183 
under section 951 with respect to such fund for such 
taxable year.’’. 
(28) Section 6035 is hereby repealed. 
(29) Subparagraph (D) of section 6103(e)(1) is 
amended by striking clause (iv) and redesignating 
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively. 
(30) Subparagraph (B) of section 6501(e)(1) is 
amended to read as follows: 
‘‘(B) CONSTRUCTIVE
DIVIDENDS.—If the 
taxpayer omits from gross income an amount 
properly 
includible 
therein 
under 
section 
951(a), the tax may be assessed, or a pro-
ceeding in court for the collection of such tax 
may be done without assessing, at any time 
within 6 years after the return was filed.’’. 
(31) Subsection (a) of section 6679 is amend-
ed— 
(A) by striking ‘‘6035, 6046, and 6046A’’ 
in paragraph (1) and inserting ‘‘6046 and 
6046A’’, and 
(B) by striking paragraph (3). 
(32) Sections 170(f)(10)(A), 508(d), 4947, and 
4948(c)(4) 
are 
each 
amended 
by 
striking 
‘‘556(b)(2),’’ each place it appears.
184 
(33) The table of parts for subchapter G of 
chapter 1 is amended by striking the item relating 
to part III. 
(34) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the 
items relating to sections 1246 and 1247. 
(35) The table of sections for subpart A of part 
III of subchapter A of chapter 61 is amended by 
striking the item relating to section 6035. 
(d) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within 
which such taxable years of foreign corporations 
end. 
(2) SUBSECTION
(c)(29).—The amendments 
made by subsection (c)(29) shall apply to disclosures 
of return or return information with respect to tax-
able years beginning after December 31, 2004.
185 
SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLD-
ING COMPANY INCOME WITH RESPECT TO 
TRANSACTIONS IN COMMODITIES. 
(a) IN GENERAL.—Clauses (i) and (ii) of section 
954(c)(1)(C) (relating to commodity transactions) are 
amended to read as follows: 
‘‘(i) arise out of commodity hedging 
transactions (as defined in paragraph 
(4)(A)), 
‘‘(ii) are active business gains or 
losses from the sale of commodities, but 
only if substantially all of the controlled 
foreign 
corporation’s 
commodities 
are 
property described in paragraph (1), (2), 
or (8) of section 1221(a), or’’. 
(b) DEFINITION AND SPECIAL RULES.—Subsection 
(c) of section 954 is amended by adding after paragraph 
(3) the following new paragraph: 
‘‘(4) DEFINITION AND SPECIAL RULES RELAT-
ING TO COMMODITY TRANSACTIONS.— 
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—For 
purposes 
of 
paragraph 
(1)(C)(i), the term ‘commodity hedging trans-
action’ means any transaction with respect to a 
commodity if such transaction—
186 
‘‘(i) is a hedging transaction as de-
fined in section 1221(b)(2), determined— 
‘‘(I) without regard to subpara-
graph (A)(ii) thereof, 
‘‘(II) by applying subparagraph 
(A)(i) thereof by substituting ‘ordi-
nary property or property described in 
section 1231(b)’ for ‘ordinary prop-
erty’, and 
‘‘(III) by substituting ‘controlled 
foreign corporation’ for ‘taxpayer’ 
each place it appears, and 
‘‘(ii) is clearly identified as such in ac-
cordance with section 1221(a)(7). 
‘‘(B) TREATMENT OF DEALER ACTIVITIES 
UNDER PARAGRAPH (1)(C).—Commodities with 
respect to which gains and losses are not taken 
into account under paragraph (2)(C) in com-
puting a controlled foreign corporation’s foreign 
personal holding company income shall not be 
taken into account in applying the substantially 
all test under paragraph (1)(C)(ii) to such cor-
poration. 
‘‘(C) REGULATIONS.—The Secretary shall 
prescribe such regulations as are appropriate to
187 
carry out the purposes of paragraph (1)(C) in 
the case of transactions involving related par-
ties.’’. 
(c) MODIFICATION OF EXCEPTION FOR DEALERS.— 
Clause (i) of section 954(c)(2)(C) is amended by inserting 
‘‘and transactions involving physical settlement’’ after 
‘‘(including hedging transactions’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
December 31, 2004. 
SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT 
LEASING AND SHIPPING INCOME. 
