103 
been previously taxed under paragraph (1) or 
(2)— 
‘‘(i) section 6416(b)(3) shall not apply, 
and 
‘‘(ii) the tax imposed by subparagraph 
(A) shall be an amount equal to the excess 
(if any) of— 
‘‘(I) the amount of tax imposed by 
this paragraph (determined without re-
gard to this subparagraph), over 
‘‘(II) the amount of tax paid with 
respect to the tax imposed under para-
graph (1) or (2) on such shaft or com-
ponent. 
‘‘(C) ARROW.—For purposes of this para-
graph, the term ‘arrow’ means any shaft de-
scribed in paragraph (2) to which additional 
components are attached.’’. 
(c) CONFORMING AMENDMENTS.—Section 4161(b)(2) 
is amended— 
(1) by inserting ‘‘(other than broadheads)’’ after 
‘‘point’’, and 
(2) by striking ‘‘ARROWS.—’’ in the heading and 
inserting ‘‘ARROW COMPONENTS.—’’.
104 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004. 
SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE 
BOXES. 
(a) REPEAL.—Paragraph (6) of section 4162(a) (de-
fining sport fishing equipment) is amended by striking sub-
paragraph (C) and by redesignating subparagraphs (D) 
through (J) as subparagraphs (C) through (I), respectively. 
(b) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004. 
SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH. 
(a) NOT TREATED AS SPORT FISHING EQUIPMENT.— 
Subsection (a) of section 4162 (relating to sport fishing 
equipment defined) is amended by inserting ‘‘and’’ at the 
end of paragraph (8), by striking ‘‘, and’’ at the end of 
paragraph (9) and inserting a period, and by striking 
paragraph (10). 
(b) CONFORMING
AMENDMENT.—Section 4162 is 
amended by striking subsection (b) and by redesignating 
subsection (c) as subsection (b). 
(c) EFFECTIVE DATE.—The amendments made this 
section shall apply to articles sold by the manufacturer, 
producer, or importer after December 31, 2004.
105 
SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS 
WHOLESALERS FOR COST OF CARRYING FED-
ERAL EXCISE TAXES ON BOTTLED DISTILLED 
SPIRITS. 
(a) IN GENERAL.—Subpart A of part I of subchapter 
A of chapter 51 (relating to gallonage and occupational 
taxes) is amended by adding at the end the following new 
section: 
‘‘SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER’S AVER-
AGE COST OF CARRYING EXCISE TAX. 
‘‘(a) IN GENERAL.—For purposes of section 38, in the 
case of an eligible wholesaler, the amount of the distilled 
spirits wholesalers credit for any taxable year is the amount 
equal to the product of— 
‘‘(1) the number of cases of bottled distilled spir-
its— 
‘‘(A) which were bottled in the United 
States, and 
‘‘(B) which are purchased by such whole-
saler during the taxable year directly from the 
bottler of such spirits, and 
‘‘(2) the average tax-financing cost per case for 
the most recent calendar year ending before the begin-
ning of such taxable year. 
‘‘(b) ELIGIBLE WHOLESALER.—For purposes of this 
section, the term ‘eligible wholesaler’ means any person who
106 
holds a permit under the Federal Alcohol Administration 
Act as a wholesaler of distilled spirits. 
‘‘(c) AVERAGE TAX-FINANCING COST.— 
‘‘(1) IN GENERAL.—For purposes of this section, 
the average tax-financing cost per case for any cal-
endar year is the amount of interest which would ac-
crue at the deemed financing rate during a 60-day 
period on an amount equal to the deemed Federal ex-
cise per case. 
‘‘(2) DEEMED FINANCING RATE.—For purposes 
of paragraph (1), the deemed financing rate for any 
calendar year is the average of the corporate overpay-
ment rates under paragraph (1) of section 6621(a) 
(determined without regard to the last sentence of 
such paragraph) for calendar quarters of such year. 
‘‘(3) DEEMED FEDERAL EXCISE TAX BASED ON 
CASE.—For purposes of paragraph (1), the deemed 
Federal excise tax per case of 12 80-proof 750ml bot-
tles is $22.83. 
‘‘(4) NUMBER OF CASES IN LOT.—For purposes 
of this section, the number of cases in any lot of dis-
tilled spirits shall be determined by dividing the 
number of liters in such lot by 9.’’ 
(b) CONFORMING AMENDMENTS.—
107 
(1) Subsection (b) of section 38 is amended by 
striking ‘‘plus’’ at the end of paragraph (14), by 
striking the period at the end of paragraph (15) and 
inserting ‘‘, plus’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(16) in the case of an eligible wholesaler (as de-
fined in section 5011(b)), the distilled spirits whole-
salers credit determined under section 5011(a).’’ 
(2) Subsection (d) of section 39 (relating to 
carryback and carryforward of unused credits) is 
amended by adding at the end the following new 
paragraph: 
‘‘(11) NO CARRYBACK OF SECTION 5011 CREDIT 
BEFORE JANUARY 1, 2005.—No portion of the unused 
business credit for any taxable year which is attrib-
utable to the credit determined under section 5011(a) 
may be carried back to a taxable year beginning be-
fore January 1, 2005.’’. 
(3) The table of sections for subpart A of part I 
of subchapter A of chapter 51 is amended by adding 
at the end the following new item: 
‘‘Sec. 5011. Income tax credit for wholesaler’s average cost of car-
rying excise tax.’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004.
108 
SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELAT-
ING TO DISTILLED SPIRITS, WINE, AND BEER. 
(a) IN GENERAL.—Subpart G of part II of subchapter 
A of chapter 51 is amended by redesignating section 5148 
as section 5149 and by inserting after section 5147 the fol-
lowing new section: 
‘‘SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX. 
‘‘(a) IN GENERAL.—Notwithstanding sections 5081, 
5091, 5111, 5121, and 5131, the rate of tax imposed under 
such sections for the suspension period shall be zero. During 
such period, persons engaged in or carrying on a trade or 
business covered by such sections shall register under section 
5141 and shall comply with the recordkeeping requirements 
under this part. 
‘‘(b) SUSPENSION PERIOD.—For purposes of sub-
section (a), the suspension period is the period beginning 
on July 1, 2004, and ending on June 30, 2007.’’. 
(b) CONFORMING
AMENDMENT.—Section 5117 is 
amended by adding at the end the following new subsection: 
‘‘(d) SPECIAL RULE DURING SUSPENSION PERIOD.— 
Except as provided in subsection (b) or by the Secretary, 
during the suspension period (as defined in section 5148) 
it shall be unlawful for any dealer to purchase distilled 
spirits for resale from any person other than a wholesale 
dealer in liquors who is required to keep records under sec-
tion 5114.’’.
109 
(c) CLERICAL AMENDMENT.—The table of sections for 
subpart G of part II of subchapter A of chapter 51 is 
amended by striking the last item and inserting the fol-
lowing new items: 
‘‘Sec. 5148. Suspension of occupational tax. 
‘‘Sec. 5149. Cross references.’’. 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall take effect on the date of the enactment of this 
Act. 
SEC. 294. MODIFICATION OF UNRELATED BUSINESS IN-
COME LIMITATION ON INVESTMENT IN CER-
TAIN SMALL BUSINESS INVESTMENT COMPA-
NIES. 
(a) IN GENERAL.—Paragraph (6) of section 514(c) (re-
lating to acquisition indebtedness) is amended to read as 
follows: 
‘‘(6) CERTAIN FEDERAL FINANCING.— 
‘‘(A) IN
GENERAL.—For purposes of this 
section, the term ‘acquisition indebtedness’ does 
not include— 
‘‘(i) an obligation, to the extent that it 
is insured by the Federal Housing Adminis-
tration, to finance the purchase, rehabilita-
tion, or construction of housing for low and 
moderate income persons, or
110 
‘‘(ii) indebtedness incurred by a small 
business investment company licensed under 
the Small Business Investment Act of 1958 
and formed after the date of the enactment 
of the American Jobs Creation Act of 2004, 
if such indebtedness is evidenced by a deben-
ture— 
‘‘(I) issued by such company 
under section 303(a) of such Act, and 
‘‘(II) held or guaranteed by the 
Small Business Administration. 
‘‘(B) LIMITATION.—Subparagraph (A)(ii) 
shall not apply with respect to any small busi-
ness investment company during any period 
that— 
‘‘(i) any organization which is exempt 
from tax under this title (other than a gov-
ernmental unit) owns more than 25 percent 
of the capital or profits interest in such 
company, or 
‘‘(ii) organizations which are exempt 
from tax under this title (including govern-
mental units other than any agency or in-
strumentality of the United States) own, in 
the aggregate, 50 percent or more of the
111 
capital or profits interest in such com-
pany.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to indebtedness incurred by small busi-
ness investment companies formed after the date of the en-
actment of the American Jobs Creation Act of 2004. 
SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME 
FROM CERTAIN INTERNATIONAL SHIPPING 
ACTIVITIES USING PER TON RATE. 
(a) IN GENERAL.—Chapter 1 of the Internal Revenue 
Code of 1986 is amended by inserting after subchapter Q 
the following new subchapter: 
‘‘Subchapter R—Election To Determine Tax-
able Income From Certain International 
Shipping Activities Using per Ton Rate 
‘‘Sec. 1352. Alternative tax on qualifying shipping activities. 
‘‘Sec. 1353. Taxable income from qualifying shipping activities. 
‘‘Sec. 1354. Qualifying shipping tax election; revocation; termi-
nation. 
‘‘Sec. 1355. Definitions and special rules. 
‘‘Sec. 1356. Qualifying shipping activities. 
‘‘Sec. 1357. Items not subject to regular tax; depreciation; interest. 
‘‘Sec. 1358. Allocation of credits, income, and deductions. 
‘‘Sec. 1359. Disposition of qualifying shipping assets. 
‘‘SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING 
ACTIVITIES. 
‘‘(a) IN GENERAL.—The taxable income of an electing 
corporation from qualifying shipping activities shall be the 
amount determined under this subchapter, and the cor-
porate percentages of the items of income, gain, loss, deduc-
112 
tion, or credit of an electing corporation and of other mem-
bers of the electing group of such corporation which would 
otherwise be taken into account by reason of its qualifying 
shipping activities shall be taken into account to the extent 
provided in section 1357. 
‘‘(b) ALTERNATIVE TAX.—The taxable income of an 
electing corporation from qualifying shipping activities, if 
otherwise taxable under section 11, 55, 882, 887, or 1201(a) 
shall be subject to tax only under this section at the max-
imum rate specified in section 11(b). The income of a for-
eign corporation shall not be subject to tax under this sub-
chapter to the extent its income is excludible from gross in-
come under section 883(a)(1). 
