award. If such individual is convicted of criminal 
conduct arising from the role described in the pre-
ceding sentence, the Whistleblower Office shall deny 
any award. 
‘‘(4) APPEAL
OF
AWARD
DETERMINATION.— 
Any determination regarding an award under para-
graph (1), (2), or (3) may, within 30 days of such 
determination, be appealed to the Tax Court (and 
the Tax Court shall have jurisdiction with respect to 
such matter). 
‘‘(5) APPLICATION OF THIS SUBSECTION.—This 
subsection shall apply with respect to any action— 
‘‘(A) against any taxpayer, but in the case 
of any individual, only if such individual’s gross 
income exceeds $200,000 for any taxable year 
subject to such action, and 
‘‘(B) if the tax, penalties, interest, addi-
tions to tax, and additional amounts in dispute 
exceed $2,000,000. 
‘‘(6) ADDITIONAL RULES.— 
‘‘(A) NO CONTRACT NECESSARY.—No con-
tract with the Internal Revenue Service is nec-
essary for any individual to receive an award 
under this subsection. 
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‘‘(B) REPRESENTATION.—Any individual 
described in paragraph (1) or (2) may be rep-
resented by counsel. 
‘‘(C) SUBMISSION OF INFORMATION.—No 
award may be made under this subsection 
based on information submitted to the Sec-
retary unless such information is submitted 
under penalty of perjury.’’. 
(2) ASSIGNMENT TO SPECIAL TRIAL JUDGES.— 
(A) IN GENERAL.—Section 7443A(b) (re-
lating to proceedings which may be assigned to 
special trial judges) is amended by striking 
‘‘and’’ at the end of paragraph (5), by redesig-
nating paragraph (6) as paragraph (7), and by 
inserting after paragraph (5) the following new 
paragraph: 
‘‘(6) any proceeding under section 7623(b)(4), 
and’’. 
(B) CONFORMING
AMENDMENT.—Section 
7443A(c) is amended by striking ‘‘or (5)’’ and 
inserting ‘‘(5), or (6)’’. 
(3) DEDUCTION ALLOWED WHETHER OR NOT 
TAXPAYER ITEMIZES.—Subsection (a) of section 62 
(relating to general rule defining adjusted gross in-
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come) is amended by inserting after paragraph (20) 
the following new paragraph: 
‘‘(21) ATTORNEYS FEES RELATING TO AWARDS 
TO
WHISTLEBLOWERS.—Any deduction allowable 
under this chapter for attorney fees and court costs 
paid by, or on behalf of, the taxpayer in connection 
with any award under section 7623(b) (relating to 
awards to whistleblowers). The preceding sentence 
shall not apply to any deduction in excess of the 
amount includible in the taxpayer’s gross income for 
the taxable year on account of such award.’’. 
(b) WHISTLEBLOWER OFFICE.— 
(1) IN
GENERAL.—Not later than the date 
which is 12 months after the date of the enactment 
of this Act, the Secretary of the Treasury shall issue 
guidance for the operation of a whistleblower pro-
gram to be administered in the Internal Revenue 
Service by an office to be known as the ‘‘Whistle-
blower Office’’ which— 
(A) shall at all times operate at the direc-
tion of the Commissioner of Internal Revenue 
and coordinate and consult with other divisions 
in the Internal Revenue Service as directed by 
the Commissioner of Internal Revenue, 
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(B) shall analyze information received from 
any individual described in section 7623(b) of 
the Internal Revenue Code of 1986 and either 
investigate the matter itself or assign it to the 
appropriate Internal Revenue Service office, 
and 
(C) in its sole discretion, may ask for addi-
tional assistance from such individual or any 
legal representative of such individual. 
(2) REQUEST FOR ASSISTANCE.—The guidance 
issued under paragraph (1) shall specify that any as-
sistance requested under paragraph (1)(C) shall be 
under the direction and control of the Whistleblower 
Office or the office assigned to investigate the mat-
ter under paragraph (1)(A). No individual or legal 
representative whose assistance is so requested may 
by reason of such request represent himself or her-
self as an employee of the Federal Government. 
(c) REPORT BY SECRETARY.—The Secretary of the 
Treasury shall each year conduct a study and report to 
Congress on the use of section 7623 of the Internal Rev-
enue Code of 1986, including— 
(1) an analysis of the use of such section dur-
ing the preceding year and the results of such use, 
and 
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(2) any legislative or administrative rec-
ommendations regarding the provisions of such sec-
tion and its application. 
(d) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to information provided on or 
after the date of the enactment of this Act. 
SEC. 407. FRIVOLOUS TAX SUBMISSIONS. 
(a) CIVIL PENALTIES.—Section 6702 is amended to 
read as follows: 
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS. 
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if— 
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which— 
‘‘(A) does not contain information on 
which the substantial correctness of the self-as-
sessment may be judged, or 
‘‘(B) contains information that on its face 
indicates that the self-assessment is substan-
tially incorrect, and 
‘‘(2) the conduct referred to in paragraph (1)— 
‘‘(A) is based on a position which the Sec-
retary has identified as frivolous under sub-
section (c), or 
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‘‘(B) reflects a desire to delay or impede 
the administration of Federal tax laws. 
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS 
SUBMISSIONS.— 
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a 
specified frivolous submission shall pay a penalty of 
$5,000. 
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For 
purposes of this section— 
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission— 
‘‘(i) is based on a position which the 
Secretary has identified as frivolous under 
subsection (c), or 
‘‘(ii) reflects a desire to delay or im-
pede the administration of Federal tax 
laws. 
‘‘(B) SPECIFIED SUBMISSION.—The term 
‘specified submission’ means— 
‘‘(i) a request for a hearing under— 
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‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon 
filing of notice of lien), or 
‘‘(II) section 6330 (relating to 
notice and opportunity for hearing be-
fore levy), and 
‘‘(ii) an application under— 
‘‘(I) section 6159 (relating to 
agreements for payment of tax liabil-
ity in installments), 
‘‘(II) section 7122 (relating to 
compromises), or 
‘‘(III) section 7811 (relating to 
taxpayer assistance orders). 
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission 
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission. 
‘‘(c) LISTING OF FRIVOLOUS POSITIONS.—The Sec-
retary shall prescribe (and periodically revise) a list of po-
sitions which the Secretary has identified as being frivo-
lous for purposes of this subsection. The Secretary shall 
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not include in such list any position that the Secretary 
determines 
meets 
the 
requirement 
of 
section 
6662(d)(2)(B)(ii)(II). 
‘‘(d) REDUCTION OF PENALTY.—The Secretary may 
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would 
promote compliance with and administration of the Fed-
eral tax laws. 
‘‘(e) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be 
in addition to any other penalty provided by law.’’. 
(b) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS BEFORE LEVY.— 
(1) FRIVOLOUS
REQUESTS
DISREGARDED.— 
Section 6330 (relating to notice and opportunity for 
hearing before levy) is amended by adding at the 
end the following new subsection: 
‘‘(g) FRIVOLOUS REQUESTS FOR HEARING, ETC.— 
Notwithstanding any other provision of this section, if the 
Secretary determines that any portion of a request for a 
hearing under this section or section 6320 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’. 
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(2) PRECLUSION
FROM
RAISING
FRIVOLOUS 
ISSUES AT HEARING.—Section 6330(c)(4) is amend-
ed— 
(A) by striking ‘‘(A)’’ and inserting 
‘‘(A)(i)’’; 
(B) by striking ‘‘(B)’’ and inserting ‘‘(ii)’’; 
(C) by striking the period at the end of the 
first sentence and inserting ‘‘; or’’; and 
(D) by inserting after subparagraph (A)(ii) 
(as so redesignated) the following: 
‘‘(B) the issue meets the requirement of 
clause (i) or (ii) of section 6702(b)(2)(A).’’. 
