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tion was an electing small business corporation under sub-
chapter S of the Internal Revenue Code of 1986.
SEC. 526. EXPANSION OF QUALIFYING BENEFICIARIES OF
AN ELECTING SMALL BUSINESS TRUST.
(a) NO LOOK THROUGH
FOR ELIGIBILITY PUR-
POSES.—Clause (v) of section 1361(c)(2)(B) is amended by
adding at the end the following new sentence: ‘‘This clause
shall not apply for purposes of subsection (b)(1)(C).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall take effect on the date of the enactment of this
Act.
SEC. 527. DEDUCTIBILITY OF INTEREST EXPENSE ON IN-
DEBTEDNESS INCURRED BY AN ELECTING
SMALL BUSINESS TRUST TO ACQUIRE S COR-
PORATION STOCK.
(a) IN
GENERAL.—Subparagraph (C) of section
641(c)(2) (relating to modifications) is amended by insert-
ing after clause (iii) the following new clause:
‘‘(iv) Any interest expense paid or ac-
crued on indebtedness incurred to acquire
stock in an S corporation.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2006.
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PART II—REVENUE PROVISIONS
SEC. 531. MODIFICATION OF EFFECTIVE DATE OF LEASING
PROVISIONS OF THE AMERICAN JOBS CRE-
ATION ACT OF 2004.
(a) LEASES TO FOREIGN ENTITIES.—Section 849(b)
of the American Jobs Creation Act of 2004 is amended by
adding at the end the following new paragraph:
‘‘(5) LEASES TO FOREIGN ENTITIES.—In the case
of tax-exempt use property leased to a tax-exempt en-
tity which is a foreign person or entity, the amend-
ments made by this part shall apply to taxable years
beginning after December 31, 2006, with respect to
leases entered into on or before March 12, 2004.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall take effect as if included in the enactment of
the American Jobs Creation Act of 2004.
SEC. 532. APPLICATION OF RULES TREATING INVERTED
CORPORATIONS 
AS 
DOMESTIC 
CORPORA-
TIONS TO CERTAIN TRANSACTIONS OCCUR-
RING AFTER MARCH 20, 2002.
(a) IN GENERAL.—Section 7874(b) (relating to in-
verted corporations treated as domestic corporations) is
amended to read as follows:
‘‘(b) INVERTED CORPORATIONS TREATED AS DOMES-
TIC CORPORATIONS.—
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‘‘(1) IN
GENERAL.—Notwithstanding section
7701(a)(4), a foreign corporation shall be treated for
purposes of this title as a domestic corporation if such
corporation would be a surrogate foreign corporation
if subsection (a)(2) were applied by substituting ‘80
percent’ for ‘60 percent’.
‘‘(2) SPECIAL RULE FOR CERTAIN TRANSACTIONS
OCCURRING AFTER MARCH 20, 2002.—
‘‘(A) IN GENERAL.—If—
‘‘(i) paragraph (1) does not apply to a
foreign corporation, but
‘‘(ii) paragraph (1) would apply to
such corporation if, in addition to the sub-
stitution under paragraph (1), subsection
(a)(2) were applied by substituting ‘March
20, 2002’ for ‘March 4, 2003’ each place it
appears,
then paragraph (1) shall apply to such corpora-
tion but only with respect to taxable years of
such corporation beginning after December 31,
2006.
‘‘(B) SPECIAL
RULES.—Subject to such
rules as the Secretary may prescribe, in the case
of a corporation to which paragraph (1) applies
by reason of this paragraph—
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‘‘(i) the corporation shall be treated, as
of the close of its last taxable year beginning
before January 1, 2007, as having trans-
ferred all of its assets, liabilities, and earn-
ings and profits to a domestic corporation
in a transaction with respect to which no
tax is imposed under this title,
‘‘(ii) the bases of the assets transferred
in the transaction to the domestic corpora-
tion shall be the same as the bases of the as-
sets in the hands of the foreign corporation,
subject to any adjustments under this title
for built-in losses,
‘‘(iii) the basis of the stock of any
shareholder in the domestic corporation
shall be the same as the basis of the stock
of the shareholder in the foreign corporation
for which it is treated as exchanged, and
‘‘(iv) the transfer of any earnings and
profits by reason of clause (i) shall be dis-
regarded in determining any deemed divi-
dend or foreign tax creditable to the domes-
tic corporation with respect to such trans-
fer.
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‘‘(C) REGULATIONS.—The Secretary may
prescribe such regulations as may be necessary
or appropriate to carry out this paragraph, in-
cluding regulations to prevent the avoidance of
the purposes of this paragraph.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2006.
SEC. 533. DENIAL OF DEDUCTION FOR PUNITIVE DAMAGES.
(a) DISALLOWANCE OF DEDUCTION.—
(1) IN
GENERAL.—Section 162(g) (relating to
treble damage payments under the antitrust laws) is
amended—
(A) by redesignating paragraphs (1) and
(2) as subparagraphs (A) and (B), respectively,
(B) by striking ‘‘If’’ and inserting:
‘‘(1) TREBLE DAMAGES.—If’’, and
(C) by adding at the end the following new
paragraph:
‘‘(2) PUNITIVE DAMAGES.—No deduction shall be
allowed under this chapter for any amount paid or
incurred for punitive damages in connection with
any judgment in, or settlement of, any action. This
paragraph shall not apply to punitive damages de-
scribed in section 104(c).’’.
