106
value of the property at the time of the distribu-
tion—
‘‘(A) in any case in which gain or loss is 
recognized by the liquidating corporation with 
respect to such property, or 
‘‘(B) in any case in which the liquidating 
corporation is a foreign corporation, the cor-
porate distributee is a domestic corporation, 
and the corporate distributee’s aggregate ad-
justed bases of property described in section 
362(e)(1)(B) which is distributed in such liq-
uidation would (but for this subparagraph) ex-
ceed the fair market value of such property im-
mediately after such liquidation.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions after the date of 
the enactment of this Act. 
SEC. 332. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 
TRANSFERS. 
(a) TREATMENT OF CONTRIBUTED PROPERTY WITH 
BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 
amended by striking ‘‘and’’ at the end of subparagraph 
(A), by striking the period at the end of subparagraph 
(B) and inserting ‘‘, and’’, and by adding at the end the 
following:
107
‘‘(C) if any property so contributed has a 
built-in loss—
‘‘(i) such built-in loss shall be taken 
into account only in determining the 
amount of items allocated to the contrib-
uting partner, and 
‘‘(ii) except as provided in regulations, 
in determining the amount of items allo-
cated to other partners, the basis of the 
contributed property in the hands of the 
partnership shall be treated as being equal 
to its fair market value immediately after 
the contribution. 
For purposes of subparagraph (C), the term ‘built-
in loss’ means the excess of the adjusted basis of the 
property (determined without regard to subpara-
graph (C)(ii)) over its fair market value immediately 
after the contribution.’’
(b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY
ON TRANSFER
OF PARTNERSHIP INTEREST IF 
THERE IS SUBSTANTIAL BUILT-IN LOSS.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 743 (relating to optional adjustment to 
basis of partnership property) is amended by insert-
ing before the period ‘‘or unless the partnership has
108
a substantial built-in loss immediately after such 
transfer’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
743 is amended by inserting ‘‘or with respect to 
which there is a substantial built-in loss immediately 
after such transfer’’ after ‘‘section 754 is in effect’’. 
(3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 
is amended by adding at the end the following new 
subsection: 
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a partnership has a substantial built-in loss 
with respect to a transfer of an interest in a part-
nership if the transferee partner’s proportionate 
share of the adjusted basis of the partnership prop-
erty exceeds by more than $250,000 the basis of 
such partner’s interest in the partnership. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of paragraph (1) and section 
734(d), including regulations aggregating related 
partnerships and disregarding property acquired by 
the partnership in an attempt to avoid such pur-
poses.’’
(4) CLERICAL AMENDMENTS.—
109
(A) The section heading for section 743 is 
amended to read as follows: 
‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY WHERE SECTION 754 ELECTION OR 
SUBSTANTIAL BUILT-IN LOSS.’’
(B) The table of sections for subpart C of 
part II of subchapter K of chapter 1 is amend-
ed by striking the item relating to section 743 
and inserting the following new item:
‘‘Sec. 743. Adjustment to basis of partnership property where sec-
tion 754 election or substantial built-in loss.’’
(c) ADJUSTMENT
TO BASIS
OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY
IF THERE IS SUBSTANTIAL 
BASIS REDUCTION.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 734 (relating to optional adjustment to 
basis of undistributed partnership property) is 
amended by inserting before the period ‘‘or unless 
there is a substantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
734 is amended by inserting ‘‘or unless there is a 
substantial basis reduction’’ after ‘‘section 754 is in 
effect’’. 
(3) SUBSTANTIAL BASIS REDUCTION.—Section 
734 is amended by adding at the end the following 
new subsection:
110
‘‘(d) SUBSTANTIAL BASIS REDUCTION.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, there is a substantial basis reduction with re-
spect to a distribution if the sum of the amounts de-
scribed in subparagraphs (A) and (B) of subsection 
(b)(2) exceeds $250,000. 
‘‘(2) REGULATIONS.—
‘‘For regulations to carry out this subsection, see 
section 743(d)(2).’’
(4) CLERICAL AMENDMENTS.—
(A) The section heading for section 734 is 
amended to read as follows: 
‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY WHERE SECTION 
754 ELECTION OR SUBSTANTIAL BASIS RE-
DUCTION.’’
(B) The table of sections for subpart B of 
part II of subchapter K of chapter 1 is amend-
ed by striking the item relating to section 734 
and inserting the following new item:
‘‘Sec. 734. Adjustment to basis of undistributed partnership prop-
erty where section 754 election or substantial basis 
reduction.’’
