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(C) by striking the period at the end of the
first sentence and inserting ‘‘; or’’; and
(D) by inserting after subparagraph (A)(ii)
(as so redesignated) the following:
‘‘(B) the issue meets the requirement of
clause (i) or (ii) of section 6702(b)(2)(A).’’.
(3) 
STATEMENT
OF
GROUNDS.—Section
6330(b)(1) is amended by striking ‘‘under subsection
(a)(3)(B)’’ and inserting ‘‘in writing under subsection
(a)(3)(B) and states the grounds for the requested
hearing’’.
(c) TREATMENT OF FRIVOLOUS REQUESTS FOR HEAR-
INGS UPON FILING OF NOTICE OF LIEN.—Section 6320 is
amended—
(1) in subsection (b)(1), by striking ‘‘under sub-
section (a)(3)(B)’’ and inserting ‘‘in writing under
subsection (a)(3)(B) and states the grounds for the re-
quested hearing’’, and
(2) in subsection (c), by striking ‘‘and (e)’’ and
inserting ‘‘(e), and (g)’’.
(d) TREATMENT OF FRIVOLOUS APPLICATIONS FOR
OFFERS-IN-COMPROMISE
AND
INSTALLMENT
AGREE-
MENTS.—Section 7122 is amended by adding at the end
the following new subsection:
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‘‘(e) 
FRIVOLOUS
SUBMISSIONS, 
ETC.—Notwith-
standing any other provision of this section, if the Secretary
determines that any portion of an application for an offer-
in-compromise or installment agreement submitted under
this section or section 6159 meets the requirement of clause
(i) or (ii) of section 6702(b)(2)(A), then the Secretary may
treat such portion as if it were never submitted and such
portion shall not be subject to any further administrative
or judicial review.’’.
(e) 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.’’.
(f) EFFECTIVE DATE.—The amendments made by this
section shall apply to submissions made and issues raised
after the date on which the Secretary first prescribes a list
under section 6702(c) of the Internal Revenue Code of 1986,
as amended by subsection (a).
SEC. 414. REGULATION OF INDIVIDUALS PRACTICING BE-
FORE THE DEPARTMENT OF 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
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(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 de-
rived) from the conduct giving rise to the penalty and may
be in addition to, or in lieu of, any suspension, disbarment,
or censure of the representative.’’.
(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 following
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-
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ment, which is of a type which the Secretary determines
as having a potential for tax avoidance or evasion.’’.
SEC. 415. PENALTY FOR PROMOTING ABUSIVE TAX SHEL-
TERS.
(a) PENALTY FOR PROMOTING ABUSIVE TAX SHEL-
TERS.—Section 6700 (relating to promoting abusive tax
shelters, etc.) is amended—
(1) by redesignating subsections (b) and (c) as
subsections (d) and (e), respectively,
(2) by striking ‘‘a penalty’’ and all that follows
through the period in the first sentence of subsection
(a) and inserting ‘‘a penalty determined under sub-
section (b)’’, and
(3) by inserting after subsection (a) the following
new subsections:
‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN-
ALTY; LIABILITY FOR PENALTY.—
‘‘(1) AMOUNT OF PENALTY.—The amount of the
penalty imposed by subsection (a) shall not exceed
100 percent of the gross income derived (or to be de-
rived) from such activity by the person or persons
subject to such penalty.
‘‘(2) CALCULATION OF PENALTY.—The penalty
amount determined under paragraph (1) shall be cal-
culated with respect to each instance of an activity
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described in subsection (a), each instance in which in-
come was derived by the person or persons subject to
such penalty, and each person who participated in
such an activity.
‘‘(3) LIABILITY FOR PENALTY.—If more than 1
person is liable under subsection (a) with respect to
such activity, all such persons shall be jointly and
severally liable for the penalty under such subsection.
‘‘(c) PENALTY NOT DEDUCTIBLE.—The payment of
any penalty imposed under this section or the payment of
any amount to settle or avoid the imposition of such pen-
alty shall not be deductible by the person who is subject
to such penalty or who makes such payment.’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to activities after the date of the enact-
ment of this Act.
SEC. 416. STATUTE OF LIMITATIONS FOR TAXABLE YEARS
FOR 
WHICH 
REQUIRED 
LISTED 
TRANS-
ACTIONS NOT REPORTED.
(a) IN GENERAL.—Section 6501(c) (relating to excep-
tions) is amended by adding at the end the following new
paragraph:
‘‘(10) LISTED
TRANSACTIONS.—If a taxpayer
fails to include on any return or statement for any
taxable year any information with respect to a listed
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transaction (as defined in section 6707A(c)(2)) which
is required under section 6011 to be included with
such return or statement, the time for assessment of
any tax imposed by this title with respect to such
transaction shall not expire before the date which is
1 year after the earlier of—
‘‘(A) the date on which the Secretary is fur-
nished the information so required; or
‘‘(B) the date that a material advisor (as
defined in section 6111) meets the requirements
of section 6112 with respect to a request by the
Secretary under section 6112(b) relating to such
transaction with respect to such taxpayer.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years with respect to which
the period for assessing a deficiency did not expire before
the date of the enactment of this Act.
SEC. 417. DENIAL OF DEDUCTION FOR INTEREST ON UN-
DERPAYMENTS ATTRIBUTABLE TO NONDIS-
CLOSED REPORTABLE AND NONECONOMIC
SUBSTANCE TRANSACTIONS.
(a) IN GENERAL.—Section 163 (relating to deduction
for interest) is amended by redesignating subsection (m) as
subsection (n) and by inserting after subsection (l) the fol-
lowing new subsection:
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‘‘(m) INTEREST ON UNPAID TAXES ATTRIBUTABLE TO
NONDISCLOSED REPORTABLE TRANSACTIONS
AND NON-
ECONOMIC SUBSTANCE TRANSACTIONS.—No deduction shall
be allowed under this chapter for any interest paid or ac-
crued under section 6601 on any underpayment of tax
which is attributable to—
‘‘(1) the portion of any reportable transaction
understatement (as defined in section 6662A(b)) with
respect 
to 
which 
the 
requirement 
of 
section
6664(d)(2)(A) is not met, or
‘‘(2) any noneconomic substance transaction un-
derstatement (as defined in section 6662B(c)).’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall apply to transactions in taxable years begin-
ning after the date of the enactment of this Act.
SEC. 418. AUTHORIZATION OF APPROPRIATIONS FOR TAX
LAW ENFORCEMENT.
There is authorized to be appropriated $300,000,000
for each fiscal year beginning after September 30, 2003, for
the purpose of carrying out tax law enforcement to combat
tax avoidance transactions and other tax shelters, including
the use of offshore financial accounts to conceal taxable in-
come.
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SEC. 419. PENALTY FOR AIDING AND ABETTING THE UN-
DERSTATEMENT OF TAX LIABILITY.
(a) IN GENERAL.—Section 6701(a) (relating to impo-
sition of penalty) is amended—
(1) by inserting ‘‘the tax liability or’’ after ‘‘re-
spect to,’’ in paragraph (1),
(2) by inserting ‘‘aid, assistance, procurement,
or advice with respect to such’’ before ‘‘portion’’ both
places it appears in paragraphs (2) and (3), and
(3) by inserting ‘‘instance of aid, assistance, pro-
curement, or advice or each such’’ before ‘‘document’’
in the matter following paragraph (3).
(b) AMOUNT OF PENALTY.—Subsection (b) of section
6701 (relating to penalties for aiding and abetting under-
statement of tax liability) is amended to read as follows:
‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN-
ALTY; LIABILITY FOR PENALTY.—
‘‘(1) AMOUNT OF PENALTY.—The amount of the
penalty imposed by subsection (a) shall not exceed
100 percent of the gross income derived (or to be de-
rived) from such aid, assistance, procurement, or ad-
vice provided by the person or persons subject to such
penalty.
‘‘(2) CALCULATION OF PENALTY.—The penalty
amount determined under paragraph (1) shall be cal-
culated with respect to each instance of aid, assist-
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ance, procurement, or advice described in subsection
(a), each instance in which income was derived by the
person or persons subject to such penalty, and each
person who made such an understatement of the li-
ability for tax.
