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‘‘(B) EXCEPTIONS.—Such term shall not 
include— 
‘‘(i) any option to which part II of 
subchapter D of chapter 1 applies, or 
‘‘(ii) any payment or right to payment 
from a plan referred to in section 
280G(b)(6). 
‘‘(4) EXPANDED
AFFILIATED
GROUP.—The 
term ‘expanded affiliated group’ means an affiliated 
group (as defined in section 1504(a) without regard 
to section 1504(b)(3)); except that section 1504(a) 
shall be applied by substituting ‘more than 50 per-
cent’ for ‘at least 80 percent’ each place it appears. 
‘‘(f) SPECIAL RULES.—For purposes of this sec-
tion— 
‘‘(1) CANCELLATION
OF
RESTRICTION.—The 
cancellation of a restriction which by its terms will 
never lapse shall be treated as a grant. 
‘‘(2) PAYMENT OR REIMBURSEMENT OF TAX BY 
CORPORATION TREATED AS SPECIFIED STOCK COM-
PENSATION.—Any payment of the tax imposed by 
this section directly or indirectly by the expatriated 
corporation or by any member of the expanded affili-
ated group which includes such corporation—
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‘‘(A) shall be treated as specified stock 
compensation, and 
‘‘(B) shall not be allowed as a deduction 
under any provision of chapter 1. 
‘‘(3) 
CERTAIN
RESTRICTIONS
IGNORED.— 
Whether there is specified stock compensation, and 
the value thereof, shall be determined without regard 
to any restriction other than a restriction which by 
its terms will never lapse. 
‘‘(4) PROPERTY TRANSFERS.—Any transfer of 
property shall be treated as a payment and any right 
to a transfer of property shall be treated as a right 
to a payment. 
‘‘(5) OTHER
ADMINISTRATIVE
PROVISIONS.— 
For purposes of subtitle F, any tax imposed by this 
section shall be treated as a tax imposed by subtitle 
A. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section.’’. 
(b) DENIAL OF DEDUCTION.— 
(1) IN
GENERAL.—Paragraph (6) of section 
275(a) is amended by inserting ‘‘45,’’ before ‘‘46,’’. 
(2) $1,000,000 LIMIT
ON
DEDUCTIBLE
COM-
PENSATION REDUCED BY PAYMENT OF EXCISE TAX
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ON SPECIFIED STOCK COMPENSATION.—Paragraph 
(4) of section 162(m) is amended by adding at the 
end the following new subparagraph: 
‘‘(G) COORDINATION WITH EXCISE TAX ON 
SPECIFIED STOCK COMPENSATION.—The dollar 
limitation contained in paragraph (1) with re-
spect to any covered employee shall be reduced 
(but not below zero) by the amount of any pay-
ment (with respect to such employee) of the tax 
imposed by section 4985 directly or indirectly 
by the expatriated corporation (as defined in 
such section) or by any member of the ex-
panded affiliated group (as defined in such sec-
tion) which includes such corporation.’’. 
(c) CONFORMING AMENDMENTS.— 
(1) The last sentence of section 3121(v)(2)(A) 
is amended by inserting before the period ‘‘or to any 
specified stock compensation (as defined in section 
4985) on which tax is imposed by section 4985’’. 
(2) The table of chapters for subtitle D is 
amended by inserting after the item relating to 
chapter 44 the following new item: 
‘‘Chapter 45. Provisions relating to expatriated entities.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on March 4, 2003; except that 
periods before such date shall not be taken into account
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in applying the periods in subsections (a) and (e)(1) of 
section 4985 of the Internal Revenue Code of 1986, as 
added by this section. 
SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOR-
EIGN JURISDICTIONS. 
(a) IN GENERAL.—Section 845(a) (relating to alloca-
tion in case of reinsurance agreement involving tax avoid-
ance or evasion) is amended by striking ‘‘source and char-
acter’’ and inserting ‘‘amount, source, or character’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to any risk reinsured after the date 
of the enactment of this Act. 
SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF 
INDIVIDUALS. 
(a) EXPATRIATION TO AVOID TAX.— 
(1) IN
GENERAL.—Subsection (a) of section 
877 (relating to treatment of expatriates) is amend-
ed to read as follows: 
‘‘(a) TREATMENT OF EXPATRIATES.— 
‘‘(1) IN GENERAL.—Every nonresident alien in-
dividual to whom this section applies and who, with-
in the 10-year period immediately preceding the 
close of the taxable year, lost United States citizen-
ship shall be taxable for such taxable year in the 
manner provided in subsection (b) if the tax imposed
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pursuant to such subsection (after any reduction in 
such tax under the last sentence of such subsection) 
exceeds the tax which, without regard to this section, 
is imposed pursuant to section 871. 
‘‘(2) INDIVIDUALS
SUBJECT
TO
THIS
SEC-
TION.—This section shall apply to any individual 
if— 
‘‘(A) the average annual net income tax 
(as defined in section 38(c)(1)) of such indi-
vidual for the period of 5 taxable years ending 
before the date of the loss of United States citi-
zenship is greater than $124,000, 
‘‘(B) the net worth of the individual as of 
such date is $2,000,000 or more, or 
‘‘(C) such individual fails to certify under 
penalty of perjury that he has met the require-
ments of this title for the 5 preceding taxable 
years or fails to submit such evidence of such 
compliance as the Secretary may require. 
In the case of the loss of United States citizenship 
in any calendar year after 2004, such $124,000 
amount shall be increased by an amount equal to 
such dollar amount multiplied by the cost-of-living 
adjustment determined under section 1(f)(3) for 
such calendar year by substituting ‘2003’ for ‘1992’
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in subparagraph (B) thereof. Any increase under the 
preceding sentence shall be rounded to the nearest 
multiple of $1,000.’’. 
(2) REVISION
OF
EXCEPTIONS
FROM
ALTER-
NATIVE TAX.—Subsection (c) of section 877 (relat-
ing to tax avoidance not presumed in certain cases) 
is amended to read as follows: 
‘‘(c) EXCEPTIONS.— 
‘‘(1) IN
GENERAL.—Subparagraphs (A) and 
(B) of subsection (a)(2) shall not apply to an indi-
vidual described in paragraph (2) or (3). 
‘‘(2) DUAL CITIZENS.— 
‘‘(A) IN GENERAL.—An individual is de-
scribed in this paragraph if— 
‘‘(i) the individual became at birth a 
citizen of the United States and a citizen 
of another country and continues to be a 
citizen of such other country, and 
‘‘(ii) the individual has had no sub-
stantial contacts with the United States. 
‘‘(B) SUBSTANTIAL CONTACTS.—An indi-
vidual shall be treated as having no substantial 
contacts with the United States only if the indi-
vidual—
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‘‘(i) was never a resident of the 
United States (as defined in section 
7701(b)), 
‘‘(ii) has never held a United States 
passport, and 
‘‘(iii) was not present in the United 
States for more than 30 days during any 
calendar year which is 1 of the 10 calendar 
years preceding the individual’s loss of 
United States citizenship. 
‘‘(3) CERTAIN MINORS.—An individual is de-
scribed in this paragraph if— 
‘‘(A) the individual became at birth a cit-
izen of the United States, 
‘‘(B) neither parent of such individual was 
a citizen of the United States at the time of 
such birth, 
‘‘(C) the individual’s loss of United States 
citizenship occurs before such individual attains 
age 181⁄2, and 
‘‘(D) the individual was not present in the 
United States for more than 30 days during 
any calendar year which is 1 of the 10 calendar 
years preceding the individual’s loss of United 
States citizenship.’’.
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(3) 
CONFORMING
AMENDMENT.—Section 
2107(a) is amended to read as follows: 
‘‘(a) TREATMENT OF EXPATRIATES.—A tax com-
puted in accordance with the table contained in section 
2001 is hereby imposed on the transfer of the taxable es-
tate, determined as provided in section 2106, of every de-
cedent nonresident not a citizen of the United States if 
the date of death occurs during a taxable year with respect 
to which the decedent is subject to tax under section 
877(b).’’. 
(b) SPECIAL RULES FOR DETERMINING WHEN AN 
INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN 
OR LONG-TERM RESIDENT.—Section 7701 (relating to 
definitions) is amended by redesignating subsection (n) as 
subsection (o) and by inserting after subsection (m) the 
following new subsection: 
‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN 
INDIVIDUAL IS NO LONGER A UNITED STATES CITIZEN 
OR LONG-TERM RESIDENT.—An individual who would 
(but for this subsection) cease to be treated as a citizen 
or resident of the United States shall continue to be treat-
ed as a citizen or resident of the United States, as the 
case may be, until such individual— 
‘‘(1) gives notice of an expatriating act or ter-
mination of residency (with the requisite intent to
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relinquish citizenship or terminate residency) to the 
Secretary of State or the Secretary of Homeland Se-
curity, and 
‘‘(2) provides a statement in accordance with 
section 6039G.’’. 
(c) PHYSICAL PRESENCE IN THE UNITED STATES 
FOR MORE THAN 30 DAYS.—Section 877 (relating to ex-
patriation to avoid tax) is amended by adding at the end 
the following new subsection: 
‘‘(g) PHYSICAL PRESENCE.— 
‘‘(1) IN GENERAL.—This section shall not apply 
to any individual to whom this section would other-
wise apply for any taxable year during the 10-year 
period referred to in subsection (a) in which such in-
dividual is physically present in the United States at 
any time on more than 30 days in the calendar year 
ending in such taxable year, and such individual 
shall be treated for purposes of this title as a citizen 
or resident of the United States, as the case may be, 
for such taxable year. 
‘‘(2) EXCEPTION.— 
‘‘(A) IN GENERAL.—In the case of an indi-
vidual described in any of the following sub-
paragraphs of this paragraph, a day of physical 
presence in the United States shall be dis-
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regarded if the individual is performing services 
in the United States on such day for an em-
ployer. The preceding sentence shall not apply 
if— 
‘‘(i) such employer is related (within 
the meaning of section 267 and 707) to 
such individual, or 
‘‘(ii) such employer fails to meet such 
requirements as the Secretary may pre-
scribe by regulations to prevent the avoid-
ance of the purposes of this paragraph. 
Not more than 30 days during any calendar 
year may be disregarded under this subpara-
graph. 
‘‘(B) INDIVIDUALS WITH TIES TO OTHER 
COUNTRIES.—An individual is described in this 
subparagraph if— 
‘‘(i) the individual becomes (not later 
than the close of a reasonable period after 
loss of United States citizenship or termi-
nation of residency) a citizen or resident of 
the country in which— 
‘‘(I) such individual was born,
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‘‘(II) if such individual is mar-
ried, such individual’s spouse was 
born, or 
‘‘(III) either of such individual’s 
parents were born, and 
‘‘(ii) the individual becomes fully lia-
ble for income tax in such country. 
‘‘(C) MINIMAL PRIOR PHYSICAL PRESENCE 
IN THE UNITED STATES.—An individual is de-
scribed in this subparagraph if, for each year in 
the 10-year period ending on the date of loss of 
United States citizenship or termination of resi-
dency, the individual was physically present in 
the United States for 30 days or less. The rule 
of section 7701(b)(3)(D)(ii) shall apply for pur-
poses of this subparagraph.’’. 
(d) TRANSFERS SUBJECT TO GIFT TAX.— 
(1) IN
GENERAL.—Subsection (a) of section 
2501 (relating to taxable transfers) is amended by 
striking paragraph (4), by redesignating paragraph 
(5) as paragraph (4), and by striking paragraph (3) 
and inserting the following new paragraph: 
‘‘(3) EXCEPTION.— 
‘‘(A) CERTAIN
INDIVIDUALS.—Paragraph 
(2) shall not apply in the case of a donor to
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whom section 877(b) applies for the taxable 
year which includes the date of the transfer. 
‘‘(B) CREDIT FOR FOREIGN GIFT TAXES.— 
The tax imposed by this section solely by reason 
of this paragraph shall be credited with the 
amount of any gift tax actually paid to any for-
eign country in respect of any gift which is tax-
able under this section solely by reason of this 
paragraph.’’. 
(2) TRANSFERS
OF
CERTAIN
STOCK.—Sub-
section (a) of section 2501 is amended by adding at 
the end the following new paragraph: 
‘‘(5) TRANSFERS OF CERTAIN STOCK.— 
‘‘(A) IN GENERAL.—In the case of a trans-
fer of stock in a foreign corporation described 
in subparagraph (B) by a donor to whom sec-
tion 877(b) applies for the taxable year which 
includes the date of the transfer— 
‘‘(i) section 2511(a) shall be applied 
without regard to whether such stock is 
situated within the United States, and 
‘‘(ii) the value of such stock for pur-
poses of this chapter shall be its U.S.-asset 
value determined under subparagraph (C).
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‘‘(B) 
FOREIGN
CORPORATION
DE-
SCRIBED.—A foreign corporation is described in 
this subparagraph with respect to a donor if— 
‘‘(i) the donor owned (within the 
meaning of section 958(a)) at the time of 
such transfer 10 percent or more of the 
total combined voting power of all classes 
of stock entitled to vote of the foreign cor-
poration, and 
‘‘(ii) such donor owned (within the 
meaning of section 958(a)), or is consid-
ered to have owned (by applying the own-
ership rules of section 958(b)), at the time 
of such transfer, more than 50 percent 
of— 
‘‘(I) the total combined voting 
power of all classes of stock entitled 
to vote of such corporation, or 
‘‘(II) the total value of the stock 
of such corporation. 
‘‘(C) U.S.-ASSET VALUE.—For purposes of 
subparagraph (A), the U.S.-asset value of stock 
shall be the amount which bears the same ratio 
to the fair market value of such stock at the 
time of transfer as—
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‘‘(i) the fair market value (at such 
time) of the assets owned by such foreign 
corporation and situated in the United 
States, bears to 
‘‘(ii) the total fair market value (at 
such time) of all assets owned by such for-
eign corporation.’’. 
(e) ENHANCED INFORMATION REPORTING FROM IN-
DIVIDUALS LOSING UNITED STATES CITIZENSHIP.— 
(1) IN
GENERAL.—Subsection (a) of section 
6039G is amended to read as follows: 
‘‘(a) IN GENERAL.—Notwithstanding any other pro-
vision of law, any individual to whom section 877(b) ap-
plies for any taxable year shall provide a statement for 
such taxable year which includes the information described 
in subsection (b).’’. 
(2) INFORMATION
TO
BE
PROVIDED.—Sub-
section (b) of section 6039G is amended to read as 
follows: 
‘‘(b) INFORMATION TO BE PROVIDED.—Information 
required under subsection (a) shall include— 
‘‘(1) the taxpayer’s TIN, 
‘‘(2) the mailing address of such individual’s 
principal foreign residence,
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‘‘(3) the foreign country in which such indi-
vidual is residing, 
‘‘(4) the foreign country of which such indi-
vidual is a citizen, 
‘‘(5) information detailing the income, assets, 
and liabilities of such individual, 
‘‘(6) the number of days during any portion of 
which that the individual was physically present in 
the United States during the taxable year, and 
‘‘(7) such other information as the Secretary 
may prescribe.’’. 
(3) INCREASE IN PENALTY.—Subsection (d) of 
section 6039G is amended to read as follows: 
‘‘(d) PENALTY.—If— 
‘‘(1) an individual is required to file a state-
ment under subsection (a) for any taxable year, and 
‘‘(2) fails to file such a statement with the Sec-
retary on or before the date such statement is re-
quired to be filed or fails to include all the informa-
tion required to be shown on the statement or in-
cludes incorrect information, 
such individual shall pay a penalty of $10,000 unless it 
is shown that such failure is due to reasonable cause and 
not to willful neglect.’’.
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(4) 
CONFORMING
AMENDMENT.—Section 
6039G is amended by striking subsections (c), (f), 
and (g) and by redesignating subsections (d) and (e) 
as subsection (c) and (d), respectively. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to individuals who expatriate after 
June 3, 2004. 
SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISI-
TIONS. 
(a) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 61 is amended by inserting after sec-
tion 6043 the following new section: 
‘‘SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS 
AND ACQUISITIONS. 
‘‘(a) IN GENERAL.—According to the forms or regu-
lations prescribed by the Secretary, the acquiring corpora-
tion in any taxable acquisition shall make a return setting 
forth— 
‘‘(1) a description of the acquisition, 
‘‘(2) the name and address of each shareholder 
of the acquired corporation who is required to recog-
nize gain (if any) as a result of the acquisition, 
‘‘(3) the amount of money and the fair market 
value of other property transferred to each such 
shareholder as part of such acquisition, and
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‘‘(4) such other information as the Secretary 
may prescribe. 
To the extent provided by the Secretary, the requirements 
of this section applicable to the acquiring corporation shall 
be applicable to the acquired corporation and not to the 
acquiring corporation. 
‘‘(b) NOMINEES.—According to the forms or regula-
tions prescribed by the Secretary— 
‘‘(1) REPORTING.—Any person who holds stock 
as a nominee for another person shall furnish in the 
manner prescribed by the Secretary to such other 
person the information provided by the corporation 
under subsection (d). 
‘‘(2) REPORTING TO NOMINEES.—In the case of 
stock held by any person as a nominee, references in 
this section (other than in subsection (c)) to a share-
holder shall be treated as a reference to the nomi-
nee. 
‘‘(c) TAXABLE ACQUISITION.—For purposes of this 
section, the term ‘taxable acquisition’ means any acquisi-
tion by a corporation of stock in or property of another 
corporation if any shareholder of the acquired corporation 
is required to recognize gain (if any) as a result of such 
acquisition.
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‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE-
HOLDERS.—According to the forms or regulations pre-
scribed by the Secretary, every person required to make 
a return under subsection (a) shall furnish to each share-
holder whose name is required to be set forth in such re-
turn a written statement showing— 
‘‘(1) the name, address, and phone number of 
the information contact of the person required to 
make such return, 
‘‘(2) the information required to be shown on 
such return with respect to such shareholder, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
The written statement required under the preceding sen-
tence shall be furnished to the shareholder on or before 
January 31 of the year following the calendar year during 
which the taxable acquisition occurred.’’. 
(b) ASSESSABLE PENALTIES.— 
(1) Subparagraph (B) of section 6724(d)(1) 
(relating to definitions) is amended by redesignating 
clauses (ii) through (xviii) as clauses (iii) through 
(xix), respectively, and by inserting after clause (i) 
the following new clause:
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‘‘(ii) section 6043A(a) (relating to re-
turns relating to taxable mergers and ac-
quisitions),’’. 
(2) Paragraph (2) of section 6724(d) is amend-
ed by redesignating subparagraphs (F) through 
(BB) as subparagraphs (G) through (CC), respec-
tively, and by inserting after subparagraph (E) the 
following new subparagraph: 
‘‘(F) subsections (b) and (d) of section 
6043A (relating to returns relating to taxable 
mergers and acquisitions).’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart B of part III of subchapter A of chapter 61 
is amended by inserting after the item relating to section 
6043 the following new item: 
‘‘Sec. 6043A. Returns relating to taxable mergers and acquisi-
tions.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to acquisitions after the date of 
the enactment of this Act. 
SEC. 606. STUDIES. 
(a) TRANSFER PRICING RULES.—The Secretary of 
the Treasury or the Secretary’s delegate shall conduct a 
study regarding the effectiveness of current transfer pric-
ing rules and compliance efforts in ensuring that cross- 
border transfers and other related-party transactions, par-
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ticularly transactions involving intangible assets, service 
contracts, or leases cannot be used improperly to shift in-
come out of the United States. The study shall include 
a review of the contemporaneous documentation and pen-
alty rules under section 6662 of the Internal Revenue 
Code of 1986, a review of the regulatory and administra-
tive guidance implementing the principles of section 482 
of such Code to transactions involving intangible property 
and services and to cost-sharing arrangements, and an ex-
amination of whether increased disclosure of cross-border 
transactions should be required. The study shall set forth 
specific recommendations to address all abuses identified 
in the study. Not later than June 30, 2005, such Sec-
retary or delegate shall submit to the Congress a report 
of such study. 
(b) INCOME TAX TREATIES.—The Secretary of the 
Treasury or the Secretary’s delegate shall conduct a study 
of United States income tax treaties to identify any inap-
propriate reductions in United States withholding tax that 
provide opportunities for shifting income out of the United 
States, and to evaluate whether existing anti-abuse mecha-
nisms are operating properly. The study shall include spe-
cific recommendations to address all inappropriate uses of 
tax treaties. Not later than June 30, 2005, such Secretary
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or delegate shall submit to the Congress a report of such 
study. 
