holder shall not be treated as passive category 
income. 
‘‘(B) 
SUBPART
F
INCLUSIONS.—Any 
amount included in gross income under section 
951(a)(1)(A) shall be treated as passive cat-
egory income to the extent the amount so in-
cluded is attributable to passive category in-
come. 
‘‘(C) INTEREST, 
RENTS, 
AND
ROYAL-
TIES.—Any interest, rent, or royalty which is 
received or accrued from a controlled foreign 
corporation in which the taxpayer is a United 
States shareholder shall be treated as passive 
category income to the extent it is properly allo-
cable (under regulations prescribed by the Sec-
retary) to passive category income of the con-
trolled foreign corporation. 
‘‘(D) DIVIDENDS.—Any dividend paid out 
of the earnings and profits of any controlled 
foreign corporation in which the taxpayer is a
United States shareholder shall be treated as 
passive 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 
corporation meets the requirements of section 
954(b)(3)(A) (relating to de minimis rule) for 
any taxable year, for purposes of this para-
graph, none of its foreign base company income 
(as defined in section 954(a) without regard to 
section 954(b)(5)) and none of its gross insur-
ance 
income 
(as 
defined 
in 
section 
954(b)(3)(C)) for such taxable year shall be 
treated as passive category income, except that 
this sentence shall not apply to any income 
which (without regard to this sentence) would 
be treated as financial services income. Solely 
for purposes of applying subparagraph (D), 
passive income of a controlled foreign corpora-
tion shall not be treated as passive category in-
come if the requirements of section 954(b)(4) 
are met with respect to such income.
‘‘(F) COORDINATION
WITH
HIGH-TAXED 
INCOME 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.’’
(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 inserting after subparagraph (G) the following 
new subparagraph: 
‘‘(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
100
be treated as imposed on income described in 
paragraph (1)(B).’’
(6) Paragraph (3) of section 904(d) is amended 
by striking subparagraph (H) and by redesignating 
subparagraph (I) as subparagraph (H). 
(7) Paragraph (2) of section 904(d) is amended 
by adding at the end the following new subpara-
graph: 
‘‘(K) TRANSITIONAL
RULES
FOR
2005 
CHANGES.—For purposes of paragraph (1)—
‘‘(i) taxes carried from any taxable 
year beginning before January 1, 2005, to 
any taxable year beginning on or after 
such date, with respect to any item of in-
come, shall be treated as described in the 
subparagraph of paragraph (1) in which 
such income would be described were such 
taxes paid or accrued in a taxable year be-
ginning 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 
taxable year for purposes of allocating such 
income among the separate categories in 
effect for such taxable year.’’.
101
(8) 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 
December 31, 2004. 
SEC. 1114. 10-YEAR FOREIGN TAX CREDIT CARRYFORWARD. 
(a) GENERAL RULE.—Section 904(c) (relating to 
carryback and carryover of excess tax paid) is amended 
by striking ‘‘in the first, second, third, fourth, or fifth’’ 
and inserting ‘‘in any of the first 10’’. 
(b) EXCESS EXTRACTION TAXES.—Paragraph (1) of 
section 907(f) is amended by striking ‘‘in the first, second, 
third, fourth, or fifth’’ and inserting ‘‘in any of the first 
10’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to excess foreign taxes which (with-
out regard to the amendments made by this section) may 
be carried to any taxable year beginning after December 
31, 2004.
102
SEC. 1115. 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 sec-
tion 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—
‘‘(i) the portion of earnings and prof-
its attributable to income described in such 
subparagraph, to 
‘‘(ii) the total amount of earnings and 
profits. 
‘‘(B) 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-
103
garding the treatment of distributions 
out of earnings and profits for periods 
before the taxpayer’s acquisition of 
the stock to which the distributions 
relate. 
‘‘(ii) 
INADEQUATE
SUBSTAN-
TIATION.—If the Secretary determines that 
the proper subparagraph of paragraph (1) 
in which a dividend is described has not 
been substantiated, such dividend shall be 
treated as income described in paragraph 
(1)(A). 
‘‘(iii) LOOK-THRU WITH RESPECT TO 
CARRYFORWARDS OF CREDIT.—Rules simi-
lar to subparagraph (A) also shall apply to 
any carryforward under subsection (c) 
from a taxable year beginning before Janu-
ary 1, 2003, of tax allocable to a dividend 
from a noncontrolled section 902 corpora-
tion with respect to the taxpayer. The Sec-
retary may by regulations provide for the 
allocation of any carryback of tax allocable 
to a dividend from a noncontrolled section 
902 corporation to such a taxable year for 
purposes of allocating such dividend among
104
the separate categories in effect for such 
taxable year. 
‘‘(iv) COORDINATION
WITH
HIGH-
TAXED INCOME PROVISIONS.—Rules simi-
lar to the rules of paragraph (3)(F) shall 
apply for purposes of this paragraph.’’. 
(b) CONFORMING AMENDMENTS.—
(1) 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). 
(2) Clause (i) of section 864(d)(5)(A) is amend-
ed to read as follows: 
‘‘(i) 
Subclause 
(I) 
of 
section 
904(d)(2)(B)(iii).’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 1116. 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)
105
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 per-
son. The Secretary may prescribe such regulations 
as may be necessary to carry out the purposes of 
this paragraph, including rules to account for special 
partnership allocations of dividends, credits, and 
other incidents of ownership of stock in determining 
proportionate ownership.’’