‘‘(3) LIABILITY FOR PENALTY.—If more than 1
person is liable under subsection (a) with respect to
providing such aid, assistance, procurement, or ad-
vice, all such persons shall be jointly and severally
liable for the penalty under such subsection.’’.
(c) PENALTY NOT DEDUCTIBLE.—Section 6701 is
amended by adding at the end the following new subsection:
‘‘(g) PENALTY NOT DEDUCTIBLE.—The payment of
any penalty imposed under this section or the payment of
any amount to settle or avoid the imposition of such pen-
alty shall not be deductible by the person who is subject
to such penalty or who makes such payment.’’.
(d) EFFECTIVE DATE.—The amendments made by this
section shall apply to activities after the date of the enact-
ment of this Act.
SEC. 420. STUDY ON INFORMATION SHARING AMONG LAW
ENFORCEMENT AGENCIES.
(a) STUDY.—The Secretary of the Treasury shall,
jointly with the Attorney General, the Securities and Ex-
change Commission, and the Commissioner of Internal Rev-
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enue, study the effectiveness of, and ways to improve, the
sharing of information related to the promotion of prohib-
ited tax shelters or tax avoidance schemes and other poten-
tial violations of Federal laws.
(b) REPORT.—The Secretary shall, not later than 1
year after the date of the enactment of this Act, report to
the appropriate committees of the Congress the results of
the study under subsection (a), including any recommenda-
tions for legislation.
Subtitle B—Other Corporate
Governance Provisions
SEC. 421. AFFIRMATION OF CONSOLIDATED RETURN REGU-
LATION AUTHORITY.
(a) IN GENERAL.—Section 1502 (relating to consoli-
dated return regulations) is amended by adding at the end
the following new sentence: ‘‘In prescribing such regula-
tions, the Secretary may prescribe rules applicable to cor-
porations filing consolidated returns under section 1501
that are different from other provisions of this title that
would apply if such corporations filed separate returns.’’.
(b) RESULT
NOT
OVERTURNED.—Notwithstanding
subsection (a), the Internal Revenue 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 in-
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applicable to the type of factual situation in 255 F.3d 1357
(Fed. Cir. 2001).
(c) EFFECTIVE DATE.—The provisions of this section
shall apply to taxable years beginning before, on, or after
the date of the enactment of this Act.
SEC. 422. DECLARATION BY CHIEF EXECUTIVE OFFICER RE-
LATING TO FEDERAL ANNUAL INCOME TAX
RETURN OF A CORPORATION.
(a) IN GENERAL.—The Federal annual tax return of
a corporation with respect to income shall also include a
declaration signed by the chief executive officer of such cor-
poration (or other such officer of the corporation as the Sec-
retary of the Treasury may designate if the corporation does
not have a chief executive officer), under penalties of per-
jury, that the corporation has in place processes and proce-
dures to ensure that such return complies with the Internal
Revenue Code of 1986 and that the chief executive officer
was provided reasonable assurance of the accuracy of all
material aspects of such return. The preceding sentence
shall not apply to any return of a regulated investment
company (within the meaning of section 851 of such Code).
(b) EFFECTIVE DATE.—This section shall apply to the
Federal annual tax return of a corporation with respect to
income for taxable years ending after the date of the enact-
ment of this Act.
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‘‘(3) EXCEPTION
FOR
AMOUNTS
PAID
OR
IN-
CURRED
AS
THE
RESULT
OF
CERTAIN
COURT
OR-
DERS.—Paragraph (1) shall not apply to any
amount paid or incurred by order of a court in a suit
in which no government or entity described in para-
graph (4) is a party.
‘‘(4) CERTAIN NONGOVERNMENTAL REGULATORY
ENTITIES.—An entity is described in this paragraph
if it is—
‘‘(A) a nongovernmental entity which exer-
cises self-regulatory powers (including imposing
sanctions) in connection with a qualified board
or exchange (as defined in section 1256(g)(7)), or
‘‘(B) to the extent provided in regulations,
a nongovernmental entity which exercises self-
regulatory powers (including imposing sanc-
tions) as part of performing an essential govern-
mental function.
‘‘(5) EXCEPTION FOR TAXES DUE.—Paragraph
(1) shall not apply to any amount paid or incurred
as taxes due.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to amounts paid or incurred after April
27, 2003, except that such amendment shall not apply to
amounts paid or incurred under any binding order or
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agreement entered into on or before April 27, 2003. Such
exception shall not apply to an order or agreement requir-
ing court approval unless the approval was obtained on or
before April 27, 2003.
SEC. 424. DISALLOWANCE OF DEDUCTION FOR PUNITIVE
DAMAGES.
(a) DISALLOWANCE OF DEDUCTION.—
(1) IN
GENERAL.—Section 162(g) (relating to
treble damage payments under the antitrust laws) is
amended—
(A) by redesignating paragraphs (1) and
(2) as subparagraphs (A) and (B), respectively,
(B) by striking ‘‘If’’ and inserting:
‘‘(1) TREBLE DAMAGES.—If’’, and
(C) by adding at the end the following new
paragraph:
‘‘(2) PUNITIVE DAMAGES.—No deduction shall be
allowed under this chapter for any amount paid or
incurred for punitive damages in connection with
any judgment in, or settlement of, any action. This
paragraph shall not apply to punitive damages de-
scribed in section 104(c).’’.
(2) CONFORMING AMENDMENT.—The heading for
section 162(g) is amended by inserting ‘‘OR PUNITIVE
DAMAGES’’ after ‘‘LAWS’’.
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(b) INCLUSION IN INCOME OF PUNITIVE DAMAGES
PAID BY INSURER OR OTHERWISE.—
(1) IN GENERAL.—Part II of subchapter B of
chapter 1 (relating to items specifically included in
gross income) is amended by adding at the end the
following new section:
‘‘SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSUR-
ANCE OR OTHERWISE.
‘‘Gross income shall include any amount paid to or
on behalf of a taxpayer as insurance or otherwise by reason
of the taxpayer’s liability (or agreement) to pay punitive
damages.’’.
(2) REPORTING REQUIREMENTS.—Section 6041
(relating to information at source) is amended by
adding at the end the following new subsection:
‘‘(f) SECTION TO APPLY TO PUNITIVE DAMAGES COM-
PENSATION.—This section shall apply to payments by a
person to or on behalf of another person as insurance or
otherwise by reason of the other person’s liability (or agree-
ment) to pay punitive damages.’’.
(3) CONFORMING AMENDMENT.—The table of sec-
tions for part II of subchapter B of chapter 1 is
amended by adding at the end the following new item:
‘‘Sec. 91. Punitive damages compensated by insurance or otherwise.’’.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to damages paid or incurred on or after
the date of the enactment of this Act.
SEC. 425. INCREASE IN CRIMINAL MONETARY PENALTY LIM-
ITATION FOR THE UNDERPAYMENT OR OVER-
PAYMENT OF TAX DUE TO FRAUD.
(a) IN GENERAL.—Section 7206 (relating to fraud and
false statements) is amended—
(1) by striking ‘‘Any person who—’’ and insert-
ing ‘‘(a) IN GENERAL.—Any person who—’’, and
(2) by adding at the end the following new sub-
section:
‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN-
DERPAYMENT OR OVERPAYMENT OF TAX DUE TO FRAUD.—
If any portion of any underpayment (as defined in section
6664(a)) or overpayment (as defined in section 6401(a)) of
tax required to be shown on a return is attributable to
fraudulent action described in subsection (a), the applicable
dollar amount under subsection (a) shall in no event be less
than an amount equal to such portion. A rule similar to
the rule under section 6663(b) shall apply for purposes of
determining the portion so attributable.’’.
(b) INCREASE IN PENALTIES.—
(1) ATTEMPT TO EVADE OR DEFEAT TAX.—Sec-
tion 7201 is amended—
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(A) by striking ‘‘$100,000’’ and inserting
‘‘$250,000’’,
(B) by striking ‘‘$500,000’’ and inserting
‘‘$1,000,000’’, and
(C) by striking ‘‘5 years’’ and inserting ‘‘10
years’’.
