To extend and modify the research credit.

JUMPSTART OUR BUSINESS STRENGTH (JOBS) ACT

The PRESIDING OFFICER. Under the previous order, the hour of 10:30
a.m. having arrived, the Senate will proceed to the consideration of S.
1637, which the clerk will report.
The assistant legislative clerk read as follows:

A bill (S. 1637) to amend the Internal Revenue Code of 1986
to comply with the World Trade Organization rulings on the
FSC/ETI benefit in a manner that preserves jobs and
production activities in the United States, to reform and
simplify the international taxation rules of the United
States, and for other purposes.

The Senate proceeded to consider the bill, which had been reported
from the Committee on Finance, with an amendment to strike all after
the enacting clause and inserting in lieu thereof the following:

(Strike the part shown in black brackets and insert the part shown in
italic.)

S. 1637

Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,

[SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF
CONTENTS.

[(a) Short Title.--This Act may be cited as the ``Jumpstart
Our Business Strength (JOBS) Act''.
[(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a
section or other provision, the reference shall be considered
to be made to a section or other provision of the Internal
Revenue Code of 1986.
[(c) Table of Contents.--

[Sec. 1. Short title; amendment of 1986 Code; table of contents.

[TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME

[Sec. 101. Repeal of exclusion for extraterritorial income.
[Sec. 102. Deduction relating to income attributable to United States
production activities.

[TITLE II--INTERNATIONAL TAX PROVISIONS

[Subtitle A--International Tax Reform

[Sec. 201. 20-year foreign tax credit carryforward.
[Sec. 202. Look-thru rules to apply to dividends from noncontrolled
section 902 corporations.
[Sec. 203. Foreign tax credit under alternative minimum tax.
[Sec. 204. Recharacterization of overall domestic loss.
[Sec. 205. Interest expense allocation rules.
[Sec. 206. Determination of foreign personal holding company income
with respect to transactions in commodities.

[Subtitle B--International Tax Simplification

[Sec. 211. Repeal of foreign personal holding company rules and foreign
investment company rules.
[Sec. 212. Expansion of de minimis rule under subpart F.
[Sec. 213. Attribution of stock ownership through partnerships to apply
in determining section 902 and 960 credits.
[Sec. 214. Application of uniform capitalization rules to foreign
persons.
[Sec. 215. Repeal of withholding tax on dividends from certain foreign
corporations.
[Sec. 216. Repeal of special capital gains tax on aliens present in the
United States for 183 days or more.

[TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME

[SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

[(a) In General.--Section 114 is hereby repealed.
[(b) Conforming Amendments.--
[(1)(A) Subpart E of part III of subchapter N of chapter 1
(relating to qualifying foreign trade income) is hereby
repealed.
[(B) The table of subparts for such part III is amended by
striking the item relating to subpart E.
[(2) The table of sections for part III of subchapter B of
chapter 1 is amended by striking the item relating to section
114.
[(3) The second sentence of section 56(g)(4)(B)(i) is
amended by striking ``or under section 114''.
[(4) Section 275(a) is amended--
[(A) by inserting ``or'' at the end of paragraph (4)(A), by
striking ``or'' at the end of paragraph (4)(B) and inserting
a period, and by striking subparagraph (C), and
[(B) by striking the last sentence.
[(5) Paragraph (3) of section 864(e) is amended--
[(A) by striking:
[``(3) Tax-exempt assets not taken into account.--
[``(A) In general.--For purposes of''; and inserting:
[``(3) Tax-exempt assets not taken into account.--For
purposes of'', and
[(B) by striking subparagraph (B).
[(6) Section 903 is amended by striking ``114, 164(a),''
and inserting ``164(a)''.
[(7) Section 999(c)(1) is amended by striking
``941(a)(5),''.
[(c) Effective Date.--
[(1) In general.--The amendments made by this section shall
apply to transactions occurring after the date of the
enactment of this Act.
[(2) Binding contracts.--The amendments made by this
section shall not apply to any transaction in the ordinary
course of a trade or business which occurs pursuant to a
binding contract--
[(A) which is between the taxpayer and a person who is not
a related person (as defined in section 943(b)(3) of such
Code, as in effect on the day before the date of the
enactment of this Act), and
[(B) which is in effect on September 17, 2003, and at all
times thereafter.
[(d) Revocation of Section 943(e) Elections.--
[(1) In general.--In the case of a corporation that elected
to be treated as a domestic corporation under section 943(e)
of the Internal Revenue Code of 1986 (as in effect on the day
before the date of the enactment of this Act)--
[(A) the corporation may, during the 1-year period
beginning on the date of the enactment of this Act, revoke
such election, effective as of such date of enactment, and
[(B) if the corporation does revoke such election--
[(i) such corporation shall be treated as a domestic
corporation transferring (as of such date of enactment) all
of its property to a foreign corporation in connection with
an exchange described in section 354 of such Code, and
[(ii) no gain or loss shall be recognized on such transfer.
[(2) Exception.--Subparagraph (B)(ii) of paragraph (1)
shall not apply to gain on any asset held by the revoking
corporation if--
[(A) the basis of such asset is determined in whole or in
part by reference to the basis

[[Page S2026]]

of such asset in the hands of the person from whom the
revoking corporation acquired such asset,
[(B) the asset was acquired by transfer (not as a result of
the election under section 943(e) of such Code) occurring on
or after the 1st day on which its election under section
943(e) of such Code was effective, and
[(C) a principal purpose of the acquisition was the
reduction or avoidance of tax (other than a reduction in tax
under section 114 of such Code, as in effect on the day
before the date of the enactment of this Act).
[(e) General Transition.--
[(1) In general.--In the case of a taxable year ending
after the date of the enactment of this Act and beginning
before January 1, 2007, for purposes of chapter 1 of such
Code, a current FSC/ETI beneficiary shall be allowed a
deduction equal to the transition amount determined under
this subsection with respect to such beneficiary for such
year.
[(2) Current fsc/eti beneficiary.--The term ``current FSC/
ETI beneficiary'' means any corporation which entered into
one or more transactions during its taxable year beginning in
calendar year 2002 with respect to which FSC/ETI benefits
were allowable.
[(3) Transition amount.--For purposes of this subsection--
[(A) In general.--The transition amount applicable to any
current FSC/ETI beneficiary for any taxable year is the
phaseout percentage of the base period amount.
[(B) Phaseout percentage.--
[(i) In general.--In the case of a taxpayer using the
calendar year as its taxable year, the phaseout percentage
shall be determined under the following table:

The phaseout
percentage is:
80 .................................................................
80 .................................................................
60..................................................................