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(2) CONFORMING AMENDMENT.—The heading for
section 162(g) is amended by inserting ‘‘OR PUNITIVE
DAMAGES’’ after ‘‘LAWS’’.
(b) INCLUSION IN INCOME OF PUNITIVE DAMAGES
PAID BY INSURER OR OTHERWISE.—
(1) IN GENERAL.—Part II of subchapter B of
chapter 1 (relating to items specifically included in
gross income) is amended by adding at the end the
following new section:
‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR-
ANCE OR OTHERWISE.
‘‘Gross income shall include any amount paid to or
on behalf of a taxpayer as insurance or otherwise by reason
of the taxpayer’s liability (or agreement) to pay punitive
damages.’’.
(2) REPORTING REQUIREMENTS.—Section 6041
(relating to information at source) is amended by
adding at the end the following new subsection:
‘‘(h) SECTION TO APPLY TO PUNITIVE DAMAGES COM-
PENSATION.—This section shall apply to payments by a
person to or on behalf of another person as insurance or
otherwise by reason of the other person’s liability (or agree-
ment) to pay punitive damages.’’.
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(3) CONFORMING AMENDMENT.—The table of sec-
tions for part II of subchapter B of chapter 1 is
amended by adding at the end the following new item:
‘‘Sec. 91. Punitive damages compensated by insurance or otherwise’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to damages paid or incurred on or after
the date of the enactment of this Act.
SEC. 534. DENIAL OF DEDUCTION FOR CERTAIN FINES, PEN-
ALTIES, AND OTHER AMOUNTS.
(a) IN GENERAL.—Subsection (f) of section 162 (relat-
ing to trade or business expenses) is amended to read as
follows:
‘‘(f) FINES, PENALTIES, AND OTHER AMOUNTS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), no deduction otherwise allowable shall be
allowed under this chapter for any amount paid or
incurred (whether by suit, agreement, or otherwise)
to, or at the direction of, a government or entity de-
scribed in paragraph (4) in relation to—
‘‘(A) the violation of any law, or
‘‘(B) an investigation or inquiry into the
potential violation of any law which is initiated
by such government or entity.
‘‘(2) EXCEPTION
FOR
AMOUNTS
CONSTITUTING
RESTITUTION OR PAID TO COME INTO COMPLIANCE
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WITH LAW.—Paragraph (1) shall not apply to any
amount which—
‘‘(A) the taxpayer establishes—
‘‘(i) constitutes restitution (or remedi-
ation of property) for damage or harm
caused by, or which may be caused by, the
violation of any law or the potential viola-
tion of any law, or
‘‘(ii) is paid to come into compliance
with any law which was violated or in-
volved in the investigation or inquiry, and
‘‘(B) is identified as an amount described
in clause (i) or (ii) of subparagraph (A), as the
case may be, in the court order or settlement
agreement, except that the requirement of this
subparagraph shall not apply in the case of any
settlement agreement which requires the taxpayer
to pay or incur an amount not greater than
$1,000,000.
A taxpayer shall not meet the requirements of sub-
paragraph (A) solely by reason an identification
under subparagraph (B). This paragraph shall not
apply to any amount paid or incurred as reimburse-
ment to the government or entity for the costs of any
investigation or litigation unless such amount is paid
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or incurred for a cost or fee regularly charged for any
routine audit or other customary review performed by
the government or entity.
‘‘(3) EXCEPTION
FOR
AMOUNTS
PAID
OR
IN-
CURRED
AS
THE
RESULT
OF
CERTAIN
COURT
OR-
DERS.—Paragraph (1) shall not apply to any
amount paid or incurred by order of a court in a suit
in which no government or entity described in para-
graph (4) is a party.
‘‘(4) CERTAIN NONGOVERNMENTAL REGULATORY
ENTITIES.—An entity is described in this paragraph
if it is—
‘‘(A) a nongovernmental entity which exer-
cises self-regulatory powers (including imposing
sanctions) in connection with a qualified board
or exchange (as defined in section 1256(g)(7)), or
‘‘(B) to the extent provided in regulations,
a nongovernmental entity which exercises self-
regulatory powers (including imposing sanc-
tions) as part of performing an essential govern-
mental function.
‘‘(5) EXCEPTION FOR TAXES DUE.—Paragraph
(1) shall not apply to any amount paid or incurred
as taxes due.’’.
(b) REPORTING OF DEDUCTIBLE AMOUNTS.—
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(1) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 is amended by inserting after
section 6050V the following new section:
‘‘SEC. 6050W. INFORMATION WITH RESPECT TO CERTAIN
FINES, PENALTIES, AND OTHER AMOUNTS.
‘‘(a) REQUIREMENT OF REPORTING.—
‘‘(1) IN GENERAL.—The appropriate official of
any government or entity which is described in sec-
tion 162(f)(4) which is involved in a suit or agree-
ment described in paragraph (2) shall make a return
in such form as determined by the Secretary setting
forth—
‘‘(A) the amount required to be paid as a
result of the suit or agreement to which para-
graph (1) of section 162(f) applies,
‘‘(B) any amount required to be paid as a
result of the suit or agreement which constitutes
restitution or remediation of property, and
‘‘(C) any amount required to be paid as a
result of the suit or agreement for the purpose of
coming into compliance with any law which was
violated or involved in the investigation or in-
quiry.
‘‘(2) SUIT OR AGREEMENT DESCRIBED.—