(2) WILLFUL FAILURE TO FILE RETURN, SUPPLY
INFORMATION, 
OR
PAY
TAX.—Section 
7203 
is
amended—
(A) in the first sentence—
(i) by striking ‘‘misdemeanor’’ and in-
serting ‘‘felony’’, and
(ii) by striking ‘‘1 year’’ and inserting
‘‘10 years’’, and
(B) by striking the third sentence.
(3) FRAUD
AND
FALSE
STATEMENTS.—Section
7206(a) (as redesignated by subsection (a)) is
amended—
(A) by striking ‘‘$100,000’’ and inserting
‘‘$250,000’’,
(B) by striking ‘‘$500,000’’ and inserting
‘‘$1,000,000’’, and
(C) by striking ‘‘3 years’’ and inserting ‘‘5
years’’.
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(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to underpayments and overpayments at-
tributable to actions occurring after the date of the enact-
ment of this Act.
Subtitle C—Enron-Related Tax
Shelter Provisions
SEC. 431. LIMITATION ON TRANSFER OR IMPORTATION OF
BUILT-IN LOSSES.
(a) IN GENERAL.—Section 362 (relating to basis to
corporations) is amended by adding at the end the following
new subsection:
‘‘(e) LIMITATIONS ON BUILT-IN LOSSES.—
‘‘(1) LIMITATION ON IMPORTATION OF BUILT-IN
LOSSES.—
‘‘(A) IN GENERAL.—If in any transaction
described in subsection (a) or (b) there would
(but for this subsection) be an importation of a
net built-in loss, the basis of each property de-
scribed in subparagraph (B) which is acquired
in such transaction shall (notwithstanding sub-
sections (a) and (b)) be its fair market value im-
mediately after such transaction.
‘‘(B) PROPERTY DESCRIBED.—For purposes
of subparagraph (A), property is described in
this subparagraph if—
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‘‘(i) gain or loss with respect to such
property is not subject to tax under this
subtitle in the hands of the transferor imme-
diately before the transfer, and
‘‘(ii) gain or loss with respect to such
property is subject to such tax in the hands
of the transferee immediately after such
transfer.
In any case in which the transferor is a partner-
ship, the preceding sentence shall be applied by
treating each partner in such partnership as
holding such partner’s proportionate share of the
property of such partnership.
‘‘(C) 
IMPORTATION
OF
NET
BUILT-IN
LOSS.—For purposes of subparagraph (A), there
is an importation of a net built-in loss in a
transaction if the transferee’s aggregate adjusted
bases of property described in subparagraph (B)
which is transferred in such transaction would
(but for this paragraph) exceed the fair market
value of such property immediately after such
transaction.
‘‘(2) LIMITATION
ON
TRANSFER
OF
BUILT-IN
LOSSES IN SECTION 351 TRANSACTIONS.—
‘‘(A) IN GENERAL.—If—
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‘‘(i) property is transferred by a trans-
feror in any transaction which is described
in subsection (a) and which is not described
in paragraph (1) of this subsection, and
‘‘(ii) the transferee’s aggregate adjusted
bases of such property so transferred would
(but for this paragraph) exceed the fair
market value of such property immediately
after such transaction,
then, notwithstanding subsection (a), the trans-
feree’s aggregate adjusted bases of the property so
transferred shall not exceed the fair market value
of such property immediately after such trans-
action.
‘‘(B) ALLOCATION OF BASIS REDUCTION.—
The aggregate reduction in basis by reason of
subparagraph (A) shall be allocated among the
property so transferred in proportion to their re-
spective built-in losses immediately before the
transaction.
‘‘(C) EXCEPTION FOR TRANSFERS WITHIN
AFFILIATED
GROUP.—Subparagraph (A) shall
not apply to any transaction if the transferor
owns stock in the transferee meeting the require-
ments of section 1504(a)(2). In the case of prop-
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erty to which subparagraph (A) does not apply
by reason of the preceding sentence, the trans-
feror’s basis in the stock received for such prop-
erty shall not exceed its fair market value imme-
diately after the transfer.’’.
(b) COMPARABLE
TREATMENT
WHERE
LIQUIDA-
TION.—Paragraph (1) of section 334(b) (relating to liquida-
tion of subsidiary) is amended to read as follows:
‘‘(1) IN GENERAL.—If property is received by a
corporate distributee in a distribution in a complete
liquidation to which section 332 applies (or in a
transfer described in section 337(b)(1)), the basis of
such property in the hands of such distributee shall
be the same as it would be in the hands of the trans-
feror; except that the basis of such property in the
hands of such distributee shall be the fair market
value of the property at the time of the distribution—
‘‘(A) in any case in which gain or loss is
recognized by the liquidating corporation with
respect to such property, or
‘‘(B) in any case in which the liquidating
corporation is a foreign corporation, the cor-
porate distributee is a domestic corporation, and
the corporate distributee’s aggregate adjusted
bases 
of 
property 
described 
in 
section
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362(e)(1)(B) which is distributed in such liq-
uidation would (but for this subparagraph) ex-
ceed the fair market value of such property im-
mediately after such liquidation.’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendment made by sub-
section (a) shall apply to transactions after December
31, 2003.
(2) LIQUIDATIONS.—The amendment made by
subsection (b) shall apply to liquidations after Decem-
ber 31, 2003.
SEC. 432. NO REDUCTION OF BASIS UNDER SECTION 734 IN
STOCK 
HELD 
BY 
PARTNERSHIP 
IN 
COR-
PORATE PARTNER.
(a) IN GENERAL.—Section 755 is amended by adding
at the end the following new subsection:
‘‘(c) NO ALLOCATION OF BASIS DECREASE TO STOCK
OF CORPORATE PARTNER.—In making an allocation under
subsection (a) of any decrease in the adjusted basis of part-
nership property under section 734(b)—
‘‘(1) no allocation may be made to stock in a
corporation (or any person which is related (within
the meaning of section 267(b) or 707(b)(1)) to such
corporation) which is a partner in the partnership,
and
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‘‘(2) any amount not allocable to stock by reason
of paragraph (1) shall be allocated under subsection
(a) to other partnership property in such manner as
the Secretary may prescribe.
Gain shall be recognized to the partnership to the extent
that the amount required to be allocated under paragraph
(2) to other partnership property exceeds the aggregate ad-
justed basis of such other property immediately before the
allocation required by paragraph (2).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to distributions after February 13, 2003.
SEC. 433. REPEAL OF SPECIAL RULES FOR FASITS.
(a) IN GENERAL.—Part V of subchapter M of chapter
1 (relating to financial asset securitization investment
trusts) is hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (6) of section 56(g) is amended by
striking ‘‘REMIC, or FASIT’’ and inserting ‘‘or
REMIC’’.
(2) Clause (ii) of section 382(l)(4)(B) is amended
by striking ‘‘a REMIC to which part IV of subchapter
M applies, or a FASIT to which part V of subchapter
M applies,’’ and inserting ‘‘or a REMIC to which
part IV of subchapter M applies,’’.
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(3) Paragraph (1) of section 582(c) is amended
by striking ‘‘, and any regular interest in a FASIT,’’.
(4) Subparagraph (E) of section 856(c)(5) is
amended by striking the last sentence.
(5)(A) Section 860G(a)(1) is amended by adding
at the end the following new sentence: ‘‘An interest
shall not fail to qualify as a regular interest solely be-
cause the specified principal amount of the regular
interest (or the amount of interest accrued on the reg-
ular interest) can be reduced as a result of the non-
occurrence of 1 or more contingent payments with re-
spect to any reverse mortgage loan held by the
REMIC if, on the startup day for the REMIC, the
sponsor reasonably believes that all principal and in-
terest due under the regular interest will be paid at
or prior to the liquidation of the REMIC.’’.
(B) The last sentence of section 860G(a)(3) is
amended by inserting ‘‘, and any reverse mortgage
loan (and each balance increase on such loan meeting
the requirements of subparagraph (A)(iii)) shall be
treated as an obligation secured by an interest in real
property’’ before the period at the end.
(6) Paragraph (3) of section 860G(a) is amended
by adding ‘‘and’’ at the end of subparagraph (B), by
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striking ‘‘, and’’ at the end of subparagraph (C) and
inserting a period, and by striking subparagraph (D).
