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‘‘(A) any United States citizen who relin-
quishes citizenship, and
‘‘(B) any long-term resident of the United
States who—
‘‘(i) ceases to be a lawful permanent
resident of the United States (within the
meaning of section 7701(b)(6)), or
‘‘(ii) commences to be treated as a resi-
dent of a foreign country under the provi-
sions of a tax treaty between the United
States and the foreign country and who
does not waive the benefits of such treaty
applicable to residents of the foreign coun-
try.
‘‘(2) EXPATRIATION DATE.—The term ‘expatria-
tion date’ means—
‘‘(A) the date an individual relinquishes
United States citizenship, or
‘‘(B) in the case of a long-term resident of
the United States, the date of the event described
in clause (i) or (ii) of paragraph (1)(B).
‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A cit-
izen shall be treated as relinquishing United States
citizenship on the earliest of—
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‘‘(A) the date the individual renounces such
individual’s United States nationality before a
diplomatic or consular officer of the United
States pursuant to paragraph (5) of section
349(a) of the Immigration and Nationality Act
(8 U.S.C. 1481(a)(5)),
‘‘(B) the date the individual furnishes to the
United States Department of State a signed
statement of voluntary relinquishment of United
States nationality confirming the performance of
an act of expatriation specified in paragraph
(1), (2), (3), or (4) of section 349(a) of the Im-
migration and Nationality Act (8 U.S.C.
1481(a)(1)–(4)),
‘‘(C) the date the United States Department
of State issues to the individual a certificate of
loss of nationality, or
‘‘(D) the date a court of the United States
cancels a naturalized citizen’s certificate of natu-
ralization.
Subparagraph (A) or (B) shall not apply to any in-
dividual unless the renunciation or voluntary relin-
quishment is subsequently approved by the issuance to
the individual of a certificate of loss of nationality by
the United States Department of State.
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‘‘(4) LONG-TERM
RESIDENT.—The term ‘long-
term resident’ has the meaning given to such term by
section 877(e)(2).
‘‘(f) SPECIAL RULES APPLICABLE TO BENEFICIARIES’
INTERESTS IN TRUST.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if an individual is determined under para-
graph (3) to hold an interest in a trust on the day
before the expatriation date—
‘‘(A) the individual shall not be treated as
having sold such interest,
‘‘(B) such interest shall be treated as a sep-
arate share in the trust, and
‘‘(C)(i) such separate share shall be treated
as a separate trust consisting of the assets allo-
cable to such share,
‘‘(ii) the separate trust shall be treated as
having sold its assets on the day before the expa-
triation date for their fair market value and as
having distributed all of its assets to the indi-
vidual as of such time, and
‘‘(iii) the individual shall be treated as hav-
ing recontributed the assets to the separate trust.
Subsection (a)(2) shall apply to any income, gain, or
loss of the individual arising from a distribution de-
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scribed in subparagraph (C)(ii). In determining the
amount of such distribution, proper adjustments shall
be made for liabilities of the trust allocable to an in-
dividual’s share in the trust.
‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI-
FIED TRUSTS.—
‘‘(A) IN GENERAL.—If the trust interest de-
scribed in paragraph (1) is an interest in a
qualified trust—
‘‘(i) paragraph (1) and subsection (a)
shall not apply, and
‘‘(ii) in addition to any other tax im-
posed by this title, there is hereby imposed
on each distribution with respect to such in-
terest a tax in the amount determined
under subparagraph (B).
‘‘(B) AMOUNT OF TAX.—The amount of tax
under subparagraph (A)(ii) shall be equal to the
lesser of—
‘‘(i) the highest rate of tax imposed by
section 1(e) for the taxable year which in-
cludes the day before the expatriation date,
multiplied by the amount of the distribu-
tion, or
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‘‘(ii) the balance in the deferred tax ac-
count immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th
day preceding the distribution.
‘‘(C) DEFERRED TAX ACCOUNT.—For pur-
poses of subparagraph (B)(ii)—
‘‘(i) OPENING BALANCE.—The opening
balance in a deferred tax account with re-
spect to any trust interest is an amount
equal to the tax which would have been im-
posed on the allocable expatriation gain
with respect to the trust interest if such
gain had been included in gross income
under subsection (a).
‘‘(ii) INCREASE
FOR
INTEREST.—The
balance in the deferred tax account shall be
increased by the amount of interest deter-
mined (on the balance in the account at the
time the interest accrues), for periods after
the 90th day after the expatriation date, by
using the rates and method applicable
under section 6621 for underpayments of
tax for such periods, except that section
6621(a)(2) shall be applied by substituting
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‘5 percentage points’ for ‘3 percentage
points’ in subparagraph (B) thereof.
