARROWS. 
(a) BOWS.—Paragraph (1) of section 4161(b) (relating 
to bows) is amended to read as follows: 
‘‘(1) BOWS.—
‘‘(A) IN
GENERAL.—There is hereby im-
posed on the sale by the manufacturer, producer, 
or importer of any bow which has a peak draw
weight of 30 pounds or more, a tax equal to 11 
percent of the price for which so sold. 
‘‘(B) ARCHERY EQUIPMENT.—There is here-
by imposed on the sale by the manufacturer, pro-
ducer, or importer—
‘‘(i) of any part or accessory suitable 
for inclusion in or attachment to a bow de-
scribed in subparagraph (A), and
140
(2) Subsection (d) of section 39 (relating to 
carryback and carryforward of unused credits) is 
amended by adding at the end the following new 
paragraph: 
‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT 
BEFORE JANUARY 1, 2004.—No portion of the unused 
business credit for any taxable year which is attrib-
utable to the credit determined under section 5011(a) 
may be carried back to a taxable year beginning be-
fore January 1, 2004.’’. 
(3) The table of sections for subpart A of part I 
of subchapter A of chapter 51 is amended by adding 
at the end the following new item:
‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of car-
rying excise tax.’’.
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 1110. CAPITAL GAIN TREATMENT UNDER SECTION 
631(b) TO APPLY TO OUTRIGHT SALES BY 
LANDOWNERS. 
(a) IN GENERAL.—The first sentence of section 631(b) 
(relating to disposal of timber with a retained economic in-
terest) is amended by striking ‘‘retains an economic interest 
in such timber’’ and inserting ‘‘either retains an economic
141
interest in such timber or makes an outright sale of such 
timber’’. 
(b) CONFORMING AMENDMENTS.—
(1) The third sentence of section 631(b) is 
amended by striking ‘‘The date of disposal’’ and in-
serting ‘‘In the case of disposal of timber with a re-
tained economic interest, the date of disposal’’. 
(2) The heading for section 631(b) is amended by 
striking ‘‘WITH A RETAINED ECONOMIC INTEREST’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to sales after December 31, 2003.
SEC. 1111. SONAR DEVICES SUITABLE FOR FINDING FISH. 
(a) NOT TREATED AS SPORT FISHING EQUIPMENT.—
Subsection (a) of section 4162 (relating to sport fishing 
equipment defined) is amended by inserting ‘‘and’’ at the 
end of paragraph (8), by striking ‘‘, and’’ at the end of 
paragraph (9) and inserting a period, and by striking 
paragraph (10). 
(b) CONFORMING
AMENDMENT.—Section 4162 is 
amended by striking subsection (b) and by redesignating 
subsection (c) as subsection (b). 
(c) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2003.
142
SEC. 1112. TAXATION OF CERTAIN SETTLEMENT FUNDS. 
(a) IN GENERAL.—Subsection (g) of section 468B (re-
lating to clarification of taxation of certain funds) is 
amended to read as follows: 
‘‘(g) CLARIFICATION
OF
TAXATION
OF
CERTAIN 
FUNDS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), nothing in any provision of law shall be 
construed as providing that an escrow account, settle-
ment fund, or similar fund is not subject to current 
income tax. The Secretary shall prescribe regulations 
providing for the taxation of any such account or 
fund whether as a grantor trust or otherwise. 
‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET-
TLEMENT
FUNDS.—An escrow account, settlement 
fund, or similar fund shall be treated as beneficially 
owned by the United States and shall be exempt from 
taxation under this subtitle if—
‘‘(A) it is established pursuant to a consent 
decree entered by a judge of a United States Dis-
trict Court, 
‘‘(B) it is created for the receipt of settle-
ment payments as directed by a government en-
tity for the sole purpose of resolving or satisfying 
one or more claims asserting liability under the
143
Comprehensive Environmental Response, Com-
pensation, and Liability Act of 1980, 
‘‘(C) the authority and control over the ex-
penditure of funds therein (including the expend-
iture of contributions thereto and any net earn-
ings thereon) is with such government entity, 
and 
‘‘(D) upon termination, any remaining 
funds will be disbursed upon instructions by 
such government entity in accordance with ap-
plicable law. 