(b) CLARIFICATION OF COMPARABLE ATTRIBUTION 
UNDER SECTION 901(b)(5).—Paragraph (5) of section 
901(b) is amended by striking ‘‘any individual’’ and in-
serting ‘‘any person’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxes of foreign corporations 
for taxable years of such corporations beginning after the 
date of the enactment of this Act.
106
SEC. 1117. 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 pur-
suant to section 367(d)(2) of the Internal Revenue Code 
of 1986 on or after August 5, 1997. 
SEC. 1118. APPLICATION OF UNIFORM CAPITALIZATION 
RULES TO FOREIGN PERSONS. 
(a) IN GENERAL.—Section 263A(c) (relating to ex-
ceptions) is amended by adding at the end the following 
new paragraph: 
‘‘(7) FOREIGN PERSONS.—Except for purposes 
of applying sections 871(b)(1) and 882(a)(1), this 
section shall not apply to any taxpayer who is not 
a United States person if such taxpayer capitalizes 
costs of produced property or property acquired for 
resale by applying the method used to ascertain the 
income, profit, or loss for purposes of reports or 
statements to shareholders, partners, other propri-
etors, or beneficiaries, or for credit purposes.’’
(b) EFFECTIVE DATE.—
107
(1) IN
GENERAL.—The amendment made by 
subsection (a) shall apply to taxable years beginning 
after December 31, 2004. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In 
the case of any taxpayer required by the amendment 
made by this section to change its method of ac-
counting for its first taxable year beginning after 
December 31, 2004—
(A) such change shall be treated as initi-
ated by the taxpayer, 
(B) such change shall be treated as made 
with the consent of the Secretary of the Treas-
ury, and 
(C) the net amount of the adjustments re-
quired to be taken into account by the taxpayer 
under section 481 of the Internal Revenue Code 
of 1986 shall be taken into account in such first 
year. 
SEC. 1119. UNITED STATES PROPERTY NOT TO INCLUDE 
CERTAIN ASSETS ACQUIRED BY DEALERS IN 
ORDINARY COURSE OF TRADE OR BUSINESS. 
(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)
108
and inserting ‘‘; and’’, and by adding at the end the fol-
lowing new subparagraph: 
‘‘(L) securities acquired and held by a con-
trolled foreign corporation in the ordinary 
course of its business as a dealer in securities 
if—
‘‘(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 
customers in the ordinary course of busi-
ness.’’
(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 corpora-
tions beginning after December 31, 2004, and to taxable 
years of United States shareholders with or within which 
such taxable years of foreign corporations end.
109
SEC. 1120. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES. 
(a) TREATMENT OF CERTAIN DIVIDENDS.—
(1) NONRESIDENT ALIEN INDIVIDUALS.—Sec-
tion 871 (relating to tax on nonresident alien indi-
viduals) is amended by redesignating subsection (k) 
as subsection (l) and by inserting after subsection (j) 
the following new subsection:
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG-
ULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed 
under paragraph (1)(A) of subsection (a) on 
any interest-related dividend received from a 
regulated investment company. 
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A) 
shall not apply—
‘‘(i) to any interest-related dividend 
received from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than 
interest described in subparagraph (E) (i) 
or (iii)) received by such company on in-
debtedness issued by such person or by any 
corporation or partnership with respect to
110
which such person is a 10-percent share-
holder, 
‘‘(ii) to any interest-related dividend 
with respect to stock of a regulated invest-
ment company unless the person who 
would otherwise be required to deduct and 
withhold tax from such dividend under 
chapter 3 receives a statement (which 
meets requirements similar to the require-
ments of subsection (h)(5)) that the bene-
ficial owner of such stock is not a United 
States person, and 
‘‘(iii) to any interest-related dividend 
paid to any person within a foreign coun-
try (or any interest-related dividend pay-
ment addressed to, or for the account of, 
persons within such foreign country) dur-
ing any period described in subsection 
(h)(6) with respect to such country. 
Clause (iii) shall not apply to any dividend with 
respect to any stock which was acquired on or 
before the date of the publication of the Sec-
retary’s determination under subsection (h)(6). 
‘‘(C) INTEREST-RELATED DIVIDEND.—For 
purposes of this paragraph, an interest-related
111
dividend is any dividend (or part thereof) which 
is designated by the regulated investment com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later 
than 60 days after the close of its taxable year. 
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year 
described in section 855) is greater than the 
qualified net interest income of the company for 
such taxable year, the portion of each distribu-
tion which shall be an interest-related dividend 
shall be only that portion of the amounts so 
designated which such qualified net interest in-
come bears to the aggregate amount so des-
ignated. 
‘‘(D) 
QUALIFIED
NET
INTEREST
IN-
COME.—For purposes of subparagraph (C), the 
term ‘qualified net interest income’ means the 
qualified interest income of the regulated in-
vestment company reduced by the deductions 
properly allocable to such income. 
‘‘(E) QUALIFIED INTEREST INCOME.—For 
purposes of subparagraph (D), the term ‘quali-
112
fied interest income’ means the sum of the fol-
lowing amounts derived by the regulated invest-
ment company from sources within the United 
States: 
‘‘(i) Any amount includible in gross 
income as original issue discount (within 
the meaning of section 1273) on an obliga-
tion payable 183 days or less from the date 
of original issue (without regard to the pe-
riod held by the company). 
‘‘(ii) Any interest includible in gross 
income (including amounts recognized as 
ordinary income in respect of original issue 
discount or market discount or acquisition 
discount under part V of subchapter P and 
such other amounts as regulations may 
provide) on an obligation which is in reg-
istered form; except that this clause shall 
not apply to—
‘‘(I) any interest on an obligation 
issued by a corporation or partnership 
if the regulated investment company 
is a 10-percent shareholder in such 
corporation or partnership, and
113
‘‘(II) any interest which is treat-
ed as not being portfolio interest 
under the rules of subsection (h)(4). 
