to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; etc.
TITLE I—PROVISIONS RELATING TO TAX SHELTERS
Subtitle A—Taxpayer-Related Provisions
Sec. 101. Clarification of economic substance doctrine.
Sec. 102. Penalty for failing to disclose reportable transactions.
Sec. 103. Accuracy-related penalty for listed transactions, other reportable
transactions having a significant tax avoidance purpose, etc.
Sec. 104. Penalty for understatements attributable to transactions lacking eco-
nomic substance, etc.
Sec. 105. Tax shelter exception to confidentiality privileges relating to taxpayer
communications.
Sec. 106. Disallowance of certain partnership loss transfers.
Sec. 107. Modifications of substantial understatement penalty for nonreportable
transactions.
Subtitle B—Promoter-Related Provisions
Sec. 111. Disclosure of reportable transactions.
Sec. 112. Failure to furnish information regarding reportable transactions.
Sec. 113. Modification of penalty for failure to maintain lists of investors.
Sec. 114. Modification of actions to enjoin certain conduct related to tax shel-
ters and reportable transactions.
Sec. 115. Penalty on failure to report interests in foreign financial accounts.
Sec. 116. Frivolous tax submissions.
Sec. 117. Regulation of individuals practicing before the Department of the
Treasury.
Sec. 118. Penalty on promoters of tax shelters.
Subtitle C—Other Provisions
Sec. 121. Treatment of stripped interests in bond and preferred stock funds,
etc.
Sec. 122. Minimum holding period for foreign tax credit on withholding taxes
on income other than dividends.
Sec. 123. Affirmation of consolidated return regulation authority.
TITLE II—PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH
CORPORATE EARNINGS STRIPPING AND EXPATRIATION
Sec. 201. Reduction in potential for earnings stripping by further limiting de-
duction for interest on certain indebtedness.
Sec. 202. Tax treatment of expatriated entities.
Sec. 203. Excise tax on stock compensation of insiders in expatriated corpora-
tions.
Sec. 204. Reporting of taxable mergers and acquisitions.
Sec. 205. Studies.
TITLE III—SIMPLIFICATION OF RULES RELATING TO THE
TAXATION OF UNITED STATES BUSINESSES OPERATING ABROAD
Subtitle A—Treatment of Controlled Foreign Corporations
Sec. 301. Repeal of CFC rules on foreign base company sales and service in-
come.
Sec. 302. Look-thru treatment of payments between related controlled foreign
corporations under foreign personal holding company income
rules.
Sec. 303. Look-thru treatment for sales of partnership interests.
Sec. 304. Repeal of foreign personal holding company rules and foreign invest-
ment company rules.
Sec. 305. Clarification of treatment of pipeline transportation income.
Sec. 306. Determination of foreign personal holding company income with re-
spect to transactions in commodities.
Sec. 307. Effective date.
Subtitle B—Provisions Relating to Foreign Tax Credit
Sec. 311. Interest expense allocation rules.
Sec. 312. Recharacterization of overall domestic loss.
Sec. 313. Reduction to 3 foreign tax credit baskets.
Sec. 314. 10-year foreign tax credit carryforward.
Sec. 315. Repeal of limitation of foreign tax credit under alternative minimum
tax.
Sec. 316. Look-thru rules to apply to dividends from noncontrolled section 902
corporations.
Sec. 317. Attribution of stock ownership through partnerships to apply in de-
termining section 902 and 960 credits.
Subtitle C—Other Provisions
Sec. 321. Application of uniform capitalization rules to foreign persons.
Sec. 322. United States property not to include certain assets acquired by deal-
ers in ordinary course of trade or business.
Sec. 323. Treatment of certain dividends of regulated investment companies.
Sec. 324. Election not to use average exchange rate for foreign tax paid other
than in functional currency.
Sec. 325. Repeal of withholding tax on dividends from certain foreign corpora-
tions.
Sec. 326. Increase in expensing under section 179.
Sec. 327. Repeal of exclusion for extraterritorial income.
Sec. 328. Repeal of FSC transitional rules.
TITLE IV—OTHER PROVISIONS
Sec. 401. Extension of Internal Revenue Service user fees.
Sec. 402. Extension of customs user fees.
Sec. 403. Inclusion in gross income of funded deferred compensation of cor-
porate insiders.
Sec. 404. Simplification of excise tax imposed on bows and arrows.
Sec. 405. Exclusion from gross income for interest on overpayments of income
tax by individuals.
Sec. 406. Deposits made to suspend running of interest on potential underpay-
ments.
Sec. 407. Partial payment of tax liability in installment agreements.
Sec. 408. Extension of transfers of excess pension assets to retiree health ac-
counts.
Sec. 409. Clarification of rules for payment of estimated tax for certain deemed
asset sales.
TITLE I—PROVISIONS RELATING
TO TAX SHELTERS
Subtitle A—Taxpayer-Related
Provisions
SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE.
(a) IN GENERAL.—Section 7701 is amended by re-
designating subsection (m) as subsection (n) and by in-
serting after subsection (l) the following new subsection:
‘‘(m) CLARIFICATION
OF ECONOMIC SUBSTANCE
DOCTRINE; ETC.—
‘‘(1) GENERAL RULES.—
‘‘(A) IN GENERAL.—In applying the eco-
nomic substance doctrine, the determination of
whether a transaction has economic substance
shall be made as provided in this paragraph.
‘‘(B) DEFINITION
OF
ECONOMIC
SUB-
STANCE.—For purposes of subparagraph (A), a
transaction has economic substance only if—
‘‘(i) the transaction changes in a
meaningful way (apart from Federal in-
come tax effects) the taxpayer’s economic
position, and
‘‘(ii) the taxpayer has a substantial
nontax purpose for entering into such
transaction and the transaction is a rea-
sonable means of accomplishing such pur-
pose.
‘‘(2) ECONOMIC
SUBSTANCE
DOCTRINE.—For
purposes of this subsection, the term ‘economic sub-
stance doctrine’ means the common law doctrine
under which tax benefits under subtitle A with re-
spect to a transaction are not allowable if the trans-
action does not have economic substance or lacks a
business purpose.
‘‘(3) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to
carry out the purposes of this subsection, including
regulations on the application of this subsection to
transactions involving tax-indifferent parties.’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to transactions after the date of
the enactment of this Act.
SEC. 102. 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-
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.
‘‘(2) LISTED TRANSACTION.—The term ‘listed
transaction’ means a reportable transaction which is
the same as, or similar to, a transaction specifically
identified by the Secretary as a tax avoidance trans-
action 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,
‘‘(B) the person on whom the penalty is
imposed has a history of complying with the re-
quirements of this title,
‘‘(C) it is shown that the violation is due
to an unintentional mistake of fact,
‘‘(D) imposing the penalty would be
against equity and good conscience, and
‘‘(E) rescinding the penalty would promote
compliance with the requirements of this title
and effective tax administration.