(a) ELIMINATION OF FOREIGN BASE COMPANY SHIP-
PING INCOME.—Section 954 (relating to foreign base com-
pany income) is amended— 
(1) by striking paragraph (4) of subsection (a) 
(relating to foreign base company shipping income), 
and 
(2) by striking subsection (f) (relating to for-
eign base company shipping income). 
(b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI-
TIES.—Subparagraph (A) of section 954(c)(2) is amended 
by adding at the end the following new sentence: ‘‘For 
purposes of the preceding sentence, rents derived from 
leasing an aircraft or vessel in foreign commerce shall not
188 
fail to be treated as derived in the active conduct of a 
trade or business if, as determined under regulations pre-
scribed by the Secretary, the active leasing expenses are 
not less than 10 percent of the profit on the lease.’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Section 952(c)(1)(B)(iii) is amended by 
striking subclause (I) and redesignating subclauses 
(II) through (VI) as subclauses (I) through (V), re-
spectively. 
(2) Subsection (b) of section 954 is amended— 
(A) by striking ‘‘the foreign base company 
shipping income,’’ in paragraph (5), 
(B) by striking paragraphs (6) and (7), 
and 
(C) by redesignating paragraph (8) as 
paragraph (6). 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end. 
SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART 
F FOR ACTIVE FINANCING. 
(a) IN GENERAL.—Section 954(h)(3) is amended by 
adding at the end the following:
189 
‘‘(E) DIRECT CONDUCT OF ACTIVITIES.— 
For purposes of subparagraph (A)(ii)(II), an 
activity shall be treated as conducted directly by 
an eligible controlled foreign corporation or 
qualified business unit in its home country if 
the activity is performed by employees of a re-
lated person and— 
‘‘(i) the related person is an eligible 
controlled foreign corporation the home 
country of which is the same as the home 
country of the corporation or unit to which 
subparagraph (A)(ii)(II) is being applied, 
‘‘(ii) the activity is performed in the 
home country of the related person, and 
‘‘(iii) the related person is com-
pensated on an arm’s-length basis for the 
performance of the activity by its employ-
ees and such compensation is treated as 
earned by such person in its home country 
for purposes of the home country’s tax 
laws.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of such foreign 
corporations beginning after December 31, 2004, and to
190 
taxable years of United States shareholders with or within 
which such taxable years of such foreign corporations end. 
TITLE IV—EXTENSION OF 
CERTAIN EXPIRING PROVISIONS 
SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL 
CREDITS AGAINST REGULAR AND MINIMUM 
TAX LIABILITY. 
(a) IN GENERAL.—Paragraph (2) of section 26(a) is 
amended— 
(1) by striking ‘‘RULE FOR 2000, 2001, 2002, AND 
2003.—’’ and inserting ‘‘RULE FOR TAXABLE YEARS 
2000 THROUGH 2005.—’’, and 
(2) by striking ‘‘or 2003,’’ and inserting ‘‘2003, 
2004, or 2005,’’. 
(b) CONFORMING PROVISIONS.— 
(1) Section 904(h) is amended by striking ‘‘or 
2003’’ and inserting ‘‘2003, 2004, or 2005’’. 
(2) The amendments made by sections 201(b), 
202(f), and 618(b) of the Economic Growth and Tax 
Relief Reconciliation Act of 2001 shall not apply to 
taxable years beginning during 2004 or 2005. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
191 
SEC. 402. EXTENSION OF RESEARCH CREDIT. 
(a) EXTENSION.— 
(1) IN GENERAL.—Section 41(h)(1)(B) (relat-
ing to termination) is amended by striking ‘‘June 
30, 2004’’ and inserting ‘‘December 31, 2005’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
45C(b)(1)(D) is amended by striking ‘‘June 30, 
2004’’ and inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to amounts paid or incurred 
after June 30, 2004. 
SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRO-
DUCED 
FROM 
CERTAIN 
RENEWABLE 
RE-
SOURCES. 
(a) IN GENERAL.—Subparagraphs (A) and (B) of 
section 45(c)(3) (defining qualified facility) are both 
amended by striking ‘‘2004’’ and inserting ‘‘2006’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to facilities placed in service after 
December 31, 2003. 
SEC. 404. INDIAN EMPLOYMENT TAX CREDIT. 
