HR 4520 PCS 
TITLE II—JOB CREATION TAX IN-
CENTIVES 
FOR 
MANUFAC-
TURERS, SMALL BUSINESSES, 
AND FARMERS 
Subtitle A—Small Business 
Expensing 
SEC. 201. 2-YEAR EXTENSION OF INCREASED EXPENSING 
FOR SMALL BUSINESS. 
Subsections (b), (c), and (d) of section 179 are each 
amended by striking ‘‘2006’’ each place it appears and 
inserting ‘‘2008’’. 
Subtitle B—Depreciation 
SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CER-
TAIN LEASEHOLD IMPROVEMENTS AND RES-
TAURANT PROPERTY. 
(a) 15-YEAR
RECOVERY
PERIOD.—Subparagraph 
(E) of section 168(e)(3) (relating to classification of cer-
tain property) is amended by striking ‘‘and’’ at the end 
of clause (ii), by striking the period at the end of clause 
(iii) and inserting a comma, and by adding at the end the 
following new clauses: 
‘‘(iv) any qualified leasehold improve-
ment property placed in service before Jan-
uary 1, 2006, and
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‘‘(v) any qualified restaurant property 
placed in service before January 1, 2006.’’ 
(b) QUALIFIED LEASEHOLD IMPROVEMENT PROP-
ERTY.—Subsection (e) of section 168 is amended by add-
ing at the end the following new paragraph: 
‘‘(6) QUALIFIED
LEASEHOLD
IMPROVEMENT 
PROPERTY.—The term ‘qualified leasehold improve-
ment property’ has the meaning given such term in 
section 168(k)(3) except that the following special 
rules shall apply: 
‘‘(A) IMPROVEMENTS MADE BY LESSOR.— 
In the case of an improvement made by the per-
son who was the lessor of such improvement 
when such improvement was placed in service, 
such improvement shall be qualified leasehold 
improvement property (if at all) only so long as 
such improvement is held by such person. 
‘‘(B) EXCEPTION FOR CHANGES IN FORM 
OF BUSINESS.—Property shall not cease to be 
qualified leasehold improvement property under 
subparagraph (A) by reason of— 
‘‘(i) death, 
‘‘(ii) a transaction to which section 
381(a) applies,
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‘‘(iii) a mere change in the form of 
conducting the trade or business so long as 
the property is retained in such trade or 
business as qualified leasehold improve-
ment property and the taxpayer retains a 
substantial interest in such trade or busi-
ness, 
‘‘(iv) the acquisition of such property 
in an exchange described in section 1031, 
1033, or 1038 to the extent that the basis 
of such property includes an amount rep-
resenting the adjusted basis of other prop-
erty owned by the taxpayer or a related 
person, or 
‘‘(v) the acquisition of such property 
by the taxpayer in a transaction described 
in section 332, 351, 361, 721, or 731 (or 
the acquisition of such property by the tax-
payer from the transferee or acquiring cor-
poration in a transaction described in such 
section), to the extent that the basis of the 
property in the hands of the taxpayer is 
determined by reference to its basis in the 
hands of the transferor or distributor.’’.
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(c) QUALIFIED
RESTAURANT
PROPERTY.—Sub-
section (e) of section 168 (as amended by subsection (b)) 
is further amended by adding at the end the following new 
paragraph: 
‘‘(7) QUALIFIED RESTAURANT PROPERTY.—The 
term ‘qualified restaurant property’ means any sec-
tion 1250 property which is an improvement to a 
building if— 
‘‘(A) such improvement is placed in service 
more than 3 years after the date such building 
was first placed in service, and 
‘‘(B) more than 50 percent of the build-
ing’s square footage is devoted to preparation 
of, and seating for on-premises consumption of, 
prepared meals.’’. 
(d) REQUIREMENT TO USE STRAIGHT LINE METH-
OD.— 
(1) Paragraph (3) of section 168(b) is amended 
by adding at the end the following new subpara-
graphs: 
‘‘(G) 
Qualified 
leasehold 
improvement 
property described in subsection (e)(6). 
‘‘(H) Qualified restaurant property de-
scribed in subsection (e)(7).’’.
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(2) Subparagraph (A) of section 168(b)(2) is 
amended by inserting before the comma ‘‘not re-
ferred to in paragraph (3)’’. 
(e) ALTERNATIVE SYSTEM.—The table contained in 
section 168(g)(3)(B) is amended by adding at the end the 
following new items: 
‘‘(E)(iv) ..................................................................
‘‘(E)(v) ...................................................................
39’’.
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property placed in service after 
the date of the enactment of this Act. 
SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE 
FOR AIRCRAFT. 
(a) AIRCRAFT
TREATED
AS
QUALIFIED
PROP-
ERTY.— 
(1) IN
GENERAL.—Paragraph (2) of section 
168(k) is amended by redesignating subparagraphs 
(C) through (F) as subparagraphs (D) through (G), 
respectively, and by inserting after subparagraph 
(B) the following new subparagraph: 
‘‘(C) 
CERTAIN
AIRCRAFT.—The 
term 
‘qualified property’ includes property— 
‘‘(i) which meets the requirements of 
clauses (ii) and (iii) of subparagraph (A), 
‘‘(ii) which is an aircraft which is not 
a transportation property (as defined in
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subparagraph (B)(iii)) other than for agri-
cultural or firefighting purposes, 
‘‘(iii) which is purchased and on which 
such purchaser, at the time of the contract 
for purchase, has made a nonrefundable 
deposit of the lesser of— 
‘‘(I) 10 percent of the cost, or 
‘‘(II) $100,000, and 
‘‘(iv) which has— 
‘‘(I) an estimated production pe-
riod exceeding 4 months, and 
‘‘(II) 
a 
cost 
exceeding 
$200,000.’’. 
(2) PLACED IN SERVICE DATE.—Clause (iv) of 
section 168(k)(2)(A) is amended by striking ‘‘sub-
paragraph (B)’’ and inserting ‘‘subparagraphs (B) 
and (C)’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 168(k)(2)(B) is amended by adding 
at the end the following new clause: 
‘‘(iv) 
APPLICATION
OF
SUBPARA-
GRAPH.—This 
subparagraph 
shall 
not 
apply to any property which is described in 
subparagraph (C).’’.
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(2) Section 168(k)(4)(A)(ii) is amended by 
striking ‘‘paragraph (2)(C)’’ and inserting ‘‘para-
graph (2)(D)’’. 
(3) Section 168(k)(4)(B)(iii) is amended by in-
serting ‘‘and paragraph (2)(C)’’ after ‘‘of this para-
graph)’’. 
(4) Section 168(k)(4)(C) is amended by striking 
‘‘subparagraphs (B) and (D)’’ and inserting ‘‘sub-
paragraphs (B), (C), and (E)’’. 
(5) Section 168(k)(4)(D) is amended by strik-
ing ‘‘Paragraph (2)(E)’’ and inserting ‘‘Paragraph 
(2)(F)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect as if included in the amend-
ments made by section 101 of the Job Creation and Work-
er Assistance Act of 2002. 
SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE 
FOR BONUS DEPRECIATION PROPERTY. 
(a) IN GENERAL.—Section 168(k)(2)(D) (relating to 
special rules) is amended by adding at the end the fol-
lowing new clause: 
‘‘(iii) SYNDICATION.—For purposes of 
subparagraph (A)(ii), if—
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‘‘(I) property is originally placed 
in service after September 10, 2001, 
by the lessor of such property, 
‘‘(II) such property is sold by 
such lessor or any subsequent pur-
chaser within 3 months after the date 
so placed in service (or, in the case of 
multiple units of property subject to 
the same lease, within 3 months after 
the date the final unit is placed in 
service, so long as the period between 
the time the first unit is placed in 
service and the time the last unit is 
placed in service does not exceed 12 
months), and 
‘‘(III) the user of such property 
after the last sale during such 3- 
month period remains the same as 
when such property was originally 
placed in service, 
such property shall be treated as originally 
placed in service not earlier than the date 
of such last sale, so long as no previous 
owner of such property elects the applica-
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tion of this subsection with respect to such 
property.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall take effect as if included in the amend-
ments made by section 101 of the Job Creation and Work-
er Assistance Act of 2002; except that the parenthetical 
material in section 168(k)(2)(D)(iii)(II) of the Internal 
Revenue Code of 1986, as added by this section, shall 
apply to property sold after June 4, 2004. 