(7) Section 860G(a)(3), as amended by para-
graph (6), is amended by adding at the end the fol-
lowing new sentence: ‘‘For purposes of subparagraph
(A), if more than 50 percent of the obligations trans-
ferred to, or purchased by, the REMIC are originated
by the United States or any State (or any political
subdivision, agency, or instrumentality of the United
States or any State) and are principally secured by
an interest in real property, then each obligation
transferred to, or purchased by, the REMIC shall be
treated as secured by an interest in real property.’’.
(8)(A) Section 860G(a)(3)(A) is amended by
striking ‘‘or’’ at the end of clause (i), by inserting
‘‘or’’ at the end of clause (ii), and by inserting after
clause (ii) the following new clause:
‘‘(iii) represents an increase in the
principal amount under the original terms
of an obligation described in clause (i) or
(ii) if such increase—
‘‘(I) is attributable to an advance
made to the obligor pursuant to the
original terms of the obligation,
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‘‘(II) occurs after the startup day,
and
‘‘(III) is purchased by the REMIC
pursuant to a fixed price contract in
effect on the startup day.’’.
(B) Section 860G(a)(7)(B) is amended to read as
follows:
‘‘(B) QUALIFIED RESERVE FUND.—For pur-
poses of subparagraph (A), the term ‘qualified
reserve fund’ means any reasonably required re-
serve to—
‘‘(i) provide for full payment of ex-
penses of the REMIC or amounts due on
regular interests in the event of defaults on
qualified mortgages or lower than expected
returns on cash flow investments, or
‘‘(ii) provide a source of funds for the
purchase of obligations described in clause
(ii) or (iii) of paragraph (3)(A).
The aggregate fair market value of the assets held
in any such reserve shall not exceed 50 percent
of the aggregate fair market value of all of the
assets of the REMIC on the startup day, and the
amount of any such reserve shall be promptly
and appropriately reduced to the extent the
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amount held in such reserve is no longer reason-
ably required for purposes specified in clause (i)
or (ii) of this subparagraph.’’.
(9) Subparagraph (C) of section 1202(e)(4) is
amended by striking ‘‘REMIC, or FASIT’’ and in-
serting ‘‘or REMIC’’.
(10) Clause (xi) of section 7701(a)(19)(C) is
amended—
(A) by striking ‘‘and any regular interest in
a FASIT,’’, and
(B) by striking ‘‘or FASIT’’ each place it
appears.
(11) Subparagraph (A) of section 7701(i)(2) is
amended by striking ‘‘or a FASIT’’.
(12) The table of parts for subchapter M of chap-
ter 1 is amended by striking the item relating to part
V.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall
take effect on February 14, 2003.
(2) EXCEPTION
FOR
EXISTING
FASITS.—Para-
graph (1) shall not apply to any FASIT in existence
on the date of the enactment of this Act to the extent
that regular interests issued by the FASIT before such
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date continue to remain outstanding in accordance
with the original terms of issuance.
SEC. 434. EXPANDED DISALLOWANCE OF DEDUCTION FOR
INTEREST ON CONVERTIBLE DEBT.
(a) IN GENERAL.—Paragraph (2) of section 163(l) is
amended by inserting ‘‘or equity held by the issuer (or any
related party) in any other person’’ after ‘‘or a related
party’’.
(b) CAPITALIZATION ALLOWED WITH RESPECT TO EQ-
UITY OF PERSONS OTHER THAN ISSUER AND RELATED
PARTIES.—Section 163(l) is amended by redesignating
paragraphs (4) and (5) as paragraphs (5) and (6) and by
inserting after paragraph (3) the following new paragraph:
‘‘(4) CAPITALIZATION ALLOWED WITH RESPECT
TO EQUITY OF PERSONS OTHER THAN ISSUER AND
RELATED PARTIES.—If the disqualified debt instru-
ment of a corporation is payable in equity held by the
issuer (or any related party) in any other person
(other than a related party), the basis of such equity
shall be increased by the amount not allowed as a de-
duction by reason of paragraph (1) with respect to
the instrument.’’.
(c) EXCEPTION FOR CERTAIN INSTRUMENTS ISSUED
BY DEALERS IN SECURITIES.—Section 163(l), as amended
by subsection (b), is amended by redesignating paragraphs
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(5) and (6) as paragraphs (6) and (7) and by inserting
after paragraph (4) the following new paragraph:
‘‘(5) EXCEPTION
FOR
CERTAIN
INSTRUMENTS
ISSUED BY DEALERS IN SECURITIES.—For purposes
of this subsection, the term ‘disqualified debt instru-
ment’ does not include indebtedness issued by a dealer
in securities (or a related party) which is payable in,
or by reference to, equity (other than equity of the
issuer or a related party) held by such dealer in its
capacity as a dealer in securities. For purposes of
this paragraph, the term ‘dealer in securities’ has the
meaning given such term by section 475.’’.
(d) CONFORMING AMENDMENTS.—Paragraph (3) of
section 163(l) is amended—
(1) by striking ‘‘or a related party’’ in the mate-
rial preceding subparagraph (A) and inserting ‘‘or
any other person’’, and
(2) by striking ‘‘or interest’’ each place it ap-
pears.
(e) EFFECTIVE DATE.—The amendments made by this
section shall apply to debt instruments issued after Feb-
ruary 13, 2003.
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SEC. 435. EXPANDED AUTHORITY TO DISALLOW TAX BENE-
FITS UNDER SECTION 269.
(a) IN GENERAL.—Subsection (a) of section 269 (relat-
ing to acquisitions made to evade or avoid income tax) is
amended to read as follows:
‘‘(a) IN GENERAL.—If—
‘‘(1)(A) any person or persons acquire, directly
or indirectly, control of a corporation, or
‘‘(B) any corporation acquires, directly or indi-
rectly, property of another corporation and the basis
of such property, in the hands of the acquiring cor-
poration, is determined by reference to the basis in
the hands of the transferor corporation, and
‘‘(2) the principal purpose for which such acqui-
sition was made is evasion or avoidance of Federal
income tax,
then the Secretary may disallow such deduction, credit, or
other allowance. For purposes of paragraph (1)(A), control
means the ownership of stock possessing at least 50 percent
of the total combined voting power of all classes of stock
entitled to vote or at least 50 percent of the total value of
all shares of all classes of stock of the corporation.’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to stock and property acquired after
February 13, 2003.
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SEC. 436. MODIFICATION OF INTERACTION BETWEEN SUB-
PART F AND PASSIVE FOREIGN INVESTMENT
COMPANY RULES.
(a) LIMITATION ON EXCEPTION FROM PFIC RULES
FOR UNITED STATES SHAREHOLDERS OF CONTROLLED
FOREIGN
CORPORATIONS.—Paragraph (2) of section
1297(e) (relating to passive foreign investment company)
is amended by adding at the end the following flush sen-
tence:
‘‘Such term shall not include any period if the
earning of subpart F income by such corporation
during such period would result in only a remote
likelihood of an inclusion in gross income under
section 951(a)(1)(A)(i).’’.
(b) EFFECTIVE DATE.—The amendment made by this
section shall apply to taxable years of controlled foreign cor-
porations beginning after February 13, 2003, and to tax-
able years of United States shareholders with or within
which such taxable years of controlled foreign corporations
end.
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Subtitle D—Provisions to
Discourage Expatriation
SEC. 441. TAX TREATMENT OF INVERTED CORPORATE ENTI-
TIES.
(a) IN GENERAL.—Subchapter C of chapter 80 (relat-
ing to provisions affecting more than one subtitle) is
amended by adding at the end the following new section:
‘‘SEC. 7874. RULES RELATING TO INVERTED CORPORATE
ENTITIES.
‘‘(a) INVERTED CORPORATIONS TREATED AS DOMES-
TIC CORPORATIONS.—
‘‘(1) IN GENERAL.—If a foreign incorporated en-
tity is treated as an inverted domestic corporation,
then, notwithstanding section 7701(a)(4), such entity
shall be treated for purposes of this title as a domestic
corporation.