Section 45A(f) (relating to termination) is amended 
by striking ‘‘December 31, 2004’’ and inserting ‘‘Decem-
ber 31, 2005’’.
192 
SEC. 405. WORK OPPORTUNITY CREDIT. 
(a) IN GENERAL.—Subparagraph (B) of section 
51(c)(4) is amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to individuals who begin work 
for the employer after December 31, 2003. 
SEC. 406. WELFARE-TO-WORK CREDIT. 
(a) IN GENERAL.—Subsection (f) of section 51A is 
amended by striking ‘‘December 31, 2003’’ and inserting 
‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to individuals who begin work 
for the employer after December 31, 2003. 
SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SEC-
ONDARY SCHOOL TEACHERS. 
(a) IN GENERAL.—Subparagraph (D) of section 
62(a)(2) (relating to certain trade and business deductions 
of employees) is amended by striking ‘‘or 2003’’ and in-
serting ‘‘, 2003, 2004, or 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003.
193 
SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION 
BENEFIT FOR PROPERTY ON INDIAN RES-
ERVATIONS. 
Paragraph (8) of section 168(j) (relating to termi-
nation) is amended by striking ‘‘December 31, 2004’’ and 
inserting ‘‘December 31, 2005’’. 
SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER 
TECHNOLOGY AND EQUIPMENT USED FOR 
EDUCATIONAL PURPOSES. 
(a) IN GENERAL.—Subparagraph (G) of section 
170(e)(6) (relating to special rule for contributions of 
computer technology and equipment for educational pur-
poses) is amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION 
COSTS. 
(a) IN GENERAL.—Subsection (h) of section 198 (re-
lating to termination) is amended by striking ‘‘December 
31, 2003’’ and inserting ‘‘December 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to expenditures paid or incurred 
after December 31, 2003.
195 
August 1, 2004, shall be treated as timely if made 
before the close of the 90-day period beginning on 
the date of the enactment of this Act. 
(2) The determination and publication required 
by section 220(j)(5) of such Code with respect to 
calendar year 2004 shall be treated as timely if 
made before the close of the 120-day period begin-
ning on the date of the enactment of this Act. If the 
determination under the preceding sentence is that 
2004 is a cut-off year under section 220(i) of such 
Code, the cut-off date under such section 220(i) 
shall be the last day of such 120-day period. 
SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLE-
TION FOR OIL AND NATURAL GAS PRODUCED 
FROM MARGINAL PROPERTIES. 
(a) IN GENERAL.—Subparagraph (H) of section 
613A(c)(6) is amended by striking ‘‘January 1, 2004’’ and 
inserting ‘‘January 1, 2006’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 413. QUALIFIED ZONE ACADEMY BONDS. 
(a) 
IN
GENERAL.—Paragraph 
(1) 
of 
section 
1397E(e) is amended by striking ‘‘and 2003’’ and insert-
ing ‘‘2003, 2004, and 2005’’.
196 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to obligations issued after the 
date of the enactment of this Act. 
SEC. 414. DISTRICT OF COLUMBIA. 
(a) DISTRICT OF COLUMBIA ENTERPRISE ZONE.— 
Subsection (f) of section 1400 is amended by striking 
‘‘December 31, 2003’’ both places it appears and inserting 
‘‘December 31, 2005’’. 
(b) 
TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—Subsection (b) of section 1400A is amended by 
striking ‘‘December 31, 2003’’ and inserting ‘‘December 
31, 2005’’. 
(c) ZERO PERCENT CAPITAL GAINS RATE.— 
(1) Section 1400B is amended by striking 
‘‘January 1, 2004’’ each place it appears and insert-
ing ‘‘January 1, 2006’’. 
(2) Subsections (e)(2) and (g)(2) of section 
1400B are each amended by striking ‘‘2008’’ each 
place it appears in the headings and text and insert-
ing ‘‘2010’’. 
(3) Subsection (d) of section 1400F is amended 
by striking ‘‘December 31, 2008’’ and inserting 
‘‘December 31, 2010’’.
197 
(d) FIRST-TIME HOMEBUYER CREDIT.—Subsection 
(i) of section 1400C is amended by striking ‘‘January 1, 
2004’’ and inserting ‘‘January 1, 2006’’. 