(3) 
STATEMENT
OF
GROUNDS.—Section 
6330(b)(1) is amended by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’. 
(c) TREATMENT
OF FRIVOLOUS REQUESTS
FOR 
HEARINGS UPON FILING OF NOTICE OF LIEN.—Section 
6320 is amended— 
(1) in subsection (b)(1), by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under 
subsection (a)(3)(B) and states the grounds for the 
requested hearing’’, and 
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(2) in subsection (c), by striking ‘‘and (e)’’ and 
inserting ‘‘(e), and (g)’’. 
(d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR 
OFFERS-IN-COMPROMISE
AND
INSTALLMENT
AGREE-
MENTS.—Section 7122 is amended by adding at the end 
the following new subsection: 
‘‘(f) 
FRIVOLOUS
SUBMISSIONS, 
ETC.—Notwith-
standing any other provision of this section, if the Sec-
retary determines that any portion of an application for 
an offer-in-compromise or installment agreement sub-
mitted under this section or section 6159 meets the re-
quirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were 
never submitted and such portion shall not be subject to 
any further administrative or judicial review.’’. 
(e) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter B of chapter 68 is amended by 
striking the item relating to section 6702 and inserting 
the following new item: 
‘‘Sec. 6702. Frivolous tax submissions.’’. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to submissions made and issues 
raised after the date on which the Secretary first pre-
scribes a list under section 6702(c) of the Internal Rev-
enue Code of 1986, as amended by subsection (a). 
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SEC. 408. ADDITION OF MENINGOCOCCAL AND HUMAN 
PAPILLOMAVIRUS VACCINES TO LIST OF TAX-
ABLE VACCINES. 
(a) MENINGOCOCCAL VACCINE.—Section 4132(a)(1) 
(defining taxable vaccine) is amended by adding at the end 
the following new subparagraph: 
‘‘(O) Any meningococcal vaccine.’’. 
(b) HUMAN
PAPILLOMAVIRUS
VACCINE.—Section 
4132(a)(1), as amended by subsection (a), is amended by 
adding at the end the following new subparagraph: 
‘‘(P) Any vaccine against the human 
papillomavirus.’’. 
(c) EFFECTIVE DATE.— 
(1) SALES, ETC.—The amendments made by 
this section shall apply to sales and uses on or after 
the first day of the first month which begins more 
than 4 weeks after the date of the enactment of this 
Act. 
(2) DELIVERIES.—For purposes of paragraph 
(1) and section 4131 of the Internal Revenue Code 
of 1986, in the case of sales on or before the effec-
tive date described in such paragraph for which de-
livery is made after such date, the delivery date shall 
be considered the sale date. 
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SEC. 409. CLARIFICATION OF TAXATION OF CERTAIN SET-
TLEMENT FUNDS MADE PERMANENT. 
(a) IN GENERAL.—Subsection (g) of section 468B is 
amended by striking paragraph (3). 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in section 201 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
SEC. 410. MODIFICATION OF ACTIVE BUSINESS DEFINITION 
UNDER SECTION 355 MADE PERMANENT. 
(a) IN GENERAL.—Subparagraphs (A) and (D) of 
section 355(b)(3) are each amended by striking ‘‘and on 
or before December 31, 2010’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall take effect as if included in section 202 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
SEC. 411. REVISION OF STATE VETERANS LIMIT MADE PER-
MANENT. 
(a) IN GENERAL.—Subparagraph (B) of section 
143(l)(3) is amended by striking clause (iv). 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in section 203 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
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SEC. 412. CAPITAL GAINS TREATMENT FOR CERTAIN SELF- 
CREATED MUSICAL WORKS MADE PERMA-
NENT. 
(a) IN GENERAL.—Paragraph (3) of section 1221(b) 
is amended by striking ‘‘before January 1, 2011,’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in section 204 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
SEC. 413. REDUCTION IN MINIMUM VESSEL TONNAGE 
WHICH QUALIFIES FOR TONNAGE TAX MADE 
PERMANENT. 
(a) IN GENERAL.—Paragraph (4) of section 1355(a) 
is amended by striking ‘‘10,000 (6,000, in the case of tax-
able years beginning after December 31, 2005, and ending 
before January 1, 2011)’’ and inserting ‘‘6,000’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in section 205 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
SEC. 414. MODIFICATION OF SPECIAL ARBITRAGE RULE 
FOR CERTAIN FUNDS MADE PERMANENT. 
(a) IN GENERAL.—Section 206 of the Tax Increase 
Prevention and Reconciliation Act of 2005 is amended by 
striking ‘‘and before August 31, 2009’’. 
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in section 206 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
SEC. 415. GREAT LAKES DOMESTIC SHIPPING TO NOT DIS-
QUALIFY VESSEL FROM TONNAGE TAX. 
(a) IN GENERAL.—Section 1355 (relating to defini-
tions and special rules) is amended by redesignating sub-
section (g) as subsection (h) and by inserting after sub-
section (f) the following new subsection: 
‘‘(g) GREAT LAKES DOMESTIC SHIPPING TO NOT 
DISQUALIFY VESSEL.— 
‘‘(1) IN GENERAL.—If the electing corporation 
elects (at such time and in such manner as the Sec-
retary may require) to apply this subsection for any 
taxable year to any qualifying vessel which is used 
in qualified zone domestic trade during the taxable 
year— 
‘‘(A) solely for purposes of subsection 
(a)(4), such use shall be treated as use in 
United States foreign trade (and not as use in 
United States domestic trade), and 
‘‘(B) subsection (f) shall not apply with re-
spect to such vessel for such taxable year. 
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‘‘(2) EFFECT
OF
TEMPORARILY
OPERATING 
VESSEL IN UNITED STATES DOMESTIC TRADE.—In 
the case of a qualifying vessel to which this sub-
section applies— 
‘‘(A) IN GENERAL.—An electing corpora-
tion shall be treated as using such vessel in 
qualified zone domestic trade during any period 
of temporary use in the United States domestic 
trade (other than qualified zone domestic trade) 
if the electing corporation gives timely notice to 
the Secretary stating— 
‘‘(i) that it temporarily operates or 
has operated in the United States domestic 
trade (other than qualified zone domestic 
trade) a qualifying vessel which had been 
used in the United States foreign trade or 
qualified zone domestic trade, and 
‘‘(ii) its intention to resume operation 
of the vessel in the United States foreign 
trade or qualified zone domestic trade. 
‘‘(B) NOTICE.—Notice shall be deemed 
timely if given not later than the due date (in-
cluding extensions) for the corporation’s tax re-
turn for the taxable year in which the tem-
porary cessation begins. 
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‘‘(C) PERIOD
DISREGARD
IN
EFFECT.— 
The period of temporary use under subpara-
graph (A) continues until the earlier of the date 
of which— 
‘‘(i) the electing corporation abandons 
its intention to resume operations of the 
vessel in the United States foreign trade or 
qualified zone domestic trade, or 
‘‘(ii) the electing corporation resumes 
operation of the vessel in the United States 
foreign trade or qualified zone domestic 
trade. 
‘‘(D) NO DISREGARD IF DOMESTIC TRADE 
USE
EXCEEDS
DAYS.—Subparagraph (A) 
shall not apply to any qualifying vessel which is 
operated in the United States domestic trade 
(other than qualified zone domestic trade) for 
more than 30 days during the taxable year. 
