of nondeductible CFC dividends received during 
such year. 
‘‘(B) COORDINATION WITH SECTION 172.—
The nondeductible CFC dividends for any tax-
able year shall not be taken into account—
‘‘(i) in determining under section 172 
the amount of any net operating loss for 
such taxable year, and 
‘‘(ii) in determining taxable income 
for such taxable year for purposes of the 
2nd sentence of section 172(b)(2). 
‘‘(3) NONDEDUCTIBLE
CFC
DIVIDENDS.—For 
purposes of this subsection, the term ‘nondeductible 
CFC dividends’ means the excess of the amount of 
dividends taken into account under subsection (a) 
over the deduction allowed under subsection (a) for 
such dividends. 
‘‘(f) FAILURE TO MAINTAIN AVERAGE PAYOUT 
RATE.—
‘‘(1) IN GENERAL.—If, during any of the 10 
taxable years beginning after the taxable year for 
which a deduction is allowed under this section, the 
average described in subsection (b)(2)(B) for the 
base period years exceeds the amount described in 
subsection (b)(2)(A) for the taxable year, the tax im-
posed by this chapter for the taxable year of such 
excess shall be increased by an amount equal to the 
sum of—
‘‘(A) the increase in tax which would result 
if such deduction (as reduced by any previous 
reductions under this subsection) were reduced 
(but not below zero) by 80 percent of such ex-
cess, and 
‘‘(B) interest at the underpayment rate, 
determined as if the amount described in para-
graph (1) were an underpayment for the tax-
able year for which the deduction was allowed. 
‘‘(2) CARRYOVER OF EXCESS DIVIDENDS.—If, 
for any of such 10 taxable years, the amount de-
scribed in subsection (b)(2)(A) for such taxable year 
exceeds 
the 
average 
described 
in 
subsection 
(b)(2)(B) for the base period years, such excess shall 
be treated for purposes of this subsection as a divi-
dend received during the following taxable year. 
‘‘(g) ELECTION.—This section shall apply for the tax-
payer’s first taxable year beginning on or after the date 
of the enactment of this section if the taxpayer elects its 
application for such taxable year. The taxpayer may elect 
to apply this section to the taxpayer’s last taxable year
beginning before the date of the enactment of this section 
in lieu of such first taxable year.’’
(b) ALTERNATIVE MINIMUM TAX.—Subparagraph 
(C) of section 56(g)(4) is amended by adding at the end 
the following new clause: 
‘‘(v) SPECIAL RULE FOR CERTAIN DIS-
TRIBUTIONS FROM CONTROLLED FOREIGN 
CORPORATIONS.—Clause (i) shall not apply 
to any deduction allowable under section 
965.’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart F of part III of subchapter N of chapter 1 
is amended by adding at the end the following new item:
‘‘Sec. 965. Temporary dividends received deduction.’’.
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending on or after 
the date of the enactment of this Act. 
Subtitle D—Small Business 
Expensing 
SEC. 1031. 2-YEAR EXTENSION OF INCREASED EXPENSING 
FOR SMALL BUSINESS. 
Subsections (b), (c), and (d) of section 179 (as 
amended by the Jobs and Growth Tax Relief Reconcili-
ation Act of 2003) are each amended by striking ‘‘2006’’ 
each place it appears and inserting ‘‘2008’’.
Subtitle E—Depreciation 
SEC. 1041. 1-YEAR EXTENSION OF BONUS DEPRECIATION. 
(a) 50-PERCENT BONUS DEPRECIATION.—Section 
168(k)(4) (as amended by the Jobs and Growth Tax Relief 
Reconciliation Act of 2003) is amended—
(1) by striking ‘‘January 1, 2005’’ each place 
it appears and inserting ‘‘January 1, 2006’’, and 
(2) by striking ‘‘January 1, 2006’’ in subpara-
graph (B)(iii) (as in effect before the amendment 
made by paragraph (1)) and inserting ‘‘January 1, 
2007’’. 
(b) 30-PERCENT BONUS DEPRECIATION.—Section 
168(k)(2) (as so amended) is amended—
(1) by striking ‘‘January 1, 2005’’ each place 
it appears and inserting ‘‘January 1, 2006’’, and 
(2) by striking ‘‘January 1, 2006’’ in subpara-
graph (A)(iv) (as in effect before the amendment 
made by paragraph (1)) and inserting ‘‘January 1, 
2007’’. 
(c) CONFORMING
AMENDMENT.—The subsection 
heading for section 168(k) (as so amended) is amended 
by striking ‘‘JANUARY 1, 2005’’ and inserting ‘‘JANUARY 
1, 2006’’.
SEC. 1042. RECOVERY PERIOD FOR DEPRECIATION OF CER-
TAIN LEASEHOLD IMPROVEMENTS AND RES-
TAURANT PROPERTY. 