‘‘SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING 
ACTIVITIES. 
‘‘(a) IN GENERAL.—For purposes of this subchapter, 
the taxable income of an electing corporation from quali-
fying shipping activities shall be its corporate income per-
centage of the sum of the amounts determined under sub-
section (b) for each qualifying vessel operated by such elect-
ing corporation or other electing entity. 
‘‘(b) AMOUNTS.—For purposes of subsection (a), the 
amount of taxable income of an electing entity for each 
qualifying vessel shall equal the product of—
113 
‘‘(1) the daily notional taxable income from the 
operation of the qualifying vessel in United States 
foreign trade, and 
‘‘(2) the number of days during the taxable year 
that the electing entity operated such vessel as a 
qualifying vessel in United States foreign trade. 
‘‘(c) DAILY NOTIONAL TAXABLE INCOME.—For pur-
poses of subsection (b), the daily notional taxable income 
from the operation of a qualifying vessel is 40 cents for each 
100 tons of the net tonnage of the vessel, up to 25,000 net 
tons, and 20 cents for each 100 tons of the net tonnage of 
the vessel, in excess of 25,000 net tons. 
‘‘(d) MULTIPLE OPERATORS OF VESSEL.—If 2 or more 
persons have a joint interest in a qualifying vessel and are 
treated as operators of that vessel, the taxable income from 
the operation of such vessel for that time (as determined 
under this section) shall be allocated among such persons 
on the basis of their ownership and charter interests in such 
vessel or on such other basis as the Secretary may prescribe 
by regulations. 
‘‘(e) NONCORPORATE PERCENTAGE.—Notwithstanding 
any contrary provision of this subchapter, the noncorporate 
percentage of any item of income, gain, loss, deduction, or 
credit of any member of an electing group shall be taken
114 
into account for all purposes of this subtitle as if this sub-
chapter were not in effect. 
‘‘SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REVOCA-
TION; TERMINATION. 
‘‘(a) IN GENERAL.—Except as provided in subsections 
(b) and (f), a qualifying shipping tax election may be made 
in respect of any qualifying entity. 
‘‘(b) CONDITION OF ELECTION.—An election may be 
made by a member of a controlled group under this sub-
section for any taxable year only if all qualifying entities 
that are members of the controlled group join in the election. 
‘‘(c) WHEN MADE.—An election under subsection (a) 
may be made by a qualifying entity in such form as pre-
scribed by the Secretary. Such election shall be filed with 
the qualifying entity’s return for the first taxable year to 
which the election shall apply, by the due date for such re-
turn (including any applicable extensions). 
‘‘(d) YEARS
FOR WHICH EFFECTIVE.—An election 
under subsection (a) shall be effective for the taxable year 
of the qualifying entity for which it is made and for all 
succeeding taxable years of the entity, until such election 
is terminated under subsection (e). 
‘‘(e) TERMINATION.— 
‘‘(1) BY REVOCATION.—
115 
‘‘(A) IN GENERAL.—An election under sub-
section (a) may be terminated by revocation. 
‘‘(B) WHEN
EFFECTIVE.—Except as pro-
vided in subparagraph (C)— 
‘‘(i) a revocation made during the tax-
able year and on or before the 15th day of 
the 3rd month thereof shall be effective on 
the 1st day of such taxable year, and 
‘‘(ii) a revocation made during the tax-
able year but after such 15th day shall be 
effective on the 1st day of the following tax-
able year. 
‘‘(C) REVOCATION MAY SPECIFY PROSPEC-
TIVE DATE.—If the revocation specifies a date for 
revocation which is on or after the day on which 
the revocation is made, the revocation shall be ef-
fective on and after the date so specified. 
‘‘(2) BY ENTITY CEASING TO BE QUALIFYING EN-
TITY.— 
‘‘(A) IN GENERAL.—An election under sub-
section (a) shall be terminated whenever (at any 
time on or after the 1st day of the 1st taxable 
year for which the entity is an electing entity) 
such entity ceases to be a qualifying entity.
116 
‘‘(B) WHEN EFFECTIVE.—Any termination 
under this paragraph shall be effective on and 
after the date of cessation. 
‘‘(f) ELECTION AFTER TERMINATION.—If a qualifying 
entity has made an election under subsection (a) and if such 
election has been terminated under subsection (e), such enti-
ty (and any successor entity) shall not be eligible to make 
an election under subsection (a) for any taxable year before 
its 5th taxable year which begins after the 1st taxable year 
for which such termination is effective, unless the Secretary 
consents to such election. 
‘‘SEC. 1355. DEFINITIONS AND SPECIAL RULES. 
‘‘(a) DEFINITIONS.—For purposes of this subchapter: 
‘‘(1) The term ‘controlled group’ means any 
group of trusts and business entities whose members 
would be treated as a single employer under the rules 
of section 52(a) (without regard to paragraphs (1) 
and (2) thereof) and section 52(b)(1). 
‘‘(2) The term ‘corporate income percentage’ 
means the least aggregate share, expressed as a per-
centage, of any item of income or gain of an electing 
corporation or electing group of which such corpora-
tion is a member from qualifying shipping activities 
that would, but for an election in effect under this 
subchapter, be required to be reported on the Federal
117 
income tax return of an electing corporation during 
any taxable period. In the case of an electing group 
which includes two or more electing corporations, the 
corporate income percentage of each such corporation 
shall be determined on the basis of such corporations’ 
direct and indirect ownership and charter interests in 
qualifying vessels of the electing group or on such 
other basis as the Secretary may prescribe by regula-
tions. 
‘‘(3) The term ‘corporate loss percentage’ means 
the greatest aggregate share, expressed as a percent-
age, of any item of loss, deduction or credit of an 
electing corporation or electing group of which such 
corporation is a member from qualifying shipping ac-
tivities that would, but for an election in effect under 
this subchapter, be required to be reported on the Fed-
eral income tax return of an electing corporation dur-
ing any taxable period. 
‘‘(4) The term ‘corporate percentages’ means the 
corporate income percentage and the corporate loss 
percentage. 
‘‘(5) The term ‘electing corporation’ means any 
C corporation that is an electing entity or that would, 
but for an election in effect under this subchapter, be 
required to report any item of income, gain, loss, de-
118 
duction, or credit of an electing entity on its Federal 
income tax return. 
‘‘(6) The term ‘electing entity’ means any quali-
fying entity for which an election is in effect under 
this subchapter. 
‘‘(7) The term ‘electing group’ means a controlled 
group of which one or more members is an electing 
entity. 
‘‘(8) The term ‘noncorporate percentage’ means 
the difference between one hundred percent and the 
corporate income percentage or corporate loss percent-
age, as applicable. 
‘‘(9) The term ‘qualifying entity’ means a trust 
or business entity that— 
‘‘(A) operates one or more qualifying ves-
sels, and 
‘‘(B) meets the shipping activity require-
ment in subsection (c). 
‘‘(10) The term ‘qualifying shipping assets’ 
means any qualifying vessel and other assets which 
are used in core qualifying activities as described in 
section 1356(b). 
‘‘(11) The term ‘qualifying vessel’ means a self- 
propelled (or a combination self-propelled and non- 
self-propelled) United States flag vessel of not less
119 
than 10,000 deadweight tons used in the United 
States foreign trade. 
‘‘(12) The term ‘United States domestic trade’ 
means the transportation of goods or passengers be-
tween places in the United States. 
‘‘(13) The term ‘United States flag vessel’ means 
any vessel documented under the laws of the United 
States. 
‘‘(14) The term ‘United States foreign trade’ 
means the transportation of goods or passengers be-
tween a place in the United States and a foreign 
place or between foreign places. 
‘‘(b) OPERATING A VESSEL.—For purposes of this sub-
chapter: 
‘‘(1) Except as provided in paragraph (2), an 
entity is treated as operating any vessel owned by, or 
chartered (including a time charter) to, the entity. 
‘‘(2) An entity is treated as operating a vessel 
that it has chartered out on bareboat charter terms 
only if— 
‘‘(A) the vessel is temporarily surplus to the 
entity’s requirements and the term of the charter 
does not exceed three years; or 
‘‘(B) the vessel is bareboat chartered to a 
member of a controlled group which includes
120 
such entity or to an unrelated third party that 
sub-bareboats or time charters the vessel to a 
member of such controlled group (including the 
owner). 
‘‘(c) SHIPPING ACTIVITY REQUIREMENT.—For pur-
poses of this section, the shipping activity requirement is 
met for a taxable year only by an entity described in para-
graph (1), (2), or (3). 
‘‘(1) An entity in the first taxable year of its 
qualifying shipping tax election if, for the preceding 
taxable year, the test in paragraph (4) is met. 
‘‘(2) An entity in the second or any subsequent 
taxable year of its qualifying shipping tax election if, 
for each of the two preceding taxable years, the test 
in paragraph (4) is met. 
‘‘(3) An entity that would be described in para-
graph (1) or (2) if the test in paragraph (4) were ap-
plied on an aggregate basis to the controlled group of 
which such entity is a member, and vessel charters be-
tween members of the controlled group were dis-
regarded. 
‘‘(4) The test in this paragraph is met if on av-
erage at least 25 percent of the aggregate tonnage of 
qualifying vessels operated by the entity were owned 
by the entity or chartered to the entity on bareboat
121 
charter terms. For purposes of the preceding sentence, 
vessels chartered (including time chartered) to an en-
tity by a member of a controlled group which includes 
the entity, or by a third party that bareboat charters 
the vessels from the entity or a member of the entity’s 
controlled group, shall be treated as chartered to the 
entity on bareboat charter terms. 
‘‘(d) EFFECT OF TEMPORARILY CEASING TO OPERATE 
A QUALIFYING VESSEL.— 
‘‘(1) A temporary cessation by an electing entity 
in operation of a qualifying vessel shall be dis-
regarded for purposes of subsections (b) and (c) if the 
electing entity gives timely notice to the Secretary 
stating— 
‘‘(A) that it has temporarily ceased to oper-
ate the qualifying vessel, and 
‘‘(B) its intention to resume operating the 
qualifying vessel. 
‘‘(2) Notice shall be deemed timely if given not 
later than the due date (including extensions) for the 
electing entity’s tax return (as set forth in section 
6072(b)) for the taxable year in which the temporary 
cessation begins. 
‘‘(3) The treatment provided by paragraph (1) 
shall continue until the earlier of—
122 
‘‘(A) the electing entity abandoning its in-
tention to resume operation of the qualifying ves-
sel, or 
‘‘(B) the electing entity resuming operation 
of the qualifying vessel. 