‘‘(3) ALLOCATION
OF
INCOME
AND
DEDUC-
TIONS
TO
QUALIFYING
SHIPPING
ACTIVITIES.—In 
the case of a qualifying vessel to which this sub-
section applies, the Secretary shall prescribe rules 
for the proper allocation of income, expenses, losses, 
and deductions between the qualified shipping activi-
ties and the other activities of such vessel. 
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‘‘(4) QUALIFIED ZONE DOMESTIC TRADE.—For 
purposes of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
zone domestic trade’ means the transportation 
of goods or passengers between places in the 
qualified zone if such transportation is in the 
United States domestic trade. 
‘‘(B) QUALIFIED ZONE.—The term ‘quali-
fied zone’ means the Great Lakes Waterway 
and the St. Lawrence Seaway.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 416. USE OF QUALIFIED MORTGAGE BONDS TO FI-
NANCE RESIDENCES FOR VETERANS WITH-
OUT REGARD TO FIRST-TIME HOMEBUYER 
REQUIREMENT. 
(a) IN GENERAL.—Section 143(d)(2) (relating to ex-
ceptions to 3-year requirement) is amended by striking 
‘‘and’’ at the end of subparagraph (B), by adding ‘‘and’’ 
at the end of subparagraph (C), and by inserting after 
subparagraph (C) the following new subparagraph: 
‘‘(D) in the case of bonds issued after the 
date of the enactment of this subparagraph and 
before January 1, 2008, financing of any resi-
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dence for a veteran (as defined in section 101 
of title 38, United States Code), if such veteran 
has not previously qualified for and received 
such financing by reason of this subpara-
graph,’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to bonds issued after the date of 
the enactment of this Act. 
SEC. 417. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL 
RESIDENCE BY CERTAIN EMPLOYEES OF THE 
INTELLIGENCE COMMUNITY. 
(a) IN GENERAL.—Subparagraph (A) of section 
121(d)(9) (relating to exclusion of gain from sale of prin-
cipal residence) is amended by striking ‘‘duty’’ and all that 
follows and inserting ‘‘duty— 
‘‘(i) as a member of the uniformed 
services, 
‘‘(ii) as a member of the Foreign 
Service of the United States, or 
‘‘(iii) as an employee of the intel-
ligence community.’’. 
(b) EMPLOYEE OF INTELLIGENCE COMMUNITY DE-
FINED.—Subparagraph (C) of section 121(d)(9) is amend-
ed by redesignating clause (iv) as clause (v) and by insert-
ing after clause (iii) the following new clause: 
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‘‘(iv) EMPLOYEE
OF
INTELLIGENCE 
COMMUNITY.—The term ‘employee of the 
intelligence community’ means an employee 
(as defined by section 2105 of title 5, 
United States Code) of— 
‘‘(I) the Office of the Director of 
National Intelligence, 
‘‘(II) the Central Intelligence 
Agency, 
‘‘(III) 
the 
National 
Security 
Agency, 
‘‘(IV) the Defense Intelligence 
Agency, 
‘‘(V) the National Geospatial-In-
telligence Agency, 
‘‘(VI) the National Reconnais-
sance Office, 
‘‘(VII) any other office within the 
Department of Defense for the collec-
tion of specialized national intelligence 
through reconnaissance programs, 
‘‘(VIII) any of the intelligence 
elements of the Army, the Navy, the 
Air Force, the Marine Corps, the Fed-
eral Bureau of Investigation, the De-
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partment of Treasury, the Depart-
ment of Energy, and the Coast 
Guard, 
‘‘(IX) the Bureau of Intelligence 
and Research of the Department of 
State, or 
‘‘(X) any of the elements of the 
Department of Homeland Security 
concerned with the analyses of foreign 
intelligence information.’’. 
(c) SPECIAL RULE.—Subparagraph (C) of section 
121(d)(9), as amended by subsection (b), is amended by 
adding at the end the following new clause: 
‘‘(vi) SPECIAL RULE RELATING TO IN-
TELLIGENCE
COMMUNITY.—An employee 
of the intelligence community shall not be 
treated as serving on qualified extended 
duty unless such duty is at a duty station 
located outside the United States.’’. 
(d) CONFORMING AMENDMENT.—The heading for 
section 121(d)(9) is amended to read as follows: ‘‘UNI-
FORMED
SERVICES, FOREIGN
SERVICE, AND
INTEL-
LIGENCE COMMUNITY’’. 
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(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales or exchanges after the date 
of the enactment of this Act and before January 1, 2011. 
SEC. 418. SALE OF PROPERTY BY JUDICIAL OFFICERS. 
(a) IN GENERAL.—Section 1043(b) (relating to the 
sale of property to comply with conflict-of-interest require-
ments) is amended— 
(1) in paragraph (1)— 
(A) in subparagraph (A), by inserting ‘‘, or 
a judicial officer,’’ after ‘‘an officer or employee 
of the executive branch’’; and 
(B) in subparagraph (B), by inserting ‘‘ju-
dicial canon,’’ after ‘‘any statute, regulation, 
rule,’’; 
(2) in paragraph (2)— 
(A) in subparagraph (A), by inserting ‘‘ju-
dicial canon,’’ after ‘‘any Federal conflict of in-
terest statute, regulation, rule,’’; and 
(B) in subparagraph (B), by inserting 
after ‘‘the Director of the Office of Government 
Ethics,’’ the following: ‘‘in the case of executive 
branch officers or employees, or by the Judicial 
Conference of the United States (or its des-
ignee), in the case of judicial officers,’’; and 
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(3) in paragraph (5)(B), by inserting ‘‘judicial 
canon,’’ after ‘‘any statute, regulation, rule,’’. 
(b) JUDICIAL OFFICER DEFINED.—Section 1043(b) 
is amended by adding at the end the following new para-
graph: 
‘‘(6) JUDICIAL
OFFICER.—The term ‘judicial 
officer’ means the Chief Justice of the United 
States, the Associate Justices of the Supreme Court, 
and the judges of the United States courts of ap-
peals, United States district courts, including the 
district courts in Guam, the Northern Mariana Is-
lands, and the Virgin Islands, Court of Appeals for 
the Federal Circuit, Court of International Trade, 
Tax Court, Court of Federal Claims, Court of Ap-
peals for Veterans Claims, United States Court of 
Appeals for the Armed Forces, and any court cre-
ated by Act of Congress, the judges of which are en-
titled to hold office during good behavior.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales after the date of enactment 
of this Act. 
SEC. 419. PREMIUMS FOR MORTGAGE INSURANCE. 
(a) IN GENERAL.—Section 163(h)(3) (relating to 
qualified residence interest) is amended by adding at the 
end the following new subparagraph: 
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‘‘(E) MORTGAGE
INSURANCE
PREMIUMS 
TREATED AS INTEREST.— 
‘‘(i) IN GENERAL.—Premiums paid or 
accrued for qualified mortgage insurance 
by a taxpayer during the taxable year in 
connection with acquisition indebtedness 
with respect to a qualified residence of the 
taxpayer shall be treated for purposes of 
this section as interest which is qualified 
residence interest. 
‘‘(ii) PHASEOUT.—The amount other-
wise treated as interest under clause (i) 
shall be reduced (but not below zero) by 10 
percent of such amount for each $1,000 
($500 in the case of a married individual 
filing a separate return) (or fraction there-
of) that the taxpayer’s adjusted gross in-
come 
for 
the 
taxable 
year 
exceeds 
$100,000 ($50,000 in the case of a mar-
ried individual filing a separate return). 
‘‘(iii) LIMITATION.—Clause (i) shall 
not apply with respect to any mortgage in-
surance contracts issued before January 1, 
2007. 