‘‘(iii) DECREASE
FOR
TAXES
PRE-
VIOUSLY PAID.—The balance in the tax de-
ferred account shall be reduced—
‘‘(I) by the amount of taxes im-
posed by subparagraph (A) on any dis-
tribution to the person holding the
trust interest, and
‘‘(II) in the case of a person hold-
ing a nonvested interest, to the extent
provided in regulations, by the amount
of taxes imposed by subparagraph (A)
on distributions from the trust with re-
spect to nonvested interests not held by
such person.
‘‘(D) ALLOCABLE EXPATRIATION GAIN.—For
purposes of this paragraph, the allocable expa-
triation gain with respect to any beneficiary’s
interest in a trust is the amount of gain which
would be allocable to such beneficiary’s vested
and nonvested interests in the trust if the bene-
ficiary held directly all assets allocable to such
interests.
‘‘(E) TAX DEDUCTED AND WITHHELD.—
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‘‘(i) IN GENERAL.—The tax imposed by
subparagraph (A)(ii) shall be deducted and
withheld by the trustees from the distribu-
tion to which it relates.
‘‘(ii) EXCEPTION WHERE FAILURE TO
WAIVE TREATY RIGHTS.—If an amount may
not be deducted and withheld under clause
(i) by reason of the distributee failing to
waive any treaty right with respect to such
distribution—
‘‘(I) the tax imposed by subpara-
graph (A)(ii) shall be imposed on the
trust and each trustee shall be person-
ally liable for the amount of such tax,
and
‘‘(II) any other beneficiary of the
trust shall be entitled to recover from
the distributee the amount of such tax
imposed on the other beneficiary.
‘‘(F) DISPOSITION.—If a trust ceases to be
a qualified trust at any time, a covered expa-
triate disposes of an interest in a qualified trust,
or a covered expatriate holding an interest in a
qualified trust dies, then, in lieu of the tax im-
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posed by subparagraph (A)(ii), there is hereby
imposed a tax equal to the lesser of—
‘‘(i) the tax determined under para-
graph (1) as if the day before the expatria-
tion date were the date of such cessation,
disposition, or death, whichever is applica-
ble, or
‘‘(ii) the balance in the tax deferred ac-
count immediately before such date.
Such tax shall be imposed on the trust and each
trustee shall be personally liable for the amount
of such tax and any other beneficiary of the trust
shall be entitled to recover from the covered expa-
triate or the estate the amount of such tax im-
posed on the other beneficiary.
‘‘(G) DEFINITIONS AND SPECIAL RULES.—
For purposes of this paragraph—
‘‘(i) QUALIFIED
TRUST.—The term
‘qualified trust’ means a trust which is de-
scribed in section 7701(a)(30)(E).
‘‘(ii) VESTED
INTEREST.—The term
‘vested interest’ means any interest which,
as of the day before the expatriation date, is
vested in the beneficiary.
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‘‘(iii) 
NONVESTED
INTEREST.—The
term ‘nonvested interest’ means, with re-
spect to any beneficiary, any interest in a
trust which is not a vested interest. Such
interest shall be determined by assuming the
maximum exercise of discretion in favor of
the beneficiary and the occurrence of all
contingencies in favor of the beneficiary.
‘‘(iv) ADJUSTMENTS.—The Secretary
may provide for such adjustments to the
bases of assets in a trust or a deferred tax
account, and the timing of such adjust-
ments, in order to ensure that gain is taxed
only once.
‘‘(v) COORDINATION WITH RETIREMENT
PLAN
RULES.—This subsection shall not
apply to an interest in a trust which is
part of a retirement plan to which sub-
section (d)(2) applies.
‘‘(3) DETERMINATION OF BENEFICIARIES’ INTER-
EST IN TRUST.—
‘‘(A) DETERMINATIONS UNDER PARAGRAPH
(1).—For purposes of paragraph (1), a bene-
ficiary’s interest in a trust shall be based upon
all relevant facts and circumstances, including
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the terms of the trust instrument and any letter
of wishes or similar document, historical pat-
terns of trust distributions, and the existence of
and functions performed by a trust protector or
any similar adviser.