For purposes of this paragraph, the term ‘government 
entity’ means the United States, any State or polit-
ical subdivision thereof, the District of Columbia, any 
possession of the United States, and any agency or 
instrumentality of any of the foregoing.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
SEC. 1113. SUSPENSION OF OCCUPATIONAL TAXES RELAT-
ING TO DISTILLED SPIRITS, WINE, AND BEER. 
(a) IN GENERAL.—Subpart G of part II of subchapter 
A of chapter 51 is amended by redesignating section 5148 
as section 5149 and by inserting after section 5147 the fol-
lowing new section:
144
‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 
‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 
5091, 5111, 5121, and 5131, the rate of tax imposed under 
such sections for the suspension period shall be zero. During 
such period, persons engaged in or carrying on a trade or 
business covered by such sections shall register under section 
5141 and shall comply with the recordkeeping requirements 
under this part. 
‘‘(b) SUSPENSION PERIOD.—For purposes of sub-
section (a), the suspension period is the period beginning 
on July 1, 2004, and ending on June 30, 2007.’’. 
(b) CONFORMING
AMENDMENT.—Section 5117 is 
amended by adding at the end the following new subsection: 
‘‘(d) SPECIAL RULE DURING SUSPENSION PERIOD.—
Except as provided by the Secretary, during the suspension 
period (as defined in section 5148) it shall be unlawful for 
any dealer to purchase distilled spirits for resale from any 
person other than a wholesale dealer in liquors who is re-
quired to keep records under section 5114.’’. 
(c) CLERICAL AMENDMENT.—The table of sections for 
subpart G of part II of subchapter A of chapter 51 is 
amended by striking the last item and inserting the fol-
lowing new items:
‘‘Sec. 5148. Suspension of occupational tax. 
‘‘Sec. 5149. Cross references.’’.
145
(d) EFFECTIVE DATE.—The amendments made by this 
section shall take effect on the date of the enactment of this 
Act. 
TITLE II—PROVISIONS TO RE-
DUCE 
TAX 
AVOIDANCE 
THROUGH CORPORATE EARN-
INGS STRIPPING AND EXPA-
TRIATION 
SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS 
STRIPPING BY FURTHER LIMITING DEDUC-
TION FOR INTEREST ON CERTAIN INDEBTED-
NESS. 
(a) REDUCTION IN POTENTIAL FOR EARNINGS STRIP-
PING.—
(1) IN GENERAL.—Section 163(j) is amended by 
striking paragraphs (1) and (2), by redesignating 
paragraphs (3) through (8) as paragraphs (4)
through (9), respectively, and by inserting before 
paragraph (4), as so redesignated, the following new 
paragraphs: 
‘‘(1) LIMITATION.—
‘‘(A) IN GENERAL.—In the case of a cor-
poration, no deduction shall be allowed under 
this chapter for disqualified interest paid or ac-
crued during the taxable year.
146
‘‘(B) 
MAXIMUM
DISALLOWANCE.—The 
amount disallowed under subparagraph (A) shall 
not exceed the sum of—
‘‘(i) the corporation’s excess interest ex-
pense for the taxable year, and 
‘‘(ii) the corporation’s excess related 
party interest expense for such year. 
In no event shall the disallowance under sub-
paragraph (A) reduce the deduction for interest 
below the sum of the amount of interest includ-
ible in the gross income of the taxpayer for such 
taxable year and an amount equal to 25 percent 
of adjusted taxable income (35 percent in the 
case of the first taxable year beginning after De-
cember 31, 2003). 
‘‘(C) DISALLOWED
AMOUNT
CARRIED
TO 
SUCCEEDING TAXABLE YEAR.—
‘‘(i) IN GENERAL.—Any amount dis-
allowed under subparagraph (A) for any 
taxable year shall be treated as paid or ac-
crued in the succeeding taxable year and in 
the 2nd through 10th succeeding taxable 
years to the extent not previously taken into 
account under this subparagraph.