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‘‘(iv) TERMINATION.—Clause (i) shall 
not apply to amounts— 
‘‘(I) paid or accrued after De-
cember 31, 2007, or 
‘‘(II) properly allocable to any 
period after such date.’’. 
(b) DEFINITION
AND
SPECIAL
RULES.—Section 
163(h)(4) (relating to other definitions and special rules) 
is amended by adding at the end the following new sub-
paragraphs: 
‘‘(E) 
QUALIFIED
MORTGAGE
INSUR-
ANCE.—The term ‘qualified mortgage insur-
ance’ means— 
‘‘(i) mortgage insurance provided by 
the Veterans Administration, the Federal 
Housing Administration, or the Rural 
Housing Administration, and 
‘‘(ii) private mortgage insurance (as 
defined by section 2 of the Homeowners 
Protection Act of 1998 (12 U.S.C. 4901), 
as in effect on the date of the enactment 
of this subparagraph). 
‘‘(F) SPECIAL RULES FOR PREPAID QUALI-
FIED
MORTGAGE
INSURANCE.—Any amount 
paid by the taxpayer for qualified mortgage in-
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surance that is properly allocable to any mort-
gage the payment of which extends to periods 
that are after the close of the taxable year in 
which such amount is paid shall be chargeable 
to capital account and shall be treated as paid 
in such periods to which so allocated. No deduc-
tion shall be allowed for the unamortized bal-
ance of such account if such mortgage is satis-
fied before the end of its term. The preceding 
sentences shall not apply to amounts paid for 
qualified mortgage insurance provided by the 
Veterans Administration or the Rural Housing 
Administration.’’. 
(c) INFORMATION RETURNS RELATING TO MORT-
GAGE INSURANCE.—Section 6050H (relating to returns 
relating to mortgage interest received in trade or business 
from individuals) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(h) RETURNS RELATING TO MORTGAGE INSURANCE 
PREMIUMS.— 
‘‘(1) IN
GENERAL.—The Secretary may pre-
scribe, by regulations, that any person who, in the 
course of a trade or business, receives from any indi-
vidual premiums for mortgage insurance aggregating 
$600 or more for any calendar year, shall make a 
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return with respect to each such individual. Such re-
turn shall be in such form, shall be made at such 
time, and shall contain such information as the Sec-
retary may prescribe. 
‘‘(2) STATEMENT TO BE FURNISHED TO INDI-
VIDUALS WITH RESPECT TO WHOM INFORMATION IS 
REQUIRED.—Every person required to make a re-
turn under paragraph (1) shall furnish to each indi-
vidual with respect to whom a return is made a writ-
ten statement showing such information as the Sec-
retary may prescribe. Such written statement shall 
be furnished on or before January 31 of the year 
following the calendar year for which the return 
under paragraph (1) was required to be made. 
‘‘(3) SPECIAL
RULES.—For purposes of this 
subsection— 
‘‘(A) rules similar to the rules of sub-
section (c) shall apply, and 
‘‘(B) 
the 
term 
‘mortgage 
insurance’ 
means— 
‘‘(i) mortgage insurance provided by 
the Veterans Administration, the Federal 
Housing Administration, or the Rural 
Housing Administration, and 
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100 
‘‘(ii) private mortgage insurance (as 
defined by section 2 of the Homeowners 
Protection Act of 1998 (12 U.S.C. 4901), 
as in effect on the date of the enactment 
of this subsection).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts paid or accrued after 
December 31, 2006. 
SEC. 420. MODIFICATION OF REFUNDS FOR KEROSENE 
USED IN AVIATION. 
(a) IN GENERAL.—Paragraph (4) of section 6427(l) 
(relating to nontaxable uses of diesel fuel and kerosene) 
is amended to read as follows: 
‘‘(4) REFUNDS FOR KEROSENE USED IN AVIA-
TION.— 
‘‘(A) KEROSENE
USED
IN
COMMERCIAL 
AVIATION.—In the case of kerosene used in 
commercial aviation (as defined in section 
4083(b)) (other than supplies for vessels or air-
craft within the meaning of section 4221(d)(3)), 
paragraph (1) shall not apply to so much of the 
tax imposed by section 4041 or 4081, as the 
case may be, as is attributable to— 
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101 
‘‘(i) the Leaking Underground Stor-
age Tank Trust Fund financing rate im-
posed by such section, and 
‘‘(ii) so much of the rate of tax speci-
fied 
in 
section 
4041(c) 
or 
4081(a)(2)(A)(iii), as the case may be, as 
does not exceed 4.3 cents per gallon. 
‘‘(B) KEROSENE
USED
IN
NONCOMMER-
CIAL AVIATION.—In the case of kerosene used 
in aviation that is not commercial aviation (as 
so defined) (other than any use which is exempt 
from the tax imposed by section 4041(c) other 
than by reason of a prior imposition of tax), 
paragraph (1) shall not apply to— 
‘‘(i) any tax imposed by subsection (c) 
or (d)(2) of section 4041, and 
‘‘(ii) so much of the tax imposed by 
section 4081 as is attributable to— 
‘‘(I) the Leaking Underground 
Storage Tank Trust Fund financing 
rate imposed by such section, and 
‘‘(II) so much of the rate of tax 
specified in section 4081(a)(2)(A)(iii) 
as does not exceed the rate specified 
in section 4081(a)(2)(C)(ii). 
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102 
‘‘(C) PAYMENTS
TO
ULTIMATE, 
REG-
ISTERED VENDOR.— 
‘‘(i) IN
GENERAL.—With respect to 
any kerosene used in aviation (other than 
kerosene described in clause (ii) or ker-
osene to which paragraph (5) applies), if 
the ultimate purchaser of such kerosene 
waives (at such time and in such form and 
manner as the Secretary shall prescribe) 
the right to payment under paragraph (1) 
and assigns such right to the ultimate ven-
dor, then the Secretary shall pay the 
amount which would be paid under para-
graph (1) to such ultimate vendor, but 
only if such ultimate vendor— 
‘‘(I) is registered under section 
4101, and 
‘‘(II) meets the requirements of 
subparagraph (A), (B), or (D) of sec-
tion 6416(a)(1). 
‘‘(ii) PAYMENTS FOR KEROSENE USED 
IN
NONCOMMERCIAL
AVIATION.—The 
amount which would be paid under para-
graph (1) with respect to any kerosene to 
which subparagraph (B) applies shall be 
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103 
paid only to the ultimate vendor of such 
kerosene. A payment shall be made to such 
vendor if such vendor— 
‘‘(I) is registered under section 
4101, and 
‘‘(II) meets the requirements of 
subparagraph (A), (B), or (D) of sec-
tion 6416(a)(1).’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 6427(l) is amended by striking 
paragraph (5) and by redesignating paragraph (6) 
as paragraph (5). 
(2) Section 4082(d)(2)(B) is amended by strik-
ing ‘‘section 6427(l)(6)(B)’’ and inserting ‘‘section 
6427(l)(5)(B)’’. 
(3) Section 6427(i)(4)(A) is amended— 
(A) by striking ‘‘paragraph (4)(B), (5), or 
(6)’’ each place it appears and inserting ‘‘para-
graph (4)(C) or (5)’’, and 
(B) by striking ‘‘(l)(5), and (l)(6)’’ and in-
serting ‘‘(l)(4)(C)(ii), and (l)(5)’’. 
(4) Section 6427(l)(1) is amended by striking 
‘‘paragraph (4)(B)’’ and inserting ‘‘paragraph 
(4)(C)(i)’’. 
(5) Section 9502(d) is amended— 
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104 
(A) in paragraph (2), by striking ‘‘and 
(l)(5)’’, and 
(B) in paragraph (3), by striking ‘‘or (5)’’. 
