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‘‘(A) IN
GENERAL.—This subsection shall 
apply to partnerships and S corporations in the 
same manner as it applies to C corporations. 
‘‘(B) ALLOCATIONS TO CERTAIN CORPORATE 
PARTNERS.—If a C corporation is a partner in 
a partnership— 
‘‘(i) the corporation’s allocable share of 
indebtedness and interest income of the 
partnership shall be taken into account in 
applying this subsection to the corporation, 
and 
‘‘(ii) if a deduction is not disallowed 
under this subsection with respect to any 
interest expense of the partnership, this sub-
section shall be applied separately in deter-
mining whether a deduction is allowable to 
the corporation with respect to the corpora-
tion’s allocable share of such interest ex-
pense.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act.
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HR 3550 EAS 
SEC. 5677. RECOGNITION OF CANCELLATION OF INDEBTED-
NESS INCOME REALIZED ON SATISFACTION 
OF DEBT WITH PARTNERSHIP INTEREST. 
(a) IN GENERAL.—Paragraph (8) of section 108(e) (re-
lating to general rules for discharge of indebtedness (includ-
ing discharges not in title 11 cases or insolvency)) is 
amended to read as follows: 
‘‘(8) INDEBTEDNESS SATISFIED BY CORPORATE 
STOCK OR PARTNERSHIP INTEREST.—For purposes of 
determining income of a debtor from discharge of in-
debtedness, if— 
‘‘(A) a debtor corporation transfers stock, or 
‘‘(B) a debtor partnership transfers a cap-
ital or profits interest in such partnership, 
to a creditor in satisfaction of its recourse or non-
recourse indebtedness, such corporation or partnership 
shall be treated as having satisfied the indebtedness 
with an amount of money equal to the fair market 
value of the stock or interest. In the case of any part-
nership, any discharge of indebtedness income recog-
nized under this paragraph shall be included in the 
distributive shares of taxpayers which were the part-
ners in the partnership immediately before such dis-
charge.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply with respect to cancellations of indebted-
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HR 3550 EAS 
ness occurring on or after the date of the enactment of this 
Act. 
SEC. 5678. MODIFICATION OF STRADDLE RULES. 
(a) RULES RELATING TO IDENTIFIED STRADDLES.— 
(1) IN GENERAL.—Subparagraph (A) of section 
1092(a)(2) (relating to special rule for identified 
straddles) is amended to read as follows: 
‘‘(A) IN
GENERAL.—In the case of any 
straddle which is an identified straddle— 
‘‘(i) paragraph (1) shall not apply 
with respect to identified positions com-
prising the identified straddle, 
‘‘(ii) if there is any loss with respect to 
any identified position of the identified 
straddle, the basis of each of the identified 
offsetting positions in the identified straddle 
shall be increased by an amount which 
bears the same ratio to the loss as the unrec-
ognized gain with respect to such offsetting 
position bears to the aggregate unrecognized 
gain with respect to all such offsetting posi-
tions, and 
‘‘(iii) any loss described in clause (ii) 
shall not otherwise be taken into account for 
purposes of this title.’’.
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(2) 
IDENTIFIED
STRADDLE.—Section 
1092(a)(2)(B) (defining identified straddle) is amend-
ed— 
(A) by striking clause (ii) and inserting the 
following: 
‘‘(ii) to the extent provided by regula-
tions, the value of each position of which (in 
the hands of the taxpayer immediately be-
fore the creation of the straddle) is not less 
than the basis of such position in the hands 
of the taxpayer at the time the straddle is 
created, and’’, and 
(B) by adding at the end the following new 
flush sentence: 
‘‘The Secretary shall prescribe regulations which 
specify the proper methods for clearly identifying 
a straddle as an identified straddle (and the po-
sitions comprising such straddle), which specify 
the rules for the application of this section for a 
taxpayer which fails to properly identify the po-
sitions of an identified straddle, and which 
specify the ordering rules in cases where a tax-
payer disposes of less than an entire position 
which is part of an identified straddle.’’.