(c) IMPACT OF CORPORATE EXPATRIATION PROVI-
SIONS.—The Secretary of the Treasury or the Secretary’s 
delegate shall conduct a study of the impact of the provi-
sions of this title on corporate expatriation. The study 
shall include such recommendations as such Secretary or 
delegate may have to improve the impact of such provi-
sions in carrying out the purposes of this title. Not later 
than December 31, 2005, such Secretary or delegate shall 
submit to the Congress a report of such study. 
Subtitle B—Provisions Relating to 
Tax Shelters 
Part I—Taxpayer-Related Provisions 
SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORT-
ABLE TRANSACTIONS. 
(a) IN GENERAL.—Part I of subchapter B of chapter 
68 (relating to assessable penalties) is amended by insert-
ing after section 6707 the following new section: 
‘‘SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORT-
ABLE TRANSACTION INFORMATION WITH RE-
TURN. 
‘‘(a) IMPOSITION
OF PENALTY.—Any person who 
fails to include on any return or statement any informa-
tion with respect to a reportable transaction which is re-
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quired under section 6011 to be included with such return 
or statement shall pay a penalty in the amount determined 
under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the amount of the penalty under sub-
section (a) shall be— 
‘‘(A) $10,000 in the case of a natural per-
son, and 
‘‘(B) $50,000 in any other case. 
‘‘(2) LISTED
TRANSACTION.—The amount of 
the penalty under subsection (a) with respect to a 
listed transaction shall be— 
‘‘(A) $100,000 in the case of a natural 
person, and 
‘‘(B) $200,000 in any other case. 
‘‘(c) DEFINITIONS.—For purposes of this section— 
‘‘(1) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ means any transaction with 
respect to which information is required to be in-
cluded with a return or statement because, as deter-
mined under regulations prescribed under section 
6011, such transaction is of a type which the Sec-
retary determines as having a potential for tax 
avoidance or evasion.
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‘‘(2) LISTED TRANSACTION.—The term ‘listed 
transaction’ means a reportable transaction which is 
the same as, or substantially similar to, a trans-
action specifically identified by the Secretary as a 
tax avoidance transaction for purposes of section 
6011. 
‘‘(d) AUTHORITY TO RESCIND PENALTY.— 
‘‘(1) IN GENERAL.—The Commissioner of In-
ternal Revenue may rescind all or any portion of any 
penalty imposed by this section with respect to any 
violation if— 
‘‘(A) the violation is with respect to a re-
portable transaction other than a listed trans-
action, and 
‘‘(B) rescinding the penalty would promote 
compliance with the requirements of this title 
and effective tax administration. 
‘‘(2) NO
JUDICIAL
APPEAL.—Notwithstanding 
any other provision of law, any determination under 
this subsection may not be reviewed in any judicial 
proceeding. 
‘‘(3) RECORDS.—If a penalty is rescinded under 
paragraph (1), the Commissioner shall place in the 
file in the Office of the Commissioner the opinion of 
the Commissioner or the head of the Office of Tax
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Shelter Analysis with respect to the determination, 
including— 
‘‘(A) a statement of the facts and cir-
cumstances relating to the violation, 
‘‘(B) the reasons for the rescission, and 
‘‘(C) the amount of the penalty rescinded. 
‘‘(e) COORDINATION WITH OTHER PENALTIES.—The 
penalty imposed by this section shall be in addition to any 
other penalty imposed by this title.’’ 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 is amended 
by inserting after the item relating to section 6707 the 
following: 
‘‘Sec. 6707A. Penalty for failure to include reportable transaction 
information with return.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to returns and statements the due 
date for which is after the date of the enactment of this 
Act. 
(d) REPORT.—The Commissioner of Internal Rev-
enue shall annually report to the Committee on Ways and 
Means of the House of Representatives and the Committee 
on Finance of the Senate— 
(1) a summary of the total number and aggre-
gate amount of penalties imposed, and rescinded,
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under section 6707A of the Internal Revenue Code 
of 1986, and 
(2) a description of each penalty rescinded 
under section 6707(c) of such Code and the reasons 
therefor. 
SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED 
TRANSACTIONS, OTHER REPORTABLE TRANS-
ACTIONS HAVING A SIGNIFICANT TAX AVOID-
ANCE PURPOSE, ETC. 
(a) IN GENERAL.—Subchapter A of chapter 68 is 
amended by inserting after section 6662 the following new 
section: 
‘‘SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PEN-
ALTY ON UNDERSTATEMENTS WITH RESPECT 
TO REPORTABLE TRANSACTIONS. 
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has a 
reportable transaction understatement for any taxable 
year, there shall be added to the tax an amount equal to 
20 percent of the amount of such understatement. 
‘‘(b) REPORTABLE
TRANSACTION
UNDERSTATE-
MENT.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘reportable trans-
action understatement’ means the sum of— 
‘‘(A) the product of—
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‘‘(i) the amount of the increase (if 
any) in taxable income which results from 
a difference between the proper tax treat-
ment of an item to which this section ap-
plies and the taxpayer’s treatment of such 
item (as shown on the taxpayer’s return of 
tax), and 
‘‘(ii) the highest rate of tax imposed 
by section 1 (section 11 in the case of a 
taxpayer which is a corporation), and 
‘‘(B) the amount of the decrease (if any) 
in the aggregate amount of credits determined 
under subtitle A which results from a difference 
between the taxpayer’s treatment of an item to 
which this section applies (as shown on the tax-
payer’s return of tax) and the proper tax treat-
ment of such item. 
For purposes of subparagraph (A), any reduction of 
the excess of deductions allowed for the taxable year 
over gross income for such year, and any reduction 
in the amount of capital losses which would (without 
regard to section 1211) be allowed for such year, 
shall be treated as an increase in taxable income.
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‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This 
section shall apply to any item which is attributable 
to— 
‘‘(A) any listed transaction, and 
‘‘(B) any reportable transaction (other 
than a listed transaction) if a significant pur-
pose of such transaction is the avoidance or 
evasion of Federal income tax. 
‘‘(c) HIGHER PENALTY FOR NONDISCLOSED TRANS-
ACTIONS.—Subsection (a) shall be applied by substituting 
‘30 percent’ for ‘20 percent’ with respect to the portion 
of any reportable transaction understatement with respect 
to which the requirement of section 6664(d)(2)(A) is not 
met. 
‘‘(d) DEFINITIONS
OF REPORTABLE
AND LISTED 
TRANSACTIONS.—For purposes of this section, the terms 
‘reportable transaction’ and ‘listed transaction’ have the 
respective meanings given to such terms by section 
6707A(c). 
‘‘(e) SPECIAL RULES.— 
‘‘(1) COORDINATION
WITH
PENALTIES, ETC., 
ON OTHER UNDERSTATEMENTS.—In the case of an 
understatement (as defined in section 6662(d)(2))— 
‘‘(A) the amount of such understatement 
(determined without regard to this paragraph)
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shall be increased by the aggregate amount of 
reportable transaction understatements for pur-
poses of determining whether such understate-
ment is a substantial understatement under 
section 6662(d)(1), and 
‘‘(B) the addition to tax under section 
6662(a) shall apply only to the excess of the 
amount of the substantial understatement (if 
any) after the application of subparagraph (A) 
over the aggregate amount of reportable trans-
action understatements. 
‘‘(2) 
COORDINATION
WITH
OTHER
PEN-
ALTIES.— 
‘‘(A) APPLICATION OF FRAUD PENALTY.— 
References to an underpayment in section 6663 
shall be treated as including references to a re-
portable transaction understatement. 
‘‘(B) NO DOUBLE PENALTY.—This section 
shall not apply to any portion of an understate-
ment on which a penalty is imposed under sec-
tion 6663. 
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any tax treatment included with an 
amendment or supplement to a return of tax be
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taken into account in determining the amount of any 
reportable transaction understatement if the amend-
ment or supplement is filed after the earlier of the 
date the taxpayer is first contacted by the Secretary 
regarding the examination of the return or such 
other date as is specified by the Secretary.’’. 
(b) DETERMINATION
OF
OTHER
UNDERSTATE-
MENTS.—Subparagraph (A) of section 6662(d)(2) is 
amended by adding at the end the following flush sen-
tence: 
‘‘The excess under the preceding sentence shall 
be determined without regard to items to which 
section 6662A applies.’’. 
(c) REASONABLE CAUSE EXCEPTION.— 
(1) IN GENERAL.—Section 6664 is amended by 
adding at the end the following new subsection: 
‘‘(d) REASONABLE CAUSE EXCEPTION FOR REPORT-
ABLE TRANSACTION UNDERSTATEMENTS.— 
‘‘(1) IN
GENERAL.—No penalty shall be im-
posed under section 6662A with respect to any por-
tion of a reportable transaction understatement if it 
is shown that there was a reasonable cause for such 
portion and that the taxpayer acted in good faith 
with respect to such portion.
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‘‘(2) SPECIAL RULES.—Paragraph (1) shall not 
apply to any reportable transaction understatement 
unless— 
‘‘(A) the relevant facts affecting the tax 
treatment of the item are adequately disclosed 
in accordance with the regulations prescribed 
under section 6011, 
‘‘(B) there is or was substantial authority 
for such treatment, and 
‘‘(C) the taxpayer reasonably believed that 
such treatment was more likely than not the 
proper treatment. 
A taxpayer failing to adequately disclose in accord-
ance with section 6011 shall be treated as meeting 
the requirements of subparagraph (A) if the penalty 
for such failure was rescinded under section 
6707A(d). 
‘‘(3) RULES
RELATING
TO
REASONABLE
BE-
LIEF.—For purposes of paragraph (2)(C)— 
‘‘(A) IN GENERAL.—A taxpayer shall be 
treated as having a reasonable belief with re-
spect to the tax treatment of an item only if 
such belief—
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‘‘(i) is based on the facts and law that 
exist at the time the return of tax which 
includes such tax treatment is filed, and 
‘‘(ii) relates solely to the taxpayer’s 
chances of success on the merits of such 
treatment and does not take into account 
the possibility that a return will not be au-
dited, such treatment will not be raised on 
audit, or such treatment will be resolved 
through settlement if it is raised. 
‘‘(B) CERTAIN OPINIONS MAY NOT BE RE-
LIED UPON.— 
‘‘(i) IN GENERAL.—An opinion of a 
tax advisor may not be relied upon to es-
tablish the reasonable belief of a taxpayer 
if— 
‘‘(I) the tax advisor is described 
in clause (ii), or 
‘‘(II) the opinion is described in 
clause (iii). 
‘‘(ii) DISQUALIFIED TAX ADVISORS.— 
A tax advisor is described in this clause if 
the tax advisor— 
‘‘(I) is a material advisor (within 
the meaning of section 6111(b)(1))
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and participates in the organization, 
management, promotion, or sale of 
the transaction or is related (within 
the meaning of section 267(b) or 
707(b)(1)) to any person who so par-
ticipates, 
‘‘(II) is compensated directly or 
indirectly by a material advisor with 
respect to the transaction, 
‘‘(III) has a fee arrangement 
with respect to the transaction which 
is contingent on all or part of the in-
tended tax benefits from the trans-
action being sustained, or 
‘‘(IV) as determined under regu-
lations prescribed by the Secretary, 
has a disqualifying financial interest 
with respect to the transaction. 
‘‘(iii) DISQUALIFIED
OPINIONS.—For 
purposes of clause (i), an opinion is dis-
qualified if the opinion— 
‘‘(I) is based on unreasonable 
factual or legal assumptions (includ-
ing assumptions as to future events),
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‘‘(II) unreasonably relies on rep-
resentations, statements, findings, or 
agreements of the taxpayer or any 
other person, 
‘‘(III) does not identify and con-
sider all relevant facts, or 
‘‘(IV) fails to meet any other re-
quirement as the Secretary may pre-
scribe.’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 6664(c) is 
amended by striking ‘‘this part’’ and inserting 
‘‘section 6662 or 6663’’. 
(B) The heading for subsection (c) of sec-
tion 6664 is amended by inserting ‘‘FOR UN-
DERPAYMENTS’’ after ‘‘EXCEPTION’’. 
(d) REDUCTION IN PENALTY FOR SUBSTANTIAL UN-
DERSTATEMENT OF INCOME TAX NOT TO APPLY TO TAX 
SHELTERS.—Subparagraph (C) of section 6662(d)(2) (re-
lating to substantial understatement of income tax) is 
amended to read as follows: 
‘‘(C) REDUCTION NOT TO APPLY TO TAX 
SHELTERS.—
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‘‘(i) IN GENERAL.—Subparagraph (B) 
shall not apply to any item attributable to 
a tax shelter. 
‘‘(ii) TAX SHELTER.—For purposes of 
clause (i), the term ‘tax shelter’ means— 
‘‘(I) a partnership or other enti-
ty, 
‘‘(II) any investment plan or ar-
rangement, or 
‘‘(III) any other plan or arrange-
ment, 
if a significant purpose of such partner-
ship, entity, plan, or arrangement is the 
avoidance or evasion of Federal income 
tax.’’. 
(e) CONFORMING AMENDMENTS.— 
(1) Sections 461(i)(3)(C), 1274(b)(3), and 
7525(b) are each amended by striking ‘‘section 
6662(d)(2)(C)(iii)’’ 
and 
inserting 
‘‘section 
6662(d)(2)(C)(ii)’’. 
(2) The heading for section 6662 is amended to 
read as follows:
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‘‘SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY 
ON UNDERPAYMENTS.’’ 
(3) The table of sections for part II of sub-
chapter A of chapter 68 is amended by striking the 
item relating to section 6662 and inserting the fol-
lowing new items: 
‘‘Sec. 6662. Imposition of accuracy-related penalty on underpay-
ments. 
‘‘Sec. 6662A. Imposition of accuracy-related penalty on under-
statements with respect to reportable trans-
actions.’’. 
(f) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act. 
SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY 
PRIVILEGES RELATING TO TAXPAYER COM-
MUNICATIONS. 
(a) IN GENERAL.—Section 7525(b) (relating to sec-
tion not to apply to communications regarding corporate 
tax shelters) is amended to read as follows: 
‘‘(b) SECTION NOT TO APPLY TO COMMUNICATIONS 
REGARDING TAX SHELTERS.—The privilege under sub-
section (a) shall not apply to any written communication 
which is— 
‘‘(1) between a federally authorized tax practi-
tioner and— 
‘‘(A) any person,
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‘‘(B) any director, officer, employee, agent, 
or representative of the person, or 
‘‘(C) any other person holding a capital or 
profits interest in the person, and 
‘‘(2) in connection with the promotion of the di-
rect or indirect participation of the person in any 
tax 
shelter 
(as 
defined 
in 
section 
6662(d)(2)(C)(ii)).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to communications made on or 
after the date of the enactment of this Act. 
SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS 
FOR 
WHICH 
REQUIRED 
LISTED 
TRANS-
ACTIONS NOT REPORTED. 
(a) IN GENERAL.—Section 6501(c) (relating to ex-
ceptions) is amended by adding at the end the following 
new paragraph: 
‘‘(10) LISTED TRANSACTIONS.—If a taxpayer 
fails to include on any return or statement for any 
taxable year any information with respect to a listed 
transaction (as defined in section 6707A(c)(2)) 
which is required under section 6011 to be included 
with such return or statement, the time for assess-
ment of any tax imposed by this title with respect
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to such transaction shall not expire before the date 
which is 1 year after the earlier of— 
‘‘(A) the date on which the Secretary is 
furnished the information so required, or 
‘‘(B) the date that a material advisor (as 
defined in section 6111) meets the requirements 
of section 6112 with respect to a request by the 
Secretary under section 6112(b) relating to 
such transaction with respect to such tax-
payer.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years with respect to 
which the period for assessing a deficiency did not expire 
before the date of the enactment of this Act. 
SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6111 (relating to registra-
tion of tax shelters) is amended to read as follows: 
‘‘SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—Each material advisor with re-
spect to any reportable transaction shall make a return 
(in such form as the Secretary may prescribe) setting 
forth— 
‘‘(1) information identifying and describing the 
transaction,
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‘‘(2) information describing any potential tax 
benefits expected to result from the transaction, and 
‘‘(3) such other information as the Secretary 
may prescribe. 
Such return shall be filed not later than the date specified 
by the Secretary. 
‘‘(b) DEFINITIONS.—For purposes of this section— 
‘‘(1) MATERIAL ADVISOR.— 
‘‘(A) IN
GENERAL.—The term ‘material 
advisor’ means any person— 
‘‘(i) who provides any material aid, 
assistance, or advice with respect to orga-
nizing, managing, promoting, selling, im-
plementing, or carrying out any reportable 
transaction, and 
‘‘(ii) who directly or indirectly derives 
gross income in excess of the threshold 
amount (or such other amount as may be 
prescribed by the Secretary) for such ad-
vice or assistance. 
‘‘(B) THRESHOLD AMOUNT.—For purposes 
of subparagraph (A), the threshold amount is— 
‘‘(i) $50,000 in the case of a report-
able transaction substantially all of the tax
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benefits from which are provided to nat-
ural persons, and 
‘‘(ii) $250,000 in any other case. 
‘‘(2) REPORTABLE
TRANSACTION.—The term 
‘reportable transaction’ has the meaning given to 
such term by section 6707A(c). 
‘‘(c) REGULATIONS.—The Secretary may prescribe 
regulations which provide— 
‘‘(1) that only 1 person shall be required to 
meet the requirements of subsection (a) in cases in 
which 2 or more persons would otherwise be re-
quired to meet such requirements, 
‘‘(2) exemptions from the requirements of this 
section, and 
‘‘(3) such rules as may be necessary or appro-
priate to carry out the purposes of this section.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) The item relating to section 6111 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows: 
‘‘Sec. 6111. Disclosure of reportable transactions.’’. 
(2) So much of section 6112 as precedes sub-
section (c) thereof is amended to read as follows:
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‘‘SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANS-
ACTIONS MUST KEEP LISTS OF ADVISEES, 
ETC. 
‘‘(a) IN GENERAL.—Each material advisor (as de-
fined in section 6111) with respect to any reportable 
transaction (as defined in section 6707A(c)) shall (wheth-
er or not required to file a return under section 6111 with 
respect to such transaction) maintain (in such manner as 
the Secretary may by regulations prescribe) a list— 
‘‘(1) identifying each person with respect to 
whom such advisor acted as a material advisor with 
respect to such transaction, and 
‘‘(2) containing such other information as the 
Secretary may by regulations require.’’. 
(3) Section 6112 is amended— 
(A) by redesignating subsection (c) as sub-
section (b), 
(B) by inserting ‘‘written’’ before ‘‘re-
quest’’ in subsection (b)(1) (as so redesig-
nated), and 
(C) by striking ‘‘shall prescribe’’ in sub-
section (b)(2) (as so redesignated) and inserting 
‘‘may prescribe’’. 
(4) The item relating to section 6112 in the 
table of sections for subchapter B of chapter 61 is 
amended to read as follows:
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‘‘Sec. 6112. Material advisors of reportable transactions must 
keep lists of advisees, etc.’’. 
(5)(A) The heading for section 6708 is amend-
ed to read as follows: 
‘‘SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES 
WITH RESPECT TO REPORTABLE TRANS-
ACTIONS.’’ 
(B) The item relating to section 6708 in the 
table of sections for part I of subchapter B of chap-
ter 68 is amended to read as follows: 
‘‘Sec. 6708. Failure to maintain lists of advisees with respect to 
reportable transactions.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions with respect to 
which material aid, assistance, or advice referred to in sec-
tion 6111(b)(1)(A)(i) of the Internal Revenue Code of 
1986 (as added by this section) is provided after the date 
of the enactment of this Act. 
SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 6707 (relating to failure 
to furnish information regarding tax shelters) is amended 
to read as follows:
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‘‘SEC. 6707. FAILURE TO FURNISH INFORMATION REGARD-
ING REPORTABLE TRANSACTIONS. 
‘‘(a) IN GENERAL.—If a person who is required to 
file a return under section 6111(a) with respect to any 
reportable transaction— 
‘‘(1) fails to file such return on or before the 
date prescribed therefor, or 
‘‘(2) files false or incomplete information with 
the Secretary with respect to such transaction, 
such person shall pay a penalty with respect to such return 
in the amount determined under subsection (b). 
‘‘(b) AMOUNT OF PENALTY.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the penalty imposed under subsection (a) 
with respect to any failure shall be $50,000. 
‘‘(2) LISTED TRANSACTIONS.—The penalty im-
posed under subsection (a) with respect to any listed 
transaction shall be an amount equal to the greater 
of— 
‘‘(A) $200,000, or 
‘‘(B) 50 percent of the gross income de-
rived by such person with respect to aid, assist-
ance, or advice which is provided with respect 
to the listed transaction before the date the re-
turn is filed under section 6111.
