ance with regulations prescribed by the Sec-
retary, and’’. 
(3) REASONABLE CAUSE EXCEPTION TO LOSS 
OF REIT STATUS IF FAILURE TO SATISFY REQUIRE-
MENTS.—Subsection (g) of section 856 (relating to 
termination of election) is amended— 
(A) in paragraph (1) by inserting before 
the period at the end of the first sentence the 
following: ‘‘unless paragraph (5) applies’’, and 
(B) by adding at the end the following new 
paragraph: 
‘‘(5) ENTITIES
TO
WHICH
PARAGRAPH
AP-
PLIES.—This paragraph applies to a corporation, 
trust, or association— 
‘‘(A) which is not a real estate investment 
trust to which the provisions of this part apply 
for the taxable year due to one or more failures 
to comply with one or more of the provisions of 
this part (other than subsection (c)(6) or (c)(7) 
of section 856), 
‘‘(B) such failures are due to reasonable 
cause and not due to willful neglect, and 
‘‘(C) if such corporation, trust, or associa-
tion pays (as prescribed by the Secretary in 
regulations and in the same manner as tax) a
penalty of $50,000 for each failure to satisfy a 
provision of this part due to reasonable cause 
and not willful neglect.’’. 
(4) DEDUCTION OF TAX PAID FROM AMOUNT 
REQUIRED TO BE DISTRIBUTED.—Subparagraph (E) 
of section 857(b)(2) is amended by striking ‘‘(7)’’ 
and inserting ‘‘(7) of this subsection, section 
856(c)(7)(B)(iii), and section 856(g)(1).’’. 
(5) EXPANSION OF DEFICIENCY DIVIDEND PRO-
CEDURE.—Subsection (e) of section 860 is amended 
by striking ‘‘or’’ at the end of paragraph (2), by 
striking the period at the end of paragraph (3) and 
inserting ‘‘; or’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(4) a statement by the taxpayer attached to its 
amendment or supplement to a return of tax for the 
relevant tax year.’’. 
(g) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to taxable years beginning after Decem-
ber 31, 2000. 
(2) SUBSECTIONS
(c) 
THROUGH
(f).—The 
amendments made by subsections (c), (d), (e), and
(f) shall apply to taxable years beginning after the 
date of the enactment of this Act. 
SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES. 
(a) TREATMENT OF CERTAIN DIVIDENDS.— 
(1) NONRESIDENT ALIEN INDIVIDUALS.—Sec-
tion 871 (relating to tax on nonresident alien indi-
viduals) is amended by redesignating subsection (k) 
as subsection (l) and by inserting after subsection (j) 
the following new subsection: 
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG-
ULATED INVESTMENT COMPANIES.— 
‘‘(1) INTEREST-RELATED DIVIDENDS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed 
under paragraph (1)(A) of subsection (a) on 
any interest-related dividend received from a 
regulated investment company. 
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A) 
shall not apply— 
‘‘(i) to any interest-related dividend 
received from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than 
interest described in subparagraph (E) (i)
or (iii)) received by such company on in-
debtedness issued by such person or by any 
corporation or partnership with respect to 
which such person is a 10-percent share-
holder, 
‘‘(ii) to any interest-related dividend 
with respect to stock of a regulated invest-
ment company unless the person who 
would otherwise be required to deduct and 
withhold tax from such dividend under 
chapter 3 receives a statement (which 
meets requirements similar to the require-
ments of subsection (h)(5)) that the bene-
ficial owner of such stock is not a United 
States person, and 
‘‘(iii) to any interest-related dividend 
paid to any person within a foreign coun-
try (or any interest-related dividend pay-
ment addressed to, or for the account of, 
persons within such foreign country) dur-
ing any period described in subsection 
(h)(6) with respect to such country. 
Clause (iii) shall not apply to any dividend with 
respect to any stock which was acquired on or
before the date of the publication of the Sec-
retary’s determination under subsection (h)(6). 
‘‘(C) INTEREST-RELATED DIVIDEND.—For 
purposes of this paragraph, an interest-related 
dividend is any dividend (or part thereof) which 
is designated by the regulated investment com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later 
than 60 days after the close of its taxable year. 
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year 
described in section 855) is greater than the 
qualified net interest income of the company for 
such taxable year, the portion of each distribu-
tion which shall be an interest-related dividend 
shall be only that portion of the amounts so 
designated which such qualified net interest in-
come bears to the aggregate amount so des-
ignated. 
‘‘(D) 
QUALIFIED
NET
INTEREST
IN-
COME.—For purposes of subparagraph (C), the 
term ‘qualified net interest income’ means the 
qualified interest income of the regulated in-
vestment company reduced by the deductions 
properly allocable to such income. 
‘‘(E) QUALIFIED INTEREST INCOME.—For 
purposes of subparagraph (D), the term ‘quali-
fied interest income’ means the sum of the fol-
lowing amounts derived by the regulated invest-
ment company from sources within the United 
States: 
‘‘(i) Any amount includible in gross 
income as original issue discount (within 
the meaning of section 1273) on an obliga-
tion payable 183 days or less from the date 
of original issue (without regard to the pe-
riod held by the company). 
‘‘(ii) Any interest includible in gross 
income (including amounts recognized as 
ordinary income in respect of original issue 
discount or market discount or acquisition 
discount under part V of subchapter P and 
such other amounts as regulations may 
provide) on an obligation which is in reg-
istered form; except that this clause shall 
not apply to— 
‘‘(I) any interest on an obligation 
issued by a corporation or partnership
if the regulated investment company 
is a 10-percent shareholder in such 
corporation or partnership, and 
‘‘(II) any interest which is treat-
ed as not being portfolio interest 
under the rules of subsection (h)(4). 
‘‘(iii) Any interest referred to in sub-
section (i)(2)(A) (without regard to the 
trade or business of the regulated invest-
ment company). 
‘‘(iv) Any interest-related dividend in-
cludable in gross income with respect to 
stock of another regulated investment com-
pany. 
‘‘(F) 10-PERCENT
SHAREHOLDER.—For 
purposes of this paragraph, the term ‘10-per-
cent shareholder’ has the meaning given such 
term by subsection (h)(3)(B). 
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed 
under paragraph (1)(A) of subsection (a) on 
any short-term capital gain dividend received 
from a regulated investment company.
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE 
UNDER SUBSECTION (a)(2).—Subparagraph (A) 
shall not apply in the case of any nonresident 
alien individual subject to tax under subsection 
(a)(2). 
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a 
short-term capital gain dividend is any dividend 
(or part thereof) which is designated by the reg-
ulated investment company as a short-term cap-
ital gain dividend in a written notice mailed to 
its shareholders not later than 60 days after the 
close of its taxable year. If the aggregate 
amount so designated with respect to a taxable 
year of the company (including amounts so des-
ignated with respect to dividends paid after the 
close of the taxable year described in section 
855) is greater than the qualified short-term 
gain of the company for such taxable year, the 
portion of each distribution which shall be a 
short-term capital gain dividend shall be only 
that portion of the amounts so designated 
which such qualified short-term gain bears to 
the aggregate amount so designated.
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the 
net short-term capital gain of the regulated in-
vestment company for the taxable year over the 
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this 
subparagraph— 
‘‘(i) the net short-term capital gain of 
the regulated investment company shall be 
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to stock of another regu-
lated investment company as a short-term 
capital gain, and 
‘‘(ii) the excess of the net short-term 
capital gain for a taxable year over the net 
long-term capital loss for a taxable year (to 
which an election under section 4982(e)(4) 
does not apply) shall be determined with-
out regard to any net capital loss or net 
short-term capital loss attributable to 
transactions after October 31 of such year, 
and any such net capital loss or net short-
term capital loss shall be treated as arising 
on the 1st day of the next taxable year. 
To the extent provided in regulations, clause 
(ii) shall apply also for purposes of computing 
the taxable income of the regulated investment 
company.’’ 
(2) FOREIGN CORPORATIONS.—Section 881 (re-
lating to tax on income of foreign corporations not 
connected with United States business) is amended 
by redesignating subsection (e) as subsection (f) and 
by inserting after subsection (d) the following new 
subsection: 
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS 
OF REGULATED INVESTMENT COMPANIES.— 
‘‘(1) INTEREST-RELATED DIVIDENDS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed 
under paragraph (1) of subsection (a) on any 
interest-related dividend (as defined in section 
871(k)(1)) received from a regulated investment 
company. 
‘‘(B) 
EXCEPTION.—Subparagraph 
(A) 
shall not apply— 
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and
‘‘(ii) to any interest-related dividend 
received by a controlled foreign corporation 
(within the meaning of section 957(a)) to 
the extent such dividend is attributable to 
interest received by the regulated invest-
ment company from a person who is a re-
lated person (within the meaning of section 
864(d)(4)) with respect to such controlled 
foreign corporation. 