(a) 20-YEAR RECOVERY PERIOD.—Paragraph (3) of 
section 168(e) (relating to classification of certain prop-
erty) is amended by adding after subparagraph (E) the 
following new subparagraph: 
‘‘(F) 20-YEAR PROPERTY.—The term ‘20-
year property’ includes—
‘‘(i) any qualified leasehold improvement 
property placed in service, and 
‘‘(ii) any qualified restaurant property 
placed in service. 
(b) QUALIFIED LEASEHOLD IMPROVEMENT PROP-
ERTY.—Subsection (e) of section 168 is amended by add-
ing at the end the following new paragraph: 
‘‘(6) QUALIFIED
LEASEHOLD
IMPROVEMENT 
PROPERTY.—The term ‘qualified leasehold improve-
ment property’ has the meaning given such term in 
section 168(k)(3) except that the following special 
rules shall apply: 
‘‘(A) IMPROVEMENTS MADE BY LESSOR.—
In the case of an improvement made by the per-
son who was the lessor of such improvement 
when such improvement was placed in service, 
such improvement shall be qualified leasehold
improvement property (if at all) only so long as 
such improvement is held by such person. 
‘‘(B) EXCEPTION FOR CHANGES IN FORM 
OF BUSINESS.—Property shall not cease to be 
qualified leasehold improvement property under 
subparagraph (A) by reason of—
‘‘(i) death, 
‘‘(ii) a transaction to which section 
381(a) applies, 
‘‘(iii) a mere change in the form of 
conducting the trade or business so long as 
the property is retained in such trade or 
business as qualified leasehold improve-
ment property and the taxpayer retains a 
substantial interest in such trade or busi-
ness, 
‘‘(iv) the acquisition of such property 
in an exchange described in section 1031, 
1033, 1038, or 1039 to the extent that the 
basis of such property includes an amount 
representing the adjusted basis of other 
property owned by the taxpayer or a re-
lated person, or 
‘‘(v) the acquisition of such property 
by the taxpayer in a transaction described
in section 332, 351, 361, 721, or 731 (or 
the acquisition of such property by the tax-
payer from the transferee or acquiring cor-
poration in a transaction described in such 
section), to the extent that the basis of the 
property in the hands of the taxpayer is 
determined by reference to its basis in the 
hands of the transferor or distributor. 
‘‘(C) RELATED PERSON.—For purposes of 
this paragraph, a person (hereafter in this sub-
paragraph referred to as the ‘related person’) is 
related to any person if the related person bears 
a relationship to such person specified in sec-
tion 267(b) or 707(b)(1), or the related person 
and such person are engaged in trades or busi-
nesses under common control (within the mean-
ing of subsections (a) and (b) of section 52).’’. 
(c) QUALIFIED
RESTAURANT
PROPERTY.—Sub-
section (e) of section 168 (as amended by subsection (b)) 
is further amended by adding at the end the following new 
paragraph: 
‘‘(7) QUALIFIED RESTAURANT PROPERTY.—The 
term ‘qualified restaurant property’ means any sec-
tion 1250 property which is a building (or any addi-
tion or improvement to such building) if more than
50 percent of the building’s square footage is de-
voted to preparation of, and seating for on-premises 
consumption of, prepared meals.’’. 
(d) REQUIREMENT TO USE STRAIGHT LINE METH-
OD.—
(1) Paragraph (3) of section 168(b) is amended 
by adding at the end the following new subpara-
graphs: 
‘‘(G) 
Qualified 
leasehold 
improvement 
property described in subsection (e)(6). 
‘‘(H) Qualified restaurant property de-
scribed in subsection (e)(7).’’. 
(2) Subparagraph (A) of section 168(b)(2) is 
amended by inserting before the comma ‘‘not re-
ferred to in paragraph (3)’’. 
(e) ALTERNATIVE SYSTEM.—The table contained in 
section 168(g)(3)(B) is amended by adding at the end the 
following new items:
‘‘(F)(i) ...................................................................
‘‘(F)(ii) ..................................................................
39’’.
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act.
SEC. 1043. SHORTER RECOVERY PERIODS FOR MANUFAC-
TURING PROPERTY. 
(a) IN GENERAL.—Paragraph (3) of section 168(e), 
as amended by section 1042, is amended by adding after 
subparagraph (F) the following new subparagraph: 
‘‘(G) MANUFACTURING PROPERTY.—
‘‘(i) IN GENERAL.—
‘‘(I) 
Manufacturing 
property 
which would (but for this subpara-
graph) be 10-year property shall be 
treated as 7-year property. 
‘‘(II) 
Manufacturing 
property 
which would (but for this subpara-
graph) be 7-year property shall be 
treated as 5-year property. 
‘‘(III) Manufacturing property 
which would (but for this subpara-
graph) be 5-year property shall be 
treated as 3-year property. 