[(ii) Special rule for 2003.--The phaseout percentage for
2003 shall be the amount that bears the same ratio to 100
percent as the number of days after the date of the enactment
of this Act bears to 365.
[(iii) Special rule for fiscal year taxpayers.--In the case
of a taxpayer not using the calendar year as its taxable
year, the phaseout percentage is the weighted average of the
phaseout percentages determined under the preceding
provisions of this paragraph with respect to calendar years
any portion of which is included in the taxpayer's taxable
year. The weighted average shall be determined on the basis
of the respective portions of the taxable year in each
calendar year.
[(4) Base period amount.--For purposes of this subsection,
the base period amount is the aggregate FSC/ETI benefits for
the taxpayer's taxable year beginning in calendar year 2002.
[(5) FSC/ETI benefit.--For purposes of this subsection, the
term ``FSC/ETI benefit'' means--
[(A) amounts excludable from gross income under section 114
of such Code, and
[(B) the exempt foreign trade income of related foreign
sales corporations from property acquired from the taxpayer
(determined without regard to section 923(a)(5) of such Code
(relating to special rule for military property), as in
effect on the day before the date of the enactment of the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000).

In determining the FSC/ETI benefit there shall be excluded
any amount attributable to a transaction with respect to
which the taxpayer is the lessor unless the leased property
was manufactured or produced in whole or in part by the
taxpayer.
[(6) Special rule for farm cooperatives.--Determinations
under this subsection with respect to an organization
described in section 943(g)(1) of such Code, as in effect on
the day before the date of the enactment of this Act, shall
be made at the cooperative level and the purposes of this
subsection shall be carried out in a manner similar to
section 250(h) of such Code, as added by this Act. Such
determinations shall be in accordance with such requirements
and procedures as the Secretary may prescribe.
[(7) Certain rules to apply.--Rules similar to the rules of
section 41(f) of such Code shall apply for purposes of this
subsection.
[(8) Coordination with binding contract rule.--The
deduction determined under paragraph (1) for any taxable year
shall be reduced by the phaseout percentage of any FSC/ETI
benefit realized for the taxable year by reason of subsection
(c)(2), except that for purposes of this paragraph the
phaseout percentage for 2003 shall be treated as being equal
to 100 percent.
[(9) Special rule for taxable year which includes date of
enactment.--In the case of a taxable year which includes the
date of the enactment of this Act, the deduction allowed
under this subsection to any current FSC/ETI beneficiary
shall in no event exceed--
[(A) 100 percent of such beneficiary's base period amount
for calendar year 2003, reduced by
[(B) the aggregate FSC/ETI benefits of such beneficiary
with respect to transactions occurring during the portion of
the taxable year ending on the date of the enactment of this
Act.

[SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO
UNITED STATES PRODUCTION ACTIVITIES.

[(a) In General.--Part VIII of subchapter B of chapter 1
(relating to special deductions for corporations) is amended
by adding at the end the following new section:

[``SEC. 250. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION
ACTIVITIES.

[``(a) In General.--In the case of a corporation, there
shall be allowed as a deduction an amount equal to 9 percent
of the qualified production activities income of the
corporation for the taxable year.
[``(b) Phasein.--In the case of taxable years beginning in
2004, 2005, 2006, 2007, or 2008, subsection (a) shall be
applied by substituting for the percentage contained therein
the transition percentage determined under the following
table:

The transition
percentage is:

1 4..................................................................
2 5..................................................................
3 6..................................................................
6.7 or 2008..........................................................

[``(c) Qualified Production Activities Income.--For
purposes of this section--
[``(1) In general.--The term `qualified production
activities income' means an amount equal to the applicable
percentage of the portion of the modified taxable income of
the taxpayer which is attributable to domestic production
activities.
[``(2) Applicable percentage.--For purposes of this
subsection, the term `applicable percentage' means--
[``(A) in the case of taxable years beginning before 2012,
a percentage equal to the domestic/worldwide fraction,
[``(B) in the case of taxable years beginning in 2012, a
percentage (not greater than 100 percent) equal to twice the
domestic/worldwide fraction, and
[``(C) in the case of taxable years beginning after 2012,
100 percent.
[``(d) Determination of Income Attributable to Domestic
Production Activities.--For purposes of this section--
[``(1) In general.--The portion of the modified taxable
income which is attributable to domestic production
activities is so much of the modified taxable income for the
taxable year as does not exceed--
[``(A) the taxpayer's domestic production gross receipts
for such taxable year, reduced by
[``(B) the sum of--
[``(i) the costs of goods sold that are allocable to such
receipts,
[``(ii) other deductions, expenses, or losses directly
allocable to such receipts, and
[``(iii) a proper share of other deductions, expenses, and
losses that are not directly allocable to such receipts or
another class of income.
[``(2) Allocation method.--The Secretary shall prescribe
rules for the proper allocation of items of income,
deduction, expense, and loss for purposes of determining
income attributable to domestic production activities.
[``(3) Special rules for determining costs.--
[``(A) In general.--For purposes of determining costs under
clause (i) of paragraph (1)(B), any item or service brought
into the United States without a transfer price meeting the
requirements of section 482 shall be treated as acquired by
purchase, and its cost shall be treated as not less than its
value when it entered the United States. A similar rule shall
apply in determining the adjusted basis of leased or rented
property where the lease or rental gives rise to domestic
production gross receipts.
[``(B) Exports for further manufacture.--In the case of any
property described in subparagraph (A) that had been exported
by the taxpayer for further manufacture, the increase in cost
or adjusted basis under subparagraph (A) shall not exceed the
difference between the value of the property when exported
and the value of the property when brought back into the
United States after the further manufacture.
[``(4) Modified taxable income.--The term `modified taxable
income' means taxable income computed without regard to the
deduction allowable under this section.
[``(e) Domestic Production Gross Receipts.--For purposes of
this section, the term `domestic production gross receipts'
means the gross receipts of the taxpayer which are derived
from--
[``(1) any sale, exchange, or other disposition of, or
[``(2) any lease, rental, or license of,
qualifying production property which was manufactured,
produced, grown, or extracted in whole or in significant part
by the taxpayer within the United States.
[``(f) Qualifying Production Property.--For purposes of
this section--
[``(1) In general.--Except as otherwise provided in this
paragraph, the term `qualifying production property' means--
[``(A) any tangible personal property,
[``(B) any computer software, and
[``(C) any property described in section 168(f) (3) or (4).
[``(2) Exclusions from qualifying production property.--The
term `qualifying production property' shall not include--
[``(A) consumable property that is sold, leased, or
licensed by the taxpayer as an integral part of the provision
of services,
[``(B) oil or gas (or any primary product thereof),
[``(C) electricity,
[``(D) water supplied by pipeline to the consumer,
[``(E) any unprocessed timber which is softwood,
[``(F) utility services, or
[``(G) any property (not described in paragraph (1)(B))
which is a film, tape, recording,