‘‘(B) OTHER DETERMINATIONS.—For pur-
poses of this section—
‘‘(i) CONSTRUCTIVE OWNERSHIP.—If a
beneficiary of a trust is a corporation, part-
nership, trust, or estate, the shareholders,
partners, or beneficiaries shall be deemed to
be the trust beneficiaries for purposes of this
section.
‘‘(ii) TAXPAYER RETURN POSITION.—A
taxpayer shall clearly indicate on its in-
come tax return—
‘‘(I) the methodology used to de-
termine that taxpayer’s trust interest
under this section, and
‘‘(II) if the taxpayer knows (or
has reason to know) that any other
beneficiary of such trust is using a dif-
ferent methodology to determine such
beneficiary’s trust interest under this
section.
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‘‘(g) TERMINATION OF DEFERRALS, ETC.—In the case
of any covered expatriate, notwithstanding any other provi-
sion of this title—
‘‘(1) any period during which recognition of in-
come or gain is deferred shall terminate on the day
before the expatriation date, and
‘‘(2) any extension of time for payment of tax
shall cease to apply on the day before the expatriation
date and the unpaid portion of such tax shall be due
and payable at the time and in the manner pre-
scribed by the Secretary.
‘‘(h) IMPOSITION OF TENTATIVE TAX.—
‘‘(1) IN GENERAL.—If an individual is required
to include any amount in gross income under sub-
section (a) for any taxable year, there is hereby im-
posed, immediately before the expatriation date, a tax
in an amount equal to the amount of tax which
would be imposed if the taxable year were a short tax-
able year ending on the expatriation date.
‘‘(2) DUE DATE.—The due date for any tax im-
posed by paragraph (1) shall be the 90th day after the
expatriation date.
‘‘(3) TREATMENT OF TAX.—Any tax paid under
paragraph (1) shall be treated as a payment of the
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tax imposed by this chapter for the taxable year to
which subsection (a) applies.
‘‘(4) DEFERRAL OF TAX.—The provisions of sub-
section (b) shall apply to the tax imposed by this sub-
section to the extent attributable to gain includible in
gross income by reason of this section.
‘‘(i) SPECIAL LIENS FOR DEFERRED TAX AMOUNTS.—
‘‘(1) IMPOSITION OF LIEN.—
‘‘(A) IN GENERAL.—If a covered expatriate
makes an election under subsection (a)(4) or (b)
which results in the deferral of any tax imposed
by reason of subsection (a), the deferred amount
(including any interest, additional amount, ad-
dition to tax, assessable penalty, and costs at-
tributable to the deferred amount) shall be a lien
in favor of the United States on all property of
the expatriate located in the United States (with-
out regard to whether this section applies to the
property).
‘‘(B) DEFERRED AMOUNT.—For purposes of
this subsection, the deferred amount is the
amount of the increase in the covered expatri-
ate’s income tax which, but for the election under
subsection (a)(4) or (b), would have occurred by
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reason of this section for the taxable year includ-
ing the expatriation date.
‘‘(2) PERIOD OF LIEN.—The lien imposed by this
subsection shall arise on the expatriation date and
continue until—
‘‘(A) the liability for tax by reason of this
section is satisfied or has become unenforceable
by reason of lapse of time, or
‘‘(B) it is established to the satisfaction of
the Secretary that no further tax liability may
arise by reason of this section.
‘‘(3) CERTAIN RULES APPLY.—The rules set forth
in paragraphs (1), (3), and (4) of section 6324A(d)
shall apply with respect to the lien imposed by this
subsection as if it were a lien imposed by section
6324A.
‘‘(j) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(b) INCLUSION IN INCOME OF GIFTS AND BEQUESTS
RECEIVED BY UNITED STATES CITIZENS AND RESIDENTS
FROM EXPATRIATES.—Section 102 (relating to gifts, etc.
not included in gross income) is amended by adding at the
end the following new subsection:
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‘‘(d) GIFTS AND INHERITANCES FROM COVERED EX-
PATRIATES.—
‘‘(1) IN GENERAL.—Subsection (a) shall not ex-
clude from gross income the value of any property ac-
quired by gift, bequest, devise, or inheritance from a
covered expatriate after the expatriation date. For
purposes of this subsection, any term used in this sub-
section which is also used in section 877A shall have
the same meaning as when used in section 877A.