‘‘(2) DISCRETION.—The exercise of authority
under paragraph (1) shall be at the sole discretion
of the Commissioner and may be delegated only to
the head of the Office of Tax Shelter Analysis. The
Commissioner, in his sole discretion, may establish a
procedure to determine if a penalty should be re-
ferred to the Commissioner or the head of such Of-
fice for a determination under paragraph (1).
‘‘(3) NO APPEAL.—Notwithstanding any other
provision of law, any determination under this sub-
section may not be reviewed in any administrative or
judicial proceeding.
‘‘(4) 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
Shelter Analysis with respect to the determination,
including—
‘‘(A) the reasons for the rescission, and
‘‘(B) 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,
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. 103. 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—
‘‘(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.
‘‘(2) ITEMS TO WHICH SECTION APPLIES.—This
section shall apply to any item which is attributable
to—
‘‘(A) any listed transaction, and
such understatement is a substantial under-
statement 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 and noneconomic sub-
stance transaction 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 and non-
economic substance transaction understate-
ments.
‘‘(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 6662B or 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
taken into account in determining the amount of any
reportable transaction understatement or non-
economic substance transaction understatement if
the amendment or supplement is filed after the ear-
lier 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.
‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION
UNDERSTATEMENT.—For purposes of this sub-
section, the term ‘noneconomic substance trans-
action understatement’ has the meaning given to
such term by section 6662B(c).’’
(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 and without regard to
items with respect to which a penalty is im-
posed by section 6662B.’’
(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.
‘‘(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.
‘‘(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—
‘‘(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))
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 continuing 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),
‘‘(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.—
‘‘(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:
‘‘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 transactions.’’
(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. 104. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC.
(a) IN GENERAL.—Subchapter A of chapter 68 is
amended by inserting after section 6662A the following
new section:
‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB-
UTABLE TO TRANSACTIONS LACKING ECO-
NOMIC SUBSTANCE, ETC.
‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an
noneconomic substance transaction understatement for
any taxable year, there shall be added to the tax an
amount equal to 40 percent of the amount of such under-
statement.
‘‘(b) REDUCTION
OF PENALTY
FOR DISCLOSED
TRANSACTIONS.—Subsection (a) shall be applied by sub-
stituting ‘20 percent’ for ‘40 percent’ with respect to the
portion of any noneconomic substance transaction under-
statement with respect to which the relevant facts affect-
ing the tax treatment of the item are adequately disclosed
in accordance with the regulations prescribed under sec-
tion 6011.
‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN-
DERSTATEMENT.—For purposes of this section—
‘‘(1) IN
GENERAL.—The term ‘noneconomic
substance transaction understatement’ means any
amount which would be an understatement under
section 6662A(b)(1) if such section only applied to
items attributable to noneconomic substance trans-
actions.
‘‘(2) 
NONECONOMIC
SUBSTANCE
TRANS-
ACTION.—The term ‘noneconomic substance trans-
action’ means any transaction if—
‘‘(A) the transaction lacks economic sub-
stance (within the meaning of section 7701(m)),
or
‘‘(B) the transaction fails to meet the re-
quirements of any similar rule of law.
‘‘(3) 
EXCEPTION
FOR
PERSONAL
TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an indi-
vidual, such term shall not include any transaction
other than a transaction entered into in connection
with a trade or business or an activity engaged in
for the production of income.
‘‘(d) COORDINATION WITH OTHER PENALTIES.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this part, the penalty imposed by this sec-
tion shall be in addition to any other penalty im-
posed by this title.
‘‘(2) CROSS REFERENCE.—
‘‘For coordination of penalty with understate-
ments under section 6662 and other special rules,
see section 6662A(e).’’
(b) CLERICAL AMENDMENT.—The table of sections
for part II of subchapter A of chapter 68 is amended by
inserting after the item relating to section 6662A the fol-
lowing new item:
‘‘Sec. 6662B. Penalty for understatements attributable to trans-
actions lacking economic substance, etc.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transactions after the date of
the enactment of this Act.
SEC. 106. 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
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 immediately after
the contribution.
For purposes of subparagraph (C), the term ‘built-
in loss’ means the excess of the adjusted basis of the
property over its fair market value immediately after
the contribution.’’
(b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY
ON TRANSFER
OF PARTNERSHIP INTEREST IF
THERE IS SUBSTANTIAL BUILT-IN LOSS.—
(1) ADJUSTMENT
REQUIRED.—Subsection (a)
of section 743 (relating to optional adjustment to
basis of partnership property) is amended by insert-
ing 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 with respect to
which there is a substantial built-in loss immediately
after such transfer’’ 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—
‘‘(A) the transferee partner’s proportionate
share of the adjusted basis of the partnership
property exceeds the basis of such partner’s in-
terest in the partnership, and
‘‘(B) such excess exceeds the greater of—
‘‘(i) $250,000, or
‘‘(ii) 10 percent of the basis of such
partner’s interest in the partnership.
‘‘(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) CLERICAL AMENDMENTS.—
(A) The section heading for section 743 is
amended to read as follows:
‘‘SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROP-
ERTY 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. Adjustment to basis of partnership property where sec-
tion 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
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 the greater of $250,000 or 10 percent
of the aggregate adjusted basis of partnership prop-
erty immediately after the distribution.
‘‘(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:
‘‘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).—The amendments made
by subsection (b) shall apply to transfers after the
date of the enactment of this Act.
(3) SUBSECTION (c).—The amendments made
by subsection (c) shall apply to distributions after
the date of the enactment of this Act.
SEC. 107. 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) REDUCTION FOR UNDERSTATEMENT OF TAX-
PAYER DUE TO POSITION OF TAXPAYER OR DISCLOSED
ITEM.—Section 6662(d)(2)(B)(i) (relating to substantial
authority) is amended to read as follows:
‘‘(i) the tax treatment of any item by
the taxpayer if the taxpayer had reason-
able belief that the tax treatment was more
likely than not the proper treatment, or’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
Subtitle B—Promoter-Related
Provisions
SEC. 111. 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,
‘‘(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, promoting, selling, implementing,
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
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:
‘‘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:
‘‘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. 112. 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:
‘‘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.
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. 113. 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
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. 114. 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
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
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 67 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. 115. 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
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
‘‘(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. 116. FRIVOLOUS TAX SUBMISSIONS.
(a) CIVIL PENALTIES.—Section 6702 is amended to
read as follows:
‘‘SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.
‘‘(a) CIVIL PENALTY
FOR FRIVOLOUS TAX RE-
TURNS.—A person shall pay a penalty of $5,000 if—
‘‘(1) such person files what purports to be a re-
turn of a tax imposed by this title but which—
‘‘(A) does not contain information on
which the substantial correctness of the self-as-
sessment may be judged, or
‘‘(B) contains information that on its face
indicates that the self-assessment is substan-
tially incorrect; and
‘‘(2) the conduct referred to in paragraph (1)—
‘‘(A) is due to a position which is frivolous,
or
‘‘(B) reflects a desire to delay or impede
the administration of Federal tax laws.