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall 
apply to any interest-related dividend received 
by a controlled foreign corporation (within the 
meaning of section 957(a)) to the extent such 
dividend is attributable to interest received by 
the regulated investment company which is de-
scribed in clause (ii) of section 871(k)(1)(E) 
(and not described in clause (i) or (iii) of such 
section). 
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.— 
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend 
(as defined in section 871(k)(2)) received from a 
regulated investment company.’’.
(3) WITHHOLDING TAXES.— 
(A) Section 1441(c) (relating to excep-
tions) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM 
REGULATED INVESTMENT COMPANIES.— 
‘‘(A) IN GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the 
tax imposed by section 871(a)(1)(A) by reason 
of section 871(k). 
‘‘(B) SPECIAL
RULE.—For purposes of 
subparagraph 
(A), 
clause 
(i) 
of 
section 
871(k)(1)(B) shall not apply to any dividend 
unless the regulated investment company knows 
that such dividend is a dividend referred to in 
such clause. A similar rule shall apply with re-
spect to the exception contained in section 
871(k)(2)(B).’’. 
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is 
amended— 
(i) by striking ‘‘and the reference in 
section 1441(c)(10)’’ and inserting ‘‘the 
reference in section 1441(c)(10)’’, and
(ii) by inserting before the period at 
the end the following: ‘‘, and the references 
in section 1441(c)(12) to sections 871(a) 
and 871(k) shall be treated as referring to 
sections 881(a) and 881(e) (except that for 
purposes of applying subparagraph (A) of 
section 1441(c)(12), as so modified, clause 
(ii) of section 881(e)(1)(B) shall not apply 
to any dividend unless the regulated invest-
ment company knows that such dividend is 
a dividend referred to in such clause)’’. 
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN
REGULATED
INVESTMENT
COMPANIES.—Section 
2105 (relating to property without the United States for 
estate tax purposes) is amended by adding at the end the 
following new subsection: 
‘‘(d) STOCK IN A RIC.— 
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company 
(as defined in section 851) owned by a nonresident 
not a citizen of the United States shall not be 
deemed property within the United States in the 
proportion that, at the end of the quarter of such in-
vestment company’s taxable year immediately pre-
ceding a decedent’s date of death (or at such other
time as the Secretary may designate in regulations), 
the assets of the investment company that were 
qualifying assets with respect to the decedent bore 
to the total assets of the investment company. 
‘‘(2) QUALIFYING
ASSETS.—For purposes of 
this subsection, qualifying assets with respect to a 
decedent are assets that, if owned directly by the de-
cedent, would have been— 
‘‘(A) amounts, deposits, or debt obligations 
described in subsection (b) of this section, 
‘‘(B) debt obligations described in the last 
sentence of section 2104(c), or 
‘‘(C) other property not within the United 
States.’’ 
(c) TREATMENT OF REGULATED INVESTMENT COM-
PANIES UNDER SECTION 897.— 
(1) Paragraph (1) of section 897(h) is amended 
by striking ‘‘REIT’’ each place it appears and in-
serting ‘‘qualified investment entity’’. 
(2) Paragraphs (2) and (3) of section 897(h) 
are amended to read as follows: 
‘‘(2) SALE OF STOCK IN DOMESTICALLY CON-
TROLLED ENTITY NOT TAXED.—The term ‘United 
States real property interest’ does not include any
interest in a domestically controlled qualified invest-
ment entity. 
‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON-
TROLLED
QUALIFIED
INVESTMENT
ENTITIES.—In 
the case of a domestically controlled qualified invest-
ment entity, rules similar to the rules of subsection 
(d) shall apply to the foreign ownership percentage 
of any gain.’’ 
(3) Subparagraphs (A) and (B) of section 
897(h)(4) are amended to read as follows: 
‘‘(A) QUALIFIED INVESTMENT ENTITY.— 
The term ‘qualified investment entity’ means 
any real estate investment trust and any regu-
lated investment company. 
‘‘(B) DOMESTICALLY
CONTROLLED.—The 
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock 
was held directly or indirectly by foreign per-
sons.’’ 
(4) Subparagraphs (C) and (D) of section 
897(h)(4) are each amended by striking ‘‘REIT’’ 
and inserting ‘‘qualified investment entity’’.
100 
(5) The subsection heading for subsection (h) of 
section 897 is amended by striking ‘‘REITS’’ and 
inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 
(d) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to dividends with respect to 
taxable years of regulated investment companies be-
ginning after December 31, 2004. 
(2) ESTATE
TAX
TREATMENT.—The amend-
ment made by subsection (b) shall apply to estates 
of decedents dying after December 31, 2004. 
(3) CERTAIN OTHER PROVISIONS.—The amend-
ments made by subsection (c) (other than paragraph 
(1) thereof) shall take effect after December 31, 
2004. 
SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS. 
(a) IN GENERAL.—Subsection (g) of section 468B 
(relating to clarification of taxation of certain funds) is 
amended to read as follows: 
‘‘(g) CLARIFICATION
OF TAXATION
OF CERTAIN 
FUNDS.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), nothing in any provision of law shall be 
construed as providing that an escrow account, set-
101 
tlement fund, or similar fund is not subject to cur-
rent income tax. The Secretary shall prescribe regu-
lations providing for the taxation of any such ac-
count or fund whether as a grantor trust or other-
wise. 
‘‘(2) EXEMPTION FROM TAX FOR CERTAIN SET-
TLEMENT FUNDS.—An escrow account, settlement 
fund, or similar fund shall be treated as beneficially 
owned by the United States and shall be exempt 
from taxation under this subtitle if— 
‘‘(A) it is established pursuant to a con-
sent decree entered by a judge of a United 
States District Court, 
‘‘(B) it is created for the receipt of settle-
ment payments as directed by a government en-
tity for the sole purpose of resolving or satis-
fying one or more claims asserting liability 
under the Comprehensive Environmental Re-
sponse, Compensation, and Liability Act of 
1980, 
‘‘(C) the authority and control over the ex-
penditure of funds therein (including the ex-
penditure of contributions thereto and any net 
earnings thereon) is with such government enti-
ty, and
102 
‘‘(D) upon termination, any remaining 
funds will be disbursed to such government en-
tity for use in accordance with applicable law. 
For purposes of this paragraph, the term ‘govern-
ment entity’ means the United States, any State or 
political subdivision thereof, the District of Colum-
bia, any possession of the United States, and any 
agency or instrumentality of any of the foregoing.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALI-
FYING FOR ORPHAN DRUG CREDIT. 
(a) IN GENERAL.—Paragraph (2) of section 45C(b) 
(relating to qualified clinical testing expenses) is amended 
by adding at the end the following new subparagraph: 
‘‘(C) TREATMENT OF CERTAIN EXPENSES 
INCURRED
BEFORE
DESIGNATION.—For pur-
poses of subparagraph (A)(ii)(I), if a drug is 
designated under section 526 of the Federal 
Food, Drug, and Cosmetic Act not later than 
the due date (including extensions) for filing 
the return of tax under this subtitle for the tax-
able year in which the application for such des-
ignation of such drug was filed, such drug shall
103 
be treated as having been designated on the 
date that such application was filed.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to expenses incurred after the 
date of the enactment of this Act. 
SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON 
BOWS AND ARROWS. 
(a) BOWS.—Paragraph (1) of section 4161(b) (relat-
ing to bows) is amended to read as follows: 
‘‘(1) BOWS.— 
‘‘(A) IN GENERAL.—There is hereby im-
posed on the sale by the manufacturer, pro-
ducer, or importer of any bow which has a peak 
draw weight of 30 pounds or more, a tax equal 
to 11 percent of the price for which so sold. 
‘‘(B) ARCHERY
EQUIPMENT.—There is 
hereby imposed on the sale by the manufac-
turer, producer, or importer— 
‘‘(i) of any part or accessory suitable 
for inclusion in or attachment to a bow de-
scribed in subparagraph (A), and 
‘‘(ii) of any quiver or broadhead suit-
able for use with an arrow described in 
paragraph (2),
104 
a tax equal to 11 percent of the price for which 
so sold.’’. 
(b) ARROWS.—Subsection (b) of section 4161 (relat-
ing to bows and arrows, etc.) is amended by redesignating 
paragraph (3) as paragraph (4) and inserting after para-
graph (2) the following: 
‘‘(3) ARROWS.— 
‘‘(A) IN GENERAL.—There is hereby im-
posed on the sale by the manufacturer, pro-
ducer, or importer of any arrow, a tax equal to 
12 percent of the price for which so sold. 