‘‘(2) INVERTED
DOMESTIC
CORPORATION.—For
purposes of this section, a foreign incorporated entity
shall be treated as an inverted domestic corporation
if, pursuant to a plan (or a series of related trans-
actions)—
‘‘(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-
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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 corporation by
reason of holding stock in the domestic cor-
poration, or
‘‘(ii) in the case of an acquisition with
respect to a domestic partnership, by former
partners of the domestic partnership by rea-
son of holding a capital or profits 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 af-
filiated group.
Except as provided in regulations, an acquisition of
properties of a domestic corporation shall not be
treated as described in subparagraph (A) if none of
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the corporation’s stock was readily tradeable on an es-
tablished securities market at any time during the 4-
year period ending on the date of the acquisition.
‘‘(b) PRESERVATION OF DOMESTIC TAX BASE IN CER-
TAIN INVERSION TRANSACTIONS TO WHICH SUBSECTION
(a) DOES NOT APPLY.—
‘‘(1) IN GENERAL.—If a foreign incorporated en-
tity would be treated as an inverted domestic corpora-
tion with respect to an acquired entity if either—
‘‘(A) subsection (a)(2)(A) were applied by
substituting ‘after December 31, 1996, and on or
before March 20, 2002’ for ‘after March 20, 2002’
and subsection (a)(2)(B) were applied by sub-
stituting ‘more than 50 percent’ for ‘at least 80
percent’, or
‘‘(B) subsection (a)(2)(B) were applied by
substituting ‘more than 50 percent’ for ‘at least
80 percent’,
then the rules of subsection (c) shall apply to any in-
version gain of the acquired entity during the appli-
cable period and the rules of subsection (d) shall
apply to any related party transaction of the ac-
quired entity during the applicable period. This sub-
section shall not apply for any taxable year if sub-
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section (a) applies to such foreign incorporated entity
for such taxable year.
‘‘(2) ACQUIRED ENTITY.—For purposes of this
section—
‘‘(A) IN GENERAL.—The term ‘acquired en-
tity’ means the domestic corporation or partner-
ship substantially all of the properties of which
are directly or indirectly acquired in an acquisi-
tion described in subsection (a)(2)(A) to which
this subsection applies.
‘‘(B) AGGREGATION RULES.—Any domestic
person bearing a relationship described in sec-
tion 267(b) or 707(b) to an acquired entity shall
be treated as an acquired entity with respect to
the acquisition described in subparagraph (A).
‘‘(3) APPLICABLE PERIOD.—For purposes of this
section—
‘‘(A) IN
GENERAL.—The term ‘applicable
period’ means the period—
‘‘(i) beginning on the first date prop-
erties are acquired as part of the acquisi-
tion described in subsection (a)(2)(A) to
which this subsection applies, and
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‘‘(ii) ending on the date which is 10
years after the last date properties are ac-
quired as part of such acquisition.
‘‘(B) SPECIAL RULE FOR INVERSIONS OC-
CURRING BEFORE MARCH 21, 2002.—In the case
of any acquired entity to which paragraph
(1)(A) applies, the applicable period shall be the
10-year period beginning on January 1, 2003.
‘‘(c) TAX ON INVERSION GAINS MAY NOT BE OFF-
SET.—If subsection (b) applies—
‘‘(1) IN GENERAL.—The taxable income of an ac-
quired entity (or any expanded affiliated group which
includes such 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) CREDITS NOT ALLOWED AGAINST TAX ON IN-
VERSION GAIN.—Credits shall be allowed against the
tax imposed by this chapter on an acquired entity for
any taxable year described in paragraph (1) only to
the extent such tax exceeds the product of—
‘‘(A) the amount of the inversion gain for
the taxable year, and
‘‘(B) the highest rate of tax specified in sec-
tion 11(b)(1).
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For purposes of determining the credit allowed by sec-
tion 901 inversion gain shall be treated as from
sources within the United States.
‘‘(3) SPECIAL RULES FOR PARTNERSHIPS.—In
the case of an acquired entity which is a
partnership—
‘‘(A) the limitations of this subsection shall
apply at the partner 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) income or gain required to be rec-
ognized for the taxable year by the partner
under section 367(a), 741, or 1001, or
under any other provision of chapter 1, by
reason of the transfer during the applicable
period of any partnership interest of the
partner in such partnership to the foreign
incorporated entity, and
‘‘(C) the highest rate of tax specified in the
rate schedule applicable to the partner under
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chapter 1 shall be substituted for the rate of tax
under paragraph (2)(B).
‘‘(4) INVERSION GAIN.—For purposes of this sec-
tion, the term ‘inversion gain’ means any income or
gain required to be recognized under section 304,
311(b), 367, 1001, or 1248, or under any other provi-
sion of chapter 1, by reason of the transfer during the
applicable period of stock or other properties by an
acquired entity—
‘‘(A) as part of the acquisition described in
subsection (a)(2)(A) to which subsection (b) ap-
plies, or
‘‘(B) after such acquisition to a foreign re-
lated person.
The Secretary may provide that income or gain from
the sale of inventories or other transactions in the or-
dinary course of a trade or business shall not be treat-
ed as inversion gain under subparagraph (B) to the
extent the Secretary determines such treatment would
not be inconsistent with the purposes of this section.
‘‘(5) COORDINATION WITH SECTION 172 AND MIN-
IMUM TAX.—Rules similar to the rules of paragraphs
(3) and (4) of section 860E(a) shall apply for pur-
poses of this section.
‘‘(6) STATUTE OF LIMITATIONS.—
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‘‘(A) IN
GENERAL.—The statutory period
for the assessment of any deficiency attributable
to the inversion gain of any taxpayer for any
pre-inversion year shall not expire before the ex-
piration of 3 years from the date the Secretary
is notified by the taxpayer (in such manner as
the Secretary may prescribe) of the acquisition
described in subsection (a)(2)(A) to which such
gain relates and such deficiency may be assessed
before the expiration of such 3-year period not-
withstanding the provisions of any other law or
rule of law which would otherwise 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 (a)(2)(A) is completed.
‘‘(d) SPECIAL RULES APPLICABLE TO ACQUIRED EN-
TITIES TO WHICH SUBSECTION (b) APPLIES.—
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‘‘(1) INCREASES
IN
ACCURACY-RELATED
PEN-
ALTIES.—In the case of any underpayment of tax of
an acquired entity to which subsection (b) applies—
‘‘(A) section 6662(a) shall be applied with
respect to such underpayment by substituting ‘30
percent’ for ‘20 percent’, and
‘‘(B) if such underpayment is attributable
to one or more gross valuation understatements,
the increase in the rate of penalty under section
6662(h) shall be to 50 percent rather than 40
percent.
‘‘(2) MODIFICATIONS OF LIMITATION ON INTER-
EST DEDUCTION.—In the case of an acquired entity
to which subsection (b) applies, section 163(j) shall be
applied—
‘‘(A) without regard to paragraph (2)(A)(ii)
thereof, and
‘‘(B) by substituting ‘25 percent’ for ‘50
percent’ each place it appears in paragraph
(2)(B) thereof.
‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—For
purposes of this section—
‘‘(1) RULES FOR APPLICATION OF SUBSECTION
(a)(2).—In applying subsection (a)(2) for purposes of
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subsections (a) and (b), the following rules shall
apply:
‘‘(A) 
CERTAIN
STOCK
DISREGARDED.—
There shall not be taken into account in deter-
mining ownership for purposes of subsection
(a)(2)(B)—
‘‘(i) stock held by members of the ex-
panded affiliated group which includes the
foreign incorporated entity, or
‘‘(ii) stock of such entity which is sold
in a public offering or private placement re-
lated to the acquisition described in sub-
section (a)(2)(A).
‘‘(B) PLAN DEEMED IN CERTAIN CASES.—If
a foreign incorporated entity acquires directly or
indirectly substantially all of the properties of a
domestic corporation or partnership during the
4-year period beginning on the date which is 2
years before the ownership requirements of sub-
section (a)(2)(B) are met with respect to such do-
mestic corporation or partnership, such actions
shall be treated as pursuant to a plan.