Subtitle C—S Corporation Reform 
and Simplification 
SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHARE-
HOLDER. 
(a) IN GENERAL.—Paragraph (1) of section 1361(c) 
(relating to special rules for applying subsection (b)) is 
amended to read as follows: 
‘‘(1) MEMBERS
OF
FAMILY
TREATED
AS
SHAREHOLDER.— 
‘‘(A) IN GENERAL.—For purpose of sub-
section (b)(1)(A)— 
‘‘(i) except as provided in clause (ii), 
a husband and wife (and their estates) 
shall be treated as 1 shareholder, and 
‘‘(ii) in the case of a family with re-
spect to which an election is in effect
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under subparagraph (D), all members of 
the family shall be treated as 1 share-
holder. 
‘‘(B) MEMBERS
OF
THE
FAMILY.—For 
purpose of subparagraph (A)(ii)— 
‘‘(i) IN GENERAL.—The term ‘mem-
bers of the family’ means the common an-
cestor, lineal descendants of the common 
ancestor, and the spouses (or former 
spouses) of such lineal descendants or com-
mon ancestor. 
‘‘(ii) COMMON ANCESTOR.—For pur-
poses of this paragraph, an individual shall 
not be considered a common ancestor if, as 
of the later of the effective date of this 
paragraph or the time the election under 
section 1362(a) is made, the individual is 
more than 3 generations removed from the 
youngest generation of shareholders who 
would (but for this clause) be members of 
the family. For purposes of the preceding 
sentence, a spouse (or former spouse) shall 
be treated as being of the same generation 
as the individual to which such spouse is 
(or was) married.
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‘‘(C) EFFECT OF ADOPTION, ETC.—In de-
termining whether any relationship specified in 
subparagraph (B) exists, the rules of section 
152(b)(2) shall apply. 
‘‘(D) ELECTION.—An election under sub-
paragraph (A)(ii)— 
‘‘(i) may, except as otherwise provided 
in regulations prescribed by the Secretary, 
be made by any member of the family, and 
‘‘(ii) shall remain in effect until termi-
nated as provided in regulations prescribed 
by the Secretary.’’. 
(b) RELIEF FROM INADVERTENT INVALID ELECTION 
OR TERMINATION.—Section 1362(f) (relating to inad-
vertent invalid elections or terminations), as amended by 
section 229, is amended— 
(1) by inserting ‘‘or section 1361(c)(1)(A)(ii)’’ 
after ‘‘section 1361(b)(3)(B)(ii),’’ in paragraph (1), 
and 
(2) by inserting ‘‘or section 1361(c)(1)(D)(iii)’’ 
after ‘‘section 1361(b)(3)(C),’’ in paragraph (1)(B). 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendment made 
by subsection (a) shall apply to taxable years begin-
ning after December 31, 2004.
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(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to elections and termi-
nations made after December 31, 2004. 
SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHARE-
HOLDERS TO 100. 
(a) IN GENERAL.—Section 1361(b)(1)(A) (defining 
small business corporation) is amended by striking ‘‘75’’ 
and inserting ‘‘100’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE 
SHAREHOLDERS TO INCLUDE IRAS. 
(a) IN GENERAL.—Section 1361(c)(2)(A) (relating to 
certain trusts permitted as shareholders) is amended by 
inserting after clause (v) the following new clause: 
‘‘(vi) In the case of a corporation 
which is a bank (as defined in section 
581), a trust which constitutes an indi-
vidual retirement account under section 
408(a), including one designated as a Roth 
IRA under section 408A, but only to the 
extent of the stock held by such trust in 
such bank as of the date of the enactment 
of this clause.’’.
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(b) 
TREATMENT
AS
SHAREHOLDER.—Section 
1361(c)(2)(B) (relating to treatment as shareholders) is 
amended by adding at the end the following new clause: 
‘‘(vi) In the case of a trust described 
in clause (vi) of subparagraph (A), the in-
dividual for whose benefit the trust was 
created shall be treated as a shareholder.’’. 
(c) SALE OF BANK STOCK IN IRA RELATING TO S 
CORPORATION ELECTION EXEMPT FROM PROHIBITED 
TRANSACTION RULES.—Section 4975(d) (relating to ex-
emptions) is amended by striking ‘‘or’’ at the end of para-
graph (14), by striking the period at the end of paragraph 
(15) and inserting ‘‘; or’’, and by adding at the end the 
following new paragraph: 
‘‘(16) a sale of stock held by a trust which con-
stitutes an individual retirement account under sec-
tion 408(a) to the individual for whose benefit such 
account is established if— 
‘‘(A) such stock is in a bank (as defined in 
section 581), 
‘‘(B) such stock is held by such trust as of 
the date of the enactment of this paragraph, 
‘‘(C) such sale is pursuant to an election 
under section 1362(a) by such bank,
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‘‘(D) such sale is for fair market value at 
the time of sale (as established by an inde-
pendent appraiser) and the terms of the sale 
are otherwise at least as favorable to such trust 
as the terms that would apply on a sale to an 
unrelated party, 
‘‘(E) such trust does not pay any commis-
sions, costs, or other expenses in connection 
with the sale, and 
‘‘(F) the stock is sold in a single trans-
action for cash not later than 120 days after 
the S corporation election is made.’’. 
(d) CONFORMING AMENDMENT.—Section 512(e)(1) 
is amended by inserting ‘‘1361(c)(2)(A)(vi) or’’ before 
‘‘1361(c)(6)’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 224. DISREGARD OF UNEXERCISED POWERS OF AP-
POINTMENT IN DETERMINING POTENTIAL 
CURRENT BENEFICIARIES OF ESBT. 
(a) IN GENERAL.—Section 1361(e)(2) (defining po-
tential current beneficiary) is amended— 
(1) by inserting ‘‘(determined without regard to 
any power of appointment to the extent such power
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remains unexercised at the end of such period)’’ 
after ‘‘of the trust’’ in the first sentence, and 
(2) by striking ‘‘60-day’’ in the second sentence 
and inserting ‘‘1-year’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO 
DIVORCE, ETC. 
(a) IN GENERAL.—Section 1366(d)(2) (relating to 
indefinite carryover of disallowed losses and deductions) 
is amended to read as follows: 
‘‘(2) INDEFINITE CARRYOVER OF DISALLOWED 
LOSSES AND DEDUCTIONS.— 
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), any loss or deduction which 
is disallowed for any taxable year by reason of 
paragraph (1) shall be treated as incurred by 
the corporation in the succeeding taxable year 
with respect to that shareholder. 
‘‘(B) TRANSFERS
OF
STOCK
BETWEEN 
SPOUSES
OR
INCIDENT
TO
DIVORCE.—In the 
case of any transfer described in section 
1041(a) of stock of an S corporation, any loss 
or deduction described in subparagraph (A)
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with respect such stock shall be treated as in-
curred by the corporation in the succeeding tax-
able year with respect to the transferee.’’ 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK 
AMOUNTS BY QUALIFIED SUBCHAPTER S 
TRUST INCOME BENEFICIARIES. 
(a) IN GENERAL.—Section 1361(d)(1) (relating to 
special rule for qualified subchapter S trust) is amended— 
(1) by striking ‘‘and’’ at the end of subpara-
graph (A), 
(2) by striking the period at the end of sub-
paragraph (B) and inserting ‘‘, and’’, and 
(3) by adding at the end the following new sub-
paragraph: 
‘‘(C) for purposes of applying sections 465 
and 469 to the beneficiary of the trust, the dis-
position of the S corporation stock by the trust 
shall be treated as a disposition by such bene-
ficiary.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transfers made after December 
31, 2004.
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SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME 
FROM PASSIVE INCOME TEST FOR BANK S 
CORPORATIONS. 
