(A) such change shall be treated as initi-
ated by the taxpayer, 
(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury, and 
(C) if the net amount of the adjustments 
required to be taken into account by the tax-
payer under section 481 of the Internal Rev-
enue Code of 1986 is positive, such amount 
shall be taken into account over a period of 8 
years beginning with such first taxable year. 
SEC. 302. REPEAL OF LOWER OF COST OR MARKET METH-
OD OF INVENTORY. 
(a) IN GENERAL.—Section 471 is amended by redes-
ignating subsection (c) as subsection (d) and by inserting 
after subsection (b) the following new subsection: 
‘‘(c) INVENTORIES
TAKEN
INTO
ACCOUNT
AT 
COST.—A method of determining inventories shall not be 
treated as clearly reflecting income unless such method 
provides that inventories shall be taken into account at 
cost.’’. 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after the date of the enactment of this Act. 
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(2) CHANGE IN METHOD OF ACCOUNTING.—In 
the case of any taxpayer required by the amend-
ments made by this section to change its method of 
accounting for its first taxable year beginning after 
the date of the enactment of this Act— 
(A) such change shall be treated as initi-
ated by the taxpayer, 
(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury, and 
(C) if the net amount of the adjustments 
required to be taken into account by the tax-
payer under section 481 of the Internal Rev-
enue Code of 1986 is positive, such amount 
shall be taken into account over a period of 8 
years beginning with such first taxable year. 
SEC. 303. SPECIAL RULE FOR SERVICE PROVIDERS ON AC-
CRUAL METHOD NOT APPLICABLE TO C COR-
PORATIONS. 
(a) IN GENERAL.—Subparagraph (A) of section 
448(d)(5) is amended by inserting ‘‘(other than a C cor-
poration)’’ after ‘‘any person’’. 
(b) EFFECTIVE DATE.— 
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(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after the date of the enactment of this Act. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In 
the case of any taxpayer required by the amend-
ments made by this section to change its method of 
accounting for its first taxable year beginning after 
the date of the enactment of this Act— 
(A) such change shall be treated as initi-
ated by the taxpayer, 
(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury, and 
(C) if the net amount of the adjustments 
required to be taken into account by the tax-
payer under section 481 of the Internal Rev-
enue Code of 1986 is positive, such amount 
shall be taken into account over a period of 8 
years beginning with such first taxable year. 
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TITLE IV—MODIFICATION TO EX-
PENSING AND DEPRECIATION 
RULES 
SEC. 401. SMALL BUSINESS EXPENSING PROVISIONS MADE 
PERMANENT. 
(a) INCREASE
IN SMALL BUSINESS EXPENSING 
MADE PERMANENT.—Subsection (b) of section 179 is 
amended— 
(1) by striking ‘‘$25,000 ($250,000 in the case 
of taxable years beginning after 2007 and before 
2011)’’ in paragraph (1) and inserting ‘‘$250,000’’, 
and 
(2) by striking ‘‘$200,000 ($800,000 in the 
case of taxable years beginning after 2007 and be-
fore 2011)’’ in paragraph (2) and inserting 
‘‘$800,000’’. 
(b) EXPENSING FOR COMPUTER SOFTWARE MADE 
PERMANENT.—Clause (ii) of section 179(d)(1)(A) is 
amended by striking ‘‘and which is placed in service in 
a taxable year beginning after 2002 and before 2011,’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to taxable years beginning after the date 
of the enactment of this Act. 
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(2) COMPUTER
SOFTWARE.—The amendment 
made by subsection (b) shall apply to property 
placed in service after the date of the enactment of 
this Act. 
SEC. 402. AMORTIZATION OF GOODWILL AND OTHER IN-
TANGIBLES. 
(a) IN GENERAL.—Subsection (a) of section 197 (re-
lating to general rule) is amended by striking ‘‘15-year’’ 
and inserting ‘‘20-year’’. 
(b) CERTAIN INTERESTS OR RIGHTS ACQUIRED SEP-
ARATELY.—Clause (i) of section 197(e)(4)(D) is amended 
by striking ‘‘15 years’’ and inserting ‘‘20 years’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to property acquired after the date 
of the enactment of this Act. 
TITLE 
V—CODIFICATION 
OF 
ECONOMIC SUBSTANCE DOC-
TRINE 
SEC. 501. CODIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE. 
(a) IN GENERAL.—Section 7701 is amended by re-
designating subsection (p) as subsection (q) and by insert-
ing after subsection (o) the following new subsection: 
‘‘(p) CLARIFICATION
OF
ECONOMIC
SUBSTANCE 
DOCTRINE.— 
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‘‘(1) APPLICATION OF DOCTRINE.—In the case 
of any transaction to which the economic substance 
doctrine is relevant, such transaction shall be treated 
as having economic substance only if— 
‘‘(A) the transaction changes in a mean-
ingful way (apart from Federal income tax ef-
fects) the taxpayer’s economic position, and 
‘‘(B) the taxpayer has a substantial pur-
pose (apart from Federal income tax effects) 
for entering into such transaction. 