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(3) UNRECOGNIZED
GAIN.—Section 1092(a)(3) 
(defining unrecognized gain) is amended by redesig-
nating subparagraph (B) as subparagraph (C) and 
by inserting after subparagraph (A) the following new 
subparagraph: 
‘‘(B) 
SPECIAL
RULE
FOR
IDENTIFIED 
STRADDLES.—For 
purposes 
of 
paragraph 
(2)(A)(ii), the unrecognized gain with respect to 
any identified offsetting position shall be the ex-
cess of the fair market value of the position at 
the time of the determination over the fair mar-
ket value of the position at the time the taxpayer 
identified the position as a position in an identi-
fied straddle.’’ 
(4) 
CONFORMING
AMENDMENT.—Section 
1092(c)(2) is amended by striking subparagraph (B) 
and by redesignating subparagraph (C) as subpara-
graph (B). 
(b) 
PHYSICALLY
SETTLED
POSITIONS.—Section 
1092(d) (relating to definitions and special rules) is amend-
ed by adding at the end the following new paragraph: 
‘‘(8) SPECIAL RULES FOR PHYSICALLY SETTLED 
POSITIONS.—For purposes of subsection (a), if a tax-
payer settles a position which is part of a straddle by 
delivering property to which the position relates (and
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HR 3550 EAS 
such position, if terminated, would result in a real-
ization of a loss), then such taxpayer shall be treated 
as if such taxpayer— 
‘‘(A) terminated the position for its fair 
market value immediately before the settlement, 
and 
‘‘(B) sold the property so delivered by the 
taxpayer at its fair market value.’’. 
(c) REPEAL OF STOCK EXCEPTION.— 
(1) IN
GENERAL.—Section 1092(d)(3) is re-
pealed. 
(2) 
CONFORMING
AMENDMENT.—Section 
1258(d)(1) is amended by striking ‘‘; except that the 
term ‘personal property’ shall include stock’’. 
(d) REPEAL OF QUALIFIED COVERED CALL EXCEP-
TION.—Section 1092(c)(4) is amended by adding at the end 
the following new subparagraph: 
‘‘(I) TERMINATION.—This paragraph shall 
not apply to any position established on or after 
the date of the enactment of this subparagraph.’’. 
(e) EFFECTIVE DATE.—The amendments made by this 
section shall apply to positions established on or after the 
date of the enactment of this Act.
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SEC. 5679. DENIAL OF INSTALLMENT SALE TREATMENT FOR 
ALL READILY TRADEABLE DEBT. 
(a) IN GENERAL.—Section 453(f)(4)(B) (relating to 
purchaser evidences of indebtedness payable on demand or 
readily tradeable) is amended by striking ‘‘is issued by a 
corporation or a government or political subdivision thereof 
and’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to sales occurring on or after the date 
of the enactment of this Act. 
PART III—CORPORATIONS AND PARTNERSHIPS 
SEC. 5680. MODIFICATION OF TREATMENT OF TRANSFERS 
TO CREDITORS IN DIVISIVE REORGANIZA-
TIONS. 
(a) IN GENERAL.—Section 361(b)(3) (relating to treat-
ment of transfers to creditors) is amended by adding at the 
end the following new sentence: ‘‘In the case of a reorganiza-
tion described in section 368(a)(1)(D) with respect to which 
stock or securities of the corporation to which the assets are 
transferred are distributed in a transaction which qualifies 
under section 355, this paragraph shall apply only to the 
extent that the sum of the money and the fair market value 
of other property transferred to such creditors does not ex-
ceed the adjusted bases of such assets transferred.’’. 
(b) LIABILITIES
IN
EXCESS
OF
BASIS.—Section 
357(c)(1)(B) is amended by inserting ‘‘with respect to
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HR 3550 EAS 
which stock or securities of the corporation to which the as-
sets are transferred are distributed in a transaction which 
qualifies under section 355’’ after ‘‘section 368(a)(1)(D)’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transfers of money or other property, 
or liabilities assumed, in connection with a reorganization 
occurring on or after the date of the enactment of this Act. 
SEC. 
5681. 
CLARIFICATION 
OF 
DEFINITION 
OF 
NON-
QUALIFIED PREFERRED STOCK. 