‘‘(ii) MANUFACTURING
PROPERTY.—
For purposes of this subparagraph, the 
term ‘manufacturing property’ means—
‘‘(I) property used in an activity 
which is manufacturing within the 
meaning of codes 31–33 of the North
American Industry Classification Sys-
tem (2002), and 
‘‘(II) property treated as manu-
facturing property by regulations pre-
scribed by the Secretary.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act. 
Subtitle F—5-Year Carryback of 
Certain Net Operating Losses 
SEC. 1051. 5-YEAR CARRYBACK OF CERTAIN NET OPER-
ATING LOSSES. 
(a) IN GENERAL.—Subparagraph (H) of section 
172(b)(1) is amended—
(1) by inserting ‘‘5-YEAR CARRYBACK OF CER-
TAIN LOSSES.—’’ after ‘‘(H)’’, and 
(2) by striking ‘‘or 2002’’ and inserting ‘‘, 
2002, or 2003’’. 
(b) TEMPORARY SUSPENSION OF LIMITATION ON AL-
TERNATIVE MINIMUM TAXABLE INCOME FOR CERTAIN 
NOL 
CARRYBACKS.—Subclause 
(I) 
of 
section 
56(d)(1)(A)(ii) is amended—
(1) by striking ‘‘or 2002’’ and inserting ‘‘, 
2002, or 2003’’, and
(2) by striking ‘‘and 2002’’ and inserting ‘‘, 
2002, or 2003’’. 
(c) TECHNICAL CORRECTIONS.—
(1) Subparagraph (H) of section 172(b)(1) is 
amended by striking ‘‘a taxpayer which has’’. 
(2) Section 102(c)(2) of the Job Creation and 
Worker Assistance Act of 2002 (Public Law 107–
147) is amended by striking ‘‘before January 1, 
2003’’ and inserting ‘‘after December 31, 1990’’. 
(3)(A) Subclause (I) of section 56(d)(1)(A)(i) is 
amended by striking ‘‘attributable to carryovers’’. 
(B) Subclause (I) of section 56(d)(1)(A)(ii) is 
amended—
(i) by striking ‘‘for taxable years’’ and in-
serting ‘‘from taxable years’’, and 
(ii) by striking ‘‘carryforwards’’ and insert-
ing ‘‘carryovers’’. 
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to net operating losses for taxable years 
ending after December 31, 2002. 
(2) TECHNICAL
CORRECTIONS.—The amend-
ments made by subsection (c) shall take effect as if 
included in the amendments made by section 102 of
the Job Creation and Worker Assistance Act of 
2002. 
(3) ELECTION.—In the case of a net operating 
loss for a taxable year ending during 2003—
(A) any election made under section 
172(b)(3) of such Code may (notwithstanding 
such section) be revoked before November 1, 
2003, and 
(B) any election made under section 172(j) 
of such Code shall (notwithstanding such sec-
tion) be treated as timely made if made before 
November 1, 2003. 
Subtitle G—Alternative Minimum 
Tax Relief 
SEC. 1061. NET OPERATING LOSSES AND FOREIGN TAX 
CREDIT UNDER ALTERNATIVE MINIMUM TAX. 
(a) NET OPERATING LOSSES.—Subparagraph (A) of 
section 56(d)(1) is amended to read as follows: 
‘‘(A) the amount of such deduction shall 
not exceed the alternative minimum taxable in-
come determined without regard to such deduc-
tion, and’’. 
(b) FOREIGN TAX CREDIT.—
(1) Subsection (a) of section 59 is amended by 
striking paragraph (2) and by redesignating para-
graphs (3) and (4) as paragraphs (2) and (3), re-
spectively. 
(2) Section 53(d)(1)(B)(i)(II) of such Code is 
amended by striking ‘‘and if section 59(a)(2) did not 
apply’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 1062. EXPANSION OF EXEMPTION FROM ALTERNATIVE 
MINIMUM TAX FOR SMALL CORPORATIONS. 
(a) IN GENERAL.—Subparagraphs (A) and (B) of 
section 
55(e)(1) 
are 
each 
amended 
by 
striking 
‘‘$7,500,000’’ each place it appears and inserting 
‘‘$15,000,000’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 1063. REDUCTION IN AMOUNT OF DEPRECIATION SUB-
JECT TO ALTERNATIVE MINIMUM TAX. 
(a) IN GENERAL.—Clause (ii) of section 56(a)(1)(A) 
is amended—
(1) by striking ‘‘150-PERCENT’’ in the heading 
and inserting ‘‘175-PERCENT’’, and 
(2) by striking ‘‘150 percent’’ in the text and 
inserting ‘‘175 percent’’.
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to property placed in service after 
December 31, 2005. 
Subtitle H—S Corporation Reform 
and Simplification 
SEC. 1071. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER. 
