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‘‘(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.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to amounts paid or incurred after April
27, 2003, except that such amendment shall not apply to
amounts paid or incurred under any binding order or
agreement entered into on or before April 27, 2003. Such
exception shall not apply to an order or agreement requir-
ing court approval unless the approval was obtained on or
before April 27, 2003.
SEC. 334. DISALLOWANCE 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 by adding at the end the following new
paragraph:
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‘‘(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).’’.
(2) CONFORMING AMENDMENTS.—
(A) Section 162(g) is amended—
(i) by striking ‘‘If’’ and inserting:
‘‘(1) TREBLE DAMAGES.—If’’, and
(ii) by redesignating paragraphs (1)
and (2) as subparagraphs (A) and (B), re-
spectively.
(B) 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:
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‘‘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:
‘‘(f) 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.’’.
(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. 335. INCREASE IN CRIMINAL MONETARY PENALTY LIM-
ITATION FOR THE UNDERPAYMENT OR OVER-
PAYMENT OF TAX DUE TO FRAUD.
(a) IN GENERAL.—Section 7206 (relating to fraud and
false statements) is amended—
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(1) by striking ‘‘Any person who—’’ and insert-
ing ‘‘(a) IN GENERAL.—Any person who—’’, and
(2) by adding at the end the following new sub-
section:
‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN-
DERPAYMENT OR OVERPAYMENT OF TAX DUE TO FRAUD.—
If any portion of any underpayment (as defined in section
6664(a)) or overpayment (as defined in section 6401(a)) of
tax required to be shown on a return is attributable to
fraudulent action described in subsection (a), the applicable
dollar amount under subsection (a) shall in no event be less
than an amount equal to such portion. A rule similar to
the rule under section 6663(b) shall apply for purposes of
determining the portion so attributable.’’.
(b) INCREASE IN PENALTIES.—
(1) ATTEMPT TO EVADE OR DEFEAT TAX.—Sec-
tion 7201 is amended—
(A) by striking ‘‘$100,000’’ and inserting
‘‘$250,000’’,
(B) by striking ‘‘$500,000’’ and inserting
‘‘$1,000,000’’, and
(C) by striking ‘‘5 years’’ and inserting ‘‘10
years’’.
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(2) WILLFUL FAILURE TO FILE RETURN, SUPPLY
INFORMATION, 
OR
PAY
TAX.—Section 
7203 
is
amended—
(A) in the first sentence—
(i) by striking ‘‘misdemeanor’’ and in-
serting ‘‘felony’’, and
(ii) by striking ‘‘1 year’’ and inserting
‘‘10 years’’, and
(B) by striking the third sentence.
(3) FRAUD
AND
FALSE
STATEMENTS.—Section
7206(a) (as redesignated by subsection (a)) is
amended—
(A) by striking ‘‘$100,000’’ and inserting
‘‘$250,000’’,
(B) by striking ‘‘$500,000’’ and inserting
‘‘$1,000,000’’, and
(C) by striking ‘‘3 years’’ and inserting ‘‘5
years’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to underpayments and overpayments at-
tributable to actions occurring after the date of the enact-
ment of this Act.
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PART II—EXECUTIVE COMPENSATION REFORM
SEC. 336. TREATMENT OF NONQUALIFIED DEFERRED COM-
PENSATION FUNDED WITH ASSETS LOCATED
OUTSIDE THE UNITED STATES.
(a) IN GENERAL.—Section 83(c) (relating to special
rules for property transferred in connection with perform-
ance of services) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(4) FOREIGN ASSETS FUNDING NONQUALIFIED
DEFERRED COMPENSATION ARRANGEMENTS.—
‘‘(A) IN GENERAL.—In determining whether
there is a transfer of property for purposes of
subsection (a), if assets are—
‘‘(i) designated or otherwise available
for the payment of nonqualified deferred
compensation, and
‘‘(ii) located outside the United States,
such assets shall not be treated as subject to the
claims of creditors.
‘‘(B) COMPENSATION
FOR
SERVICES
PER-
FORMED IN FOREIGN JURISDICTION.—Subpara-
graph (A) shall not apply to assets located in a
foreign jurisdiction if substantially all of the
services to which the nonqualified deferred com-
pensation relates are performed in such jurisdic-
tion.