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Subparagraph (B) shall be applied by substituting 
‘75 percent’ for ‘50 percent’ in the case of an inten-
tional failure or act described in subsection (a). 
‘‘(c) RESCISSION AUTHORITY.—The provisions of 
section 6707A(d) (relating to authority of Commissioner 
to rescind penalty) shall apply to any penalty imposed 
under this section. 
‘‘(d) REPORTABLE AND LISTED TRANSACTIONS.— 
For purposes of this section, the terms ‘reportable trans-
action’ and ‘listed transaction’ have the respective mean-
ings given to such terms by section 6707A(c).’’. 
(b) CLERICAL AMENDMENT.—The item relating to 
section 6707 in the table of sections for part I of sub-
chapter B of chapter 68 is amended by striking ‘‘tax shel-
ters’’ and inserting ‘‘reportable transactions’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to returns the due date for which 
is after the date of the enactment of this Act. 
SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO 
MAINTAIN LISTS OF INVESTORS. 
(a) IN GENERAL.—Subsection (a) of section 6708 is 
amended to read as follows: 
‘‘(a) IMPOSITION OF PENALTY.— 
‘‘(1) IN GENERAL.—If any person who is re-
quired to maintain a list under section 6112(a) fails
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to make such list available upon written request to 
the Secretary in accordance with section 6112(b) 
within 20 business days after the date of such re-
quest, such person shall pay a penalty of $10,000 
for each day of such failure after such 20th day. 
‘‘(2) REASONABLE
CAUSE
EXCEPTION.—No 
penalty shall be imposed by paragraph (1) with re-
spect to the failure on any day if such failure is due 
to reasonable cause.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to requests made after the date 
of the enactment of this Act. 
SEC. 618. PENALTY ON PROMOTERS OF TAX SHELTERS. 
(a) PENALTY ON PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700(a) is amended by adding at the end 
the following new sentence: ‘‘Notwithstanding the first 
sentence, if an activity with respect to which a penalty 
imposed under this subsection involves a statement de-
scribed in paragraph (2)(A), the amount of the penalty 
shall be equal to 50 percent of the gross income derived 
(or to be derived) from such activity by the person on 
which the penalty is imposed.’’ 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to activities after the date of the 
enactment of this Act.
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SEC. 619. MODIFICATIONS OF SUBSTANTIAL UNDERSTATE-
MENT 
PENALTY 
FOR 
NONREPORTABLE 
TRANSACTIONS. 
(a) SUBSTANTIAL UNDERSTATEMENT OF CORPORA-
TIONS.—Section 6662(d)(1)(B) (relating to special rule 
for corporations) is amended to read as follows: 
‘‘(B) 
SPECIAL
RULE
FOR
CORPORA-
TIONS.—In the case of a corporation other than 
an S corporation or a personal holding company 
(as defined in section 542), there is a substan-
tial understatement of income tax for any tax-
able year if the amount of the understatement 
for the taxable year exceeds the lesser of— 
‘‘(i) 10 percent of the tax required to 
be shown on the return for the taxable 
year (or, if greater, $10,000), or 
‘‘(ii) $10,000,000.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 620. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN 
CONDUCT RELATED TO TAX SHELTERS AND 
REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 7408 (relating to action 
to enjoin promoters of abusive tax shelters, etc.) is amend-
ed by redesignating subsection (c) as subsection (d) and
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by striking subsections (a) and (b) and inserting the fol-
lowing new subsections: 
‘‘(a) AUTHORITY TO SEEK INJUNCTION.—A civil ac-
tion in the name of the United States to enjoin any person 
from further engaging in specified conduct may be com-
menced at the request of the Secretary. Any action under 
this section shall be brought in the district court of the 
United States for the district in which such person resides, 
has his principal place of business, or has engaged in spec-
ified conduct. The court may exercise its jurisdiction over 
such action (as provided in section 7402(a)) separate and 
apart from any other action brought by the United States 
against such person. 
‘‘(b) ADJUDICATION AND DECREE.—In any action 
under subsection (a), if the court finds— 
‘‘(1) that the person has engaged in any speci-
fied conduct, and 
‘‘(2) that injunctive relief is appropriate to pre-
vent recurrence of such conduct, 
the court may enjoin such person from engaging in such 
conduct or in any other activity subject to penalty under 
this title. 
‘‘(c) SPECIFIED CONDUCT.—For purposes of this 
section, the term ‘specified conduct’ means any action, or
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failure to take action, subject to penalty under section 
6700, 6701, 6707, or 6708.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) The heading for section 7408 is amended to 
read as follows: 
‘‘SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RE-
LATED TO TAX SHELTERS AND REPORTABLE 
TRANSACTIONS.’’ 
(2) The table of sections for subchapter A of 
chapter 76 is amended by striking the item relating 
to section 7408 and inserting the following new 
item: 
‘‘Sec. 7408. Actions to enjoin specified conduct related to tax shelters and 
reportable transactions.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the day after the date of 
the enactment of this Act. 
SEC. 621. PENALTY ON FAILURE TO REPORT INTERESTS IN 
FOREIGN FINANCIAL ACCOUNTS. 
(a) IN GENERAL.—Section 5321(a)(5) of title 31, 
United States Code, is amended to read as follows: 
‘‘(5) FOREIGN
FINANCIAL
AGENCY
TRANS-
ACTION VIOLATION.— 
‘‘(A) PENALTY
AUTHORIZED.—The Sec-
retary of the Treasury may impose a civil 
money penalty on any person who violates, or
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causes any violation of, any provision of section 
5314. 
‘‘(B) AMOUNT OF PENALTY.— 
‘‘(i) IN
GENERAL.—Except as pro-
vided in subparagraph (C), the amount of 
any civil penalty imposed under subpara-
graph (A) shall not exceed $5,000. 
‘‘(ii) REASONABLE
CAUSE
EXCEP-
TION.—No penalty shall be imposed under 
subparagraph (A) with respect to any vio-
lation if— 
‘‘(I) such violation was due to 
reasonable cause, and 
‘‘(II) the amount of the trans-
action or the balance in the account 
at the time of the transaction was 
properly reported. 
‘‘(C) WILLFUL VIOLATIONS.—In the case 
of any person willfully violating, or willfully 
causing any violation of, any provision of sec-
tion 5314— 
‘‘(i) the maximum penalty under sub-
paragraph (B)(i) shall be increased to the 
greater of— 
‘‘(I) $25,000, or
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‘‘(II) the amount (not exceeding 
$100,000) determined under subpara-
graph (D), and 
‘‘(ii) subparagraph (B)(ii) shall not 
apply. 
‘‘(D) AMOUNT.—The amount determined 
under this subparagraph is— 
‘‘(i) in the case of a violation involving 
a transaction, the amount of the trans-
action, or 
‘‘(ii) in the case of a violation involv-
ing a failure to report the existence of an 
account or any identifying information re-
quired to be provided with respect to an 
account, the balance in the account at the 
time of the violation.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to violations occurring after the 
date of the enactment of this Act. 
SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF THE TREASURY. 
(a) CENSURE; IMPOSITION OF PENALTY.— 
(1) IN GENERAL.—Section 330(b) of title 31, 
United States Code, is amended—
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(A) by inserting ‘‘, or censure,’’ after ‘‘De-
partment’’, and 
(B) by adding at the end the following new 
flush sentence: 
‘‘The Secretary may impose a monetary penalty on any 
representative described in the preceding sentence. If the 
representative was acting on behalf of an employer or any 
firm or other entity in connection with the conduct giving 
rise to such penalty, the Secretary may impose a monetary 
penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such pen-
alty shall not exceed the gross income derived (or to be 
derived) from the conduct giving rise to the penalty. Any 
such penalty imposed on an individual may be in addition 
to, or in lieu of, any suspension, disbarment, or censure 
of such individual.’’ 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to actions taken after 
the date of the enactment of this Act. 
(b) TAX SHELTER OPINIONS, ETC.—Section 330 of 
such title 31 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(d) Nothing in this section or in any other provision 
of law shall be construed to limit the authority of the Sec-
retary of the Treasury to impose standards applicable to
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the rendering of written advice with respect to any entity, 
transaction plan or arrangement, or other plan or arrange-
ment, which is of a type which the Secretary determines 
as having a potential for tax avoidance or evasion.’’. 
Part II—Other Provisions 
SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC. 
(a) IN GENERAL.—Section 1286 (relating to tax 
treatment of stripped bonds) is amended by redesignating 
subsection (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
‘‘(f) TREATMENT OF STRIPPED INTERESTS IN BOND 
AND PREFERRED STOCK FUNDS, ETC.—In the case of an 
account or entity substantially all of the assets of which 
consist of bonds, preferred stock, or a combination thereof, 
the Secretary may by regulations provide that rules simi-
lar to the rules of this section and 305(e), as appropriate, 
shall apply to interests in such account or entity to which 
(but for this subsection) this section or section 305(e), as 
the case may be, would not apply.’’. 
(b) CROSS REFERENCE.—Subsection (e) of section 
305 is amended by adding at the end the following new 
paragraph:
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‘‘(7) CROSS REFERENCE.— 
‘‘For treatment of stripped interests in certain ac-
counts or entities holding preferred stock, see sec-
tion 1286(f).’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to purchases and dispositions after 
the date of the enactment of this Act. 
SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX 
CREDIT ON WITHHOLDING TAXES ON INCOME 
OTHER THAN DIVIDENDS. 
(a) IN GENERAL.—Section 901 is amended by redes-
ignating subsection (l) as subsection (m) and by inserting 
after subsection (k) the following new subsection: 
‘‘(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING 
TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS 
ETC.— 
‘‘(1) IN GENERAL.—In no event shall a credit 
be allowed under subsection (a) for any withholding 
tax (as defined in subsection (k)) on any item of in-
come or gain with respect to any property if— 
‘‘(A) such property is held by the recipient 
of the item for 15 days or less during the 30- 
day period beginning on the date which is 15 
days before the date on which the right to re-
ceive payment of such item arises, or 
‘‘(B) to the extent that the recipient of the 
item is under an obligation (whether pursuant
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to a short sale or otherwise) to make related 
payments with respect to positions in substan-
tially similar or related property. 
This paragraph shall not apply to any dividend to 
which subsection (k) applies. 
‘‘(2) EXCEPTION FOR TAXES PAID BY DEAL-
ERS.— 
‘‘(A) IN
GENERAL.—Paragraph (1) shall 
not apply to any qualified tax with respect to 
any property held in the active conduct in a for-
eign country of a business as a dealer in such 
property. 
‘‘(B) QUALIFIED
TAX.—For purposes of 
subparagraph (A), the term ‘qualified tax’ 
means a tax paid to a foreign country (other 
than the foreign country referred to in subpara-
graph (A)) if— 
‘‘(i) the item to which such tax is at-
tributable is subject to taxation on a net 
basis by the country referred to in sub-
paragraph (A), and 
‘‘(ii) such country allows a credit 
against its net basis tax for the full 
amount of the tax paid to such other for-
eign country.
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‘‘(C) DEALER.—For purposes of subpara-
graph (A), the term ‘dealer’ means— 
‘‘(i) with respect to a security, any 
person to whom paragraphs (1) and (2) of 
subsection (k) would not apply by reason 
of paragraph (4) thereof if such security 
were stock, and 
‘‘(ii) with respect to any other prop-
erty, any person with respect to whom 
such property is described in section 
1221(a)(1). 
‘‘(D) REGULATIONS.—The Secretary may 
prescribe such regulations as may be appro-
priate to carry out this paragraph, including 
regulations to prevent the abuse of the excep-
tion provided by this paragraph and to treat 
other taxes as qualified taxes. 
‘‘(3) EXCEPTIONS.—The Secretary may by reg-
ulation provide that paragraph (1) shall not apply to 
property where the Secretary determines that the 
application of paragraph (1) to such property is not 
necessary to carry out the purposes of this sub-
section. 
‘‘(4) CERTAIN RULES TO APPLY.—Rules similar 
to the rules of paragraphs (5), (6), and (7) of sub-
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section (k) shall apply for purposes of this sub-
section. 
‘‘(5) DETERMINATION OF HOLDING PERIOD.— 
Holding periods shall be determined for purposes of 
this subsection without regard to section 1235 or 
any similar rule.’’. 
(b) CONFORMING AMENDMENT.—The heading of 
subsection (k) of section 901 is amended by inserting ‘‘ON 
DIVIDENDS’’ after ‘‘TAXES’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts paid or accrued more 
than 30 days after the date of the enactment of this Act. 
SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS 
TRANSFERS. 
(a) TREATMENT OF CONTRIBUTED PROPERTY WITH 
BUILT-IN LOSS.—Paragraph (1) of section 704(c) is 
amended by striking ‘‘and’’ at the end of subparagraph 
(A), by striking the period at the end of subparagraph 
(B) and inserting ‘‘, and’’, and by adding at the end the 
following: 
‘‘(C) if any property so contributed has a 
built-in loss— 
‘‘(i) such built-in loss shall be taken 
into account only in determining the
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amount of items allocated to the contrib-
uting partner, and 
‘‘(ii) except as provided in regulations, 
in determining the amount of items allo-
cated to other partners, the basis of the 
contributed property in the hands of the 
partnership shall be treated as being equal 
to its fair market value at the time of con-
tribution. 
For purposes of subparagraph (C), the term ‘built- 
in loss’ means the excess of the adjusted basis of the 
property (determined without regard to subpara-
graph (C)(ii)) over its fair market value at the time 
of contribution.’’. 
(b) SPECIAL RULES FOR TRANSFERS OF PARTNER-
SHIP INTEREST IF THERE IS SUBSTANTIAL BUILT-IN 
LOSS.— 
(1) ADJUSTMENT OF PARTNERSHIP BASIS RE-
QUIRED.—Subsection (a) of section 743 (relating to 
optional adjustment to basis of partnership prop-
erty) is amended by inserting before the period ‘‘or 
unless the partnership has a substantial built-in loss 
immediately after such transfer’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
743 is amended by inserting ‘‘or which has a sub-
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stantial built-in loss immediately after such trans-
fer’’ after ‘‘section 754 is in effect’’. 
(3) SUBSTANTIAL BUILT-IN LOSS.—Section 743 
is amended by adding at the end the following new 
subsection: 
‘‘(d) SUBSTANTIAL BUILT-IN LOSS.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a partnership has a substantial built-in loss 
with respect to a transfer of an interest in a part-
nership if the partnership’s adjusted basis in the 
partnership property exceeds by more than $250,000 
the fair market value of such property. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of paragraph (1) and section 
734(d), including regulations aggregating related 
partnerships and disregarding property acquired by 
the partnership in an attempt to avoid such pur-
poses.’’. 
(4) ALTERNATIVE
RULES
FOR
ELECTING
IN-
VESTMENT PARTNERSHIPS.— 
(A) IN GENERAL.—Section 743 is amended 
by adding at the end the following new sub-
section:
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‘‘(e) ALTERNATIVE RULES FOR ELECTING INVEST-
MENT PARTNERSHIPS.— 
‘‘(1) 
NO
ADJUSTMENT
OF
PARTNERSHIP 
BASIS.—For purposes of this section, an electing in-
vestment partnership shall not be treated as having 
a substantial built-in loss with respect to any trans-
fer occurring while the election under paragraph 
(6)(A) is in effect. 
‘‘(2) LOSS DEFERRAL FOR TRANSFEREE PART-
NER.—In the case of a transfer of an interest in an 
electing investment partnership, the transferee part-
ner’s distributive share of losses (without regard to 
gains) from the sale or exchange of partnership 
property shall not be allowed except to the extent 
that it is established that such losses exceed the loss 
(if any) recognized by the transferor (or any prior 
transferor to the extent not fully offset by a prior 
disallowance under this paragraph) on the transfer 
of the partnership interest. 
‘‘(3) NO REDUCTION IN PARTNERSHIP BASIS.— 
Losses disallowed under paragraph (2) shall not de-
crease the transferee partner’s basis in the partner-
ship interest. 
‘‘(4) EFFECT OF TERMINATION OF PARTNER-
SHIP.—This subsection shall be applied without re-
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gard to any termination of a partnership under sec-
tion 708(b)(1)(B). 
‘‘(5) CERTAIN BASIS REDUCTIONS TREATED AS 
LOSSES.—In the case of a transferee partner whose 
basis in property distributed by the partnership is 
reduced under section 732(a)(2), the amount of the 
loss recognized by the transferor on the transfer of 
the partnership interest which is taken into account 
under paragraph (2) shall be reduced by the amount 
of such basis reduction. 
‘‘(6) ELECTING INVESTMENT PARTNERSHIP.— 
For purposes of this subsection, the term ‘electing 
investment partnership’ means any partnership if— 
‘‘(A) the partnership makes an election to 
have this subsection apply, 
‘‘(B) the partnership would be an invest-
ment company under section 3(a)(1)(A) of the 
Investment Company Act of 1940 but for an 
exemption under paragraph (1) or (7) of section 
3(c) of such Act, 
‘‘(C) such partnership has never been en-
gaged in a trade or business, 
‘‘(D) substantially all of the assets of such 
partnership are held for investment,
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‘‘(E) at least 95 percent of the assets con-
tributed to such partnership consist of money, 
‘‘(F) no assets contributed to such part-
nership had an adjusted basis in excess of fair 
market value at the time of contribution, 
‘‘(G) all partnership interests of such part-
nership are issued by such partnership pursu-
ant to a private offering and during the 24- 
month period beginning on the date of the first 
capital contribution to such partnership, 
‘‘(H) the partnership agreement of such 
partnership has substantive restrictions on each 
partner’s ability to cause a redemption of the 
partner’s interest, and 
‘‘(I) the partnership agreement of such 
partnership provides for a term that is not in 
excess of 15 years. 
The election described in subparagraph (A), once 
made, shall be irrevocable except with the consent of 
the Secretary. 
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to 
carry out the purposes of this subsection, including 
regulations for applying this subsection to tiered 
partnerships.’’.
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(B) INFORMATION
REPORTING.—Section 
6031 is amended by adding at the end the fol-
lowing new subsection: 
‘‘(f) ELECTING INVESTMENT PARTNERSHIPS.—In 
the case of any electing investment partnership (as defined 
in section 743(e)(6)), the information required under sub-
section (b) to be furnished to any partner to whom section 
743(e)(2) applies shall include such information as is nec-
essary to enable the partner to compute the amount of 
losses disallowed under section 743(e).’’. 
(5) CLERICAL AMENDMENTS.— 
(A) The section heading for section 743 is 
amended to read as follows: 
‘‘SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION 
OR SUBSTANTIAL BUILT-IN LOSS.’’ 
(B) The table of sections for subpart C of 
part II of subchapter K of chapter 1 is amend-
ed by striking the item relating to section 743 
and inserting the following new item: 
‘‘Sec. 743. Special rules where section 754 election or substantial 
built-in loss.’’. 
(c) ADJUSTMENT
TO BASIS
OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY
IF THERE IS SUBSTANTIAL 
BASIS REDUCTION.— 
(1) ADJUSTMENT
REQUIRED.—Subsection (a) 
of section 734 (relating to optional adjustment to
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basis of undistributed partnership property) is 
amended by inserting before the period ‘‘or unless 
there is a substantial basis reduction’’. 
(2) ADJUSTMENT.—Subsection (b) of section 
734 is amended by inserting ‘‘or unless there is a 
substantial basis reduction’’ after ‘‘section 754 is in 
effect’’. 
(3) SUBSTANTIAL BASIS REDUCTION.—Section 
734 is amended by adding at the end the following 
new subsection: 
‘‘(d) SUBSTANTIAL BASIS REDUCTION.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, there is a substantial basis reduction with re-
spect to a distribution if the sum of the amounts de-
scribed in subparagraphs (A) and (B) of subsection 
(b)(2) exceeds $250,000. 
‘‘(2) REGULATIONS.— 
‘‘For regulations to carry out this subsection, see 
section 743(d)(2).’’. 
(4) CLERICAL AMENDMENTS.— 
(A) The section heading for section 734 is 
amended to read as follows:
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‘‘SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED 
PARTNERSHIP PROPERTY WHERE SECTION 
754 ELECTION OR SUBSTANTIAL BASIS RE-
DUCTION.’’ 
(B) The table of sections for subpart B of 
part II of subchapter K of chapter 1 is amend-
ed by striking the item relating to section 734 
and inserting the following new item: 
‘‘Sec. 734. Adjustment to basis of undistributed partnership prop-
erty where section 754 election or substantial basis 
reduction.’’. 
