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‘‘(E) maintain employee records relating to
such individual, and
‘‘(F) agree to be treated as a certified pro-
fessional employer organization for purposes of
section 3511 with respect to such individual.
‘‘(3) WORK SITE COVERAGE REQUIREMENT.—The
requirements of this paragraph are met with respect
to an individual if at least 85 percent of the individ-
uals performing services for the customer at the work
site where such individual performs services are sub-
ject to 1 or more contracts with the certified profes-
sional employer organization which meet the require-
ments of paragraph (2) (but not taking into account
those individuals who are excluded employees within
the meaning of section 414(q)(5)).
‘‘(f) DETERMINATION OF EMPLOYMENT STATUS.—Ex-
cept to the extent necessary for purposes of section 3511,
nothing in this section shall be construed to affect the deter-
mination of who is an employee or employer for purposes
of this title.
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(c) CONFORMING AMENDMENTS.—
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(1) Section 3302 is amended by adding at the
end the following new subsection:
‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM-
PLOYER ORGANIZATIONS.—If a certified professional em-
ployer organization (as defined in section 7705), or a cus-
tomer of such organization, makes a contribution to the
State’s unemployment fund with respect to a work site em-
ployee, such organization shall be eligible for the credits
available under this section with respect to such contribu-
tion.’’.
(2) Section 3303(a) is amended—
(A) by striking the period at the end of
paragraph (3) and inserting ‘‘; and’’ and by in-
serting after paragraph (3) the following new
paragraph:
‘‘(4) if the taxpayer is a certified professional
employer organization (as defined in section 7705)
that is treated as the employer under section 3511,
such certified professional employer organization is
permitted to collect and remit, in accordance with
paragraphs (1), (2), and (3), contributions during the
taxable year to the State unemployment fund with re-
spect to a work site employee.’’, and
(B) in the last sentence—
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(i) by striking ‘‘paragraphs (1), (2),
and (3)’’ and inserting ‘‘paragraphs (1),
(2), (3), and (4)’’, and
(ii) by striking ‘‘paragraph (1), (2), or
(3)’’ and inserting ‘‘paragraph (1), (2), (3),
or (4)’’.
(3) Section 6053(c) (relating to reporting of tips)
is amended by adding at the end the following new
paragraph:
‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR-
GANIZATIONS.—For purposes of any report required
by this subsection, in the case of a certified profes-
sional employer organization that is treated under
section 3511 as the employer of a work site employee,
the customer with respect to whom a work site em-
ployee performs services shall be the employer for pur-
poses of reporting under this section and the certified
professional employer organization shall furnish to
the customer any information necessary to complete
such reporting no later than such time as the Sec-
retary shall prescribe.’’.
(d) CLERICAL AMENDMENTS.—
(1) The table of sections for chapter 25 is amend-
ed by adding at the end the following new item:
‘‘Sec. 3511. Certified professional employer organizations.’’.
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(2) The table of sections for chapter 79 is amend-
ed by inserting after the item relating to section 7704
the following new item:
‘‘Sec. 7705. Certified professional employer organizations defined.’’.
(e) REPORTING REQUIREMENTS AND OBLIGATIONS.—
The Secretary of the Treasury shall develop such reporting
and recordkeeping rules, regulations, and procedures as the
Secretary determines necessary or appropriate to ensure
compliance with the amendments made by this section with
respect to entities applying for certification as certified pro-
fessional employer organizations or entities that have been
so certified. Such rules shall be designed in a manner which
streamlines, to the extent possible, the application of re-
quirements of such amendments, the exchange of informa-
tion between a certified professional employer organization
and its customers, and the reporting and recordkeeping ob-
ligations of the certified professional employer organization.
(f) USER FEES.—Subsection (b) of section 7528 (relat-
ing to Internal Revenue Service user fees) is amended by
adding at the end the following new paragraph:
‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR-
GANIZATIONS.—The fee charged under the program in
connection with the certification by the Secretary of
a professional employer organization under section
7705 shall not exceed $500.’’.
(g) EFFECTIVE DATES.—
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(1) IN
GENERAL.—The amendments made by
this section shall apply with respect to wages for serv-
ices performed on or after January 1 of the first cal-
endar year beginning more than 12 months after the
date of the enactment of this Act.