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‘‘(C) REGULATIONS.—The Secretary shall
prescribe such regulations as are necessary to
carry out the provisions of this paragraph, in-
cluding regulations to exempt arrangements from
the application of this paragraph if—
‘‘(i) the arrangement will not result in
an improper deferral of United States tax,
and
‘‘(ii) the assets involved in the arrange-
ment will be readily accessible in any insol-
vency or bankruptcy proceeding.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts deferred in taxable years be-
ginning after December 31, 2003.
SEC. 337. INCLUSION IN GROSS INCOME OF FUNDED DE-
FERRED COMPENSATION OF CORPORATE IN-
SIDERS.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 is amended by adding at the end the fol-
lowing new section:
‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF FUNDED DE-
FERRED COMPENSATION OF CORPORATE IN-
SIDERS.
‘‘(a) IN GENERAL.—If an employer maintains a fund-
ed deferred compensation plan—
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‘‘(1) compensation of any disqualified individual
which is deferred under such funded deferred com-
pensation plan shall be included in the gross income
of the disqualified individual or beneficiary for the
1st taxable year in which there is no substantial risk
of forfeiture of the rights to such compensation, and
‘‘(2) the tax treatment of any amount made
available under the plan to a disqualified individual
or beneficiary shall be determined under section 72
(relating to annuities, etc.).
‘‘(b) FUNDED DEFERRED COMPENSATION PLAN.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘funded deferred
compensation plan’ means any plan providing for the
deferral of compensation unless—
‘‘(A) the employee’s rights to the compensa-
tion deferred under the plan are no greater than
the rights of a general creditor of the employer,
and
‘‘(B) all amounts set aside (directly or indi-
rectly) for purposes of paying the deferred com-
pensation, and all income attributable to such
amounts, remain (until made available to the
participant or other beneficiary) solely the prop-
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erty of the employer (without being restricted to
the provision of benefits under the plan),
‘‘(C) the amounts referred to in subpara-
graph (B) are available to satisfy the claims of
the employer’s general creditors at all times (not
merely after bankruptcy or insolvency), and
‘‘(D) the investment options which a partic-
ipant may elect under the plan are the same as
the investment options which a participant may
elect under the qualified employer plan of the
employer which has the fewest investment op-
tions.
Such term shall not include a qualified employer
plan.
‘‘(2) SPECIAL RULES.—
‘‘(A) EMPLOYEE’S RIGHTS.—A plan shall be
treated as failing to meet the requirements of
paragraph (1)(A) unless—
‘‘(i) the compensation deferred under
the plan is payable only upon separation
from service, death, disability (within the
meaning of section 1614(a)(3) of the Social
Security Act (42 U.S.C. 1382c(a)(3))), or at
a specified time (or pursuant to a fixed
schedule), and
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‘‘(ii) the plan does not permit the ac-
celeration of the time such deferred com-
pensation is payable by reason of any event.
If the employer and employee agree to a modi-
fication of the plan that accelerates the time for
payment of any deferred compensation, then all
compensation previously deferred under the plan
shall be includible in gross income for the taxable
year during which such modification takes effect
and the taxpayer shall pay interest at the under-
payment rate on the underpayments that would
have occurred had the deferred compensation
been includible in gross income on the earliest
date that there is no substantial risk of forfeiture
of the rights to such compensation.
‘‘(B) CREDITOR’S RIGHTS.—A plan shall be
treated as failing to meet the requirements of
paragraph (1)(B) with respect to amounts set
aside in a trust unless—
‘‘(i) the employee has no beneficial in-
terest in the trust,
‘‘(ii) assets in the trust are available to
satisfy claims of general creditors at all
times (not merely after bankruptcy or insol-
vency), and
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‘‘(iii) there is no factor that would
make it more difficult for general creditors
to reach the assets in the trust than it
would be if the trust assets were held di-
rectly by the employer in the United States.
Except as provided in regulations prescribed by
the Secretary, such a factor shall include the lo-
cation of the trust outside the United States un-
less substantially all of the services to which the
nonqualified deferred compensation relates are
performed outside the United States. Such regu-
lations may exempt any such trust if the trust
will not result in an improper deferral of United
States tax, and the assets involved in the trust
will be readily accessible in any insolvency or
bankruptcy proceeding.