‘‘(b) CIVIL PENALTY
FOR SPECIFIED FRIVOLOUS
SUBMISSIONS.—
‘‘(1) IMPOSITION OF PENALTY.—Except as pro-
vided in paragraph (3), any person who submits a
specified frivolous submission shall pay a penalty of
$5,000.
‘‘(2) SPECIFIED FRIVOLOUS SUBMISSION.—For
purposes of this section—
‘‘(A) 
SPECIFIED
FRIVOLOUS
SUBMIS-
SION.—The term ‘specified frivolous submis-
sion’ means a specified submission if any por-
tion of such submission—
‘‘(i) is based on a position which is
frivolous, or
‘‘(ii) reflects a desire to delay or im-
pede the administration of Federal tax
laws.
‘‘(B) SPECIFIED SUBMISSION.—The term
‘specified submission’ means—
‘‘(i) a request for a hearing under—
‘‘(I) section 6320 (relating to no-
tice and opportunity for hearing upon
filing of notice of lien), or
‘‘(II) section 6330 (relating to
notice and opportunity for hearing be-
fore levy), and
‘‘(ii) an application under—
‘‘(I) section 6159 (relating to
agreements for payment of tax liabil-
ity in installments),
‘‘(II) section 7122 (relating to
compromises), or
‘‘(III) section 7811 (relating to
taxpayer assistance orders).
‘‘(3) OPPORTUNITY
TO
WITHDRAW
SUBMIS-
SION.—If the Secretary provides a person with no-
tice that a submission is a specified frivolous sub-
mission and such person withdraws such submission
within 30 days after such notice, the penalty im-
posed under paragraph (1) shall not apply with re-
spect to such submission.
‘‘(c) REDUCTION OF PENALTY.—The Secretary may
reduce the amount of any penalty imposed under this sec-
tion if the Secretary determines that such reduction would
promote compliance with and administration of the Fed-
eral tax laws.
‘‘(d) PENALTIES
IN ADDITION
TO OTHER PEN-
ALTIES.—The penalties imposed by this section shall be
in addition to any other penalty provided by law.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part I of subchapter B of chapter 68 is amended by
striking the item relating to section 6702 and inserting
the following new item:
‘‘Sec. 6702. Frivolous tax submissions.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to submissions made and issues
raised after the date of the enactment of this Act.
SEC. 117. 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—
(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 and
may be in addition to, or in lieu of, any suspension, disbar-
ment, or censure.’’
(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
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.’’
SEC. 118. 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.
Subtitle C—Other Provisions
SEC. 121. 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:
‘‘(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. 122. 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
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.
‘‘(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-
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. 123. 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.
TITLE II—PROVISIONS TO RE-
DUCE 
TAX 
AVOIDANCE
THROUGH CORPORATE EARN-
INGS STRIPPING AND EXPA-
TRIATION
SEC. 201. REDUCTION IN POTENTIAL FOR EARNINGS STRIP-
PING BY FURTHER LIMITING DEDUCTION
FOR INTEREST ON CERTAIN INDEBTEDNESS.
(a) REDUCTION
IN
POTENTIAL
FOR
EARNINGS
STRIPPING.—
(1) IN GENERAL.—Paragraphs (1) and (2) of
section 163(j) are amended to read as follows:
‘‘(1) LIMITATION.—
‘‘(A) IN GENERAL.—In the case of a cor-
poration, no deduction shall be allowed under
this chapter for disqualified interest paid or ac-
crued during the taxable year.
‘‘(B) MAXIMUM DISALLOWANCE.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), the amount disallowed
under subparagraph (A) shall not exceed
the corporation’s excess overall interest ex-
pense for the taxable year.
‘‘(ii) 
CORPORATIONS
WHICH
ARE
MEMBERS
OF
WORLDWIDE
AFFILIATED
GROUP.—In the case of a corporation
which is a member of a worldwide affili-
ated group, the amount disallowed under
subparagraph (A) shall not exceed the
greater of—
‘‘(I) 
the 
corporation’s 
excess
overall interest expense for the taxable
year, or
‘‘(II) the corporation’s excess do-
mestic disqualified interest for such
year.
‘‘(C) DISALLOWED AMOUNT CARRIED TO
SUCCEEDING TAXABLE YEAR.—Any amount dis-
allowed under subparagraph (A) for any taxable
year shall be treated as disqualified interest
paid or accrued in the succeeding taxable year
and in the 2nd through 5th succeeding taxable
years to the extent not previously taken into ac-
count under this subparagraph. The amount of
such a carryforward taken into account for any
such succeeding taxable year shall not exceed—
‘‘(i) the excess (if any) of—
‘‘(I) 35 percent of the adjusted
taxable income of the corporation for
such succeeding taxable year, over
‘‘(II) the corporation’s net inter-
est expense for such succeeding tax-
able year, reduced by
‘‘(ii) amounts carried to such suc-
ceeding taxable year from taxable years
preceding the taxable year from which the
amount is being carried forward.
‘‘(D) SPECIAL RULES FOR CARRYOVER.—
‘‘(i) NO CARRYOVER OF EXCESS DO-
MESTIC DISQUALIFIED INTEREST.—In the
case of a corporation which is a member of
a worldwide affiliated group, the amount
disallowed under subparagraph (A) for any
taxable year which may be treated as pro-
vided in subparagraph (C) shall not exceed
the excess (if any) of the amount dis-
allowed over the amount described in sub-
paragraph (B)(ii)(II) for such year.
‘‘(ii) NO
CARRYOVER
TO
YEAR
FOR
WHICH
AMOUNT
DISALLOWED.—No
amount may be carried under this sub-
paragraph to any taxable year for which
any amount is disallowed under subpara-
graph (A).
‘‘(2) EXCESS
INTEREST
EXPENSE.—For pur-
poses of this subsection—
‘‘(A) EXCESS
OVERALL
INTEREST
EX-
PENSE.—The term ‘excess overall interest ex-
pense’ means the excess (if any) of—
‘‘(i) the corporation’s net interest ex-
pense, over
‘‘(ii) 35 percent of the adjusted tax-
able income of the corporation.
‘‘(B) EXCESS DOMESTIC DISQUALIFIED IN-
TEREST.—The term ‘excess domestic disquali-
fied interest’ means the product of—
‘‘(i) the disqualified interest paid or
accrued by the corporation during the tax-
able year, and
‘‘(ii) 
the 
corporation’s 
dispropor-
tionate domestic related-party indebtedness
percentage.’’