‘‘(e) EFFECT OF TEMPORARILY OPERATING A QUALI-
FYING
VESSEL
IN
THE
UNITED
STATES
DOMESTIC 
TRADE.— 
‘‘(1) The temporary operation in the United 
States domestic trade of any qualifying vessel which 
had been used in the United States foreign trade shall 
be disregarded for purposes of this subchapter if the 
electing entity gives timely notice to the Secretary 
stating— 
‘‘(A) that it temporarily operates or has op-
erated in the United States domestic trade a 
qualifying vessel which had been used in the 
United States foreign trade, and 
‘‘(B) its intention to resume operation of 
the vessel in the United States foreign trade. 
‘‘(2) Notice shall be deemed timely if given not 
later than the due date (including extensions) for the 
electing entity’s tax return (as set forth in section 
6072(b)) for the taxable year in which the temporary 
cessation begins.
123 
‘‘(3) The treatment provided by paragraph (1) 
shall continue until the earlier of— 
‘‘(A) the electing entity abandoning its in-
tention to resume operations of the vessel in the 
United States foreign trade, or 
‘‘(B) the electing entity resuming operation 
of the vessel in the United States foreign trade. 
‘‘(f) EFFECT OF CHANGE IN USE.— 
‘‘(1) Except as provided in subsection (e), a ves-
sel that is used other than for operations in the 
United States foreign trade on other than a tem-
porary basis ceases to be a qualifying vessel when 
such use begins. 
‘‘(2) For purposes of this subsection, a change in 
use of a vessel, other than a commencement of oper-
ation in the United States domestic trade, is taken to 
be permanent unless there are circumstances indi-
cating that it is temporary. 
‘‘(g) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section. 
‘‘SEC. 1356. QUALIFYING SHIPPING ACTIVITIES. 
‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur-
poses of this subchapter the ‘qualifying shipping activities’ 
of an electing entity consist of—
124 
‘‘(1) core qualifying activities, 
‘‘(2) qualifying secondary activities, and 
‘‘(3) qualifying incidental activities. 
‘‘(b) CORE QUALIFYING ACTIVITIES.— 
‘‘(1) The ‘core qualifying activities’ of an elect-
ing entity are— 
‘‘(A) its activities in operating qualifying 
vessels in United States foreign trade, and 
‘‘(B) other activities of the electing entity 
and other members of its electing group that are 
an integral part of its business of operating 
qualifying vessels in United States foreign trade, 
including ownership or operation of barges, con-
tainers, chassis, and other equipment that are 
the complement of, or used in connection with, a 
qualifying vessel in United States foreign trade, 
the inland haulage of cargo shipped, or to be 
shipped, on qualifying vessels in United States 
foreign trade, and the provision of terminal, 
maintenance, repair, logistical, or other vessel, 
container, or cargo-related services that are an 
integral part of operating qualifying vessels in 
United States foreign trade.
125 
‘‘(2) ‘Core qualifying activities’ do not include 
the provision by an entity of facilities or services to 
any person, other than— 
‘‘(A) another member of such entity’s elect-
ing group, 
‘‘(B) a consignor, consignee, or other cus-
tomer of such entity’s business of operating 
qualifying vessels in United States foreign trade, 
or 
‘‘(C) a member of an alliance, joint venture, 
pool, partnership or similar undertaking involv-
ing the operation of qualifying vessels in United 
States foreign trade of which such entity is a 
member. 
‘‘(c) QUALIFYING SECONDARY ACTIVITIES.—For pur-
poses of this subsection— 
‘‘(1) the term ‘secondary activities’ means activi-
ties that are not core qualifying activities, and— 
‘‘(A) are the active management or oper-
ation of vessels in the United States foreign 
trade, 
‘‘(B) the provision of vessel, container, or 
cargo-related facilities or services to any person, 
or
126 
‘‘(C) such other activities as may be pre-
scribed by the Secretary pursuant to regulations, 
and 
‘‘(2) the ‘qualified secondary activities’ of an 
electing entity are its secondary activities and the sec-
ondary activities of other members of its electing 
group, but only to the extent that, without regard to 
this subchapter, the aggregate gross income derived by 
the electing entity and the other members of its elect-
ing group from such activities does not exceed 20 per-
cent of the aggregate gross income derived by the elect-
ing entity and the other members of its electing group 
from their core qualifying activities. 
‘‘(d) QUALIFYING
INCIDENTAL
ACTIVITIES.—Ship-
ping-related activities carried on by an electing entity or 
another member of its electing group are qualified inci-
dental activities of the electing entity if— 
‘‘(1) incidental to its core qualifying activities, 
‘‘(2) not qualifying secondary activities, and 
‘‘(3) without regard to this subchapter, the aggre-
gate gross income derived by the electing entity and 
other members of its electing group from such activi-
ties does not exceed 0.1 percent of such entities’ aggre-
gate gross income from their core qualifying activi-
ties.
127 
‘‘SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRE-
CIATION; INTEREST. 
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come of an electing entity shall not include the corporate 
income percentage of— 
‘‘(1) income from qualifying shipping activities 
in the United States foreign trade, 
‘‘(2) income from money, bank deposits and 
other temporary investments which are reasonably 
necessary to meet the working capital requirements of 
qualifying shipping activities, and 
‘‘(3) income from money or other intangible as-
sets accumulated pursuant to a plan to purchase 
qualifying shipping assets. 
‘‘(b) ELECTING GROUP MEMBER.—Gross income of a 
member of an electing group that is not an electing entity 
shall not include the corporate income percentage of its in-
come from qualifying shipping activities that are taken into 
account under this subchapter as qualifying shipping ac-
tivities of an electing entity. 
‘‘(c) DENIAL OF LOSSES, DEDUCTIONS, AND CRED-
ITS.— 
‘‘(1) GENERAL RULE.—Subject to paragraph (2), 
the corporate loss percentage of each item of loss, de-
duction (other than for interest expense), or credit of 
any taxpayer with respect to any activity the income
128 
from which is excluded from gross income under this 
section shall be disallowed. 
‘‘(2) 
DEPRECIATION.—Notwithstanding 
para-
graph (1), the deduction for depreciation of a quali-
fying shipping asset shall be allowed in determining 
the adjusted basis of such asset for purposes of deter-
mining gain from its disposition. 
‘‘(A) Except as provided in subparagraph 
(B), the straight line method of depreciation 
shall apply to the corporate income percentage of 
qualifying shipping assets the income from oper-
ation of which is excluded from gross income 
under this section. 
‘‘(B) Subparagraph (A) shall not apply to 
any qualifying shipping asset which is subject to 
a charter entered into prior to the effective date 
of this subchapter. 
‘‘(3) INTEREST.—The corporate loss percentage 
of an electing entity’s interest expense shall be dis-
allowed in the ratio that the fair market value of its 
qualifying vessel assets bears to the fair market value 
of its total assets. 
‘‘(d) SECTION INAPPLICABLE TO UNRELATED PER-
SONS.—This section shall not apply to a taxpayer that is 
not a member of an electing group.
129 
‘‘SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DE-
DUCTIONS. 
‘‘(a) QUALIFYING SHIPPING ACTIVITIES.—For pur-
poses of this chapter, the qualifying shipping activities of 
an electing entity shall be treated as a separate trade or 
business activity from all other activities conducted by the 
entity. 
‘‘(b) EXCLUSION OF CREDITS OR DEDUCTIONS.— 
‘‘(1) No deduction shall be allowed against the 
taxable income of an electing corporation from quali-
fying shipping activities, and no credit shall be al-
lowed against the tax imposed by section 1352(b). 
‘‘(2) No deduction shall be allowed for any net 
operating loss attributable to the qualifying shipping 
activities of a corporation to the extent that such loss 
is carried forward by the corporation from a taxable 
year preceding the first taxable year for which such 
corporation was an electing corporation. 
‘‘(c) TRANSACTIONS NOT AT ARM’S LENGTH.—Section 
482 shall apply in accordance with this subsection to a 
transaction or series of transactions— 
‘‘(1) as between an electing entity and another 
person, or 
‘‘(2) as between an entity’s qualifying shipping 
activities and other activities carried on by it.
130 
‘‘SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING AS-
SETS. 
‘‘(a) IN GENERAL.—If an electing entity sells or dis-
poses of qualifying shipping assets (as defined in subsection 
(c)) in an otherwise taxable transaction, at the election of 
the entity no gain shall be recognized if replacement quali-
fying shipping assets are acquired during the period speci-
fied in subsection (b), except to the extent that the amount 
realized upon such sale or disposition exceeds the cost of 
the replacement qualifying shipping assets. 
‘‘(b) PERIOD WITHIN WHICH PROPERTY MUST BE 
REPLACED.—The period referred to in subsection (a) shall 
be the period beginning one year prior to the disposition 
of the qualifying shipping assets and ending— 
‘‘(1) 3 years after the close of the first taxable 
year in which the gain is realized, or 
‘‘(2) subject to such terms and conditions as may 
be specified by the Secretary, on such later date as the 
Secretary may designate on application by the tax-
payer. Such application shall be made at such time 
and in such manner as the Secretary may by regula-
tions prescribe. 
‘‘(c) TIME FOR ASSESSMENT OF DEFICIENCY ATTRIB-
UTABLE TO GAIN.—If an electing entity has made the elec-
tion provided in subsection (a), then—
131 
‘‘(1) the statutory period for the assessment of 
any deficiency, for any taxable year in which any 
part of the gain is realized, attributable to such gain 
shall not expire prior to the expiration of 3 years 
from the date the Secretary is notified by the entity 
(in such manner as the Secretary may by regulations 
prescribe) of the replacement tonnage tax property or 
of an intention not to replace, and 
‘‘(2) such deficiency may be assessed before the 
expiration of such 3-year period notwithstanding the 
provisions of section 6212(c) or the provisions of any 
other law or rule of law which would otherwise pre-
vent such assessment. 
‘‘(d) BASIS OF REPLACEMENT QUALIFYING SHIPPING 
ASSETS.—In the case of replacement qualifying shipping 
assets purchased by an electing entity which resulted in the 
nonrecognition of any part of the gain realized as the result 
of a sale or other disposition of qualifying shipping assets, 
the basis shall be the cost of such property decreased in the 
amount of the gain not so recognized; and if the property 
purchased consists of more than one piece of property, the 
basis determined under this sentence shall be allocated to 
the purchased properties in proportion to their respective 
costs.
132 
‘‘(e) REPLACEMENT QUALIFYING SHIPPING ASSETS 
MUST BE ACQUIRED FROM UNRELATED PERSON IN CER-
TAIN CASES.— 
‘‘(1) IN
GENERAL.—Subsection (a) shall not 
apply if the replacement qualifying shipping assets 
are acquired from a related person except to the ex-
tent that the related person acquired the replacement 
qualifying shipping assets from an unrelated person 
during the period applicable under subsection (b). 