147
‘‘(ii) LIMITATION ON AMOUNT CARRIED 
TO
YEAR.—A carryforward amount may 
not be taken into account for any such suc-
ceeding taxable year to the extent that such 
amount, when added to amounts carried to 
such succeeding taxable year from taxable 
years preceding the taxable year from which 
the amount is being carried forward, would 
result in (or increase) a disallowance under 
subparagraph (A). 
‘‘(iii) 
CARRYOVER
APPLIED
SEPA-
RATELY TO CATEGORIES OF DISQUALIFIED 
INTEREST.—Clauses (i) and (ii) shall be 
applied separately to disqualified interest 
described in paragraph (3)(A) and to dis-
qualified interest described in paragraph 
(3)(B). For purposes of this subparagraph, 
any amount disallowed under subparagraph 
(A) for any taxable year shall be treated as 
disqualified interest described in paragraph 
(3)(A) to the extent thereof and then as dis-
qualified interest described in paragraph 
(3)(B).
148
‘‘(2) EXCESS INTEREST EXPENSE; EXCESS RE-
LATED PARTY INTEREST EXPENSE.—For purposes of 
this subsection—
‘‘(A) EXCESS
INTEREST
EXPENSE.—The 
term ‘excess interest expense’ means the excess (if 
any) of—
‘‘(i) the corporation’s net interest ex-
pense, over 
‘‘(ii) 50 percent of the adjusted taxable 
income of the corporation. 
‘‘(B) EXCESS
RELATED
PARTY
INTEREST 
EXPENSE.—The term ‘excess related party inter-
est expense’ means the excess (if any) of—
‘‘(i) the lesser of—
‘‘(I) the amount of disqualified 
interest described in paragraph (3)(A), 
or 
‘‘(II) the corporation’s net interest 
expense, over 
‘‘(ii) 25 percent (35 percent in the case 
of the first taxable year beginning after De-
cember 31, 2003) of the adjusted taxable in-
come of the corporation. 
‘‘(3) ALTERNATIVE MAXIMUM DISALLOWANCE.—
149
‘‘(A) IN GENERAL.—In the case of a cor-
poration with respect to which an election is in 
effect under subparagraph (B), the amount dis-
allowed under paragraph (1)(A) shall not exceed 
the excess (if any) of—
‘‘(i) the corporation’s net interest ex-
pense, over 
‘‘(ii) 30 percent of the adjusted taxable 
income of the corporation. 
‘‘(B) ELECTION.—A corporation may make 
a one-time irrevocable election to have the alter-
native maximum disallowance described in sub-
paragraph (A) apply for purposes of this sub-
section in lieu of paragraph (1)(B). An election 
under this subparagraph shall not apply with re-
spect to any taxable year beginning before Janu-
ary 1, 2005. 
‘‘(C) LIMITATION.—Subparagraph (B) shall 
not apply with respect to any corporation which 
is— 
‘‘(i) a surrogate foreign corporation (as 
defined in section 7874(a)(2)(B)), 
‘‘(ii) a corporation which would be a 
surrogate foreign corporation (as so defined)
151
‘‘(A) IN GENERAL.—If this subsection ap-
plies to any taxable REIT subsidiary for any 
taxable year, no deduction shall be allowed under 
this chapter for disqualified interest paid or ac-
crued by such subsidiary during such taxable 
year. The amount disallowed under the preceding 
sentence shall not exceed the subsidiary’s excess 
interest expense for the taxable year. 
‘‘(B) DISALLOWED
AMOUNT
CARRIED
TO 
SUCCEEDING TAXABLE YEAR.—Any amount dis-
allowed under subparagraph (A) for any taxable 
year shall be treated as disqualified interest paid 
or accrued in the succeeding taxable year (and 
clause (ii) of paragraph (2)(A) shall not apply 
for purposes of applying this subsection to the 
amount so treated). 