‘‘(2) EXCEPTIONS FOR TRANSFERS OTHERWISE
SUBJECT TO ESTATE OR GIFT TAX.—Paragraph (1)
shall not apply to any property if either—
‘‘(A) the gift, bequest, devise, or inheritance
is—
‘‘(i) shown on a timely filed return of
tax imposed by chapter 12 as a taxable gift
by the covered expatriate, or
‘‘(ii) included in the gross estate of the
covered expatriate for purposes of chapter
11 and shown on a timely filed return of
tax imposed by chapter 11 of the estate of
the covered expatriate, or
‘‘(B) no such return was timely filed but no
such return would have been required to be filed
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even if the covered expatriate were a citizen or
long-term resident of the United States.’’.
(c) DEFINITION OF TERMINATION OF UNITED STATES
CITIZENSHIP.—Section 7701(a) is amended by adding at
the end the following new paragraph:
‘‘(49) TERMINATION OF UNITED STATES CITIZEN-
SHIP.—
‘‘(A) IN GENERAL.—An individual shall not
cease to be treated as a United States citizen be-
fore the date on which the individual’s citizen-
ship is treated as relinquished under section
877A(e)(3).
‘‘(B) DUAL
CITIZENS.—Under regulations
prescribed by the Secretary, subparagraph (A)
shall not apply to an individual who became at
birth a citizen of the United States and a citizen
of another country.’’.
(d) INELIGIBILITY
FOR
VISA
OR
ADMISSION
TO
UNITED STATES.—
(1) IN GENERAL.—Section 212(a)(10)(E) of the
Immigration 
and 
Nationality 
Act 
(8 
U.S.C.
1182(a)(10)(E)) is amended to read as follows:
‘‘(E) FORMER
CITIZENS
NOT
IN
COMPLI-
ANCE
WITH
EXPATRIATION
REVENUE
PROVI-
SIONS.—Any alien who is a former citizen of the
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United States who relinquishes United States
citizenship (within the meaning of section
877A(e)(3) of the Internal Revenue Code of 1986)
and who is not in compliance with section 877A
of such Code (relating to expatriation).’’.
(2) AVAILABILITY OF INFORMATION.—
(A) IN GENERAL.—Section 6103(l) (relating
to disclosure of returns and return information
for purposes other than tax administration) is
amended by adding at the end the following new
paragraph:
‘‘(21) DISCLOSURE TO DENY VISA OR ADMISSION
TO CERTAIN EXPATRIATES.—Upon written request of
the Attorney General or the Attorney General’s dele-
gate, the Secretary shall disclose whether an indi-
vidual is in compliance with section 877A (and if not
in compliance, any items of noncompliance) to offi-
cers and employees of the Federal agency responsible
for administering section 212(a)(10)(E) of the Immi-
gration and Nationality Act solely for the purpose of,
and to the extent necessary in, administering such
section 212(a)(10)(E).’’.
(B) SAFEGUARDS.—Section 6103(p)(4) (re-
lating to safeguards) is amended by striking ‘‘or
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(20)’’ each place it appears and inserting ‘‘(20),
or (21)’’.
(3) EFFECTIVE DATES.—The amendments made
by this subsection shall apply to individuals who re-
linquish United States citizenship on or after the date
of the enactment of this Act.
(e) CONFORMING AMENDMENTS.—
(1) Section 877 is amended by adding at the end
the following new subsection:
‘‘(h) APPLICATION.—This section shall not apply to an
expatriate (as defined in section 877A(e)) whose expatria-
tion date (as so defined) occurs on or after the date of the
enactment of the Safe, Accountable, Flexible, and Efficient
Transportation Equity Act of 2005.’’.
(2) Section 2107 is amended by adding at the
end the following new subsection:
‘‘(f) APPLICATION.—This section shall not apply to
any expatriate subject to section 877A.’’.
(3) Section 2501(a)(3) is amended by adding at
the end the following new subparagraph:
‘‘(C) APPLICATION.—This paragraph shall
not apply to any expatriate subject to section
877A.’’.
(f) CLERICAL AMENDMENT.—The table of sections for
subpart A of part II of subchapter N of chapter 1 is amend-
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ed by inserting after the item relating to section 877 the
following new item:
‘‘Sec. 877A. Tax responsibilities of expatriation.’’.
(g) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in this
subsection, the amendments made by this section shall
apply to expatriates (within the meaning of section
877A(e) of the Internal Revenue Code of 1986, as
added by this section) whose expatriation date (as so
defined) occurs on or after the date of the enactment
of this Act.
(2) GIFTS AND BEQUESTS.—Section 102(d) of
the Internal Revenue Code of 1986 (as added by sub-
section (b)) shall apply to gifts and bequests received
on or after the date of the enactment of this Act, from
an individual or the estate of an individual whose ex-
patriation date (as so defined) occurs after such date.