(a) IN GENERAL.—Paragraph (1) of section 1361(c) 
(relating to special rules for applying subsection (b)) is 
amended to read as follows: 
‘‘(1) MEMBERS
OF
FAMILY
TREATED
AS
SHAREHOLDER.—
‘‘(A) IN GENERAL.—For purpose of sub-
section (b)(1)(A)—
‘‘(i) except as provided in clause (ii), 
a husband and wife (and their estates) 
shall be treated as 1 shareholder, and 
‘‘(ii) in the case of a family with re-
spect to which an election is in effect 
under subparagraph (E), all members of 
the family shall be treated as 1 share-
holder. 
‘‘(B) MEMBERS
OF
THE
FAMILY.—For 
purpose of subparagraph (A)(ii), the term 
‘members of the family’ means the common an-
cestor, lineal descendants of the common ances-
tor and the spouses (or former spouses) of such 
lineal descendants or common ancestor. 
‘‘(C) COMMON ANCESTOR.—For purposes 
of this paragraph, an individual shall not be 
considered a common ancestor if, as of the later 
of the effective date of this paragraph or the 
time the election under section 1362(a) is 
made, the individual is more than 3 generations 
removed from the youngest generation of share-
holders. 
‘‘(D) EFFECT OF ADOPTION, ETC.—In de-
termining whether any relationship specified in 
subparagraph (B) or (C) exists, the rules of 
section 152(b)(2) shall apply. 
‘‘(E) ELECTION.—An election under sub-
paragraph (A)(ii)—
‘‘(i) must be made with the consent of 
shareholders (including those that are fam-
ily members) holding in the aggregate 
more than one-half of the shares of stock 
in the corporation on the day the election 
is made, 
‘‘(ii) in the case of—
‘‘(I) an electing small business 
trust, shall be made by the trustee of 
the trust, and 
‘‘(II) a qualified subchapter S 
trust, shall be made by the beneficiary 
of the trust, 
‘‘(iii) under regulations, shall remain 
in effect until terminated, and 
‘‘(iv) shall apply only with respect to 
1 family in any corporation.’’. 
(b) RELIEF FROM INADVERTENT INVALID ELECTION 
OR TERMINATION.—Section 1362(f) (relating to inad-
vertent invalid elections or terminations), as amended by 
section 1079, is amended—
(1) 
by 
inserting 
‘‘or 
under 
section 
1361(c)(1)(A)(ii)’’ after ‘‘section 1361(b)(3)(B)(ii)’’ 
in paragraph (1), and 
(2) 
by 
inserting 
‘‘or 
under 
section 
1361(c)(1)(E)(iii)’’ after ‘‘section 1361(b)(3)(C)’’ in 
paragraph (1)(B). 
(c) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made by 
subsection (a) shall apply to taxable years beginning 
after December 31, 2003.
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to elections and termi-
nations made after December 31, 2003. 
SEC. 1072. INCREASE IN NUMBER OF ELIGIBLE SHARE-
HOLDERS TO 100. 
(a) IN GENERAL.—Section 1361(b)(1)(A) (defining 
small business corporation) is amended by striking ‘‘75’’ 
and inserting ‘‘100’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 1073. EXPANSION OF BANK S CORPORATION ELIGIBLE 
SHAREHOLDERS TO INCLUDE IRAS. 
(a) IN GENERAL.—Section 1361(c)(2)(A) (relating to 
certain trusts permitted as shareholders) is amended by 
inserting after clause (v) the following new clause: 
‘‘(vi) In the case of a corporation 
which is a bank (as defined in section 
581), a trust which constitutes an indi-
vidual retirement account under section 
408(a), including one designated as a Roth 
IRA under section 408A, but only to the 
extent of the stock held by such trust in 
such bank as of the date of the enactment 
of this clause.’’.
(b) 
TREATMENT
AS
SHAREHOLDER.—Section 
1361(c)(2)(B) (relating to treatment as shareholders) is 
amended by adding at the end the following new clause: 
‘‘(vi) In the case of a trust described 
in clause (vi) of subparagraph (A), the in-
dividual for whose benefit the trust was 
created shall be treated as a shareholder.’’. 
(c) SALE OF BANK STOCK IN IRA RELATING TO S 
CORPORATION ELECTION EXEMPT FROM PROHIBITED 
TRANSACTION RULES.—Section 4975(d) (relating to ex-
emptions) is amended by striking ‘‘or’’ at the end of para-
graph (14), by striking the period at the end of paragraph 
(15) and inserting ‘‘; or’’, and by adding at the end the 
following new paragraph: 
‘‘(16) a sale of stock held by a trust which con-
stitutes an individual retirement account under sec-
tion 408(a) to the individual for whose benefit such 
account is established if—
‘‘(A) such stock is in a bank (as defined in 
section 581), 
‘‘(B) such stock is held by such trust as of 
the date of the enactment of this paragraph, 
‘‘(C) such sale is pursuant to an election 
under section 1362(a) by such bank,
‘‘(D) such sale is for fair market value at 
the time of sale (as established by an inde-
pendent appraiser) and the terms of the sale 
are otherwise at least as favorable to such trust 
as the terms that would apply on a sale to an 
unrelated party, 
‘‘(E) such trust does not pay any commis-
sions, costs, or other expenses in connection 
with the sale, and 
‘‘(F) the stock is sold in a single trans-
action for cash not later than 120 days after 
the S corporation election is made.’’. 