‘‘(c) DISQUALIFIED INDIVIDUAL.—For purposes of this
section, the term ‘disqualified individual’ means, with re-
spect to a corporation, any individual—
‘‘(1) who is subject to the requirements of section
16(a) of the Securities Exchange Act of 1934 with re-
spect to such corporation, or
‘‘(2) who would be subject to such requirements
if such corporation were an issuer of equity securities
referred to in such section.
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‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—For
purposes of this section—
‘‘(1) QUALIFIED
EMPLOYER
PLAN.—The term
‘qualified employer plan’ means—
‘‘(A) any plan, contract, pension, account,
or trust described in subparagraph (A) or (B) of
section 219(g)(5), and
‘‘(B) any other plan of an organization ex-
empt from tax under subtitle A.
‘‘(2) PLAN INCLUDES ARRANGEMENTS, ETC.—The
term ‘plan’ includes any agreement or arrangement.
‘‘(3) SUBSTANTIAL RISK OF FORFEITURE.—The
rights of a person to compensation are subject to a
substantial risk of forfeiture if such person’s rights to
such compensation are conditioned upon the future
performance of substantial services by any individual.
‘‘(4) TREATMENT OF EARNINGS.—References to
deferred compensation shall be treated as including
references to income attributable to such compensation
or such income.’’.
(b) CLERICAL AMENDMENT.—The table of sections for
such subpart A is amended by adding at the end the fol-
lowing new item:
‘‘Sec. 409A. Inclusion in gross income of funded deferred compensa-
tion of corporate insiders.’’.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts deferred in taxable years be-
ginning after December 31, 2003.
SEC. 338. PROHIBITION ON DEFERRAL OF GAIN FROM THE
EXERCISE 
OF 
STOCK 
OPTIONS 
AND 
RE-
STRICTED 
STOCK 
GAINS 
THROUGH 
DE-
FERRED COMPENSATION ARRANGEMENTS.
(a) IN GENERAL.—Section 83 (relating to property
transferred in connection with performance of services) is
amending by adding at the end the following new sub-
section:
‘‘(i) 
PROHIBITION
ON
ADDITIONAL
DEFERRAL
THROUGH DEFERRED COMPENSATION ARRANGEMENTS.—
If a taxpayer elects to exchange an option to purchase em-
ployer securities—
‘‘(1) to which subsection (a) applies, or
‘‘(2) which is described in subsection (e)(3),
or any other compensation based on employer securities, for
a right to receive future payments, then, notwithstanding
any other provision of this title, there shall be included in
gross income for the taxable year of the exchange an amount
equal to the present value of such right (or such other
amount as the Secretary may by regulations specify). For
purposes of this subsection, the term ‘employer securities’
has the meaning given such term by section 409(l).’’.
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(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to any exchange after December 31,
2003.
SEC. 339. INCREASE IN WITHHOLDING FROM SUPPLE-
MENTAL WAGE PAYMENTS IN EXCESS OF
$1,000,000.
(a) IN GENERAL.—If an employer elects under Treas-
ury Regulation 31.3402(g)–1 to determine the amount to
be deducted and withheld from any supplemental wage pay-
ment by using a flat percentage rate, the rate to be used
in determining the amount to be so deducted and withheld
shall not be less than 28 percent (or the corresponding rate
in effect under section 1(i)(2) of the Internal Revenue Code
of 1986 for taxable years beginning in the calendar year
in which the payment is made).
(b) SPECIAL RULE FOR LARGE PAYMENTS.—
(1) IN
GENERAL.—Notwithstanding subsection
(a), if the supplemental wage payment, when added
to all such payments previously made by the employer
to the employee during the calendar year, exceeds
$1,000,000, the rate used with respect to such excess
shall be equal to the maximum rate of tax in effect
under section 1 of such Code for taxable years begin-
ning in such calendar year.
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(2) AGGREGATION.—All persons treated as a sin-
gle employer under subsection (a) or (b) of section 52
of the Internal Revenue Code of 1986 shall be treated
as a single employer for purposes of this subsection.
(c) CONFORMING AMENDMENT.—Section 13273 of the
Revenue Reconciliation Act of 1993 (Public Law 103–66)
is repealed.
(d) EFFECTIVE DATE.—The provisions of, and the
amendment made by, this section shall apply to payments
made after December 31, 2003.
Subtitle D—International
Provisions
PART I—PROVISIONS TO DISCOURAGE
EXPATRIATION
SEC. 340. REVISION OF TAX RULES ON EXPATRIATION.