(a) IN GENERAL.—Section 1362(d)(3) (relating to 
where passive investment income exceeds 25 percent of 
gross receipts for 3 consecutive taxable years and corpora-
tion has accumulated earnings and profits) is amended by 
adding at the end the following new subparagraph: 
‘‘(F) EXCEPTION
FOR
BANKS; ETC.—In 
the case of a bank (as defined in section 581), 
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))), or a financial 
holding company (within the meaning of section 
2(p) of such Act), the term ‘passive investment 
income’ shall not include— 
‘‘(i) interest income earned by such 
bank or company, or 
‘‘(ii) dividends on assets required to 
be held by such bank or company, includ-
ing stock in the Federal Reserve Bank, the 
Federal Home Loan Bank, or the Federal 
Agricultural Mortgage Bank or participa-
tion certificates issued by a Federal Inter-
mediate Credit Bank.’’.
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 228. TREATMENT OF BANK DIRECTOR SHARES. 
(a) IN GENERAL.—Section 1361 (defining S corpora-
tion) is amended by adding at the end the following new 
subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.— 
‘‘(1) IN
GENERAL.—Restricted bank director 
stock shall not be taken into account as outstanding 
stock of the S corporation in applying this sub-
chapter (other than section 1368(f)). 
‘‘(2) RESTRICTED
BANK
DIRECTOR
STOCK.— 
For purposes of this subsection, the term ‘restricted 
bank director stock’ means stock in a bank (as de-
fined in section 581), a bank holding company (with-
in the meaning of section 2(a) of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1841(a))), or a fi-
nancial holding company (within the meaning of sec-
tion 2(p) of such Act), registered with the Federal 
Reserve System, if such stock— 
‘‘(A) is required to be held by an individual 
under applicable Federal or State law in order 
to permit such individual to serve as a director, 
and
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‘‘(B) is subject to an agreement with such 
bank or company (or a corporation which con-
trols (within the meaning of section 368(c)) 
such bank or company) pursuant to which the 
holder is required to sell back such stock (at 
the same price as the individual acquired such 
stock) upon ceasing to hold the office of direc-
tor. 
‘‘(3) CROSS REFERENCE.— 
‘‘For treatment of certain distributions with re-
spect to restricted bank director stock, see section 
1368(f).’’. 
(b) DISTRIBUTIONS.—Section 1368 (relating to dis-
tributions) is amended by adding at the end the following 
new subsection: 
‘‘(f) RESTRICTED BANK DIRECTOR STOCK.—If a di-
rector receives a distribution (not in part or full payment 
in exchange for stock) from an S corporation with respect 
to any restricted bank director stock (as defined in section 
1361(f)), the amount of such distribution— 
‘‘(1) shall be includible in gross income of the 
director, and 
‘‘(2) shall be deductible by the corporation for 
the taxable year of such corporation in which or with 
which ends the taxable year in which such amount 
in included in the gross income of the director.’’.
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALI-
FIED SUBCHAPTER S SUBSIDIARY ELECTIONS 
AND TERMINATIONS. 
(a) IN GENERAL.—Section 1362(f) (relating to inad-
vertent invalid elections or terminations) is amended— 
(1) by inserting ‘‘, section 1361(b)(3)(B)(ii),’’ 
after ‘‘subsection (a)’’ in paragraph (1), 
(2) by inserting ‘‘, section 1361(b)(3)(C),’’ after 
‘‘subsection (d)’’ in paragraph (1)(B), 
(3) by amending paragraph (3)(A) to read as 
follows: 
‘‘(A) so that the corporation for which the 
election was made is a small business corpora-
tion or a qualified subchapter S subsidiary, as 
the case may be, or’’, 
(4) by amending paragraph (4) to read as fol-
lows: 
‘‘(4) the corporation for which the election was 
made, and each person who was a shareholder in 
such corporation at any time during the period spec-
ified pursuant to this subsection, agrees to make 
such adjustments (consistent with the treatment of
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such corporation as an S corporation or a qualified 
subchapter S subsidiary, as the case may be) as may 
be required by the Secretary with respect to such pe-
riod,’’, and 
(5) by inserting ‘‘or a qualified subchapter S 
subsidiary, as the case may be’’ after ‘‘S corpora-
tion’’ in the matter following paragraph (4). 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUB-
CHAPTER S SUBSIDIARIES. 
(a) IN GENERAL.—Section 1361(b)(3)(A) (relating 
to treatment of certain wholly owned subsidiaries) is 
amended by inserting ‘‘and in the case of information re-
turns required under part III of subchapter A of chapter 
61’’ after ‘‘Secretary’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EM-
PLOYER SECURITIES. 
(a) IN GENERAL.—Subsection (f) of section 4975 (re-
lating to other definitions and special rules) is amended 
by adding at the end the following new paragraph:
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‘‘(7) S CORPORATION
REPAYMENT
OF
LOANS 
FOR QUALIFYING EMPLOYER SECURITIES.—A plan 
shall not be treated as violating the requirements of 
section 401 or 409 or subsection (e)(7), or as engag-
ing in a prohibited transaction for purposes of sub-
section (d)(3), merely by reason of any distribution 
(as described in section 1368(a)) with respect to S 
corporation stock that constitutes qualifying em-
ployer securities, which in accordance with the plan 
provisions is used to make payments on a loan de-
scribed in subsection (d)(3) the proceeds of which 
were used to acquire such qualifying employer secu-
rities (whether or not allocated to participants). The 
preceding sentence shall not apply in the case of a 
distribution which is paid with respect to any em-
ployer security which is allocated to a participant 
unless the plan provides that employer securities 
with a fair market value of not less than the amount 
of such distribution are allocated to such participant 
for the year which (but for the preceding sentence) 
such distribution would have been allocated to such 
participant.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to distributions with respect to S 
corporation stock made after December 31, 2004.
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Subtitle D—Alternative Minimum 
Tax Relief 
SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MIN-
IMUM TAX. 
(a) IN GENERAL.— 
(1) Subsection (a) of section 59 is amended by 
striking paragraph (2) and by redesignating para-
graphs (3) and (4) as paragraphs (2) and (3), re-
spectively. 
(2) Section 53(d)(1)(B)(i)(II) is amended by 
striking ‘‘and if section 59(a)(2) did not apply’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE 
MINIMUM TAX FOR SMALL CORPORATIONS. 
(a) IN GENERAL.—Subparagraphs (A) and (B) of 
section 
55(e)(1) 
are 
each 
amended 
by 
striking 
‘‘$7,500,000’’ each place it appears and inserting 
‘‘$20,000,000’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2005.
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SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO IN-
CREASE ALTERNATIVE MINIMUM TAX. 
(a) IN GENERAL.—Subsection (c) of section 55 (de-
fining regular tax) is amended by redesignating paragraph 
(2) as paragraph (3) and by inserting after paragraph (1) 
the following new paragraph: 
‘‘(2) COORDINATION WITH INCOME AVERAGING 
FOR FARMERS.—Solely for purposes of this section, 
section 1301 (relating to averaging of farm income) 
shall not apply in computing the regular tax liabil-
ity.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
December 31, 2003. 
Subtitle E—Restructuring of 
Incentives for Alcohol Fuels, Etc. 
SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED 
WITH 
EXCISE 
TAX 
CREDIT; 
REPEAL 
OF 
OTHER ALCOHOL-BASED FUEL INCENTIVES; 
ETC. 
(a) EXCISE TAX CREDIT FOR ALCOHOL FUEL MIX-
TURES.— 
(1) IN
GENERAL.—Subsection (f) of section 
6427 is amended to read as follows: 
‘‘(f) ALCOHOL FUEL MIXTURES.—
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‘‘(1) IN
GENERAL.—The amount of credit 
which would (but for section 40(c)) be determined 
under section 40(a)(1) for any period— 
‘‘(A) shall, with respect to taxable events 
occurring during such period, be treated— 
‘‘(i) as a payment of the taxpayer’s li-
ability for tax imposed by section 4081, 
and 
‘‘(ii) as received at the time of the 
taxable event, and 
‘‘(B) to the extent such amount of credit 
exceeds such liability for such period, shall (ex-
cept as provided in subsection (k)) be paid sub-
ject to subsection (i)(3) by the Secretary with-
out interest. 