(d) CONFORMING AMENDMENT.—Section 512(e)(1) 
is amended by inserting ‘‘1361(c)(2)(A)(vi) or’’ before 
‘‘1361(c)(6)’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 1074. DISREGARD OF UNEXERCISED POWERS OF AP-
POINTMENT IN DETERMINING POTENTIAL 
CURRENT BENEFICIARIES OF ESBT. 
(a) IN GENERAL.—Section 1361(e)(2) (defining po-
tential current beneficiary) is amended—
(1) by inserting ‘‘(determined without regard to 
any power of appointment to the extent such power
is not exercised during such period)’’ after ‘‘of the 
trust’’ in the first sentence, and 
(2) by striking ‘‘60-day’’ in the second sentence 
and inserting ‘‘1-year’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 1075. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 
DIVORCE, ETC. 
(a) IN GENERAL.—Section 1366(d)(2) (relating to 
indefinite carryover of disallowed losses and deductions) 
is amended to read as follows: 
‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED 
LOSSES AND DEDUCTIONS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), any loss or deduction which 
is disallowed for any taxable year by reason of 
paragraph (1) shall be treated as incurred by 
the corporation in the succeeding taxable year 
with respect to that shareholder. 
‘‘(B) TRANSFERS
OF
STOCK
BETWEEN 
SPOUSES
OR
INCIDENT
TO
DIVORCE.—In the 
case of any transfer described in section 1041 
of stock of an S corporation, any loss or deduc-
tion described in subparagraph (A) with respect
such stock shall be treated as incurred by the 
corporation in the succeeding taxable year with 
respect to the transferee.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 1076. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 
AMOUNTS BY QUALIFIED SUBCHAPTER S 
TRUST INCOME BENEFICIARIES. 
(a) IN GENERAL.—Section 1361(d)(1) (relating to 
special rule for qualified subchapter S trust) is amended—
(1) by striking ‘‘and’’ at the end of subpara-
graph (A), 
(2) by striking the period at the end of sub-
paragraph (B) and inserting ‘‘, and’’, and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(C) for purposes of applying sections 465 
and 469 to the beneficiary of the trust, the dis-
position of the S corporation stock by the trust 
shall be treated as a disposition by such bene-
ficiary.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transfers made after December 
31, 2003.
SEC. 1077. EXCLUSION OF INVESTMENT SECURITIES IN-
COME FROM PASSIVE INCOME TEST FOR 
BANK S CORPORATIONS. 
(a) IN GENERAL.—Section 1362(d)(3) (relating to 
where passive investment income exceeds 25 percent of 
gross receipts for 3 consecutive taxable years and corpora-
tion has accumulated earnings and profits) is amended by 
adding at the end the following new subparagraph: 
‘‘(F) EXCEPTION
FOR
BANKS; ETC.—In 
the case of a bank (as defined in section 581) 
or a bank holding company (as defined in sec-
tion 246A(c)(3)(B)(ii)), the term ‘passive in-
vestment income’ shall not include—
‘‘(i) interest income earned by such 
bank or bank holding company, or 
‘‘(ii) dividends on assets required to 
be held by such bank or bank holding com-
pany, including stock in the Federal Re-
serve Bank, the Federal Home Loan Bank, 
or the Federal Agricultural Mortgage 
Bank or participation certificates issued by 
a Federal Intermediate Credit Bank.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
pose of the shares of stock upon termination of 
the holder’s status as a director at the same 
price as the individual acquired such shares of 
stock. 
‘‘(3) DISTRIBUTIONS.—A distribution (not in 
part or full payment in exchange for stock) made by 
the corporation with respect to qualifying director 
shares shall be includible as ordinary income of the 
holder and deductible to the corporation as an ex-
pense in computing taxable income under section 
1363(b) in the year such distribution is received.’’. 
(b) CONFORMING AMENDMENT.—Section 1366(a) is 
amended by adding at the end the following new para-
graph: 
‘‘(3) ALLOCATION
WITH
RESPECT
TO
QUALI-
FYING
DIRECTOR
SHARES.—The holders of quali-
fying director shares (as defined in section 1361(f)) 
shall not, with respect to such shares of stock, be al-
located any of the items described in paragraph 
(1).’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
SEC. 1079. RELIEF FROM INADVERTENTLY INVALID QUALI-
FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 
AND TERMINATIONS. 