‘‘(C) CERTAIN TRANSFERS DISREGARDED.—
The transfer of properties or liabilities (includ-
ing by contribution or distribution) shall be dis-
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regarded if such transfers are part of a plan a
principal purpose of which is to avoid the pur-
poses of this section.
‘‘(D) SPECIAL RULE FOR RELATED PART-
NERSHIPS.—For purposes of applying subsection
(a)(2) to the acquisition of a domestic partner-
ship, except as provided in regulations, all part-
nerships which are under common control (with-
in the meaning of section 482) shall be treated
as 1 partnership.
‘‘(E) TREATMENT
OF
CERTAIN
RIGHTS.—
The Secretary shall prescribe such regulations as
may be necessary—
‘‘(i) to treat warrants, options, con-
tracts to acquire stock, convertible debt in-
struments, and other similar interests as
stock, and
‘‘(ii) to treat stock as not stock.
‘‘(2) EXPANDED AFFILIATED GROUP.—The term
‘expanded affiliated group’ means an affiliated group
as defined in section 1504(a) but without regard to
section 1504(b)(3), except that section 1504(a) shall
be applied by substituting ‘more than 50 percent’ for
‘at least 80 percent’ each place it appears.
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‘‘(3) FOREIGN
INCORPORATED
ENTITY.—The
term ‘foreign incorporated entity’ means any entity
which is, or but for subsection (a)(1) would be, treated
as a foreign corporation for purposes of this title.
‘‘(4) FOREIGN RELATED PERSON.—The term ‘for-
eign related person’ means, with respect to any ac-
quired entity, a foreign person which—
‘‘(A) bears a relationship to such entity de-
scribed in section 267(b) or 707(b), or
‘‘(B) is under the same common control
(within the meaning of section 482) as such enti-
ty.
‘‘(5) SUBSEQUENT ACQUISITIONS BY UNRELATED
DOMESTIC CORPORATIONS.—
‘‘(A) IN GENERAL.—Subject to such condi-
tions, limitations, and exceptions as the Sec-
retary may prescribe, if, after an acquisition de-
scribed in subsection (a)(2)(A) to which sub-
section (b) applies, a domestic corporation stock
of which is traded on an established securities
market acquires directly or indirectly any prop-
erties of one or more acquired entities in a
transaction with respect to which the require-
ments of subparagraph (B) are met, this section
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shall cease to apply to any such acquired entity
with respect to which such requirements are met.
‘‘(B) REQUIREMENTS.—The requirements of
the subparagraph are met with respect to a
transaction involving any acquisition described
in subparagraph (A) if—
‘‘(i) before such transaction the domes-
tic corporation did not have a relationship
described in section 267(b) or 707(b), and
was not under common control (within the
meaning of section 482), with the acquired
entity, or any member of an expanded af-
filiated group including such entity, and
‘‘(ii) after such transaction, such ac-
quired entity—
‘‘(I) is a member of the same ex-
panded affiliated group which includes
the domestic corporation or has such a
relationship or is under such common
control with any member of such
group, and
‘‘(II) is not a member of, and does
not have such a relationship and is not
under such common control with any
member of, the expanded affiliated
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group which before such acquisition in-
cluded such entity.
‘‘(f) REGULATIONS.—The Secretary shall provide such
regulations as are necessary to carry out this section, in-
cluding 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-thru 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) INFORMATION REPORTING.—The Secretary of the
Treasury shall exercise the Secretary’s authority under the
Internal Revenue Code of 1986 to require entities involved
in transactions to which section 7874 of such Code (as
added by subsection (a)) applies to report to the Secretary,
shareholders, partners, and such other persons as the Sec-
retary may prescribe such information as is necessary to
ensure the proper tax treatment of such transactions.
(c) CONFORMING AMENDMENT.—The table of sections
for subchapter C of chapter 80 is amended by adding at
the end the following new item:
‘‘Sec. 7874. Rules relating to inverted corporate entities.’’.
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(d) TRANSITION RULE FOR CERTAIN REGULATED IN-
VESTMENT COMPANIES AND UNIT INVESTMENT TRUSTS.—
Notwithstanding section 7874 of the Internal Revenue Code
of 1986 (as added by subsection (a)), a regulated investment
company, or other pooled fund or trust specified by the Sec-
retary of the Treasury, may elect to recognize gain by rea-
son of section 367(a) of such Code with respect to a trans-
action under which a foreign incorporated entity is treated
as an inverted domestic corporation under section 7874(a)
of such Code by reason of an acquisition completed after
March 20, 2002, and before January 1, 2004.
(e) DISCLOSURE
OF
CORPORATE
EXPATRIATION
TRANSACTIONS.—
(1) IN GENERAL.—Section 14 of the Securities
Exchange Act of 1934 (15 U.S.C. 78n) is amended by
adding at the end the following new subsection:
‘‘(i) PROXY SOLICITATIONS
IN CONNECTION WITH
CORPORATE EXPATRIATION TRANSACTIONS.—
‘‘(1) DISCLOSURE
TO
SHAREHOLDERS
OF
EF-
FECTS
OF
CORPORATE
EXPATRIATION
TRANS-
ACTION.—The Commission shall, by rule, require that
each domestic issuer shall prominently disclose, not
later than 5 business days before any shareholder vote
relating to a corporate expatriation transaction, as a
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separate and distinct document accompanying each
proxy statement relating to the transaction—
‘‘(A) the number of employees of the domes-
tic issuer that would be located in the new for-
eign jurisdiction of incorporation or organiza-
tion of that issuer upon completion of the cor-
porate expatriation transaction;
‘‘(B) how the rights of holders of the securi-
ties of the domestic issuer would be impacted by
a completed corporate expatriation transaction,
and any differences in such rights before and
after a completed corporate expatriation trans-
action; and
‘‘(C) that, as a result of a completed cor-
porate expatriation transaction, any taxable
holder of the securities of the domestic issuer
shall be subject to the taxation of any capital
gains realized with respect to such securities,
and the amount of any such capital gains tax
that would apply as a result of the transaction.
‘‘(2) DEFINITIONS.—In this subsection, the fol-
lowing definitions shall apply:
‘‘(A) CORPORATE
EXPATRIATION
TRANS-
ACTION.—The 
term 
‘corporate 
expatriation
transaction’ means any transaction, or series of
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related transactions, described in subsection (a)
or (b) of section 7874 of the Internal Revenue
Code of 1986.
‘‘(A) DOMESTIC ISSUER.—The term ‘domes-
tic issuer’ means an issuer created or organized
in the United States or under the law of the
United States or of any State.’’
(2) EFFECTIVE DATE.—Section 14(i) of the Secu-
rities Exchange Act of 1934 (as added by this sub-
section) shall apply with respect to corporate expa-
triation transactions (as defined in that section 14(i))
proposed on and after the date of enactment of this
Act.
SEC. 442. IMPOSITION OF MARK-TO-MARKET TAX ON INDI-
VIDUALS WHO EXPATRIATE.
(a) IN GENERAL.—Subpart A of part II of subchapter
N of chapter 1 is amended by inserting after section 877
the following new section:
‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
‘‘(a) 
GENERAL
RULES.—For 
purposes 
of 
this
subtitle—
‘‘(1) MARK TO MARKET.—Except as provided in
subsections (d) and (f), all property of a covered expa-
triate to whom this section applies shall be treated as
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sold on the day before the expatriation date for its
fair market value.
‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the
case of any sale under paragraph (1)—
‘‘(A) notwithstanding any other provision of
this title, any gain arising from such sale shall
be taken into account for the taxable year of the
sale, and
‘‘(B) any loss arising from such sale shall
be taken into account for the taxable year of the
sale to the extent otherwise provided by this title,
except that section 1091 shall not apply to any
such loss.
Proper adjustment shall be made in the amount of
any gain or loss subsequently realized for gain or loss
taken into account under the preceding sentence.
‘‘(3) EXCLUSION FOR CERTAIN GAIN.—
‘‘(A) IN GENERAL.—The amount which, but
for this paragraph, would be includible in the
gross income of any individual by reason of this
section shall be reduced (but not below zero) by
$600,000. For purposes of this paragraph, allo-
cable expatriation gain taken into account under
subsection (f)(2) shall be treated in the same
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manner as an amount required to be includible
in gross income.