(3) DUE DATE FOR TENTATIVE TAX.—The due
date under section 877A(h)(2) of the Internal Revenue
Code of 1986, as added by this section, shall in no
event occur before the 90th day after the date of the
enactment of this Act.
SEC. 5513. DISALLOWANCE OF DEDUCTION FOR PUNITIVE
DAMAGES.
(a) DISALLOWANCE OF DEDUCTION.—
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(1) IN
GENERAL.—Section 162(g) (relating to
treble damage payments under the antitrust laws) is
amended—
(A) by redesignating paragraphs (1) and
(2) as subparagraphs (A) and (B), respectively,
(B) by striking ‘‘If’’ and inserting:
‘‘(1) TREBLE DAMAGES.—If’’, and
(C) by adding at the end the following new
paragraph:
‘‘(2) PUNITIVE DAMAGES.—No deduction shall be
allowed under this chapter for any amount paid or
incurred for punitive damages in connection with
any judgment in, or settlement of, any action. This
paragraph shall not apply to punitive damages de-
scribed in section 104(c).’’.
(2) CONFORMING AMENDMENT.—The heading for
section 162(g) is amended by inserting ‘‘OR PUNITIVE
DAMAGES’’ after ‘‘LAWS’’.
(b) INCLUSION IN INCOME OF PUNITIVE DAMAGES
PAID BY INSURER OR OTHERWISE.—
(1) IN GENERAL.—Part II of subchapter B of
chapter 1 (relating to items specifically included in
gross income) is amended by adding at the end the
following new section:
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‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR-
ANCE OR OTHERWISE.
‘‘Gross income shall include any amount paid to or
on behalf of a taxpayer as insurance or otherwise by reason
of the taxpayer’s liability (or agreement) to pay punitive
damages.’’.
(2) REPORTING REQUIREMENTS.—Section 6041
(relating to information at source) is amended by
adding at the end the following new subsection:
‘‘(f) SECTION TO APPLY TO PUNITIVE DAMAGES COM-
PENSATION.—This section shall apply to payments by a
person to or on behalf of another person as insurance or
otherwise by reason of the other person’s liability (or agree-
ment) to pay punitive damages.’’.
(3) CONFORMING AMENDMENT.—The table of sec-
tions for part II of subchapter B of chapter 1 is
amended by adding at the end the following new item:
‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to damages paid or incurred on or after
the date of the enactment of this Act.
SEC. 5514. APPLICATION OF EARNINGS STRIPPING RULES
TO PARTNERS WHICH ARE C CORPORATIONS.
(a) IN GENERAL.—Section 163(j) (relating to limita-
tion on deduction for interest on certain indebtedness) is
amended by redesignating paragraph (8) as paragraph (9)
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and by inserting after paragraph (7) the following new
paragraph:
‘‘(8) ALLOCATIONS
TO
CERTAIN
CORPORATE
PARTNERS.—If a C corporation is a partner in a
partnership—
‘‘(A) the corporation’s allocable share of in-
debtedness and interest income of the partnership
shall be taken into account in applying this sub-
section to the corporation, and
‘‘(B) if a deduction is not disallowed under
this subsection with respect to any interest ex-
pense of the partnership, this subsection shall be
applied separately in determining whether a de-
duction is allowable to the corporation with re-
spect to the corporation’s allocable share of such
interest expense.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to taxable years beginning on or after
the date of the enactment of this Act.
SEC. 5515. PROHIBITION ON DEFERRAL OF GAIN FROM THE
EXERCISE 
OF 
STOCK 
OPTIONS 
AND 
RE-
STRICTED 
STOCK 
GAINS 
THROUGH 
DE-
FERRED COMPENSATION ARRANGEMENTS.
(a) IN GENERAL.—Section 83 (relating to property
transferred in connection with performance of services) is
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amending by adding at the end the following new sub-
section:
‘‘(i) 
PROHIBITION
ON
ADDITIONAL
DEFERRAL
THROUGH DEFERRED COMPENSATION ARRANGEMENTS.—
If a taxpayer exchanges—
‘‘(1) an option to purchase employer securities—
‘‘(A) to which subsection (a) applies, or
‘‘(B) which is described in subsection (e)(3),
or
‘‘(2) employer securities or any other property
based on employer securities transferred to the tax-
payer,
for a right to receive future payments, then, notwith-
standing any other provision of this title, there shall be in-
cluded in gross income for the taxable year of the exchange
an amount equal to the present value of such right (or such
other amount as the Secretary may by regulations specify).