(a) IN GENERAL.—Section 1362(f) (relating to inad-
vertent invalid elections or terminations) is amended—
(1) 
by 
inserting 
‘‘or 
under 
section 
1361(b)(3)(B)(ii)’’ after ‘‘subsection (a)’’ in para-
graph (1), 
(2) 
by 
inserting 
‘‘or 
under 
section 
1361(b)(3)(C)’’ after ‘‘subsection (d)’’ in paragraph 
(1)(B), 
(3) by inserting ‘‘or a qualified subchapter S 
subsidiary, as the case may be’’ after ‘‘small busi-
ness corporation’’ in paragraph (3)(A), 
(4) by inserting ‘‘or a qualified subchapter S 
subsidiary, as the case may be’’ after ‘‘S corpora-
tion’’ in paragraph (4), and 
(5) by inserting ‘‘or a qualified subchapter S 
subsidiary, as the case may be’’ after ‘‘S corpora-
tion’’ in the matter following paragraph (4). 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003.
SEC. 1080. INFORMATION RETURNS FOR QUALIFIED SUB-
CHAPTER S SUBSIDIARIES. 
(a) IN GENERAL.—Section 1361(b)(3)(A) (relating 
to treatment of certain wholly owned subsidiaries) is 
amended by inserting ‘‘and in the case of information re-
turns required under part III of subchapter A of chapter 
61’’ after ‘‘Secretary’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
Subtitle I—Protecting Employee 
Benefits 
SEC. 1091. TREATMENT OF NONQUALIFIED DEFERRED 
COMPENSATION PLANS. 
(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 DEFERRED 
COMPENSATION UNDER NONQUALIFIED DE-
FERRED COMPENSATION PLANS. 
‘‘(a) RULES
RELATING
TO
CONSTRUCTIVE
RE-
CEIPT.—
‘‘(1) IN GENERAL.—
‘‘(A) GROSS INCOME INCLUSION.—In the 
case of a nonqualified deferred compensation 
plan, all compensation deferred under the plan
for all taxable years (to the extent not subject 
to a substantial risk of forfeiture and not pre-
viously included in gross income) shall be in-
cludible in gross income for the taxable year 
unless at all times during the taxable year the 
plan meets the requirements of paragraphs (2), 
(3), and (4) and is operated in accordance with 
such requirements. 
‘‘(B) INTEREST
ON
TAX
LIABILITY
PAY-
ABLE
WITH
RESPECT
TO
PREVIOUSLY
DE-
FERRED COMPENSATION.—
‘‘(i) IN GENERAL.—If compensation is 
required to be included in gross income 
under subparagraph (A) for a taxable year, 
the tax imposed by this chapter for such 
taxable year shall be increased by the 
amount of interest determined under 
clause (ii). 
‘‘(ii) INTEREST.—For purposes of 
clause (i), the interest determined under 
this clause for any taxable year is the
amount of interest at the underpayment 
rate plus 1 percentage point on the under-
payments that would have occurred had 
the deferred compensation been includible
in gross income for the taxable year in 
which first deferred or, if later, the first 
taxable in which such deferred compensa-
tion is not subject to a substantial risk of 
forfeiture. 
‘‘(2) DISTRIBUTIONS.—
‘‘(A) IN GENERAL.—The requirements of 
this paragraph are met if the plan provides that 
compensation deferred under the plan may not 
be distributed earlier than—
‘‘(i) separation from service (except as 
provided in subparagraph (B)(i)), 
‘‘(ii) disability (as defined by section 
223(d) of the Social Security Act), 
‘‘(iii) death, 
‘‘(iv) a specified time (or pursuant to 
a fixed schedule) specified under the plan 
as of the date of the deferral of such com-
pensation, 
‘‘(v) to the extent provided by the 
Secretary, a change in the ownership or ef-
fective control of the corporation, or in the 
ownership of a substantial portion of the 
assets of the corporation, or
‘‘(vi) the occurrence of an unforesee-
able emergency. 
‘‘(B) SPECIAL RULES.—
‘‘(i) SPECIFIED EMPLOYEES.—In the 
case of specified employees, the require-
ment of subparagraph (A)(i) is met only if 
distributions may not be made earlier than 
6 months after the date of separation from 
service. For purposes of the preceding sen-
tence, a specified employee is a key em-
ployee (as defined in section 416(i)) of a 
corporation the stock in which is publicly 
traded on an established securities market 
or otherwise. 
‘‘(ii) 
UNFORESEEABLE
EMER-
GENCY.—For purposes of subparagraph 
(A)(vi)—
‘‘(I) IN
GENERAL.—The term 
‘unforeseeable emergency’ means a se-
vere financial hardship to the partici-
pant resulting from a sudden and un-
expected illness or accident of the par-
ticipant or of a dependent (as defined 
in section 152(a)) of the participant, 
loss of the participant’s property due
to casualty, or other similar extraor-
dinary 
and 
unforeseeable 
cir-
cumstances arising as a result of 
events beyond the control of the par-
ticipant. 