‘‘(iii) Any interest referred to in sub-
section (i)(2)(A) (without regard to the 
trade or business of the regulated invest-
ment company).
‘‘(iv) Any interest-related dividend in-
cludable in gross income with respect to 
stock of another regulated investment com-
pany. 
‘‘(F) 10-PERCENT
SHAREHOLDER.—For 
purposes of this paragraph, the term ‘10-per-
cent shareholder’ has the meaning given such 
term by subsection (h)(3)(B).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed 
under paragraph (1)(A) of subsection (a) on 
any short-term capital gain dividend received 
from a regulated investment company. 
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE 
UNDER SUBSECTION (a)(2).—Subparagraph (A) 
shall not apply in the case of any nonresident
114
alien individual subject to tax under subsection 
(a)(2).
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a 
short-term capital gain dividend is any dividend 
(or part thereof) which is designated by the reg-
ulated investment company as a short-term cap-
ital gain dividend in a written notice mailed to 
its shareholders not later than 60 days after the 
close of its taxable year. If the aggregate 
amount so designated with respect to a taxable 
year of the company (including amounts so des-
ignated with respect to dividends paid after the 
close of the taxable year described in section 
855) is greater than the qualified short-term 
gain of the company for such taxable year, the 
portion of each distribution which shall be a 
short-term capital gain dividend shall be only 
that portion of the amounts so designated 
which such qualified short-term gain bears to 
the aggregate amount so designated. 
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For 
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the 
net short-term capital gain of the regulated in-
115
vestment company for the taxable year over the 
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this 
subparagraph—
‘‘(i) the net short-term capital gain of 
the regulated investment company shall be 
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to stock of another regu-
lated investment company as a short-term 
capital gain, and 
‘‘(ii) the excess of the net short-term 
capital gain for a taxable year over the net 
long-term capital loss for a taxable year (to 
which an election under section 4982(e)(4) 
does not apply) shall be determined with-
out regard to any net capital loss or net 
short-term capital loss attributable to 
transactions after October 31 of such year, 
and any such net capital loss or net short-
term capital loss shall be treated as arising 
on the 1st day of the next taxable year. 
To the extent provided in regulations, clause 
(ii) shall apply also for purposes of computing
116
the taxable income of the regulated investment 
company.’’
(2) FOREIGN CORPORATIONS.—Section 881 (re-
lating to tax on income of foreign corporations not 
connected with United States business) is amended 
by redesignating subsection (e) as subsection (f) and 
by inserting after subsection (d) the following new 
subsection: 
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS 
OF REGULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), no tax shall be imposed 
under paragraph (1) of subsection (a) on any 
interest-related dividend (as defined in section 
871(k)(1)) received from a regulated investment 
company. 
‘‘(B) 
EXCEPTION.—Subparagraph 
(A) 
shall not apply—
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and 
‘‘(ii) to any interest-related dividend 
received by a controlled foreign corporation 
(within the meaning of section 957(a)) to 
the extent such dividend is attributable to
117
interest received by the regulated invest-
ment company from a person who is a re-
lated person (within the meaning of section 
864(d)(4)) with respect to such controlled 
foreign corporation. 
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall 
apply to any interest-related dividend received 
by a controlled foreign corporation (within the 
meaning of section 957(a)) to the extent such 
dividend is attributable to interest received by 
the regulated investment company which is de-
scribed in clause (ii) of section 871(k)(1)(E) 
(and not described in clause (i) or (iii) of such 
section). 
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend 
(as defined in section 871(k)(2)) received from a 
regulated investment company.’’
(3) WITHHOLDING TAXES.—
(A) Section 1441(c) (relating to excep-
tions) is amended by adding at the end the fol-
lowing new paragraph:
118
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM 
REGULATED INVESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the 
tax imposed by section 871(a)(1)(A) by reason 
of section 871(k). 
‘‘(B) SPECIAL
RULE.—For purposes of 
subparagraph 
(A), 
clause 
(i) 
of 
section 
871(k)(1)(B) shall not apply to any dividend 
unless the regulated investment company knows 
that such dividend is a dividend referred to in 
such clause. A similar rule shall apply with re-
spect to the exception contained in section 
871(k)(2)(B).’’ 
(B) Section 1442(a) (relating to with-
holding of tax on foreign corporations) is 
amended—
(i) by striking ‘‘and the reference in 
section 1441(c)(10)’’ and inserting ‘‘the 
reference in section 1441(c)(10)’’, and
(ii) by inserting before the period at 
the end the following: ‘‘, and the references 
in section 1441(c)(12) to sections 871(a) 
and 871(k) shall be treated as referring to
119
sections 881(a) and 881(e) (except that for 
purposes of applying subparagraph (A) of 
section 1441(c)(12), as so modified, clause 
(ii) of section 881(e)(1)(B) shall not apply 
to any dividend unless the regulated invest-
ment company knows that such dividend is 
a dividend referred to in such clause)’’. 
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN
REGULATED
INVESTMENT
COMPANIES.—Section 
2105 (relating to property without the United States for 
estate tax purposes) is amended by adding at the end the 
following new subsection: 
‘‘(d) STOCK IN A RIC.—
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company 
(as defined in section 851) owned by a nonresident 
not a citizen of the United States shall not be 
deemed property within the United States in the 
proportion that, at the end of the quarter of such in-
vestment company’s taxable year immediately pre-
ceding a decedent’s date of death (or at such other 
time as the Secretary may designate in regulations), 
the assets of the investment company that were 
qualifying assets with respect to the decedent bore 
to the total assets of the investment company.