‘‘(2) SPECIAL RULE WHERE TAXPAYER RELIES 
ON PROFIT POTENTIAL.— 
‘‘(A) IN
GENERAL.—The potential for 
profit of a transaction shall be taken into ac-
count in determining whether the requirements 
of subparagraphs (A) and (B) of paragraph (1) 
are met with respect to the transaction only if 
the present value of the reasonably expected 
pre-tax profit from the transaction is substan-
tial in relation to the present value of the ex-
pected net tax benefits that would be allowed if 
the transaction were respected. 
‘‘(B) TREATMENT OF FEES AND FOREIGN 
TAXES.—Fees and other transaction expenses 
and foreign taxes shall be taken into account as 
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expenses in determining pre-tax profit under 
subparagraph (A). 
‘‘(3) STATE AND LOCAL TAX BENEFITS.—For 
purposes of paragraph (1), any State or local income 
tax effect which is related to a Federal income tax 
effect shall be treated in the same manner as a Fed-
eral income tax effect. 
‘‘(4) FINANCIAL ACCOUNTING BENEFITS.—For 
purposes of paragraph (1)(B), achieving a financial 
accounting benefit shall not be taken into account as 
a purpose for entering into a transaction if such 
transaction results in a Federal income tax benefit. 
‘‘(5) DEFINITIONS AND SPECIAL RULES.—For 
purposes of this subsection— 
‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 
The term ‘economic substance doctrine’ means 
the common law doctrine under which tax bene-
fits under subtitle A with respect to a trans-
action are not allowable if the transaction does 
not have economic substance or lacks a business 
purpose. 
‘‘(B) EXCEPTION FOR PERSONAL TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an 
individual, paragraph (1) shall apply only to 
transactions entered into in connection with a 
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trade or business or an activity engaged in for 
the production of income. 
‘‘(C) OTHER
COMMON
LAW
DOCTRINES 
NOT
AFFECTED.—Except as specifically pro-
vided in this subsection, the provisions of this 
subsection shall not be construed as altering or 
supplanting any other rule of law, and the re-
quirements of this subsection shall be construed 
as being in addition to any such other rule of 
law. 
‘‘(D) DETERMINATION OF APPLICATION OF 
DOCTRINE NOT AFFECTED.—The determination 
of whether the economic substance doctrine is 
relevant to a transaction shall be made in the 
same manner as if this subsection had never 
been enacted. 
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section. Such regulations may include exemptions 
from the application of this subsection.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to transactions entered into after 
the date of the enactment of this Act. 
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TITLE 
VI—MODIFICATIONS 
TO 
DEDUCTIONS FOR DIVIDENDS 
RECEIVED 
SEC. 601. MODIFICATIONS TO DEDUCTIONS FOR DIVI-
DENDS RECEIVED. 
(a) GENERAL REDUCTION IN PERCENTAGE OF DE-
DUCTION.— 
(1) 
IN
GENERAL.—Sections 
243(a)(1), 
243(c)(1), 
244(a)(3), 
244(b)(2), 
245(c)(1)(B), 
246(b)(3)(B), and 246A(a)(1), before amendment by 
subsection (c), are each amended by striking ‘‘70 
percent’’ and inserting ‘‘60 percent’’. 
(2) CONFORMING
AMENDMENTS.—Paragraph 
(2) of section 861(a), before amendment by sub-
section (c), is amended by striking ‘‘100/70th’’ both 
places it appears and inserting ‘‘100/60th’’. 
(b) REDUCTION IN PERCENTAGE FOR 20-PERCENT 
OWNED CORPORATIONS.— 
(1) 
IN
GENERAL.—Sections 
243(c)(1), 
245(c)(1)(B), 246(b)(3)(A), 246A(a)(1) is amended 
by striking ‘‘80 percent’’ and inserting ‘‘70 per-
cent’’. 
(2) CONFORMING AMENDMENT.—Paragraph (2) 
of section 861(a) is amended by striking ‘‘100/80th’’ 
and inserting ‘‘100/70th’’. 
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(c) REPEAL OF NOL EXCEPTION TO LIMITATION ON 
AGGREGATE
DEDUCTIONS; 
ESTABLISHMENT
OF 
CARRYFORWARD.— 
(1) IN
GENERAL.—Paragraph (2) of section 
246(b) is amended to read as follows: 
‘‘(2) CARRYFORWARD.—The aggregate amount 
of deductions disallowed under paragraph (1) for 
any taxable year shall be treated as an increase in 
the amount allowable as a deduction under section 
243(a)(1) for the following taxable year (subject to 
the application of paragraph (1) to such following 
taxable year).’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Subsection (d) of section 172 is 
amended by striking paragraph (5) and by re-
designating paragraph (6) as paragraph (5). 
