graph are met if the royalties described in paragraph 
(1)—
‘‘(A) are received by a corporation engaged 
in the active conduct of the trade or business 
of developing, manufacturing, or producing 
computer software, and 
‘‘(B) are attributable to computer software 
which—
‘‘(i) is developed, manufactured, or 
produced by such corporation (or its prede-
cessor) in connection with the trade or 
business described in subparagraph (A), or 
‘‘(ii) is directly related to such trade 
or business. 
‘‘(3) ROYALTIES MUST CONSTITUTE AT LEAST 
50 PERCENT OF INCOME.—The requirements of this 
paragraph are met if the royalties described in para-
graph (1) constitute at least 50 percent of the ordi-
nary gross income of the corporation for the taxable 
year. 
‘‘(4) DEDUCTIONS UNDER SECTIONS 162 AND 
174 RELATING TO ROYALTIES MUST EQUAL OR EX-
CEED 25 PERCENT OF ORDINARY GROSS INCOME.—
‘‘(A) IN GENERAL.—The requirements of 
this paragraph are met if—
‘‘(i) the sum of the deductions allow-
able to the corporation under sections 162, 
174, and 195 for the taxable year which 
are properly allocable to the trade or busi-
ness described in paragraph (2) equals or 
exceeds 25 percent of the ordinary gross 
income of such corporation for such tax-
able year, or 
‘‘(ii) the average of such deductions 
for the 5-taxable year period ending with 
such taxable year equals or exceeds 25 per-
cent of the average ordinary gross income 
of such corporation for such period. 
If a corporation has not been in existence dur-
ing the 5-taxable year period described in clause 
(ii), then the period of existence of such cor-
poration shall be substituted for such 5-taxable 
year period. 
‘‘(B) DEDUCTIONS
ALLOWABLE
UNDER 
SECTION 162.—For purposes of subparagraph 
(A), a deduction shall not be treated as allow-
able under section 162 if it is specifically allow-
able under another section. 
‘‘(C) LIMITATION ON ALLOWABLE DEDUC-
TIONS.—For purposes of subparagraph (A), no
deduction shall be taken into account with re-
spect to compensation for personal services ren-
dered by the 5 individual shareholders holding 
the largest percentage (by value) of the out-
standing stock of the corporation. For purposes 
of the preceding sentence individuals holding 
less than 5 percent (by value) of the stock of 
such corporation shall not be taken into ac-
count.’’
(16) Section 556(b)(1) is amended by striking 
‘‘, but not including’’ and all that follows and insert-
ing a period. 
(17) Section 561(a) is amended by striking 
paragraph (3), by inserting ‘‘and’’ at the end of 
paragraph (1), and by striking ‘‘, and’’ at the end 
of paragraph (2) and inserting a period. 
(18) Section 562(b) is amended to read as fol-
lows: 
‘‘(b) DISTRIBUTIONS IN LIQUIDATION.—Except in 
the case of a foreign personal holding company described 
in section 552—
‘‘(1) in the case of amounts distributed in liq-
uidation, the part of such distribution which is prop-
erly chargeable to earnings and profits accumulated 
after February 28, 1913, shall be treated as a divi-
dend for purposes of computing the dividends paid 
deduction, and 
‘‘(2) in the case of a complete liquidation occur-
ring within 24 months after the adoption of a plan 
of liquidation, any distribution within such period 
pursuant to such plan shall, to the extent of the 
earnings and profits (computed without regard to 
capital losses) of the corporation for the taxable year 
in which such distribution is made, be treated as a 
dividend for purposes of computing the dividends 
paid deduction. 
For purposes of paragraph (1), a liquidation includes a 
redemption of stock to which section 302 applies. Except 
to the extent provided in regulations, the preceding sen-
tence shall not apply in the case of any mere holding or 
investment company which is not a regulated investment 
company.’’
(19) Section 563 is amended by striking sub-
sections (a) and (b), by redesignating subsections (c) 
and (d) as subsections (a) and (b), and by striking 
‘‘, (b), or (c)’’ in subsection (b) (as so redesignated). 
(20) Section 564 is hereby repealed. 
(21) Section 631(c) is amended by striking the 
next to the last sentence and inserting the following: 
‘‘This subsection shall have no application for pur-
poses of applying subchapter G (relating to corpora-
tions used to avoid income tax on shareholders).’’. 
(22) Section 852(b)(1) is amended by striking 
‘‘which is a personal holding company (as defined in 
section 542) or’’. 
(23)(A) Section 856(h)(1) is amended to read 
as follows: 
‘‘(1) IN GENERAL.—For purposes of subsection 
(a)(6), a corporation, trust, or association is closely 
held if the stock ownership requirement of section 
465(a)(3) is met.’’. 
(B) Section 856(h)(3)(A)(i) is amended by 
striking ‘‘section 542(a)(2)’’ and inserting ‘‘section 
465(a)(3)’’.
(C) Paragraph (3) of section 856(h) is amended 
by striking subparagraph (B) and by redesignating 
subparagraphs (C) and (D) as subparagraphs (B) 
and (C), respectively. 
(D) Subparagraph (C) of section 856(h)(3), as 
redesignated by the preceding subparagraph, is 
amended by striking ‘‘subparagraph (C)’’ and insert-
ing ‘‘subparagraph (B)’’. 
(24) The last sentence of section 882(c)(2) is 
amended to read as follows:
‘‘The preceding sentence shall not be construed to 
deny the credit provided by section 33 for tax with-
held at source or the credit provided by section 34 
for certain uses of gasoline.’’. 