(d) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendment made 
by subsection (a) shall apply to contributions made 
after the date of the enactment of this Act. 
(2) SUBSECTION (b).— 
(A) IN GENERAL.—Except as provided in 
subparagraph (B), the amendments made by 
subsection (b) shall apply to transfers after the 
date of the enactment of this Act. 
(B) TRANSITION RULE.—In the case of an 
electing investment partnership which is in ex-
istence on June 4, 2004, section 743(e)(6)(H) 
of the Internal Revenue Code of 1986, as added 
by this section, shall not apply to such partner-
ship and section 743(e)(6)(I) of such Code, as
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so added, shall be applied by substituting ‘‘20 
years’’ for ‘‘15 years’’. 
(3) SUBSECTION (c).—The amendments made 
by subsection (c) shall apply to distributions after 
the date of the enactment of this Act. 
SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN 
STOCK HELD BY PARTNERSHIP IN COR-
PORATE PARTNER. 
(a) IN GENERAL.—Section 755 is amended by adding 
at the end the following new subsection: 
‘‘(c) NO ALLOCATION
OF BASIS DECREASE
TO 
STOCK OF CORPORATE PARTNER.—In making an alloca-
tion under subsection (a) of any decrease in the adjusted 
basis of partnership property under section 734(b)— 
‘‘(1) no allocation may be made to stock in a 
corporation (or any person related (within the mean-
ing of sections 267(b) and 707(b)(1)) to such cor-
poration) which is a partner in the partnership, and 
‘‘(2) any amount not allocable to stock by rea-
son of paragraph (1) shall be allocated under sub-
section (a) to other partnership property. 
Gain shall be recognized to the partnership to the extent 
that the amount required to be allocated under paragraph 
(2) to other partnership property exceeds the aggregate
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adjusted basis of such other property immediately before 
the allocation required by paragraph (2).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to distributions after the date of 
the enactment of this Act. 
SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS. 
(a) IN GENERAL.—Part V of subchapter M of chap-
ter 1 (relating to financial asset securitization investment 
trusts) is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (6) of section 56(g) is amended 
by striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or 
REMIC’’. 
(2) Clause (ii) of section 382(l)(4)(B) is amend-
ed by striking ‘‘a REMIC to which part IV of sub-
chapter M applies, or a FASIT to which part V of 
subchapter M applies,’’ and inserting ‘‘or a REMIC 
to which part IV of subchapter M applies,’’. 
(3) Paragraph (1) of section 582(c) is amended 
by striking ‘‘, and any regular interest in a 
FASIT,’’. 
(4) Subparagraph (E) of section 856(c)(5) is 
amended by striking the last sentence. 
(5)(A) Section 860G(a)(1) is amended by add-
ing at the end the following new sentence: ‘‘An inter-
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est shall not fail to qualify as a regular interest sole-
ly because the specified principal amount of the reg-
ular interest (or the amount of interest accrued on 
the regular interest) can be reduced as a result of 
the nonoccurrence of 1 or more contingent payments 
with respect to any reverse mortgage loan held by 
the REMIC if, on the startup day for the REMIC, 
the sponsor reasonably believes that all principal and 
interest due under the regular interest will be paid 
at or prior to the liquidation of the REMIC.’’. 
(B) The last sentence of section 860G(a)(3) is 
amended by inserting ‘‘, and any reverse mortgage 
loan (and each balance increase on such loan meet-
ing the requirements of subparagraph (A)(iii)) shall 
be treated as an obligation secured by an interest in 
real property’’ before the period at the end. 
(6) Paragraph (3) of section 860G(a) is amend-
ed by adding ‘‘and’’ at the end of subparagraph (B), 
by striking ‘‘, and’’ at the end of subparagraph (C) 
and inserting a period, and by striking subparagraph 
(D). 
(7) Section 860G(a)(3), as amended by para-
graph (6), is amended by adding at the end the fol-
lowing new sentence: ‘‘For purposes of subparagraph 
(A), if more than 50 percent of the obligations
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transferred to, or purchased by, the REMIC are 
originated by the United States or any State (or any 
political subdivision, agency, or instrumentality of 
the United States or any State) and are principally 
secured by an interest in real property, then each 
obligation transferred to, or purchased by, the 
REMIC shall be treated as secured by an interest in 
real property.’’. 
(8)(A) Section 860G(a)(3)(A) is amended by 
striking ‘‘or’’ at the end of clause (i), by inserting 
‘‘or’’ at the end of clause (ii), and by inserting after 
clause (ii) the following new clause: 
‘‘(iii) represents an increase in the 
principal amount under the original terms 
of an obligation described in clause (i) or 
(ii) if such increase— 
‘‘(I) is attributable to an advance 
made to the obligor pursuant to the 
original terms of the obligation, 
‘‘(II) occurs after the startup 
day, and 
‘‘(III) 
is 
purchased 
by 
the 
REMIC pursuant to a fixed price con-
tract in effect on the startup day.’’.
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(B) Section 860G(a)(7)(B) is amended to read 
as follows: 
‘‘(B) QUALIFIED
RESERVE
FUND.—For 
purposes of subparagraph (A), the term ‘quali-
fied reserve fund’ means any reasonably re-
quired reserve to— 
‘‘(i) provide for full payment of ex-
penses of the REMIC or amounts due on 
regular interests in the event of defaults on 
qualified mortgages or lower than expected 
returns on cash flow investments, or 
‘‘(ii) provide a source of funds for the 
purchase of obligations described in clause 
(ii) or (iii) of paragraph (3)(A). 
The aggregate fair market value of the assets 
held in any such reserve shall not exceed 50 
percent of the aggregate fair market value of all 
of the assets of the REMIC on the startup day, 
and the amount of any such reserve shall be 
promptly and appropriately reduced to the ex-
tent the amount held in such reserve is no 
longer reasonably required for purposes speci-
fied in clause (i) or (ii) of this subparagraph.’’.
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(9) Subparagraph (C) of section 1202(e)(4) is 
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’. 
(10) Clause (xi) of section 7701(a)(19)(C) is 
amended— 
(A) by striking ‘‘and any regular interest 
in a FASIT,’’, and 
(B) by striking ‘‘or FASIT’’ each place it 
appears. 
(11) Subparagraph (A) of section 7701(i)(2) is 
amended by striking ‘‘or a FASIT’’. 
(12) The table of parts for subchapter M of 
chapter 1 is amended by striking the item relating 
to part V. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall take effect on January 1, 2005. 
(2) EXCEPTION FOR EXISTING FASITS.—Para-
graph (1) shall not apply to any FASIT in existence 
on the date of the enactment of this Act to the ex-
tent that regular interests issued by the FASIT be-
fore such date continue to remain outstanding in ac-
cordance with the original terms of issuance.
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SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 
ON REMIC RESIDUALS. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(e) LIMITATION
ON
TRANSFER
OF
BUILT-IN 
LOSSES ON REMIC RESIDUALS IN SECTION 351 TRANS-
ACTIONS.—If— 
‘‘(1) a residual interest (as defined in section 
860G(a)(2)) in a REMIC is transferred in any 
transaction which is described in subsection (a), and 
‘‘(2) the transferee’s adjusted basis in such re-
sidual interest would (but for this paragraph) exceed 
its fair market value immediately after such trans-
action, 
then, notwithstanding subsection (a), the transferee’s ad-
justed basis in such residual interest shall not exceed its 
fair market value (whether or not greater than zero) im-
mediately after such transaction.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to transactions after the date of 
the enactment of this Act.
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SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PUR-
POSES OF DETERMINING INVESTMENT OF 
EARNINGS IN UNITED STATES PROPERTY. 
(a) IN GENERAL.—Subparagraph (A) of section 
956(c)(2) is amended to read as follows: 
‘‘(A) obligations of the United States, 
money, or deposits with persons described in 
paragraph (4);’’. 
(b) ELIGIBLE PERSONS.—Section 956(c) (relating to 
exceptions to definition of United States property) is 
amended by adding at the end the following new para-
graph: 
‘‘(4) FINANCIAL SERVICES PROVIDERS.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (2)(A), a person is described in this para-
graph if at least 80 percent of the person’s in-
come is from the active conduct of a banking 
business which is derived from persons who are 
not related persons. 
‘‘(B) SPECIAL
RULES.—For purposes of 
subparagraph (A) all related persons shall be 
treated as 1 person in applying the 80-percent 
test. 
‘‘(C) RELATED PERSON.—For purposes of 
this paragraph, a person is a related person to 
another person if—
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‘‘(i) the related person bears a rela-
tionship to such person specified in section 
267(b) or 707(b)(1), or 
‘‘(ii) such persons are members of the 
same controlled group of corporations (as 
defined in section 1563(a), except that 
‘more than 50 percent’ shall be substituted 
for ‘at least 80 percent’ each place it ap-
pears therein).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSUR-
ANCE COMPANIES. 
(a) IN GENERAL.—Clause (i) of section 831(b)(2)(A) 
is amended by striking ‘‘$1,200,000’’ and inserting 
‘‘$1,890,000’’. 
(b) INFLATION ADJUSTMENT.—Paragraph (2) of sec-
tion 831(b) is amended by adding at the end the following 
new subparagraph: 
‘‘(C) INFLATION
ADJUSTMENT.—In the 
case of any taxable year beginning in a calendar 
year after 2004, the $1,890,000 amount in sub-
paragraph (A) shall be increased by an amount 
equal to—
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‘‘(i) $1,890,000, multiplied by 
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such 
calendar year by substituting ‘calendar 
year 2003’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof. 
If the amount as adjusted under the preceding 
sentence is not a multiple of $1,000, such 
amount shall be rounded to the next lowest 
multiple of $1,000.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE TRANSACTIONS. 
(a) IN GENERAL.—Section 163 (relating to deduction 
for interest) is amended by redesignating subsection (m) 
as subsection (n) and by inserting after subsection (l) the 
following new subsection: 
‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE 
TO NONDISCLOSED REPORTABLE TRANSACTIONS.—No 
deduction shall be allowed under this chapter for any in-
terest paid or accrued under section 6601 on any under-
payment of tax which is attributable to the portion of any
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reportable transaction understatement (as defined in sec-
tion 6662A(b)) with respect to which the requirement of 
section 6664(d)(2)(A) is not met.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions in taxable years 
beginning after the date of the enactment of this Act. 
SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ES-
TIMATED TAX FOR CERTAIN DEEMED ASSET 
SALES. 
(a) IN GENERAL.—Paragraph (13) of section 338(h) 
(relating to tax on deemed sale not taken into account for 
estimated tax purposes) is amended by adding at the end 
the following: ‘‘The preceding sentence shall not apply 
with respect to a qualified stock purchase for which an 
election is made under paragraph (10).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to transactions occurring after 
the date of the enactment of this Act. 
SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A 
PRINCIPAL RESIDENCE ACQUIRED IN A LIKE- 
KIND EXCHANGE WITHIN 5 YEARS OF SALE. 
(a) IN GENERAL.—Section 121(d) (relating to special 
rules for exclusion of gain from sale of principal residence) 
is amended by adding at the end the following new para-
graph:
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‘‘(10) PROPERTY ACQUIRED IN LIKE-KIND EX-
CHANGE.—If a taxpayer acquired property in an ex-
change to which section 1031 applied, subsection (a) 
shall not apply to the sale or exchange of such prop-
erty if it occurs during the 5-year period beginning 
with the date of the acquisition of such property.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to sales or exchanges after the date 
of the enactment of this Act. 
SEC. 642. PREVENTION OF MISMATCHING OF INTEREST 
AND ORIGINAL ISSUE DISCOUNT DEDUC-
TIONS AND INCOME INCLUSIONS IN TRANS-
ACTIONS WITH RELATED FOREIGN PERSONS. 
(a) ORIGINAL ISSUE DISCOUNT.—Section 163(e)(3) 
(relating to special rule for original issue discount on obli-
gation held by related foreign person) is amended by re-
designating subparagraph (B) as subparagraph (C) and 
by inserting after subparagraph (A) the following new sub-
paragraph: 
‘‘(B) SPECIAL
RULE
FOR
CERTAIN
FOR-
EIGN ENTITIES.— 
‘‘(i) IN GENERAL.—In the case of any 
debt instrument having original issue dis-
count which is held by a related foreign 
person which is a foreign personal holding
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company (as defined in section 552), a 
controlled foreign corporation (as defined 
in section 957), or a passive foreign invest-
ment company (as defined in section 
1297), a deduction shall be allowable to 
the issuer with respect to such original 
issue discount for any taxable year before 
the taxable year in which paid only to the 
extent such original issue discount (re-
duced by properly allowable deductions and 
qualified 
deficits 
under 
section 
952(c)(1)(B)) is includible during such 
prior taxable year in the gross income of a 
United States person who owns (within the 
meaning of section 958(a)) stock in such 
corporation. 
‘‘(ii) SECRETARIAL AUTHORITY.—The 
Secretary may by regulation exempt trans-
actions from the application of clause (i), 
including any transaction which is entered 
into by a payor in the ordinary course of 
a trade or business in which the payor is 
predominantly engaged.’’. 
(b) 
INTEREST
AND
OTHER
DEDUCTIBLE 
AMOUNTS.—Section 267(a)(3) is amended—
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(1) by striking ‘‘The Secretary’’ and inserting: 
‘‘(A) IN GENERAL.—The Secretary’’, and 
(2) by adding at the end the following new sub-
paragraph: 
‘‘(B) SPECIAL
RULE
FOR
CERTAIN
FOR-
EIGN ENTITIES.— 
‘‘(i) IN
GENERAL.—Notwithstanding 
subparagraph (A), in the case of any item 
payable to a foreign personal holding com-
pany (as defined in section 552), a con-
trolled foreign corporation (as defined in 
section 957), or a passive foreign invest-
ment company (as defined in section 
1297), a deduction shall be allowable to 
the payor with respect to such amount for 
any taxable year before the taxable year in 
which paid only to the extent that an 
amount attributable to such item (reduced 
by properly allowable deductions and quali-
fied deficits under section 952(c)(1)(B)) is 
includible during such prior taxable year in 
the gross income of a United States person 
who owns (within the meaning of section 
958(a)) stock in such corporation.
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‘‘(ii) SECRETARIAL AUTHORITY.—The 
Secretary may by regulation exempt trans-
actions from the application of clause (i), 
including any transaction which is entered 
into by a payor in the ordinary course of 
a trade or business in which the payor is 
predominantly engaged and in which the 
payment of the accrued amounts occurs 
within 81⁄2 months after accrual or within 
such other period as the Secretary may 
prescribe.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to payments accrued on or after 
the date of the enactment of this Act. 
SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST 
ON OVERPAYMENTS OF INCOME TAX BY INDI-
VIDUALS. 
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to items specifically excluded from gross 
income) is amended by inserting after section 139A the 
following new section:
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‘‘SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTER-
EST ON OVERPAYMENTS OF INCOME TAX BY 
INDIVIDUALS. 
‘‘(a) IN GENERAL.—In the case of an individual, 
gross income shall not include interest paid under section 
6611 on any overpayment of tax imposed by this subtitle. 
‘‘(b) EXCEPTION.—Subsection (a) shall not apply in 
the case of a failure to claim items resulting in the over-
payment on the original return if the Secretary determines 
that the principal purpose of such failure is to take advan-
tage of subsection (a). 
‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED 
ADJUSTED GROSS INCOME.—For purposes of this title, 
interest not included in gross income under subsection (a) 
shall not be treated as interest which is exempt from tax 
for purposes of sections 32(i)(2)(B) and 6012(d) or any 
computation in which interest exempt from tax under this 
title is added to adjusted gross income.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for part III of subchapter B of chapter 1 is amended by 
inserting after the item relating to section 139A the fol-
lowing new item: 
‘‘Sec. 139B. Exclusion from gross income for interest on over-
payments of income tax by individuals.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to interest received in calendar
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years beginning after the date of the enactment of this 
Act. 
SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS. 
(a) IN GENERAL.—Subchapter A of chapter 67 (re-
lating to interest on underpayments) is amended by add-
ing at the end the following new section: 
‘‘SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF IN-
TEREST ON POTENTIAL UNDERPAYMENTS, 
ETC. 
‘‘(a) AUTHORITY TO MAKE DEPOSITS OTHER THAN 
AS PAYMENT OF TAX.—A taxpayer may make a cash de-
posit with the Secretary which may be used by the Sec-
retary to pay any tax imposed under subtitle A or B or 
chapter 41, 42, 43, or 44 which has not been assessed 
at the time of the deposit. Such a deposit shall be made 
in such manner as the Secretary shall prescribe. 
‘‘(b) NO INTEREST IMPOSED.—To the extent that 
such deposit is used by the Secretary to pay tax, for pur-
poses of section 6601 (relating to interest on underpay-
ments), the tax shall be treated as paid when the deposit 
is made. 
‘‘(c) RETURN OF DEPOSIT.—Except in a case where 
the Secretary determines that collection of tax is in jeop-
ardy, the Secretary shall return to the taxpayer any
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amount of the deposit (to the extent not used for a pay-
ment of tax) which the taxpayer requests in writing. 
‘‘(d) PAYMENT OF INTEREST.— 
‘‘(1) IN
GENERAL.—For purposes of section 
6611 (relating to interest on overpayments), a de-
posit which is returned to a taxpayer shall be treated 
as a payment of tax for any period to the extent 
(and only to the extent) attributable to a disputable 
tax for such period. Under regulations prescribed by 
the Secretary, rules similar to the rules of section 
6611(b)(2) shall apply. 
‘‘(2) DISPUTABLE TAX.— 
‘‘(A) IN GENERAL.—For purposes of this 
section, the term ‘disputable tax’ means the 
amount of tax specified at the time of the de-
posit as the taxpayer’s reasonable estimate of 
the maximum amount of any tax attributable to 
disputable items. 
‘‘(B) SAFE
HARBOR
BASED
ON
30-DAY 
LETTER.—In the case of a taxpayer who has 
been issued a 30-day letter, the maximum 
amount of tax under subparagraph (A) shall 
not be less than the amount of the proposed de-
ficiency specified in such letter.
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‘‘(3) OTHER
DEFINITIONS.—For purposes of 
paragraph (2)— 
‘‘(A) DISPUTABLE ITEM.—The term ‘dis-
putable item’ means any item of income, gain, 
loss, deduction, or credit if the taxpayer— 
‘‘(i) has a reasonable basis for its 
treatment of such item, and 
‘‘(ii) reasonably believes that the Sec-
retary also has a reasonable basis for dis-
allowing the taxpayer’s treatment of such 
item. 
‘‘(B) 30-DAY LETTER.—The term ‘30-day 
letter’ means the first letter of proposed defi-
ciency which allows the taxpayer an opportunity 
for administrative review in the Internal Rev-
enue Service Office of Appeals. 
‘‘(4) RATE OF INTEREST.—The rate of interest 
allowable under this subsection shall be the Federal 
short-term rate determined under section 6621(b), 
compounded daily. 
‘‘(e) USE OF DEPOSITS.— 
‘‘(1) PAYMENT OF TAX.—Except as otherwise 
provided by the taxpayer, deposits shall be treated 
as used for the payment of tax in the order depos-
ited.
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‘‘(2) RETURNS
OF
DEPOSITS.—Deposits shall 
be treated as returned to the taxpayer on a last-in, 
first-out basis.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for subchapter A of chapter 67 is amended by adding at 
the end the following new item: 
‘‘Sec. 6603. Deposits made to suspend running of interest on po-
tential underpayments, etc.’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to deposits made after the 
date of the enactment of this Act. 
(2) COORDINATION
WITH
DEPOSITS
MADE 
UNDER REVENUE PROCEDURE 84–58.—In the case of 
an amount held by the Secretary of the Treasury or 
his delegate on the date of the enactment of this Act 
as a deposit in the nature of a cash bond deposit 
pursuant to Revenue Procedure 84–58, the date that 
the taxpayer identifies such amount as a deposit 
made pursuant to section 6603 of the Internal Rev-
enue Code (as added by this Act) shall be treated as 
the date such amount is deposited for purposes of 
such section 6603. 
SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN IN-
STALLMENT AGREEMENTS. 
(a) IN GENERAL.—
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(1) Section 6159(a) (relating to authorization 
of agreements) is amended— 
(A) by striking ‘‘satisfy liability for pay-
ment of’’ and inserting ‘‘make payment on’’, 
and 
(B) by inserting ‘‘full or partial’’ after ‘‘fa-
cilitate’’. 