(B) Subparagraph (A) of section 172(b)(2) 
is amended by striking ‘‘paragraphs (1), (4), 
and (5)’’ and inserting ‘‘paragraphs (1) and 
(4)’’. 
(C) Paragraph (1) of section 246(b) is 
amended by striking ‘‘Except as provided in 
paragraph (2), the’’ and inserting ‘‘The’’. 
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(D) Paragraph (3) of section 246(b) is 
amended by striking ‘‘paragraph (1)’’ and in-
serting ‘‘paragraphs (1) and (2)’’. 
(E) Subparagraph (B) of section 805(a)(4) 
is amended by striking ‘‘section 1212(a)(1),’’ 
and all that follows and inserting ‘‘section 
1212(a)(1).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2008. 
TITLE VII—OTHER PROVISIONS 
SEC. 701. RECOGNITION OF ORDINARY INCOME ON SALE 
OR EXERCISE OF STOCK OPTION IN S COR-
PORATION WITH AN ESOP. 
(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. 409B. RECOGNITION OF ORDINARY INCOME ON SALE 
OR EXERCISE OF STOCK OPTION IN S COR-
PORATION WITH AN ESOP. 
‘‘(a) IN GENERAL.—If an S corporation in which an 
employee stock ownership plan is a stockholder grants an 
option with respect to its stock and such option is sold 
or exercised, there shall be included in the gross income 
of the holder of such option (determined immediately be-
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fore such sale or exercise) as ordinary income an amount 
equal to the income inclusion amount. 
‘‘(b) INCOME INCLUSION AMOUNT.—For purposes of 
this section, the term ‘income inclusion amount’ means, 
with respect to the holder of any option, the excess (if 
any) of— 
‘‘(1) the sum of the net income amounts with 
respect to such option for all taxable years of the S 
corporation ending during the taxpayer’s holding pe-
riod, over 
‘‘(2) the sum of the net loss amounts with re-
spect to such option for all such taxable years. 
‘‘(c) NET INCOME AND LOSS AMOUNTS.—For pur-
poses of this section, with respect to any taxable year of 
the S corporation— 
‘‘(1) NET INCOME AMOUNT.—The term ‘net in-
come amount’ means the excess (if any) of— 
‘‘(A) the pass-thru income share for such 
taxable year, over 
‘‘(B) the pass-thru loss share for such tax-
able year. 
‘‘(2) NET LOSS AMOUNT.—The term ‘net loss 
amount’ means the excess (if any) of the amount de-
scribed in paragraph (1)(B) over the amount de-
scribed in paragraph (1)(A). 
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‘‘(d) PASS-THRU INCOME AND LOSS SHARES.—For 
purposes of this section, with respect to any taxable year 
of the S corporation— 
‘‘(1) PASS-THRU
INCOME
SHARE.—The term 
‘pass-thru income share’ means the excess (if any) 
of— 
‘‘(A) the aggregate items of income taken 
into account under section 1366 by the em-
ployee stock ownership plan for such taxable 
year, over 
‘‘(B) the aggregate items of income which 
would have been so taken into account if such 
option had been exercised upon being granted. 
‘‘(2) PASS-THRU
LOSS
SHARE.—The term 
‘pass-thru loss share’ means the excess (if any) of— 
‘‘(A) the aggregate items of deduction and 
loss taken into account under section 1366 by 
the employee stock ownership plan for such tax-
able year, over 
‘‘(B) the aggregate items of deduction and 
loss which would have been so taken into ac-
count if such option had been exercised upon 
being granted. 
‘‘(e) INTEREST AT UNDERPAYMENT RATE.— 
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SEC. 702. TREATMENT OF SECURITIES OF A CONTROLLED 
CORPORATION EXCHANGED FOR ASSETS IN 
CERTAIN REORGANIZATIONS. 
(a) IN GENERAL.—Section 361 (relating to non-
recognition of gain or loss to corporations; treatment of 
distributions) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(d) RECEIPT OF SECURITIES, ETC., IN EXCHANGE 
FOR ASSETS IN CERTAIN REORGANIZATIONS.—If— 
‘‘(1) property is transferred to a corporation 
(hereinafter in this subsection referred to as the 
‘controlled corporation’) pursuant to a plan of reor-
ganization described in section 368(a)(1)(D), and 
‘‘(2) pursuant to such plan of reorganization, 
stock or securities in the controlled corporation are 
distributed in a transaction which qualifies under 
section 355, 
then any securities and nonqualified preferred stock (as 
defined in section 351(g)(2)) of the controlled corporation 
shall be treated as other property for purposes of sub-
sections (a) and (b).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to distributions after the date 
of the enactment of this Act. 
Æ 
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