(2) CERTIFICATION PROGRAM.—The Secretary of
the Treasury shall establish the certification program
described in section 7705(b) of the Internal Revenue
Code of 1986, as added by subsection (b), not later
than 6 months before the effective date determined
under paragraph (1).
(h) NO INFERENCE.—Nothing contained in this section
or the amendments made by this section shall be construed
to create any inference with respect to the determination
of who is an employee or employer—
(1) for Federal tax purposes (other than the pur-
poses set forth in the amendments made by this sec-
tion), or
(2) for purposes of any other provision of law.
PART II—SUBCHAPTER S PROVISIONS
SEC. 211. CAPITAL GAIN OF S CORPORATION NOT TREATED
AS PASSIVE INVESTMENT INCOME.
(a) IN GENERAL.—Section 1362(d)(3) is amended by
striking subparagraphs (B), (C), (D), (E), and (F) and in-
serting the following new subparagraph:
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‘‘(B) PASSIVE
INVESTMENT
INCOME
DE-
FINED.—
‘‘(i) IN GENERAL.—Except as otherwise
provided in this subparagraph, the term
‘passive investment income’ means gross re-
ceipts derived from royalties, rents, divi-
dends, interest, and annuities.
‘‘(ii) EXCEPTION
FOR
INTEREST
ON
NOTES
FROM
SALES
OF
INVENTORY.—The
term ‘passive investment income’ shall not
include interest on any obligation acquired
in the ordinary course of the corporation’s
trade or business from its sale of property
described in section 1221(a)(1).
‘‘(iii) TREATMENT OF CERTAIN LEND-
ING OR FINANCE COMPANIES.—If the S cor-
poration meets the requirements of section
542(c)(6) for the taxable year, the term
‘passive investment income’ shall not in-
clude gross receipts for the taxable year
which are derived directly from the active
and regular conduct of a lending or finance
business (as defined in section 542(d)(1)).
‘‘(iv) TREATMENT
OF
CERTAIN
DIVI-
DENDS.—If an S corporation holds stock in
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a C corporation meeting the requirements of
section 1504(a)(2), the term ‘passive invest-
ment income’ shall not include dividends
from such C corporation to the extent such
dividends are attributable to the earnings
and profits of such C corporation derived
from the active conduct of a trade or busi-
ness.
‘‘(v) EXCEPTION FOR BANKS, ETC.—In
the case of a bank (as defined in section
581) or a depository institution holding
company (as defined in section 3(w)(1) of
the Federal Deposit Insurance Act (12
U.S.C. 1813(w)(1)), the term ‘passive in-
vestment income’ shall not include—
‘‘(I) interest income earned by
such bank or company, or
‘‘(II) dividends on assets required
to be held by such bank or company,
including stock in the Federal Reserve
Bank, the Federal Home Loan Bank,
or the Federal Agricultural Mortgage
Bank 
or 
participation 
certificates
issued by a Federal Intermediate Cred-
it Bank.’’.
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(b) CONFORMING AMENDMENT.—Clause (i) of section
1042(c)(4)(A) 
is 
amended 
by 
striking 
‘‘section
1362(d)(3)(C)’’ and inserting ‘‘section 1362(d)(3)(B)’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after the date
of the enactment of this Act.
SEC. 212. TREATMENT OF BANK DIRECTOR SHARES.
(a) IN GENERAL.—Section 1361 (defining S corpora-
tion) is amended by adding at the end the following new
subsection:
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—
‘‘(1) IN
GENERAL.—Restricted bank director
stock shall not be taken into account as outstanding
stock of the S corporation in applying this subchapter
(other than section 1368(f)).
‘‘(2) RESTRICTED BANK DIRECTOR STOCK.—For
purposes of this subsection, the term ‘restricted bank
director stock’ means stock in a bank (as defined in
section 581) or a depository institution holding com-
pany (as defined in section 3(w)(1) of the Federal De-
posit Insurance Act (12 U.S.C. 1813(w)(1)), if such
stock—
‘‘(A) is required to be held by an individual
under applicable Federal or State law in order
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to permit such individual to serve as a director,
and
‘‘(B) is subject to an agreement with such
bank or company (or a corporation which con-
trols (within the meaning of section 368(c)) such
bank or company) pursuant to which the holder
is required to sell back such stock (at the same
price as the individual acquired such stock) upon
ceasing to hold the office of director.