‘‘(B) EXCEPTION.—In the case of any 
arrow of which the shaft or any other compo-
nent has been previously taxed under paragraph 
(1) or (2)— 
‘‘(i) section 6416(b)(3) shall not 
apply, and 
‘‘(ii) the tax imposed by subparagraph 
(A) shall be an amount equal to the excess 
(if any) of— 
‘‘(I) the amount of tax imposed 
by this paragraph (determined with-
out regard to this subparagraph), over 
‘‘(II) the amount of tax paid with 
respect to the tax imposed under
105 
paragraph (1) or (2) on such shaft or 
component. 
‘‘(C) ARROW.—For purposes of this para-
graph, the term ‘arrow’ means any shaft de-
scribed in paragraph (2) to which additional 
components are attached.’’. 
(c) 
CONFORMING
AMENDMENTS.—Section 
4161(b)(2) is amended— 
(1) by inserting ‘‘(other than broadheads)’’ 
after ‘‘point’’, and 
(2) by striking ‘‘ARROWS.—’’ in the heading 
and inserting ‘‘ARROW COMPONENTS.—’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to articles sold by the manufac-
turer, producer, or importer after December 31, 2004. 
SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE 
BOXES. 
(a) REPEAL.—Paragraph (6) of section 4162(a) (de-
fining sport fishing equipment) is amended by striking 
subparagraph (C) and by redesignating subparagraphs 
(D) through (J) as subparagraphs (C) through (I), respec-
tively. 
(b) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004.
106 
SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH. 
(a) NOT TREATED
AS SPORT FISHING EQUIP-
MENT.—Subsection (a) of section 4162 (relating to sport 
fishing equipment defined) is amended by inserting ‘‘and’’ 
at the end of paragraph (8), by striking ‘‘, and’’ at the 
end of paragraph (9) and inserting a period, and by strik-
ing paragraph (10). 
(b) CONFORMING AMENDMENT.—Section 4162 is 
amended by striking subsection (b) and by redesignating 
subsection (c) as subsection (b). 
(c) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004. 
SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS 
WHOLESALERS FOR COST OF CARRYING FED-
ERAL EXCISE TAXES ON BOTTLED DISTILLED 
SPIRITS. 
(a) IN GENERAL.—Subpart A of part I of subchapter 
A of chapter 51 (relating to gallonage and occupational 
taxes) is amended by adding at the end the following new 
section: 
‘‘SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER’S AV-
ERAGE COST OF CARRYING EXCISE TAX. 
‘‘(a) IN GENERAL.—For purposes of section 38, in 
the case of an eligible wholesaler, the amount of the dis-
107 
tilled spirits wholesalers credit for any taxable year is the 
amount equal to the product of— 
‘‘(1) the number of cases of bottled distilled 
spirits— 
‘‘(A) which were bottled in the United 
States, and 
‘‘(B) which are purchased by such whole-
saler during the taxable year directly from the 
bottler of such spirits, and 
‘‘(2) the average tax-financing cost per case for 
the most recent calendar year ending before the be-
ginning of such taxable year. 
‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 
section, the term ‘eligible wholesaler’ means any person 
who holds a permit under the Federal Alcohol Administra-
tion Act as a wholesaler of distilled spirits. 
‘‘(c) AVERAGE TAX-FINANCING COST.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the average tax-financing cost per case for any 
calendar year is the amount of interest which would 
accrue at the deemed financing rate during a 60-day 
period on an amount equal to the deemed Federal 
excise per case. 
‘‘(2) DEEMED FINANCING RATE.—For purposes 
of paragraph (1), the deemed financing rate for any
108 
calendar year is the average of the corporate over-
payment rates under paragraph (1) of section 
6621(a) (determined without regard to the last sen-
tence of such paragraph) for calendar quarters of 
such year. 
‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON 
CASE.—For purposes of paragraph (1), the deemed 
Federal excise tax per case of 12 80-proof 750ml 
bottles is $22.83. 
‘‘(4) NUMBER OF CASES IN LOT.—For purposes 
of this section, the number of cases in any lot of dis-
tilled spirits shall be determined by dividing the 
number of liters in such lot by 9.’’ 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (b) of section 38 is amended by 
striking ‘‘plus’’ at the end of paragraph (14), by 
striking the period at the end of paragraph (15) and 
inserting ‘‘, plus’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(16) in the case of an eligible wholesaler (as 
defined in section 5011(b)), the distilled spirits 
wholesalers 
credit 
determined 
under 
section 
5011(a).’’ 
(2) Subsection (d) of section 39 (relating to 
carryback and carryforward of unused credits) is
109 
amended by adding at the end the following new 
paragraph: 
‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT 
BEFORE JANUARY 1, 2005.—No portion of the un-
used business credit for any taxable year which is 
attributable to the credit determined under section 
5011(a) may be carried back to a taxable year be-
ginning before January 1, 2005.’’. 
(3) The table of sections for subpart A of part 
I of subchapter A of chapter 51 is amended by add-
ing at the end the following new item: 
‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of car-
rying excise tax.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELAT-
ING TO DISTILLED SPIRITS, WINE, AND BEER. 
(a) IN GENERAL.—Subpart G of part II of sub-
chapter A of chapter 51 is amended by redesignating sec-
tion 5148 as section 5149 and by inserting after section 
5147 the following new section: 
‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 
‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 
5091, 5111, 5121, and 5131, the rate of tax imposed 
under such sections for the suspension period shall be
110 
zero. During such period, persons engaged in or carrying 
on a trade or business covered by such sections shall reg-
ister under section 5141 and shall comply with the record-
keeping requirements under this part. 
‘‘(b) SUSPENSION PERIOD.—For purposes of sub-
section (a), the suspension period is the period beginning 
on July 1, 2004, and ending on June 30, 2007.’’. 
(b) CONFORMING AMENDMENT.—Section 5117 is 
amended by adding at the end the following new sub-
section: 
‘‘(d) SPECIAL
RULE
DURING
SUSPENSION
PE-
RIOD.—Except as provided in subsection (b) or by the Sec-
retary, during the suspension period (as defined in section 
5148) it shall be unlawful for any dealer to purchase dis-
tilled spirits for resale from any person other than a 
wholesale dealer in liquors who is required to keep records 
under section 5114.’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart G of part II of subchapter A of chapter 51 
is amended by striking the last item and inserting the fol-
lowing new items: 
‘‘Sec. 5148. Suspension of occupational tax. 
‘‘Sec. 5149. Cross references.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act.
111 
SEC. 294. MODIFICATION OF UNRELATED BUSINESS IN-
COME LIMITATION ON INVESTMENT IN CER-
TAIN SMALL BUSINESS INVESTMENT COMPA-
NIES. 
(a) IN GENERAL.—Paragraph (6) of section 514(c) 
(relating to acquisition indebtedness) is amended to read 
as follows: 
‘‘(6) CERTAIN FEDERAL FINANCING.— 
‘‘(A) IN GENERAL.—For purposes of this 
section, the term ‘acquisition indebtedness’ does 
not include— 
‘‘(i) an obligation, to the extent that 
it is insured by the Federal Housing Ad-
ministration, to finance the purchase, reha-
bilitation, or construction of housing for 
low and moderate income persons, or 
‘‘(ii) indebtedness incurred by a small 
business 
investment 
company 
licensed 
under the Small Business Investment Act 
of 1958 and formed after the date of the 
enactment of the American Jobs Creation 
Act of 2004, if such indebtedness is evi-
denced by a debenture— 
‘‘(I) issued by such company 
under section 303(a) of such Act, and
112 
‘‘(II) held or guaranteed by the 
Small Business Administration. 
‘‘(B) LIMITATION.—Subparagraph (A)(ii) 
shall not apply with respect to any small busi-
ness investment company during any period 
that— 
‘‘(i) any organization which is exempt 
from tax under this title (other than a gov-
ernmental unit) owns more than 25 per-
cent of the capital or profits interest in 
such company, or 
‘‘(ii) organizations which are exempt 
from tax under this title (including govern-
mental units other than any agency or in-
strumentality of the United States) own, in 
the aggregate, 50 percent or more of the 
capital or profits interest in such com-
pany.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to indebtedness incurred by small 
business investment companies formed after the date of 
the enactment of the American Jobs Creation Act of 2004.
113 
SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME 
FROM CERTAIN INTERNATIONAL SHIPPING 
ACTIVITIES USING PER TON RATE. 
(a) IN GENERAL.—Chapter 1 of the Internal Rev-
enue Code of 1986 is amended by inserting after sub-
chapter Q the following new subchapter: 
‘‘Subchapter R—Election To Determine Tax-
able Income From Certain International 
Shipping Activities Using per Ton Rate 
‘‘Sec. 1352. Alternative tax on qualifying shipping activities. 
‘‘Sec. 1353. Taxable income from qualifying shipping activities. 
‘‘Sec. 1354. Qualifying shipping tax election; revocation; termi-
nation. 
‘‘Sec. 1355. Definitions and special rules. 