‘‘(B) COST-OF-LIVING ADJUSTMENT.—
‘‘(i) IN GENERAL.—In the case of an
expatriation date occurring in any calendar
year after 2004, the $600,000 amount under
subparagraph (A) shall be increased by an
amount equal to—
‘‘(I) such dollar amount, multi-
plied by
‘‘(II) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year, determined by sub-
stituting ‘calendar year 2003’ for ‘cal-
endar year 1992’ in subparagraph (B)
thereof.
‘‘(ii) 
ROUNDING
RULES.—If 
any
amount after adjustment under clause (i) is
not a multiple of $1,000, such amount shall
be rounded to the next lower multiple of
$1,000.
‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS
UNITED STATES CITIZEN.—
‘‘(A) IN GENERAL.—If a covered expatriate
elects the application of this paragraph—
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‘‘(i) this section (other than this para-
graph and subsection (i)) shall not apply to
the expatriate, but
‘‘(ii) in the case of property to which
this section would apply but for such elec-
tion, the expatriate shall be subject to tax
under this title in the same manner as if
the individual were a United States citizen.
‘‘(B) REQUIREMENTS.—Subparagraph (A)
shall not apply to an individual unless the
individual—
‘‘(i) provides security for payment of
tax in such form and manner, and in such
amount, as the Secretary may require,
‘‘(ii) consents to the waiver of any
right of the individual under any treaty of
the United States which would preclude as-
sessment or collection of any tax which may
be imposed by reason of this paragraph,
and
‘‘(iii) complies with such other require-
ments as the Secretary may prescribe.
‘‘(C) ELECTION.—An election under sub-
paragraph (A) shall apply to all property to
which this section would apply but for the elec-
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tion and, once made, shall be irrevocable. Such
election shall also apply to property the basis of
which is determined in whole or in part by ref-
erence to the property with respect to which the
election was made.
‘‘(b) ELECTION TO DEFER TAX.—
‘‘(1) IN GENERAL.—If the taxpayer elects the ap-
plication of this subsection with respect to any prop-
erty treated as sold by reason of subsection (a), the
payment of the additional tax attributable to such
property shall be postponed until the due date of the
return for the taxable year in which such property is
disposed of (or, in the case of property disposed of in
a transaction in which gain is not recognized in
whole or in part, until such other date as the Sec-
retary may prescribe).
‘‘(2) DETERMINATION OF TAX WITH RESPECT TO
PROPERTY.—For purposes of paragraph (1), the addi-
tional tax attributable to any property is an amount
which bears the same ratio to the additional tax im-
posed by this chapter for the taxable year solely by
reason of subsection (a) as the gain taken into ac-
count under subsection (a) with respect to such prop-
erty bears to the total gain taken into account under
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subsection (a) with respect to all property to which
subsection (a) applies.
‘‘(3) TERMINATION OF POSTPONEMENT.—No tax
may be postponed under this subsection later than the
due date for the return of tax imposed by this chapter
for the taxable year which includes the date of death
of the expatriate (or, if earlier, the time that the secu-
rity provided with respect to the property fails to
meet the requirements of paragraph (4), unless the
taxpayer corrects such failure within the time speci-
fied by the Secretary).
‘‘(4) SECURITY.—
‘‘(A) IN
GENERAL.—No election may be
made under paragraph (1) with respect to any
property unless adequate security is provided to
the Secretary with respect to such property.
‘‘(B) ADEQUATE SECURITY.—For purposes
of subparagraph (A), security with respect to
any property shall be treated as adequate secu-
rity if—
‘‘(i) it is a bond in an amount equal
to the deferred tax amount under paragraph
(2) for the property, or
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‘‘(ii) the taxpayer otherwise establishes
to the satisfaction of the Secretary that the
security is adequate.
‘‘(5) WAIVER OF CERTAIN RIGHTS.—No election
may be made under paragraph (1) unless the tax-
payer consents to the waiver of any right under any
treaty of the United States which would preclude as-
sessment or collection of any tax imposed by reason
of this section.
‘‘(6) ELECTIONS.—An election under paragraph
(1) shall only apply to property described in the elec-
tion and, once made, is irrevocable. An election may
be made under paragraph (1) with respect to an in-
terest in a trust with respect to which gain is re-
quired to be recognized under subsection (f)(1).
‘‘(7) INTEREST.—For purposes of section 6601—
‘‘(A) the last date for the payment of tax
shall be determined without regard to the election
under this subsection, and
‘‘(B) section 6621(a)(2) shall be applied by
substituting ‘5 percentage points’ for ‘3 percent-
age points’ in subparagraph (B) thereof.
‘‘(c) COVERED EXPATRIATE.—For purposes of this
section—
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‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘covered expatriate’ means an ex-
patriate.
‘‘(2) EXCEPTIONS.—An individual shall not be
treated as a covered expatriate if—
‘‘(A) the individual—
‘‘(i) became at birth a citizen of the
United States and a citizen of another
country and, as of the expatriation date,
continues to be a citizen of, and is taxed as
a resident of, such other country, and
‘‘(ii) has not been a resident of the
United States (as defined in section
7701(b)(1)(A)(ii)) during the 5 taxable
years ending with the taxable year during
which the expatriation date occurs, or
‘‘(B)(i) the individual’s relinquishment of
United States citizenship occurs before such indi-
vidual attains age 181⁄2, and
‘‘(ii) the individual has been a resident of
the United States (as so defined) for not more
than 5 taxable years before the date of relin-
quishment.
‘‘(d) EXEMPT PROPERTY; SPECIAL RULES FOR PEN-
SION PLANS.—
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‘‘(1) EXEMPT PROPERTY.—This section shall not
apply to the following:
‘‘(A) UNITED STATES REAL PROPERTY IN-
TERESTS.—Any United States real property in-
terest (as defined in section 897(c)(1)), other
than stock of a United States real property hold-
ing corporation which does not, on the day before
the expatriation date, meet the requirements of
section 897(c)(2).
‘‘(B) SPECIFIED PROPERTY.—Any property
or interest in property not described in subpara-
graph (A) which the Secretary specifies in regu-
lations.
‘‘(2) SPECIAL RULES FOR CERTAIN RETIREMENT
PLANS.—
‘‘(A) IN GENERAL.—If a covered expatriate
holds on the day before the expatriation date any
interest in a retirement plan to which this para-
graph applies—
‘‘(i) such interest shall not be treated
as sold for purposes of subsection (a)(1), but
‘‘(ii) an amount equal to the present
value of the expatriate’s nonforfeitable ac-
crued benefit shall be treated as having been
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received by such individual on such date as
a distribution under the plan.
‘‘(B) TREATMENT
OF
SUBSEQUENT
DIS-
TRIBUTIONS.—In the case of any distribution on
or after the expatriation date to or on behalf of
the covered expatriate from a plan from which
the expatriate was treated as receiving a dis-
tribution under subparagraph (A), the amount
otherwise includible in gross income by reason of
the subsequent distribution shall be reduced by
the excess of the amount includible in gross in-
come under subparagraph (A) over any portion
of such amount to which this subparagraph pre-
viously applied.
‘‘(C) TREATMENT
OF
SUBSEQUENT
DIS-
TRIBUTIONS BY PLAN.—For purposes of this title,
a retirement plan to which this paragraph ap-
plies, and any person acting on the plan’s behalf,
shall treat any subsequent distribution described
in subparagraph (B) in the same manner as
such distribution would be treated without re-
gard to this paragraph.
‘‘(D) APPLICABLE PLANS.—This paragraph
shall apply to—
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‘‘(i) any qualified retirement plan (as
defined in section 4974(c)),
‘‘(ii) an eligible deferred compensation
plan (as defined in section 457(b)) of an el-
igible 
employer 
described 
in 
section
457(e)(1)(A), and
‘‘(iii) to the extent provided in regula-
tions, any foreign pension plan or similar
retirement arrangements or programs.
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) 
EXPATRIATE.—The 
term 
‘expatriate’
means—
‘‘(A) any United States citizen who relin-
quishes citizenship, and
‘‘(B) any long-term resident of the United
States who—
‘‘(i) ceases to be a lawful permanent
resident of the United States (within the
meaning of section 7701(b)(6)), or
‘‘(ii) commences to be treated as a resi-
dent of a foreign country under the provi-
sions of a tax treaty between the United
States and the foreign country and who
does not waive the benefits of such treaty
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applicable to residents of the foreign coun-
try.