‘‘(3) CROSS REFERENCE.—
‘‘For treatment of certain distributions with respect to restricted bank director
stock, see section 1368(f)’’.
(b) DISTRIBUTIONS.—Section 1368 (relating to dis-
tributions) is amended by adding at the end the following
new subsection:
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di-
rector receives a distribution (not in part or full payment
in exchange for stock) from an S corporation with respect
to any restricted bank director stock (as defined in section
1361(f)), the amount of such distribution—
‘‘(1) shall be includible in gross income of the di-
rector, and
‘‘(2) shall be deductible by the corporation for the
taxable year of such corporation in which or with
which ends the taxable year in which such amount in
included in the gross income of the director.’’.
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(c) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to taxable years beginning
after December 31, 2006.
(2) SPECIAL RULE FOR TREATMENT AS SECOND
CLASS OF STOCK.—In the case of any taxable year be-
ginning after December 31, 1996, restricted bank di-
rector stock (as defined in section 1361(f) of the Inter-
nal Revenue Code of 1986, as added by this section)
shall not be taken into account in determining wheth-
er an S corporation has more than 1 class of stock.
SEC. 213. SPECIAL RULE FOR BANK REQUIRED TO CHANGE
FROM THE RESERVE METHOD OF ACCOUNT-
ING ON BECOMING S CORPORATION.
(a) IN GENERAL.—Section 1361, as amended by this
Act, is amended by adding at the end the following new
subsection:
‘‘(g) SPECIAL RULE FOR BANK REQUIRED TO CHANGE
FROM THE RESERVE METHOD OF ACCOUNTING ON BECOM-
ING S CORPORATION.—In the case of a bank which changes
from the reserve method of accounting for bad debts de-
scribed in section 585 or 593 for its first taxable year for
which an election under section 1362(a) is in effect, the
bank may elect to take into account any adjustments under
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section 481 by reason of such change for the taxable year
immediately preceding such first taxable year.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2006.
SEC. 214. TREATMENT OF THE SALE OF INTEREST IN A
QUALIFIED SUBCHAPTER S SUBSIDIARY.
(a) IN
GENERAL.—Subparagraph (C) of section
1361(b)(3) (relating to treatment of terminations of quali-
fied subchapter S subsidiary status) is amended—
(1) by striking ‘‘For purposes of this title,’’ and
inserting the following:
‘‘(i) IN
GENERAL.—For purposes of
this title,’’, and
(2) by inserting at the end the following new
clause:
‘‘(ii) TERMINATION
BY
REASON
OF
SALE OF STOCK.—If the failure to meet the
requirements of subparagraph (B) is by rea-
son of the sale of stock of a corporation
which is a qualified subchapter S sub-
sidiary, the sale of such stock shall be treat-
ed as if—
‘‘(I) the sale were a sale of an un-
divided interest in the assets of such
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corporation (based on the percentage of
the corporation’s stock sold), and
‘‘(II) the sale were followed by an
acquisition by such corporation of all
of its assets (and the assumption by
such corporation of all of its liabilities)
in a transaction to which section 351
applies.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning after Decem-
ber 31, 2006 .
SEC. 215. ELIMINATION OF ALL EARNINGS AND PROFITS AT-
TRIBUTABLE TO PRE-1983 YEARS FOR CER-
TAIN CORPORATIONS.
In the case of a corporation which is—
(1) described in section 1311(a)(1) of the Small
Business Job Protection Act of 1996, and
(2) not described in section 1311(a)(2) of such
Act,
the amount of such corporation’s accumulated earnings and
profits (for the first taxable year beginning after the date
of the enactment of this Act) shall be reduced by an amount
equal to the portion (if any) of such accumulated earnings
and profits which were accumulated in any taxable year
beginning before January 1, 1983, for which such corpora-
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tion was an electing small business corporation under sub-
chapter S of the Internal Revenue Code of 1986.
SEC. 216. 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.
Subtitle B—Revenue Provisions
SEC. 221. 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.’’.
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(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. 222. 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.—
‘‘(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-
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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—
‘‘(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,
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‘‘(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.
‘‘(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. 223. 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—
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(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).’’.
(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
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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.’’.
(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. 224. 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