‘‘(2) RELATED PERSON.—For purposes of this 
subsection, a person is related to another person if the 
person bears a relationship to the other person de-
scribed in section 267(b) or 707(b)(1).’’ 
(b) TECHNICAL AND CONFORMING AMENDMENT.—The 
second sentence of section 56(g)(4)(B)(i), as amended by 
this Act, is further amended by inserting ‘‘or 1357’’ after 
‘‘section 139A’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after the date 
of the enactment of this Act. 
SEC. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR 
CERTAIN EXPENSES INCURRED IN SUPPORT 
OF NATIVE ALASKAN SUBSISTENCE WHALING. 
(a) IN GENERAL.—Section 170 (relating to charitable, 
etc., contributions and gifts), as amended by this Act, is
133 
amended by redesignating subsection (n) as subsection (o) 
and by inserting after subsection (m) the following new sub-
section: 
‘‘(n) EXPENSES PAID BY CERTAIN WHALING CAPTAINS 
IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE WHAL-
ING.— 
‘‘(1) IN GENERAL.—In the case of an individual 
who is recognized by the Alaska Eskimo Whaling 
Commission as a whaling captain charged with the 
responsibility of maintaining and carrying out sanc-
tioned whaling activities and who engages in such ac-
tivities during the taxable year, the amount described 
in paragraph (2) (to the extent such amount does not 
exceed $10,000 for the taxable year) shall be treated 
for purposes of this section as a charitable contribu-
tion. 
‘‘(2) AMOUNT DESCRIBED.— 
‘‘(A) IN GENERAL.—The amount described 
in this paragraph is the aggregate of the reason-
able and necessary whaling expenses paid by the 
taxpayer during the taxable year in carrying out 
sanctioned whaling activities. 
‘‘(B) WHALING EXPENSES.—For purposes of 
subparagraph (A), the term ‘whaling expenses’ 
includes expenses for—
134 
‘‘(i) the acquisition and maintenance 
of whaling boats, weapons, and gear used in 
sanctioned whaling activities, 
‘‘(ii) the supplying of food for the crew 
and other provisions for carrying out such 
activities, and 
‘‘(iii) storage and distribution of the 
catch from such activities. 
‘‘(3) SANCTIONED
WHALING
ACTIVITIES.—For 
purposes of this subsection, the term ‘sanctioned whal-
ing activities’ means subsistence bowhead whale hunt-
ing activities conducted pursuant to the management 
plan of the Alaska Eskimo Whaling Commission.’’. 
(b) EFFECTIVE DATE.—The amendments made by sub-
section (a) shall apply to contributions made after Decem-
ber 31, 2004. 
TITLE 
III—TAX 
REFORM 
AND 
SIMPLIFICATION FOR UNITED 
STATES BUSINESSES 
SEC. 301. INTEREST EXPENSE ALLOCATION RULES. 
(a) 
ELECTION
TO
ALLOCATE
ON
WORLDWIDE 
BASIS.—Section 864 is amended by redesignating sub-
section (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection:
135 
‘‘(f) ELECTION TO ALLOCATE INTEREST, ETC. ON 
WORLDWIDE BASIS.—For purposes of this subchapter, at 
the election of the worldwide affiliated group— 
‘‘(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 domes-
tic members of a worldwide affiliated group from 
sources outside the United States shall be deter-
mined by allocating and apportioning the inter-
est expense of such domestic members to such in-
come in an amount equal to the excess (if any) 
of— 
‘‘(i) the total interest expense of the 
worldwide affiliated group multiplied by 
the ratio which the foreign assets of the 
worldwide affiliated group bears to all the 
assets of the worldwide affiliated group, 
over
136 
‘‘(ii) the interest expense of all foreign 
corporations which are members of the 
worldwide affiliated group to the extent 
such interest expense of such foreign cor-
porations would have been allocated and 
apportioned to foreign source income if this 
subsection were applied to a group con-
sisting of all the foreign corporations in 
such worldwide affiliated group. 
‘‘(C) WORLDWIDE AFFILIATED GROUP.—For 
purposes of this paragraph, the term ‘worldwide 
affiliated group’ means a group consisting of— 
‘‘(i) the includible members of an af-
filiated 
group 
(as 
defined 
in 
section 
1504(a), determined without regard to 
paragraphs (2) and (4) of section 1504(b)), 
and 
‘‘(ii) all controlled foreign corporations 
in which such members in the aggregate 
meet the ownership requirements of section 
1504(a)(2) either directly or indirectly 
through applying paragraph (2) of section 
958(a) or through applying rules similar to 
the rules of such paragraph to stock owned
137 
directly or indirectly by domestic partner-
ships, trusts, or estates. 
‘‘(2) ALLOCATION
AND
APPORTIONMENT
OF 
OTHER
EXPENSES.—Expenses other than interest 
which are not directly allocable or apportioned to any 
specific income producing activity shall be allocated 
and apportioned as if all members of the affiliated 
group were a single corporation. For purposes of the 
preceding sentence, the term ‘affiliated group’ has the 
meaning given such term by section 1504 (determined 
without regard to paragraph (4) of section 1504(b)). 
‘‘(3) TREATMENT OF TAX-EXEMPT ASSETS; BASIS 
OF
STOCK
IN
NONAFFILIATED
10-PERCENT
OWNED 
CORPORATIONS.—The rules of paragraphs (3) and (4) 
of subsection (e) shall apply for purposes of this sub-
section, except that paragraph (4) shall be applied on 
a worldwide affiliated group basis. 
‘‘(4) TREATMENT OF CERTAIN FINANCIAL INSTI-
TUTIONS.— 
‘‘(A) IN GENERAL.—For purposes of para-
graph (1), any corporation described in subpara-
graph (B) shall be treated as an includible cor-
poration for purposes of section 1504 only for 
purposes of applying this subsection separately 
to corporations so described.
138 
‘‘(B) DESCRIPTION.—A corporation is de-
scribed in this subparagraph if— 
‘‘(i) such corporation is a financial in-
stitution described in section 581 or 591, 
‘‘(ii) the business of such financial in-
stitution is predominantly with persons 
other than related persons (within the 
meaning of subsection (d)(4)) or their cus-
tomers, and 
‘‘(iii) such financial institution is re-
quired by State or Federal law to be oper-
ated separately from any other entity which 
is not such an institution. 
‘‘(C) TREATMENT OF BANK AND FINANCIAL 
HOLDING COMPANIES.—To the extent provided in 
regulations— 
‘‘(i) a bank holding company (within 
the meaning of section 2(a) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 
1841(a)), 
‘‘(ii) a financial holding company 
(within the meaning of section 2(p) of the 
Bank Holding Company Act of 1956 (12 
U.S.C. 1841(p)), and
139 
‘‘(iii) any subsidiary of a financial in-
stitution described in section 581 or 591, or 
of any such bank or financial holding com-
pany, if such subsidiary is predominantly 
engaged (directly or indirectly) in the active 
conduct of a banking, financing, or similar 
business, 
shall be treated as a corporation described in 
subparagraph (B). 
‘‘(5) ELECTION TO EXPAND FINANCIAL INSTITU-
TION GROUP OF WORLDWIDE GROUP.— 
‘‘(A) IN GENERAL.—If a worldwide affili-
ated group elects the application of this sub-
section, all financial corporations which— 
‘‘(i) are members of such worldwide af-
filiated group, but 
‘‘(ii) are not corporations described in 
paragraph (4)(B), 
shall be treated as described in paragraph (4)(B) 
for purposes of applying paragraph (4)(A). This 
subsection (other than this paragraph) shall 
apply to any such group in the same manner as 
this subsection (other than this paragraph) ap-
plies to the pre-election worldwide affiliated 
group of which such group is a part.
140 
‘‘(B) FINANCIAL CORPORATION.—For pur-
poses of this paragraph, the term ‘financial cor-
poration’ means any corporation if at least 80 
percent of its gross income is income described in 
section 904(d)(2)(C)(ii) and the regulations 
thereunder which is derived from transactions 
with persons who are not related (within the 
meaning of section 267(b) or 707(b)(1)) to the 
corporation. For purposes of the preceding sen-
tence, there shall be disregarded any item of in-
come or gain from a transaction or series of 
transactions a principal purpose of which is the 
qualification of any corporation as a financial 
corporation. 
‘‘(C) ANTIABUSE RULES.—In the case of a 
corporation which is a member of an electing fi-
nancial institution group, to the extent that such 
corporation— 
‘‘(i) distributes dividends or makes 
other distributions with respect to its stock 
after the date of the enactment of this para-
graph to any member of the pre-election 
worldwide affiliated group (other than to a 
member of the electing financial institution 
group) in excess of the greater of—
141 
‘‘(I) its average annual dividend 
(expressed as a percentage of current 
earnings and profits) during the 5-tax-
able-year period ending with the tax-
able year preceding the taxable year, or 
‘‘(II) 25 percent of its average an-
nual earnings and profits for such 5- 
taxable-year period, or 
‘‘(ii) deals with any person in any 
manner not clearly reflecting the income of 
the corporation (as determined under prin-
ciples similar to the principles of section 
482), 
an amount of indebtedness of the electing finan-
cial institution group equal to the excess dis-
tribution or the understatement or overstatement 
of income, as the case may be, shall be re-
characterized (for the taxable year and subse-
quent taxable years) for purposes of this para-
graph as indebtedness of the worldwide affiliated 
group (excluding the electing financial institu-
tion group). If a corporation has not been in ex-
istence for 5 taxable years, this subparagraph 
shall be applied with respect to the period it was 
in existence.
142 
‘‘(D) ELECTION.—An election under this 
paragraph with respect to any financial institu-
tion group may be made only by the common 
parent of the pre-election worldwide affiliated 
group and may be made only for the first taxable 
year beginning after December 31, 2008, in 
which such affiliated group includes 1 or more 
financial corporations. Such an election, once 
made, shall apply to all financial corporations 
which are members of the electing financial in-
stitution group for such taxable year and all 
subsequent years unless revoked with the consent 
of the Secretary. 
‘‘(E) DEFINITIONS RELATING TO GROUPS.— 
For purposes of this paragraph— 
‘‘(i) PRE-ELECTION
WORLDWIDE
AF-
FILIATED
GROUP.—The term ‘pre-election 
worldwide affiliated group’ means, with re-
spect to a corporation, the worldwide affili-
ated group of which such corporation would 
(but for an election under this paragraph) 
be a member for purposes of applying para-
graph (1). 