‘‘Sec. 1356. Qualifying shipping activities. 
‘‘Sec. 1357. Items not subject to regular tax; depreciation; inter-
est. 
‘‘Sec. 1358. Allocation of credits, income, and deductions. 
‘‘Sec. 1359. Disposition of qualifying shipping assets. 
‘‘SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING 
ACTIVITIES. 
‘‘(a) IN GENERAL.—The taxable income of an elect-
ing corporation from qualifying shipping activities shall be 
the amount determined under this subchapter, and the 
corporate percentages of the items of income, gain, loss, 
deduction, or credit of an electing corporation and of other 
members of the electing group of such corporation which 
would otherwise be taken into account by reason of its 
qualifying shipping activities shall be taken into account 
to the extent provided in section 1357.
114 
‘‘(b) ALTERNATIVE TAX.—The taxable income of an 
electing corporation from qualifying shipping activities, if 
otherwise taxable under section 11, 55, 882, 887, or 
1201(a) shall be subject to tax only under this section at 
the maximum rate specified in section 11(b). The income 
of a foreign corporation shall not be subject to tax under 
this subchapter to the extent its income is excludible from 
gross income under section 883(a)(1). 
‘‘SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING 
ACTIVITIES. 
‘‘(a) IN GENERAL.—For purposes of this subchapter, 
the taxable income of an electing corporation from quali-
fying shipping activities shall be its corporate income per-
centage of the sum of the amounts determined under sub-
section (b) for each qualifying vessel operated by such 
electing corporation or other electing entity. 
‘‘(b) AMOUNTS.—For purposes of subsection (a), the 
amount of taxable income of an electing entity for each 
qualifying vessel shall equal the product of— 
‘‘(1) the daily notional taxable income from the 
operation of the qualifying vessel in United States 
foreign trade, and 
‘‘(2) the number of days during the taxable 
year that the electing entity operated such vessel as 
a qualifying vessel in United States foreign trade.
115 
‘‘(c) DAILY NOTIONAL TAXABLE INCOME.—For pur-
poses of subsection (b), the daily notional taxable income 
from the operation of a qualifying vessel is 40 cents for 
each 100 tons of the net tonnage of the vessel, up to 
25,000 net tons, and 20 cents for each 100 tons of the 
net tonnage of the vessel, in excess of 25,000 net tons. 
‘‘(d) MULTIPLE OPERATORS OF VESSEL.—If 2 or 
more persons have a joint interest in a qualifying vessel 
and are treated as operators of that vessel, the taxable 
income from the operation of such vessel for that time (as 
determined under this section) shall be allocated among 
such persons on the basis of their ownership and charter 
interests in such vessel or on such other basis as the Sec-
retary may prescribe by regulations. 
‘‘(e) 
NONCORPORATE
PERCENTAGE.—Notwith-
standing any contrary provision of this subchapter, the 
noncorporate percentage of any item of income, gain, loss, 
deduction, or credit of any member of an electing group 
shall be taken into account for all purposes of this subtitle 
as if this subchapter were not in effect. 
‘‘SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REV-
OCATION; TERMINATION. 
‘‘(a) IN GENERAL.—Except as provided in sub-
sections (b) and (f), a qualifying shipping tax election may 
be made in respect of any qualifying entity.
116 
‘‘(b) CONDITION OF ELECTION.—An election may be 
made by a member of a controlled group under this sub-
section for any taxable year only if all qualifying entities 
that are members of the controlled group join in the elec-
tion. 
‘‘(c) WHEN MADE.—An election under subsection (a) 
may be made by a qualifying entity in such form as pre-
scribed by the Secretary. Such election shall be filed with 
the qualifying entity’s return for the first taxable year to 
which the election shall apply, by the due date for such 
return (including any applicable extensions). 
‘‘(d) YEARS FOR WHICH EFFECTIVE.—An election 
under subsection (a) shall be effective for the taxable year 
of the qualifying entity for which it is made and for all 
succeeding taxable years of the entity, until such election 
is terminated under subsection (e). 
‘‘(e) TERMINATION.— 
‘‘(1) BY REVOCATION.— 
‘‘(A) IN
GENERAL.—An election under 
subsection (a) may be terminated by revocation. 
‘‘(B) WHEN EFFECTIVE.—Except as pro-
vided in subparagraph (C)— 
‘‘(i) a revocation made during the tax-
able year and on or before the 15th day of
117 
the 3rd month thereof shall be effective on 
the 1st day of such taxable year, and 
‘‘(ii) a revocation made during the 
taxable year but after such 15th day shall 
be effective on the 1st day of the following 
taxable year. 
‘‘(C) REVOCATION MAY SPECIFY PROSPEC-
TIVE DATE.—If the revocation specifies a date 
for revocation which is on or after the day on 
which the revocation is made, the revocation 
shall be effective on and after the date so speci-
fied. 
‘‘(2) BY ENTITY CEASING TO BE QUALIFYING 
ENTITY.— 
‘‘(A) IN
GENERAL.—An election under 
subsection (a) shall be terminated whenever (at 
any time on or after the 1st day of the 1st tax-
able year for which the entity is an electing en-
tity) such entity ceases to be a qualifying enti-
ty. 
‘‘(B) WHEN EFFECTIVE.—Any termination 
under this paragraph shall be effective on and 
after the date of cessation. 
‘‘(f) ELECTION AFTER TERMINATION.—If a quali-
fying entity has made an election under subsection (a) and
118 
if such election has been terminated under subsection (e), 
such entity (and any successor entity) shall not be eligible 
to make an election under subsection (a) for any taxable 
year before its 5th taxable year which begins after the 1st 
taxable year for which such termination is effective, unless 
the Secretary consents to such election. 
‘‘SEC. 1355. DEFINITIONS AND SPECIAL RULES. 
‘‘(a) DEFINITIONS.—For purposes of this sub-
chapter: 
‘‘(1) The term ‘controlled group’ means any 
group of trusts and business entities whose members 
would be treated as a single employer under the 
rules of section 52(a) (without regard to paragraphs 
(1) and (2) thereof) and section 52(b)(1). 
‘‘(2) The term ‘corporate income percentage’ 
means the least aggregate share, expressed as a per-
centage, of any item of income or gain of an electing 
corporation or electing group of which such corpora-
tion is a member from qualifying shipping activities 
that would, but for an election in effect under this 
subchapter, be required to be reported on the Fed-
eral income tax return of an electing corporation 
during any taxable period. In the case of an electing 
group which includes two or more electing corpora-
tions, the corporate income percentage of each such
119 
corporation shall be determined on the basis of such 
corporations’ direct and indirect ownership and 
charter interests in qualifying vessels of the electing 
group or on such other basis as the Secretary may 
prescribe by regulations. 
‘‘(3) The term ‘corporate loss percentage’ 
means the greatest aggregate share, expressed as a 
percentage, of any item of loss, deduction or credit 
of an electing corporation or electing group of which 
such corporation is a member from qualifying ship-
ping activities that would, but for an election in ef-
fect under this subchapter, be required to be re-
ported on the Federal income tax return of an elect-
ing corporation during any taxable period. 
‘‘(4) The term ‘corporate percentages’ means 
the corporate income percentage and the corporate 
loss percentage. 
‘‘(5) The term ‘electing corporation’ means any 
C corporation that is an electing entity or that 
would, but for an election in effect under this sub-
chapter, be required to report any item of income, 
gain, loss, deduction, or credit of an electing entity 
on its Federal income tax return.
120 
‘‘(6) The term ‘electing entity’ means any quali-
fying entity for which an election is in effect under 
this subchapter. 
‘‘(7) The term ‘electing group’ means a con-
trolled group of which one or more members is an 
electing entity. 
‘‘(8) The term ‘noncorporate percentage’ means 
the difference between one hundred percent and the 
corporate income percentage or corporate loss per-
centage, as applicable. 
‘‘(9) The term ‘qualifying entity’ means a trust 
or business entity that— 
‘‘(A) operates one or more qualifying ves-
sels, and 
‘‘(B) meets the shipping activity require-
ment in subsection (c). 
‘‘(10) The term ‘qualifying shipping assets’ 
means any qualifying vessel and other assets which 
are used in core qualifying activities as described in 
section 1356(b). 
‘‘(11) The term ‘qualifying vessel’ means a self- 
propelled (or a combination self-propelled and non- 
self-propelled) United States flag vessel of not less 
than 10,000 deadweight tons used in the United 
States foreign trade.
121 
‘‘(12) The term ‘United States domestic trade’ 
means the transportation of goods or passengers be-
tween places in the United States. 
‘‘(13) The term ‘United States flag vessel’ 
means any vessel documented under the laws of the 
United States. 
‘‘(14) The term ‘United States foreign trade’ 
means the transportation of goods or passengers be-
tween a place in the United States and a foreign 
place or between foreign places. 