(2) DISPROPORTIONATE
DOMESTIC
RELATED-
PARTY
INDEBTEDNESS
PERCENTAGE.—Subsection
(j) of section 163 is amended by redesignating para-
graphs (6), (7), and (8) as paragraphs (7), (8), and
(9), respectively, and by inserting after paragraph
(5) the following new paragraph:
‘‘(6) DISPROPORTIONATE DOMESTIC RELATED-
PARTY INDEBTEDNESS PERCENTAGE.—For purposes
of this subsection—
‘‘(A) IN GENERAL.—The term ‘dispropor-
tionate domestic related-party indebtedness per-
centage’ means, for any taxable year, the per-
centage (but not greater than 100 percent)
which, as of the close of such taxable year (or
on any other day during the taxable year as the
Secretary may by regulations prescribe)—
‘‘(i) the disproportionate indebtedness
of the corporation, bears to
‘‘(ii) the related-party indebtedness of
the corporation.
‘‘(B) 
DISPROPORTIONATE
INDEBTED-
NESS.—The term ‘disproportionate indebted-
ness’ means the amount by which the total in-
debtedness of the corporation exceeds the
amount which bears the same ratio to the total
indebtedness of the worldwide affiliated group
as—
‘‘(i) the money and all other assets of
the corporation, bears to
‘‘(ii) the money and all other assets of
the worldwide affiliated group of which
such corporation is a member.
For purposes of determining the money and
other assets, and indebtedness, of a worldwide
affiliated group, all members of the same world-
wide affiliated group shall be treated as 1 cor-
poration.
‘‘(C) RELATED-PARTY
INDEBTEDNESS.—
The term ‘related-party indebtedness’ means
any indebtedness of the corporation if the inter-
est on such indebtedness is disqualified interest.
‘‘(D) WORLDWIDE AFFILIATED GROUP.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), the term ‘worldwide af-
filiated group’ means an affiliated group as
defined in section 1504(a), determined
without regard to paragraphs (2), (3), and
(4) of section 1504(b).
‘‘(ii) TREATMENT OF CERTAIN FINAN-
CIAL INSTITUTIONS.—
‘‘(I) IN GENERAL.—All financial
corporations (as defined in section
864(e)(6)(B)) which are members of a
worldwide affiliated group shall be
treated as a separate worldwide affili-
ated group (and not as part of any
other worldwide affiliated group) for
purposes of applying this subsection.
‘‘(II) DETERMINATION
OF
DO-
MESTIC DEBT AND ASSETS.—For pur-
poses of this paragraph, all such fi-
nancial corporations which are mem-
bers of the same affiliated group (as
defined in section 1504(a), determined
without regard to paragraph (2) of
section 1504(b)) shall be treated as 1
corporation.
‘‘(E) DETERMINATION OF DEBT AND AS-
SETS.—For purposes of this paragraph—
‘‘(i) the amount taken into account
with respect to any asset shall be the ad-
justed basis thereof for purposes of deter-
mining gain,
‘‘(ii) the amount taken into account
with respect to any indebtedness with
original issue discount shall be its issue
price plus the portion of the original issue
discount previously accrued as determined
under the rules of section 1272 (deter-
mined without regard to subsection (a)(7)
or (b)(4) thereof), and
‘‘(iii) there shall be such other adjust-
ments as the Secretary may by regulations
prescribe.’’
(3) CONFORMING AMENDMENT.—Paragraph (9)
of section 163(j), as redesignated by paragraph (2),
is amended by inserting ‘‘or worldwide affiliated
group’’ after ‘‘an affiliated group’’.
(b) MAINTENANCE OF CURRENT LAW FOR INTEREST
PAID BY TAXABLE REIT SUBSIDIARIES TO REIT.—
(1) EXCEPTION FROM 163(J).—Paragraph (3) of
section 163(j) is amended by inserting ‘‘and’’ at the
end of subparagraph (A), by striking ‘‘, and’’ at the
end of subparagraph (B) and inserting a period, and
by striking subparagraph (C).
(2) DISALLOWANCE.—Section 856 is amended
by adding at the end the following new subsection:
‘‘(m) LIMITATION ON DEDUCTION FOR INTEREST ON
CERTAIN
INDEBTEDNESS
OF
TAXABLE
REIT SUB-
SIDIARY.—
‘‘(1) LIMITATION.—
‘‘(A) IN GENERAL.—If this subsection ap-
plies to any taxable REIT subsidiary for any
taxable year, no deduction shall be allowed
under this chapter for disqualified interest paid
or accrued by such subsidiary during such tax-
able year. The amount disallowed under the
preceding sentence shall not exceed the subsidi-
ary’s excess interest expense for the taxable
year.
‘‘(B) DISALLOWED AMOUNT CARRIED TO
SUCCEEDING TAXABLE YEAR.—Any amount dis-
allowed under subparagraph (A) for any taxable
year shall be treated as disqualified interest
paid or accrued in the succeeding taxable year
(and clause (ii) of paragraph (2)(A) shall not
apply for purposes of applying this subsection
to the amount so treated).
‘‘(2) SUBSIDIARIES TO WHICH SUBSECTION AP-
PLIES.—
‘‘(A) IN GENERAL.—This subsection shall
apply to any taxable REIT subsidiary for any
taxable year if—
‘‘(i) such subsidiary has excess inter-
est expense for such taxable year, and
‘‘(ii) the ratio of debt to equity of
such subsidiary as of the close of such tax-
able year (or on any other day during the
taxable year as the Secretary may by regu-
lations prescribe) exceeds 1.5 to 1.
‘‘(B) EXCESS INTEREST EXPENSE.—
‘‘(i) IN
GENERAL.—For purposes of
this subsection, the term ‘excess interest
expense’ means the excess (if any) of—
‘‘(I) the taxable REIT subsidi-
ary’s net interest expense, over
‘‘(II) the sum of 50 percent of
the adjusted taxable income of the
subsidiary plus any excess limitation
carryforward under clause (ii).
‘‘(ii) 
EXCESS
LIMITATION
CARRYFORWARD.—If a taxable REIT sub-
sidiary has an excess limitation for any
taxable year, the amount of such excess
limitation shall be an excess limitation
carryforward to the 1st succeeding taxable
year and to the 2nd and 3rd succeeding
taxable years to the extent not previously
taken into account under this clause. The
amount of such a carryforward taken into
account for any such succeeding taxable
year shall not exceed the excess interest
expense for such succeeding taxable year
(determined 
without 
regard 
to 
the
carryforward from the taxable year of such
excess limitation).
‘‘(iii) EXCESS LIMITATION.—For pur-
poses of clause (ii), the term ‘excess limita-
tion’ means the excess (if any) of—
‘‘(I) 50 percent of the adjusted
taxable income of the subsidiary, over
‘‘(II) the subsidiary’s net interest
expense.
‘‘(C) RATIO
OF
DEBT
TO
EQUITY.—For
purposes of this paragraph, the term ‘ratio of
debt to equity’ means the ratio which the total
indebtedness of the subsidiary bears to the sum
of its money and all other assets reduced (but
not below zero) by such total indebtedness. The
rules of section 163(j)(6)(E) shall apply for
purposes of the preceding sentence.