(6) Section 9503(c)(7) is amended— 
(A) by amending subparagraphs (A) and 
(B) to read as follows: 
‘‘(A) 4.3 cents per gallon of kerosene sub-
ject to section 6427(l)(4)(A) with respect to 
which a payment has been made by the Sec-
retary under section 6427(l), and 
‘‘(B) 21.8 cents per gallon of kerosene sub-
ject to section 6427(l)(4)(B) with respect to 
which a payment has been made by the Sec-
retary under section 6427(l).’’, and 
(B) in the matter following subparagraph 
(B), by striking ‘‘or (5)’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to kerosene sold after Sep-
tember 30, 2005. 
(2) SPECIAL RULE FOR PENDING CLAIMS.—In 
the case of kerosene sold for use in aviation (other 
than kerosene to which section 6427(l)(4)(C)(ii) of 
the Internal Revenue Code of 1986 (as added by 
subsection (a)) applies or kerosene to which section 
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105 
6427(l)(5) of such Code (as redesignated by sub-
section (b)) applies) after September 30, 2005, and 
before the date of the enactment of this Act, the ul-
timate purchaser shall be treated as having waived 
the right to payment under section 6427(l)(1) of 
such Code and as having assigned such right to the 
ultimate vendor if such ultimate vendor has met the 
requirements of subparagraph (A), (B), or (D) of 
section 6416(a)(1) of such Code. 
(d) SPECIAL RULE FOR KEROSENE USED IN AVIA-
TION ON A FARM FOR FARMING PURPOSES.— 
(1) REFUNDS FOR PURCHASES AFTER DECEM-
BER 31, 2004, AND BEFORE OCTOBER 1, 2005.— 
The Secretary of the Treasury shall pay to the ulti-
mate purchaser of any kerosene which is used in 
aviation on a farm for farming purposes and which 
was purchased after December 31, 2004, and before 
October 1, 2005, an amount equal to the aggregate 
amount of tax imposed on such fuel under section 
4041 or 4081 of the Internal Revenue Code of 1986, 
as the case may be, reduced by any payment to the 
ultimate vendor under section 6427(l)(5)(C) of such 
Code (as in effect on the day before the date of the 
enactment of the Safe, Accountable, Flexible, Effi-
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106 
cient Transportation Equity Act: a Legacy for 
Users). 
(2) USE
ON
A
FARM
FOR
FARMING
PUR-
POSES.—For purposes of paragraph (1), kerosene 
shall be treated as used on a farm for farming pur-
poses if such kerosene is used for farming purposes 
(within the meaning of section 6420(c)(3) of the In-
ternal Revenue Code of 1986) in carrying on a trade 
or business on a farm situated in the United States. 
For purposes of the preceding sentence, rules similar 
to the rules of section 6420(c)(4) of such Code shall 
apply. 
(3) TIME FOR FILING CLAIMS.—No claim shall 
be allowed under paragraph (1) unless the ultimate 
purchaser files such claim before the date that is 3 
months after the date of the enactment of this Act. 
(4) NO DOUBLE BENEFIT.—No amount shall be 
paid under paragraph (1) or section 6427(l) of the 
Internal Revenue Code of 1986 with respect to any 
kerosene described in paragraph (1) to the extent 
that such amount is in excess of the tax imposed on 
such kerosene under section 4041 or 4081 of such 
Code, as the case may be. 
(5) APPLICABLE LAWS.—For purposes of this 
subsection, rules similar to the rules of section 
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107 
6427(j) of the Internal Revenue Code of 1986 shall 
apply. 
SEC. 421. REGIONAL INCOME TAX AGENCIES TREATED AS 
STATES 
FOR 
PURPOSES 
OF 
CONFIDEN-
TIALITY AND DISCLOSURE REQUIREMENTS. 
(a) IN GENERAL.—Paragraph (5) of section 6103(b) 
is amended to read as follows: 
‘‘(5) STATE.— 
‘‘(A) IN
GENERAL.—The term ‘State’ 
means— 
‘‘(i) any of the 50 States, the District 
of Columbia, the Commonwealth of Puerto 
Rico, the Virgin Islands, the Canal Zone, 
Guam, American Samoa, and the Com-
monwealth of the Northern Mariana Is-
lands, 
‘‘(ii) for purposes of subsections 
(a)(2), (b)(4), (d)(1), (h)(4), and (p), any 
municipality— 
‘‘(I) with a population in excess 
of 250,000 (as determined under the 
most recent decennial United States 
census data available), 
‘‘(II) which imposes a tax on in-
come or wages, and 
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108 
‘‘(III) with which the Secretary 
(in his sole discretion) has entered 
into an agreement regarding disclo-
sure, and 
‘‘(iii) for purposes of subsections 
(a)(2), (b)(4), (d)(1), (h)(4), and (p), any 
governmental entity— 
‘‘(I) which is formed and oper-
ated by a qualified group of munici-
palities, and 
‘‘(II) with which the Secretary 
(in his sole discretion) has entered 
into an agreement regarding disclo-
sure. 
‘‘(B) REGIONAL INCOME TAX AGENCIES.— 
For purposes of subparagraph (A)(iii)— 
‘‘(i) QUALIFIED
GROUP
OF
MUNICI-
PALITIES.—The term ‘qualified group of 
municipalities’ means, with respect to any 
governmental entity, 2 or more municipali-
ties— 
‘‘(I) each of which imposes a tax 
on income or wages, 
‘‘(II) each of which, under the 
authority of a State statute, admin-
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109 
isters the laws relating to the imposi-
tion of such taxes through such entity, 
and 
‘‘(III) which collectively have a 
population in excess of 250,000 (as 
determined under the most recent de-
cennial United States census data 
available). 
‘‘(ii) REFERENCES
TO
STATE
LAW, 
ETC.—For purposes of applying subpara-
graph (A)(iii) to the subsections referred 
to in such subparagraph, any reference in 
such subsections to State law, proceedings, 
or tax returns shall be treated as ref-
erences to the law, proceedings, or tax re-
turns, as the case may be, of the munici-
palities which form and operate the gov-
ernmental entity referred to in such sub-
paragraph. 
‘‘(iii) DISCLOSURE TO CONTRACTORS 
AND
OTHER
AGENTS.—Notwithstanding 
any other provision of this section, no re-
turn or return information shall be dis-
closed to any contractor or other agent of 
a governmental entity referred to in sub-
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110 
paragraph (A)(iii) unless such entity, to 
the satisfaction of the Secretary— 
‘‘(I) has requirements in effect 
which require each such contractor or 
other agent which would have access 
to returns or return information to 
provide safeguards (within the mean-
ing of subsection (p)(4)) to protect 
the confidentiality of such returns or 
return information, 
‘‘(II) agrees to conduct an on-site 
review every 3 years (or a mid-point 
review in the case of contracts or 
agreements of less than 3 years in du-
ration) of each contractor or other 
agent to determine compliance with 
such requirements, 
‘‘(III) submits the findings of the 
most recent review conducted under 
subclause (II) to the Secretary as part 
of the report required by subsection 
(p)(4)(E), and 
‘‘(IV) certifies to the Secretary 
for the most recent annual period that 
such contractor or other agent is in 
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111 
compliance with all such require-
ments. 
The certification required by subclause 
(IV) shall include the name and address of 
each contractor and other agent, a descrip-
tion of the contract or agreement with 
such contractor or other agent, and the du-
ration of such contract or agreement. The 
requirements of this clause shall not apply 
to disclosures pursuant to subsection (n) 
for purposes of Federal tax administration 
and a rule similar to the rule of subsection 
(p)(8)(B) shall apply for purposes of this 
clause.’’. 