(25) Section 936(a)(3) is amended by striking 
subparagraphs (B) and (C), by inserting ‘‘or’’ at the 
end of subparagraph (A), and by redesignating sub-
paragraph (D) as subparagraph (B). 
(26) Section 936 is amended by striking sub-
section (g). 
(27) Section 992(d) is amended by striking 
paragraph (2) and by redesignating paragraphs (3), 
(4), (5), (6), and (7) as paragraphs (2), (3), (4), 
(5), and (6), respectively. 
(28) Section 992 is amended by striking sub-
section (e). 
(29) Section 1202(e)(8) is amended by striking 
‘‘section 
543(d)(1)’’ 
and 
inserting 
‘‘section 
553(c)(1)’’. 
(30) Section 1298(b) is amended by striking 
paragraph (8) and redesignating paragraph (9) as 
paragraph (8). 
(31) Section 1504(c)(2)(B) is amended by add-
ing ‘‘and’’ at the end of clause (i), by striking clause 
(ii), and by redesignating clause (iii) as clause (ii).
(32)(A) Section 1551(a) is amended by striking 
‘‘or the accumulated earnings credit’’ and all that 
follows and inserting ‘‘unless such transferee cor-
poration shall establish by the clear preponderance 
of the evidence that the securing of such benefits 
was not a major purpose of such transfer.’’. 
(B) The section heading for section 1551 is 
amended by striking ‘‘AND ACCUMULATED EARN-
INGS CREDIT’’. 
(C) The item relating to section 1551 in the 
table of sections for part I of subchapter B of chap-
ter 6 is amended by striking ‘‘and accumulated 
earnings credit’’. 
(33)(A) Section 1561(a) is amended—
(i) by striking paragraph (2), 
(ii) by redesignating paragraphs (3) and 
(4) as paragraphs (2) and (3), 
(iii) by striking ‘‘paragraph (3)’’ each 
place it appears and inserting ‘‘paragraph (2)’’, 
(iv) by striking ‘‘paragraph (4)’’ and in-
serting ‘‘paragraph (3)’’, and 
(v) by striking the third sentence. 
(B) Section 1561(b) is amended to read as fol-
lows:
‘‘(b) CERTAIN SHORT TAXABLE YEARS.—If a cor-
poration has a short taxable year which does not include 
a December 31 and is a component member of a controlled 
group of corporations with respect to such taxable year, 
then for purposes of this subtitle, the amount in each tax-
able income bracket in the tax table in section 11(b) for 
such corporation for such taxable year shall be the amount 
specified in subsection (a)(1), divided by the number of 
corporations which are component members of such group 
on the last day of such taxable year. For purposes of the 
preceding sentence, section 1563(b) shall be applied as if 
such last day were substituted for December 31.’’. 
(34) Section 2057(e)(2)(C) is amended by add-
ing at the end the following new sentence: ‘‘Ref-
erences to sections 542 and 543 in the preceding 
sentence shall be treated as references to such sec-
tions as in effect on the day before their repeal.’’
(35) Sections 6422 is amended by striking 
paragraph (3) and by redesignating paragraphs (4) 
through (12) and paragraphs (3) through (11), re-
spectively. 
(36) Section 6501 is amended by striking sub-
section (f). 
(37) Section 6503(k) of such Code is amended 
by striking paragraph (1) and by redesignating
paragraphs (2) through (5) as paragraphs (1) 
through (4), respectively. 
(38) Section 6515 is amended by striking para-
graph (1) and by redesignating paragraphs (2) 
through (6) as paragraphs (1) through (5), respec-
tively. 
(39) Section 6601(b) is amended by striking 
paragraph (4) and redesignating paragraph (5) as 
paragraph (4). 
(40) Subsections (d)(1)(B) and (e)(2) of section 
6662 of such Code are each amended by striking ‘‘or 
a personal holding company (as defined in section 
542)’’. 
(41) Section 6683 is hereby repealed. 
(42) Section 7518(c)(1) is amended by insert-
ing ‘‘and’’ at the end of subparagraph (C), by strik-
ing ‘‘, and’’ at the end of subparagraph (D) and in-
serting a period, and by striking subparagraph (E). 
(c) CLERICAL AMENDMENTS.—
(1) The table of parts for subchapter G of 
chapter 1 of such Code is amended by striking the 
items relating to parts I and II. 
(2) The table of sections for part IV of such 
subchapter G is amended by striking the item relat-
ing to section 564.
(3) The table of sections for part I of sub-
chapter B of chapter 68 of such Code is amended 
by striking the item relating to section 6683. 
SEC. 207. EFFECTIVE DATES. 
(a) IN GENERAL.—Except as otherwise provided in 
this section, the amendments made by this title shall apply 
to distributions received, and basis allocations made under 
section 282 of the Internal Revenue Code of 1986 (as 
added by this title), after December 31, 2002. 
(b) SPECIAL RULES.—
(1) SECTION
1374
TAX.—In applying the 
amendments made by this title, any tax imposed by 
section 1374 of the Internal Revenue Code of 1986 
for any taxable year beginning before January 1, 
2003, shall not be taken into account. 
(2) SECTION 205(d) AND 206.—The amendments 
made by sections 205(d) and 206 shall apply to tax-
able years beginning after December 31, 2002; ex-
cept that—
(A) section 547 of such Code (as in effect 
before its repeal) shall continue to apply to defi-
ciency dividends (as defined in section 547(d) of 
such Code) relating to taxable years beginning 
before January 1, 2003, and