‘‘(b) OPERATING A VESSEL.—For purposes of this 
subchapter: 
‘‘(1) Except as provided in paragraph (2), an 
entity is treated as operating any vessel owned by, 
or chartered (including a time charter) to, the enti-
ty. 
‘‘(2) An entity is treated as operating a vessel 
that it has chartered out on bareboat charter terms 
only if— 
‘‘(A) the vessel is temporarily surplus to 
the entity’s requirements and the term of the 
charter does not exceed three years; or 
‘‘(B) the vessel is bareboat chartered to a 
member of a controlled group which includes 
such entity or to an unrelated third party that
122 
sub-bareboats or time charters the vessel to a 
member of such controlled group (including the 
owner). 
‘‘(c) SHIPPING ACTIVITY REQUIREMENT.—For pur-
poses of this section, the shipping activity requirement is 
met for a taxable year only by an entity described in para-
graph (1), (2), or (3). 
‘‘(1) An entity in the first taxable year of its 
qualifying shipping tax election if, for the preceding 
taxable year, the test in paragraph (4) is met. 
‘‘(2) An entity in the second or any subsequent 
taxable year of its qualifying shipping tax election if, 
for each of the two preceding taxable years, the test 
in paragraph (4) is met. 
‘‘(3) An entity that would be described in para-
graph (1) or (2) if the test in paragraph (4) were 
applied on an aggregate basis to the controlled 
group of which such entity is a member, and vessel 
charters between members of the controlled group 
were disregarded. 
‘‘(4) The test in this paragraph is met if on av-
erage at least 25 percent of the aggregate tonnage 
of qualifying vessels operated by the entity were 
owned by the entity or chartered to the entity on 
bareboat charter terms. For purposes of the pre-
123 
ceding sentence, vessels chartered (including time 
chartered) to an entity by a member of a controlled 
group which includes the entity, or by a third party 
that bareboat charters the vessels from the entity or 
a member of the entity’s controlled group, shall be 
treated as chartered to the entity on bareboat char-
ter terms. 
‘‘(d) EFFECT OF TEMPORARILY CEASING TO OPER-
ATE A QUALIFYING VESSEL.— 
‘‘(1) A temporary cessation by an electing enti-
ty in operation of a qualifying vessel shall be dis-
regarded for purposes of subsections (b) and (c) if 
the electing entity gives timely notice to the Sec-
retary stating— 
‘‘(A) that it has temporarily ceased to op-
erate the qualifying vessel, and 
‘‘(B) its intention to resume operating the 
qualifying vessel. 
‘‘(2) Notice shall be deemed timely if given not 
later than the due date (including extensions) for 
the electing entity’s tax return (as set forth in sec-
tion 6072(b)) for the taxable year in which the tem-
porary cessation begins. 
‘‘(3) The treatment provided by paragraph (1) 
shall continue until the earlier of—
124 
‘‘(A) the electing entity abandoning its in-
tention to resume operation of the qualifying 
vessel, or 
‘‘(B) the electing entity resuming operation 
of the qualifying vessel. 
‘‘(e) EFFECT
OF
TEMPORARILY
OPERATING
A 
QUALIFYING VESSEL IN THE UNITED STATES DOMESTIC 
TRADE.— 
‘‘(1) The temporary operation in the United 
States domestic trade of any qualifying vessel which 
had been used in the United States foreign trade 
shall be disregarded for purposes of this subchapter 
if the electing entity gives timely notice to the Sec-
retary stating— 
‘‘(A) that it temporarily operates or has 
operated in the United States domestic trade a 
qualifying vessel which had been used in the 
United States foreign trade, and 
‘‘(B) its intention to resume operation of 
the vessel in the United States foreign trade. 
‘‘(2) Notice shall be deemed timely if given not 
later than the due date (including extensions) for 
the electing entity’s tax return (as set forth in sec-
tion 6072(b)) for the taxable year in which the tem-
porary cessation begins.
125 
‘‘(3) The treatment provided by paragraph (1) 
shall continue until the earlier of— 
‘‘(A) the electing entity abandoning its in-
tention to resume operations of the vessel in the 
United States foreign trade, or 
‘‘(B) the electing entity resuming operation 
of the vessel in the United States foreign trade. 
‘‘(f) EFFECT OF CHANGE IN USE.— 
‘‘(1) Except as provided in subsection (e), a 
vessel that is used other than for operations in the 
United States foreign trade on other than a tem-
porary basis ceases to be a qualifying vessel when 
such use begins. 
‘‘(2) For purposes of this subsection, a change 
in use of a vessel, other than a commencement of 
operation in the United States domestic trade, is 
taken to be permanent unless there are cir-
cumstances indicating that it is temporary. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section. 
‘‘SEC. 1356. QUALIFYING SHIPPING ACTIVITIES. 
‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur-
poses of this subchapter the ‘qualifying shipping activities’ 
of an electing entity consist of—
126 
‘‘(1) core qualifying activities, 
‘‘(2) qualifying secondary activities, and 
‘‘(3) qualifying incidental activities. 
‘‘(b) CORE QUALIFYING ACTIVITIES.— 
‘‘(1) The ‘core qualifying activities’ of an elect-
ing entity are— 
‘‘(A) its activities in operating qualifying 
vessels in United States foreign trade, and 
‘‘(B) other activities of the electing entity 
and other members of its electing group that 
are an integral part of its business of operating 
qualifying vessels in United States foreign 
trade, including ownership or operation of 
barges, containers, chassis, and other equip-
ment that are the complement of, or used in 
connection with, a qualifying vessel in United 
States foreign trade, the inland haulage of 
cargo shipped, or to be shipped, on qualifying 
vessels in United States foreign trade, and the 
provision of terminal, maintenance, repair, 
logistical, or other vessel, container, or cargo-re-
lated services that are an integral part of oper-
ating qualifying vessels in United States foreign 
trade.
127 
‘‘(2) ‘Core qualifying activities’ do not include 
the provision by an entity of facilities or services to 
any person, other than— 
‘‘(A) another member of such entity’s 
electing group, 
‘‘(B) a consignor, consignee, or other cus-
tomer of such entity’s business of operating 
qualifying vessels in United States foreign 
trade, or 
‘‘(C) a member of an alliance, joint ven-
ture, pool, partnership or similar undertaking 
involving the operation of qualifying vessels in 
United States foreign trade of which such enti-
ty is a member. 
‘‘(c) QUALIFYING
SECONDARY
ACTIVITIES.—For 
purposes of this subsection— 
‘‘(1) the term ‘secondary activities’ means ac-
tivities that are not core qualifying activities, and— 
‘‘(A) are the active management or oper-
ation of vessels in the United States foreign 
trade, 
‘‘(B) the provision of vessel, container, or 
cargo-related facilities or services to any person, 
or
128 
‘‘(C) such other activities as may be pre-
scribed by the Secretary pursuant to regula-
tions, and 
‘‘(2) the ‘qualified secondary activities’ of an 
electing entity are its secondary activities and the 
secondary activities of other members of its electing 
group, but only to the extent that, without regard to 
this subchapter, the aggregate gross income derived 
by the electing entity and the other members of its 
electing group from such activities does not exceed 
20 percent of the aggregate gross income derived by 
the electing entity and the other members of its 
electing group from their core qualifying activities. 
‘‘(d) QUALIFYING INCIDENTAL ACTIVITIES.—Ship-
ping-related activities carried on by an electing entity or 
another member of its electing group are qualified inci-
dental activities of the electing entity if— 
‘‘(1) incidental to its core qualifying activities, 
‘‘(2) not qualifying secondary activities, and 
‘‘(3) without regard to this subchapter, the ag-
gregate gross income derived by the electing entity 
and other members of its electing group from such 
activities does not exceed 0.1 percent of such enti-
ties’ aggregate gross income from their core quali-
fying activities.
129 
‘‘SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRE-
CIATION; INTEREST. 
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come of an electing entity shall not include the corporate 
income percentage of— 
‘‘(1) income from qualifying shipping activities 
in the United States foreign trade, 
‘‘(2) income from money, bank deposits and 
other temporary investments which are reasonably 
necessary to meet the working capital requirements 
of qualifying shipping activities, and 
‘‘(3) income from money or other intangible as-
sets accumulated pursuant to a plan to purchase 
qualifying shipping assets. 
‘‘(b) ELECTING GROUP MEMBER.—Gross income of 
a member of an electing group that is not an electing enti-
ty shall not include the corporate income percentage of 
its income from qualifying shipping activities that are 
taken into account under this subchapter as qualifying 
shipping activities of an electing entity. 
‘‘(c) DENIAL OF LOSSES, DEDUCTIONS, AND CRED-
ITS.— 
‘‘(1) GENERAL
RULE.—Subject to paragraph 
(2), the corporate loss percentage of each item of 
loss, deduction (other than for interest expense), or 
credit of any taxpayer with respect to any activity
130 
the income from which is excluded from gross in-
come under this section shall be disallowed. 