‘‘(ii) ELECTING
FINANCIAL
INSTITU-
TION GROUP.—The term ‘electing financial
143 
institution group’ means the group of cor-
porations to which this subsection applies 
separately by reason of the application of 
paragraph (4)(A) and which includes finan-
cial corporations by reason of an election 
under subparagraph (A). 
‘‘(F) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be appropriate 
to carry out this subsection, including regula-
tions— 
‘‘(i) providing for the direct allocation 
of interest expense in other circumstances 
where such allocation would be appropriate 
to carry out the purposes of this subsection, 
‘‘(ii) preventing assets or interest ex-
pense from being taken into account more 
than once, and 
‘‘(iii) dealing with changes in members 
of any group (through acquisitions or other-
wise) treated under this paragraph as an 
affiliated group for purposes of this sub-
section. 
‘‘(6) ELECTION.—An election to have this sub-
section apply with respect to any worldwide affiliated 
group may be made only by the common parent of the
144 
domestic affiliated group referred to in paragraph 
(1)(C) and may be made only for the first taxable 
year beginning after December 31, 2008, in which a 
worldwide affiliated group exists which includes such 
affiliated group and at least 1 foreign corporation. 
Such an election, once made, shall apply to such com-
mon parent and all other corporations which are 
members of such worldwide affiliated group for such 
taxable year and all subsequent years unless revoked 
with the consent of the Secretary.’’. 
(b) EXPANSION OF REGULATORY AUTHORITY.—Para-
graph (7) of section 864(e) is amended— 
(1) by inserting before the comma at the end of 
subparagraph (B) ‘‘and in other circumstances where 
such allocation would be appropriate to carry out the 
purposes of this subsection’’, and 
(2) by striking ‘‘and’’ at the end of subpara-
graph (E), by redesignating subparagraph (F) as sub-
paragraph (G), and by inserting after subparagraph 
(E) the following new subparagraph: 
‘‘(F) preventing assets or interest expense 
from being taken into account more than once, 
and’’.
145 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2008. 
SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS. 
(a) GENERAL RULE.—Section 904 is amended by re-
designating subsections (g), (h), (i), (j), and (k) as sub-
sections (h), (i), (j), (k), and (l) respectively, and by insert-
ing after subsection (f) the following new subsection: 
‘‘(g) RECHARACTERIZATION OF OVERALL DOMESTIC 
LOSS.— 
‘‘(1) GENERAL RULE.—For purposes of this sub-
part and section 936, in the case of any taxpayer who 
sustains an overall domestic loss for any taxable year 
beginning after December 31, 2006, that portion of 
the taxpayer’s taxable income from sources within the 
United States for each succeeding taxable year which 
is equal to the lesser of— 
‘‘(A) the amount of such loss (to the extent 
not used under this paragraph in prior taxable 
years), or 
‘‘(B) 50 percent of the taxpayer’s taxable 
income from sources within the United States for 
such succeeding taxable year,
146 
shall be treated as income from sources without the 
United States (and not as income from sources within 
the United States). 
‘‘(2) OVERALL DOMESTIC LOSS DEFINED.—For 
purposes of this subsection— 
‘‘(A) IN GENERAL.—The term ‘overall do-
mestic loss’ means any domestic loss to the extent 
such loss offsets taxable income from sources 
without the United States for the taxable year or 
for any preceding taxable year by reason of a 
carryback. For purposes of the preceding sen-
tence, the term ‘domestic loss’ means the amount 
by which the gross income for the taxable year 
from sources within the United States is exceeded 
by the sum of the deductions properly appor-
tioned or allocated thereto (determined without 
regard to any carryback from a subsequent tax-
able year). 
‘‘(B) TAXPAYER MUST HAVE ELECTED FOR-
EIGN TAX CREDIT FOR YEAR OF LOSS.—The term 
‘overall domestic loss’ shall not include any loss 
for any taxable year unless the taxpayer chose 
the benefits of this subpart for such taxable year. 
‘‘(3) CHARACTERIZATION
OF
SUBSEQUENT
IN-
COME.—
147 
‘‘(A) IN
GENERAL.—Any income from 
sources within the United States that is treated 
as income from sources without the United 
States under paragraph (1) shall be allocated 
among and increase the income categories in 
proportion to the loss from sources within the 
United States previously allocated to those in-
come categories. 
‘‘(B) INCOME CATEGORY.—For purposes of 
this paragraph, the term ‘income category’ has 
the meaning given such term by subsection 
(f)(5)(E)(i). 
‘‘(4) COORDINATION WITH SUBSECTION (f).—The 
Secretary shall prescribe such regulations as may be 
necessary to coordinate the provisions of this sub-
section with the provisions of subsection (f).’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 535(d)(2) is amended by striking 
‘‘section 904(g)(6)’’ and inserting ‘‘section 904(h)(6)’’. 
(2) Subparagraph (A) of section 936(a)(2) is 
amended by striking ‘‘section 904(f)’’ and inserting 
‘‘subsections (f) and (g) of section 904’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to losses for taxable years beginning 
after December 31, 2006.
148 
SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS. 
(a) IN GENERAL.—Paragraph (1) of section 904(d) 
(relating to separate application of section with respect to 
certain categories of income) is amended to read as follows: 
‘‘(1) IN GENERAL.—The provisions of subsections 
(a), (b), and (c) and sections 902, 907, and 960 shall 
be applied separately with respect to— 
‘‘(A) passive category income, and 
‘‘(B) general category income.’’ 
(b) CATEGORIES.—Paragraph (2) of section 904(d) is 
amended by striking subparagraph (B), by redesignating 
subparagraph (A) as subparagraph (B), and by inserting 
before subparagraph (B) (as so redesignated) the following 
new subparagraph: 
‘‘(A) CATEGORIES.— 
‘‘(i) PASSIVE CATEGORY INCOME.—The 
term ‘passive category income’ means pas-
sive income and specified passive category 
income. 
‘‘(ii) GENERAL
CATEGORY
INCOME.— 
The term ‘general category income’ means 
income other than passive category income.’’ 
(c) SPECIFIED PASSIVE CATEGORY INCOME.—Sub-
paragraph (B) of section 904(d)(2), as so redesignated, is 
amended by adding at the end the following new clause:
149 
‘‘(v) SPECIFIED PASSIVE CATEGORY IN-
COME.—The term ‘specified passive category 
income’ means— 
‘‘(I) dividends from a DISC or 
former DISC (as defined in section 
992(a)) to the extent such dividends 
are treated as income from sources 
without the United States, 
‘‘(II) taxable income attributable 
to foreign trade income (within the 
meaning of section 923(b)), and 
‘‘(III) distributions from a FSC 
(or a former FSC) out of earnings and 
profits attributable to foreign trade in-
come (within the meaning of section 
923(b)) or interest or carrying charges 
(as defined in section 927(d)(1)) de-
rived from a transaction which results 
in foreign trade income (as defined in 
section 923(b)).’’ 
(d) TREATMENT
OF FINANCIAL SERVICES.—Para-
graph (2) of section 904(d) is amended by striking subpara-
graph (D), by redesignating subparagraph (C) as subpara-
graph (D), and by inserting before subparagraph (D) (as 
so redesignated) the following new subparagraph:
150 
‘‘(C) TREATMENT OF FINANCIAL SERVICES 
INCOME AND COMPANIES.— 
‘‘(i) IN GENERAL.—Financial services 
income shall be treated as general category 
income in the case of— 
‘‘(I) a member of a financial serv-
ices group, and 
‘‘(II) any other person if such per-
son is predominantly engaged in the 
active conduct of a banking, insurance, 
financing, or similar business. 
‘‘(ii) FINANCIAL
SERVICES
GROUP.— 
The term ‘financial services group’ means 
any affiliated group (as defined in section 
1504(a) without regard to paragraphs (2) 
and (3) of section 1504(b)) which is pre-
dominantly engaged in the active conduct of 
a banking, insurance, financing, or similar 
business. In determining whether such a 
group is so engaged, there shall be taken 
into account only the income of members of 
the group that are— 
‘‘(I) United States corporations, 
or
151 
‘‘(II) controlled foreign corpora-
tions in which such United States cor-
porations own, directly or indirectly, 
at least 80 percent of the total voting 
power and value of the stock. 
‘‘(iii) PASS-THRU ENTITIES.—The Sec-
retary shall by regulation specify for pur-
poses of this subparagraph the treatment of 
financial services income received or ac-
crued by partnerships and by other pass- 
thru entities which are not members of a fi-
nancial services group.’’ 
(e) CONFORMING AMENDMENTS.— 
(1) Clause (iii) of section 904(d)(2)(B) (relating 
to exceptions from passive income), as so redesig-
nated, is amended by striking subclause (I) and by 
redesignating subclauses (II) and (III) as subclauses 
(I) and (II), respectively. 
(2) Clause (i) of section 904(d)(2)(D) (defining 
financial services income), as so redesignated, is 
amended by adding ‘‘or’’ at the end of subclause (I) 
and by striking subclauses (II) and (III) and insert-
ing the following new subclause:
152 
‘‘(II) passive income (determined 
without 
regard 
to 
subparagraph 
(B)(iii)(II)).’’ 
(3) Section 904(d)(2)(D) (defining financial 
services income), as so redesignated, is amended by 
striking clause (iii). 
(4) Paragraph (3) of section 904(d) is amended 
to read as follows: 
‘‘(3) LOOK-THRU IN CASE OF CONTROLLED FOR-
EIGN CORPORATIONS.— 
‘‘(A) IN
GENERAL.—Except as otherwise 
provided in this paragraph, dividends, interest, 
rents, and royalties received or accrued by the 
taxpayer from a controlled foreign corporation 
in which the taxpayer is a United States share-
holder shall not be treated as passive category in-
come. 
‘‘(B) 
SUBPART
F
INCLUSIONS.—Any 
amount included in gross income under section 
951(a)(1)(A) shall be treated as passive category 
income to the extent the amount so included is 
attributable to passive category income. 
‘‘(C) INTEREST, RENTS, AND ROYALTIES.— 
Any interest, rent, or royalty which is received 
or accrued from a controlled foreign corporation
153 
in which the taxpayer is a United States share-
holder shall be treated as passive category in-
come to the extent it is properly allocable (under 
regulations prescribed by the Secretary) to pas-
sive category income of the controlled foreign cor-
poration. 
‘‘(D) DIVIDENDS.—Any dividend paid out 
of the earnings and profits of any controlled for-
eign corporation in which the taxpayer is a 
United States shareholder shall be treated as pas-
sive category income in proportion to the ratio 
of— 
‘‘(i) the portion of the earnings and 
profits attributable to passive category in-
come, to 
‘‘(ii) the total amount of earnings and 
profits. 