For purposes of this subsection, the term ‘employer securi-
ties’ includes any security issued by the employer.’’.
(b) CONTROLLED GROUP RULES.—Section 414(t)(2) is
amended by inserting ‘‘83(i),’’ after ‘‘79,’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to any exchange after the date of the
enactment of this Act.
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SEC. 5516. LIMITATION OF EMPLOYER DEDUCTION FOR
CERTAIN ENTERTAINMENT EXPENSES.
(a) IN GENERAL.—Paragraph (2) of section 274(e) (re-
lating to expenses treated as compensation) is amended to
read as follows:
‘‘(2) EXPENSES TREATED AS COMPENSATION.—
Expenses for goods, services, and facilities, to the ex-
tent that the expenses do not exceed the amount of the
expenses which are treated by the taxpayer, with re-
spect to the recipient of the entertainment, amuse-
ment, or recreation, as compensation to an employee
on the taxpayer’s return of tax under this chapter
and as wages to such employee for purposes of chapter
24 (relating to withholding of income tax at source on
wages).’’.
(b) PERSONS NOT EMPLOYEES.—Paragraph (9) of sec-
tion 274(e) is amended by striking ‘‘to the extent that the
expenses are includible in the gross income’’ and inserting
‘‘to the extent that the expenses do not exceed the amount
of the expenses which are includible in the gross income’’.
(c) EFFECTIVE DATE.—The amendment made by this
section shall apply to expenses incurred after the date of
the enactment of this Act.
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SEC. 5517. INCREASE IN PENALTY FOR BAD CHECKS AND
MONEY ORDERS.
(a) IN GENERAL.—Section 6657 (relating to bad
checks) is amended—
(1) by striking ‘‘$750’’ and inserting ‘‘$1,250’’,
and
(2) by striking ‘‘$15’’ and inserting ‘‘$25’’.
(b) EFFECTIVE DATE.—The amendments made by this
section apply to checks or money orders received after the
date of the enactment of this Act.
SEC. 5518. ELIMINATION OF DOUBLE DEDUCTION ON MIN-
ING 
EXPLORATION 
AND 
DEVELOPMENT
COSTS UNDER THE MINIMUM TAX.
(a) IN GENERAL.—Section 57(a)(1) (relating to deple-
tion) is amended by striking ‘‘for the taxable year)’’ and
inserting ‘‘for the taxable year and determined without re-
gard to so much of the basis as is attributable to mining
exploration and development costs described in section 616
or 617 for which a deduction is allowable for any taxable
year under this part).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years beginning after the date
of the enactment this Act.
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PART II—ECONOMIC SUBSTANCE DOCTRINE
SEC. 5521. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE.
(a) IN GENERAL.—Section 7701 is amended by redes-
ignating subsection (o) as subsection (p) and by inserting
after subsection (n) the following new subsection:
‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE; ETC.—
‘‘(1) GENERAL RULES.—
‘‘(A) IN GENERAL.—In any case in which a
court determines that the economic substance
doctrine is relevant for purposes of this title to
a transaction (or series of transactions), such
transaction (or series of transactions) shall have
economic substance only if the requirements of
this paragraph are met.
‘‘(B) 
DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A)—
‘‘(i) IN GENERAL.—A transaction has
economic substance only if—
‘‘(I) the transaction changes in a
meaningful way (apart from Federal
tax effects) the taxpayer’s economic po-
sition, and
‘‘(II) the taxpayer has a substan-
tial nontax purpose for entering into
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such transaction and the transaction is
a reasonable means of accomplishing
such purpose.
In applying subclause (II), a purpose of
achieving a financial accounting benefit
shall not be taken into account in deter-
mining whether a transaction has a sub-
stantial nontax purpose if the origin of such
financial accounting benefit is a reduction
of income tax.
‘‘(ii) SPECIAL RULE WHERE TAXPAYER
RELIES ON PROFIT POTENTIAL.—A trans-
action shall not be treated as having eco-
nomic substance by reason of having a po-
tential for profit unless—
‘‘(I) the present value of the rea-
sonably expected pre-tax profit from
the transaction is substantial in rela-
tion to the present value of the expected
net tax benefits that would be allowed
if the transaction were respected, and
‘‘(II) the reasonably expected pre-
tax profit from the transaction exceeds
a risk-free rate of return.