(2) Section 6159(c) (relating to Secretary re-
quired to enter into installment agreements in cer-
tain cases) is amended in the matter preceding para-
graph (1) by inserting ‘‘full’’ before ‘‘payment’’. 
(b) REQUIREMENT TO REVIEW PARTIAL PAYMENT 
AGREEMENTS EVERY TWO YEARS.—Section 6159 is 
amended by redesignating subsections (d) and (e) as sub-
sections (e) and (f), respectively, and inserting after sub-
section (c) the following new subsection: 
‘‘(d) SECRETARY REQUIRED TO REVIEW INSTALL-
MENT AGREEMENTS FOR PARTIAL COLLECTION EVERY 
TWO YEARS.—In the case of an agreement entered into 
by the Secretary under subsection (a) for partial collection 
of a tax liability, the Secretary shall review the agreement 
at least once every 2 years.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to agreements entered into on or 
after the date of the enactment of this Act.
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SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGU-
LATION AUTHORITY. 
(a) IN GENERAL.—Section 1502 is amended by add-
ing at the end the following new sentence: ‘‘In carrying 
out the preceding sentence, the Secretary may prescribe 
rules that are different from the provisions of chapter 1 
that would apply if such corporations filed separate re-
turns.’’. 
(b) RESULT NOT OVERTURNED.—Notwithstanding 
the amendment made by subsection (a), the Internal Rev-
enue Code of 1986 shall be construed by treating Treasury 
Regulation § 1.1502-20(c)(1)(iii) (as in effect on January 
1, 2001) as being inapplicable to the factual situation in 
Rite Aid Corporation and Subsidiary Corporations v. 
United States, 255 F.3d 1357 (Fed. Cir. 2001). 
(c) EFFECTIVE DATE.—This section, and the amend-
ment made by this section, shall apply to taxable years 
beginning before, on, or after the date of the enactment 
of this Act. 
Part III—Leasing 
SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEAS-
ING ARRANGEMENTS. 
(a) CLARIFICATION OF RECOVERY PERIOD FOR TAX- 
EXEMPT USE PROPERTY SUBJECT TO LEASE.—Subpara-
graph (A) of section 168(g)(3) (relating to special rules 
for determining class life) is amended by inserting ‘‘(not-
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withstanding any other subparagraph of this paragraph)’’ 
after ‘‘shall’’. 
(b) LIMITATION
ON DEPRECIATION PERIOD
FOR 
SOFTWARE LEASED
TO TAX-EXEMPT ENTITY.—Para-
graph (1) of section 167(f) is amended by adding at the 
end the following new subparagraph: 
‘‘(C) TAX-EXEMPT
USE
PROPERTY
SUB-
JECT TO LEASE.—In the case of computer soft-
ware which would be tax-exempt use property 
as defined in subsection (h) of section 168 if 
such section applied to computer software, the 
useful life under subparagraph (A) shall not be 
less than 125 percent of the lease term (within 
the meaning of section 168(i)(3)).’’. 
(c) LEASE TERM TO INCLUDE RELATED SERVICE 
CONTRACTS.—Subparagraph (A) of section 168(i)(3) (re-
lating to lease term) is amended by striking ‘‘and’’ at the 
end of clause (i), by redesignating clause (ii) as clause 
(iii), and by inserting after clause (i) the following new 
clause: 
‘‘(ii) the term of a lease shall include 
the term of any service contract or similar 
arrangement (whether or not treated as a 
lease under section 7701(e))—
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‘‘(I) which is part of the same 
transaction (or series of related trans-
actions) which includes the lease, and 
‘‘(II) which is with respect to the 
property subject to the lease or sub-
stantially similar property, and’’. 
(d) EXPANSION OF SHORT-TERM LEASE EXEMPTION 
FOR
QUALIFIED
TECHNOLOGICAL
EQUIPMENT.—Sub-
paragraph (A) of section 168(h)(3) is amended by adding 
at the end the following new sentence: ‘‘Notwithstanding 
subsection (i)(3)(A)(i), in determining a lease term for 
purposes of the preceding sentence, there shall not be 
taken into account any option of the lessee to renew at 
the fair market value rent determined at the time of re-
newal; except that the aggregate period not taken into ac-
count by reason of this sentence shall not exceed 24 
months.’’. 
SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO 
PROPERTY 
USED 
BY 
GOVERNMENTS 
OR 
OTHER TAX-EXEMPT ENTITIES. 
(a) IN GENERAL.—Subpart C of part II of sub-
chapter E of chapter 1 (relating to taxable year for which 
deductions taken) is amended by adding at the end the 
following new section:
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‘‘SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO 
PROPERTY 
USED 
BY 
GOVERNMENTS 
OR 
OTHER TAX-EXEMPT ENTITIES. 
‘‘(a) LIMITATION ON LOSSES.—Except as otherwise 
provided in this section, a tax-exempt use loss for any tax-
able year shall not be allowed. 
‘‘(b) DISALLOWED LOSS CARRIED TO NEXT YEAR.— 
Any tax-exempt use loss with respect to any tax-exempt 
use property which is disallowed under subsection (a) for 
any taxable year shall be treated as a deduction with re-
spect to such property in the next taxable year. 
‘‘(c) DEFINITIONS.—For purposes of this section— 
‘‘(1) TAX-EXEMPT USE LOSS.—The term ‘tax- 
exempt use loss’ means, with respect to any taxable 
year, the amount (if any) by which— 
‘‘(A) the sum of— 
‘‘(i) the aggregate deductions (other 
than interest) directly allocable to a tax-ex-
empt use property, plus 
‘‘(ii) the aggregate deductions for in-
terest properly allocable to such property, 
exceed 
‘‘(B) the aggregate income from such 
property. 
‘‘(2) TAX-EXEMPT USE PROPERTY.—The term 
‘tax-exempt use property’ has the meaning given to
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such term by section 168(h) (without regard to 
paragraphs (1)(C) and (3) thereof and determined 
as if property described in section 167(f)(1)(B) were 
tangible property). Such term shall not include prop-
erty which would (but for this sentence) be tax-ex-
empt use property solely by reason of section 
168(h)(6) if any credit is allowable under section 42 
or 47 with respect to such property. 
‘‘(d) EXCEPTION FOR CERTAIN LEASES.—This sec-
tion shall not apply to any lease of property which meets 
the requirements of all of the following paragraphs: 
‘‘(1) AVAILABILITY OF FUNDS.— 
‘‘(A) IN
GENERAL.—A lease of property 
meets the requirements of this paragraph if (at 
any time during the lease term) not more than 
an allowable amount of funds are— 
‘‘(i) subject to any arrangement re-
ferred to in subparagraph (B), or 
‘‘(ii) set aside or expected to be set 
aside, 
to or for the benefit of the lessor or any lender, 
or to or for the benefit of the lessee to satisfy 
the lessee’s obligations or options under the 
lease. For purposes of clause (ii), funds shall be 
treated as set aside or expected to be set aside
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only if a reasonable person would conclude, 
based on the facts and circumstances, that such 
funds are set aside or expected to be set aside. 
‘‘(B) ARRANGEMENTS.—The arrangements 
referred to in this subparagraph include a de-
feasance arrangement, a loan by the lessee to 
the lessor or any lender, a deposit arrangement, 
a letter of credit collateralized with cash or cash 
equivalents, a payment undertaking agreement, 
prepaid rent (within the meaning of the regula-
tions under section 467), a sinking fund ar-
rangement, a guaranteed investment contract, 
financial guaranty insurance, and any similar 
arrangement (whether or not such arrangement 
provides credit support). 
‘‘(C) ALLOWABLE AMOUNT.— 
‘‘(i) IN GENERAL.—Except as other-
wise provided in this subparagraph, the 
term ‘allowable amount’ means an amount 
equal to 20 percent of the lessor’s adjusted 
basis in the property at the time the lease 
is entered into. 
‘‘(ii) HIGHER AMOUNT PERMITTED IN 
CERTAIN CASES.—To the extent provided 
in regulations, a higher percentage shall be
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permitted under clause (i) where necessary 
because of the credit-worthiness of the les-
see. In no event may such regulations per-
mit a percentage of more than 50 percent. 
‘‘(iii) OPTION
TO
PURCHASE
OTHER 
THAN AT FAIR MARKET VALUE.—If under 
the lease the lessee has the option to pur-
chase the property for a fixed price or for 
other than the fair market value of the 
property (determined at the time of exer-
cise), the allowable amount at the time 
such option may be exercised may not ex-
ceed 50 percent of the price at which such 
option may be exercised. 
‘‘(iv) NO
ALLOWABLE
AMOUNT
FOR 
CERTAIN ARRANGEMENTS.—The allowable 
amount shall be zero with respect to any 
arrangement which involves— 
‘‘(I) a loan from the lessee to the 
lessor or a lender, 
‘‘(II) any deposit received, letter 
of credit issued, or payment under-
taking agreement entered into by a 
lender otherwise involved in the trans-
action, or
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‘‘(III) in the case of a trans-
action which involves a lender, any 
credit support made available to the 
lessor in which any such lender does 
not have a claim that is senior to the 
lessor. 
For purposes of subclause (I), the term 
‘loan’ shall not include any amount treated 
as a loan under section 467 with respect to 
a section 467 rental agreement. 
‘‘(2) LESSOR MUST MAKE SUBSTANTIAL EQUITY 
INVESTMENT.— 
‘‘(A) IN
GENERAL.—A lease of property 
meets the requirements of this paragraph if— 
‘‘(i) the lessor— 
‘‘(I) has at the time the lease is 
entered into an unconditional at-risk 
equity investment (as determined by 
the Secretary) in the property of at 
least 20 percent of the lessor’s ad-
justed basis in the property as of that 
time, and 
‘‘(II) maintains such investment 
throughout the term of the lease, and
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‘‘(ii) the fair market value of the 
property at the end of the lease term is 
reasonably expected to be equal to at least 
20 percent of such basis. 
‘‘(B) RISK
OF
LOSS.—For purposes of 
clause (ii), the fair market value at the end of 
the lease term shall be reduced to the extent 
that a person other than the lessor bears a risk 
of loss in the value of the property. 
‘‘(C) PARAGRAPH
NOT
TO
APPLY
TO 
SHORT-TERM
LEASES.—This paragraph shall 
not apply to any lease with a lease term of 5 
years or less. 
‘‘(3) LESSEE MAY NOT BEAR MORE THAN MINI-
MAL RISK OF LOSS.— 
‘‘(A) IN
GENERAL.—A lease of property 
meets the requirements of this paragraph if 
there is no arrangement under which the lessee 
bears— 
‘‘(i) any portion of the loss that would 
occur if the fair market value of the leased 
property were 25 percent less than its rea-
sonably expected fair market value at the 
time the lease is terminated, or
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‘‘(ii) more than 50 percent of the loss 
that would occur if the fair market value 
of the leased property at the time the lease 
is terminated were zero. 
‘‘(B) EXCEPTION.—The Secretary may by 
regulations provide that the requirements of 
this paragraph are not met where the lessee 
bears more than a minimal risk of loss. 
‘‘(C) PARAGRAPH
NOT
TO
APPLY
TO 
SHORT-TERM
LEASES.—This paragraph shall 
not apply to any lease with a lease term of 5 
years or less. 
‘‘(e) SPECIAL RULES.— 
‘‘(1) TREATMENT
OF
FORMER
TAX-EXEMPT 
USE PROPERTY.— 
‘‘(A) IN
GENERAL.—In the case of any 
former tax-exempt use property— 
‘‘(i) any deduction allowable under 
subsection (b) with respect to such prop-
erty for any taxable year shall be allowed 
only to the extent of any net income (with-
out regard to such deduction) from such 
property for such taxable year, and 
‘‘(ii) any portion of such unused de-
duction remaining after application of
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clause (i) shall be treated as a deduction 
allowable under subsection (b) with respect 
to such property in the next taxable year. 
‘‘(B) FORMER
TAX-EXEMPT
USE
PROP-
ERTY.—For purposes of this subsection, the 
term ‘former tax-exempt use property’ means 
any property which— 
‘‘(i) is not tax-exempt use property for 
the taxable year, but 
‘‘(ii) was tax-exempt use property for 
any prior taxable year. 
‘‘(2) DISPOSITION
OF
ENTIRE
INTEREST
IN 
PROPERTY.—If during the taxable year a taxpayer 
disposes of the taxpayer’s entire interest in tax-ex-
empt use property (or former tax-exempt use prop-
erty), rules similar to the rules of section 469(g) 
shall apply for purposes of this section. 
‘‘(3) COORDINATION WITH SECTION 469.—This 
section shall be applied before the application of sec-
tion 469. 
‘‘(4) COORDINATION WITH SECTIONS 1031 AND 
1033.— 
‘‘(A) IN GENERAL.—Sections 1031(a) and 
1033(a) shall not apply if—
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‘‘(i) the exchanged or converted prop-
erty is tax-exempt use property subject to 
a lease which was entered into before 
March 13, 2004, and which would not have 
met the requirements of subsection (d) had 
such requirements been in effect when the 
lease was entered into, or 
‘‘(ii) the replacement property is tax- 
exempt use property subject to a lease 
which does not meet the requirements of 
subsection (d). 
‘‘(B) ADJUSTED
BASIS.—In the case of 
property acquired by the lessor in a transaction 
to which section 1031 or 1033 applies, the ad-
justed basis of such property for purposes of 
this section shall be equal to the lesser of— 
‘‘(i) the fair market value of the prop-
erty as of the beginning of the lease term, 
or 
‘‘(ii) the amount which would be the 
lessor’s adjusted basis if such sections did 
not apply to such transaction. 
‘‘(f) OTHER DEFINITIONS.—For purposes of this sec-
tion—
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‘‘(1) RELATED
PARTIES.—The terms ‘lessor’, 
‘lessee’, and ‘lender’ each include any related party 
(within the meaning of section 197(f)(9)(C)(i)). 
‘‘(2) LEASE TERM.—The term ‘lease term’ has 
the meaning given to such term by section 168(i)(3). 
‘‘(3) LENDER.—The term ‘lender’ means, with 
respect to any lease, a person that makes a loan to 
the lessor which is secured (or economically similar 
to being secured) by the lease or the leased property. 
‘‘(4) LOAN.—The term ‘loan’ includes any simi-
lar arrangement. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the provisions of this section, including regula-
tions which— 
‘‘(1) allow in appropriate cases the aggregation 
of property subject to the same lease, and 
‘‘(2) provide for the determination of the alloca-
tion of interest expense for purposes of this sec-
tion.’’. 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subpart C of part II of subchapter E of chapter 
1 is amended by adding at the end the following new item: 
‘‘Sec. 470. Limitation on deductions allocable to property used by 
governments or other tax-exempt entities.’’.
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SEC. 649. EFFECTIVE DATE. 
(a) IN GENERAL.—Except as provided in this section, 
the amendments made by this part shall apply to leases 
entered into after March 12, 2004. 
(b) EXCEPTION.— 
(1) IN GENERAL.—The amendments made by 
this part shall not apply to qualified transportation 
property. 
(2) QUALIFIED TRANSPORTATION PROPERTY.— 
For purposes of paragraph (1), the term ‘‘qualified 
transportation property’’ means domestic property 
subject to a lease with respect to which a formal ap-
plication— 
(A) was submitted for approval to the Fed-
eral Transit Administration (an agency of the 
Department of Transportation) after June 30, 
2003, and before March 13, 2004, 
(B) is approved by the Federal Transit Ad-
ministration before January 1, 2005, and 
(C) includes a description of such property 
and the value of such property. 
(3) EXCHANGES AND CONVERSION OF TAX-EX-
EMPT USE PROPERTY.—Section 470(e)(4) of the In-
ternal Revenue Code of 1986, as added by this sec-
tion, shall apply to property exchanged or converted 
after the date of the enactment of this Act.
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Subtitle C—Reduction of Fuel Tax 
Evasion 
SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR 
MOBILE MACHINERY. 
(a) EXEMPTION FROM TAX ON HEAVY TRUCKS AND 
TRAILERS SOLD AT RETAIL.— 
(1) IN GENERAL.—Section 4053 (relating to ex-
emptions) is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(8) MOBILE MACHINERY.—Any vehicle which 
consists of a chassis— 
‘‘(A) to which there has been permanently 
mounted (by welding, bolting, riveting, or other 
means) machinery or equipment to perform a 
construction, manufacturing, processing, farm-
ing, mining, drilling, timbering, or similar oper-
ation if the operation of the machinery or 
equipment is unrelated to transportation on or 
off the public highways, 
‘‘(B) which has been specially designed to 
serve only as a mobile carriage and mount (and 
a power source, where applicable) for the par-
ticular machinery or equipment involved, wheth-
er or not such machinery or equipment is in op-
eration, and
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‘‘(C) which, by reason of such special de-
sign, could not, without substantial structural 
modification, be used as a component of a vehi-
cle designed to perform a function of trans-
porting any load other than that particular ma-
chinery or equipment or similar machinery or 
equipment requiring such a specially designed 
chassis.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall take effect on the day after 
the date of the enactment of this Act. 
(b) EXEMPTION FROM TAX ON USE OF CERTAIN VE-
HICLES.— 
(1) IN GENERAL.—Section 4483 (relating to ex-
emptions) is amended by redesignating subsection 
(g) as subsection (h) and by inserting after sub-
section (f) the following new subsection: 
‘‘(g) EXEMPTION FOR MOBILE MACHINERY.—No tax 
shall be imposed by section 4481 on the use of any vehicle 
described in section 4053(8).’’. 
(2) EFFECTIVE DATE.—The amendments made 
by this subsection shall take effect on the day after 
the date of the enactment of this Act. 
(c) EXEMPTION FROM TAX ON TIRES.—
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(1) 
IN
GENERAL.—Section 
4072(b)(2) 
is 
amended by adding at the end the following flush 
sentence: ‘‘Such term shall not include tires of a 
type used exclusively on vehicles described in section 
4053(8).’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall take effect on the day after 
the date of the enactment of this Act. 
(d) REFUND OF FUEL TAXES.— 
(1) IN GENERAL.—Section 6421(e)(2) (defining 
off-highway business use) is amended by adding at 
the end the following new subparagraph: 
‘‘(C) USES IN MOBILE MACHINERY.— 
‘‘(i) IN
GENERAL.—The term ‘off- 
highway business use’ shall include any use 
in a vehicle which meets the requirements 
described in clause (ii). 
‘‘(ii) REQUIREMENTS
FOR
MOBILE 
MACHINERY.—The requirements described 
in this clause are— 
‘‘(I) the design-based test, and 
‘‘(II) the use-based test. 
‘‘(iii) DESIGN-BASED TEST.—For pur-
poses of clause (ii)(I), the design-based
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test is met if the vehicle consists of a chas-
sis— 
‘‘(I) to which there has been per-
manently mounted (by welding, bolt-
ing, riveting, or other means) machin-
ery or equipment to perform a con-
struction, manufacturing, processing, 
farming, mining, drilling, timbering, 
or similar operation if the operation of 
the machinery or equipment is unre-
lated to transportation on or off the 
public highways, 
‘‘(II) which has been specially de-
signed to serve only as a mobile car-
riage and mount (and a power source, 
where applicable) for the particular 
machinery or equipment involved, 
whether or not such machinery or 
equipment is in operation, and 
‘‘(III) which, by reason of such 
special design, could not, without sub-
stantial structural modification, be 
used as a component of a vehicle de-
signed to perform a function of trans-
porting any load other than that par-
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ticular machinery or equipment or 
similar machinery or equipment re-
quiring such a specially designed chas-
sis. 
‘‘(iv) USE-BASED
TEST.—For pur-
poses of clause (ii)(II), the use-based test 
is met if the use of the vehicle on public 
highways was less than 7,500 miles during 
the taxpayer’s taxable year.’’. 
(2) NO
TAX-FREE
SALES.—Subsection (b) of 
section 4082, as amended by section 652, is amend-
ed by inserting before the period at the end ‘‘and 
such term shall not include any use described in sec-
tion 6421(e)(2)(C)’’. 
(3) ANNUAL REFUND OF TAX PAID.—Section 
6427(i)(2) (relating to exceptions) is amended by 
adding at the end the following new subparagraph: 
‘‘(C) NONAPPLICATION OF PARAGRAPH.— 
This paragraph shall not apply to any fuel used 
solely in any off-highway business use described 
in section 6421(e)(2)(C).’’. 
(4) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after the date of the enactment of this Act.
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SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE. 