‘‘(3) DISQUALIFIED INTEREST.—For purposes
of this subsection, the term ‘disqualified interest’
means any interest paid or accrued (directly or indi-
rectly) by a taxable REIT subsidiary of a real estate
investment trust to such trust.
‘‘(4) OTHER RULES TO APPLY.—Rules similar
to the rules of paragraphs (7), (8), and (9) of sec-
tion 163(j) shall apply for purposes of this sub-
section.’’
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years beginning
after December 31, 2003.
(2) EARLIER EFFECTIVE DATE WITH RESPECT
TO
EXPATRIATED
CORPORATIONS, 
ETC.—The
amendments made by this section shall apply to tax-
able years ending after March 20, 2002, in the case
of a taxpayer which is—
(A) a surrogate foreign corporation, as de-
fined in section 7874(b) of the Internal Rev-
enue Code of 1986 (as added by section 202),
(B) a corporation which would be a surro-
gate foreign corporation (as so defined) if ‘‘De-
cember 31, 1996’’ were substituted for ‘‘March
20, 2002’’ in such section 7874(b), and
(C) any corporation which is an expatri-
ated entity (as defined in such section 7874(b))
with respect to a corporation described in sub-
paragraph (A) or (B).
(3) EARLIER
EFFECTIVE
DATE
FOR
RECENT
DEBT.—
(A) IN
GENERAL.—Subject to subpara-
graph (B), the amendments made by this sec-
tion shall also apply to taxable years ending
after July 10, 2002, and beginning before the
first taxable year to which such amendments
would (without regard to this paragraph) apply.
(B) 
APPLICATION
ONLY
TO
RECENT
DEBT.—In the case of a taxable year to which
the amendments made by this section apply
solely by reason of this paragraph, the increase
in the amount disallowed under section 163(j)
of the Internal Revenue Code of 1986 by reason
of such amendments shall not exceed the
amount of disqualified interest for such year on
indebtedness incurred after July 10, 2002.
(4) LIMITATION
ON
CARRYOVER
OF
DIS-
ALLOWED INTEREST.—For purposes of applying sec-
tion 163(j)(1)(C) of the Internal Revenue Code of
1986 (as added by this section), amounts carried to
any taxable year beginning after December 31,
2003, shall be treated as disallowed for the most re-
cent taxable year beginning on or before such date.
SEC. 202. TAX TREATMENT OF EXPATRIATED ENTITIES AND
THEIR FOREIGN PARENTS.
(a) IN GENERAL.—Subchapter C of chapter 80 (re-
lating to provisions affecting more than one subtitle) is
amended by adding at the end the following new section:
‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES
AND THEIR FOREIGN PARENTS.
‘‘(a) INVERTED CORPORATIONS TREATED AS DOMES-
TIC CORPORATIONS.—
‘‘(1) IN GENERAL.—If a foreign incorporated
entity is treated as an inverted domestic corporation,
then, notwithstanding section 7701(a)(4), such enti-
ty shall be treated for purposes of this title as a do-
mestic corporation.
‘‘(2) EXCEPTION.—Paragraph (1) shall not
apply for purposes of determining under section 367
whether any shareholder recognizes gain in connec-
tion with the acquisition.
‘‘(3) INVERTED DOMESTIC CORPORATION.—For
purposes of this section, a foreign incorporated enti-
ty shall be treated as an inverted domestic corpora-
tion if, pursuant to a plan (or a series of related
transactions)—
‘‘(A) the entity completes after March 20,
2002, the direct or indirect acquisition of sub-
stantially all of the properties held directly or
indirectly by a domestic corporation or substan-
tially all of the properties constituting a trade
or business of a domestic partnership,
‘‘(B) after the acquisition at least 80 per-
cent of the stock (by vote or value) of the entity
is held—
‘‘(i) in the case of an acquisition with
respect to a domestic corporation, by
former shareholders of the domestic cor-
poration by reason of holding stock in the
domestic corporation, or
‘‘(ii) in the case of an acquisition with
respect to a domestic partnership, by
former partners of the domestic partner-
ship by reason of holding a capital or prof-
its interest in the domestic partnership,
and
‘‘(C) the expanded affiliated group which
after the acquisition includes the entity does
not have substantial business activities in the
foreign country in which or under the law of
which the entity is created or organized when
compared to the total business activities of such
expanded affiliated group.
‘‘(4) TERMINATION.—This subsection shall not
apply to any acquisition completed after March 20,
2005.
‘‘(b) TAX ON INVERSION GAIN OF EXPATRIATED EN-
TITIES.—
‘‘(1) IN GENERAL.—The taxable income of an
expatriated entity for any taxable year which in-
cludes any portion of the applicable period shall in
no event be less than the inversion gain of the entity
for the taxable year.
‘‘(2) EXPATRIATED ENTITY.—For purposes of
this subsection—
‘‘(A) IN GENERAL.—The term ‘expatriated
entity’ means—
‘‘(i) the domestic corporation or part-
nership referred to in subparagraph (B)(i)
with respect to which a foreign incor-
porated entity is a surrogate foreign cor-
poration, and
‘‘(ii) any United States person who is
related (within the meaning of section
267(b) or 707(b)(1)) to a domestic cor-
poration or partnership described in clause
(i).
‘‘(B) 
SURROGATE
FOREIGN
CORPORA-
TION.—A foreign incorporated entity shall be
treated as a surrogate foreign corporation if,
pursuant to a plan (or a series of related trans-
actions)—
‘‘(i) the entity completes after March
20, 2002, the direct or indirect acquisition
of substantially all of the properties held
directly or indirectly by a domestic cor-
poration or substantially all of the prop-
erties constituting a trade or business of a
domestic partnership, and
‘‘(ii) after the acquisition at least 60
percent of the stock (by vote or value) of
the entity is held—
‘‘(I) in the case of an acquisition
with respect to a domestic corpora-
tion, by former shareholders of the
domestic corporation by reason of
holding stock in the domestic corpora-
tion, or
‘‘(II) in the case of an acquisition
with respect to a domestic partner-
ship, by former partners of the do-
mestic partnership by reason of hold-
ing a capital or profits interest in the
domestic partnership.
The term ‘surrogate foreign corporation’ shall
not include an inverted domestic corporation.
‘‘(c) GENERAL DEFINITIONS AND SPECIAL RULES.—
‘‘(1) FOREIGN
INCORPORATED
ENTITY.—For
purposes of this section, the term ‘foreign incor-
porated entity’ means any entity which is, or but for
subsection (a) would be, treated as a foreign cor-
poration for purposes of this title.