(b) SPECIAL RULES FOR DISCLOSURE.—Subsection 
(d) of section 6103 is amended by adding at the end the 
following new paragraph: 
‘‘(6) LIMITATION ON DISCLOSURE REGARDING 
REGIONAL
INCOME
TAX
AGENCIES
TREATED
AS 
STATES.—For purposes of paragraph (1), inspection 
by or disclosure to an entity described in subsection 
(b)(5)(A)(iii) shall be for the purpose of, and only to 
the extent necessary in, the administration of the 
laws of the member municipalities in such entity re-
lating to the imposition of a tax on income or wages. 
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112 
Such entity may not redisclose any return or return 
information received pursuant to paragraph (1) to 
any such member municipality.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to disclosures made after Decem-
ber 31, 2006. 
SEC. 422. DESIGNATION OF WINES BY SEMI-GENERIC 
NAMES. 
(a) IN GENERAL.—Subsection (c) of section 5388 
(relating to use of semi-generic designations) is amended 
by adding at the end the following new paragraph: 
‘‘(3) SPECIAL
RULE
FOR
USE
OF
CERTAIN 
SEMI-GENERIC DESIGNATIONS.— 
‘‘(A) IN
GENERAL.—In the case of any 
wine to which this paragraph applies— 
‘‘(i) paragraph (1) shall not apply, 
‘‘(ii) in the case of wine of the Euro-
pean Community, designations referred to 
in subparagraph (C)(i) may be used for 
such wine only if the requirement of sub-
paragraph (B)(ii) is met, and 
‘‘(iii) in the case any other wine bear-
ing a brand name, or brand name and fan-
ciful name, semi-generic designations may 
be used for such wine only if the require-
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113 
ments of clauses (i), (ii), and (iii) of sub-
paragraph (B) are met. 
‘‘(B) REQUIREMENTS.— 
‘‘(i) The requirement of this clause is 
met if there appears in direct conjunction 
with the semi-generic designation an ap-
propriate appellation of origin disclosing 
the origin of the wine. 
‘‘(ii) The requirement of this clause is 
met if the wine conforms to the standard 
of identity, if any, for such wine contained 
in the regulations under this section or, if 
there is no such standard, to the trade un-
derstanding of such class or type. 
‘‘(iii) The requirement of this clause 
is met if the person, or its successor in in-
terest, using the semi-generic designation 
held a Certificate of Label Approval or 
Certificate of Exemption from Label Ap-
proval issued by the Secretary for a wine 
label bearing such brand name, or brand 
name and fanciful name, before March 10, 
2006, on which such semi-generic designa-
tion appeared. 
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114 
‘‘(C) WINES
TO
WHICH
PARAGRAPH
AP-
PLIES.— 
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), this paragraph shall 
apply to any grape wine which is des-
ignated as Burgundy, Claret, Chablis, 
Champagne, Chianti, Malaga, Marsala, 
Madeira, Moselle, Port, Retsina, Rhine 
Wine or Hock, Sauterne, Haut Sauterne, 
Sherry, or Tokay. 
‘‘(ii) EXCEPTION.—This paragraph 
shall not apply to wine which— 
‘‘(I) contains less than 7 percent 
or more than 24 percent alcohol by 
volume, 
‘‘(II) is intended for sale outside 
the United States, or 
‘‘(III) does not bear a brand 
name.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to wine imported or bottled in the 
United States on or after the date of enactment of this 
Act. 
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115 
SEC. 423. MODIFICATION OF RAILROAD TRACK MAINTE-
NANCE CREDIT. 
(a) IN GENERAL.—Section 45G(d) (defining qualified 
railroad track maintenance expenditures) is amended— 
(1) by inserting ‘‘gross’’ after ‘‘means’’, and 
(2) by inserting ‘‘(determined without regard to 
any consideration for such expenditures given by the 
Class II or Class III railroad which made the assign-
ment of such track)’’ after ‘‘Class II or Class III 
railroad’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in the amend-
ment made by section 245(a) of the American Jobs Cre-
ation Act of 2004. 
SEC. 424. MODIFICATION OF EXCISE TAX ON UNRELATED 
BUSINESS TAXABLE INCOME OF CHARITABLE 
REMAINDER TRUSTS. 
(a) IN GENERAL.—Subsection (c) of section 664 (re-
lating to exemption from income taxes) is amended to read 
as follows: 
‘‘(c) TAXATION OF TRUSTS.— 
‘‘(1) INCOME TAX.—A charitable remainder an-
nuity trust and a charitable remainder unitrust 
shall, for any taxable year, not be subject to any tax 
imposed by this subtitle. 
‘‘(2) EXCISE TAX.— 
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116 
‘‘(A) IN GENERAL.—In the case of a chari-
table remainder annuity trust or a charitable 
remainder unitrust which has unrelated busi-
ness taxable income (within the meaning of sec-
tion 512, determined as if part III of sub-
chapter F applied to such trust) for a taxable 
year, there is hereby imposed on such trust or 
unitrust an excise tax equal to the amount of 
such unrelated business taxable income. 
‘‘(B) CERTAIN RULES TO APPLY.—The tax 
imposed by subparagraph (A) shall be treated 
as imposed by chapter 42 for purposes of this 
title other than subchapter E of chapter 42. 
‘‘(C) TAX COURT PROCEEDINGS.—For pur-
poses of this paragraph, the references in sec-
tion 6212(c)(1) to section 4940 shall be deemed 
to include references to this paragraph.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2006. 
SEC. 425. LOANS TO QUALIFIED CONTINUING CARE FACILI-
TIES MADE PERMANENT. 
(a) IN GENERAL.—Subsection (h) of section 7872 
(relating to exception for loans to qualified continuing care 
facilities) is amended by striking paragraph (4). 
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117 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect as if included in section 209 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
SEC. 426. TECHNICAL CORRECTIONS. 
(a) TECHNICAL CORRECTION RELATING TO LOOK- 
THROUGH TREATMENT
OF PAYMENTS BETWEEN RE-
LATED CONTROLLED FOREIGN CORPORATIONS UNDER 
THE FOREIGN PERSONAL HOLDING COMPANY RULES.— 
(1) IN GENERAL.— 
(A) 
The 
first 
sentence 
of 
section 
954(c)(6)(A) is amended by striking ‘‘which is 
not subpart F income’’ and inserting ‘‘which is 
neither subpart F income nor income treated as 
effectively connected with the conduct of a 
trade or business in the United States’’. 
(B) Section 954(c)(6)(A) is amended by 
striking the last sentence and inserting the fol-
lowing: ‘‘The Secretary shall prescribe such reg-
ulations as may be necessary or appropriate to 
carry out this paragraph, including such regula-
tions as may be necessary or appropriate to 
prevent the abuse of the purposes of this para-
graph.’’ 
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118 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall take effect as if included in 
section 103(b) of the Tax Increase Prevention and 
Reconciliation Act of 2005. 
(b) TECHNICAL CORRECTION REGARDING AUTHOR-
ITY TO EXERCISE REASONABLE CAUSE AND GOOD FAITH 
EXCEPTION.— 
(1) IN GENERAL.—Section 903(d)(2)(B)(iii) of 
the American Jobs Creation Act of 2004, as amend-
ed by section 303(a) of the Gulf Opportunity Zone 
Act of 2005, is amended by inserting ‘‘or the Sec-
retary’s delegate’’ after ‘‘the Secretary of the Treas-
ury’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall take effect as if included in 
the provisions of the American Jobs Creation Act of 
2004 to which it relates. 
DIVISION B—MEDICARE AND 
OTHER HEALTH PROVISIONS 
SEC. 1. SHORT TITLE OF DIVISION. 