120
‘‘(2) QUALIFYING
ASSETS.—For purposes of 
this subsection, qualifying assets with respect to a 
decedent are assets that, if owned directly by the de-
cedent, would have been—
‘‘(A) amounts, deposits, or debt obligations 
described in subsection (b) of this section, 
‘‘(B) debt obligations described in the last 
sentence of section 2104(c), or 
‘‘(C) other property not within the United 
States.’’
(c) TREATMENT OF REGULATED INVESTMENT COM-
PANIES UNDER SECTION 897.—
(1) Paragraph (1) of section 897(h) is amended 
by striking ‘‘REIT’’ each place it appears and in-
serting ‘‘qualified investment entity’’. 
(2) Paragraphs (2) and (3) of section 897(h) 
are amended to read as follows:
‘‘(2) SALE OF STOCK IN DOMESTICALLY CON-
TROLLED ENTITY NOT TAXED.—The term ‘United 
States real property interest’ does not include any 
interest in a domestically controlled qualified invest-
ment entity. 
‘‘(3) DISTRIBUTIONS BY DOMESTICALLY CON-
TROLLED
QUALIFIED
INVESTMENT
ENTITIES.—In 
the case of a domestically controlled qualified invest-
121
ment entity, rules similar to the rules of subsection 
(d) shall apply to the foreign ownership percentage 
of any gain.’’
(3) Subparagraphs (A) and (B) of section 
897(h)(4) are amended to read as follows: 
‘‘(A) QUALIFIED INVESTMENT ENTITY.—
The term ‘qualified investment entity’ means 
any real estate investment trust and any regu-
lated investment company. 
‘‘(B) DOMESTICALLY
CONTROLLED.—The 
term ‘domestically controlled qualified invest-
ment entity’ means any qualified investment en-
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock 
was held directly or indirectly by foreign per-
sons.’’
(4) Subparagraphs (C) and (D) of section 
897(h)(4) are each amended by striking ‘‘REIT’’ 
and inserting ‘‘qualified investment entity’’. 
(5) The subsection heading for subsection (h) of 
section 897 is amended by striking ‘‘REITS’’ and 
inserting ‘‘CERTAIN INVESTMENT ENTITIES’’. 
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
122
this section shall apply to dividends with respect to 
taxable years of regulated investment companies be-
ginning after the date of the enactment of this Act. 
(2) ESTATE
TAX
TREATMENT.—The amend-
ment made by subsection (b) shall apply to estates 
of decedents dying after the date of the enactment 
of this Act. 
(3) CERTAIN OTHER PROVISIONS.—The amend-
ments made by subsection (c) (other than paragraph 
(1) thereof) shall take effect on the date of the en-
actment of this Act. 
SEC. 1121. 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
CUR-
RENCY.—
‘‘(i) IN GENERAL.—At the election of 
the taxpayer, subparagraph (A) shall not
123
apply to any foreign income taxes the li-
ability for which is denominated in any 
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 amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2004. 
SEC. 1122. REPEAL OF WITHHOLDING TAX ON DIVIDENDS 
FROM CERTAIN FOREIGN CORPORATIONS. 
(a) IN GENERAL.—Paragraph (2) of section 871(i) 
(relating to tax not to apply to certain interest and divi-
dends) is amended by adding at the end the following new 
subparagraph:
124
‘‘(D) Dividends paid by a foreign corpora-
tion 
which 
are 
treated 
under 
section 
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. 
TITLE II—PROVISIONS TO RE-
DUCE 
TAX 
AVOIDANCE 
THROUGH CORPORATE EARN-
INGS STRIPPING AND EXPA-
TRIATION 
SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS 
STRIPPING BY FURTHER LIMITING DEDUC-
TION FOR INTEREST ON CERTAIN INDEBTED-
NESS. 
(a) REDUCTION
IN
POTENTIAL
FOR
EARNINGS 
STRIPPING.—Paragraphs (1) and (2) of section 163(j) are 
amended to read as follows: 
‘‘(1) LIMITATION.—
‘‘(A) IN GENERAL.—In the case of a cor-
poration, no deduction shall be allowed under 
this chapter for disqualified interest paid or ac-
crued during the taxable year.
125
‘‘(B) 
MAXIMUM
DISALLOWANCE.—The 
amount disallowed under subparagraph (A) 
shall not exceed the sum of—
‘‘(i) the corporation’s excess interest 
expense for the taxable year, and 
‘‘(ii) the corporation’s excess related 
party interest expense for such year. 
In no event shall the disallowance under sub-
paragraph (A) reduce the deduction for dis-
qualified interest below an amount equal to 25 
percent of adjusted taxable income (35 percent 
in the case of the first taxable year beginning 
after December 31, 2003). 
‘‘(C) DISALLOWED AMOUNT CARRIED TO 
SUCCEEDING TAXABLE YEAR.—
‘‘(i) IN GENERAL.—Any amount dis-
allowed under subparagraph (A) for any 
taxable year shall be treated as paid or ac-
crued in the succeeding taxable year and in 
the 2nd through 10th succeeding taxable 
years to the extent not previously taken 
into account under this subparagraph. 
‘‘(ii) LIMITATION
ON
AMOUNT
CAR-
RIED TO YEAR.—A carryforward amount 
may not be taken into account for any
126
such succeeding taxable year to the extent 
that such amount, when added to amounts 
carried to such succeeding taxable year 
from taxable years preceding the taxable 
year from which the amount is being car-
ried forward, would result in (or increase) 
a disallowance under subparagraph (A). 