‘‘(2) EXPANDED
AFFILIATED
GROUP.—The
term ‘expanded affiliated group’ means an affiliated
group as defined in section 1504(a) but without re-
gard to section 1504(b), except that section 1504(a)
shall be applied by substituting ‘more than 50 per-
cent’ for ‘at least 80 percent’ each place it appears.
‘‘(3) CERTAIN
STOCK
DISREGARDED.—There
shall not be taken into account in determining own-
ership 
under 
subsections 
(a)(3)(B) 
and
(b)(2)(B)(ii)—
‘‘(i) stock held by members of the ex-
panded affiliated group which includes the
foreign incorporated entity, or
‘‘(ii) stock of such foreign incor-
porated entity which is sold in a public of-
fering related to the acquisition described
in subsection (a)(3)(A) or (b)(2)(B)(i), re-
spectively.
‘‘(4) PLAN DEEMED IN CERTAIN CASES.—If a
foreign incorporated entity acquires directly or indi-
rectly substantially all of the properties of a domes-
tic corporation or partnership during the 4-year pe-
riod beginning on the date which is 2 years before
the ownership requirements of subsections (a)(3)(B)
and (b)(2)(B)(ii) are met, such actions shall be
treated as pursuant to a plan.
‘‘(5) CERTAIN TRANSFERS DISREGARDED.—The
transfer of properties or liabilities (including by con-
tribution or distribution) shall be disregarded if such
transfers are part of a plan a principal purpose of
which is to avoid the purposes of this section.
‘‘(6) SPECIAL RULE FOR RELATED PARTNER-
SHIPS.—For 
purposes 
of 
applying 
subsections
(a)(3)(B) and (b)(2)(B)(ii) to the acquisition of a
domestic partnership, except as provided in regula-
tions, all partnerships which are under common con-
trol (within the meaning of section 482) shall be
treated as 1 partnership.
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to de-
termine whether a corporation is an inverted domes-
tic corporation or surrogate foreign corporation, in-
cluding regulations—
‘‘(A) to treat warrants, options, contracts
to acquire stock, convertible debt interests, and
other similar interests as stock, and
‘‘(B) to treat stock as not stock.
‘‘(d) DEFINITIONS RELATING TO TAX ON INVERSION
GAIN.—For purposes of subsection (b)—
‘‘(1) APPLICABLE PERIOD.—The term ‘applica-
ble period’ means the period—
‘‘(A) beginning on the first date properties
are acquired as part of the acquisition described
in subsection (b)(2)(B)(i), and
‘‘(B) ending on the date which is 10 years
after the last date properties are acquired as
part of such acquisition.
‘‘(2) INVERSION
GAIN.—The term ‘inversion
gain’ means the income or gain recognized by reason
of the transfer during the applicable period of stock
or other properties by an expatriated entity, and any
income received or accrued during the applicable pe-
riod by reason of a license of any property by an ex-
patriated entity —
‘‘(B) the highest rate of tax specified in
section 11(b)(1).
For purposes of determining the credit allowed by
section 901, inversion gain shall be treated as from
sources within the United States.
‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In
the case of an expatriated entity which is a
partnership—
‘‘(A) subsection (b) shall apply at the part-
ner rather than the partnership level,
‘‘(B) the inversion gain of any partner for
any taxable year shall be equal to the sum of—
‘‘(i) the partner’s distributive share of
inversion gain of the partnership for such
taxable year, plus
‘‘(ii) gain recognized for the taxable
year by the partner by reason of the trans-
fer during the applicable period of any
partnership interest of the partner in such
partnership to the surrogate foreign cor-
poration, and
‘‘(C) the highest rate of tax specified in
the rate schedule applicable to the partner
under this chapter shall be substituted for the
rate of tax referred to in paragraph (1).
‘‘(3) COORDINATION
WITH
SECTION
172
AND
MINIMUM TAX.—Rules similar to the rules of para-
graphs (3) and (4) of section 860E(a) shall apply
for purposes of subsection (b).
‘‘(4) STATUTE OF LIMITATIONS.—
‘‘(A) IN GENERAL.—The statutory period
for the assessment of any deficiency attrib-
utable to the inversion gain of any taxpayer for
any pre-inversion year shall not expire before
the expiration of 3 years from the date the Sec-
retary is notified by the taxpayer (in such man-
ner as the Secretary may prescribe) of the ac-
quisition described in subsection (b)(2)(B)(i) to
which such gain relates and such deficiency
may be assessed before the expiration of such
3-year period notwithstanding the provisions of
any other law or rule of law which would other-
wise prevent such assessment.
‘‘(B) PRE-INVERSION YEAR.—For purposes
of subparagraph (A), the term ‘pre-inversion
year’ means any taxable year if—
‘‘(i) any portion of the applicable pe-
riod is included in such taxable year, and
‘‘(ii) such year ends before the taxable
year in which the acquisition described in
subsection (b)(2)(B)(i) is completed.
‘‘(f) SPECIAL RULE FOR TREATIES.—Nothing in sec-
tion 894 or 7852(d) or in any other provision of law shall
be construed as permitting an exemption, by reason of any
treaty obligation of the United States heretofore or here-
after entered into, from the provisions of this section.
‘‘(g) REGULATIONS.—The Secretary shall provide
such regulations as are necessary to carry out this section,
including regulations providing for such adjustments to
the application of this section as are necessary to prevent
the avoidance of the purposes of this section, including the
avoidance of such purposes through—
‘‘(1) the use of related persons, pass-through or
other noncorporate entities, or other intermediaries,
or
‘‘(2) transactions designed to have persons
cease to be (or not become) members of expanded
affiliated groups or related persons.’’.
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subchapter C of chapter 80 is amended by adding
at the end the following new item:
‘‘Sec. 7874. Rules relating to expatriated entities and their for-
eign parents.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years ending after
March 20, 2002.
SEC. 203. EXCISE TAX ON STOCK COMPENSATION OF INSID-
ERS IN EXPATRIATED CORPORATIONS.
(a) IN GENERAL.—Subtitle D is amended by adding
at the end the following new chapter:
‘‘CHAPTER 48—STOCK COMPENSATION OF
INSIDERS IN EXPATRIATED CORPORA-
TIONS
‘‘Sec. 5000A. Stock compensation of insiders in expatriated cor-
porations.
‘‘SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN EXPA-
TRIATED CORPORATIONS.
‘‘(a) IMPOSITION OF TAX.—In the case of an indi-
vidual who is a disqualified individual with respect to any
expatriated corporation, there is hereby imposed on such
person a tax equal to 20 percent of the value (determined
under subsection (b)) of the specified stock compensation
held (directly or indirectly) by or for the benefit of such
individual or a member of such individual’s family (as de-
fined in section 267) at any time during the 12-month
period beginning on the date which is 6 months before
the expatriation date.
‘‘(b) VALUE.—For purposes of subsection (a)—
‘‘(1) IN GENERAL.—The value of specified stock
compensation shall be—
‘‘(A) in the case of a stock option, the fair
value of such option, and
‘‘(B) in any other case, the fair market
value of such compensation.