(a) IN GENERAL.—Section 351(g)(3)(A) is amended 
by adding at the end the following: ‘‘Stock shall not be treat-
ed as participating in corporate growth to any significant 
extent unless there is a real and meaningful likelihood of 
the shareholder actually participating in the earnings and 
growth of the corporation.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to transactions after May 14, 2003. 
SEC. 5682. MODIFICATION OF DEFINITION OF CONTROLLED 
GROUP OF CORPORATIONS. 
(a) IN GENERAL.—Section 1563(a)(2) (relating to 
brother-sister controlled group) is amended by striking 
‘‘possessing—’’ and all that follows through ‘‘(B)’’ and in-
serting ‘‘possessing’’. 
(b) APPLICATION
OF EXISTING RULES
TO OTHER 
CODE PROVISIONS.—Section 1563(f) (relating to other defi-
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HR 3550 EAS 
nitions and rules) is amended by adding at the end the 
following new paragraph: 
‘‘(5) BROTHER-SISTER CONTROLLED GROUP DEF-
INITION FOR PROVISIONS OTHER THAN THIS PART.— 
‘‘(A) IN GENERAL.—Except as specifically 
provided in an applicable provision, subsection 
(a)(2) shall be applied to an applicable provision 
as if it read as follows: 
‘(2) BROTHER-SISTER
CONTROLLED
GROUP.— 
Two or more corporations if 5 or fewer persons who 
are individuals, estates, or trusts own (within the 
meaning of subsection (d)(2) stock possessing— 
‘(A) at least 80 percent of the total com-
bined voting power of all classes of stock entitled 
to vote, or at least 80 percent of the total value 
of shares of all classes of stock, of each corpora-
tion, and 
‘(B) more than 50 percent of the total com-
bined voting power of all classes of stock entitled 
to vote or more than 50 percent of the total value 
of shares of all classes of stock of each corpora-
tion, taking into account the stock ownership of 
each such person only to the extent such stock 
ownership is identical with respect to each such 
corporation.’
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‘‘(B) APPLICABLE
PROVISION.—For pur-
poses of this paragraph, an applicable provision 
is any provision of law (other than this part) 
which incorporates the definition of controlled 
group of corporations under subsection (a).’’. 
(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. 5683. MANDATORY BASIS ADJUSTMENTS IN CONNEC-
TION WITH PARTNERSHIP DISTRIBUTIONS 
AND TRANSFERS OF PARTNERSHIP INTER-
ESTS. 
(a) IN GENERAL.—Section 754 is repealed. 
(b) ADJUSTMENT TO BASIS OF UNDISTRIBUTED PART-
NERSHIP PROPERTY.—Section 734 is amended— 
(1) by striking ‘‘, with respect to which the elec-
tion provided in section 754 is in effect,’’ in the mat-
ter preceding paragraph (1) of subsection (b), 
(2) by striking ‘‘(as adjusted by section 732(d))’’ 
both places it appears in subsection (b), 
(3) by striking the last sentence of subsection (b), 
(4) by striking subsection (a) and by redesig-
nating subsections (b) and (c) as subsections (a) and 
(b), respectively, and 
(5) by striking ‘‘OPTIONAL’’ in the heading.
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HR 3550 EAS 
(c) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY.—Section 743 is amended— 
(1) by striking ‘‘with respect to which the elec-
tion provided in section 754 is in effect’’ in the mat-
ter preceding paragraph (1) of subsection (b), 
(2) by striking subsection (a) and by redesig-
nating subsections (b) and (c) as subsections (a) and 
(b), respectively, 
(3) by adding at the end the following new sub-
section: 
‘‘(c) ELECTION TO ADJUST BASIS FOR TRANSFERS 
UPON DEATH
OF PARTNER.—Subsection (a) shall not 
apply and no adjustments shall be made in the case of any 
transfer of an interest in a partnership upon the death of 
a partner unless an election to do so is made by the partner-
ship. Such an election shall apply with respect to all such 
transfers of interests in the partnership. Any election under 
section 754 in effect on the date of the enactment of this 
subsection shall constitute an election made under this sub-
section. Such election may be revoked by the partnership, 
subject to such limitations as may be provided by regula-
tions prescribed by the Secretary.’’, and 
(4) by striking ‘‘OPTIONAL’’ in the heading. 
(d) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 732 is repealed.