[[Page S2027]]

book, magazine, newspaper, or similar property the market for
which is primarily topical or otherwise essentially
transitory in nature.

For purposes of subparagraph (E), the term `unprocessed
timber' means any log, cant, or similar form of timber.
[``(g) Domestic/Worldwide Fraction.--For purposes of this
section--
[``(1) In general.--The term `domestic/worldwide fraction'
means a fraction--
[``(A) the numerator of which is the value of the domestic
production of the taxpayer, and
[``(B) the denominator of which is the value of the
worldwide production of the taxpayer.
[``(2) Value of domestic production.--The value of domestic
production is the excess of--
[``(A) the domestic production gross receipts, over
[``(B) the cost of purchased inputs allocable to such
receipts that are deductible under this chapter for the
taxable year.
[``(3) Purchased inputs.--
[``(A) In general.--Purchased inputs are any of the
following items acquired by purchase:
[``(i) Services (other than services of employees) used in
manufacture, production, growth, or extraction activities.
[``(ii) Items consumed in connection with such activities.
[``(iii) Items incorporated as part of the property being
manufactured, produced, grown, or extracted.
[``(B) Special rule.--Rules similar to the rules of
subsection (d)(3) shall apply for purposes of this
subsection.
[``(4) Value of worldwide production.--
[``(A) In general.--The value of worldwide production shall
be determined under the principles of paragraph (2), except
that--
[``(i) worldwide production gross receipts shall be taken
into account, and
[``(ii) paragraph (3)(B) shall not apply.
[``(B) Worldwide production gross receipts.--The worldwide
production gross receipts is the amount that would be
determined under subsection (e) if such subsection were
applied without any reference to the United States.
[``(5) Special rule for affiliated groups.--
[``(A) In general.--In the case of a taxpayer that is a
member of an expanded affiliated group, the domestic/
worldwide fraction shall be the amount determined under the
preceding provisions of this subsection by treating all
members of such group as a single corporation.
[``(B) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group as defined in
section 1504(a), determined--
[``(i) by substituting `50 percent' for `80 percent' each
place it appears, and
[``(ii) without regard to paragraphs (2), (3), (4), and (8)
of section 1504(b).
[``(h) Definitions and Special Rules.--
[``(1) Exclusion for patrons of agricultural and
horticultural cooperatives.--
[``(A) In general.--If any amount described in paragraph
(1) or (3) of section 1385 (a)--
[``(i) is received by a person from an organization to
which part I of subchapter T applies which is engaged in the
marketing of agricultural or horticultural products, and
[``(ii) is allocable to the portion of the qualified
production activities income of the organization which is
deductible under subsection (a) (determined as if the
organization were a corporation if it is not) and designated
as such by the organization in a written notice mailed to its
patrons during the payment period described in section
1382(a),

then such person shall be allowed an exclusion from gross
income with respect to such amount. The taxable income of the
organization shall not be reduced under section 1382 by the
portion of any such amount with respect to which an exclusion
is allowable to a person by reason of this paragraph.
[``(B) Special rules.--For purposes of applying
subparagraph (A), in determining the qualified production
activities income of the organization under this section--
[``(i) there shall not be taken into account in computing
the organization's modified taxable income any deduction
allowable under subsection (b) or (c) of section 1382
(relating to patronage dividends, per-unit retain
allocations, and nonpatronage distributions), and
[``(ii) the organization shall be treated as having
manufactured, produced, grown, or extracted in whole or
significant part any qualifying production property marketed
by the organization which its patrons have so manufactured,
produced, grown, or extracted.
[``(2) Special rule for partnerships.--For purposes of this
section, a corporation's distributive share of any
partnership item shall be taken into account as if directly
realized by the corporation.
[``(3) Coordination with minimum tax.--The deduction under
this section shall be allowed for purposes of the tax imposed
by section 55; except that for purposes of section 55,
alternative minimum taxable income shall be taken into
account in determining the deduction under this section.
[``(4) Ordering rule.--The amount of any other deduction
allowable under this chapter shall be determined as if this
section had not been enacted.
[``(5) Coordination with transition rules.--For purposes of
this section--
[``(A) domestic production gross receipts shall not include
gross receipts from any transaction if the binding contract
transition relief of section 101(c)(2) of the Jumpstart Our
Business Strength (JOBS) Act applies to such transaction, and
[``(B) any deduction allowed under section 101(e) of such
Act shall be disregarded in determining the portion of the
taxable income which is attributable to domestic production
gross receipts.''.
[(b) Deduction Allowed to Shareholders of S Corporations.--
[(1) In general.--Section 1363(b) (relating to computation
of S corporation's taxable income) is amended by striking
``and'' at the end of paragraph (3), by striking the period
at the end of paragraph (4) and inserting ``, and'', and by
adding at the end the following new paragraph:
[``(5) the deduction under section 250 shall be allowed to
the S corporation.''
[(2) Increase in basis.--Section 1367(a)(1) (relating to
increases in basis) is amended by striking ``and'' at the end
of subparagraph (B), by striking the period at the end of
subparagraph (C) and inserting ``, and'', and by adding at
the end the following new subparagraph:
[``(D) any deduction allowed under section 250.''
[(c) Minimum Tax.--Section 56(g)(4)(C) (relating to
disallowance of items not deductible in computing earnings
and profits) is amended by adding at the end the following
new clause:
[``(v) Deduction for domestic production.--Clause (i) shall
not apply to any amount allowable as a deduction under
section 250.''
[(d) Clerical Amendment.--The table of sections for part
VIII of subchapter B of chapter 1 is amended by adding at the
end the following new item:

[``Sec. 250. Income attributable to domestic production activities.''

[(e) Effective Date.--
[(1) In general.--The amendments made by this section shall
apply to taxable years ending after the date of the enactment
of this Act.
[(2) Application of section 15.--Section 15 of the Internal
Revenue Code of 1986 shall apply to the amendments made by
this section as if they were changes in a rate of tax.

[TITLE II--INTERNATIONAL TAX PROVISIONS

[Subtitle A--International Tax Reform

[SEC. 201. 20-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 20''.
[(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 20''.
[(c) Effective Date.--The amendments made by this section
shall apply to excess foreign taxes which (without regard to
the amendments made by this section) may be carried to any
taxable year beginning after December 31, 2004.

[SEC. 202. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM
NONCONTROLLED SECTION 902 CORPORATIONS.

[(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 taxpayer shall be treated as income described
in a subparagraph of paragraph (1) in proportion to the ratio
of--
[``(i) the portion of earnings and profits 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 Secretary may prescribe
regulations regarding 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 substantiation.--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 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 corporation to
such a taxable year for purposes of allocating such dividend
among the separate categories in effect for such taxable
year.

[[Page S2028]]

[``(iv) Coordination with high-taxed income provisions.--
Rules similar 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 amended 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. 203. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

[(a) In General.--
[(1) Subsection (a) of section 59 is amended by striking
paragraph (2) and by redesignating paragraphs (3) and (4) as
paragraphs (2) and (3), respectively.
[(2) Section 53(d)(1)(B)(i)(II) of such Code is amended by
striking ``and if section 59(a)(2) did not apply''.
[(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2004.

[SEC. 204. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

[(a) General Rule.--Section 904 is amended by redesignating
subsections (g), (h), (i), (j), and (k) as subsections (h),
(i), (j), (k), and (l) respectively, and by inserting after
subsection (f) the following new subsection:
[``(g) Recharacterization of Overall Domestic Loss.--
[``(1) General rule.--For purposes of this subpart 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,
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 domestic 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 sentence, 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 apportioned or
allocated thereto (determined without regard to any carryback
from a subsequent taxable year).
[``(B) Taxpayer must have elected foreign 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 income.--
[``(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 income 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 subsection 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.

[SEC. 205. INTEREST EXPENSE ALLOCATION RULES.

[(a) Election To Allocate on Worldwide Basis.-- Section 864
is amended by redesignating subsection (f) as subsection (g)
and by inserting after subsection (e) the following new
subsection:
[``(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 interest 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 affiliated group.--The
taxable income of the domestic members of a worldwide
affiliated group from sources outside the United States shall
be determined by allocating and apportioning the interest
expense of such domestic members to such income 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
[``(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 corporations
would have been allocated and apportioned to foreign source
income if this subsection were applied to a group consisting
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 affiliated 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
directly or indirectly by domestic partnerships, 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 subsection; except that paragraph (4) shall
be applied on worldwide affiliated group basis.
[``(4) Treatment of certain financial institutions.--
[``(A) In general.--For purposes of paragraph (1), any
corporation described in subparagraph (B) shall be treated as
an includible corporation for purposes of section 1504 only
for purposes of applying this subsection separately to
corporations so described.
[``(B) Description.--A corporation is described in this
subparagraph if--
[``(i) such corporation is a financial institution
described in section 581 or 591,
[``(ii) the business of such financial institution is
predominantly with persons other than related persons (within
the meaning of subsection (d)(4)) or their customers, and
[``(iii) such financial institution is required by State or
Federal law to be operated 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),
[``(ii) a financial holding company (within the meaning of
section 2(p) of the Bank Holding Company Act of 1956), and
[``(iii) any subsidiary of a financial institution
described in section 581 or 591, or of any such bank or
financial holding company, 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 institution group of
worldwide group.--
[``(A) In general.--If a worldwide affiliated group elects
the application of this subsection, all financial
corporations which--
[``(i) are members of such worldwide affiliated 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)
applies to the pre-election worldwide affiliated group of
which such group is a part.
[``(B) Financial corporation.--For purposes of this
paragraph, the term `financial corporation' means any
corporation if at least 80 percent of its gross income is
income described in section 904(d)(2)(D)(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 sentence, there shall be disregarded any
item of income 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 financial 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 paragraph

[[Page S2029]]