‘‘(2) DATE
FOR
DETERMINING
VALUE.—The
determination of value shall be made—
‘‘(A) in the case of specified stock com-
pensation held on the expatriation date, on such
date,
‘‘(B) in the case of such compensation
which is canceled during the 6 months before
the expatriation date, on the day before such
cancellation, and
‘‘(C) in the case of such compensation
which is granted after the expatriation date, on
the date such compensation is granted.
‘‘(c) TAX TO APPLY ONLY IF SHAREHOLDER GAIN
RECOGNIZED.—Subsection (a) shall apply to any disquali-
fied individual with respect to an expatriated corporation
only if gain (if any) on any stock in such corporation is
recognized in whole or part by any shareholder by reason
of the acquisition referred to in section 7874(b)(2)(B)(i)
issuer of equity securities referred to in such
section.
‘‘(2) EXPATRIATED
CORPORATION; EXPATRIA-
TION DATE.—
‘‘(A) EXPATRIATED
CORPORATION.—The
term ‘expatriated corporation’ means any cor-
poration which would be an expatriated entity
(as defined in section 7874(b)(2)) if—
‘‘(i) section 7874(b)(2)(B) were ap-
plied by substituting ‘July 10, 2002’ for
‘March 20, 2002’, and
‘‘(ii) the last sentence of section
7874(b)(2)(B) did not apply.
Such term includes any predecessor or suc-
cessor of such a corporation.
‘‘(B) EXPATRIATION DATE.—The term ‘ex-
patriation date’ means, with respect to a cor-
poration, the date on which the corporation
first becomes an expatriated corporation.
‘‘(3) SPECIFIED STOCK COMPENSATION.—
‘‘(A) IN
GENERAL.—The term ‘specified
stock compensation’ means payment (or right
to payment) granted by the expatriated cor-
poration (or by any member of the expanded af-
filiated group which includes such corporation)
to any person in connection with the perform-
ance of services by a disqualified individual for
such corporation or member if the value of such
payment or right is based on (or determined by
reference to) the value (or change in value) of
stock in such corporation (or any such mem-
ber).
‘‘(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)); 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
section—
‘‘(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—
‘‘(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 ‘‘48,’’ after ‘‘46,’’.
(2) $1,000,000
LIMIT
ON
DEDUCTIBLE
COM-
PENSATION REDUCED BY PAYMENT OF EXCISE TAX
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 5000A 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
5000A) on which tax is imposed by section 5000A’’.
(2) The table of chapters for subtitle D is
amended by adding at the end the following new
item:
‘‘Chapter 48. Stock compensation of insiders in expatriated cor-
porations.’’
(d) EFFECTIVE DATE.—The amendments made by
this section shall take effect on July 11, 2002; except that
periods before such date shall not be taken into account
in applying the periods in subsections (a) and (e)(1) of
section 5000A of the Internal Revenue Code of 1986, as
added by this section.
SEC. 204. 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. TAXABLE MERGERS AND ACQUISITIONS.
‘‘(a) IN GENERAL.—The acquiring corporation in any
taxable acquisition shall make a return (according to the
forms or regulations prescribed by the Secretary) 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
‘‘(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) NOMINEE 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 sub-
section (d).
‘‘(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.
‘‘(d) STATEMENTS TO BE FURNISHED TO SHARE-
HOLDERS.—Every person required to make a return under
subsection (a) shall furnish to each shareholder whose
name is required to be set forth in such return 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 (xvii) as clauses (iii) through
(xviii), respectively, and by inserting after clause (i)
the following new clause:
‘‘(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
(AA) as subparagraphs (G) through (BB), 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. 205. 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-
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 December 31, 2002, 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 December 31, 2002, such Sec-
retary or delegate shall submit to the Congress a report
of such study.
(c) IMPACT
OF EXPATRIATION PROVISIONS.—The
Secretary of the Treasury or the Secretary’s delegate shall
conduct a study of the impact of the provisions of this
title on corporate earnings stripping and expatriation. The
study shall include such recommendations as such Sec-
retary or delegate may have to improve the impact of such
provisions in carrying out the purposes of this title. Not
later than December 31, 2004, such Secretary or delegate
shall submit to the Congress a report of such study.
TITLE III—SIMPLIFICATION OF
RULES 
RELATING 
TO 
THE
TAXATION OF UNITED STATES
BUSINESSES 
OPERATING
ABROAD
Subtitle A—Treatment of
Controlled Foreign Corporations
SEC. 301. REPEAL OF CFC RULES ON FOREIGN BASE COM-
PANY SALES AND SERVICES INCOME.
(a) IN GENERAL.—Subsection (a) of section 954 (re-
lating to foreign base company income) is amended by
striking paragraphs (2) and (3) and by redesignating
paragraphs (4) and (5) as paragraphs (2) and (3), respec-
tively.
(b) CERTAIN SALES.—Paragraph (1) of section
954(c) is amended by adding at the end the following new
subparagraph:
‘‘(H) CERTAIN
SALES.—Income (whether
in the form of profits, commissions, fees, or
otherwise) derived in connection with the pur-
chase of personal property from a related per-
son and its sale to any person, the sale of per-
sonal property to any person on behalf of a re-
lated person, the purchase of personal property
from any person and its sale to a related per-
son, or the purchase of personal property from
any person on behalf of a related person
where—
‘‘(i) the property which is purchased
(or in the case of property sold on behalf
of a related person, the property which is
sold) is manufactured, produced, grown, or
extracted in the United States, and
‘‘(ii) the property is sold for use, con-
sumption, or disposition in the United
States, or, in the case of property pur-
chased on behalf of a related person, is
purchased for use, consumption, or disposi-
tion in the United States.’’
(c) CONFORMING AMENDMENTS.—
(1) Clause (iii) of section 952(c)(1)(B) is
amended by striking subclauses (III) and (IV) and
by redesignating subclauses (V) and (VI) as sub-
clauses (III) and (IV), respectively.
(2) Section 953(c)(6)(A) is amended by striking
‘‘section 
954(d)(3)’’ 
and 
inserting 
‘‘section
954(b)(9)’’.
(3) Subsection (b) of section 954 is amended by
adding at the end the following new paragraph:
‘‘(9) RELATED
PERSON
DEFINED.—For pur-
poses of this subsection, a person is a related person
with respect to a controlled foreign corporation if—
‘‘(A) such person is an individual, corpora-
tion, partnership, trust, or estate which con-
trols, or is controlled by, the controlled foreign
corporation, or
‘‘(B) such person is a corporation, partner-
ship, trust, or estate which is controlled by the
same person or persons which control the con-
trolled foreign corporation.