(e) EFFECTIVE DATES.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall take effect on the date of the en-
actment of this Act. 
(2) TAX-EXEMPT
ECONOMIC
DEVELOPMENT 
BONDS.—The amendment made by subsection (b) 
shall apply to obligations issued after December 31, 
2003. 
SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY 
ZONE BOND FINANCING. 
Subparagraph (D) of section 1400L(d)(2) is amend-
ed by striking ‘‘2005’’ and inserting ‘‘2010’’. 
SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVI-
TIES. 
(a) 
IN
GENERAL.—Clause 
(iv) 
of 
section 
6103(i)(3)(C) and subparagraph (E) of section 6103(i)(7) 
are both amended by striking ‘‘December 31, 2003’’ and 
inserting ‘‘December 31, 2005’’. 
(b) DISCLOSURE OF TAXPAYER IDENTITY TO LAW 
ENFORCEMENT AGENCIES INVESTIGATING TERRORISM.—
198 
Subparagraph (A) of section 6103(i)(7) is amended by 
adding at the end the following new clause: 
‘‘(v) TAXPAYER IDENTITY.—For pur-
poses of this subparagraph, a taxpayer’s 
identity shall not be treated as taxpayer 
return information.’’. 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by 
subsection (a) shall apply to disclosures on or after 
the date of the enactment of this Act. 
(2) SUBSECTION (b).—The amendment made 
by subsection (b) shall take effect as if included in 
section 201 of the Victims of Terrorism Tax Relief 
Act of 2001. 
SEC. 417. DISCLOSURE OF RETURN INFORMATION RELAT-
ING TO STUDENT LOANS. 
Section 6103(l)(13)(D) (relating to termination) is 
amended by striking ‘‘December 31, 2004’’ and inserting 
‘‘December 31, 2005’’. 
SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS. 
(a) IN GENERAL.—Paragraph (1) of section 7652(f) 
is amended by striking ‘‘January 1, 2004’’ and inserting 
‘‘January 1, 2006’’.
199 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to articles brought into the 
United States after December 31, 2003. 
SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDG-
ET FOR THE INTERNAL REVENUE SERVICE. 
(a) IN GENERAL.—Paragraph (2) of section 8021(f) 
(relating to joint reviews) is amended by striking ‘‘2004’’ 
and inserting ‘‘2005’’. 
(b) REPORT.—Subparagraph (C) of section 8022(3) 
(regarding reports) is amended— 
(1) by striking ‘‘2004’’ and inserting ‘‘2005’’, 
and 
(2) by striking ‘‘with respect to—’’ and all that 
follows and inserting ‘‘with respect to the matters 
addressed in the joint review referred to in section 
8021(f)(2).’’. 
(c) TIME FOR JOINT REVIEW.—The joint review re-
quired by section 8021(f)(2) of the Internal Revenue Code 
of 1986 to be made before June 1, 2004, shall be treated 
as timely if made before June 1, 2005. 
SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS 
TO MENTAL HEALTH BENEFITS. 
(a) IN GENERAL.—Subsection (f) of section 9812 is 
amended by striking ‘‘and’’ at the end of paragraph (1),
200 
by striking paragraph (2), and by inserting after para-
graph (1) the following new paragraphs: 
‘‘(2) on or after January 1, 2004, and before 
the date of the enactment of American Jobs Cre-
ation Act of 2004, and 
‘‘(3) after December 31, 2005.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to benefits for services furnished 
on or after December 31, 2003. 
SEC. 
421. 
COMBINED 
EMPLOYMENT 
TAX 
REPORTING 
PROJECT. 
(a) IN GENERAL.—Paragraph (1) of section 976(b) 
of the Taxpayer Relief Act of 1997 (111 Stat. 898) is 
amended by striking ‘‘for a period ending with the date 
which is 5 years after the date of the enactment of this 
Act’’ and inserting ‘‘during the period ending on Decem-
ber 31, 2005’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to disclosures on or after the 
date of the enactment of this Act. 
SEC. 422. CLEAN-FUEL VEHICLES. 