‘‘(2) SPECIAL RULES.— 
‘‘(A) ONLY
CERTAIN
ALCOHOL
TAKEN 
INTO
ACCOUNT.—For purposes of paragraph 
(1), section 40 shall be applied— 
‘‘(i) by not taking into account alcohol 
with a proof of less than 190, and 
‘‘(ii) by treating as alcohol the alcohol 
gallon equivalent of ethyl tertiary butyl 
ether or other ethers produced from such 
alcohol.
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‘‘(B) TREATMENT
OF
REFINERS.—For 
purposes of paragraph (1), in the case of a mix-
ture— 
‘‘(i) the alcohol in which is described 
in subparagraph (A)(ii), and 
‘‘(ii) which is produced by any person 
at a refinery prior to any taxable event, 
section 40 shall be applied by treating such per-
son as having sold such mixture at the time of 
its removal from the refinery (and only at such 
time) to another person for use as a fuel. 
‘‘(3) MIXTURES
NOT
USED
AS
FUEL.—Rules 
similar to the rules of subparagraphs (A) and (D) 
of section 40(d)(3) shall apply for purposes of this 
subsection. 
‘‘(4) TERMINATION.—This section shall apply 
only to periods to which section 40 applies, deter-
mined by substituting in section 40(e)— 
‘‘(A) ‘December 31, 2010’ for ‘December 
31, 2007’, and 
‘‘(B) ‘January 1, 2011’ for ‘January 1, 
2008’.’’ 
(2) REVISION
OF
RULES
FOR
PAYMENT
OF 
CREDIT.—Paragraph (3) of section 6427(i) is 
amended to read as follows:
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‘‘(3) SPECIAL
RULE
FOR
ALCOHOL
MIXTURE 
CREDIT.— 
‘‘(A) IN GENERAL.—A claim may be filed 
under subsection (f)(1)(B) by any person for 
any period— 
‘‘(i) for which $200 or more is pay-
able under such subsection (f)(1)(B), and 
‘‘(ii) which is not less than 1 week. 
In the case of an electronic claim, this subpara-
graph shall be applied without regard to clause 
(i). 
‘‘(B) 
PAYMENT
OF
CLAIM.—Notwith-
standing subsection (f)(1)(B), if the Secretary 
has not paid pursuant to a claim filed under 
this section within 45 days of the date of the 
filing of such claim (20 days in the case of an 
electronic claim), the claim shall be paid with 
interest from such date determined by using the 
overpayment rate and method under section 
6621. 
‘‘(C) TIME FOR FILING CLAIM.—No claim 
filed under this paragraph shall be allowed un-
less filed on or before the last day of the first 
quarter following the earliest quarter included 
in the claim.’’
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(b) REPEAL OF OTHER INCENTIVES FOR FUEL MIX-
TURES.— 
(1) Subsection (b) of section 4041 is amended 
to read as follows: 
‘‘(b) EXEMPTION
FOR
OFF-HIGHWAY
BUSINESS 
USE.— 
‘‘(1) IN GENERAL.—No tax shall be imposed by 
subsection (a) or (d)(1) on liquids sold for use or 
used in an off-highway business use. 
‘‘(2) TAX WHERE OTHER USE.—If a liquid on 
which no tax was imposed by reason of paragraph 
(1) is used otherwise than in an off-highway busi-
ness use, a tax shall be imposed by paragraph 
(1)(B), (2)(B), or (3)(A)(ii) of subsection (a) 
(whichever is appropriate) and by the corresponding 
provision of subsection (d)(1) (if any). 
‘‘(3) OFF-HIGHWAY BUSINESS USE DEFINED.— 
For purposes of this subsection, the term ‘off-high-
way business use’ has the meaning given to such 
term by section 6421(e)(2); except that such term 
shall not, for purposes of subsection (a)(1), include 
use in a diesel-powered train.’’ 
(2) Section 4041(k) is hereby repealed. 
(3) Section 4081(c) is hereby repealed. 
(4) Section 4091(c) is hereby repealed.
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(1) IN GENERAL.—Except as provided by para-
graph (2), the amendments made by this section 
shall apply to fuel sold or used after September 30, 
2004. 
(2) SUBSECTION (c).— 
(A) The amendments made by subsection 
(c)(1) shall apply to taxes imposed after Sep-
tember 30, 2003. 
(B) The amendments made by subsection 
(c)(2) shall apply to taxes imposed after Sep-
tember 30, 2006. 
SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL 
FUND. 
(a) TRANSFERS TO FUND.—Section 9503(b)(1) is 
amended by adding at the end the following new flush sen-
tence: 
‘‘For purposes of this paragraph, the amount of 
taxes received under section 4081 shall include any 
amount treated as a payment under section 
6427(f)(1)(A) and shall not be reduced by the 
amount paid under section 6427(f)(1)(B).’’. 
(b) TRANSFERS FROM FUND.—Subparagraph (A) of 
section 9503(c)(2) is amended by adding at the end the 
following new sentence: ‘‘Clauses (i)(III) and (ii) shall not 
apply to claims under section 6427(f)(1)(B).’’
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(c) EFFECTIVE DATE.— 
(1) SUBSECTION (a).—The amendment made by 
subsection (a) shall apply to taxes received after 
September 30, 2004. 
(2) SUBSECTION (b).—The amendment made by 
subsection (b) shall apply to amounts paid after 
September 30, 2004, and (to the extent related to 
section 34 of the Internal Revenue Code of 1986) to 
fuel used after such date. 
Subtitle F—Stock Options and Em-
ployee 
Stock 
Purchase 
Plan 
Stock Options 
SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 
EMPLOYEE STOCK PURCHASE PLAN STOCK 
OPTIONS FROM WAGES. 
(a) EXCLUSION FROM EMPLOYMENT TAXES.— 
(1) SOCIAL SECURITY TAXES.— 
(A) Section 3121(a) (relating to definition 
of wages) is amended by striking ‘‘or’’ at the 
end of paragraph (20), by striking the period at 
the end of paragraph (21) and inserting ‘‘; or’’, 
and by inserting after paragraph (21) the fol-
lowing new paragraph: 
‘‘(22) remuneration on account of—
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‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(B) Section 209(a) of the Social Security 
Act is amended by striking ‘‘or’’ at the end of 
paragraph (17), by striking the period at the 
end of paragraph (18) and inserting ‘‘; or’’, and 
by inserting after paragraph (18) the following 
new paragraph: 
‘‘(19) Remuneration on account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b) 
of the Internal Revenue Code of 1986) or under 
an employee stock purchase plan (as defined in 
section 423(b) of such Code), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(2) 
RAILROAD
RETIREMENT
TAXES.—Sub-
section (e) of section 3231 is amended by adding at 
the end the following new paragraph:
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‘‘(12) QUALIFIED STOCK OPTIONS.—The term 
‘compensation’ shall not include any remuneration 
on account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(3) UNEMPLOYMENT TAXES.—Section 3306(b) 
(relating to definition of wages) is amended by strik-
ing ‘‘or’’ at the end of paragraph (17), by striking 
the period at the end of paragraph (18) and insert-
ing ‘‘; or’’, and by inserting after paragraph (18) the 
following new paragraph: 
‘‘(19) remuneration on account of— 
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’.
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(b) WAGE WITHHOLDING NOT REQUIRED ON DIS-
QUALIFYING DISPOSITIONS.—Section 421(b) (relating to 
effect of disqualifying dispositions) is amended by adding 
at the end the following new sentence: ‘‘No amount shall 
be required to be deducted and withheld under chapter 
24 with respect to any increase in income attributable to 
a disposition described in the preceding sentence.’’. 
(c) WAGE WITHHOLDING NOT REQUIRED ON COM-
PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER-
CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 
423(c) (relating to special rule where option price is be-
tween 85 percent and 100 percent of value of stock) is 
amended by adding at the end the following new sentence: 
‘‘No amount shall be required to be deducted and withheld 
under chapter 24 with respect to any amount treated as 
compensation under this subsection.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to stock acquired pursuant to op-
tions exercised after the date of the enactment of this Act. 