(d) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendment made 
by subsection (a) shall apply to contributions made 
after the date of the enactment of this Act.
111
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to transfers after the 
date of the enactment of this Act. 
(3) SUBSECTION (c).—The amendments made 
by subsection (c) shall apply to distributions after 
the date of the enactment of this Act. 
SEC. 333. NO REDUCTION OF BASIS UNDER SECTION 734 IN 
STOCK HELD BY PARTNERSHIP IN COR-
PORATE PARTNER. 
(a) IN GENERAL.—Section 755 is amended by adding 
at the end the following new subsection: 
‘‘(c) NO ALLOCATION
OF BASIS DECREASE
TO 
STOCK OF CORPORATE PARTNER.—In making an alloca-
tion under subsection (a) of any decrease in the adjusted 
basis of partnership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a 
corporation which is a partner in the partnership, 
and 
‘‘(2) any amount not allocable to stock by rea-
son of paragraph (1) shall be allocated under sub-
section (a) to other partnership property. 
Gain shall be recognized to the partnership to the extent 
that the amount required to be allocated under paragraph 
(2) to other partnership property exceeds the aggregate
113
by striking ‘‘, and’’ at the end of subparagraph (C) 
and inserting a period, and by striking subparagraph 
(D). 
(6) Subparagraph (C) of section 1202(e)(4) is 
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’. 
(7) Subparagraph (C) of section 7701(a)(19) is 
amended by adding ‘‘and’’ at the end of clause (ix), 
by striking ‘‘, and’’ at the end of clause (x) and in-
serting a period, and by striking clause (xi). 
(8) The table of parts for subchapter M of 
chapter 1 is amended by striking the item relating 
to part V. 
(c) EFFECTIVE DATE.—
(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, 2003. 
(2) EXCEPTION FOR EXISTING FASITS.—
(A) IN GENERAL.—Paragraph (1) shall not 
apply to any FASIT in existence on the date of 
the enactment of this Act. 
(B) TRANSFER
OF
ADDITIONAL
ASSETS 
NOT PERMITTED.—Except as provided in regu-
lations prescribed by the Secretary of the
114
Treasury or the Secretary’s delegate, subpara-
graph (A) shall cease to apply as of the earliest 
date after the date of the enactment of this Act 
that any property is transferred to the FASIT. 
SEC. 335. EXPANDED DISALLOWANCE OF DEDUCTION FOR 
INTEREST ON CONVERTIBLE DEBT. 
(a) IN GENERAL.—Paragraph (2) of section 163(l) 
is amended by striking ‘‘or a related party’’ and inserting 
‘‘or equity held by the issuer (or any related party) in any 
other person’’. 
(b) CONFORMING AMENDMENT.—Paragraph (3) of 
section 163(l) is amended by striking ‘‘or a related party’’ 
in the material preceding subparagraph (A) and inserting 
‘‘or any other person’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to debt instruments issued after 
the date of the enactment of this Act. 
SEC. 336. EXPANDED AUTHORITY TO DISALLOW TAX BENE-
FITS UNDER SECTION 269. 
(a) IN GENERAL.—Subsection (a) of section 269 (re-
lating to acquisitions made to evade or avoid income tax) 
is amended to read as follows: 
‘‘(a) IN GENERAL.—If—
‘‘(1)(A) any person acquires stock in a corpora-
tion, or
115
‘‘(B) any corporation acquires, directly or indi-
rectly, property of another corporation and the basis 
of such property, in the hands of the acquiring cor-
poration, is determined by reference to the basis in 
the hands of the transferor corporation, and 
‘‘(2) the principal purpose for which such acqui-
sition was made is evasion or avoidance of Federal 
income tax by securing the benefit of a deduction, 
credit, or other allowance, 
then the Secretary may disallow such deduction, credit, 
or other allowance.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to stock and property acquired 
after February 13, 2003. 
SEC. 337. MODIFICATIONS OF CERTAIN RULES RELATING 
TO CONTROLLED FOREIGN CORPORATIONS. 
(a) LIMITATION ON EXCEPTION FROM PFIC RULES 
FOR UNITED STATES SHAREHOLDERS OF CONTROLLED 
FOREIGN
CORPORATIONS.—Paragraph (2) of section 
1297(e) (relating to passive investment company) is 
amended by adding at the end the following flush sen-
tence: 
‘‘Such term shall not include any period if there is 
only a remote likelihood of an inclusion in gross in-
116
come under section 951(a)(1)(A)(i) of subpart F in-
come of such corporation for such period.’’