(a) CREDIT FOR QUALIFIED ELECTRIC VEHICLES.— 
Paragraph (2) of section 30(b) (relating to phaseout) is 
amended to read as follows:
201 
‘‘(2) PHASEOUT.—In the case of any qualified 
electric vehicle placed in service after December 31, 
2005, the credit otherwise allowable under sub-
section (a) (determined after the application of para-
graph (1)) shall be reduced by 75 percent.’’. 
(b) DEDUCTION FOR QUALIFIED CLEAN-FUEL VEHI-
CLE
PROPERTY.—Subparagraph 
(B) 
of 
section 
179A(b)(1) (relating to phaseout) is amended to read as 
follows: 
‘‘(B) PHASEOUT.—In the case of any 
qualified clean-fuel vehicle property placed in 
service after December 31, 2005, the limit oth-
erwise applicable under subparagraph (A) shall 
be reduced by 75 percent.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
December 31, 2003.
202 
TITLE V—DEDUCTION OF STATE 
AND LOCAL GENERAL SALES 
TAXES 
SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL 
SALES TAXES IN LIEU OF STATE AND LOCAL 
INCOME TAXES. 
(a) IN GENERAL.—Subsection (b) of section 164 (re-
lating to definitions and special rules) is amended by add-
ing at the end the following: 
‘‘(5) GENERAL SALES TAXES.—For purposes of 
subsection (a)— 
‘‘(A) ELECTION TO DEDUCT STATE AND 
LOCAL SALES TAXES IN LIEU OF STATE AND 
LOCAL INCOME TAXES.— 
‘‘(i) IN GENERAL.—At the election of 
the taxpayer for the taxable year, sub-
section (a) shall be applied— 
‘‘(I) without regard to the ref-
erence to State and local income 
taxes, and 
‘‘(II) as if State and local general 
sales taxes were referred to in a para-
graph thereof. 
‘‘(B) DEFINITION
OF
GENERAL
SALES 
TAX.—The term ‘general sales tax’ means a tax
203 
imposed at one rate with respect to the sale at 
retail of a broad range of classes of items. 
‘‘(C) SPECIAL RULES FOR FOOD, ETC.—In 
the case of items of food, clothing, medical sup-
plies, and motor vehicles— 
‘‘(i) the fact that the tax does not 
apply with respect to some or all of such 
items shall not be taken into account in 
determining whether the tax applies with 
respect to a broad range of classes of 
items, and 
‘‘(ii) the fact that the rate of tax ap-
plicable with respect to some or all of such 
items is lower than the general rate of tax 
shall not be taken into account in deter-
mining whether the tax is imposed at one 
rate. 
‘‘(D) 
ITEMS
TAXED
AT
DIFFERENT 
RATES.—Except in the case of a lower rate of 
tax applicable with respect to an item described 
in subparagraph (C), no deduction shall be al-
lowed under this paragraph for any general 
sales tax imposed with respect to an item at a 
rate other than the general rate of tax.
204 
‘‘(E) COMPENSATING USE TAXES.—A com-
pensating use tax with respect to an item shall 
be treated as a general sales tax. For purposes 
of the preceding sentence, the term ‘compen-
sating use tax’ means, with respect to any item, 
a tax which— 
‘‘(i) is imposed on the use, storage, or 
consumption of such item, and 
‘‘(ii) is complementary to a general 
sales tax, but only if a deduction is allow-
able under this paragraph with respect to 
items sold at retail in the taxing jurisdic-
tion which are similar to such item. 
‘‘(F) SPECIAL
RULE
FOR
MOTOR
VEHI-
CLES.—In the case of motor vehicles, if the rate 
of tax exceeds the general rate, such excess 
shall be disregarded and the general rate shall 
be treated as the rate of tax. 
‘‘(G) 
SEPARATELY
STATED
GENERAL 
SALES TAXES.—If the amount of any general 
sales tax is separately stated, then, to the ex-
tent that the amount so stated is paid by the 
consumer (other than in connection with the 
consumer’s trade or business) to the seller, such
205 
amount shall be treated as a tax imposed on, 
and paid by, such consumer. 
‘‘(H) AMOUNT OF DEDUCTION TO BE DE-
TERMINED UNDER TABLES.— 
‘‘(i) IN
GENERAL.—The amount of 
the deduction allowed under this para-
graph shall be determined under tables 
prescribed by the Secretary. 