(a) RATE OF TAX.— 
(1) IN GENERAL.—Subparagraph (A) of section 
4081(a)(2) is amended by striking ‘‘and’’ at the end 
of clause (ii), by striking the period at the end of 
clause (iii) and inserting ‘‘, and’’, and by adding at 
the end the following new clause: 
‘‘(iv) in the case of aviation-grade ker-
osene, 21.8 cents per gallon.’’. 
(2) COMMERCIAL AVIATION.—Paragraph (2) of 
section 4081(a) is amended by adding at the end the 
following new subparagraph: 
‘‘(C) TAXES IMPOSED ON FUEL USED IN 
COMMERCIAL AVIATION.—In the case of avia-
tion-grade kerosene which is removed from any 
refinery or terminal directly into the fuel tank 
of an aircraft for use in commercial aviation, 
the rate of tax under subparagraph (A)(iv) shall 
be 4.3 cents per gallon.’’. 
(3) CERTAIN
REFUELER
TRUCKS, TANKERS, 
AND TANK WAGONS TREATED AS TERMINAL.—Sub-
section (a) of section 4081 is amended by adding at 
the end the following new paragraph: 
‘‘(3) CERTAIN
REFUELER
TRUCKS, TANKERS, 
AND TANK WAGONS TREATED AS TERMINAL.—
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‘‘(A) IN GENERAL.—In the case of avia-
tion-grade kerosene which is removed from any 
terminal directly into the fuel tank of an air-
craft (determined without regard to any re-
fueler truck, tanker, or tank wagon which meets 
the requirements of subparagraph (B)), a re-
fueler truck, tanker, or tank wagon shall be 
treated as part of such terminal if— 
‘‘(i) such truck, tanker, or wagon 
meets the requirements of subparagraph 
(B) with respect to an airport, and 
‘‘(ii) except in the case of exigent cir-
cumstances identified by the Secretary in 
regulations, no vehicle registered for high-
way use is loaded with aviation-grade ker-
osene at such terminal. 
‘‘(B) REQUIREMENTS.—A refueler truck, 
tanker, or tank wagon meets the requirements 
of this subparagraph with respect to an airport 
if such truck, tanker, or wagon— 
‘‘(i) is loaded with aviation-grade ker-
osene at such terminal located within such 
airport and delivers such kerosene only 
into aircraft at such airport,
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‘‘(ii) has storage tanks, hose, and cou-
pling equipment designed and used for the 
purposes of fueling aircraft, 
‘‘(iii) is not registered for highway 
use, and 
‘‘(iv) is operated by— 
‘‘(I) the terminal operator of 
such terminal, or 
‘‘(II) a person that makes a daily 
accounting to such terminal operator 
of each delivery of fuel from such 
truck, tanker, or wagon. 
‘‘(C) REPORTING.—The Secretary shall re-
quire under section 4101(d) reporting by such 
terminal operator of— 
‘‘(i) any information obtained under 
subparagraph (B)(iv)(II), and 
‘‘(ii) any similar information main-
tained by such terminal operator with re-
spect to deliveries of fuel made by trucks, 
tankers, or wagons operated by such ter-
minal operator.’’. 
(4) LIABILITY
FOR
TAX
ON
AVIATION-GRADE 
KEROSENE USED IN COMMERCIAL AVIATION.—Sub-
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section (a) of section 4081 is amended by adding at 
the end the following new paragraph: 
‘‘(4) LIABILITY FOR TAX ON AVIATION-GRADE 
KEROSENE USED IN COMMERCIAL AVIATION.—For 
purposes of paragraph (2)(C), the person who uses 
the fuel for commercial aviation shall pay the tax 
imposed under such paragraph. For purposes of the 
preceding sentence, fuel shall be treated as used 
when such fuel is removed into the fuel tank.’’. 
(5) NONTAXABLE USES.— 
(A) IN GENERAL.—Section 4082 is amend-
ed by redesignating subsections (e) and (f) as 
subsections (f) and (g), respectively, and by in-
serting after subsection (d) the following new 
subsection: 
‘‘(e) AVIATION-GRADE KEROSENE.—In the case of 
aviation-grade kerosene which is exempt from the tax im-
posed by section 4041(c) (other than by reason of a prior 
imposition of tax) and which is removed from any refinery 
or terminal directly into the fuel tank of an aircraft, the 
rate of tax under section 4081(a)(2)(A)(iv) shall be zero.’’. 
(B) CONFORMING AMENDMENTS.— 
(i) Subsection (b) of section 4082 is 
amended by adding at the end the fol-
lowing new flush sentence:
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‘‘The term ‘nontaxable use’ does not include the use of 
aviation-grade kerosene in an aircraft.’’. 
(ii) Section 4082(d) is amended by 
striking paragraph (1) and by redesig-
nating paragraphs (2) and (3) as para-
graphs (1) and (2), respectively. 
(6) NONAIRCRAFT
USE
OF
AVIATION-GRADE 
KEROSENE.— 
(A) IN GENERAL.—Subparagraph (B) of 
section 4041(a)(1) is amended by adding at the 
end the following new sentence: ‘‘This subpara-
graph shall not apply to aviation-grade ker-
osene.’’. 
(B) 
CONFORMING
AMENDMENT.—The 
heading for paragraph (1) of section 4041(a) is 
amended by inserting ‘‘AND KEROSENE’’ after 
‘‘DIESEL FUEL’’. 
(b) 
COMMERCIAL
AVIATION.—Section 
4083 
is 
amended by redesignating subsections (b) and (c) as sub-
sections (c) and (d), respectively, and by inserting after 
subsection (a) the following new subsection: 
‘‘(b) COMMERCIAL AVIATION.—For purposes of this 
subpart, the term ‘commercial aviation’ means any use of 
an aircraft in a business of transporting persons or prop-
erty for compensation or hire by air, unless properly allo-
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cable to any transportation exempt from the taxes imposed 
by sections 4261 and 4271 by reason of section 4281 or 
4282 or by reason of section 4261(h).’’. 
(c) REFUNDS.— 
(1) IN
GENERAL.—Paragraph (4) of section 
6427(l) is amended to read as follows: 
‘‘(4) REFUNDS
FOR
AVIATION-GRADE
KER-
OSENE.— 
‘‘(A) NO REFUND OF CERTAIN TAXES ON 
FUEL USED IN COMMERCIAL AVIATION.—In the 
case of aviation-grade kerosene used in com-
mercial aviation (as defined in section 4083(b)) 
(other than supplies for vessels or aircraft with-
in the meaning of section 4221(d)(3)), para-
graph (1) shall not apply to so much of the tax 
imposed by section 4081 as is attributable to— 
‘‘(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 4081(a)(2)(A)(iv) as does 
not exceed 4.3 cents per gallon. 
‘‘(B) 
PAYMENT
TO
ULTIMATE, 
REG-
ISTERED
VENDOR.—With respect to aviation- 
grade kerosene, if the ultimate purchaser of
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such kerosene waives (at such time and in such 
form and manner as the Secretary shall pre-
scribe) 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 paragraph (1) to 
such ultimate vendor, but only if such ultimate 
vendor— 
‘‘(i) is registered under section 4101, 
and 
‘‘(ii) meets the requirements of sub-
paragraph (A), (B), or (D) of section 
6416(a)(1).’’. 
(2) TIME FOR FILING CLAIMS.—Subparagraph 
(A) of section 6427(i)(4) is amended— 
(A) by striking ‘‘subsection (l)(5)’’ both 
places it appears and inserting ‘‘paragraph 
(4)(B) or (5) of subsection (l)’’, and 
(B) by striking ‘‘the preceding sentence’’ 
and inserting ‘‘subsection (l)(5)’’. 
(3) CONFORMING AMENDMENT.—Subparagraph 
(B) of section 6427(l)(2) is amended to read as fol-
lows: 
‘‘(B) in the case of aviation-grade ker-
osene—
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‘‘(i) any use which is exempt from the 
tax imposed by section 4041(c) other than 
by reason of a prior imposition of tax, or 
‘‘(ii) any use in commercial aviation 
(within the meaning of section 4083(b)).’’. 
(d) REPEAL
OF PRIOR TAXATION
OF AVIATION 
FUEL.— 
(1) IN GENERAL.—Part III of subchapter A of 
chapter 32 is amended by striking subpart B and by 
redesignating subpart C as subpart B. 
(2) CONFORMING AMENDMENTS.— 
(A) Section 4041(c) is amended to read as 
follows: 
‘‘(c) AVIATION-GRADE KEROSENE.— 
‘‘(1) IN GENERAL.—There is hereby imposed a 
tax upon aviation-grade kerosene— 
‘‘(A) sold by any person to an owner, les-
see, or other operator of an aircraft for use in 
such aircraft, or 
‘‘(B) used by any person in an aircraft un-
less there was a taxable sale of such fuel under 
subparagraph (A). 
‘‘(2) EXEMPTION
FOR
PREVIOUSLY
TAXED 
FUEL.—No tax shall be imposed by this subsection 
on the sale or use of any aviation-grade kerosene if
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HR 4520 PCS 
tax was imposed on such liquid under section 4081 
and the tax thereon was not credited or refunded. 
‘‘(3) RATE OF TAX.—The rate of tax imposed 
by this subsection shall be the rate of tax specified 
in section 4081(a)(2)(A)(iv) which is in effect at the 
time of such sale or use.’’. 
(B) Section 4041(d)(2) is amended by 
striking ‘‘section 4091’’ and inserting ‘‘section 
4081’’. 
(C) Section 4041 is amended by striking 
subsection (e). 
(D) Section 4041 is amended by striking 
subsection (i). 
(E) Sections 4101(a), 4103, 4221(a), and 
6206 are each amended by striking ‘‘, 4081, or 
4091’’ and inserting ‘‘or 4081’’. 
(F) Section 6416(b)(2) is amended by 
striking ‘‘4091 or’’. 
(G) Section 6416(b)(3) is amended by 
striking ‘‘or 4091’’ each place it appears. 
(H) Section 6416(d) is amended by strik-
ing ‘‘or to the tax imposed by section 4091 in 
the case of refunds described in section 
4091(d)’’.
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HR 4520 PCS 
(I) Section 6427(j)(1) is amended by strik-
ing ‘‘, 4081, and 4091’’ and inserting ‘‘and 
4081’’. 
(J)(i) Section 6427(l)(1) is amended to 
read as follows: 
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection and in subsection (k), if any 
diesel fuel or kerosene on which tax has been im-
posed by section 4041 or 4081 is used by any person 
in a nontaxable use, the Secretary shall pay (without 
interest) to the ultimate purchaser of such fuel an 
amount equal to the aggregate amount of tax im-
posed on such fuel under section 4041 or 4081, as 
the case may be, reduced by any payment made to 
the ultimate vendor under paragraph (4)(B).’’. 
(ii) Paragraph (5)(B) of section 6427(l) is 
amended by striking ‘‘Paragraph (1)(A) shall 
not apply to kerosene’’ and inserting ‘‘Para-
graph (1) shall not apply to kerosene (other 
than aviation-grade kerosene)’’. 
(K) 
Subparagraph 
(B) 
of 
section 
6724(d)(1) is amended by striking clause (xv) 
and by redesignating the succeeding clauses ac-
cordingly.
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HR 4520 PCS 
(L) Paragraph (2) of section 6724(d) is 
amended by striking subparagraph (W) and by 
redesignating the succeeding subparagraphs ac-
cordingly. 
(M) Paragraph (1) of section 9502(b) is 
amended by adding ‘‘and’’ at the end of sub-
paragraph (B) and by striking subparagraphs 
(C) and (D) and inserting the following new 
subparagraph: 
‘‘(C) section 4081 with respect to aviation 
gasoline and aviation-grade kerosene, and’’. 
(N) The last sentence of section 9502(b) is 
amended to read as follows: 
‘‘There shall not be taken into account under paragraph 
(1) so much of the taxes imposed by section 4081 as are 
determined 
at 
the 
rate 
specified 
in 
section 
4081(a)(2)(B).’’. 
(O) Subsection (b) of section 9508 is 
amended by striking paragraph (3) and by re-
designating paragraphs (4) and (5) as para-
graphs (3) and (4), respectively. 
(P) Section 9508(c)(2)(A) is amended by 
striking ‘‘sections 4081 and 4091’’ and insert-
ing ‘‘section 4081’’.
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HR 4520 PCS 
(Q) The table of subparts for part III of 
subchapter A of chapter 32 is amended to read 
as follows: 
‘‘Subpart A. Motor and aviation fuels. 
‘‘Subpart B. Special provisions applicable to fuels tax.’’. 
(R) The heading for subpart A of part III 
of subchapter A of chapter 32 is amended to 
read as follows: 
‘‘Subpart A—Motor and Aviation Fuels’’. 
(S) The heading for subpart B of part III 
of subchapter A of chapter 32, as redesignated 
by paragraph (1), is amended to read as fol-
lows: 
‘‘Subpart B—Special Provisions Applicable to Fuels 
Tax’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to aviation-grade kerosene re-
moved, entered, or sold after September 30, 2004. 
(f) FLOOR STOCKS TAX.— 
(1) IN GENERAL.—There is hereby imposed on 
aviation-grade kerosene held on October 1, 2004, by 
any person a tax equal to— 
(A) the tax which would have been imposed 
before such date on such kerosene had the 
amendments made by this section been in effect 
at all times before such date, reduced by
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HR 4520 PCS 
(B) the tax imposed before such date 
under section 4091 of the Internal Revenue 
Code of 1986, as in effect on the day before the 
date of the enactment of this Act. 
(2) LIABILITY FOR TAX AND METHOD OF PAY-
MENT.— 
(A) LIABILITY
FOR
TAX.—The person 
holding the kerosene on October 1, 2004, to 
which the tax imposed by paragraph (1) applies 
shall be liable for such tax. 
(B) METHOD AND TIME FOR PAYMENT.— 
The tax imposed by paragraph (1) shall be paid 
at such time and in such manner as the Sec-
retary of the Treasury (or the Secretary’s dele-
gate) shall prescribe, including the nonapplica-
tion of such tax on de minimis amounts of ker-
osene. 
(3) TRANSFER
OF
FLOOR
STOCK
TAX
REVE-
NUES TO TRUST FUNDS.—For purposes of deter-
mining the amount transferred to any trust fund, 
the tax imposed by this subsection shall be treated 
as imposed by section 4081 of the Internal Revenue 
Code of 1986— 
(A) at the Leaking Underground Storage 
Tank Trust Fund financing rate under such
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section to the extent of 0.1 cents per gallon, 
and 
(B) 
at 
the 
rate 
under 
section 
4081(a)(2)(A)(iv) to the extent of the remain-
der. 
(4) HELD BY A PERSON.—For purposes of this 
section, kerosene shall be considered as held by a 
person if title thereto has passed to such person 
(whether or not delivery to the person has been 
made). 
(5) OTHER LAWS APPLICABLE.—All provisions 
of law, including penalties, applicable with respect to 
the tax imposed by section 4081 of such Code shall, 
insofar as applicable and not inconsistent with the 
provisions of this subsection, apply with respect to 
the floor stock tax imposed by paragraph (1) to the 
same extent as if such tax were imposed by such 
section. 
SEC. 653. DYE INJECTION EQUIPMENT. 
(a) IN GENERAL.—Section 4082(a)(2) (relating to 
exemptions for diesel fuel and kerosene) is amended by 
inserting ‘‘by mechanical injection’’ after ‘‘indelibly dyed’’. 
(b) DYE INJECTOR SECURITY.—Not later than 180 
days after the date of the enactment of this Act, the Sec-
retary of the Treasury shall issue regulations regarding
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mechanical dye injection systems described in the amend-
ment made by subsection (a), and such regulations shall 
include standards for making such systems tamper resist-
ant. 
(c) PENALTY FOR TAMPERING WITH OR FAILING TO 
MAINTAIN SECURITY REQUIREMENTS FOR MECHANICAL 
DYE INJECTION SYSTEMS.— 
(1) IN GENERAL.—Part I of subchapter B of 
chapter 68 (relating to assessable penalties) is 
amended by adding after section 6715 the following 
new section: 
‘‘SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN 
SECURITY 
REQUIREMENTS 
FOR 
MECHAN-
ICAL DYE INJECTION SYSTEMS. 
‘‘(a) IMPOSITION OF PENALTY— 
‘‘(1) TAMPERING.—If any person tampers with 
a mechanical dye injection system used to indelibly 
dye fuel for purposes of section 4082, such person 
shall pay a penalty in addition to the tax (if any). 
‘‘(2) FAILURE
TO
MAINTAIN
SECURITY
RE-
QUIREMENTS.—If any operator of a mechanical dye 
injection system used to indelibly dye fuel for pur-
poses of section 4082 fails to maintain the security 
standards for such system as established by the Sec-
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HR 4520 PCS 
retary, then such operator shall pay a penalty in ad-
dition to the tax (if any). 
‘‘(b) AMOUNT OF PENALTY.—The amount of the 
penalty under subsection (a) shall be— 
‘‘(1) for each violation described in paragraph 
(1), the greater of— 
‘‘(A) $25,000, or 
‘‘(B) $10 for each gallon of fuel involved, 
and 
‘‘(2) for each— 
‘‘(A) failure to maintain security standards 
described in paragraph (2), $1,000, and 
‘‘(B) failure to correct a violation described 
in paragraph (2), $1,000 per day for each day 
after which such violation was discovered or 
such person should have reasonably known of 
such violation. 
‘‘(c) JOINT AND SEVERAL LIABILITY.— 
‘‘(1) IN
GENERAL.—If a penalty is imposed 
under this section on any business entity, each offi-
cer, employee, or agent of such entity or other con-
tracting party who willfully participated in any act 
giving rise to such penalty shall be jointly and sever-
ally liable with such entity for such penalty.
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‘‘(2) AFFILIATED GROUPS.—If a business entity 
described in paragraph (1) is part of an affiliated 
group (as defined in section 1504(a)), the parent 
corporation of such entity shall be jointly and sever-
ally liable with such entity for the penalty imposed 
under this section.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 is 
amended by adding after the item related to section 
6715 the following new item: 
‘‘Sec. 6715A. Tampering with or failing to maintain security re-
quirements for mechanical dye injection systems.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
subsections (a) and (c) shall take effect on the 180th day 
after the date on which the Secretary issues the regula-
tions described in subsection (b). 
SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS. 
(a) IN GENERAL.—Section 4083(d)(1)(A) (relating 
to administrative authority), as previously amended by 
this Act, is amended by striking ‘‘and’’ at the end of clause 
(i) and by inserting after clause (ii) the following new 
clause: 
‘‘(iii) 
inspecting 
any 
books 
and 
records and any shipping papers pertaining 
to such fuel, and’’.
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HR 4520 PCS 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERA-
TORS REQUIRED FOR EXEMPTION OF BULK 
TRANSFERS TO REGISTERED TERMINALS OR 
REFINERIES. 
(a) IN GENERAL.—Section 4081(a)(1)(B) (relating 
to exemption for bulk transfers to registered terminals or 
refineries) is amended— 
(1) by inserting ‘‘by pipeline or vessel’’ after 
‘‘transferred in bulk’’, and 
(2) by inserting ‘‘, the operator of such pipeline 
or vessel,’’ after ‘‘the taxable fuel’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on October 1, 2004. 
(c) PUBLICATION OF REGISTERED PERSONS.—Be-
ginning on July 1, 2004, the Secretary of the Treasury 
(or the Secretary’s delegate) shall periodically publish a 
current list of persons registered under section 4101 of 
the Internal Revenue Code of 1986 who are required to 
register under such section. 
SEC. 656. DISPLAY OF REGISTRATION. 
(a) IN GENERAL.—Subsection (a) of section 4101 
(relating to registration) is amended—
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(1) by striking ‘‘Every’’ and inserting the fol-
lowing: 
‘‘(1) IN GENERAL.—Every’’, and 
(2) by adding at the end the following new 
paragraph: 
‘‘(2) DISPLAY OF REGISTRATION.—Every oper-
ator of a vessel required by the Secretary to register 
under this section shall display proof of registration 
through an electronic identification device prescribed 
by the Secretary on each vessel used by such oper-
ator to transport any taxable fuel.’’. 
(b) CIVIL PENALTY FOR FAILURE TO DISPLAY REG-
ISTRATION.— 
(1) IN GENERAL.—Part I of subchapter B of 
chapter 68 (relating to assessable penalties) is 
amended by inserting after section 6716 the fol-
lowing new section: 
‘‘SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON 
VESSELS. 
‘‘(a) FAILURE TO DISPLAY REGISTRATION.—Every 
operator of a vessel who fails to display proof of registra-
tion pursuant to section 4101(a)(2) shall pay a penalty 
of $500 for each such failure. With respect to any vessel, 
only one penalty shall be imposed by this section during 
any calendar month.