For purposes of the preceding sentence, control
means, with respect to a corporation, the ownership,
directly or indirectly, of stock possessing more than
50 percent of the total voting power of all classes of
stock entitled to vote or of the total value of stock
of such corporation. In the case of a partnership,
trust, or estate, control means the ownership, di-
rectly or indirectly, of more than 50 percent (by
value) of the beneficial interests in such partnership,
trust, or estate. For purposes of this paragraph,
rules similar to the rules of section 958 shall apply.’’
(4) Paragraph (5) of section 954(b) is amended
by striking ‘‘the foreign base company sales income,
the foreign base company services income,’’.
(5) Section 954 is amended by striking sub-
sections (d) and (e).
(6) 
Sections 
552(c)(2), 
861(c)(2)(B),
904(d)(2)(H), 
953(e), 
955(b), 
958(b), 
971(f),
988(e)(3)(C), 
1297(b)(2), 
1298(d)(3), 
and
1298(e)(2)(B) are each amended by striking
‘‘954(d)(3)’’ each place it appears and inserting
‘‘954(b)(9)’’.
SEC. 302. LOOK-THRU TREATMENT OF PAYMENTS BE-
TWEEN 
RELATED 
CONTROLLED 
FOREIGN
CORPORATIONS UNDER FOREIGN PERSONAL
HOLDING COMPANY INCOME RULES.
Subsection (c) of section 954 is amended by adding
after paragraph (3) the following new paragraph:
‘‘(4) LOOK-THRU IN THE CASE OF RELATED
CONTROLLED
FOREIGN
CORPORATIONS.—For pur-
poses of this subsection, dividends, interest, rents,
and royalties received from a controlled foreign cor-
poration which is a related person (as defined in
subsection (b)(9)) shall not be treated as foreign
personal holding company income to the extent at-
tributable (determined under rules similar to the
rules of subparagraphs (C) and (D) of section
904(d)(3)) to income of the related person which is
not subpart F income (as defined in section 952).’’
SEC. 303. LOOK-THRU TREATMENT FOR SALES OF PART-
NERSHIP INTERESTS.
Section 954(c) (defining foreign personal holding
company income) is amended by adding after paragraph
(4) the following new paragraph:
‘‘(5) LOOK-THROUGH
RULE
FOR
CERTAIN
PARTNERSHIP SALES.—
‘‘(A) IN
GENERAL.—In the case of any
sale by a controlled foreign corporation of an
interest in a partnership with respect to which
such corporation is a 25-percent owner, such
corporation shall be treated for purposes of this
subsection as selling the proportionate share of
the assets of the partnership attributable to
such interest.
‘‘(B) 25-PERCENT OWNER.—For purposes
of this paragraph, the term ‘25-percent owner’
means a controlled foreign corporation which
owns 25 percent or more of the capital or prof-
its interest in the partnership. The constructive
ownership rules of section 958(b) shall apply
for purposes of the preceding sentence.’’
SEC. 304. REPEAL OF FOREIGN PERSONAL HOLDING COM-
PANY RULES AND FOREIGN INVESTMENT
COMPANY RULES.
(a) GENERAL RULE.—The following provisions are
hereby repealed:
(1) Part III of subchapter G of chapter 1 (re-
lating to foreign personal holding companies).
(2) Section 1246 (relating to gain on foreign in-
vestment company stock).
(3) Section 1247 (relating to election by foreign
investment companies to distribute income cur-
rently).
(b) EXEMPTION OF FOREIGN CORPORATIONS FROM
PERSONAL HOLDING COMPANY RULES.—
(1) IN
GENERAL.—Subsection (c) of section
542 (relating to exceptions) is amended—
(A) by striking paragraph (5) and insert-
ing the following:
‘‘(5) a foreign corporation,’’,
(B) by striking paragraphs (7) and (10)
and by redesignating paragraphs (8) and (9) as
paragraphs (7) and (8), respectively,
103
SEC. 306. DETERMINATION OF FOREIGN PERSONAL HOLD-
ING COMPANY INCOME WITH RESPECT TO
TRANSACTIONS IN COMMODITIES.
(a) IN GENERAL.—Clauses (i) and (ii) of section
954(c)(1)(C) (relating to commodity transactions) are
amended to read as follows:
‘‘(i) arise out of commodity hedging
transactions (as defined in paragraph
(6)(A)),
‘‘(ii) are active business gains or
losses from the sale of commodities, but
only if substantially all of the controlled
foreign 
corporation’s 
commodities 
are
property described in paragraph (1), (2),
or (8) of section 1221(a), or’’.
(b) DEFINITION AND SPECIAL RULES.—Subsection
(c) of section 954 is amended by adding after paragraph
(5) the following new paragraph:
‘‘(6) DEFINITION AND SPECIAL RULES RELAT-
ING TO COMMODITY TRANSACTIONS.—
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—For 
purposes 
of 
paragraph
(1)(C)(i), the term ‘commodity hedging trans-
action’ means any transaction with respect to a
commodity if such transaction—
104
‘‘(i) is a hedging transaction as de-
fined in section 1221(b)(2), determined—
‘‘(I) without regard to subpara-
graph (A)(ii) thereof,
‘‘(II) by applying subparagraph
(A)(i) thereof by substituting ‘ordi-
nary property or property described in
section 1231(b)’ for ‘ordinary prop-
erty’, and
‘‘(III) by substituting ‘controlled
foreign corporation’ for ‘taxpayer’
each place it appears, and
‘‘(ii) is clearly identified as such in ac-
cordance with section 1221(a)(7).
‘‘(B) REGULATIONS.—The Secretary shall
prescribe such regulations as are appropriate to
carry out the purposes of paragraph (1)(C) in
the case of transactions involving related par-
ties.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transactions entered into on or
after the date of enactment of this Act.
SEC. 307. EFFECTIVE DATE.
Except as otherwise provided in this subtitle, the
amendments made by this subtitle shall apply to taxable
105
years of foreign corporations beginning after December
31, 2002, and taxable years of United States persons own-
ing stock in such corporations with or within which such
corporations’ taxable years end.
Subtitle B—Provisions Relating to
Foreign Tax Credit
SEC. 311. INTEREST EXPENSE ALLOCATION RULES.
(a) ALLOCATION ON WORLDWIDE BASIS.—
(1) IN GENERAL.—Paragraphs (1) and (2) of
section 864(e) (relating to rules for allocating inter-
est, etc.) are amended to read as follows:
‘‘(1) ALLOCATION AND APPORTIONMENT OF IN-
TEREST EXPENSE.—
‘‘(A) IN GENERAL.—The taxable income of
each domestic corporation which is a member of
a worldwide affiliated group shall be determined
by allocating and apportioning interest expense
of each member as if all members of such group
were a single corporation.
‘‘(B) TREATMENT OF WORLDWIDE AFFILI-
ATED GROUP.—The taxable income of the do-
mestic members of a worldwide affiliated group
from sources outside the United States shall be
determined by allocating and apportioning the
interest expense of such domestic members to