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--

[``(I) its average annual dividend (expressed as a
percentage of current earnings and profits) during the 5-
taxable-year period ending with the taxable year preceding
the taxable year, or
[``(II) 25 percent of its average annual 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
principles similar to the principles of section 482),

an amount of indebtedness of the electing financial
institution group equal to the excess distribution or the
understatement or overstatement of income, as the case may
be, shall be recharacterized (for the taxable year and
subsequent taxable years) for purposes of this paragraph as
indebtedness of the worldwide affiliated group (excluding the
electing financial institution group). If a corporation has
not been in existence for 5 taxable years, this subparagraph
shall be applied with respect to the period it was in
existence.
[``(D) Election.--An election under this paragraph with
respect to any financial institution 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, 2009, 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
institution 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 affiliated group.--The term
`pre-election worldwide affiliated group' means, with respect
to a corporation, the worldwide affiliated group of which
such corporation would (but for an election under this
paragraph) be a member for purposes of applying paragraph
(1).
[``(ii) Electing financial institution group.--The term
`electing financial institution group' means the group of
corporations to which this subsection applies separately by
reason of the application of paragraph (4)(A) and which
includes financial 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 regulations--
[``(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 expense from being
taken into account more than once, and
[``(iii) dealing with changes in members of any group
(through acquisitions or otherwise) treated under this
paragraph as an affiliated group for purposes of this
subsection.
[``(6) Election.--An election to have this subsection apply
with respect to any worldwide affiliated group may be made
only by the common parent of the domestic affiliated group
referred to in paragraph (1)(C) and may be made only for the
first taxable year beginning after December 31, 2009, in
which a worldwide affiliated group exists which includes such
affiliated group and at least one foreign corporation. Such
an election, once made, shall apply to such common 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.--Paragraph (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 subparagraph (E), by
redesignating subparagraph (F) as subparagraph (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''.
[(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2009.

[SEC. 206. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY
INCOME WITH RESPECT TO TRANSACTIONS IN
COMMODITIES.

[(a) In General.--Clauses (i) and (ii) of section
954(c)(1)(C) (relating to commodity transactions) are amended
to read as follows:
[``(i) arise out of commodity hedging transactions (as
defined in paragraph (6)(A)),
[``(ii) are active business gains or losses from the sale
of commodities, but only if substantially all of the
controlled foreign corporation's commodities are property
described in paragraph (1), (2), or (8) of section 1221(a),
or''.
[(b) Definition and Special Rules.--Subsection (c) of
section 954 is amended by adding after paragraph (5) the
following new paragraph:
[``(6) Definition and special rules relating to commodity
transactions.--
[``(A) Commodity hedging transactions.--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 defined in section
1221(b)(2), determined--

[``(I) without regard to subparagraph (A)(ii) thereof,
[``(II) by applying subparagraph (A)(i) thereof by
substituting `ordinary property or property described in
section 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 accordance with
section 1221(a)(7).
[``(B) Regulations.--The Secretary shall prescribe such
regulations as are appropriate to carry out the purposes of
paragraph (1)(C) in the case of transactions involving
related parties.''
[(c) Effective Date.--The amendments made by this section
shall apply to transactions entered into after December 31,
2004.

[Subtitle B--International Tax Simplification

[SEC. 211. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES
AND FOREIGN INVESTMENT COMPANY RULES.

[(a) General Rule.--The following provisions are hereby
repealed:
[(1) Part III of subchapter G of chapter 1 (relating to
foreign personal holding companies).
[(2) Section 1246 (relating to gain on foreign investment
company stock).
[(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 paragraph (7) (as
so redesignated), and
[(D) by striking ``; and'' at the end of paragraph (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--

[``(I) some person other than the corporation has the right
to designate (by name or by description) the individual who
is to perform the services, or
[``(II) the individual who is to perform the services is
designated (by name or by description) in the contract, 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 outstanding stock of the corporation is owned,
directly or indirectly, by or for the individual who has
performed, is to perform, or may be designated (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 subparagraph (G), and by
redesignating subparagraph (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) Paragraph (2) of section 171(c) is amended--
[(A) by striking ``, or by a foreign personal holding
company, as defined in section 552'', and
[(B) by striking ``, or foreign personal holding company''.
[(3) Paragraph (2) of section 245(a) is amended by striking
``foreign personal holding company or''.
[(4) Section 312 is amended by striking subsection (j).
[(5) 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)''.
[(6) Subsection (e) of section 443 is amended by striking
paragraph (3) and by redesignating paragraphs (4) and (5) as
paragraphs (3) and (4), respectively.
[(7) 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).
[(8) 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).
[(9) Paragraph (1) of section 562(b) is amended by striking
``or a foreign personal holding company described in section
552''.
[(10) Section 563 is amended--
[(A) by striking subsection (c),
[(B) by redesignating subsection (d) as subsection (c), and
[(C) by striking ``subsection (a), (b), or (c)'' in
subsection (c) (as so redesignated) and inserting
``subsection (a) or (b)''.

[[Page S2030]]