This division may be cited as the ‘‘Medicare Improve-
ments and Extension Act of 2006’’. 
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119 
TITLE I—MEDICARE IMPROVED 
QUALITY AND PROVIDER PAY-
MENTS 
SEC. 101. PHYSICIAN PAYMENT AND QUALITY IMPROVE-
MENT. 
(a) ONE-YEAR INCREASE IN MEDICARE PHYSICIAN 
FEE SCHEDULE CONVERSION FACTOR.—Section 1848(d) 
of the Social Security Act (42 U.S.C. 1395w-4(d)) is 
amended by adding at the end the following new para-
graph: 
‘‘(7) CONVERSION FACTOR FOR 2007.— 
‘‘(A) IN GENERAL.—The conversion factor 
that would otherwise be applicable under this 
subsection for 2007 shall be the amount of such 
conversion factor divided by the product of— 
‘‘(i) 1 plus the Secretary’s estimate of 
the percentage increase in the MEI (as de-
fined in section 1842(i)(3)) for 2007 (di-
vided by 100); and 
‘‘(ii) 1 plus the Secretary’s estimate of 
the update adjustment factor under para-
graph (4)(B) for 2007. 
‘‘(B) NO
EFFECT
ON
COMPUTATION
OF 
CONVERSION FACTOR FOR 2008.—The conver-
sion factor under this subsection shall be com-
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120 
puted under paragraph (1)(A) for 2008 as if 
subparagraph (A) had never applied.’’. 
(b) QUALITY REPORTING SYSTEM.—Section 1848 of 
the Social Security Act (42 U.S.C. 1395w-4) is amended 
by adding at the end the following new subsection: 
‘‘(k) QUALITY REPORTING SYSTEM.— 
‘‘(1) IN GENERAL.—The Secretary shall imple-
ment a system for the reporting by eligible profes-
sionals of data on quality measures specified under 
paragraph (2). Such data shall be submitted in a 
form and manner specified by the Secretary (by pro-
gram instruction or otherwise), which may include 
submission of such data on claims under this part. 
‘‘(2) USE
OF
CONSENSUS-BASED
QUALITY 
MEASURES.— 
‘‘(A) FOR 2007.— 
‘‘(i) IN
GENERAL.—For purposes of 
applying this subsection for the reporting 
of data on quality measures for covered 
professional services furnished during the 
period beginning July 1, 2007, and ending 
December 31, 2007, the quality measures 
specified under this paragraph are the 
measures identified as 2007 physician 
quality measures under the Physician Vol-
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121 
untary Reporting Program as published on 
the public website of the Centers for Medi-
care & Medicaid Services as of the date of 
the enactment of this subsection, except as 
may be changed by the Secretary based on 
the results of a consensus-based process in 
January of 2007, if such change is pub-
lished on such website by not later than 
April 1, 2007. 
‘‘(ii) SUBSEQUENT REFINEMENTS IN 
APPLICATION PERMITTED.—The Secretary 
may, from time to time (but not later than 
July 1, 2007), publish on such website 
(without notice or opportunity for public 
comment) modifications or refinements 
(such as code additions, corrections, or re-
visions) for the application of quality meas-
ures previously published under clause (i), 
but may not, under this clause, change the 
quality measures under the reporting sys-
tem. 
‘‘(iii) 
IMPLEMENTATION.—Notwith-
standing any other provision of law, the 
Secretary may implement by program in-
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122 
struction or otherwise this subsection for 
2007. 
‘‘(B) FOR 2008.— 
‘‘(i) IN
GENERAL.—For purposes of 
reporting data on quality measures for cov-
ered professional services furnished during 
2008, the quality measures specified under 
this paragraph for covered professional 
services shall be measures that have been 
adopted or endorsed by a consensus orga-
nization (such as the National Quality 
Forum or AQA), that include measures 
that have been submitted by a physician 
specialty, and that the Secretary identifies 
as having used a consensus-based process 
for developing such measures. Such meas-
ures shall include structural measures, 
such as the use of electronic health records 
and electronic prescribing technology. 
‘‘(ii) PROPOSED SET OF MEASURES.— 
Not later than August 15, 2007, the Sec-
retary shall publish in the Federal Register 
a proposed set of quality measures that the 
Secretary determines are described in 
clause (i) and would be appropriate for eli-
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123 
gible professionals to use to submit data to 
the Secretary in 2008. The Secretary shall 
provide for a period of public comment on 
such set of measures. 
‘‘(iii) FINAL SET OF MEASURES.—Not 
later than November 15, 2007, the Sec-
retary shall publish in the Federal Register 
a final set of quality measures that the 
Secretary determines are described in 
clause (i) and would be appropriate for eli-
gible professionals to use to submit data to 
the Secretary in 2008. 
‘‘(3) COVERED PROFESSIONAL SERVICES AND 
ELIGIBLE PROFESSIONALS DEFINED.—For purposes 
of this subsection: 
‘‘(A) 
COVERED
PROFESSIONAL
SERV-
ICES.—The term ‘covered professional services’ 
means services for which payment is made 
under, or is based on, the fee schedule estab-
lished under this section and which are fur-
nished by an eligible professional. 
‘‘(B) ELIGIBLE PROFESSIONAL.—The term 
‘eligible professional’ means any of the fol-
lowing: 
‘‘(i) A physician. 
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124 
‘‘(ii) A practitioner described in sec-
tion 1842(b)(18)(C). 
‘‘(iii) A physical or occupational ther-
apist or a qualified speech-language pathol-
ogist. 
‘‘(4) USE OF REGISTRY-BASED REPORTING.— 
As part of the publication of proposed and final 
quality measures for 2008 under clauses (ii) and 
(iii) of paragraph (2)(B), the Secretary shall address 
a mechanism whereby an eligible professional may 
provide data on quality measures through an appro-
priate medical registry (such as the Society of Tho-
racic Surgeons National Database), as identified by 
the Secretary. 
‘‘(5) IDENTIFICATION UNITS.—For purposes of 
applying this subsection, the Secretary may identify 
eligible professionals through billing units, which 
may include the use of the Provider Identification 
Number, the unique physician identification number 
(described in section 1833(q)(1)), the taxpayer iden-
tification number, or the National Provider Identi-
fier. For purposes of applying this subsection for 
2007, the Secretary shall use the taxpayer identifica-
tion number as the billing unit. 
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125 
‘‘(6) EDUCATION
AND
OUTREACH.—The Sec-
retary shall provide for education and outreach to el-
igible professionals on the operation of this sub-
section. 
‘‘(7) LIMITATIONS ON REVIEW.—There shall be 
no administrative or judicial review under section 
1869, section 1878, or otherwise, of the development 
and implementation of the reporting system under 
paragraph (1), including identification of quality 
measures under paragraph (2) and the application 
of paragraphs (4) and (5). 
‘‘(8) IMPLEMENTATION.—The Secretary shall 
carry out this subsection acting through the Admin-
istrator of the Centers for Medicare & Medicaid 
Services.’’. 
(c) TRANSITIONAL BONUS INCENTIVE PAYMENTS 
FOR QUALITY REPORTING IN 2007.— 
(1) IN GENERAL.—With respect to covered pro-
fessional services furnished during a reporting period 
(as defined in paragraph (6)(C)) by an eligible pro-
fessional, if— 
(A) there are any quality measures that 
have been established under the physician re-
porting system that are applicable to any such 
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126 
services furnished by such professional for such 
period, and 
(B) the eligible professional satisfactorily 
submits (as determined under paragraph (2)) to 
the Secretary data on such quality measures in 
accordance with such reporting system for such 
reporting period, 
in addition to the amount otherwise paid under part 
B of title XVIII of the Social Security Act, subject 
to paragraph (3), there also shall be paid to the eli-
gible professional (or to an employer or facility in 
the cases described in clause (A) of section 
1842(b)(6) of the Social Security Act (42 U.S.C. 