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‘‘(b) MULTIPLE VIOLATIONS.—In determining the 
penalty under subsection (a) on any person, subsection (a) 
shall be applied by increasing the amount in subsection 
(a) by the product of such amount and the aggregate num-
ber of penalties (if any) imposed with respect to prior 
months by this section on such person (or a related person 
or any predecessor of such person or related person). 
‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 
shall be imposed under this section with respect to any 
failure if it is shown that such failure is due to reasonable 
cause.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 is 
amended by inserting after the item relating to sec-
tion 6716 the following new item: 
‘‘Sec. 6717. Failure to display tax registration on vessels.’’. 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendments made 
by subsection (a) shall take effect on October 1, 
2004. 
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to penalties imposed 
after September 30, 2004.
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HR 4520 PCS 
SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND 
FAILURE TO REPORT. 
(a) INCREASED PENALTY.—Subsection (a) of section 
7272 (relating to penalty for failure to register) is amend-
ed by inserting ‘‘($10,000 in the case of a failure to reg-
ister under section 4101)’’ after ‘‘$50’’. 
(b) INCREASED CRIMINAL PENALTY.—Section 7232 
(relating to failure to register under section 4101, false 
representations of registration status, etc.) is amended by 
striking ‘‘$5,000’’ and inserting ‘‘$10,000’’. 
(c) ASSESSABLE PENALTY FOR FAILURE TO REG-
ISTER.— 
(1) IN GENERAL.—Part I of subchapter B of 
chapter 68 (relating to assessable penalties) is 
amended by inserting after section 6717 the fol-
lowing new section: 
‘‘SEC. 6718. FAILURE TO REGISTER. 
‘‘(a) FAILURE TO REGISTER.—Every person who is 
required to register under section 4101 and fails to do 
so shall pay a penalty in addition to the tax (if any). 
‘‘(b) AMOUNT OF PENALTY.—The amount of the 
penalty under subsection (a) shall be— 
‘‘(1) $10,000 for each initial failure to register, 
and 
‘‘(2) $1,000 for each day thereafter such person 
fails to register.
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‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 
shall be imposed under this section with respect to any 
failure if it is shown that such failure is due to reasonable 
cause.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part I of subchapter B of chapter 68 is 
amended by inserting after the item relating to sec-
tion 6717 the following new item: 
‘‘Sec. 6718. Failure to register.’’. 
(d) ASSESSABLE PENALTY FOR FAILURE TO RE-
PORT.— 
(1) IN GENERAL.—Part II of subchapter B of 
chapter 68 (relating to assessable penalties) is 
amended by adding at the end the following new sec-
tion: 
‘‘SEC. 6725. FAILURE TO REPORT INFORMATION UNDER 
SECTION 4101. 
‘‘(a) IN GENERAL.—In the case of each failure de-
scribed in subsection (b) by any person with respect to 
a vessel or facility, such person shall pay a penalty of 
$10,000 in addition to the tax (if any). 
‘‘(b) FAILURES SUBJECT TO PENALTY.—For pur-
poses of subsection (a), the failures described in this sub-
section are—
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‘‘(1) any failure to make a report under section 
4101(d) on or before the date prescribed therefor, 
and 
‘‘(2) any failure to include all of the informa-
tion required to be shown on such report or the in-
clusion of incorrect information. 
‘‘(c) REASONABLE CAUSE EXCEPTION.—No penalty 
shall be imposed under this section with respect to any 
failure if it is shown that such failure is due to reasonable 
cause.’’. 
(2) CLERICAL AMENDMENT.—The table of sec-
tions for part II of subchapter B of chapter 68 is 
amended by adding at the end the following new 
item: 
‘‘Sec. 6725. Failure to report information under section 4101.’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to penalties imposed after Sep-
tember 30, 2004. 
SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IM-
PORTER NOT REGISTERED. 
(a) TAX AT POINT OF ENTRY WHERE IMPORTER 
NOT REGISTERED.—Subpart B of part III of subchapter 
A of chapter 32, as redesignated by section 652(d), is 
amended by adding after section 4103 the following new 
section:
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‘‘SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IM-
PORTER NOT REGISTERED. 
‘‘(a) IN GENERAL.—The importer of record shall be 
jointly and severally liable for the tax imposed by section 
4081(a)(1)(A)(iii) if, under regulations prescribed by the 
Secretary, any other person that is not a person who is 
registered under section 4101 is liable for such tax. 
‘‘(b) COLLECTION FROM CUSTOMS BOND.—If any 
tax for which any importer of record is liable under sub-
section (a), or for which any importer of record that is 
not a person registered under section 4101 is otherwise 
liable, is not paid on or before the last date prescribed 
for payment, the Secretary may collect such tax from the 
Customs bond posted with respect to the importation of 
the taxable fuel to which the tax relates. For purposes of 
determining the jurisdiction of any court of the United 
States or any agency of the United States, any action by 
the Secretary described in the preceding sentence shall be 
treated as an action to collect the tax from a bond de-
scribed in section 4101(b)(1) and not as an action to col-
lect from a bond relating to the importation of merchan-
dise.’’. 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subpart B of part III of subchapter A of chapter 
32, as redesignated by section 652(d), is amended by add-
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ing after the item related to section 4103 the following 
new item: 
‘‘Sec. 4104. Collection from Customs bond where importer not 
registered.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply with respect to fuel entered after 
September 30, 2004. 
SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VE-
HICLES. 
(a) PRORATION OF TAX WHERE VEHICLE SOLD.— 
(1) IN GENERAL.—Subparagraph (A) of section 
4481(c)(2) (relating to where vehicle destroyed or 
stolen) is amended by striking ‘‘destroyed or stolen’’ 
both places it appears and inserting ‘‘sold, de-
stroyed, or stolen’’. 
(2) CONFORMING AMENDMENT.—The heading 
for section 4481(c)(2) is amended by striking ‘‘DE-
STROYED
OR
STOLEN’’ and inserting ‘‘SOLD, DE-
STROYED, OR STOLEN’’. 
(b) REPEAL OF INSTALLMENT PAYMENT.— 
(1) Section 6156 (relating to installment pay-
ment of tax on use of highway motor vehicles) is re-
pealed. 
(2) The table of sections for subchapter A of 
chapter 62 is amended by striking the item relating 
to section 6156.
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(c) ELECTRONIC FILING.—Section 4481 is amended 
by redesignating subsection (e) as subsection (f) and by 
inserting after subsection (d) the following new subsection: 
‘‘(e) ELECTRONIC FILING.—Any taxpayer who files 
a return under this section with respect to 25 or more 
vehicles for any taxable period shall file such return elec-
tronically.’’. 
(d) REPEAL OF REDUCTION IN TAX FOR CERTAIN 
TRUCKS.—Section 4483 is amended by striking subsection 
(f). 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable periods beginning after 
the date of the enactment of this Act. 
SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND 
CLAIMS WITH RESPECT TO FARMING. 
(a) IN GENERAL.— 
(1) REFUNDS.—Section 6427(l) is amended by 
adding at the end the following new paragraph: 
‘‘(6) REGISTERED VENDORS PERMITTED TO AD-
MINISTER CERTAIN CLAIMS FOR REFUND OF DIESEL 
FUEL AND KEROSENE SOLD TO FARMERS.— 
‘‘(A) IN GENERAL.—In the case of diesel 
fuel or kerosene used on a farm for farming 
purposes (within the meaning of section 
6420(c)), paragraph (1) shall not apply to the
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aggregate amount of such diesel fuel or ker-
osene if such amount does not exceed 250 gal-
lons 
(as 
determined 
under 
subsection 
(i)(5)(A)(iii)). 
‘‘(B) PAYMENT TO ULTIMATE VENDOR.— 
The amount which would (but for subparagraph 
(A)) have been paid under paragraph (1) with 
respect to any fuel shall be paid to the ultimate 
vendor of such fuel, if such vendor— 
‘‘(i) is registered under section 4101, 
and 
‘‘(ii) meets the requirements of sub-
paragraph (A), (B), or (D) of section 
6416(a)(1).’’. 
(2) FILING
OF
CLAIMS.—Section 6427(i) is 
amended by inserting at the end the following new 
paragraph: 
‘‘(5) SPECIAL
RULE
FOR
VENDOR
REFUNDS 
WITH RESPECT TO FARMERS.— 
‘‘(A) IN GENERAL.—A claim may be filed 
under subsection (l)(6) by any person with re-
spect to fuel sold by such person for any pe-
riod—
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‘‘(i) for which $200 or more ($100 or 
more in the case of kerosene) is payable 
under subsection (l)(6), 
‘‘(ii) which is not less than 1 week, 
and 
‘‘(iii) which is for not more than 250 
gallons for each farmer for which there is 
a claim. 
Notwithstanding subsection (l)(1), paragraph 
(3)(B) shall apply to claims filed under the pre-
ceding sentence. 
‘‘(B) TIME FOR FILING CLAIM.—No claim 
filed under this paragraph shall be allowed un-
less filed on or before the last day of the first 
quarter following the earliest quarter included 
in the claim.’’. 
(3) CONFORMING AMENDMENTS.— 
(A) Section 6427(l)(5)(A) is amended to 
read as follows: 
‘‘(A) IN
GENERAL.—Paragraph (1) shall 
not apply to diesel fuel or kerosene used by a 
State or local government.’’. 
(B) The heading for section 6427(l)(5) is 
amended by striking ‘‘FARMERS AND’’.
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to fuels sold for nontaxable use 
after the date of the enactment of this Act. 
SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PEN-
ALTIES TO THE HIGHWAY TRUST FUND. 
(a) IN GENERAL.—Subsection (b) of section 9503 
(relating to transfer to Highway Trust Fund of amounts 
equivalent to certain taxes) is amended by redesignating 
paragraph (5) as paragraph (6) and inserting after para-
graph (4) the following new paragraph: 
‘‘(5) CERTAIN PENALTIES.—There are hereby 
appropriated to the Highway Trust Fund amounts 
equivalent to the penalties paid under sections 6715, 
6715A, 6717, 6718, 6725, 7232, and 7272 (but only 
with regard to penalties under such section related 
to failure to register under section 4101).’’. 
(b) CONFORMING AMENDMENTS.— 
(1) The heading of subsection (b) of section 
9503 is amended by inserting ‘‘AND PENALTIES’’ 
after ‘‘TAXES’’. 
(2) The heading of paragraph (1) of section 
9503(b) is amended by striking ‘‘IN GENERAL’’ and 
inserting ‘‘CERTAIN TAXES’’.
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to penalties assessed after October 
1, 2004. 
SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTI-
MATE VENDORS. 
(a) IN GENERAL.—Paragraph (4) of section 6416(a) 
(relating to abatements, credits, and refunds) is amended 
to read as follows: 
‘‘(4) REGISTERED ULTIMATE VENDOR TO AD-
MINISTER
CREDITS
AND
REFUNDS
OF
GASOLINE 
TAX.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, if an ultimate vendor purchases any 
gasoline on which tax imposed by section 4081 
has been paid and sells such gasoline to an ulti-
mate purchaser described in subparagraph (C) 
or (D) of subsection (b)(2) (and such gasoline 
is for a use described in such subparagraph), 
such ultimate vendor shall be treated as the 
person (and the only person) who paid such tax, 
but only if such ultimate vendor is registered 
under section 4101. For purposes of this sub-
paragraph, if the sale of gasoline is made by 
means of a credit card, the person extending
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the credit to the ultimate purchaser shall be 
deemed to be the ultimate vendor. 
‘‘(B) TIMING OF CLAIMS.—The procedure 
and timing of any claim under subparagraph 
(A) shall be the same as for claims under sec-
tion 6427(i)(4), except that the rules of section 
6427(i)(3)(B) regarding electronic claims shall 
not apply unless the ultimate vendor has cer-
tified to the Secretary for the most recent quar-
ter of the taxable year that all ultimate pur-
chasers of the vendor covered by such claim are 
certified and entitled to a refund under sub-
paragraph (C) or (D) of subsection (b)(2).’’. 
(b) CREDIT CARD PURCHASES OF DIESEL FUEL OR 
KEROSENE BY STATE AND LOCAL GOVERNMENTS.—Sec-
tion 6427(l)(5)(C) (relating to nontaxable uses of diesel 
fuel, kerosene, and aviation fuel) is amended by adding 
at the end the following new flush sentence: ‘‘For purposes 
of this subparagraph, if the sale of diesel fuel or kerosene 
is made by means of a credit card, the person extending 
the credit to the ultimate purchaser shall be deemed to 
be the ultimate vendor.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on October 1, 2004.
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SEC. 663. TWO-PARTY EXCHANGES. 
(a) IN GENERAL.—Subpart B of part III of sub-
chapter A of chapter 32, as amended by this Act, is 
amended by adding after section 4104 the following new 
section: 
‘‘SEC. 4105. TWO-PARTY EXCHANGES. 
‘‘(a) IN GENERAL.—In a two-party exchange, the de-
livering person shall not be liable for the tax imposed 
under section 4081(a)(1)(A)(ii). 
‘‘(b) TWO-PARTY EXCHANGE.—The term ‘two-party 
exchange’ means a transaction, other than a sale, in which 
taxable fuel is transferred from a delivering person reg-
istered under section 4101 as a taxable fuel registrant fuel 
to a receiving person who is so registered where all of the 
following occur: 
‘‘(1) The transaction includes a transfer from 
the delivering person, who holds the inventory posi-
tion for taxable fuel in the terminal as reflected in 
the records of the terminal operator. 
‘‘(2) The exchange transaction occurs before or 
contemporaneous with completion of removal across 
the rack from the terminal by the receiving person. 
‘‘(3) The terminal operator in its books and 
records treats the receiving person as the person 
that removes the taxable fuel across the terminal
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rack for purposes of reporting the transaction to the 
Secretary. 
‘‘(4) The transaction is the subject of a written 
contract.’’. 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subpart B of part III of subchapter A of chapter 
32, as amended by this Act, is amended by adding after 
the item relating to section 4104 the following new item: 
‘‘Sec. 4105. Two-party exchanges.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 664. SIMPLIFICATION OF TAX ON TIRES. 
(a) IN GENERAL.—Subsection (a) of section 4071 is 
amended to read as follows: 
‘‘(a) IMPOSITION AND RATE OF TAX.—There is here-
by imposed on taxable tires sold by the manufacturer, pro-
ducer, or importer thereof a tax at the rate of 9.4 cents 
(4.7 cents in the case of a biasply tire) for each 10 pounds 
so much of the maximum rated load capacity thereof as 
exceeds 3,500 pounds.’’ 
(b) TAXABLE TIRE.—Section 4072 is amended by re-
designating subsections (a) and (b) as subsections (b) and 
(c), respectively, and by inserting before subsection (b) (as 
so redesignated) the following new subsection:
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‘‘(a) TAXABLE TIRE.—For purposes of this chapter, 
the term ‘taxable tire’ means any tire of the type used 
on highway vehicles if wholly or in part made of rubber 
and if marked pursuant to Federal regulations for high-
way use.’’ 
(c) EXEMPTION FOR TIRES SOLD TO DEPARTMENT 
OF DEFENSE.—Section 4073 is amended to read as fol-
lows: 
‘‘SEC. 4073. EXEMPTIONS. 
‘‘The tax imposed by section 4071 shall not apply to 
tires sold for the exclusive use of the Department of De-
fense or the Coast Guard.’’. 
(d) CONFORMING AMENDMENTS.— 
(1) Section 4071 is amended by striking sub-
section (c) and by moving subsection (e) after sub-
section (b) and redesignating subsection (e) as sub-
section (c). 
(2) The item relating to section 4073 in the 
table of sections for part II of subchapter A of chap-
ter 32 is amended to read as follows: 
‘‘Sec. 4073. Exemptions.’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales in calendar years begin-
ning more than 30 days after the date of the enactment 
of this Act.
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Subtitle D—Nonqualified Deferred 
Compensation Plans 
SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COM-
PENSATION PLANS. 
(a) IN GENERAL.—Subpart A of part I of subchapter 
D of chapter 1 is amended by adding at the end the fol-
lowing new section: 
‘‘SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED 
COMPENSATION UNDER NONQUALIFIED DE-
FERRED COMPENSATION PLANS. 
‘‘(a) RULES
RELATING
TO
CONSTRUCTIVE
RE-
CEIPT.— 
‘‘(1) IN GENERAL.— 
‘‘(A) GROSS INCOME INCLUSION.—In the 
case of a nonqualified deferred compensation 
plan, all compensation deferred under the plan 
for all taxable years (to the extent not subject 
to a substantial risk of forfeiture and not pre-
viously included in gross income) shall be in-
cludible in gross income for the taxable year 
unless at all times during the taxable year the 
plan meets the requirements of paragraphs (2), 
(3), and (4) and is operated in accordance with 
such requirements.
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‘‘(B) INTEREST
ON
TAX
LIABILITY
PAY-
ABLE
WITH
RESPECT
TO
PREVIOUSLY
DE-
FERRED COMPENSATION.— 
‘‘(i) IN GENERAL.—If compensation is 
required to be included in gross income 
under subparagraph (A) for a taxable year, 
the tax imposed by this chapter for such 
taxable year shall be increased by the 
amount of interest determined under 
clause (ii). 
‘‘(ii) INTEREST.—For purposes of 
clause (i), the interest determined under 
this clause for any taxable year is the 
amount of interest at the underpayment 
rate plus 1 percentage point on the under-
payments that would have occurred had 
the deferred compensation been includible 
in gross income for the taxable year in 
which first deferred or, if later, the first 
taxable year in which such deferred com-
pensation is not subject to a substantial 
risk of forfeiture. 
‘‘(2) DISTRIBUTIONS.— 
‘‘(A) IN GENERAL.—The requirements of 
this paragraph are met if the plan provides that
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compensation deferred under the plan may not 
be distributed earlier than— 
‘‘(i) separation from service as deter-
mined by the Secretary (except as provided 
in subparagraph (B)(i)), 
‘‘(ii) the date the participant becomes 
disabled (within the meaning of subpara-
graph (C)), 
‘‘(iii) death, 
‘‘(iv) a specified time (or pursuant to 
a fixed schedule) specified under the plan 
at the date of the deferral of such com-
pensation, 
‘‘(v) to the extent provided by the 
Secretary, a change in the ownership or ef-
fective control of the corporation, or in the 
ownership of a substantial portion of the 
assets of the corporation, or 
‘‘(vi) the occurrence of an unforesee-
able emergency. 
‘‘(B) SPECIAL RULES.— 
‘‘(i) SPECIFIED EMPLOYEES.—In the 
case of specified employees, the require-
ment of subparagraph (A)(i) is met only if 
distributions may not be made earlier than
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6 months after the date of separation from 
service. For purposes of the preceding sen-
tence, a specified employee is a key em-
ployee (as defined in section 416(i)) of a 
corporation the stock in which is publicly 
traded on an established securities market 
or otherwise. 
‘‘(ii) 
UNFORESEEABLE
EMER-
GENCY.—For purposes of subparagraph 
(A)(vi)— 
‘‘(I) IN
GENERAL.—The term 
‘unforeseeable emergency’ means a se-
vere financial hardship to the partici-
pant resulting from a sudden and un-
expected illness or accident of the par-
ticipant, the participant’s spouse, or a 
dependent (as defined in section 
152(a)) of the participant, loss of the 
participant’s property due to casualty, 
or other similar extraordinary and un-
foreseeable circumstances arising as a 
result of events beyond the control of 
the participant. 
‘‘(II) LIMITATION ON DISTRIBU-
TIONS.—The requirement of subpara-
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graph (A)(vi) is met only if, as deter-
mined under regulations of the Sec-
retary, the amounts distributed with 
respect to an emergency do not exceed 
the amounts necessary to satisfy such 
emergency plus amounts necessary to 
pay taxes reasonably anticipated as a 
result of the distribution, after taking 
into account the extent to which such 
hardship is or may be relieved 
through reimbursement or compensa-
tion by insurance or otherwise or by 
liquidation of the participant’s assets 
(to the extent the liquidation of such 
assets would not itself cause severe fi-
nancial hardship). 
‘‘(C) DISABLED.—For purposes of sub-
paragraph (A)(ii), a participant shall be consid-
ered disabled if the participant— 
‘‘(i) is unable to engage in any sub-
stantial gainful activity by reason of any 
medically determinable physical or mental 
impairment which can be expected to result 
in death or can be expected to last for a
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continuous period of not less than 12 
months, or 
‘‘(ii) is, by reason of any medically de-
terminable physical or mental impairment 
which can be expected to result in death or 
can be expected to last for a continuous 
period of not less than 12 months, receiv-
ing income replacement benefits for a pe-
riod of not less than 3 months under an 
accident and health plan covering employ-
ees of the participant’s employer. 