‘‘(iii) CARRYOVER
APPLIED
SEPA-
RATELY TO CATEGORIES OF DISQUALIFIED 
INTEREST.—Clauses (i) and (ii) shall be 
applied separately to disqualified interest 
described in paragraph (3)(A) and to dis-
qualified interest described in paragraph 
(3)(B). For purposes of this subparagraph, 
any amount disallowed under subpara-
graph (A) for any taxable year shall be 
treated as disqualified interest described in 
paragraph (3)(A) to the extent thereof and 
then as disqualified interest described in 
paragraph (3)(B). 
‘‘(2) EXCESS INTEREST EXPENSE; EXCESS RE-
LATED PARTY INTEREST EXPENSE.—For purposes 
of this subsection—
127
‘‘(A) EXCESS
INTEREST
EXPENSE.—The 
term ‘excess interest expense’ means the excess 
(if any) of—
‘‘(i) the corporation’s net interest ex-
pense, over 
‘‘(ii) 50 percent of the adjusted tax-
able income of the corporation. 
‘‘(B) EXCESS RELATED PARTY INTEREST 
EXPENSE.—The term ‘excess related party in-
terest expense’ means the excess (if any) of—
‘‘(i) the lesser of—
‘‘(I) the amount of disqualified 
interest 
described 
in 
paragraph 
(3)(A), or 
‘‘(II) the corporation’s net inter-
est expense, over 
‘‘(ii) 25 percent (35 percent in the 
case of the first taxable year beginning 
after December 31, 2003) of the adjusted 
taxable income of the corporation.’’
(b) MAINTENANCE OF CURRENT LAW FOR INTEREST 
PAID BY TAXABLE REIT SUBSIDIARIES TO REIT.—
(1) EXCEPTION FROM 163(J).—Paragraph (3) of 
section 163(j) is amended by inserting ‘‘and’’ at the 
end of subparagraph (A), by striking ‘‘, and’’ at the
128
end of subparagraph (B) and inserting a period, and 
by striking subparagraph (C). 
(2) DISALLOWANCE.—Section 856 is amended 
by adding at the end the following new subsection: 
‘‘(m) LIMITATION ON DEDUCTION FOR INTEREST ON 
CERTAIN
INDEBTEDNESS
OF
TAXABLE
REIT SUB-
SIDIARY.—
‘‘(1) LIMITATION.—
‘‘(A) IN GENERAL.—If this subsection ap-
plies to any taxable REIT subsidiary for any 
taxable year, no deduction shall be allowed 
under this chapter for disqualified interest paid 
or accrued by such subsidiary during such tax-
able year. The amount disallowed under the 
preceding sentence shall not exceed the subsidi-
ary’s excess interest expense for the taxable 
year. 
‘‘(B) DISALLOWED AMOUNT CARRIED TO 
SUCCEEDING TAXABLE YEAR.—Any amount dis-
allowed under subparagraph (A) for any taxable 
year shall be treated as disqualified interest 
paid or accrued in the succeeding taxable year 
(and clause (ii) of paragraph (2)(A) shall not 
apply for purposes of applying this subsection 
to the amount so treated).
129
‘‘(2) SUBSIDIARIES TO WHICH SUBSECTION AP-
PLIES.—
‘‘(A) IN GENERAL.—This subsection shall 
apply to any taxable REIT subsidiary for any 
taxable year if—
‘‘(i) such subsidiary has excess inter-
est expense for such taxable year, and 
‘‘(ii) the ratio of debt to equity of 
such subsidiary as of the close of such tax-
able year (or on any other day during the 
taxable year as the Secretary may by regu-
lations prescribe) exceeds 1.5 to 1. 
‘‘(B) EXCESS INTEREST EXPENSE.—
‘‘(i) IN
GENERAL.—For purposes of 
this subsection, the term ‘excess interest 
expense’ means the excess (if any) of—
‘‘(I) the taxable REIT subsidi-
ary’s net interest expense, over 
‘‘(II) the sum of 50 percent of 
the adjusted taxable income of the 
subsidiary plus any excess limitation 
carryforward under clause (ii). 
‘‘(ii) 
EXCESS
LIMITATION 
CARRYFORWARD.—If a taxable REIT sub-
sidiary has an excess limitation for any
130
taxable year, the amount of such excess 
limitation shall be an excess limitation 
carryforward to the 1st succeeding taxable 
year and to the 2nd and 3rd succeeding 
taxable years to the extent not previously 
taken into account under this clause. The 
amount of such a carryforward taken into 
account for any such succeeding taxable 
year shall not exceed the excess interest 
expense for such succeeding taxable year 
(determined 
without 
regard 
to 
the 
carryforward from the taxable year of such 
excess limitation). 
‘‘(iii) EXCESS LIMITATION.—For pur-
poses of clause (ii), the term ‘excess limita-
tion’ means the excess (if any) of—
‘‘(I) 50 percent of the adjusted 
taxable income of the subsidiary, over 
‘‘(II) the subsidiary’s net interest 
expense. 
‘‘(C) RATIO
OF
DEBT
TO
EQUITY.—For 
purposes of this paragraph, the term ‘ratio of 
debt to equity’ means the ratio which the total 
indebtedness of the subsidiary bears to the sum 
of its money and all other assets reduced (but
131
not below zero) by such total indebtedness. The 
rules of section 163(j)(6)(E) shall apply for 
purposes of the preceding sentence. 