‘‘(2) SUBSIDIARIES TO WHICH SUBSECTION AP-
PLIES.—
‘‘(A) IN
GENERAL.—This subsection shall 
apply to any taxable REIT subsidiary for any 
taxable year if—
‘‘(i) such subsidiary has excess interest 
expense for such taxable year, and 
‘‘(ii) the ratio of debt to equity of such 
subsidiary as of the close of such taxable
152
year (or on any other day during the tax-
able year as the Secretary may by regula-
tions prescribe) exceeds 1.5 to 1. 
‘‘(B) EXCESS INTEREST EXPENSE.—
‘‘(i) IN
GENERAL.—For purposes of 
this subsection, the term ‘excess interest ex-
pense’ means the excess (if any) of—
‘‘(I) the taxable REIT subsidi-
ary’s net interest expense, over 
‘‘(II) the sum of 50 percent of the 
adjusted taxable income of the sub-
sidiary plus any excess limitation 
carryforward under clause (ii). 
‘‘(ii) 
EXCESS
LIMITATION 
CARRYFORWARD.—If a taxable REIT sub-
sidiary has an excess limitation for any 
taxable year, the amount of such excess lim-
itation shall be an excess limitation 
carryforward to the 1st succeeding taxable 
year and to the 2nd and 3rd succeeding tax-
able years to the extent not previously taken 
into account under this clause. The amount 
of such a carryforward taken into account 
for any such succeeding taxable year shall 
not exceed the excess interest expense for
153
such succeeding taxable year (determined 
without regard to the carryforward from the 
taxable year of such excess limitation). 
‘‘(iii) EXCESS LIMITATION.—For pur-
poses of clause (ii), the term ‘excess limita-
tion’ means the excess (if any) of—
‘‘(I) 50 percent of the adjusted 
taxable income of the subsidiary, over 
‘‘(II) the subsidiary’s net interest 
expense. 
‘‘(C) RATIO OF DEBT TO EQUITY.—For pur-
poses of this paragraph, the term ‘ratio of debt 
to equity’ means the ratio which the total indebt-
edness of the subsidiary bears to the sum of its 
money and all other assets reduced (but not 
below zero) by such total indebtedness. The rules 
of section 163(j)(6)(E) shall apply for purposes 
of the preceding sentence. 
‘‘(3) DISQUALIFIED INTEREST.—For purposes of 
this subsection, the term ‘disqualified interest’ means 
any interest paid or accrued (directly or indirectly) 
by a taxable REIT subsidiary of a real estate invest-
ment trust to such trust.
154
‘‘(4) OTHER RULES TO APPLY.—Rules similar to 
the rules of paragraphs (7), (8), and (9) of section 
163(j) shall apply for purposes of this subsection.’’
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as otherwise provided 
in this subsection, the amendments made by this sec-
tion shall apply to taxable years beginning after De-
cember 31, 2003. 
(2) EARLIER EFFECTIVE DATE WITH RESPECT 
TO EXPATRIATED CORPORATIONS, ETC.—The amend-
ments made by this section shall apply to taxable 
years ending after March 4, 2003, in the case of a 
taxpayer which is—
(A) a surrogate foreign corporation, as de-
fined in section 7874(a)(2)(B) of the Internal 
Revenue Code of 1986, as added by section 2002, 
(B) a corporation which would be a surro-
gate foreign corporation (as so defined) if ‘‘De-
cember 31, 1996’’ were substituted for ‘‘March 4, 
2003’’ in such section 7874(a), or 
(C) a corporation which is an expatriated 
entity (as defined in such section 7874(a)) with 
respect to a corporation described in subpara-
graph (A) or (B).
155
In applying such amendments to a taxpayer de-
scribed in the preceding sentence, subparagraph (B) 
of section 163(j)(2) of such Code, as amended by this 
section, shall be applied by substituting ‘‘25 percent’’ 
for ‘‘35 percent’’. 