‘‘(3) ACCELERATION
OF
BENEFITS.—The re-
quirements of this paragraph are met if the plan 
does not permit the acceleration of the time or 
schedule of any payment under the plan, except as 
provided in regulations by the Secretary. 
‘‘(4) ELECTIONS.— 
‘‘(A) IN GENERAL.—The requirements of 
this paragraph are met if the requirements of 
subparagraphs (B) and (C) are met. 
‘‘(B) INITIAL DEFERRAL DECISION.—The 
requirements of this subparagraph are met if 
the plan provides that compensation for services 
performed during a taxable year may be de-
ferred at the participant’s election only if the
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election to defer such compensation is made not 
later than the close of the preceding taxable 
year or at such other time as provided in regu-
lations. In the case of the first year in which a 
participant becomes eligible to participate in the 
plan, such election may be made with respect to 
services to be performed subsequent to the elec-
tion within 30 days after the date the partici-
pant becomes eligible to participate in such 
plan. 
‘‘(C) CHANGES IN TIME AND FORM OF DIS-
TRIBUTION.—The requirements of this subpara-
graph are met if, in the case of a plan which 
permits under a subsequent election a delay in 
a payment or a change in the form of pay-
ment— 
‘‘(i) the plan requires that such elec-
tion may not take effect until at least 12 
months after the date on which the elec-
tion is made, 
‘‘(ii) in the case an election related to 
a payment not described in clause (ii), (iii), 
or (vi) of paragraph (2)(A), the plan re-
quires that the first payment with respect 
to which such election is made be deferred
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for a period of not less than 5 years from 
the date such payment would otherwise 
have been made, and 
‘‘(iii) the plan requires that any elec-
tion related to a payment described in 
paragraph (2)(A)(iv) may not be made less 
than 12 months prior to the date of the 
first scheduled payment under such para-
graph. 
‘‘(b) RULES RELATING TO FUNDING.— 
‘‘(1) OFFSHORE
PROPERTY
IN
A
TRUST.—In 
the case of assets set aside (directly or indirectly) in 
a trust (or other arrangement determined by the 
Secretary) for purposes of paying deferred com-
pensation under a nonqualified deferred compensa-
tion plan, for purposes of section 83 such assets 
shall be treated as property transferred in connec-
tion with the performance of services whether or not 
such assets are available to satisfy claims of general 
creditors— 
‘‘(A) at the time set aside if such assets 
are located outside of the United States, or 
‘‘(B) at the time transferred if such assets 
are subsequently transferred outside of the 
United States.
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‘‘(2) EMPLOYER’S FINANCIAL HEALTH.—In the 
case of compensation deferred under a nonqualified 
deferred compensation plan, there is a transfer of 
property within the meaning of section 83 with re-
spect to such compensation as of the earlier of— 
‘‘(A) the date on which the plan first pro-
vides that assets will become restricted to the 
provision of benefits under the plan in connec-
tion with a change in the employer’s financial 
health, or 
‘‘(B) the date on which assets are so re-
stricted. 
‘‘(3) 
INCOME
INCLUSION
FOR
OFFSHORE 
TRUSTS AND EMPLOYER’S FINANCIAL HEALTH.—For 
each taxable year that assets treated as transferred 
under this subsection remain set aside in a trust or 
other arrangement subject to paragraph (1) or (2), 
any increase in value in, or earnings with respect to, 
such assets shall be treated as an additional transfer 
of property under this subsection (to the extent not 
previously included in income). 
‘‘(4) INTEREST
ON
TAX
LIABILITY
PAYABLE 
WITH RESPECT TO TRANSFERRED PROPERTY.— 
‘‘(A) IN
GENERAL.—If amounts are re-
quired to be included in gross income by reason
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of paragraph (1) or (2) for a taxable year, the 
tax imposed by this chapter for such taxable 
year shall be increased by the amount of inter-
est determined under subparagraph (B). 
‘‘(B) INTEREST.—The interest determined 
under this subparagraph for any taxable year is 
the amount of interest at the underpayment 
rate plus 1 percentage point on the underpay-
ments that would have occurred had the 
amounts so required to be included in gross in-
come by paragraph (1) or (2) been includible in 
gross income for the taxable year in which first 
deferred or, if later, the first taxable year in 
which such deferred compensation is not subject 
to a substantial risk of forfeiture. 
‘‘(c) NO INFERENCE ON EARLIER INCOME INCLU-
SION OR REQUIREMENT OF LATER INCLUSION.—Nothing 
in this section shall be construed to prevent the inclusion 
of amounts in gross income under any other provision of 
this chapter or any other rule of law earlier than the time 
provided in this section. Any amount included in gross in-
come under this section shall not be required to be in-
cluded in gross income under any other provision of this 
chapter or any other rule of law later than the time pro-
vided in this section.
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‘‘(d) OTHER DEFINITIONS AND SPECIAL RULES.— 
For purposes of this section— 
‘‘(1) NONQUALIFIED
DEFERRED
COMPENSA-
TION PLAN.—The term ‘nonqualified deferred com-
pensation plan’ means any plan that provides for the 
deferral of compensation, other than— 
‘‘(A) a qualified employer plan, and 
‘‘(B) any bona fide vacation leave, sick 
leave, compensatory time, disability pay, or 
death benefit plan. 
‘‘(2) QUALIFIED EMPLOYER PLAN.—The term 
‘qualified employer plan’ means— 
‘‘(A) any plan, contract, pension, account, 
or trust described in subparagraph (A) or (B) 
of section 219(g)(5), and 
‘‘(B) any eligible deferred compensation 
plan (within the meaning of section 457(b)) of 
an employer described in section 457(e)(1)(A). 
‘‘(3) PLAN INCLUDES ARRANGEMENTS, ETC.— 
The term ‘plan’ includes any agreement or arrange-
ment, including an agreement or arrangement that 
includes one person. 
‘‘(4) SUBSTANTIAL RISK OF FORFEITURE.—The 
rights of a person to compensation are subject to a 
substantial risk of forfeiture if such person’s rights
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to such compensation are conditioned upon the fu-
ture performance of substantial services by any indi-
vidual. 
‘‘(5) TREATMENT OF EARNINGS.—References to 
deferred compensation shall be treated as including 
references to income (whether actual or notional) at-
tributable to such compensation or such income. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section, including regula-
tions— 
‘‘(1) 
providing 
for 
the 
determination 
of 
amounts of deferral in the case of a nonqualified de-
ferred compensation plan which is a defined benefit 
plan, 
‘‘(2) relating to changes in the ownership and 
control of a corporation or assets of a corporation 
for purposes of subsection (a)(2)(A)(v), 
‘‘(3) exempting arrangements from the applica-
tion of subsection (b) if such arrangements will not 
result in an improper deferral of United States tax 
and will not result in assets being effectively beyond 
the reach of creditors, 
‘‘(4) defining financial health for purposes of 
subsection (b)(2), and
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‘‘(5) disregarding a substantial risk of for-
feiture in cases where necessary to carry out the 
purposes of this section.’’. 
(b) W–2 FORMS.— 
(1) IN
GENERAL.—Subsection (a) of section 
6051 (relating to receipts for employees) is amended 
by striking ‘‘and’’ at the end of paragraph (11), by 
striking the period at the end of paragraph (12) and 
inserting ‘‘, and’’, and by inserting after paragraph 
(12) the following new paragraph: 
‘‘(13) the total amount of deferrals under a 
nonqualified deferred compensation plan (within the 
meaning of section 409A(d)).’’. 
(2) THRESHOLD.—Subsection (a) of section 
6051 is amended by adding at the end the following: 
‘‘In the case of the amounts required to be shown 
by paragraph (13), the Secretary (by regulation) 
may establish a minimum amount of deferrals below 
which paragraph (13) does not apply and may pro-
vide that paragraph (13) does not apply with respect 
to amounts of deferrals which are not reasonably as-
certainable.’’. 
(c) CONFORMING AND CLERICAL AMENDMENTS.— 
(1) Section 414(b) is amended by inserting 
‘‘409A,’’ after ‘‘408(p),’’.
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(2) Section 414(c) is amended by inserting 
‘‘409A,’’ after ‘‘408(p),’’. 
(3) The table of sections for such subpart A of 
part I of subchapter D of chapter 1 is amended by 
adding at the end the following new item: 
‘‘Sec. 409A. Inclusion in gross income of deferred compensation 
under nonqualified deferred compensation plans.’’. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to amounts deferred after 
June 3, 2004. 
(2) CERTAIN
AMOUNTS
DEFERRED
IN
2004 
UNDER
CERTAIN
IRREVOCABLE
ELECTIONS
AND 
BINDING ARRANGEMENTS.—The amendments made 
by this section shall not apply to amounts deferred 
after June 3, 2004, and before January 1, 2005, 
pursuant to an irrevocable election or binding ar-
rangement made before June 4, 2004. 
(3) EARNINGS ATTRIBUTABLE TO AMOUNT PRE-
VIOUSLY
DEFERRED.—The amendments made by 
this section shall apply to earnings on deferred com-
pensation only to the extent that such amendments 
apply to such compensation. 
(e) GUIDANCE RELATING TO CHANGE OF OWNER-
SHIP OR CONTROL.—Not later than 90 days after the date 
of the enactment of this Act, the Secretary of the Treasury
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shall issue guidance on what constitutes a change in own-
ership or effective control for purposes of section 409A 
of the Internal Revenue Code of 1986, as added by this 
section. 
(f) GUIDANCE RELATING TO TERMINATION OF CER-
TAIN EXISTING ARRANGEMENTS.—Not later than 90 days 
after the date of the enactment of this Act, the Secretary 
of the Treasury shall issue guidance providing a limited 
period during which an individual participating in a non-
qualified deferred compensation plan adopted before June 
4, 2004, may, without violating the requirements of para-
graphs (2), (3), and (4) of section 409A(a)(2) of the Inter-
nal Revenue Code of 1986 (as added by this section), ter-
minate participation or cancel an outstanding deferral 
election with regard to amounts earned after June 3, 
2004, if such amounts are includible in income as earned. 
Subtitle E—Other Revenue 
Provisions 
SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS. 
(a) CONTRACT REQUIREMENTS.— 
(1) IN GENERAL.—Subchapter A of chapter 64 
(relating to collection) is amended by adding at the 
end the following new section:
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‘‘SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS. 
‘‘(a) IN GENERAL.—Nothing in any provision of law 
shall be construed to prevent the Secretary from entering 
into a qualified tax collection contract. 
‘‘(b) QUALIFIED TAX COLLECTION CONTRACT.—For 
purposes of this section, the term ‘qualified tax collection 
contract’ means any contract which— 
‘‘(1) is for the services of any person (other 
than an officer or employee of the Treasury Depart-
ment)— 
‘‘(A) to locate and contact any taxpayer 
specified by the Secretary, 
‘‘(B) to request full payment from such 
taxpayer of an amount of Federal tax specified 
by the Secretary and, if such request cannot be 
met by the taxpayer, to offer the taxpayer an 
installment agreement providing for full pay-
ment of such amount during a period not to ex-
ceed 5 years, and 
‘‘(C) to obtain financial information speci-
fied by the Secretary with respect to such tax-
payer, 
‘‘(2) prohibits each person providing such serv-
ices under such contract from committing any act or 
omission which employees of the Internal Revenue
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Service are prohibited from committing in the per-
formance of similar services, 
‘‘(3) prohibits subcontractors from— 
‘‘(A) having contacts with taxpayers, 
‘‘(B) providing quality assurance services, 
and 
‘‘(C) composing debt collection notices, and 
‘‘(4) permits subcontractors to perform other 
services only with the approval of the Secretary. 
‘‘(c) FEES.—The Secretary may retain and use an 
amount not in excess of 25 percent of the amount collected 
under any qualified tax collection contract for the costs 
of services performed under such contract. The Secretary 
shall keep adequate records regarding amounts so retained 
and used. The amount credited as paid by any taxpayer 
shall be determined without regard to this subsection. 
‘‘(d) NO FEDERAL LIABILITY.—The United States 
shall not be liable for any act or omission of any person 
performing services under a qualified tax collection con-
tract. 
‘‘(e) APPLICATION
OF FAIR DEBT COLLECTION 
PRACTICES ACT.—The provisions of the Fair Debt Collec-
tion Practices Act (15 U.S.C. 1692 et seq.) shall apply 
to any qualified tax collection contract, except to the ex-
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tent superseded by section 6304, section 7602(c), or by 
any other provision of this title. 
‘‘(f) CROSS REFERENCES.— 
‘‘(1) For damages for certain unauthorized collec-
tion actions by persons performing services under a 
qualified tax collection contract, see section 7433A. 
‘‘(2) For application of Taxpayer Assistance Or-
ders to persons performing services under a quali-
fied tax collection contract, see section 7811(a)(4).’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Section 7809(a) is amended by insert-
ing ‘‘6306,’’ before ‘‘7651’’. 
(B) The table of sections for subchapter A 
of chapter 64 is amended by adding at the end 
the following new item: 
‘‘Sec. 6306. Qualified Tax Collection Contracts.’’. 
(b) CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED 
COLLECTION ACTIONS BY PERSONS PERFORMING SERV-
ICES
UNDER
QUALIFIED
TAX
COLLECTION
CON-
TRACTS.— 
(1) In general.—Subchapter B of chapter 76 
(relating to proceedings by taxpayers and third par-
ties) is amended by inserting after section 7433 the 
following new section:
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‘‘SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHOR-
IZED COLLECTION ACTIONS BY PERSONS 
PERFORMING SERVICES UNDER QUALIFIED 
TAX COLLECTION CONTRACTS. 
‘‘(a) IN GENERAL.—Subject to the modifications pro-
vided by subsection (b), section 7433 shall apply to the 
acts and omissions of any person performing services 
under a qualified tax collection contract (as defined in sec-
tion 6306(b)) to the same extent and in the same manner 
as if such person were an employee of the Internal Rev-
enue Service. 
‘‘(b) MODIFICATIONS.—For purposes of subsection 
(a)— 
‘‘(1) Any civil action brought under section 
7433 by reason of this section shall be brought 
against the person who entered into the qualified tax 
collection contract with the Secretary and shall not 
be brought against the United States. 
‘‘(2) Such person and not the United States 
shall be liable for any damages and costs determined 
in such civil action. 
‘‘(3) Such civil action shall not be an exclusive 
remedy with respect to such person. 
‘‘(4) Subsections (c), (d)(1), and (e) of section 
7433 shall not apply.’’.
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(2) CLERICAL AMENDMENT.—The table of sec-
tions for subchapter B of chapter 76 is amended by 
inserting after the item relating to section 7433 the 
following new item: 
‘‘Sec. 7433A. Civil damages for certain unauthorized collection ac-
tions by persons performing services under qualified 
tax collection contracts.’’. 
(c) APPLICATION
OF TAXPAYER ASSISTANCE OR-
DERS
TO PERSONS PERFORMING SERVICES UNDER
A 
QUALIFIED TAX COLLECTION CONTRACT.—Section 7811 
(relating to taxpayer assistance orders) is amended by 
adding at the end the following new subsection: 
‘‘(g) APPLICATION TO PERSONS PERFORMING SERV-
ICES UNDER
A QUALIFIED TAX COLLECTION CON-
TRACT.—Any order issued or action taken by the National 
Taxpayer Advocate pursuant to this section shall apply to 
persons performing services under a qualified tax collec-
tion contract (as defined in section 6306(b)) to the same 
extent and in the same manner as such order or action 
applies to the Secretary.’’. 
(d) INELIGIBILITY OF INDIVIDUALS WHO COMMIT 
MISCONDUCT TO PERFORM UNDER CONTRACT.—Section 
1203 of the Internal Revenue Service Restructuring Act 
of 1998 (relating to termination of employment for mis-
conduct) is amended by adding at the end the following 
new subsection:
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‘‘(e) INDIVIDUALS PERFORMING SERVICES UNDER A 
QUALIFIED TAX COLLECTION CONTRACT.—An individual 
shall cease to be permitted to perform any services under 
any qualified tax collection contract (as defined in section 
6306(b) of the Internal Revenue Code of 1986) if there 
is a final determination by the Secretary of the Treasury 
under such contract that such individual committed any 
act or omission described under subsection (b) in connec-
tion with the performance of such services.’’. 
(e) EFFECTIVE DATE.—The amendments made to 
this section shall take effect on the date of the enactment 
of this Act. 
SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF 
PATENTS AND SIMILAR PROPERTY. 
(a) IN GENERAL.—Subparagraph (B) of section 
170(e)(1) is amended by striking ‘‘or’’ at the end of clause 
(i), by adding ‘‘or’’ at the end of clause (ii), and by insert-
ing after clause (ii) the following new clause: 
‘‘(iii) of any patent, copyright (other 
than a copyright described in section 
1221(a)(3) or 1231(b)(1)(C)), trademark, 
trade name, trade secret, know-how, soft-
ware (other than software described in sec-
tion 197(e)(3)(A)(i)), or similar property,
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or applications or registrations of such 
property,’’. 
(b) CERTAIN DONEE INCOME FROM INTELLECTUAL 
PROPERTY TREATED AS AN ADDITIONAL CHARITABLE 
CONTRIBUTION.—Section 170 is amended by redesig-
nating subsection (m) as subsection (n) and by inserting 
after subsection (l) the following new subsection: 
‘‘(m) CERTAIN DONEE INCOME FROM INTELLEC-
TUAL PROPERTY TREATED AS AN ADDITIONAL CHARI-
TABLE CONTRIBUTION.— 
‘‘(1) TREATMENT
AS
ADDITIONAL
CONTRIBU-
TION.—In the case of a taxpayer who makes a quali-
fied intellectual property contribution, the deduction 
allowed under subsection (a) for each taxable year of 
the taxpayer ending on or after the date of such con-
tribution shall be increased (subject to the limita-
tions under subsection (b)) by the applicable per-
centage of qualified donee income with respect to 
such contribution which is properly allocable to such 
year under this subsection. 
‘‘(2) REDUCTION IN ADDITIONAL DEDUCTIONS 
TO EXTENT OF INITIAL DEDUCTION.—With respect 
to any qualified intellectual property contribution, 
the deduction allowed under subsection (a) shall be 
increased under paragraph (1) only to the extent
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that the aggregate amount of such increases with re-
spect to such contribution exceed the amount al-
lowed as a deduction under subsection (a) with re-
spect to such contribution determined without re-
gard to this subsection. 
‘‘(3) QUALIFIED
DONEE
INCOME.—For pur-
poses of this subsection, the term ‘qualified donee 
income’ means any net income received by or ac-
crued to the donee which is properly allocable to the 
qualified intellectual property. 
‘‘(4) ALLOCATION
OF
QUALIFIED
DONEE
IN-
COME
TO
TAXABLE
YEARS
OF
DONOR.—For pur-
poses of this subsection, qualified donee income shall 
be treated as properly allocable to a taxable year of 
the donor if such income is received by or accrued 
to the donee for the taxable year of the donee which 
ends within or with such taxable year of the donor. 
‘‘(5) 10-YEAR LIMITATION.—Income shall not 
be treated as properly allocable to qualified intellec-
tual property for purposes of this subsection if such 
income is received by or accrued to the donee after 
the 10-year period beginning on the date of the con-
tribution of such property. 
‘‘(6) BENEFIT LIMITED TO LIFE OF INTELLEC-
TUAL PROPERTY.—Income shall not be treated as
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‘‘(B) a description of the qualified intellec-
tual property contributed, 
‘‘(C) the date of the contribution, and 
‘‘(D) the amount of net income of the 
donee for the taxable year which is properly al-
locable to the qualified intellectual property (de-
termined without regard to paragraph (10)(B) 
of section 170(m) and with the modifications 
described in paragraphs (5) and (6) of such 
section). 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) IN
GENERAL.—Terms used in this 
subsection which are also used in section 
170(m) have the respective meanings given 
such terms in such section. 
‘‘(B) SPECIFIED
TAXABLE
YEAR.—The 
term ‘specified taxable year’ means, with re-
spect to any qualified intellectual property con-
tribution, any taxable year of the donee any 
portion of which is part of the 10-year period 
beginning on the date of such contribution. 
‘‘(c) STATEMENT TO BE FURNISHED TO DONORS.— 
Every person making a return under subsection (a) or (b) 
shall furnish a copy of such return to the donor at such