‘‘(3) DISQUALIFIED INTEREST.—For purposes 
of this subsection, the term ‘disqualified interest’ 
means any interest paid or accrued (directly or indi-
rectly) by a taxable REIT subsidiary of a real estate 
investment trust to such trust. 
‘‘(4) OTHER RULES TO APPLY.—Rules similar 
to the rules of paragraphs (7), (8), and (9) of sec-
tion 163(j) shall apply for purposes of this sub-
section.’’
(c) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2003. 
(2) EARLIER EFFECTIVE DATE WITH RESPECT 
TO
EXPATRIATED
CORPORATIONS, 
ETC.—The 
amendments made by this section shall apply to tax-
able years ending after March 4, 2003, in the case 
of a taxpayer which is—
(A) a surrogate foreign corporation, as de-
fined in section 7874(a)(2)(B) of the Internal
132
Revenue Code of 1986, as added by section 
2002, 
(B) a corporation which would be a surro-
gate foreign corporation (as so defined) if ‘‘De-
cember 31, 1996’’ were substituted for ‘‘March 
4, 2003’’ in such section 7874(a), and 
(C) any corporation which is an expatri-
ated entity (as defined in such section 7874(a)) 
with respect to a corporation described in sub-
paragraph (A) or (B). 
In applying such amendments to a taxpayer de-
scribed in the preceding sentence, subparagraph (B) 
of section 163(j)(2) of such Code, as amended by 
this section, shall be applied by substituting ‘‘25 
percent’’ for ‘‘35 percent’’. 
(3) LIMITATION
ON
CARRYOVER
OF
DIS-
ALLOWED INTEREST.—
(A) IN GENERAL.—Except in the case of a 
taxpayer described in paragraph (2), for pur-
poses of applying section 163(j)(1)(C) of the 
Internal Revenue Code of 1986 (as added by 
this section), amounts carried from a taxable 
year beginning before January 1, 2004, to any 
taxable year beginning after December 31, 
2003, shall be treated as disqualified interest
133
described in section 163(j)(3)(B) of such Code 
which is disallowed for the most recent taxable 
year beginning before January 1, 2004. 
(B) EXPATRIATED CORPORATIONS.—In the 
case of a taxpayer described in paragraph (2), 
a rule similar to the rule of subparagraph (A) 
shall apply to amounts carried from a taxable 
year beginning before March 5, 2003. 
SEC. 2002. TAX TREATMENT OF EXPATRIATED ENTITIES 
AND THEIR FOREIGN PARENTS. 
(a) IN GENERAL.—Subchapter C of chapter 80 (re-
lating to provisions affecting more than one subtitle) is 
amended by adding at the end the following new section: 
‘‘SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES 
AND THEIR FOREIGN PARENTS. 
‘‘(a) TAX ON INVERSION GAIN OF EXPATRIATED EN-
TITIES.—
‘‘(1) IN GENERAL.—The taxable income of an 
expatriated entity for any taxable year which in-
cludes any portion of the applicable period shall in 
no event be less than the inversion gain of the entity 
for the taxable year. 
‘‘(2) EXPATRIATED ENTITY.—For purposes of 
this subsection—
134
‘‘(A) IN GENERAL.—The term ‘expatriated 
entity’ means—
‘‘(i) the domestic corporation or part-
nership referred to in subparagraph (B)(i) 
with respect to which a foreign corporation 
is a surrogate foreign corporation, and 
‘‘(ii) any United States person who is 
related (within the meaning of section 
267(b) or 707(b)(1)) to a domestic cor-
poration or partnership described in clause 
(i). 
‘‘(B) 
SURROGATE
FOREIGN
CORPORA-
TION.—A foreign corporation shall be treated 
as a surrogate foreign corporation if, pursuant 
to a plan (or a series of related transactions)—
‘‘(i) the entity completes after March 
4, 2003, the direct or indirect acquisition 
of substantially all of the properties held 
directly or indirectly by a domestic cor-
poration or substantially all of the prop-
erties constituting a trade or business of a 
domestic partnership, and 
‘‘(ii) after the acquisition at least 60 
percent of the stock (by vote or value) of 
the entity is held—
135
‘‘(I) in the case of an acquisition 
with respect to a domestic corpora-
tion, by former shareholders of the 
domestic corporation by reason of 
holding stock in the domestic corpora-
tion, or 
‘‘(II) in the case of an acquisition 
with respect to a domestic partner-
ship, by former partners of the do-
mestic partnership by reason of hold-
ing a capital or profits interest in the 
domestic partnership. 
An entity otherwise described in clause (i) with 
respect to any domestic corporation or partner-
ship trade or business shall be treated as not so 
described if, on or before March 4, 2003, such 
entity acquired directly or indirectly more than 
half of the properties held directly or indirectly 
by such corporation or more than half of the 
properties constituting such partnership trade 
or business, as the case may be. 
‘‘(b) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) EXPANDED
AFFILIATED
GROUP.—The 
term ‘expanded affiliated group’ means an affiliated 
group as defined in section 1504(a) but without re-
136
gard 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 ap-
pears. 
‘‘(2) CERTAIN
STOCK
DISREGARDED.—There 
shall not be taken into account in determining own-
ership under subsection (a)(2)(B)(ii)—
‘‘(A) stock held by members of the ex-
panded affiliated group which includes the for-
eign corporation, or 
‘‘(B) stock of such foreign corporation 
which is sold in a public offering related to the 
acquisition described in subsection (a)(2)(B)(i). 