[(11) Subsection (d) of section 751 is amended by adding
``and'' at the end of paragraph (2), by striking paragraph
(3), by redesignating paragraph (4) as paragraph (3), and by
striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as
so redesignated) and inserting ``paragraph (1) or (2)''.
[(12) 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.
[(13)(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''.
[(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 insurance income (as defined in section
953(c)(2)), the Secretary 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
section 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. shareholder 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 beginning 1 month earlier
than the majority U.S. shareholder 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 described 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 representative period as the
Secretary may prescribe.''
[(14) Clause (ii) of section 904(d)(2)(A) is amended to
read as follows:
[``(ii) Certain amounts included.--Except as provided in
clause (iii), the term `passive income' includes, except as
provided in subparagraph (E)(iii) or paragraph (3)(I), any
amount includible in gross income under section 1293
(relating to certain passive foreign investment companies).''
[(15)(A) Subparagraph (A) of section 904(g)(1), as
redesignated by section 204, 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(g), as so redesignated, is amended by striking ``foreign
personal holding or''.
[(16) Section 951 is amended by striking subsections (c)
and (d) and by redesignating subsections (e) and (f) as
subsections (c) and (d), respectively.
[(17) Paragraph (3) of section 989(b) is amended by
striking ``, 551(a),''.
[(18) Paragraph (5) of section 1014(b) is amended by
inserting ``and before January 1, 2005,'' after ``August 26,
1937,''.
[(19) Subsection (a) of section 1016 is amended by striking
paragraph (13).
[(20)(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.
[(21) Section 1223 is amended by striking paragraph (10)
and by redesignating the following paragraphs accordingly.
[(22) Subsection (d) of section 1248 is amended by striking
paragraph (5) and by redesignating paragraphs (6) and (7) as
paragraphs (5) and (6), respectively.
[(23) Paragraph (2) of section 1260(c) is amended by
striking subparagraphs (H) and (I) and by redesignating
subparagraph (J) as subparagraph (H).
[(24)(A) Subparagraph (F) of section 1291(b)(3) is amended
by striking ``551(d), 959(a),'' and inserting ``959(a)''.
[(B) Subsection (e) of section 1291 is amended by inserting
``(as in effect on the day before the date of the enactment
of the Jumpstart Our Business Strength (JOBS) Act)'' after
``section 1246''.
[(25) Paragraph (2) of section 1294(a) is amended 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 electing fund for the taxable year if any amount is
includible in the gross income of the taxpayer under section
951 with respect to such fund for such taxable year.''
[(26) Section 6035 is hereby repealed.
[(27) Subparagraph (D) of section 6103(e)(1) is amended by
striking clause (iv) and redesignating clauses (v) and (vi)
as clauses (iv) and (v), respectively.
[(28) 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), the tax may be assessed, or a proceeding in
court for the collection of such tax may be done without
assessing, at any time within 6 years after the return was
filed.''
[(29) 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).
[(30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4)
are each amended by striking ``556(b)(2),'' each place it
appears.
[(31) The table of parts for subchapter G of chapter 1 is
amended by striking the item relating to part III.
[(32) The table of sections for part IV of subchapter P of
chapter 1 is amended by striking the items relating to
sections 1246 and 1247.
[(33) The table of sections for subpart A of part III of
subchapter A of chapter 61 is amended by striking the item
relating to section 6035.
[(d) Effective Date.--The amendments made by this section
shall apply to taxable years of foreign corporations
beginning after December 31, 2004, and taxable years of
United States shareholders of such corporations ending with
or within such taxable years of such corporations.

[SEC. 212. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

[(a) In General.--Clause (ii) of section 954(b)(3)(A)
(relating to de minimis, etc., rules) is amended by striking
``$1,000,000'' and inserting ``$5,000,000''.
[(b) Technical Amendments.--
[(1) Clause (ii) of section 864(d)(5)(A) is amended by
striking ``$1,000,000'' and inserting ``$5,000,000''.
[(2) Clause (i) of section 881(c)(5)(A) is amended by
striking ``$1,000,000'' and inserting ``$5,000,000''.
[(c) Effective Date.--The amendments made by this section
shall apply to taxable years of foreign corporations
beginning after December 31, 2004, and taxable years of
United States shareholders of such corporations ending with
or within such taxable years of such corporations.

[SEC. 213. 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 considered to be owned by a person by reason of the
preceding 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 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 inserting ``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.

[SEC. 214. APPLICATION OF UNIFORM CAPITALIZATION RULES TO
FOREIGN PERSONS.

[(a) In General.--Section 263A(c) (relating to exceptions)
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 proprietors,
or beneficiaries, or for credit purposes.''
[(b) Effective Date.--
[(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 accounting for its first taxable year
beginning after December 31, 2004--
[(A) such change shall be treated as initiated by the
taxpayer,
[(B) such change shall be treated as made with the consent
of the Secretary of the Treasury, and

[[Page S2031]]

[(C) the net amount of the adjustments required 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. 215. 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 dividends) is
amended by adding at the end the following new subparagraph:
[``(D) Dividends paid by a foreign corporation 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.

[SEC. 216. REPEAL OF SPECIAL CAPITAL GAINS TAX ON ALIENS
PRESENT IN THE UNITED STATES FOR 183 DAYS OR
MORE.

[(a) In General.--Subsection (a) of section 871 is amended
by striking paragraph (2) and by redesignating paragraph (3)
as paragraph (2).
[(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2003.]

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF
CONTENTS.

(a) Short Title.--This Act may be cited as the ``Jumpstart
Our Business Strength (JOBS) Act''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act an amendment or repeal is
expressed in terms of an amendment to, or repeal of, a
section or other provision, the reference shall be considered
to be made to a section or other provision of the Internal
Revenue Code of 1986.
(c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME

Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Deduction relating to income attributable to United States
production activities.

TITLE II--INTERNATIONAL TAX PROVISIONS

Subtitle A--International Tax Reform

Sec. 201. 20-year foreign tax credit carryover; 1-year foreign tax
credit carryback.
Sec. 202. Look-thru rules to apply to dividends from noncontrolled
section 902 corporations.
Sec. 203. Foreign tax credit under alternative minimum tax.
Sec. 204. Recharacterization of overall domestic loss.
Sec. 205. Interest expense allocation rules.
Sec. 206. Determination of foreign personal holding company income with
respect to transactions in commodities.

Subtitle B--International Tax Simplification

Sec. 211. Repeal of foreign personal holding company rules and foreign
investment company rules.
Sec. 212. Expansion of de minimis rule under subpart F.
Sec. 213. Attribution of stock ownership through partnerships to apply
in determining section 902 and 960 credits.
Sec. 214. Application of uniform capitalization rules to foreign
persons.
Sec. 215. Repeal of withholding tax on dividends from certain foreign
corporations.
Sec. 216. Repeal of special capital gains tax on aliens present in the
United States for 183 days or more.