Subtitle G—Incentives to Reinvest 
Foreign Earnings in United States 
SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN 
UNITED STATES. 
(a) IN GENERAL.—Subpart F of part III of sub-
chapter N of chapter 1 (relating to controlled foreign cor-
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porations) is amended by adding at the end the following 
new section: 
‘‘SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION. 
‘‘(a) DEDUCTION.— 
‘‘(1) IN GENERAL.—In the case of a corpora-
tion which is a United States shareholder, there 
shall be allowed as a deduction an amount equal to 
85 percent of the dividends which are received by 
such shareholder from controlled foreign corpora-
tions during the election period. 
‘‘(2) DIVIDENDS PAID INDIRECTLY FROM CON-
TROLLED FOREIGN CORPORATIONS.—If, within the 
election period, a United States shareholder receives 
a distribution from a controlled foreign corporation 
which is excluded from gross income under section 
959(a), such distribution shall be treated for pur-
poses of this section as a dividend to the extent of 
any amount included in income by such United 
States shareholder under section 951(a)(1)(A) as a 
result of any dividend paid during the election period 
to— 
‘‘(A) such controlled foreign corporation 
from another controlled foreign corporation that 
is in a chain of ownership described in section 
958(a), or
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‘‘(B) any other controlled foreign corpora-
tion in such chain of ownership, but only to the 
extent of distributions described in section 
959(b) which are made during the election pe-
riod to the controlled foreign corporation from 
which such United States shareholder received 
such distribution. 
‘‘(b) LIMITATIONS.— 
‘‘(1) IN GENERAL.—The amount of dividends 
taken into account under subsection (a) shall not ex-
ceed the greater of— 
‘‘(A) $500,000,000, 
‘‘(B) the amount shown on the applicable 
financial statement as earnings permanently re-
invested outside the United States, or 
‘‘(C) in the case of an applicable financial 
statement which fails to show a specific amount 
of earnings permanently reinvested outside the 
United States and which shows a specific 
amount of tax liability attributable to such 
earnings, the amount of such earnings deter-
mined in such manner as the Secretary may 
prescribe. 
Except as provided in subparagraph (C), if there is 
no statement or such statement fails to show a spe-
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cific amount of such earnings or liability, such 
amount shall be treated as being zero for purposes 
of this paragraph. 
‘‘(2) DIVIDENDS MUST BE EXTRAORDINARY.— 
The amount of dividends taken into account under 
subsection (a) shall not exceed the excess (if any) 
of— 
‘‘(A) the dividends received during the tax-
able year by such shareholder from controlled 
foreign corporations, over 
‘‘(B) the annual average for the base pe-
riod years of— 
‘‘(i) the dividends received during 
each base period year by such shareholder 
from such corporations, 
‘‘(ii) the amounts includible in such 
shareholder’s gross income for each base 
period year under section 951(a)(1)(B) 
with respect to such corporations, and 
‘‘(iii) the amounts that would have 
been included for each base period year 
but for section 959(a) with respect to such 
corporations. 
The amount taken into account under clause 
(iii) for any base period year shall not include
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any amount which is not includible in gross in-
come by reason of an amount described in 
clause (ii) with respect to a prior taxable year. 
‘‘(3) REQUIREMENT
TO
INVEST
IN
UNITED 
STATES.—Subsection (a) shall not apply to any divi-
dend received by a United States shareholder unless 
the amount of the dividend is invested in the United 
States pursuant to a plan describing the expendi-
tures to be made with such amount— 
‘‘(A) which, before the dividend is received, 
is approved by the president or chief executive 
officer of such shareholder, and 
‘‘(B) which is approved by the Board of 
Directors (or management committee) of such 
shareholder no later than its first meeting on or 
after the date the dividend is received. 
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section— 
‘‘(1) ELECTION
PERIOD.—The term ‘election 
period’ means— 
‘‘(A) if this section applies to the tax-
payer’s last taxable year beginning before the 
date of the enactment of this section, any 6- 
month or shorter period during such year which
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is after the date of the enactment of this sec-
tion and which is selected by the taxpayer, and 
‘‘(B) if this section applies to the tax-
payer’s first taxable year beginning on or after 
such date, the 1st 6 months of such taxable 
year. 
‘‘(2) APPLICABLE
FINANCIAL
STATEMENT.— 
The term ‘applicable financial statement’ means the 
most recently audited financial statement (including 
notes and other documents which accompany such 
statement)— 
‘‘(A) which is certified on or before March 
31, 2003, as being prepared in accordance with 
generally accepted accounting principles, and 
‘‘(B) which is used for the purposes of a 
statement or report— 
‘‘(i) to creditors, 
‘‘(ii) to shareholders, or 
‘‘(iii) for any other substantial nontax 
purpose. 
In the case of a corporation required to file a finan-
cial statement with the Securities and Exchange 
Commission, such term means the most recent such 
statement filed on or before March 31, 2003.
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‘‘(3) BASE
PERIOD
YEARS.—The base period 
years are the 3 taxable years— 
‘‘(A) which are among the 5 most recent 
taxable years ending on or before March 31, 
2003, and 
‘‘(B) 
which 
are 
determined 
by 
dis-
regarding— 
‘‘(i) 1 taxable year for which the sum 
of the amounts described in clauses (i), 
(ii), and (iii) of subsection (b)(2)(B) is the 
largest, and 
‘‘(ii) 1 taxable year for which such 
sum is the smallest. 
Rules similar to the rules of subparagraphs (A) and 
(B) of section 41(f)(3) shall apply for purposes of 
this paragraph. 
‘‘(4) COORDINATION
WITH
DIVIDENDS
RE-
CEIVED DEDUCTION.—No deduction shall be allowed 
under section 243 or 245 for any dividend for which 
a deduction is allowed under this section. 
‘‘(d) DENIAL OF FOREIGN TAX CREDIT.— 
‘‘(1) IN GENERAL.—No credit shall be allowed 
under section 901 for any taxes paid or accrued (or 
treated as paid or accrued) with respect to the de-
ductible portion of any dividend or of any amount
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described in subsection (a)(2). No deduction shall be 
allowed under this chapter for any tax for which 
credit is not allowable by reason of the preceding 
sentence. 
‘‘(2) DEDUCTIBLE PORTION.—For purposes of 
paragraph (1), unless the taxpayer otherwise speci-
fies, the deductible portion of any dividend is the 
amount which bears the same ratio to the amount 
of such dividend as the amount allowed as a deduc-
tion under subsection (a) for the taxable year bears 
to the amount described in subsection (b)(2)(A) for 
such year. 
‘‘(e) INCREASE IN TAX ON INCLUDED AMOUNTS NOT 
REDUCED BY CREDITS, ETC.— 
‘‘(1) IN GENERAL.—Any tax under this chapter 
by reason of nondeductible CFC dividends shall not 
be treated as tax imposed by this chapter for pur-
poses of determining— 
‘‘(A) the amount of any credit allowable 
under this chapter, or 
‘‘(B) the amount of the tax imposed by 
section 55. 
Subparagraph (A) shall not apply to the credit 
under section 53 or to the credit under section 27(a) 
with respect to taxes attributable to such dividends.
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‘‘(2) INCLUSIONS MAY NOT BE OFFSET BY NET 
OPERATING LOSSES.— 
‘‘(A) IN GENERAL.—The taxable income of 
any United States shareholder for any taxable 
year shall in no event be less than the amount 
of nondeductible CFC dividends received during 
such year. 
‘‘(B) COORDINATION WITH SECTION 172.— 
The nondeductible CFC dividends for any tax-
able year shall not be taken into account— 
‘‘(i) in determining under section 172 
the amount of any net operating loss for 
such taxable year, and 
‘‘(ii) in determining taxable income 
for such taxable year for purposes of the 
2nd sentence of section 172(b)(2). 