(3) LIMITATION ON CARRYOVER OF DISALLOWED 
INTEREST.—
(A) IN GENERAL.—Except in the case of a 
taxpayer described in paragraph (2), for pur-
poses of applying section 163(j)(1)(C) of the In-
ternal Revenue Code of 1986 (as added by this 
section), amounts carried from a taxable year be-
ginning before January 1, 2004, to any taxable 
year beginning after December 31, 2003, shall be 
treated as disqualified interest described in sec-
tion 163(j)(3)(B) of such Code which is dis-
allowed for the most recent taxable year begin-
ning before January 1, 2004. 
(B) EXPATRIATED CORPORATIONS.—In the 
case of a taxpayer described in paragraph (2), a 
rule similar to the rule of subparagraph (A) 
shall apply to amounts carried from a taxable 
year ending on or before March 5, 2003.
156
SEC. 2002. TAX TREATMENT OF EXPATRIATED ENTITIES 
AND THEIR FOREIGN PARENTS. 
(a) IN GENERAL.—Subchapter C of chapter 80 (relat-
ing to provisions affecting more than one subtitle) is 
amended by adding at the end the following new section: 
‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 
AND THEIR FOREIGN PARENTS. 
‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED ENTI-
TIES.—
‘‘(1) IN GENERAL.—The taxable income of an ex-
patriated entity for any taxable year which includes 
any portion of the applicable period shall in no event 
be less than the inversion gain of the entity for the 
taxable year. 
‘‘(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).
157
‘‘(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, 
‘‘(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
158
‘‘(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 
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.
159
‘‘(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-
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-
160
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. 
‘‘(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
161
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. 
‘‘(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—
162
‘‘(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—
‘‘(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
163
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 
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
164
‘‘(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-
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.’’
165
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years ending after March 4, 
2003.
SEC. 2003. EXCISE TAX ON STOCK COMPENSATION OF IN-
SIDERS 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.
‘‘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—
166
‘‘(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-
triation date, on the day before such cancella-
tion, and 
‘‘(C) in the case of such compensation which 
is granted after the expatriation date, on the 
date such compensation is granted. 
‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN 
RECOGNIZED.—Subsection (a) shall apply to any disquali-
fied individual with respect to an expatriated corporation 
only if gain (if any) on any stock in such corporation is 
recognized in whole or part by any shareholder by reason 
of the acquisition referred to in section 7874(a)(2)(B)(i) 
with respect to such corporation. 
‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON COM-
PENSATION.—Subsection (a) shall not apply to—
168
‘‘(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-
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).
169
‘‘(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 
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
170
‘‘(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. 
‘‘(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:
171
‘‘(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.’’
(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.
172
SEC. 2004. 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. 
SEC. 2005. 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.
173
‘‘(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 $122,000, 
‘‘(B) the net worth of the individual as of 
such date is $2,000,000 or more, or 
‘‘(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 2003, such $122,000 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 ‘2002’ 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
174
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—
‘‘(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
175
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, 
‘‘(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
176
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-
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-
177
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-
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
178
‘‘(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. 
‘‘(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-
185
‘‘(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 
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-
191
‘‘(A) the violation is with respect to a re-
portable transaction other than a listed trans-
action, and 
‘‘(B) rescinding the penalty would promote 
compliance with the requirements of this title 
and effective tax administration. 
‘‘(2) NO
JUDICIAL
APPEAL.—Notwithstanding 
any other provision of law, any determination under 
this subsection may not be reviewed in any judicial 
proceeding. 
‘‘(3) RECORDS.—If a penalty is rescinded under 
paragraph (1), the Commissioner shall place in the 
file in the Office of the Commissioner the opinion of 
the Commissioner or the head of the Office of Tax 
Shelter Analysis with respect to the determination, 
including—
‘‘(A) a statement of the facts and cir-
cumstances relating to the violation, 
‘‘(B) the reasons for the rescission, and 
‘‘(C) the amount of the penalty rescinded. 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 
penalty imposed by this section shall be in addition to any 
other penalty imposed by this title.’’
(b) CONFORMING AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by