Subtitle C--Additional International Tax Provisions

Sec. 221. Active leasing income from aircraft and vessels.
Sec. 222. Look-thru treatment of payments between related controlled
foreign corporations under foreign personal holding
company income rules.
Sec. 223. Look-thru treatment for sales of partnership interests.
Sec. 224. Election not to use average exchange rate for foreign tax
paid other than in functional currency.
Sec. 225. Treatment of income tax base differences.
Sec. 226. Modification of exceptions under subpart F for active
financing.
Sec. 227. United States property not to include certain assets of
controlled foreign corporation.
Sec. 228. Provide equal treatment for interest paid by foreign
partnerships and foreign corporations.
Sec. 229. Clarification of treatment of certain transfers of intangible
property.
Sec. 230. Modification of the treatment of certain REIT distributions
attributable to gain from sales or exchanges of United
States real property interests.
Sec. 231. Toll tax on excess qualified foreign distribution amount.
Sec. 232. Exclusion of income derived from certain wagers on horse
races and dog races from gross income of nonresident
alien individuals.
Sec. 233. Limitation of withholding tax for Puerto Rico corporations.
Sec. 234. Report on WTO dispute settlement panels and the appellate
body.
Sec. 235. Study of impact of international tax laws on taxpayers other
than large corporations.
Sec. 236. Consultative role for Senate Committee on Finance in
connection with the review of proposed tax treaties.

TITLE III--DOMESTIC MANUFACTURING AND BUSINESS PROVISIONS

Subtitle A--General Provisions

Sec. 301. Expansion of qualified small-issue bond program.
Sec. 302. Expensing of broadband Internet access expenditures.
Sec. 303. Exemption of natural aging process in determination of
production period for distilled spirits under section
263A.
Sec. 304. Modification of active business definition under section 355.
Sec. 305. Exclusion of certain indebtedness of small business
investment companies from acquisition indebtedness.
Sec. 306. Modified taxation of imported archery products.
Sec. 307. Modification to cooperative marketing rules to include value
added processing involving animals.
Sec. 308. Extension of declaratory judgment procedures to farmers'
cooperative organizations.
Sec. 309. Temporary suspension of personal holding company tax.
Sec. 310. Increase in section 179 expensing.
Sec. 311. Three-year carryback of net operating losses.

Subtitle B--Manufacturing Relating to Films

Sec. 321. Special rules for certain film and television productions.
Sec. 322. Modification of application of income forecast method of
depreciation.

Subtitle C--Manufacturing Relating to Timber

Sec. 331. Expensing of certain reforestation expenditures.
Sec. 332. Election to treat cutting of timber as a sale or exchange.
Sec. 333. Capital gain treatment under section 631(b) to apply to
outright sales by landowners.
Sec. 334. Modification of safe harbor rules for timber REITS.

TITLE IV--ADDITIONAL PROVISIONS

Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 401. Clarification of economic substance doctrine.
Sec. 402. Penalty for failing to disclose reportable transaction.
Sec. 403. Accuracy-related penalty for listed transactions and other
reportable transactions having a significant tax
avoidance purpose.
Sec. 404. Penalty for understatements attributable to transactions
lacking economic substance, etc.
Sec. 405. Modifications of substantial understatement penalty for
nonreportable transactions.
Sec. 406. Tax shelter exception to confidentiality privileges relating
to taxpayer communications.
Sec. 407. Disclosure of reportable transactions.
Sec. 408. Modifications to penalty for failure to register tax
shelters.
Sec. 409. Modification of penalty for failure to maintain lists of
investors.
Sec. 410. Modification of actions to enjoin certain conduct related to
tax shelters and reportable transactions.
Sec. 411. Understatement of taxpayer's liability by income tax return
preparer.
Sec. 412. Penalty on failure to report interests in foreign financial
accounts.
Sec. 413. Frivolous tax submissions.
Sec. 414. Regulation of individuals practicing before the Department of
Treasury.
Sec. 415. Penalty on promoters of tax shelters.
Sec. 416. Statute of limitations for taxable years for which required
listed transactions not reported.
Sec. 417. Denial of deduction for interest on underpayments
attributable to nondisclosed reportable and noneconomic
substance transactions.
Sec. 418. Authorization of appropriations for tax law enforcement.

Subtitle B--Other Corporate Governance Provisions

Sec. 421. Affirmation of consolidated return regulation authority.
Sec. 422. Signing of corporate tax returns by chief executive officer.
Sec. 423. Denial of deduction for certain fines, penalties, and other
amounts.
Sec. 424. Disallowance of deduction for punitive damages.
Sec. 425. Increase in criminal monetary penalty limitation for the
underpayment or overpayment of tax due to fraud.

Subtitle C--Enron-Related Tax Shelter Provisions

Sec. 431. Limitation on transfer or importation of built-in losses.
Sec. 432. No reduction of basis under section 734 in stock held by
partnership in corporate partner.
Sec. 433. Repeal of special rules for FASITs.
Sec. 434. Expanded disallowance of deduction for interest on
convertible debt.
Sec. 435. Expanded authority to disallow tax benefits under section
269.
Sec. 436. Modification of interaction between subpart F and passive
foreign investment company rules.

Subtitle D--Provisions To Discourage Expatriation

Sec. 441. Tax treatment of inverted corporate entities.

[[Page S2032]]

Sec. 442. Imposition of mark-to-market tax on individuals who
expatriate.
Sec. 443. Excise tax on stock compensation of insiders of inverted
corporations.
Sec. 444. Reinsurance of United States risks in foreign jurisdictions.
Sec. 445. Reporting of taxable mergers and acquisitions.

Subtitle E--International Tax

Sec. 451. Clarification of banking business for purposes of determining
investment of earnings in United States property.
Sec. 452. Prohibition on nonrecognition of gain through complete
liquidation of holding company.
Sec. 453. Prevention of mismatching of interest and original issue
discount deductions and income inclusions in transactions
with related foreign persons.
Sec. 454. Effectively connected income to include certain foreign
source income.
Sec. 455. Recapture of overall foreign losses on sale of controlled
foreign corporation.
Sec. 456. Minimum holding period for foreign tax credit on withholding
taxes on income other than dividends.