‘‘(E) LOOK-THRU
APPLIES
ONLY
WHERE 
SUBPART F APPLIES.—If a controlled foreign cor-
poration meets the requirements of section 
954(b)(3)(A) (relating to de minimis rule) for 
any taxable year, for purposes of this paragraph, 
none of its foreign base company income (as de-
fined in section 954(a) without regard to section 
954(b)(5)) and none of its gross insurance in-
154 
come (as defined in section 954(b)(3)(C)) for 
such taxable year shall be treated as passive cat-
egory income, except that this sentence shall not 
apply to any income which (without regard to 
this sentence) would be treated as financial serv-
ices income. Solely for purposes of applying sub-
paragraph (D), passive income of a controlled 
foreign corporation shall not be treated as pas-
sive category income if the requirements of sec-
tion 954(b)(4) are met with respect to such in-
come. 
‘‘(F) COORDINATION WITH HIGH-TAXED IN-
COME PROVISIONS.— 
‘‘(i) In determining whether any in-
come of a controlled foreign corporation is 
passive category income, subclause (II) of 
paragraph (2)(B)(iii) shall not apply. 
‘‘(ii) Any income of the taxpayer 
which is treated as passive category income 
under this paragraph shall be so treated 
notwithstanding any provision of para-
graph (2); except that the determination of 
whether any amount is high-taxed income 
shall be made after the application of this 
paragraph.
155 
‘‘(G) DIVIDEND.—For purposes of this 
paragraph, the term ‘dividend’ includes any 
amount included in gross income in section 
951(a)(1)(B). Any amount included in gross in-
come under section 78 to the extent attributable 
to amounts included in gross income in section 
951(a)(1)(A) shall not be treated as a dividend 
but shall be treated as included in gross income 
under section 951(a)(1)(A). 
‘‘(H) LOOK-THRU APPLIES TO PASSIVE FOR-
EIGN INVESTMENT COMPANY INCLUSION.—If— 
‘‘(i) a passive foreign investment com-
pany is a controlled foreign corporation, 
and 
‘‘(ii) the taxpayer is a United States 
shareholder in such controlled foreign cor-
poration, 
any amount included in gross income under sec-
tion 1293 shall be treated as income in a sepa-
rate category to the extent such amount is attrib-
utable to income in such category.’’ 
(5) TREATMENT
OF
INCOME
TAX
BASE
DIF-
FERENCES.—Paragraph (2) of section 904(d) is 
amended by redesignating subparagraphs (H) and (I) 
as subparagraphs (I) and (J), respectively, and by in-
156 
serting after subparagraph (G) the following new sub-
paragraph: 
‘‘(H) TREATMENT
OF
INCOME
TAX
BASE 
DIFFERENCES.—Tax imposed under the law of a 
foreign country or possession of the United 
States on an amount which does not constitute 
income under United States tax principles shall 
be treated as imposed on income described in 
paragraph (1)(B).’’ 
(6) Paragraph (2) of section 904(d) is amended 
by adding at the end the following new subparagraph: 
‘‘(K) 
TRANSITIONAL
RULES
FOR
2007 
CHANGES.—For purposes of paragraph (1)— 
‘‘(i) taxes carried from any taxable 
year beginning before January 1, 2007, to 
any taxable year beginning on or after such 
date, with respect to any item of income, 
shall be treated as described in the subpara-
graph of paragraph (1) in which such in-
come would be described were such taxes 
paid or accrued in a taxable year beginning 
on or after such date, and 
‘‘(ii) the Secretary may by regulations 
provide for the allocation of any carryback 
of taxes with respect to income to such a
157 
taxable year for purposes of allocating such 
income among the separate categories in ef-
fect for such taxable year.’’. 
(7) Section 904(j)(3)(A)(i) is amended by strik-
ing ‘‘subsection (d)(2)(A)’’ and inserting ‘‘subsection 
(d)(2)(B)’’. 
(f) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2006. 
SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS 
FROM NONCONTROLLED SECTION 902 COR-
PORATIONS. 
(a) IN GENERAL.—Section 904(d)(4) (relating to look- 
thru rules apply to dividends from noncontrolled section 
902 corporations) is amended to read as follows: 
‘‘(4) LOOK-THRU APPLIES TO DIVIDENDS FROM 
NONCONTROLLED SECTION 902 CORPORATIONS.— 
‘‘(A) IN
GENERAL.—For purposes of this 
subsection, any dividend from a noncontrolled 
section 902 corporation with respect to the tax-
payer shall be treated as income described in a 
subparagraph of paragraph (1) in proportion to 
the ratio of—
158 
‘‘(i) the portion of earnings and profits 
attributable to income described in such 
subparagraph, to 
‘‘(ii) the total amount of earnings and 
profits. 
‘‘(B) EARNINGS
AND
PROFITS
OF
CON-
TROLLED FOREIGN CORPORATIONS.—In the case 
of any distribution from a controlled foreign cor-
poration to a United States shareholder, rules 
similar to the rules of subparagraph (A) shall 
apply in determining the extent to which earn-
ings and profits of the controlled foreign corpora-
tion which are attributable to dividends received 
from a noncontrolled section 902 corporation 
may be treated as income in a separate category. 
‘‘(C) SPECIAL RULES.—For purposes of this 
paragraph— 
‘‘(i) EARNINGS AND PROFITS.— 
‘‘(I) IN GENERAL.—The rules of 
section 316 shall apply. 
‘‘(II) REGULATIONS.—The Sec-
retary may prescribe regulations re-
garding the treatment of distributions 
out of earnings and profits for periods
159 
before the taxpayer’s acquisition of the 
stock to which the distributions relate. 
‘‘(ii) INADEQUATE SUBSTANTIATION.— 
If the Secretary determines that the proper 
subparagraph of paragraph (1) in which a 
dividend is described has not been substan-
tiated, such dividend shall be treated as in-
come described in paragraph (1)(A). 
‘‘(iii) 
COORDINATION
WITH
HIGH- 
TAXED INCOME PROVISIONS.—Rules similar 
to the rules of paragraph (3)(F) shall apply 
for purposes of this paragraph. 
‘‘(iv) LOOK-THRU WITH RESPECT TO 
CARRYOVER OF CREDIT.—Rules similar to 
subparagraph (A) also shall apply to any 
carryforward under subsection (c) from a 
taxable year beginning before January 1, 
2003, of tax allocable to a dividend from a 
noncontrolled section 902 corporation with 
respect to the taxpayer. The Secretary may 
by regulations provide for the allocation of 
any carryback of tax allocable to a dividend 
from a noncontrolled section 902 corpora-
tion to such a taxable year for purposes of
160 
allocating such dividend among the separate 
categories in effect for such taxable year.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (E) of section 904(d)(1) is 
hereby repealed. 
(2) Section 904(d)(2)(C)(iii) is amended by add-
ing ‘‘and’’ at the end of subclause (I), by striking sub-
clause (II), and by redesignating subclause (III) as 
subclause (II). 
(3) The last sentence of section 904(d)(2)(D) is 
amended to read as follows: ‘‘Such term does not in-
clude any financial services income.’’. 
(4) Section 904(d)(2)(E) is amended— 
(A) by inserting ‘‘or (4)’’ after ‘‘paragraph 
(3)’’ in clause (i), and 
(B) by striking clauses (ii) and (iv) and by 
redesignating clause (iii) as clause (ii). 
(5) Section 904(d)(3)(F) is amended by striking 
‘‘(D), or (E)’’ and inserting ‘‘or (D)’’. 
(6) Section 864(d)(5)(A)(i) is amended by strik-
ing ‘‘(C)(iii)(III)’’ and inserting ‘‘(C)(iii)(II)’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2002.
161 
SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH 
PARTNERSHIPS TO APPLY IN DETERMINING 
SECTION 902 AND 960 CREDITS. 
(a) IN GENERAL.—Subsection (c) of section 902 is 
amended by redesignating paragraph (7) as paragraph (8) 
and by inserting after paragraph (6) the following new 
paragraph: 
‘‘(7) 
CONSTRUCTIVE
OWNERSHIP
THROUGH 
PARTNERSHIPS.—Stock owned, directly or indirectly, 
by or for a partnership shall be considered as being 
owned proportionately by its partners. Stock consid-
ered to be owned by a person by reason of the pre-
ceding sentence shall, for purposes of applying such 
sentence, be treated as actually owned by such person. 
The Secretary may prescribe such regulations as may 
be necessary to carry out the purposes of this para-
graph, including rules to account for special partner-
ship allocations of dividends, credits, and other inci-
dents of ownership of stock in determining propor-
tionate ownership.’’. 
(b) CLARIFICATION
OF COMPARABLE ATTRIBUTION 
UNDER SECTION 901(b)(5).—Paragraph (5) of section 
901(b) is amended by striking ‘‘any individual’’ and insert-
ing ‘‘any person’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxes of foreign corporations for tax-
162 
able years of such corporations beginning after the date of 
the enactment of this Act. 
SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN 
TRANSFERS OF INTANGIBLE PROPERTY. 
(a) IN
GENERAL.—Subparagraph (C) of section 
367(d)(2) is amended by adding at the end the following 
new sentence: ‘‘For purposes of applying section 904(d), 
any such amount shall be treated in the same manner as 
if such amount were a royalty.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to amounts treated as received pursuant 
to section 367(d)(2) of the Internal Revenue Code of 1986 
on or after August 5, 1997. 
SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE 
CERTAIN ASSETS OF CONTROLLED FOREIGN 
CORPORATION. 
(a) IN GENERAL.—Section 956(c)(2) (relating to ex-
ceptions from property treated as United States property) 
is amended by striking ‘‘and’’ at the end of subparagraph 
(J), by striking the period at the end of subparagraph (K) 
and inserting a semicolon, and by adding at the end the 
following new subparagraphs: 
‘‘(L) securities acquired and held by a con-
trolled foreign corporation in the ordinary course 
of its business as a dealer in securities if—
163 
‘‘(i) the dealer accounts for the securi-
ties as securities held primarily for sale to 
customers in the ordinary course of busi-
ness, and 
‘‘(ii) the dealer disposes of the securi-
ties (or such securities mature while held by 
the dealer) within a period consistent with 
the holding of securities for sale to cus-
tomers in the ordinary course of business; 
and 
‘‘(M) an obligation of a United States per-
son which— 
‘‘(i) is not a domestic corporation, and 
‘‘(ii) is not— 
‘‘(I) a United States shareholder 
(as defined in section 951(b)) of the 
controlled foreign corporation, or 
‘‘(II) a partnership, estate, or 
trust in which the controlled foreign 
corporation, or any related person (as 
defined in section 954(d)(3)), is a 
partner, beneficiary, or trustee imme-
diately after the acquisition of any ob-
ligation of such partnership, estate, or
164 
trust by the controlled foreign corpora-
tion.’’. 