(a) IN GENERAL.—Subpart A of part II of subchapter
N of chapter 1 is amended by inserting after section 877
the following new section:
‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
‘‘(a) 
GENERAL
RULES.—For 
purposes 
of 
this
subtitle—
‘‘(1) MARK TO MARKET.—Except as provided in
subsections (d) and (f), all property of a covered expa-
triate to whom this section applies shall be treated as
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sold on the day before the expatriation date for its
fair market value.
‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the
case of any sale under paragraph (1)—
‘‘(A) notwithstanding any other provision of
this title, any gain arising from such sale shall
be taken into account for the taxable year of the
sale, and
‘‘(B) any loss arising from such sale shall
be taken into account for the taxable year of the
sale to the extent otherwise provided by this title,
except that section 1091 shall not apply to any
such loss.
Proper adjustment shall be made in the amount of
any gain or loss subsequently realized for gain or loss
taken into account under the preceding sentence.
‘‘(3) EXCLUSION FOR CERTAIN GAIN.—
‘‘(A) IN GENERAL.—The amount which, but
for this paragraph, would be includible in the
gross income of any individual by reason of this
section shall be reduced (but not below zero) by
$600,000. For purposes of this paragraph, allo-
cable expatriation gain taken into account under
subsection (f)(2) shall be treated in the same
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manner as an amount required to be includible
in gross income.
‘‘(B) COST-OF-LIVING ADJUSTMENT.—
‘‘(i) IN GENERAL.—In the case of an
expatriation date occurring in any calendar
year after 2003, the $600,000 amount under
subparagraph (A) shall be increased by an
amount equal to—
‘‘(I) such dollar amount, multi-
plied by
‘‘(II) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year, determined by sub-
stituting ‘calendar year 2002’ for ‘cal-
endar year 1992’ in subparagraph (B)
thereof.
‘‘(ii) 
ROUNDING
RULES.—If 
any
amount after adjustment under clause (i) is
not a multiple of $1,000, such amount shall
be rounded to the next lower multiple of
$1,000.
‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS
UNITED STATES CITIZEN.—
‘‘(A) IN GENERAL.—If a covered expatriate
elects the application of this paragraph—
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on or after February 5, 2003, from an individual or
the estate of an individual whose expatriation date
(as so defined) occurs after such date.
(3) DUE DATE FOR TENTATIVE TAX.—The due
date under section 877A(h)(2) of the Internal Revenue
Code of 1986, as added by this section, shall in no
event occur before the 90th day after the date of the
enactment of this Act.
SEC. 341. TAX TREATMENT OF INVERTED CORPORATE ENTI-
TIES.
(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 INVERTED CORPORATE
ENTITIES.
‘‘(a) INVERTED CORPORATIONS TREATED AS DOMES-
TIC CORPORATIONS.—
‘‘(1) IN GENERAL.—If a foreign incorporated en-
tity is treated as an inverted domestic corporation,
then, notwithstanding section 7701(a)(4), such entity
shall be treated for purposes of this title as a domestic
corporation.
‘‘(2) INVERTED
DOMESTIC
CORPORATION.—For
purposes of this section, a foreign incorporated entity
shall be treated as an inverted domestic corporation
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the partnership in an attempt to avoid such pur-
poses.’’.
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 743 is
amended to read as follows:
‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY WHERE SECTION 754 ELECTION OR SUB-
STANTIAL BUILT-IN LOSS.’’.
(B) The table of sections for subpart C of
part II of subchapter K of chapter 1 is amended
by striking the item relating to section 743 and
inserting the following new item:
‘‘Sec. 743. Adjustment to basis of partnership property where sec-
tion 754 election or substantial built-in loss.’’.
(c) ADJUSTMENT TO BASIS OF UNDISTRIBUTED PART-
NERSHIP PROPERTY IF THERE IS SUBSTANTIAL BASIS RE-
DUCTION.—
(1) ADJUSTMENT REQUIRED.—Subsection (a) of
section 734 (relating to optional adjustment to basis
of undistributed partnership property) is amended by
inserting before the period ‘‘or unless there is a sub-
stantial basis reduction’’.
(2) ADJUSTMENT.—Subsection (b) of section 734
is amended by inserting ‘‘or unless there is a substan-
tial basis reduction’’ after ‘‘section 754 is in effect’’.