‘‘(3) NONDEDUCTIBLE
CFC
DIVIDENDS.—For 
purposes of this subsection, the term ‘nondeductible 
CFC dividends’ means the excess of the amount of 
dividends taken into account under subsection (a) 
over the deduction allowed under subsection (a) for 
such dividends. 
‘‘(f) ELECTION.—This section shall apply for the tax-
payer’s first taxable year beginning on or after the date 
of the enactment of this section if the taxpayer elects its
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application for such taxable year. The taxpayer may elect 
to apply this section to the taxpayer’s last taxable year 
beginning before the date of the enactment of this section 
in lieu of such first taxable year.’’ 
(b) ALTERNATIVE MINIMUM TAX.—Subparagraph 
(C) of section 56(g)(4) is amended by adding at the end 
the following new clause: 
‘‘(v) SPECIAL RULE FOR CERTAIN DIS-
TRIBUTIONS FROM CONTROLLED FOREIGN 
CORPORATIONS.—Clause (i) shall not apply 
to any deduction allowable under section 
965.’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart F of part III of subchapter N of chapter 1 
is amended by adding at the end the following new item: 
‘‘Sec. 965. Temporary dividends received deduction.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending on or after 
the date of the enactment of this Act. 
Subtitle H—Other Incentive 
Provisions 
SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON AC-
COUNT OF WEATHER-RELATED CONDITIONS. 
(a) RULES FOR REPLACEMENT OF INVOLUNTARILY 
CONVERTED LIVESTOCK.—Subsection (e) of section 1033 
(relating to involuntary conversions) is amended—
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(1) by striking ‘‘CONDITIONS.—For purposes’’ 
and inserting ‘‘CONDITIONS.— 
‘‘(1) IN GENERAL.—For purposes’’, and 
(2) by adding at the end the following new 
paragraph: 
‘‘(2) EXTENSION OF REPLACEMENT PERIOD.— 
‘‘(A) 
IN
GENERAL.—In 
the 
case 
of 
drought, flood, or other weather-related condi-
tions described in paragraph (1) which result in 
the area being designated as eligible for assist-
ance by the Federal Government, subsection 
(a)(2)(B) shall be applied with respect to any 
converted property by substituting ‘4 years’ for 
‘2 years’. 
‘‘(B) 
FURTHER
EXTENSION
BY
SEC-
RETARY.—The Secretary may extend on a re-
gional basis the period for replacement under 
this section (after the application of subpara-
graph (A)) for such additional time as the Sec-
retary determines appropriate if the weather-re-
lated conditions which resulted in such applica-
tion continue for more than 3 years.’’. 
(b) INCOME INCLUSION RULES.—Subsection (e) of 
section 451 (relating to special rule for proceeds from live-
stock sold on account of drought, flood, or other weather-
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related conditions) is amended by adding at the end the 
following new paragraph: 
‘‘(3) SPECIAL
ELECTION
RULES.—If section 
1033(e)(2) applies to a sale or exchange of livestock 
described in paragraph (1), the election under para-
graph (1) shall be deemed valid if made during the 
replacement period described in such section.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to any taxable year with respect 
to which the due date (without regard to extensions) for 
the return is after December 31, 2002. 
SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERA-
TIVES 
WITHOUT 
REDUCING 
PATRONAGE 
DIVIDENDS. 
(a) IN GENERAL.—Subsection (a) of section 1388 
(relating to patronage dividend defined) is amended by 
adding at the end the following: ‘‘For purposes of para-
graph (3), net earnings shall not be reduced by amounts 
paid during the year as dividends on capital stock or other 
proprietary capital interests of the organization to the ex-
tent that the articles of incorporation or bylaws of such 
organization or other contract with patrons provide that 
such dividends are in addition to amounts otherwise pay-
able to patrons which are derived from business done with 
or for patrons during the taxable year.’’.
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to distributions in taxable years 
beginning after the date of the enactment of this Act. 
SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 
631(b) TO APPLY TO OUTRIGHT SALES BY 
LANDOWNERS. 
(a) IN GENERAL.—The first sentence of section 
631(b) (relating to disposal of timber with a retained eco-
nomic interest) is amended by striking ‘‘retains an eco-
nomic interest in such timber’’ and inserting ‘‘either re-
tains an economic interest in such timber or makes an 
outright sale of such timber’’. 
(b) CONFORMING AMENDMENTS.— 
(1) The third sentence of section 631(b) is 
amended by striking ‘‘The date of disposal’’ and in-
serting ‘‘In the case of disposal of timber with a re-
tained economic interest, the date of disposal’’. 
(2) The heading for section 631(b) is amended 
by striking ‘‘WITH A RETAINED ECONOMIC INTER-
EST’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales after December 31, 2004.
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SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PART-
NERSHIPS TREATED AS QUALIFYING INCOME 
OF REGULATED INVESTMENT COMPANIES. 
(a) IN GENERAL.—Paragraph (2) of section 851(b) 
(defining regulated investment company) is amended to 
read as follows: 
‘‘(2) at least 90 percent of its gross income is 
derived from— 
‘‘(A) dividends, interest, payments with re-
spect to securities loans (as defined in section 
512(a)(5)), and gains from the sale or other 
disposition of stock or securities (as defined in 
section 2(a)(36) of the Investment Company 
Act of 1940, as amended) or foreign currencies, 
or other income (including but not limited to 
gains from options, futures or forward con-
tracts) derived with respect to its business of 
investing in such stock, securities, or currencies, 
and 
‘‘(B) distributions or other income derived 
from an interest in a qualified publicly traded 
partnership (as defined in subsection (h)); 
and’’. 
(b) SOURCE
FLOW-THROUGH
RULE
NOT
TO 
APPLY.—The last sentence of section 851(b) is amended 
by inserting ‘‘(other than a qualified publicly traded part-
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nership as defined in subsection (h))’’ after ‘‘derived from 
a partnership’’. 
(c) LIMITATION ON OWNERSHIP.—Subsection (c) of 
section 851 is amended by redesignating paragraph (5) 
as paragraph (6) and inserting after paragraph (4) the 
following new paragraph: 
‘‘(5) The term ‘outstanding voting securities of 
such issuer’ shall include the equity securities of a 
qualified publicly traded partnership (as defined in 
subsection (h)).’’. 
(d) DEFINITION OF QUALIFIED PUBLICLY TRADED 
PARTNERSHIP.—Section 851 is amended by adding at the 
end the following new subsection: 
‘‘(h) QUALIFIED
PUBLICLY
TRADED
PARTNER-
SHIP.—For purposes of this section, the term ‘qualified 
publicly traded partnership’ means a publicly traded part-
nership described in section 7704(b) other than a partner-
ship which would satisfy the gross income requirements 
of section 7704(c)(2) if qualifying income included only 
income described in subsection (b)(2)(A).’’. 
(e) DEFINITION OF QUALIFYING INCOME.—Section 
7704(d)(4) is amended by striking ‘‘section 851(b)(2)’’ 
and inserting ‘‘section 851(b)(2)(A)’’.
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(f) LIMITATION ON COMPOSITION OF ASSETS.—Sub-
paragraph (B) of section 851(b)(3) is amended to read 
as follows: 
‘‘(B) not more than 25 percent of the 
value of its total assets is invested in— 
‘‘(i) the securities (other than Govern-
ment securities or the securities of other 
regulated investment companies) of any 
one issuer, 
‘‘(ii) the securities (other than the se-
curities of other regulated investment com-
panies) of two or more issuers which the 
taxpayer controls and which are deter-
mined, under regulations prescribed by the 
Secretary, to be engaged in the same or 
similar trades or businesses or related 
trades or businesses, or 
‘‘(iii) the securities of one or more 
qualified publicly traded partnerships (as 
defined in subsection (h)).’’. 
(g) APPLICATION
OF SPECIAL PASSIVE ACTIVITY 
RULE TO REGULATED INVESTMENT COMPANIES.—Sub-
section (k) of section 469 (relating to separate application 
of section in case of publicly traded partnerships) is
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amended by adding at the end the following new para-
graph: 
‘‘(4) APPLICATION
TO
REGULATED
INVEST-
MENT COMPANIES.—For purposes of this section, a 
regulated investment company (as defined in section 
851) holding an interest in a qualified publicly trad-
ed partnership (as defined in section 851(h)) shall 
be treated as a taxpayer described in subsection 
(a)(2) with respect to items attributable to such in-
terest.’’. 