(b) DETERMINATION OF PRO RATA SHARE OF SUB-
PART F INCOME.—Subsection (a) of section 951 (relating 
to amounts included in gross income of United States 
shareholders) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(4) SPECIAL RULES FOR DETERMINING PRO 
RATA SHARE OF SUBPART F INCOME.—The pro rata 
share under paragraph (2) shall be determined by 
disregarding—
‘‘(A) any rights lacking substantial eco-
nomic effect, and 
‘‘(B) stock owned by a shareholder who is 
a tax-indifferent party (as defined in section 
7701(m)(3)) if the amount which would (but 
for this paragraph) be allocated to such share-
holder does not reflect such shareholder’s eco-
nomic share of the earnings and profits of the 
corporation.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years on controlled for-
eign corporation beginning after February 13, 2003, and 
to taxable years of United States shareholder in which or
117
with which such taxable years of controlled foreign cor-
porations end. 
SEC. 338. BASIS FOR DETERMINING LOSS ALWAYS RE-
DUCED BY NONTAXED PORTION OF DIVI-
DENDS. 
(a) IN GENERAL.—Section 1059 (relating to cor-
porate shareholder’s basis in stock reduced by nontaxed 
portion of extraordinary dividends) is amended by redesig-
nating subsection (g) as subsection (h) and by inserting 
after subsection (f) the following new subsection: 
‘‘(g) BASIS FOR DETERMINING LOSS ALWAYS RE-
DUCED BY NONTAXED PORTION OF DIVIDENDS.—The 
basis of stock in a corporation (for purposes of deter-
mining loss) shall be reduced by the nontaxed portion of 
any dividend received with respect to such stock if this 
section does not otherwise apply to such dividend.’’
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to dividends received after the date 
of the enactment of this Act. 
SEC. 339. AFFIRMATION OF CONSOLIDATED RETURN REGU-
LATION AUTHORITY. 
(a) IN GENERAL.—Section 1502 (relating to consoli-
dated return regulations) is amended by adding at the end 
the following new sentence: ‘‘In prescribing such regula-
tions, the Secretary may prescribe rules applicable to cor-
118
porations filing consolidated returns under section 1501 
that are different from other provisions of this title that 
would apply if such corporations filed separate returns.’’
(b) RESULT NOT OVERTURNED.—Notwithstanding 
subsection (a), the Internal Revenue Code of 1986 shall 
be construed by treating Treasury regulation § 1.1502–
20(c)(1)(iii) (as in effect on January 1, 2001) as being 
inapplicable to the type of factual situation in 255 F.3d 
1357 (Fed. Cir. 2001). 
(c) EFFECTIVE DATE.—The provisions of this section 
shall apply to taxable years beginning before, on, or after 
the date of the enactment of this Act. 
Subtitle 
C—Prevention 
of 
Cor-
porate Expatriation To Avoid 
United States Income Tax
SEC. 341. PREVENTION OF CORPORATE EXPATRIATION TO 
AVOID UNITED STATES INCOME TAX. 
(a) IN GENERAL.—Paragraph (4) of section 7701(a) 
(defining domestic) is amended to read as follows: 
‘‘(4) DOMESTIC.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), the term ‘domestic’ when ap-
plied to a corporation or partnership means cre-
ated or organized in the United States or under 
the law of the United States or of any State
119
unless, in the case of a partnership, the Sec-
retary provides otherwise by regulations. 
‘‘(B) CERTAIN
CORPORATIONS
TREATED 
AS DOMESTIC.—
‘‘(i) IN GENERAL.—The acquiring cor-
poration in a corporate expatriation trans-
action shall be treated as a domestic cor-
poration. 
‘‘(ii) 
CORPORATE
EXPATRIATION 
TRANSACTION.—For purposes of this sub-
paragraph, the term ‘corporate expatria-
tion transaction’ means any transaction 
if—
‘‘(I) a nominally foreign corpora-
tion (referred to in this subparagraph 
as the ‘acquiring corporation’) ac-
quires, as a result of such transaction, 
directly or indirectly substantially all 
of the properties held directly or indi-
rectly by a domestic corporation, and 
‘‘(II) immediately after the trans-
action, more than 80 percent of the 
stock (by vote or value) of the acquir-
ing corporation is held by former 
shareholders of the domestic corpora-
120
tion by reason of holding stock in the 
domestic corporation. 