‘‘(II) LIMITATION ON DISTRIBU-
TIONS.—The requirement of subpara-
graph (A)(vi) is met only if, as deter-
mined under regulations of the Sec-
retary, the amounts distributed with 
respect to an emergency do not exceed 
the amounts necessary to satisfy such 
emergency plus amounts necessary to 
pay taxes reasonably anticipated as a 
result of the distribution, after taking 
into account the extent to which such 
hardship is or may be relieved 
through reimbursement or compensa-
tion by insurance or otherwise or by 
liquidation of the participant’s assets 
(to the extent the liquidation of such 
assets would not itself cause severe fi-
nancial hardship). 
‘‘(3) ACCELERATION
OF
BENEFITS.—The re-
quirements of this paragraph are met if the plan
does not permit the acceleration of the time or 
schedule under paragraph (2)(A)(iv). 
‘‘(4) ELECTIONS.—
‘‘(A) IN GENERAL.—The requirements of 
this paragraph are met if the requirements of 
subparagraphs (B) and (C) are met. 
‘‘(B) INITIAL DEFERRAL DECISION.—The 
requirements of this subparagraph are met if 
the plan provides that compensation earned 
during a taxable year may be deferred at the 
employee’s election only if the election to defer 
such compensation is made during the pre-
ceding taxable year or at such other time as 
provided in regulations. In the case of the first 
year in which an employee becomes eligible to 
participate in the plan, such election may be 
made with respect to services to be performed 
subsequent to the election within 30 days after 
the date the employee becomes eligible to par-
ticipate in such plan. 
‘‘(C) CHANGES IN TIME AND FORM OF DIS-
TRIBUTION.—The requirements of this subpara-
graph are met if, in the case of a plan which 
permits under a subsequent election a delay in 
a 
payment 
distributable 
under 
paragraph
(2)(A)(iv) or a change in the form of pay-
ment—
‘‘(i) such election may not be made 
less than 12 months prior to the date of 
the first scheduled payment under para-
graph (2)(A)(iv), and 
‘‘(ii) the plan requires that payments 
with respect to which such election is made 
be deferred for a period of not less than 5 
years from the date of such election. 
‘‘(b) RULES RELATING TO FUNDING.—
‘‘(1) OFFSHORE
PROPERTY
IN
A
TRUST.—In 
the case of assets set aside (directly or indirectly) in 
a trust (or other arrangement determined by the 
Secretary) for purposes of paying deferred com-
pensation under a nonqualified deferred compensa-
tion plan, for purposes of section 83 such assets 
shall be treated as property transferred in connec-
tion with the performance of services whether or not
such assets are available to satisfy claims of general 
creditors—
‘‘(A) at the time set aside if such assets 
are located outside of the United States, or
‘‘(B) at the time transferred if such assets 
are subsequently transferred outside of the 
United States. 
‘‘(2) EMPLOYER’S FINANCIAL HEALTH.—In the 
case of a nonqualified deferred compensation plan, 
there is a transfer of property within the meaning 
of section 83 as of the earlier of—
‘‘(A) the date on which the plan first pro-
vides that assets will become restricted to the 
provision of benefits under the plan in connec-
tion with a change in the employer’s financial 
health, or 
‘‘(B) the date on which assets are so re-
stricted. 
‘‘(3) 
INCOME
INCLUSION
FOR
OFFSHORE 
TRUSTS AND EMPLOYER’S FINANCIAL HEALTH.—For 
each taxable year that assets treated as transferred 
under this subsection remain set aside in a trust or 
other arrangement subject to paragraph (1) or (2), 
any increase in value in, or earnings with respect to, 
such assets shall be treated as an additional transfer 
of property under this subsection (to the extent not 
previously included in income). 
‘‘(4) INTEREST
ON
TAX
LIABILITY
PAYABLE 
WITH RESPECT TO TRANSFERRED PROPERTY.—
‘‘(A) IN
GENERAL.—If amounts are re-
quired to be included in gross income by reason 
of paragraph (1) or (2) for a taxable year, the 
tax imposed by this chapter for such taxable 
year shall be increased by the amount of inter-
est determined under subparagraph (B). 
‘‘(B) INTEREST.—The interest determined 
under this subparagraph for any taxable year is 
the amount of interest at the underpayment 
rate plus 1 percentage point on the underpay-
ments that would have occurred had the 
amounts so required to be included in gross in-
come by paragraph (1) or (2) been includible in 
gross income for the taxable year in which such 
assets were first set aside (directly or indi-
rectly) in a trust (or other arrangement deter-
mined by the Secretary) for purposes of the 
nonqualified deferred compensation plan. 
‘‘(c) NO INFERENCE ON EARLIER INCOME INCLU-
SION.—Nothing in this section shall be construed to pre-
vent the inclusion of amounts in gross income under any 
other provision of this chapter or any other rule of law 
earlier than the time provided in this section. 
‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.—
For purposes of this section—
‘‘(1) NONQUALIFIED
DEFERRED
COMPENSA-
TION PLAN.—The term ‘nonqualified deferred com-
pensation plan’ means any plan that provides for the 
deferral of compensation, other than—
‘‘(A) a qualified employer plan, and 
‘‘(B) any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or 
death benefit plan. 
‘‘(2) 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 eligible deferred compensation 
plan (within the meaning of section 457(b)) of 
an employer described in section 457(e)(1)(A). 
‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.—
The term ‘plan’ includes any agreement or arrange-
ment, including an agreement or arrangement that 
includes one person. 
‘‘(4) 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 fu-
ture performance of substantial services by any indi-
vidual. 
‘‘(5) TREATMENT OF EARNINGS.—References to 
deferred compensation shall be treated as including 
references to income (whether actual or notional) at-
tributable to such compensation or such income. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section, including regula-
tions—
‘‘(1) 
providing 
for 
the 
determination 
of 
amounts of deferral in the case of a nonqualified de-
ferred compensation plan which is a defined benefit 
plan, 
‘‘(2) relating to changes in the ownership and 
control of a corporation or assets of a corporation 
for purposes of subsection (a)(2)(A)(v), 
‘‘(3) exempting arrangements from the applica-
tion of subsection (b) if such arrangements will not 
result in an improper deferral of United States tax 
and will not result in assets being effectively beyond 
the reach of creditors, 
‘‘(4) defining financial health for purposes of 
subsection (b)(2), and
‘‘(5) disregarding a substantial risk of for-
feiture in cases where necessary to carry out the 
purposes of this section.’’. 
(b) W–2 FORMS.—
(1) IN
GENERAL.—Subsection (a) of section 
6051 (relating to receipts for employees) is amended 
by striking ‘‘and’’, by striking the period at the end 
of paragraph (11) and inserting ‘‘, and’’, and by in-
serting after paragraph (11) the following new para-
graph: 
‘‘(12) the total amount of deferrals under a 
nonqualified deferred compensation plan (within the 
meaning of section 409A(d)).’’. 
(2) THRESHOLD.—Subsection (a) of section 
6051 is amended by adding at the end the following: 
‘‘In the case of the amounts required to be shown 
by paragraph (12), the Secretary may (by regula-
tion) establish a minimum amount of deferrals below 
which paragraph (12) does not apply.’’. 
(c) CONFORMING AND CLERICAL AMENDMENTS.—
(1) Section 414(b) is amended by inserting 
‘‘409A,’’ after ‘‘408(p),’’. 
(2) Section 414(c) is amended by inserting 
‘‘409A,’’ after ‘‘408(p),’’.
(3) The table of sections for such subpart A is 
amended by adding at the end the following new 
item:
‘‘Sec. 409A. Inclusion in gross income of deferred compensation 
under nonqualified deferred compensation plans.’’.
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts deferred in taxable 
years beginning after December 31, 2003. 
SEC. 1092. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 
EMPLOYEE STOCK PURCHASE PLAN STOCK 
OPTIONS FROM WAGES. 
(a) EXCLUSION FROM EMPLOYMENT TAXES.—
(1) SOCIAL SECURITY TAXES.—
(A) Section 3121(a) (relating to definition 
of wages) is amended by striking ‘‘or’’ at the 
end of paragraph (20), by striking the period at 
the end of paragraph (21) and inserting ‘‘; or’’, 
and by inserting after paragraph (21) the fol-
lowing new paragraph: 
‘‘(22) remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or
‘‘(B) any disposition by the individual of 
such stock.’’. 
(B) Section 209(a) of the Social Security 
Act is amended by striking ‘‘or’’ at the end of 
paragraph (17), by striking the period at the 
end of paragraph (18) and inserting ‘‘; or’’, and 
by inserting after paragraph (18) the following 
new paragraph: 
‘‘(19) Remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b) 
of the Internal Revenue Code of 1986) or under 
an employee stock purchase plan (as defined in 
section 423(b) of such Code), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(2) 
RAILROAD
RETIREMENT
TAXES.—Sub-
section (e) of section 3231 is amended by adding at 
the end the following new paragraph: 
‘‘(11) QUALIFIED STOCK OPTIONS.—The term 
‘compensation’ shall not include any remuneration 
on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(3) UNEMPLOYMENT TAXES.—Section 3306(b) 
(relating to definition of wages) is amended by strik-
ing ‘‘or’’ at the end of paragraph (16), by striking 
the period at the end of paragraph (17) and insert-
ing ‘‘; or’’, and by inserting after paragraph (17) the 
following new paragraph: 
‘‘(18) remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(b) WAGE WITHHOLDING NOT REQUIRED ON DIS-
QUALIFYING DISPOSITIONS.—Section 421(b) (relating to 
effect of disqualifying dispositions) is amended by adding 
at the end the following new sentence: ‘‘No amount shall 
be required to be deducted and withheld under chapter