‘‘(4) PLAN DEEMED IN CERTAIN CASES.—If a 
foreign corporation acquires directly or indirectly 
substantially all of the properties of a domestic cor-
poration or partnership during the 4-year period be-
ginning on the date which is 2 years before the own-
ership requirements of subsection (a)(2)(B)(ii) are 
met, such actions shall be treated as pursuant to a 
plan. 
‘‘(5) CERTAIN TRANSFERS DISREGARDED.—The 
transfer of properties or liabilities (including by con-
tribution or distribution) shall be disregarded if such
137
transfers are part of a plan a principal purpose of 
which is to avoid the purposes of this section. 
‘‘(6) SPECIAL RULE FOR RELATED PARTNER-
SHIPS.—For 
purposes 
of 
applying 
subsection 
(a)(2)(B)(ii) to the acquisition of a trade or business 
of a domestic partnership, except as provided in reg-
ulations, all partnerships which are under common 
control (within the meaning of section 482) shall be 
treated as 1 partnership. 
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be appropriate to de-
termine whether a corporation is a surrogate foreign 
corporation, including regulations—
‘‘(A) to treat warrants, options, contracts 
to acquire stock, convertible debt interests, and 
other similar interests as stock, and 
‘‘(B) to treat stock as not stock. 
‘‘(c) OTHER DEFINITIONS.—For purposes of this 
section—
‘‘(1) APPLICABLE PERIOD.—The term ‘applica-
ble period’ means the period—
‘‘(A) beginning on the first date properties 
are acquired as part of the acquisition described 
in subsection (a)(2)(B)(i), and
138
‘‘(B) ending on the date which is 10 years 
after the last date properties are acquired as 
part of such acquisition. 
‘‘(2) INVERSION
GAIN.—The term ‘inversion 
gain’ means the income or gain recognized by reason 
of the transfer during the applicable period of stock 
or other properties by an expatriated entity, and any 
income received or accrued during the applicable pe-
riod by reason of a license of any property by an ex-
patriated entity —
‘‘(A) as part of the acquisition described in 
subsection (a)(2)(B)(i), or 
‘‘(B) after such acquisition if the transfer 
or license is to a foreign related person. 
Subparagraph (B) shall not apply to property de-
scribed in section 1221(a)(1) in the hands of the ex-
patriated entity. 
‘‘(4) FOREIGN
RELATED
PERSON.—The term 
‘foreign related person’ means, with respect to any 
expatriated entity, a foreign person which—
‘‘(A) is related (within the meaning of sec-
tion 267(b) or 707(b)(1)) to such entity, or 
‘‘(B) is under the same common control 
(within the meaning of section 482) as such en-
tity.
139
‘‘(d) SPECIAL RULES.—
‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON 
INVERSION GAIN.—Credits (other than the credit al-
lowed by section 901) shall be allowed against the 
tax imposed by this chapter on an expatriated entity 
for any taxable year described in subsection (a) 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 
section 11(b)(1). 
For purposes of determining the credit allowed by 
section 901, inversion gain shall be treated as from 
sources within the United States. 
‘‘(2) SPECIAL RULES FOR PARTNERSHIPS.—In 
the case of an expatriated entity which is a partner-
ship—
‘‘(A) subsection (a)(1) 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
140
‘‘(ii) gain recognized for the taxable 
year by the partner by reason of the trans-
fer during the applicable period of any 
partnership interest of the partner in such 
partnership to the surrogate foreign cor-
poration, and 
‘‘(C) the highest rate of tax specified in 
the rate schedule applicable to the partner 
under this chapter shall be substituted for the 
rate of tax referred to in paragraph (1). 
‘‘(3) COORDINATION
WITH
SECTION
172
AND 
MINIMUM TAX.—Rules similar to the rules of para-
graphs (3) and (4) of section 860E(a) shall apply 
for purposes of subsection (a). 
‘‘(4) STATUTE OF LIMITATIONS.—
‘‘(A) IN GENERAL.—The statutory period 
for the assessment of any deficiency attrib-
utable to the inversion gain of any taxpayer for 
any pre-inversion year shall not expire before 
the expiration of 3 years from the date the Sec-
retary is notified by the taxpayer (in such man-
ner as the Secretary may prescribe) of the ac-
quisition described in subsection (a)(2)(B)(i) to 
which such gain relates and such deficiency 
may be assessed before the expiration of such
141
3-year period notwithstanding the provisions of 
any other law or rule of law which would other-
wise prevent such assessment. 
‘‘(B) PRE-INVERSION YEAR.—For purposes 
of subparagraph (A), the term ‘pre-inversion 
year’ means any taxable year if—
‘‘(i) any portion of the applicable pe-
riod is included in such taxable year, and 
‘‘(ii) such year ends before the taxable 
year in which the acquisition described in 
subsection (a)(2)(B)(i) is completed. 
‘‘(f) SPECIAL RULE FOR TREATIES.—Nothing in sec-
tion 894 or 7852(d) or in any other provision of law shall 
be construed as permitting an exemption, by reason of any 
treaty obligation of the United States heretofore or here-
after entered into, from the provisions of this section. 
‘‘(g) REGULATIONS.—The Secretary shall provide 
such regulations as are necessary to carry out this section, 
including regulations providing for such adjustments to 
the application of this section as are necessary to prevent 
the avoidance of the purposes of this section, including the 
avoidance of such purposes through—
‘‘(1) the use of related persons, pass-through or 
other noncorporate entities, or other intermediaries, 
or
142
‘‘(2) transactions designed to have persons 
cease to be (or not become) members of expanded 
affiliated groups or related persons.’’. 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for subchapter C of chapter 80 is amended by adding 
at the end the following new item:
‘‘Sec. 7874. Rules relating to expatriated entities and their for-
eign parents.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after 
March 4, 2003.