(b) CONFORMING AMENDMENT.—Section 956(c)(2) is 
amended by striking ‘‘and (K)’’ in the last sentence and 
inserting ‘‘, (K), and (L)’’. 
(c) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years 
of United States shareholders with or within which such 
taxable years of foreign corporations end. 
SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE 
RATE FOR FOREIGN TAX PAID OTHER THAN 
IN FUNCTIONAL CURRENCY. 
(a) IN GENERAL.—Paragraph (1) of section 986(a) 
(relating to determination of foreign taxes and foreign cor-
poration’s earnings and profits) is amended by redesig-
nating subparagraph (D) as subparagraph (E) and by in-
serting after subparagraph (C) the following new subpara-
graph: 
‘‘(D) ELECTIVE
EXCEPTION
FOR
TAXES 
PAID OTHER THAN IN FUNCTIONAL CURRENCY.— 
‘‘(i) IN GENERAL.—At the election of 
the taxpayer, subparagraph (A) shall not 
apply to any foreign income taxes the li-
ability for which is denominated in any
165 
currency other than in the taxpayer’s func-
tional currency. 
‘‘(ii) 
APPLICATION
TO
QUALIFIED 
BUSINESS UNITS.—An election under this 
subparagraph may apply to foreign income 
taxes attributable to a qualified business 
unit in accordance with regulations pre-
scribed by the Secretary. 
‘‘(iii) ELECTION.—Any such election 
shall apply to the taxable year for which 
made and all subsequent taxable years un-
less revoked with the consent of the Sec-
retary.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2004. 
SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 
FROM CERTAIN FOREIGN CORPORATIONS. 
(a) IN GENERAL.—Paragraph (2) of section 871(i) (re-
lating to tax not to apply to certain interest and dividends) 
is amended by adding at the end the following new subpara-
graph: 
‘‘(D) Dividends paid by a foreign corpora-
tion 
which 
are 
treated 
under 
section
166 
861(a)(2)(B) as income from sources within the 
United States.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to payments made after December 31, 
2004. 
SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST PAID 
BY FOREIGN PARTNERSHIPS AND FOREIGN 
CORPORATIONS. 
(a) IN GENERAL.—Paragraph (1) of section 861(a) 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 
new subparagraph: 
‘‘(C) in the case of a foreign partnership, 
which is predominantly engaged in the active 
conduct of a trade or business outside the United 
States, any interest not paid by a trade or busi-
ness engaged in by the partnership in the United 
States and not allocable to income which is effec-
tively connected (or treated as effectively con-
nected) with the conduct of a trade or business 
in the United States.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003.
167 
SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN 
RELATED CONTROLLED FOREIGN CORPORA-
TIONS UNDER FOREIGN PERSONAL HOLDING 
COMPANY INCOME RULES. 
(a) IN GENERAL.—Subsection (c) of section 954, as 
amended by this Act, is amended by adding after para-
graph (4) the following new paragraph: 
‘‘(5) LOOK-THRU IN THE CASE OF RELATED CON-
TROLLED FOREIGN CORPORATIONS.—For purposes of 
this subsection, dividends, interest, rents, and royal-
ties received or accrued from a controlled foreign cor-
poration which is a related person (as defined in sub-
section (b)(9)) shall not be treated as foreign personal 
holding company income to the extent attributable or 
properly allocable (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). For 
purposes of this paragraph, interest shall include fac-
toring income which is treated as income equivalent 
to interest for purposes of paragraph (1)(E). The Sec-
retary shall prescribe such regulations as may be ap-
propriate to prevent the abuse of the purposes of this 
paragraph.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years of foreign corporations
168 
beginning after December 31, 2004, and to taxable years 
of United States shareholders with or within which such 
taxable years of foreign corporations end. 
SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PART-
NERSHIP INTERESTS. 
(a) IN GENERAL.—Section 954(c) (defining foreign 
personal holding company income), as amended by this Act, 
is amended by adding after paragraph (5) the following 
new paragraph: 
‘‘(6) LOOK-THRU RULE FOR CERTAIN PARTNER-
SHIP 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 cor-
poration 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. The 
Secretary shall prescribe such regulations as 
may be appropriate to prevent abuse of the pur-
poses of this paragraph, including regulations 
providing for coordination of this paragraph 
with the provisions of subchapter K. 
‘‘(B) 25-PERCENT OWNER.—For purposes of 
this paragraph, the term ‘25-percent owner’
169 
means a controlled foreign corporation which 
owns directly 25 percent or more of the capital 
or profits interest in a partnership. For purposes 
of the preceding sentence, if a controlled foreign 
corporation is a shareholder or partner of a cor-
poration or partnership, the controlled foreign 
corporation shall be treated as owning directly 
its proportionate share of any such capital or 
profits interest held directly or indirectly by such 
corporation or partnership.’’. 
(b) EFFECTIVE DATE.—The amendment made by this 
section shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years 
of United States shareholders with or within which such 
taxable years of foreign corporations end. 
SEC. 313. 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 (relat-
ing to foreign personal holding companies). 
(2) Section 1246 (relating to gain on foreign in-
vestment company stock).
170 
(3) Section 1247 (relating to election by foreign 
investment companies to distribute income currently). 
(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 inserting 
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, 
(C) by inserting ‘‘and’’ at the end of para-
graph (7) (as so redesignated), and 
(D) by striking ‘‘; and’’ at the end of para-
graph (8) (as so redesignated) and inserting a 
period. 
(2) TREATMENT
OF
INCOME
FROM
PERSONAL 
SERVICE
CONTRACTS.—Paragraph (1) of section 
954(c) is amended by adding at the end the following 
new subparagraph: 
‘‘(I) PERSONAL SERVICE CONTRACTS.— 
‘‘(i) Amounts received under a contract 
under which the corporation is to furnish 
personal services if—
171 
‘‘(I) some person other than the 
corporation has the right to designate 
(by name or by description) the indi-
vidual who is to perform the services, 
or 
‘‘(II) the individual who is to per-
form the services is designated (by 
name or by description) in the con-
tract, and 
‘‘(ii) amounts received from the sale or 
other disposition of such a contract. 
This subparagraph shall apply with respect to 
amounts received for services under a particular 
contract only if at some time during the taxable 
year 25 percent or more in value of the out-
standing stock of the corporation is owned, di-
rectly or indirectly, by or for the individual who 
has performed, is to perform, or may be des-
ignated (by name or by description) as the one 
to perform, such services.’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Section 1(h) is amended— 
(A) in paragraph (10), by inserting ‘‘and’’ 
at the end of subparagraph (F), by striking sub-
172 
paragraph (G), and by redesignating subpara-
graph (H) as subparagraph (G), and 
(B) by striking ‘‘a foreign personal holding 
company (as defined in section 552), a foreign 
investment company (as defined in section 
1246(b)), or’’ in paragraph (11)(C)(iii). 
(2) Section 163(e)(3)(B), as amended by section 
642(a) of this Act, is amended by striking ‘‘which is 
a foreign personal holding company (as defined in 
section 552), a controlled foreign corporation (as de-
fined in section 957), or’’ and inserting ‘‘which is a 
controlled foreign corporation (as defined in section 
957) or’’. 
(3) Paragraph (2) of section 171(c) is amend-
ed— 
(A) by striking ‘‘, or by a foreign personal 
holding company, as defined in section 552’’, 
and 
(B) by striking ‘‘, or foreign personal hold-
ing company’’. 
(4) Paragraph (2) of section 245(a) is amended 
by striking ‘‘foreign personal holding company or’’. 
(5) Section 267(a)(3)(B), as amended by section 
642(b) of this Act, is amended by striking ‘‘to a for-
eign personal holding company (as defined in section
173 
552), a controlled foreign corporation (as defined in 
section 957), or’’ and inserting ‘‘to a controlled for-
eign corporation (as defined in section 957) or’’. 
(6) Section 312 is amended by striking sub-
section (j). 
(7) Subsection (m) of section 312 is amended by 
striking ‘‘, a foreign investment company (within the 
meaning of section 1246(b)), or a foreign personal 
holding company (within the meaning of section 
552)’’. 
(8) Subsection (e) of section 443 is amended by 
striking paragraph (3) and by redesignating para-
graphs (4) and (5) as paragraphs (3) and (4), respec-
tively. 
(9) Subparagraph (B) of section 465(c)(7) is 
amended by adding ‘‘or’’ at the end of clause (i), by 
striking clause (ii), and by redesignating clause (iii) 
as clause (ii). 
(10) Paragraph (1) of section 543(b) 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).
174 
(11) Paragraph (1) of section 562(b) is amended 
by striking ‘‘or a foreign personal holding company 
described in section 552’’. 
(12) Section 563 is amended— 
(A) by striking subsection (c), 
(B) by redesignating subsection (d) as sub-
section (c), and 
(C) by striking ‘‘subsection (a), (b), or (c)’’ 
in subsection (c) (as so redesignated) and insert-
ing ‘‘subsection (a) or (b)’’. 
(13) Subsection (d) of section 751 is amended by 
adding ‘‘and’’ at the end of paragraph (2), by strik-
ing paragraph (3), by redesignating paragraph (4) as 
paragraph (3), and by striking ‘‘paragraph (1), (2), 
or (3)’’ in paragraph (3) (as so redesignated) and in-
serting ‘‘paragraph (1) or (2)’’. 
(14) Paragraph (2) of section 864(d) is amended 
by striking subparagraph (A) and by redesignating 
subparagraphs (B) and (C) as subparagraphs (A) 
and (B), respectively. 
(15)(A) Subparagraph (A) of section 898(b)(1) is 
amended to read as follows: 
‘‘(A) which is treated as a controlled foreign 
corporation for any purpose under subpart F of 
part III of this subchapter, and’’.
175 
(B) Subparagraph (B) of section 898(b)(2) is 
amended by striking ‘‘and sections 551(f) and 554, 
whichever are applicable,’’. 
(C) Paragraph (3) of section 898(b) is amended 
to read as follows: 
‘‘(3) UNITED STATES SHAREHOLDER.—The term 
‘United States shareholder’ has the meaning given to 
such term by section 951(b), except that, in the case 
of a foreign corporation having related person insur-
ance income (as defined in section 953(c)(2)), the Sec-
retary may treat any person as a United States 
shareholder for purposes of this section if such person 
is treated as a United States shareholder under sec-
tion 953(c)(1).’’. 
(D) Subsection (c) of section 898 is amended to 
read as follows: 
‘‘(c) DETERMINATION OF REQUIRED YEAR.— 
‘‘(1) IN GENERAL.—The required year is— 
‘‘(A) the majority U.S. shareholder year, or 
‘‘(B) if there is no majority U.S. share-
holder year, the taxable year prescribed under 
regulations. 