1395u(b)(6))) from the Federal Supplementary 
Medical Insurance Trust Fund established under 
section 1841 of such Act (42 U.S.C. 1395t) an 
amount equal to 1.5 percent of the Secretary’s esti-
mate (based on claims submitted not later than two 
months after the end of the reporting period) of the 
allowed charges under such part for all such covered 
professional services furnished during the reporting 
period. 
(2) SATISFACTORY
REPORTING
DESCRIBED.— 
For purposes of paragraph (1), an eligible profes-
sional shall be treated as satisfactorily submitting 
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127 
data on quality measures for covered professional 
services for a reporting period if quality measures 
have been reported as follows: 
(A) THREE OR FEWER QUALITY MEASURES 
APPLICABLE.—If there are no more than 3 
quality measures that are provided under the 
physician reporting system and that are appli-
cable to such services of such professional fur-
nished during the period, each such quality 
measure has been reported under such system 
in at least 80 percent of the cases in which 
such measure is reportable under the system. 
(B) FOUR OR MORE QUALITY MEASURES 
APPLICABLE.—If there are 4 or more quality 
measures that are provided under the physician 
reporting system and that are applicable to 
such services of such professional furnished 
during the period, at least 3 such quality meas-
ures have been reported under such system in 
at least 80 percent of the cases in which the re-
spective measure is reportable under the sys-
tem. 
(3) PAYMENT LIMITATION.— 
(A) IN
GENERAL.—In no case shall the 
total payment made under this subsection to an 
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128 
eligible professional (or to an employer or facil-
ity in the cases described in clause (A) of sec-
tion 1842(b)(6) of the Social Security Act) ex-
ceed the product of— 
(i) the total number of quality meas-
ures for which data are submitted under 
the physician reporting system for covered 
professional services of such professional 
that are furnished during the reporting pe-
riod; and 
(ii) 300 percent of the average per 
measure payment amount specified in sub-
paragraph (B). 
(B) AVERAGE
PER
MEASURE
PAYMENT 
AMOUNT SPECIFIED.—The average per measure 
payment amount specified in this subparagraph 
is an amount, estimated by the Secretary 
(based on claims submitted not later than two 
months after the end of the reporting period), 
equal to— 
(i) the total of the amount of allowed 
charges under part B of title XVIII of the 
Social Security Act for all covered profes-
sional services furnished during the report-
ing period on claims for which quality 
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129 
measures are reported under the physician 
reporting system; divided by 
(ii) the total number of quality meas-
ures for which data are reported under 
such system for covered professional serv-
ices furnished during the reporting period. 
(4) FORM OF PAYMENT.—The payment under 
this subsection shall be in the form of a single con-
solidated payment. 
(5) APPLICATION.— 
(A) 
PHYSICIAN
REPORTING
SYSTEM 
RULES.—Paragraphs (5), (6), and (8) of sec-
tion 1848(k) of the Social Security Act, as 
added by subsection (b), shall apply for pur-
poses of this subsection in the same manner as 
they apply for purposes of such section. 
(B) COORDINATION WITH OTHER BONUS 
PAYMENTS.—The provisions of this subsection 
shall not be taken into account in applying sub-
sections (m) and (u) of section 1833 of the So-
cial Security Act (42 U.S.C. 1395l) and any 
payment under such subsections shall not be 
taken into account in computing allowable 
charges under this subsection. 
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130 
(C) IMPLEMENTATION.—Notwithstanding 
any other provision of law, the Secretary may 
implement by program instruction or otherwise 
this subsection. 
(D) VALIDATION.— 
(i) IN GENERAL.—Subject to the suc-
ceeding provisions of this subparagraph, 
for purposes of determining whether a 
measure is applicable to the covered pro-
fessional services of an eligible professional 
under paragraph (2), the Secretary shall 
presume that if an eligible professional 
submits data for a measure, such measure 
is applicable to such professional. 
(ii) METHOD.—The Secretary shall 
validate (by sampling or other means as 
the Secretary determines to be appro-
priate) whether measures applicable to cov-
ered professional services of an eligible 
professional have been reported. 
(iii) DENIAL
OF
PAYMENT
AUTHOR-
ITY.—If the Secretary determines that an 
eligible professional has not reported meas-
ures applicable to covered professional 
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131 
services of such professional, the Secretary 
shall not pay the bonus incentive payment. 
(E) LIMITATIONS ON REVIEW.— 
(i) IN GENERAL.—There shall be no 
administrative or judicial review under sec-
tion 1869 or 1878 of the Social Security 
Act or otherwise of— 
(I) the determination of measures 
applicable to services furnished by eli-
gible professionals under this sub-
section; 
(II) the determination of satisfac-
tory reporting under paragraph (2); 
(III) the determination of the 
payment limitation under paragraph 
(3); and 
(IV) the determination of the 
bonus incentive payment under this 
subsection. 
(ii) 
TREATMENT
OF
DETERMINA-
TIONS.—A determination under this sub-
section shall not be treated as a determina-
tion for purposes of section 1869 of the 
Social Security Act. 
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132 
(6) DEFINITIONS.—For purposes of this sub-
section: 
(A) ELIGIBLE
PROFESSIONAL; COVERED 
PROFESSIONAL SERVICES.—The terms ‘‘eligible 
professional’’ and ‘‘covered professional serv-
ices’’ have the meanings given such terms in 
section 1848(k)(3) of the Social Security Act, 
as added by subsection (b). 
(B) PHYSICIAN REPORTING SYSTEM.—The 
term ‘‘physician reporting system’’ means the 
system established under section 1848(k) of the 
Social Security Act, as added by subsection (b). 
(C) REPORTING PERIOD.—The term ‘‘re-
porting period’’ means the period beginning on 
July 1, 2007, and ending on December 31, 
2007. 
(D) SECRETARY.—The term ‘‘Secretary’’ 
means the Secretary of Health and Human 
Services. 
(d) PHYSICIAN ASSISTANCE AND QUALITY INITIA-
TIVE FUND.—Section 1848 of the Social Security Act, as 
amended by subsection (b), is further amended by adding 
at the end the following new subsection: 
‘‘(l) PHYSICIAN ASSISTANCE AND QUALITY INITIA-
TIVE FUND.— 
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133 
‘‘(1) ESTABLISHMENT.—The Secretary shall es-
tablish under this subsection a Physician Assistance 
and Quality Initiative Fund (in this subsection re-
ferred to as the ‘Fund’) which shall be available to 
the Secretary for physician payment and quality im-
provement initiatives, which may include application 
of an adjustment to the update of the conversion 
factor under subsection (d). 
‘‘(2) FUNDING.— 
‘‘(A) AMOUNT AVAILABLE.—There shall be 
available to the Fund for expenditures an 
amount equal to $1,350,000,000. 
‘‘(B) TIMELY OBLIGATION OF ALL AVAIL-
ABLE FUNDS FOR SERVICES FURNISHED DUR-
ING 2008.—The Secretary shall provide for ex-
penditures from the Fund in a manner designed 
to provide (to the maximum extent feasible) for 
the obligation of the entire amount specified in 
subparagraph (A) for payment with respect to 
physicians’ services furnished during 2008. 
‘‘(C) PAYMENT FROM TRUST FUND.—The 
amount specified in subparagraph (A) shall be 
available to the Fund, as expenditures are made 
from the Fund, from the Federal Supple-
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