SEC. 2003. EXCISE TAX ON STOCK COMPENSATION OF IN-
SIDERS IN EXPATRIATED CORPORATIONS. 
(a) IN GENERAL.—Subtitle D is amended by insert-
ing after chapter 44 end the following new chapter: 
‘‘CHAPTER 45—PROVISIONS RELATING TO 
EXPATRIATED ENTITIES
‘‘Sec. 4985. Stock compensation of insiders in expatriated cor-
porations.
‘‘SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPA-
TRIATED CORPORATIONS. 
‘‘(a) IMPOSITION OF TAX.—In the case of an indi-
vidual who is a disqualified individual with respect to any 
expatriated corporation, there is hereby imposed on such 
person a tax equal to 15 percent of the value (determined 
under subsection (b)) of the specified stock compensation
143
held (directly or indirectly) by or for the benefit of such 
individual or a member of such individual’s family (as de-
fined in section 267) at any time during the 12-month 
period beginning on the date which is 6 months before 
the expatriation date. 
‘‘(b) VALUE.—For purposes of subsection (a)—
‘‘(1) IN GENERAL.—The value of specified stock 
compensation shall be—
‘‘(A) in the case of a stock option (or other 
similar right) or a stock appreciation right, the 
fair value of such option or right, and 
‘‘(B) in any other case, the fair market 
value of such compensation. 
‘‘(2) DATE
FOR
DETERMINING
VALUE.—The 
determination of value shall be made—
‘‘(A) in the case of specified stock com-
pensation held on the expatriation date, on such 
date, 
‘‘(B) in the case of such compensation 
which is canceled during the 6 months before 
the expatriation date, on the day before such 
cancellation, and 
‘‘(C) in the case of such compensation 
which is granted after the expatriation date, on 
the date such compensation is granted.
144
‘‘(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 
COMPENSATION.—Subsection (a) shall not apply to—
‘‘(1) any stock option which is exercised on the 
expatriation date or during the 6-month period be-
fore such date and to the stock acquired in such ex-
ercise, and 
‘‘(2) any specified stock compensation which is 
sold, exchanged, distributed or cashed-out during 
such period in a transaction in which gain or loss is 
recognized in full. 
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) DISQUALIFIED
INDIVIDUAL.—The term 
‘disqualified individual’ means, with respect to a cor-
poration, any individual who, at any time during the 
12-month period beginning on the date which is 6 
months before the expatriation date—
‘‘(A) is subject to the requirements of sec-
tion 16(a) of the Securities Exchange Act of
145
1934 with respect to such corporation or any 
member of the expanded affiliated group which 
includes such corporation, or 
‘‘(B) would be subject to such require-
ments if such corporation or member were an 
issuer of equity securities referred to in such 
section. 
‘‘(2) EXPATRIATED
CORPORATION; EXPATRIA-
TION DATE.—
‘‘(A) EXPATRIATED
CORPORATION.—The 
term ‘expatriated corporation’ means any cor-
poration which is an expatriated entity (as de-
fined in section 7874(a)(2)). Such term in-
cludes any predecessor or successor of such a 
corporation. 
‘‘(B) EXPATRIATION DATE.—The term ‘ex-
patriation date’ means, with respect to a cor-
poration, the date on which the corporation 
first becomes an expatriated corporation. 
‘‘(3) SPECIFIED STOCK COMPENSATION.—
‘‘(A) IN
GENERAL.—The term ‘specified 
stock compensation’ means payment (or right 
to payment) granted by the expatriated cor-
poration (or by any member of the expanded af-
filiated group which includes such corporation)
146
to any person in connection with the perform-
ance of services by a disqualified individual for 
such corporation or member if the value of such 
payment or right is based on (or determined by 
reference to) the value (or change in value) of 
stock in such corporation (or any such mem-
ber). 
‘‘(B) EXCEPTIONS.—Such term shall not 
include—
‘‘(i) any option to which part II of 
subchapter D of chapter 1 applies, or 
‘‘(ii) any payment or right to payment 
from a plan referred to in section 
280G(b)(6). 
‘‘(4) EXPANDED
AFFILIATED
GROUP.—The 
term ‘expanded affiliated group’ means an affiliated 
group (as defined in section 1504(a) without regard 
to section 1504(b)(3)); except that section 1504(a) 
shall be applied by substituting ‘more than 50 per-
cent’ for ‘at least 80 percent’ each place it appears. 
‘‘(f) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) CANCELLATION
OF
RESTRICTION.—The 
cancellation of a restriction which by its terms will 
never lapse shall be treated as a grant.
209
(8) The table of parts for subchapter M of 
chapter 1 is amended by striking the item relating 
to part V. 
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to taxable years beginning after Decem-
ber 31, 2003. 
(2) EXCEPTION
FOR
EXISTING
FASITS.—The 
amendments made by this section shall not apply to 
any FASIT in existence on the date of the enact-
ment of this Act to the extent that any regular in-
terest issued by the FASIT before such date con-
tinues to remain outstanding in accordance with the 
original terms of issuance of such interest. 
SEC. 3027. LIMITATION ON TRANSFER OF BUILT-IN LOSSES 
ON REMIC RESIDUALS. 
(a) IN GENERAL.—Section 362 (relating to basis to 
corporations) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(e) LIMITATION
ON
TRANSFER
OF
BUILT-IN 
LOSSES ON REMIC RESIDUALS IN SECTION 351 TRANS-
ACTIONS.—If—