‘‘(ii) REQUIREMENTS FOR TABLES.— 
The tables prescribed under clause (i)— 
‘‘(I) shall reflect the provisions of 
this paragraph, 
‘‘(II) shall be based on the aver-
age consumption by taxpayers on a 
State-by-State basis, as determined by 
the Secretary, taking into account fil-
ing status, number of dependents, ad-
justed gross income, and rates of 
State and local general sales taxation, 
and 
‘‘(III) need only be determined 
with respect to adjusted gross incomes 
up to the applicable amount (as deter-
mined under section 68(b)).
206 
‘‘(I) APPLICATION OF PARAGRAPH.—This 
paragraph shall apply to taxable years begin-
ning after December 31, 2003, and before Jan-
uary 1, 2006.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
TITLE VI—REVENUE 
PROVISIONS 
Subtitle A—Provisions to Reduce 
Tax Avoidance Through Indi-
vidual and Corporate Expatria-
tion 
SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND 
THEIR FOREIGN PARENTS. 
(a) IN GENERAL.—Subchapter C of chapter 80 (re-
lating 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 EN-
TITIES.— 
‘‘(1) IN GENERAL.—The taxable income of an 
expatriated entity for any taxable year which in-
cludes any portion of the applicable period shall in
207 
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 cor-
poration or partnership described in clause 
(i). 
‘‘(B) 
SURROGATE
FOREIGN
CORPORA-
TION.—A foreign corporation shall be treated 
as a surrogate 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 
directly or indirectly by a domestic cor-
poration or substantially all of the prop-
208 
erties constituting a trade or business of a 
domestic 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 corpora-
tion, by former shareholders of the 
domestic corporation by reason of 
holding stock in the domestic corpora-
tion, or 
‘‘(II) in the case of an acquisition 
with respect to a domestic partner-
ship, by former partners of the do-
mestic partnership by reason of hold-
ing a capital or profits interest in the 
domestic partnership, and 
‘‘(iii) after the acquisition the ex-
panded affiliated group which includes the 
entity does not have substantial business 
activities 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 ex-
panded affiliated group.
209 
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 
entity 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 re-
gard 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 ap-
pears. 
‘‘(2) CERTAIN
STOCK
DISREGARDED.—There 
shall not be taken into account in determining own-
ership under subsection (a)(2)(B)(ii)— 
‘‘(A) stock held by members of the ex-
panded affiliated group which includes the for-
eign corporation, or
210 
‘‘(B) stock of such foreign corporation 
which is sold in a public offering related to the 
acquisition 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 own-
ership 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 reg-
ulations, 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-
211 
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 
section— 
‘‘(1) APPLICABLE PERIOD.—The term ‘applica-
ble period’ means the period— 
‘‘(A) beginning on the first date properties 
are acquired as part of the acquisition described 
in subsection (a)(2)(B)(i), and 
‘‘(B) ending on the date which is 10 years 
after the last date properties are acquired as 
part of such acquisition. 
‘‘(2) INVERSION
GAIN.—The term ‘inversion 
gain’ means the income or gain recognized by reason 
of the transfer during the applicable period of stock 
or other properties by an expatriated entity, and any 
income received or accrued during the applicable pe-
riod by reason of a license of any property by an ex-
patriated entity— 
‘‘(A) as part of the acquisition described in 
subsection (a)(2)(B)(i), or
218 
fore such date and to the stock acquired in such ex-
ercise, if income is recognized under section 83 on 
or before the expatriation date with respect to the 
stock acquired pursuant to such exercise, and 
‘‘(2) any other specified stock compensation 
which is exercised, sold, exchanged, distributed, 
cashed-out, or otherwise paid during such period in 
a transaction in which income, gain, or loss is recog-
nized in full. 
‘‘(e) DEFINITIONS.—For purposes of this section— 
‘‘(1) DISQUALIFIED
INDIVIDUAL.—The term 
‘disqualified individual’ means, with respect to a cor-
poration, any individual who, at any time during the 
12-month period beginning on the date which is 6 
months before the expatriation date— 
‘‘(A) is subject to the requirements of sec-
tion 16(a) of the Securities Exchange Act of 
1934 with respect to such corporation or any 
member of the expanded affiliated group which 
includes such corporation, or 
‘‘(B) would be subject to such require-
ments if such corporation or member were an 
issuer of equity securities referred to in such 
section.