‘‘(2) DEPRECIATION.—Notwithstanding para-
graph (1), the deduction for depreciation of a quali-
fying shipping asset shall be allowed in determining 
the adjusted basis of such asset for purposes of de-
termining gain from its disposition. 
‘‘(A) Except as provided in subparagraph 
(B), the straight line method of depreciation 
shall apply to the corporate income percentage 
of qualifying shipping assets the income from 
operation of which is excluded from gross in-
come under this section. 
‘‘(B) Subparagraph (A) shall not apply to 
any qualifying shipping asset which is subject 
to a charter entered into prior to the effective 
date of this subchapter. 
‘‘(3) INTEREST.—The corporate loss percentage 
of an electing entity’s interest expense shall be dis-
allowed in the ratio that the fair market value of its 
qualifying vessel assets bears to the fair market 
value of its total assets. 
‘‘(d) SECTION INAPPLICABLE TO UNRELATED PER-
SONS.—This section shall not apply to a taxpayer that is 
not a member of an electing group.
131 
‘‘SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DE-
DUCTIONS. 
‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur-
poses of this chapter, the qualifying shipping activities of 
an electing entity shall be treated as a separate trade or 
business activity from all other activities conducted by the 
entity. 
‘‘(b) EXCLUSION OF CREDITS OR DEDUCTIONS.— 
‘‘(1) No deduction shall be allowed against the 
taxable income of an electing corporation from quali-
fying shipping activities, and no credit shall be al-
lowed against the tax imposed by section 1352(b). 
‘‘(2) No deduction shall be allowed for any net 
operating loss attributable to the qualifying shipping 
activities of a corporation to the extent that such 
loss is carried forward by the corporation from a 
taxable year preceding the first taxable year for 
which such corporation was an electing corporation. 
‘‘(c) TRANSACTIONS NOT AT ARM’S LENGTH.—Sec-
tion 482 shall apply in accordance with this subsection to 
a transaction or series of transactions— 
‘‘(1) as between an electing entity and another 
person, or 
‘‘(2) as between an entity’s qualifying shipping 
activities and other activities carried on by it.
132 
‘‘SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING AS-
SETS. 
‘‘(a) IN GENERAL.—If an electing entity sells or dis-
poses of qualifying shipping assets (as defined in sub-
section (c)) in an otherwise taxable transaction, at the 
election of the entity no gain shall be recognized if replace-
ment qualifying shipping assets are acquired during the 
period specified in subsection (b), except to the extent that 
the amount realized upon such sale or disposition exceeds 
the cost of the replacement qualifying shipping assets. 
‘‘(b) PERIOD WITHIN WHICH PROPERTY MUST BE 
REPLACED.—The period referred to in subsection (a) shall 
be the period beginning one year prior to the disposition 
of the qualifying shipping assets and ending— 
‘‘(1) 3 years after the close of the first taxable 
year in which the gain is realized, or 
‘‘(2) subject to such terms and conditions as 
may be specified by the Secretary, on such later date 
as the Secretary may designate on application by the 
taxpayer. Such application shall be made at such 
time and in such manner as the Secretary may by 
regulations prescribe. 
‘‘(c) TIME FOR ASSESSMENT OF DEFICIENCY AT-
TRIBUTABLE TO GAIN.—If an electing entity has made the 
election provided in subsection (a), then—
133 
‘‘(1) the statutory period for the assessment of 
any deficiency, for any taxable year in which any 
part of the gain is realized, attributable to such gain 
shall not expire prior to the expiration of 3 years 
from the date the Secretary is notified by the entity 
(in such manner as the Secretary may by regulations 
prescribe) of the replacement tonnage tax property 
or of an intention not to replace, and 
‘‘(2) such deficiency may be assessed before the 
expiration of such 3-year period notwithstanding the 
provisions of section 6212(c) or the provisions of any 
other law or rule of law which would otherwise pre-
vent such assessment. 
‘‘(d) BASIS OF REPLACEMENT QUALIFYING SHIP-
PING ASSETS.—In the case of replacement qualifying ship-
ping assets purchased by an electing entity which resulted 
in the nonrecognition of any part of the gain realized as 
the result of a sale or other disposition of qualifying ship-
ping assets, the basis shall be the cost of such property 
decreased in the amount of the gain not so recognized; 
and if the property purchased consists of more than one 
piece of property, the basis determined under this sentence 
shall be allocated to the purchased properties in propor-
tion to their respective costs.
134 
‘‘(e) REPLACEMENT QUALIFYING SHIPPING ASSETS 
MUST BE ACQUIRED FROM UNRELATED PERSON IN CER-
TAIN CASES.— 
‘‘(1) IN
GENERAL.—Subsection (a) shall not 
apply if the replacement qualifying shipping assets 
are acquired from a related person except to the ex-
tent that the related person acquired the replace-
ment qualifying shipping assets from an unrelated 
person during the period applicable under subsection 
(b). 
‘‘(2) RELATED PERSON.—For purposes of this 
subsection, a person is related to another person if 
the person bears a relationship to the other person 
described in section 267(b) or 707(b)(1).’’. 
(b) TECHNICAL AND CONFORMING AMENDMENT.— 
The second sentence of section 56(g)(4)(B)(i), as amended 
by this Act, is further amended by inserting ‘‘or 1357’’ 
after ‘‘section 139A’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act.
135 
SEC. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR 
CERTAIN EXPENSES INCURRED IN SUPPORT 
OF NATIVE ALASKAN SUBSISTENCE WHAL-
ING. 
(a) IN GENERAL.—Section 170 (relating to chari-
table, etc., contributions and gifts), as amended by this 
Act, is amended by redesignating subsection (n) as sub-
section (o) and by inserting after subsection (m) the fol-
lowing new subsection: 
‘‘(n) EXPENSES PAID BY CERTAIN WHALING CAP-
TAINS IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE 
WHALING.— 
‘‘(1) IN GENERAL.—In the case of an individual 
who is recognized by the Alaska Eskimo Whaling 
Commission as a whaling captain charged with the 
responsibility of maintaining and carrying out sanc-
tioned whaling activities and who engages in such 
activities during the taxable year, the amount de-
scribed in paragraph (2) (to the extent such amount 
does not exceed $10,000 for the taxable year) shall 
be treated for purposes of this section as a chari-
table contribution. 
‘‘(2) AMOUNT DESCRIBED.— 
‘‘(A) IN GENERAL.—The amount described 
in this paragraph is the aggregate of the rea-
sonable and necessary whaling expenses paid by
136 
the taxpayer during the taxable year in carrying 
out sanctioned whaling activities. 
‘‘(B) WHALING EXPENSES.—For purposes 
of subparagraph (A), the term ‘whaling ex-
penses’ includes expenses for— 
‘‘(i) the acquisition and maintenance 
of whaling boats, weapons, and gear used 
in sanctioned whaling activities, 
‘‘(ii) the supplying of food for the 
crew and other provisions for carrying out 
such activities, and 
‘‘(iii) storage and distribution of the 
catch from such activities. 
‘‘(3) SANCTIONED WHALING ACTIVITIES.—For 
purposes of this subsection, the term ‘sanctioned 
whaling activities’ means subsistence bowhead whale 
hunting activities conducted pursuant to the man-
agement plan of the Alaska Eskimo Whaling Com-
mission.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to contributions made after De-
cember 31, 2004.
137 
TITLE 
III—TAX 
REFORM 
AND 
SIMPLIFICATION FOR UNITED 
STATES BUSINESSES 
SEC. 301. INTEREST EXPENSE ALLOCATION RULES. 
(a) ELECTION
TO
ALLOCATE
ON
WORLDWIDE 
BASIS.—Section 864 is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON 
WORLDWIDE BASIS.—For purposes of this subchapter, at 
the election of the worldwide affiliated group— 
‘‘(1) ALLOCATION AND APPORTIONMENT OF IN-
TEREST EXPENSE.— 
‘‘(A) IN GENERAL.—The taxable income of 
each domestic corporation which is a member of 
a worldwide affiliated group shall be determined 
by allocating and apportioning interest expense 
of each member as if all members of such group 
were a single corporation. 
‘‘(B) TREATMENT OF WORLDWIDE AFFILI-
ATED GROUP.—The taxable income of the do-
mestic members of a worldwide affiliated group 
from sources outside the United States shall be 
determined by allocating and apportioning the 
interest expense of such domestic members to
138 
such income in an amount equal to the excess 
(if any) of— 
‘‘(i) the total interest expense of the 
worldwide affiliated group multiplied by 
the ratio which the foreign assets of the 
worldwide affiliated group bears to all the 
assets of the worldwide affiliated group, 
over 
‘‘(ii) the interest expense of all foreign 
corporations which are members of the 
worldwide affiliated group to the extent 
such interest expense of such foreign cor-
porations would have been allocated and 
apportioned to foreign source income if 
this subsection were applied to a group 
consisting of all the foreign corporations in 
such worldwide affiliated group. 