(h) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE IN-
VESTMENT TRUSTS. 
(a) EXPANSION
OF STRAIGHT DEBT SAFE HAR-
BOR.—Section 856 (defining real estate investment trust) 
is amended— 
(1) in subsection (c) by striking paragraph (7), 
and 
(2) by adding at the end the following new sub-
section: 
‘‘(m) SAFE HARBOR
IN APPLYING SUBSECTION 
(c)(4).—
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‘‘(1) IN GENERAL.—In applying subclause (III) 
of subsection (c)(4)(B)(iii), except as otherwise de-
termined by the Secretary in regulations, the fol-
lowing shall not be considered securities held by the 
trust: 
‘‘(A) Straight debt securities of an issuer 
which meet the requirements of paragraph (2). 
‘‘(B) Any loan to an individual or an es-
tate. 
‘‘(C) Any section 467 rental agreement (as 
defined in section 467(d)), other than with a 
person described in subsection (d)(2)(B). 
‘‘(D) Any obligation to pay rents from real 
property (as defined in subsection (d)(1)). 
‘‘(E) Any security issued by a State or any 
political subdivision thereof, the District of Co-
lumbia, a foreign government or any political 
subdivision thereof, or the Commonwealth of 
Puerto Rico, but only if the determination of 
any payment received or accrued under such se-
curity does not depend in whole or in part on 
the profits of any entity not described in this 
subparagraph or payments on any obligation 
issued by such an entity,
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‘‘(F) Any security issued by a real estate 
investment trust. 
‘‘(G) Any other arrangement as deter-
mined by the Secretary. 
‘‘(2) SPECIAL RULES RELATING TO STRAIGHT 
DEBT SECURITIES.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (1)(A), securities meet the requirements 
of this paragraph if such securities are straight 
debt, as defined in section 1361(c)(5) (without 
regard to subparagraph (B)(iii) thereof). 
‘‘(B) SPECIAL RULES RELATING TO CER-
TAIN
CONTINGENCIES.—For purposes of sub-
paragraph (A), any interest or principal shall 
not be treated as failing to satisfy section 
1361(c)(5)(B)(i) solely by reason of the fact 
that— 
‘‘(i) the time of payment of such in-
terest or principal is subject to a contin-
gency, but only if— 
‘‘(I) any such contingency does 
not have the effect of changing the ef-
fective yield to maturity, as deter-
mined under section 1272, other than 
a change in the annual yield to matu-
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rity which does not exceed the greater 
of 1⁄4 of 1 percent or 5 percent of the 
annual yield to maturity, or 
‘‘(II) neither the aggregate issue price 
nor the aggregate face amount of the 
issuer’s debt instruments held by the trust 
exceeds $1,000,000 and not more than 12 
months of unaccrued interest can be re-
quired to be prepaid thereunder, or 
‘‘(ii) the time or amount of payment 
is subject to a contingency upon a default 
or the exercise of a prepayment right by 
the issuer of the debt, but only if such con-
tingency is consistent with customary com-
mercial practice. 
‘‘(C) SPECIAL RULES RELATING TO COR-
PORATE
OR
PARTNERSHIP
ISSUERS.—In the 
case of an issuer which is a corporation or a 
partnership, securities that otherwise would be 
described in paragraph (1)(A) shall be consid-
ered not to be so described if the trust holding 
such securities and any of its controlled taxable 
REIT subsidiaries (as defined in subsection 
(d)(8)(A)(iv)) hold any securities of the issuer 
which—
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‘‘(i) are not described in paragraph 
(1) (prior to the application of this sub-
paragraph), and 
‘‘(ii) have an aggregate value greater 
than 1 percent of the issuer’s outstanding 
securities determined without regard to 
paragraph (3)(A)(i). 
‘‘(3) LOOK-THROUGH RULE FOR PARTNERSHIP 
SECURITIES.— 
‘‘(A) IN GENERAL.—For purposes of ap-
plying 
subclause 
(III) 
of 
subsection 
(c)(4)(B)(iii)— 
‘‘(i) a trust’s interest as a partner in 
a partnership (as defined in section 
7701(a)(2)) shall not be considered a secu-
rity, and 
‘‘(ii) the trust shall be deemed to own 
its proportionate share of each of the as-
sets of the partnership. 
‘‘(B) DETERMINATION OF TRUST’S INTER-
EST IN PARTNERSHIP ASSETS.—For purposes 
of subparagraph (A), with respect to any tax-
able year beginning after the date of the enact-
ment of this subparagraph—
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‘‘(i) the trust’s interest in the partner-
ship assets shall be the trust’s propor-
tionate interest in any securities issued by 
the partnership (determined without re-
gard to subparagraph (A)(i) and para-
graph (4), but not including securities de-
scribed in paragraph (1)), and 
‘‘(ii) the value of any debt instrument 
shall be the adjusted issue price thereof, as 
defined in section 1272(a)(4). 
‘‘(4) CERTAIN
PARTNERSHIP
DEBT
INSTRU-
MENTS NOT TREATED AS A SECURITY.—For pur-
poses of applying subclause (III) of subsection 
(c)(4)(B)(iii)— 
‘‘(A) any debt instrument issued by a part-
nership and not described in paragraph (1) 
shall not be considered a security to the extent 
of the trust’s interest as a partner in the part-
nership, and 
‘‘(B) any debt instrument issued by a part-
nership and not described in paragraph (1) 
shall not be considered a security if at least 75 
percent of the partnership’s gross income (ex-
cluding gross income from prohibited trans-
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actions) is derived from sources referred to in 
subsection (c)(3). 
‘‘(5) SECRETARIAL GUIDANCE.—The Secretary 
is authorized to provide guidance (including through 
the issuance of a written determination, as defined 
in section 6110(b)) that an arrangement shall not be 
considered a security held by the trust for purposes 
of 
applying 
subclause 
(III) 
of 
subsection 
(c)(4)(B)(iii) notwithstanding that such arrangement 
otherwise could be considered a security under sub-
paragraph (F) of subsection (c)(5).’’. 
(b) CLARIFICATION OF APPLICATION OF LIMITED 
RENTAL
EXCEPTION.—Subparagraph (A) of section 
856(d)(8) (relating to special rules for taxable REIT sub-
sidiaries) is amended to read as follows: 
‘‘(A) LIMITED RENTAL EXCEPTION.— 
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met with respect 
to any property if at least 90 percent of 
the leased space of the property is rented 
to persons other than taxable REIT sub-
sidiaries of such trust and other than per-
sons described in paragraph (2)(B). 
‘‘(ii) RENTS MUST BE SUBSTANTIALLY 
COMPARABLE.—Clause (i) shall apply only
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to the extent that the amounts paid to the 
trust as rents from real property (as de-
fined in paragraph (1) without regard to 
paragraph (2)(B)) from such property are 
substantially comparable to such rents paid 
by the other tenants of the trust’s property 
for comparable space. 
‘‘(iii) TIMES FOR TESTING RENT COM-
PARABILITY.—The 
substantial 
com-
parability requirement of clause (ii) shall 
be treated as met with respect to a lease 
to a taxable REIT subsidiary of the trust 
if such requirement is met under the terms 
of the lease— 
‘‘(I) at the time such lease is en-
tered into, 
‘‘(II) at the time of each exten-
sion of the lease, including a failure to 
exercise a right to terminate, and 
‘‘(III) at the time of any modi-
fication of the lease between the trust 
and the taxable REIT subsidiary if 
the rent under such lease is effectively 
increased pursuant to such modifica-
tion.
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With respect to subclause (III), if the tax-
able REIT subsidiary of the trust is a con-
trolled taxable REIT subsidiary of the 
trust, the term ‘rents from real property’ 
shall not in any event include rent under 
such lease to the extent of the increase in 
such rent on account of such modification. 