‘‘(2) EXPATRIATION DATE.—The term ‘expatria-
tion date’ means—
‘‘(A) the date an individual relinquishes
United States citizenship, or
‘‘(B) in the case of a long-term resident of
the United States, the date of the event described
in clause (i) or (ii) of paragraph (1)(B).
‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A cit-
izen shall be treated as relinquishing United States
citizenship on the earliest of—
‘‘(A) the date the individual renounces such
individual’s United States nationality before a
diplomatic or consular officer of the United
States pursuant to paragraph (5) of section
349(a) of the Immigration and Nationality Act
(8 U.S.C. 1481(a)(5)),
‘‘(B) the date the individual furnishes to the
United States Department of State a signed
statement of voluntary relinquishment of United
States nationality confirming the performance of
an act of expatriation specified in paragraph
(1), (2), (3), or (4) of section 349(a) of the Im-
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migration and Nationality Act (8 U.S.C.
1481(a)(1)–(4)),
‘‘(C) the date the United States Department
of State issues to the individual a certificate of
loss of nationality, or
‘‘(D) the date a court of the United States
cancels a naturalized citizen’s certificate of natu-
ralization.
Subparagraph (A) or (B) shall not apply to any in-
dividual unless the renunciation or voluntary relin-
quishment is subsequently approved by the issuance to
the individual of a certificate of loss of nationality by
the United States Department of State.
‘‘(4) LONG-TERM
RESIDENT.—The term ‘long-
term resident’ has the meaning given to such term by
section 877(e)(2).
‘‘(f) SPECIAL RULES APPLICABLE TO BENEFICIARIES’
INTERESTS IN TRUST.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if an individual is determined under para-
graph (3) to hold an interest in a trust on the day
before the expatriation date—
‘‘(A) the individual shall not be treated as
having sold such interest,
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‘‘(B) such interest shall be treated as a sep-
arate share in the trust, and
‘‘(C)(i) such separate share shall be treated
as a separate trust consisting of the assets allo-
cable to such share,
‘‘(ii) the separate trust shall be treated as
having sold its assets on the day before the expa-
triation date for their fair market value and as
having distributed all of its assets to the indi-
vidual as of such time, and
‘‘(iii) the individual shall be treated as hav-
ing recontributed the assets to the separate trust.
Subsection (a)(2) shall apply to any income, gain, or
loss of the individual arising from a distribution de-
scribed in subparagraph (C)(ii). In determining the
amount of such distribution, proper adjustments shall
be made for liabilities of the trust allocable to an in-
dividual’s share in the trust.
‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI-
FIED TRUSTS.—
‘‘(A) IN GENERAL.—If the trust interest de-
scribed in paragraph (1) is an interest in a
qualified trust—
‘‘(i) paragraph (1) and subsection (a)
shall not apply, and
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‘‘(ii) in addition to any other tax im-
posed by this title, there is hereby imposed
on each distribution with respect to such in-
terest a tax in the amount determined
under subparagraph (B).
‘‘(B) AMOUNT OF TAX.—The amount of tax
under subparagraph (A)(ii) shall be equal to the
lesser of—
‘‘(i) the highest rate of tax imposed by
section 1(e) for the taxable year which in-
cludes the day before the expatriation date,
multiplied by the amount of the distribu-
tion, or
‘‘(ii) the balance in the deferred tax ac-
count immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th
day preceding the distribution.
‘‘(C) DEFERRED TAX ACCOUNT.—For pur-
poses of subparagraph (B)(ii)—
‘‘(i) OPENING BALANCE.—The opening
balance in a deferred tax account with re-
spect to any trust interest is an amount
equal to the tax which would have been im-
posed on the allocable expatriation gain
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with respect to the trust interest if such
gain had been included in gross income
under subsection (a).
‘‘(ii) INCREASE
FOR
INTEREST.—The
balance in the deferred tax account shall be
increased by the amount of interest deter-
mined (on the balance in the account at the
time the interest accrues), for periods after
the 90th day after the expatriation date, by
using the rates and method applicable
under section 6621 for underpayments of
tax for such periods, except that section
6621(a)(2) shall be applied by substituting
‘5 percentage points’ for ‘3 percentage
points’ in subparagraph (B) thereof.
‘‘(iii) DECREASE
FOR
TAXES
PRE-
VIOUSLY PAID.—The balance in the tax de-
ferred account shall be reduced—
‘‘(I) by the amount of taxes im-
posed by subparagraph (A) on any dis-
tribution to the person holding the
trust interest, and
‘‘(II) in the case of a person hold-
ing a nonvested interest, to the extent
provided in regulations, by the amount
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‘‘(1) IN GENERAL.—If an individual is required
to include any amount in gross income under sub-
section (a) for any taxable year, there is hereby im-
posed, immediately before the expatriation date, a tax
in an amount equal to the amount of tax which
would be imposed if the taxable year were a short tax-
able year ending on the expatriation date.
‘‘(2) DUE DATE.—The due date for any tax im-
posed by paragraph (1) shall be the 90th day after the
expatriation date.
‘‘(3) TREATMENT OF TAX.—Any tax paid under
paragraph (1) shall be treated as a payment of the
tax imposed by this chapter for the taxable year to
which subsection (a) applies.
‘‘(4) DEFERRAL OF TAX.—The provisions of sub-
section (b) shall apply to the tax imposed by this sub-
section to the extent attributable to gain includible in
gross income by reason of this section.
‘‘(i) SPECIAL LIENS FOR DEFERRED TAX AMOUNTS.—
‘‘(1) IMPOSITION OF LIEN.—
‘‘(A) IN GENERAL.—If a covered expatriate
makes an election under subsection (a)(4) or (b)
which results in the deferral of any tax imposed
by reason of subsection (a), the deferred amount
(including any interest, additional amount, ad-
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dition to tax, assessable penalty, and costs at-
tributable to the deferred amount) shall be a lien
in favor of the United States on all property of
the expatriate located in the United States (with-
out regard to whether this section applies to the
property).
‘‘(B) DEFERRED AMOUNT.—For purposes of
this subsection, the deferred amount is the
amount of the increase in the covered expatri-
ate’s income tax which, but for the election under
subsection (a)(4) or (b), would have occurred by
reason of this section for the taxable year includ-
ing the expatriation date.
‘‘(2) PERIOD OF LIEN.—The lien imposed by this
subsection shall arise on the expatriation date and
continue until—
‘‘(A) the liability for tax by reason of this
section is satisfied or has become unenforceable
by reason of lapse of time, or
‘‘(B) it is established to the satisfaction of
the Secretary that no further tax liability may
arise by reason of this section.
‘‘(3) CERTAIN RULES APPLY.—The rules set forth
in paragraphs (1), (3), and (4) of section 6324A(d)
shall apply with respect to the lien imposed by this
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credits), as amended by this Act, is amended by add-
ing at the end the following:
‘‘SEC. 45H. READY RESERVE-NATIONAL GUARD EMPLOYEE
CREDIT.
‘‘(a) GENERAL RULE.—For purposes of section 38, the
Ready Reserve-National Guard employee credit determined
under this section for any taxable year with respect to each
Ready Reserve-National Guard employee of an employer is
an amount equal to 50 percent of the lesser of—
‘‘(1) the actual compensation amount with re-
spect to such employee for such taxable year, or
‘‘(2) $30,000.
‘‘(b) 
DEFINITION
OF
ACTUAL
COMPENSATION
AMOUNT.—For purposes of this section, the term ‘actual
compensation amount’ means the amount of compensation
paid or incurred by an employer with respect to a Ready
Reserve-National Guard employee on any day when the em-
ployee was absent from employment for the purpose of per-
forming qualified active duty.
‘‘(c) LIMITATIONS.—No credit shall be allowed with re-
spect to any day that a Ready Reserve-National Guard em-
ployee who performs qualified active duty was not scheduled
to work (for reason other than to participate in qualified
active duty).