‘‘(C) WORLDWIDE AFFILIATED GROUP.— 
For purposes of this paragraph, the term 
‘worldwide affiliated group’ means a group con-
sisting of— 
‘‘(i) the includible members of an af-
filiated group (as defined in section 
1504(a), determined without regard to
139 
paragraphs 
(2) 
and 
(4) 
of 
section 
1504(b)), and 
‘‘(ii) all controlled foreign corpora-
tions in which such members in the aggre-
gate meet the ownership requirements of 
section 1504(a)(2) either directly or indi-
rectly through applying paragraph (2) of 
section 958(a) or through applying rules 
similar to the rules of such paragraph to 
stock owned directly or indirectly by do-
mestic partnerships, trusts, or estates. 
‘‘(2) ALLOCATION
AND
APPORTIONMENT
OF 
OTHER
EXPENSES.—Expenses other than interest 
which are not directly allocable or apportioned to 
any specific income producing activity shall be allo-
cated and apportioned as if all members of the affili-
ated group were a single corporation. For purposes 
of the preceding sentence, the term ‘affiliated group’ 
has the meaning given such term by section 1504 
(determined without regard to paragraph (4) of sec-
tion 1504(b)). 
‘‘(3) TREATMENT
OF
TAX-EXEMPT
ASSETS; 
BASIS
OF
STOCK
IN
NONAFFILIATED
10-PERCENT 
OWNED
CORPORATIONS.—The rules of paragraphs 
(3) and (4) of subsection (e) shall apply for purposes
140 
of this subsection, except that paragraph (4) shall be 
applied on a worldwide affiliated group basis. 
‘‘(4) TREATMENT OF CERTAIN FINANCIAL IN-
STITUTIONS.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), any corporation described in sub-
paragraph (B) shall be treated as an includible 
corporation for purposes of section 1504 only 
for purposes of applying this subsection sepa-
rately to corporations so described. 
‘‘(B) DESCRIPTION.—A corporation is de-
scribed in this subparagraph if— 
‘‘(i) such corporation is a financial in-
stitution described in section 581 or 591, 
‘‘(ii) the business of such financial in-
stitution is predominantly with persons 
other than related persons (within the 
meaning of subsection (d)(4)) or their cus-
tomers, and 
‘‘(iii) such financial institution is re-
quired by State or Federal law to be oper-
ated separately from any other entity 
which is not such an institution.
141 
‘‘(C) TREATMENT OF BANK AND FINAN-
CIAL HOLDING COMPANIES.—To the extent pro-
vided in regulations— 
‘‘(i) a bank holding company (within 
the meaning of section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 
1841(a)), 
‘‘(ii) a financial holding company 
(within the meaning of section 2(p) of the 
Bank Holding Company Act of 1956 (12 
U.S.C. 1841(p)), and 
‘‘(iii) any subsidiary of a financial in-
stitution described in section 581 or 591, 
or of any such bank or financial holding 
company, if such subsidiary is predomi-
nantly engaged (directly or indirectly) in 
the active conduct of a banking, financing, 
or similar business, 
shall be treated as a corporation described in 
subparagraph (B). 
‘‘(5) ELECTION TO EXPAND FINANCIAL INSTI-
TUTION GROUP OF WORLDWIDE GROUP.— 
‘‘(A) IN GENERAL.—If a worldwide affili-
ated group elects the application of this sub-
section, all financial corporations which—
142 
‘‘(i) are members of such worldwide 
affiliated group, but 
‘‘(ii) are not corporations described in 
paragraph (4)(B), 
shall be treated as described in paragraph 
(4)(B) for purposes of applying paragraph 
(4)(A). This subsection (other than this para-
graph) shall apply to any such group in the 
same manner as this subsection (other than this 
paragraph) applies to the pre-election worldwide 
affiliated group of which such group is a part. 
‘‘(B) FINANCIAL CORPORATION.—For pur-
poses of this paragraph, the term ‘financial cor-
poration’ means any corporation if at least 80 
percent of its gross income is income described 
in section 904(d)(2)(C)(ii) and the regulations 
thereunder which is derived from transactions 
with persons who are not related (within the 
meaning of section 267(b) or 707(b)(1)) to the 
corporation. For purposes of the preceding sen-
tence, there shall be disregarded any item of in-
come or gain from a transaction or series of 
transactions a principal purpose of which is the 
qualification of any corporation as a financial 
corporation.
143 
‘‘(C) ANTIABUSE RULES.—In the case of a 
corporation which is a member of an electing fi-
nancial institution group, to the extent that 
such corporation— 
‘‘(i) distributes dividends or makes 
other distributions with respect to its stock 
after the date of the enactment of this 
paragraph to any member of the pre-elec-
tion worldwide affiliated group (other than 
to a member of the electing financial insti-
tution group) in excess of the greater of— 
‘‘(I) its average annual dividend 
(expressed as a percentage of current 
earnings and profits) during the 5- 
taxable-year period ending with the 
taxable year preceding the taxable 
year, or 
‘‘(II) 25 percent of its average 
annual earnings and profits for such 
5-taxable-year period, or 
‘‘(ii) deals with any person in any 
manner not clearly reflecting the income of 
the corporation (as determined under prin-
ciples similar to the principles of section 
482),
144 
an amount of indebtedness of the electing fi-
nancial institution group equal to the excess 
distribution or the understatement or overstate-
ment of income, as the case may be, shall be re-
characterized (for the taxable year and subse-
quent taxable years) for purposes of this para-
graph as indebtedness of the worldwide affili-
ated group (excluding the electing financial in-
stitution group). If a corporation has not been 
in existence for 5 taxable years, this subpara-
graph shall be applied with respect to the pe-
riod it was in existence. 
‘‘(D) ELECTION.—An election under this 
paragraph with respect to any financial institu-
tion group may be made only by the common 
parent of the pre-election worldwide affiliated 
group and may be made only for the first tax-
able year beginning after December 31, 2008, 
in which such affiliated group includes 1 or 
more financial corporations. Such an election, 
once made, shall apply to all financial corpora-
tions which are members of the electing finan-
cial institution group for such taxable year and 
all subsequent years unless revoked with the 
consent of the Secretary.
145 
‘‘(E) 
DEFINITIONS
RELATING
TO 
GROUPS.—For purposes of this paragraph— 
‘‘(i) PRE-ELECTION WORLDWIDE AF-
FILIATED GROUP.—The term ‘pre-election 
worldwide affiliated group’ means, with re-
spect to a corporation, the worldwide affili-
ated group of which such corporation 
would (but for an election under this para-
graph) be a member for purposes of apply-
ing paragraph (1). 
‘‘(ii) ELECTING
FINANCIAL
INSTITU-
TION GROUP.—The term ‘electing financial 
institution group’ means the group of cor-
porations to which this subsection applies 
separately by reason of the application of 
paragraph (4)(A) and which includes fi-
nancial corporations by reason of an elec-
tion under subparagraph (A). 
‘‘(F) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be appro-
priate to carry out this subsection, including 
regulations— 
‘‘(i) providing for the direct allocation 
of interest expense in other circumstances 
where such allocation would be appropriate
146 
to carry out the purposes of this sub-
section, 
‘‘(ii) preventing assets or interest ex-
pense from being taken into account more 
than once, and 
‘‘(iii) dealing with changes in mem-
bers of any group (through acquisitions or 
otherwise) treated under this paragraph as 
an affiliated group for purposes of this 
subsection. 
‘‘(6) ELECTION.—An election to have this sub-
section apply with respect to any worldwide affiliated 
group may be made only by the common parent of 
the domestic affiliated group referred to in para-
graph (1)(C) and may be made only for the first 
taxable year beginning after December 31, 2008, in 
which a worldwide affiliated group exists which in-
cludes such affiliated group and at least 1 foreign 
corporation. Such an election, once made, shall apply 
to such common parent and all other corporations 
which are members of such worldwide affiliated 
group for such taxable year and all subsequent years 
unless revoked with the consent of the Secretary.’’. 
(b) EXPANSION
OF REGULATORY AUTHORITY.— 
Paragraph (7) of section 864(e) is amended—
147 
(1) by inserting before the comma at the end of 
subparagraph (B) ‘‘and in other circumstances 
where such allocation would be appropriate to carry 
out the purposes of this subsection’’, and 
(2) by striking ‘‘and’’ at the end of subpara-
graph (E), by redesignating subparagraph (F) as 
subparagraph (G), and by inserting after subpara-
graph (E) the following new subparagraph: 
‘‘(F) preventing assets or interest expense 
from being taken into account more than once, 
and’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2008. 
SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS. 
(a) GENERAL RULE.—Section 904 is amended by re-
designating subsections (g), (h), (i), (j), and (k) as sub-
sections (h), (i), (j), (k), and (l) respectively, and by in-
serting after subsection (f) the following new subsection: 
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS.— 
‘‘(1) GENERAL
RULE.—For purposes of this 
subpart and section 936, in the case of any taxpayer 
who sustains an overall domestic loss for any taxable
148 
year beginning after December 31, 2006, that por-
tion of the taxpayer’s taxable income from sources 
within the United States for each succeeding taxable 
year which is equal to the lesser of— 
‘‘(A) the amount of such loss (to the extent 
not used under this paragraph in prior taxable 
years), or 
‘‘(B) 50 percent of the taxpayer’s taxable 
income from sources within the United States 
for such succeeding taxable year, 
shall be treated as income from sources without the 
United States (and not as income from sources with-
in the United States). 
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 
purposes of this subsection— 
‘‘(A) IN GENERAL.—The term ‘overall do-
mestic loss’ means any domestic loss to the ex-
tent such loss offsets taxable income from 
sources without the United States for the tax-
able year or for any preceding taxable year by 
reason of a carryback. For purposes of the pre-
ceding sentence, the term ‘domestic loss’ means 
the amount by which the gross income for the 
taxable year from sources within the United 
States is exceeded by the sum of the deductions
149 
properly apportioned or allocated thereto (deter-
mined without regard to any carryback from a 
subsequent taxable year). 
‘‘(B) TAXPAYER
MUST
HAVE
ELECTED 
FOREIGN TAX CREDIT FOR YEAR OF LOSS.— 
The term ‘overall domestic loss’ shall not in-
clude any loss for any taxable year unless the 
taxpayer chose the benefits of this subpart for 
such taxable year. 
‘‘(3) CHARACTERIZATION OF SUBSEQUENT IN-
COME.— 
‘‘(A) IN
GENERAL.—Any income from 
sources within the United States that is treated 
as income from sources without the United 
States under paragraph (1) shall be allocated 
among and increase the income categories in 
proportion to the loss from sources within the 
United States previously allocated to those in-
come categories. 
‘‘(B) INCOME CATEGORY.—For purposes of 
this paragraph, the term ‘income category’ has 
the meaning given such term by subsection 
(f)(5)(E)(i). 
‘‘(4) COORDINATION WITH SUBSECTION (f).— 
The Secretary shall prescribe such regulations as
150 
may be necessary to coordinate the provisions of this 
subsection with the provisions of subsection (f).’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 535(d)(2) is amended by striking 
‘‘section 
904(g)(6)’’ 
and 
inserting 
‘‘section 
904(h)(6)’’. 
(2) Subparagraph (A) of section 936(a)(2) is 
amended by striking ‘‘section 904(f)’’ and inserting 
‘‘subsections (f) and (g) of section 904’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to losses for taxable years begin-
ning after December 31, 2006. 
SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS. 
(a) IN GENERAL.—Paragraph (1) of section 904(d) 
(relating to separate application of section with respect to 
certain categories of income) is amended to read as fol-
lows: 
‘‘(1) IN
GENERAL.—The provisions of sub-
sections (a), (b), and (c) and sections 902, 907, and 
960 shall be applied separately with respect to— 
‘‘(A) passive category income, and 
‘‘(B) general category income.’’ 
(b) CATEGORIES.—Paragraph (2) of section 904(d) 
is amended by striking subparagraph (B), by redesig-
nating subparagraph (A) as subparagraph (B), and by in-
151 
serting before subparagraph (B) (as so redesignated) the 
following new subparagraph: 
‘‘(A) CATEGORIES.— 
‘‘(i) PASSIVE
CATEGORY
INCOME.— 
The term ‘passive category income’ means 
passive income and specified passive cat-
egory income. 
‘‘(ii) GENERAL CATEGORY INCOME.— 
The term ‘general category income’ means 
income other than passive category in-
come.’’. 
(c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub-
paragraph (B) of section 904(d)(2), as so redesignated, 
is amended by adding at the end the following new clause: 
‘‘(v) SPECIFIED
PASSIVE
CATEGORY 
INCOME.—The term ‘specified passive cat-
egory income’ means— 
‘‘(I) dividends from a DISC or 
former DISC (as defined in section 
992(a)) to the extent such dividends 
are treated as income from sources 
without the United States, 
‘‘(II) taxable income attributable 
to foreign trade income (within the 
meaning of section 923(b)), and
152 
‘‘(III) distributions from a FSC 
(or a former FSC) out of earnings 
and profits attributable to foreign 
trade income (within the meaning of 
section 923(b)) or interest or carrying 
charges 
(as 
defined 
in 
section 
927(d)(1)) derived from a transaction 
which results in foreign trade income 
(as defined in section 923(b)).’’. 
(d) TREATMENT OF FINANCIAL SERVICES.—Para-
graph (2) of section 904(d) is amended by striking sub-
paragraph (D), by redesignating subparagraph (C) as sub-
paragraph (D), and by inserting before subparagraph (D) 
(as so redesignated) the following new subparagraph: 
‘‘(C) TREATMENT OF FINANCIAL SERVICES 
INCOME AND COMPANIES.— 
‘‘(i) IN GENERAL.—Financial services 
income shall be treated as general category 
income in the case of— 
‘‘(I) a member of a financial 
services group, and 
‘‘(II) any other person if such 
person is predominantly engaged in 
the active conduct of a banking, insur-
ance, financing, or similar business.
153 
‘‘(ii) FINANCIAL SERVICES GROUP.— 
The term ‘financial services group’ means 
any affiliated group (as defined in section 
1504(a) without regard to paragraphs (2) 
and (3) of section 1504(b)) which is pre-
dominantly engaged in the active conduct 
of a banking, insurance, financing, or simi-
lar business. In determining whether such 
a group is so engaged, there shall be taken 
into account only the income of members 
of the group that are— 
‘‘(I) United States corporations, 
or 
‘‘(II) controlled foreign corpora-
tions in which such United States cor-
porations own, directly or indirectly, 
at least 80 percent of the total voting 
power and value of the stock. 
‘‘(iii) 
PASS-THRU
ENTITIES.—The 
Secretary shall by regulation specify for 
purposes of this subparagraph the treat-
ment of financial services income received 
or accrued by partnerships and by other 
pass-thru entities which are not members 
of a financial services group.’’.
154 
(e) CONFORMING AMENDMENTS.— 
(1) Clause (iii) of section 904(d)(2)(B) (relating 
to exceptions from passive income), as so redesig-
nated, is amended by striking subclause (I) and by 
redesignating subclauses (II) and (III) as subclauses 
(I) and (II), respectively. 
(2) Clause (i) of section 904(d)(2)(D) (defining 
financial services income), as so redesignated, is 
amended by adding ‘‘or’’ at the end of subclause (I) 
and by striking subclauses (II) and (III) and insert-
ing the following new subclause: 
‘‘(II) passive income (determined 
without 
regard 
to 
subparagraph 
(B)(iii)(II)).’’ 
(3) Section 904(d)(2)(D) (defining financial 
services income), as so redesignated, is amended by 
striking clause (iii). 
(4) Paragraph (3) of section 904(d) is amended 
to read as follows: 
‘‘(3) LOOK-THRU
IN
CASE
OF
CONTROLLED 
FOREIGN CORPORATIONS.— 
‘‘(A) IN GENERAL.—Except as otherwise 
provided in this paragraph, dividends, interest, 
rents, and royalties received or accrued by the 
taxpayer from a controlled foreign corporation
194 
SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS. 
(a) IN GENERAL.—Paragraphs (2) and (3)(B) of sec-
tion 220(i) (defining cut-off year) are each amended by 
striking ‘‘2003’’ each place it appears in the text and 
headings and inserting ‘‘2005’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 220(j) is amend-
ed— 
(A) in the text by striking ‘‘or 2002’’ each 
place it appears and inserting ‘‘2002, or 2004’’, 
and 
(B) in the heading by striking ‘‘OR 2002’’ 
and inserting ‘‘2002, OR 2004’’. 
(2) Subparagraph (A) of section 220(j)(4) is 
amended by striking ‘‘and 2002’’ and inserting 
‘‘2002, and 2004’’. 
(3) Subparagraph (C) of section 220(j)(2) is 
amended to read as follows: 
‘‘(C) NO LIMITATION FOR 2000 OR 2003.— 
The numerical limitation shall not apply for 
2000 or 2003.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1, 2004. 
(d) TIME FOR FILING REPORTS, ETC.— 
(1) The report required by section 220(j)(4) of 
the Internal Revenue Code of 1986 to be made on