‘‘(iv) CONTROLLED
TAXABLE
REIT 
SUBSIDIARY.—For purposes of clause (iii), 
the term ‘controlled taxable REIT sub-
sidiary’ means, with respect to any real es-
tate investment trust, any taxable REIT 
subsidiary of such trust if such trust owns 
directly or indirectly— 
‘‘(I) stock possessing more than 
50 percent of the total voting power 
of the outstanding stock of such sub-
sidiary, or 
‘‘(II) stock having a value of 
more than 50 percent of the total 
value of the outstanding stock of such 
subsidiary. 
‘‘(v) 
CONTINUING
QUALIFICATION 
BASED ON THIRD PARTY ACTIONS.—If the 
requirements of clause (i) are met at a
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time referred to in clause (iii), such re-
quirements shall continue to be treated as 
met so long as there is no increase in the 
space leased to any taxable REIT sub-
sidiary of such trust or to any person de-
scribed in paragraph (2)(B). 
‘‘(vi) CORRECTION PERIOD.—If there 
is an increase referred to in clause (v) dur-
ing any calendar quarter with respect to 
any property, the requirements of clause 
(iii) shall be treated as met during the 
quarter and the succeeding quarter if such 
requirements are met at the close of such 
succeeding quarter.’’. 
(c) DELETION
OF CUSTOMARY SERVICES EXCEP-
TION.—Subparagraph (B) of section 857(b)(7) (relating 
to redetermined rents) is amended by striking clause (ii) 
and by redesignating clauses (iii), (iv), (v), (vi), and (vii) 
as clauses (ii), (iii), (iv), (v), and (vi), respectively. 
(d) CONFORMITY WITH GENERAL HEDGING DEFINI-
TION.—Subparagraph (G) of section 856(c)(5) (relating 
to treatment of certain hedging instruments) is amended 
to read as follows: 
‘‘(G) TREATMENT OF CERTAIN HEDGING 
INSTRUMENTS.—Except to the extent provided
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by regulations, any income of a real estate in-
vestment trust from a hedging transaction (as 
defined in clause (ii) or (iii) of section 
1221(b)(2)(A)) which is clearly identified pur-
suant to section 1221(a)(7), including gain 
from the sale or disposition of such a trans-
action, shall not constitute gross income under 
paragraph (2) to the extent that the transaction 
hedges any indebtedness incurred or to be in-
curred by the trust to acquire or carry real es-
tate assets.’’. 
(e) CONFORMITY WITH REGULATED INVESTMENT 
COMPANY RULES.—Clause (i) of section 857(b)(5)(A) (re-
lating to imposition of tax in case of failure to meet certain 
requirements) is amended by striking ‘‘90 percent’’ and 
inserting ‘‘95 percent’’. 
(f) SAVINGS PROVISIONS.— 
(1) RULES OF APPLICATION FOR FAILURE TO 
SATISFY SECTION 856(c)(4).—Section 856(c) (relat-
ing to definition of real estate investment trust) is 
amended by inserting after paragraph (6) the fol-
lowing new paragraph: 
‘‘(7) RULES OF APPLICATION FOR FAILURE TO 
SATISFY PARAGRAPH (4).—
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‘‘(A) DE
MINIMIS
FAILURE.—A corpora-
tion, trust, or association that fails to meet the 
requirements of paragraph (4)(B)(iii) for a par-
ticular quarter shall nevertheless be considered 
to have satisfied the requirements of such para-
graph for such quarter if— 
‘‘(i) such failure is due to the owner-
ship of assets the total value of which does 
not exceed the lesser of— 
‘‘(I) 1 percent of the total value 
of the trust’s assets at the end of the 
quarter for which such measurement 
is done, and 
‘‘(II) $10,000,000, and 
‘‘(ii)(I) the corporation, trust, or asso-
ciation, following the identification of such 
failure, disposes of assets in order to meet 
the requirements of such paragraph within 
6 months after the last day of the quarter 
in which the corporation, trust or associa-
tion’s identification of the failure to satisfy 
the requirements of such paragraph oc-
curred or such other time period prescribed 
by the Secretary and in the manner pre-
scribed by the Secretary, or
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‘‘(II) the requirements of such para-
graph are otherwise met within the time 
period specified in subclause (I). 
‘‘(B) FAILURES
EXCEEDING
DE
MINIMIS 
AMOUNT.—A corporation, trust, or association 
that fails to meet the requirements of para-
graph (4) for a particular quarter shall never-
theless be considered to have satisfied the re-
quirements of such paragraph for such quarter 
if— 
‘‘(i) such failure involves the owner-
ship of assets the total value of which ex-
ceeds the de minimis standard described in 
subparagraph (A)(i) at the end of the 
quarter for which such measurement is 
done, 
‘‘(ii) following the corporation, trust, 
or association’s identification of the failure 
to satisfy the requirements of such para-
graph for a particular quarter, a descrip-
tion of each asset that causes the corpora-
tion, trust, or association to fail to satisfy 
the requirements of such paragraph at the 
close of such quarter of any taxable year is 
set forth in a schedule for such quarter
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filed in accordance with regulations pre-
scribed by the Secretary, 
‘‘(iii) the failure to meet the require-
ments of such paragraph for a particular 
quarter is due to reasonable cause and not 
due to willful neglect, 
‘‘(iv) the corporation, trust, or asso-
ciation pays a tax computed under sub-
paragraph (C), and 
‘‘(v)(I) the corporation, trust, or asso-
ciation disposes of the assets set forth on 
the schedule specified in clause (ii) within 
6 months after the last day of the quarter 
in which the corporation, trust or associa-
tion’s identification of the failure to satisfy 
the requirements of such paragraph oc-
curred or such other time period prescribed 
by the Secretary and in the manner pre-
scribed by the Secretary, or 
‘‘(II) the requirements of such para-
graph are otherwise met within the time 
period specified in subclause (I). 
‘‘(C) TAX.—For purposes of subparagraph 
(B)(iv)—
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‘‘(i) TAX IMPOSED.—If a corporation, 
trust, or association elects the application 
of this subparagraph, there is hereby im-
posed a tax on the failure described in sub-
paragraph (B) of such corporation, trust, 
or association. Such tax shall be paid by 
the corporation, trust, or association. 
‘‘(ii) TAX
COMPUTED.—The amount 
of the tax imposed by clause (i) shall be 
the greater of— 
‘‘(I) $50,000, or 
‘‘(II) the amount determined 
(pursuant to regulations promulgated 
by the Secretary) by multiplying the 
net income generated by the assets 
described in the schedule specified in 
subparagraph (B)(ii) for the period 
specified in clause (iii) by the highest 
rate of tax specified in section 11. 
‘‘(iii) 
PERIOD.—For 
purposes 
of 
clause (ii)(II), the period described in this 
clause is the period beginning on the first 
date that the failure to satisfy the require-
ments of such paragraph (4) occurs as a 
result of the ownership of such assets and
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ending on the earlier of the date on which 
the trust disposes of such assets or the end 
of the first quarter when there is no longer 
a failure to satisfy such paragraph (4). 
‘‘(iv) ADMINISTRATIVE PROVISIONS.— 
For purposes of subtitle F, the taxes im-
posed by this subparagraph shall be treat-
ed as excise taxes with respect to which the 
deficiency procedures of such subtitle 
apply.’’. 
(2) MODIFICATION OF RULES OF APPLICATION 
FOR FAILURE TO SATISFY SECTIONS 856(c)(2) OR 
856(c)(3).—Paragraph (6) of section 856(c) (relat-
ing to definition of real estate investment trust) is 
amended by striking subparagraphs (A) and (B), by 
redesignating subparagraph (C) as subparagraph 
(B), and by inserting before subparagraph (B) (as 
so redesignated) the following new subparagraph: 
‘‘(A) following the corporation, trust, or 
association’s identification of the failure to meet 
the requirements of paragraph (2) or (3), or of 
both such paragraphs, for any taxable year, a 
description of each item of its gross income de-
scribed in such paragraphs is set forth in a 
schedule for such taxable year filed in accord-
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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