‘‘(2) 1-MONTH DEFERRAL ALLOWED.—A specified 
foreign corporation may elect, in lieu of the taxable 
year under paragraph (1)(A), a taxable year begin-
176 
ning 1 month earlier than the majority U.S. share-
holder year. 
‘‘(3) MAJORITY U.S. SHAREHOLDER YEAR.— 
‘‘(A) IN
GENERAL.—For purposes of this 
subsection, the term ‘majority U.S. shareholder 
year’ means the taxable year (if any) which, on 
each testing day, constituted the taxable year 
of— 
‘‘(i) each United States shareholder de-
scribed in subsection (b)(2)(A), and 
‘‘(ii) each United States shareholder 
not described in clause (i) whose stock was 
treated as owned under subsection (b)(2)(B) 
by any shareholder described in such clause. 
‘‘(B) TESTING DAY.—The testing days shall 
be— 
‘‘(i) the first day of the corporation’s 
taxable year (determined without regard to 
this section), or 
‘‘(ii) the days during such representa-
tive period as the Secretary may pre-
scribe.’’. 
(16) Clause (ii) of section 904(d)(2)(A) is 
amended to read as follows:
177 
‘‘(ii) CERTAIN AMOUNTS INCLUDED.— 
Except as provided in clause (iii), the term 
‘passive income’ includes, except as pro-
vided in subparagraph (E)(iii) or para-
graph (3)(I), any amount includible in 
gross income under section 1293 (relating to 
certain passive foreign investment compa-
nies).’’. 
(17)(A) Subparagraph (A) of section 904(h)(1), 
as redesignated by section 302, is amended by adding 
‘‘or’’ at the end of clause (i), by striking clause (ii), 
and by redesignating clause (iii) as clause (ii). 
(B) The paragraph heading of paragraph (2) of 
section 904(h), as so redesignated, is amended by 
striking ‘‘FOREIGN PERSONAL HOLDING OR’’. 
(18) Section 951 is amended by striking sub-
sections (c) and (d) and by redesignating subsections 
(e) and (f) as subsections (c) and (d), respectively. 
(19) Paragraph (3) of section 989(b) is amended 
by striking ‘‘, 551(a),’’. 
(20) Paragraph (5) of section 1014(b) is amend-
ed by inserting ‘‘and before January 1, 2005,’’ after 
‘‘August 26, 1937,’’. 
(21) Subsection (a) of section 1016 is amended 
by striking paragraph (13).
178 
(22)(A) Paragraph (3) of section 1212(a) is 
amended to read as follows: 
‘‘(3) SPECIAL RULES ON CARRYBACKS.—A net 
capital loss of a corporation shall not be carried back 
under paragraph (1)(A) to a taxable year— 
‘‘(A) for which it is a regulated investment 
company (as defined in section 851), or 
‘‘(B) for which it is a real estate investment 
trust (as defined in section 856).’’. 
(B) The amendment made by subparagraph (A) 
shall apply to taxable years beginning after December 
31, 2004. 
(23) Section 1223 is amended by striking para-
graph (10) and by redesignating the following para-
graphs accordingly. 
(24) Subsection (d) of section 1248 is amended 
by striking paragraph (5) and by redesignating para-
graphs (6) and (7) as paragraphs (5) and (6), respec-
tively. 
(25) Paragraph (2) of section 1260(c) is amend-
ed by striking subparagraphs (H) and (I) and by re-
designating subparagraph (J) as subparagraph (H). 
(26)(A) Subparagraph (F) of section 1291(b)(3) 
is amended by striking ‘‘551(d), 959(a),’’ and insert-
ing ‘‘959(a)’’.
179 
(B) Subsection (e) of section 1291 is amended by 
inserting ‘‘(as in effect on the day before the date of 
the enactment of the American Jobs Creation Act of 
2004)’’ after ‘‘section 1246’’. 
(27) Paragraph (2) of section 1294(a) is amend-
ed to read as follows: 
‘‘(2) 
ELECTION
NOT
PERMITTED
WHERE 
AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION 
951.—The taxpayer may not make an election under 
paragraph (1) with respect to the undistributed PFIC 
earnings tax liability attributable to a qualified elect-
ing fund for the taxable year if any amount is in-
cludible in the gross income of the taxpayer under sec-
tion 951 with respect to such fund for such taxable 
year.’’. 
(28) Section 6035 is hereby repealed. 
(29) Subparagraph (D) of section 6103(e)(1) is 
amended by striking clause (iv) and redesignating 
clauses (v) and (vi) as clauses (iv) and (v), respec-
tively. 
(30) Subparagraph (B) of section 6501(e)(1) is 
amended to read as follows: 
‘‘(B) CONSTRUCTIVE
DIVIDENDS.—If the 
taxpayer omits from gross income an amount 
properly includible therein under section 951(a),
180 
the tax may be assessed, or a proceeding in court 
for the collection of such tax may be done with-
out assessing, at any time within 6 years after 
the return was filed.’’. 
(31) Subsection (a) of section 6679 is amended— 
(A) by striking ‘‘6035, 6046, and 6046A’’ in 
paragraph (1) and inserting ‘‘6046 and 6046A’’, 
and 
(B) by striking paragraph (3). 
(32) Sections 170(f)(10)(A), 508(d), 4947, and 
4948(c)(4) are each amended by striking ‘‘556(b)(2),’’ 
each place it appears. 
(33) The table of parts for subchapter G of chap-
ter 1 is amended by striking the item relating to part 
III. 
(34) The table of sections for part IV of sub-
chapter P of chapter 1 is amended by striking the 
items relating to sections 1246 and 1247. 
(35) The table of sections for subpart A of part 
III of subchapter A of chapter 61 is amended by strik-
ing the item relating to section 6035. 
(d) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section shall 
apply to taxable years of foreign corporations begin-
181 
ning after December 31, 2004, and to taxable years 
of United States shareholders with or within which 
such taxable years of foreign corporations end. 
(2) SUBSECTION (c)(29).—The amendments made 
by subsection (c)(29) shall apply to disclosures of re-
turn or return information with respect to taxable 
years beginning after December 31, 2004. 
SEC. 314. 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 
(4)(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 de-
scribed in paragraph (1), (2), or (8) of sec-
tion 1221(a), or’’. 
(b) DEFINITION AND SPECIAL RULES.—Subsection (c) 
of section 954 is amended by adding after paragraph (3) 
the following new paragraph:
182 
‘‘(4) DEFINITION AND SPECIAL RULES RELATING 
TO COMMODITY TRANSACTIONS.— 
‘‘(A) 
COMMODITY
HEDGING
TRANS-
ACTIONS.—For purposes of paragraph (1)(C)(i), 
the term ‘commodity hedging transaction’ means 
any transaction with respect to a commodity if 
such transaction— 
‘‘(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 ‘ordinary 
property or property described in sec-
tion 1231(b)’ for ‘ordinary property’, 
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) TREATMENT
OF
DEALER
ACTIVITIES 
UNDER PARAGRAPH (1)(C).—Commodities with 
respect to which gains and losses are not taken 
into account under paragraph (2)(C) in com-
183 
puting a controlled foreign corporation’s foreign 
personal holding company income shall not be 
taken into account in applying the substantially 
all test under paragraph (1)(C)(ii) to such cor-
poration. 
‘‘(C) 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) MODIFICATION OF EXCEPTION FOR DEALERS.— 
Clause (i) of section 954(c)(2)(C) is amended by inserting 
‘‘and transactions involving physical settlement’’ after ‘‘(in-
cluding hedging transactions’’. 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to transactions entered into after Decem-
ber 31, 2004. 
SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT 
LEASING AND SHIPPING INCOME. 
(a) ELIMINATION OF FOREIGN BASE COMPANY SHIP-
PING INCOME.—Section 954 (relating to foreign base com-
pany income) is amended— 
(1) by striking paragraph (4) of subsection (a) 
(relating to foreign base company shipping income), 
and
184 
(2) by striking subsection (f) (relating to foreign 
base company shipping income). 
(b) SAFE HARBOR FOR CERTAIN LEASING ACTIVI-
TIES.—Subparagraph (A) of section 954(c)(2) is amended 
by adding at the end the following new sentence: ‘‘For pur-
poses of the preceding sentence, rents derived from leasing 
an aircraft or vessel in foreign commerce shall not fail to 
be treated as derived in the active conduct of a trade or 
business if, as determined under regulations prescribed by 
the Secretary, the active leasing expenses are not less than 
10 percent of the profit on the lease.’’ 
(c) CONFORMING AMENDMENTS.— 
(1) Section 952(c)(1)(B)(iii) is amended by 
striking subclause (I) and redesignating subclauses 
(II) through (VI) as subclauses (I) through (V), re-
spectively. 
(2) Subsection (b) of section 954 is amended— 
(A) by striking ‘‘the foreign base company 
shipping income,’’ in paragraph (5), 
(B) by striking paragraphs (6) and (7), and 
(C) by redesignating paragraph (8) as 
paragraph (6). 
(d) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years
202 
ning after December 31, 2003, and before Janu-
ary 1, 2006.’’. 
(b) EFFECTIVE DATE.—The amendments made by this 
section shall apply to taxable years beginning after Decem-
ber 31, 2003. 
TITLE VI—REVENUE 
PROVISIONS 
Subtitle A—Provisions to Reduce 
Tax Avoidance Through Indi-
vidual and Corporate Expatria-
tion 
SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND 
THEIR FOREIGN PARENTS. 
(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 EXPATRIATED ENTITIES 
AND THEIR FOREIGN PARENTS. 
‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED ENTI-
TIES.— 
‘‘(1) IN GENERAL.—The taxable income of an ex-
patriated entity for any taxable year which includes 
any portion of the applicable period shall in no event 
be less than the inversion gain of the entity for the 
taxable year.
213 
triation date, on the day before such cancella-
tion, 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(a)(2)(B)(i) 
with respect to such corporation. 
‘‘(d) EXCEPTION WHERE GAIN RECOGNIZED ON COM-
PENSATION.—Subsection (a) shall not apply to— 
‘‘(1) any stock option which is exercised on the 
expatriation date or during the 6-month period before 
such date and to the stock acquired in such exercise, 
if income is recognized under section 83 on or before 
the expatriation date with respect to the stock ac-
quired pursuant to such exercise, and 
‘‘(2) any other specified stock compensation 
which is exercised, sold, exchanged, distributed, 
cashed-out, or otherwise paid during such period in 
a transaction in which income, gain, or loss is recog-
nized in full.