‘‘(iii) LOWER STOCK OWNERSHIP RE-
QUIREMENT
IN
CERTAIN
CASES.—Sub-
clause (II) of clause (ii) shall be applied by 
substituting ‘50 percent’ for ‘80 percent’ 
with respect to any nominally foreign cor-
poration if—
‘‘(I) such corporation does not 
have substantial business activities 
(when compared to the total business 
activities of the expanded affiliated 
group) in the foreign country in which 
or under the law of which the corpora-
tion is created or organized, and 
‘‘(II) the stock of the corporation 
is publicly traded and the principal 
market for the public trading of such 
stock is in the United States. 
‘‘(iv) PARTNERSHIP TRANSACTIONS.—
The term ‘corporate expatriation trans-
action’ includes any transaction if—
‘‘(I) a nominally foreign corpora-
tion (referred to in this subparagraph 
as the ‘acquiring corporation’) ac-
121
quires, as a result of such transaction, 
directly or indirectly properties consti-
tuting a trade or business of a domes-
tic partnership, 
‘‘(II) immediately after the trans-
action, more than 80 percent of the 
stock (by vote or value) of the acquir-
ing corporation is held by former 
partners of the domestic partnership 
or related foreign partnerships (deter-
mined without regard to stock of the 
acquiring corporation which is sold in 
a public offering related to the trans-
action), and 
‘‘(III) the acquiring corporation 
meets the requirements of subclauses 
(I) and (II) of clause (iii). 
‘‘(v) SPECIAL RULES.—For purposes 
of this subparagraph—
‘‘(I) a series of related trans-
actions shall be treated as 1 trans-
action, and 
‘‘(II) stock held by members of 
the expanded affiliated group which 
includes the acquiring corporation
122
shall not be taken into account in de-
termining ownership. 
‘‘(vi) OTHER DEFINITIONS.—For pur-
poses of this subparagraph—
‘‘(I) NOMINALLY FOREIGN COR-
PORATION.—The term ‘nominally for-
eign corporation’ means any corpora-
tion which would (but for this sub-
paragraph) be treated as a foreign 
corporation. 
‘‘(II) 
EXPANDED
AFFILIATED 
GROUP.—The term ‘expanded affili-
ated group’ means an affiliated group 
(as defined in section 1504(a) without 
regard to section 1504(b)). 
‘‘(III) RELATED FOREIGN PART-
NERSHIP.—A foreign partnership is 
related to a domestic partnership if 
they are under common control (with-
in the meaning of section 482), or 
they shared the same trademark or 
tradename.’’
(b) EFFECTIVE DATES.—
123
(1) IN
GENERAL.—The amendment made by 
this section shall apply to corporate expatriation 
transactions completed after September 11, 2001. 
(2) SPECIAL RULE.—The amendment made by 
this section shall also apply to corporate expatriation 
transactions completed on or before September 11, 
2001, but only with respect to taxable years of the 
acquiring corporation beginning after December 31, 
2003. 
Subtitle D—Inclusion in Gross In-
come of Funded Deferred Com-
pensation of Corporate Insiders 
SEC. 351. INCLUSION IN GROSS INCOME OF FUNDED DE-
FERRED COMPENSATION OF CORPORATE IN-
SIDERS. 
(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 FUNDED DE-
FERRED COMPENSATION OF CORPORATE IN-
SIDERS. 
‘‘(a) IN GENERAL.—If an employer maintains a fund-
ed deferred compensation plan—
‘‘(1) compensation of any disqualified individual 
which is deferred under such funded deferred com-
124
pensation plan shall be included in the gross income 
of the disqualified individual or beneficiary for the 
1st taxable year in which there is no substantial risk 
of forfeiture of the rights to such compensation, and 
‘‘(2) the tax treatment of any amount made 
available under the plan to a disqualified individual 
or beneficiary shall be determined under section 72 
(relating to annuities, etc.). 
‘‘(b) FUNDED DEFERRED COMPENSATION PLAN.—
For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘funded deferred 
compensation plan’ means any plan providing for the 
deferral of compensation unless—
‘‘(A) the employee’s rights to the com-
pensation deferred under the plan are no great-
er than the rights of a general creditor of the 
employer, and 
‘‘(B) all amounts set aside (directly or in-
directly) for purposes of paying the deferred 
compensation, and all income attributable to 
such amounts, remain (until made available to 
the participant or other beneficiary) solely the 
property of the employer (without being re-
stricted to the provision of benefits under the 
plan), and