Subtitle F--Other Revenue Provisions

Part I--Financial Instruments

Sec. 461. Treatment of stripped interests in bond and preferred stock
funds, etc.
Sec. 462. Application of earnings stripping rules to partnerships and S
corporations.
Sec. 463. Recognition of cancellation of indebtedness income realized
on satisfaction of debt with partnership interest.
Sec. 464. Modification of straddle rules.
Sec. 465. Denial of installment sale treatment for all readily
tradeable debt.

Part II--Corporations and Partnerships

Sec. 466. Modification of treatment of transfers to creditors in
divisive reorganizations.
Sec. 467. Clarification of definition of nonqualified preferred stock.
Sec. 468. Modification of definition of controlled group of
corporations.
Sec. 469. Mandatory basis adjustments in connection with partnership
distributions and transfers of partnership interests.

Part III--Depreciation and Amortization

Sec. 471. Extension of amortization of intangibles to sports
franchises.
Sec. 472. Services contracts treated in the same manner as leases for
rules relating to tax-exempt use of property.
Sec. 473. Class lives for utility grading costs.
Sec. 474. Expansion of limitation on depreciation of certain passenger
automobiles.
Sec. 475. Consistent amortization of periods for intangibles.
Sec. 476. Limitation on deductions allocable to property used by
governments or other tax-exempt entities.

Part IV--Administrative Provisions

Sec. 481. Clarification of rules for payment of estimated tax for
certain deemed asset sales.
Sec. 482. Extension of IRS user fees.
Sec. 483. Doubling of certain penalties, fines, and interest on
underpayments related to certain offshore financial
arrangement.
Sec. 484. Partial payment of tax liability in installment agreements.
Sec. 485. Extension of customs user fees.
Sec. 486. Deposits made to suspend running of interest on potential
underpayments.
Sec. 487. Qualified tax collection contracts.

Part V--Miscellaneous Provisions

Sec. 491. Addition of vaccines against hepatitis A to list of taxable
vaccines.
Sec. 492. Recognition of gain from the sale of a principal residence
acquired in a like-kind exchange within 5 years of sale.
Sec. 493. Clarification of exemption from tax for small property and
casualty insurance companies.
Sec. 494. Definition of insurance company for section 831.
Sec. 495. Limitations on deduction for charitable contributions of
patents and similar property.
Sec. 496. Repeal of 10-percent rehabilitation tax credit.
Sec. 497. Increase in age of minor children whose unearned income is
taxed as if parent's income.

TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME

SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

(a) In General.--Section 114 is hereby repealed.
(b) Conforming Amendments.--
(1)(A) Subpart E of part III of subchapter N of chapter 1
(relating to qualifying foreign trade income) is hereby
repealed.
(B) The table of subparts for such part III is amended by
striking the item relating to subpart E.
(2) The table of sections for part III of subchapter B of
chapter 1 is amended by striking the item relating to section
114.
(3) The second sentence of section 56(g)(4)(B)(i) is
amended by striking ``or under section 114''.
(4) Section 275(a) is amended--
(A) by inserting ``or'' at the end of paragraph (4)(A), by
striking ``or'' at the end of paragraph (4)(B) and inserting
a period, and by striking subparagraph (C), and
(B) by striking the last sentence.
(5) Paragraph (3) of section 864(e) is amended--
(A) by striking:
``(3) Tax-exempt assets not taken into account.--
``(A) In general.--For purposes of''; and inserting:
``(3) Tax-exempt assets not taken into account.--For
purposes of'', and
(B) by striking subparagraph (B).
(6) Section 903 is amended by striking ``114, 164(a),'' and
inserting ``164(a)''.
(7) Section 999(c)(1) is amended by striking
``941(a)(5),''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to transactions occurring after the date of the
enactment of this Act.
(2) Binding contracts.--The amendments made by this section
shall not apply to any transaction in the ordinary course of
a trade or business which occurs pursuant to a binding
contract--
(A) which is between the taxpayer and a person who is not a
related person (as defined in section 943(b)(3) of such Code,
as in effect on the day before the date of the enactment of
this Act), and
(B) which is in effect on September 17, 2003, and at all
times thereafter.
(d) Revocation of Section 943(e) Elections.--
(1) In general.--In the case of a corporation that elected
to be treated as a domestic corporation under section 943(e)
of the Internal Revenue Code of 1986 (as in effect on the day
before the date of the enactment of this Act)--
(A) the corporation may, during the 1-year period beginning
on the date of the enactment of this Act, revoke such
election, effective as of such date of enactment, and
(B) if the corporation does revoke such election--
(i) such corporation shall be treated as a domestic
corporation transferring (as of such date of enactment) all
of its property to a foreign corporation in connection with
an exchange described in section 354 of such Code, and
(ii) no gain or loss shall be recognized on such transfer.
(2) Exception.--Subparagraph (B)(ii) of paragraph (1) shall
not apply to gain on any asset held by the revoking
corporation if--
(A) the basis of such asset is determined in whole or in
part by reference to the basis of such asset in the hands of
the person from whom the revoking corporation acquired such
asset,
(B) the asset was acquired by transfer (not as a result of
the election under section 943(e) of such Code) occurring on
or after the 1st day on which its election under section
943(e) of such Code was effective, and
(C) a principal purpose of the acquisition was the
reduction or avoidance of tax (other than a reduction in tax
under section 114 of such Code, as in effect on the day
before the date of the enactment of this Act).
(e) General Transition.--
(1) In general.--In the case of a taxable year ending after
the date of the enactment of this Act and beginning before
January 1, 2007, for purposes of chapter 1 of such Code, a
current FSC/ETI beneficiary shall be allowed a deduction
equal to the transition amount determined under this
subsection with respect to such beneficiary for such year.
(2) Current fsc/eti beneficiary.--The term ``current FSC/
ETI beneficiary'' means any corporation which entered into
one or more transactions during its taxable year beginning in
calendar year 2002 with respect to which FSC/ETI benefits
were allowable.
(3) Transition amount.--For purposes of this subsection--
(A) In general.--The transition amount applicable to any
current FSC/ETI beneficiary for any taxable year is the
phaseout percentage of the base period amount.
(B) Phaseout percentage.--
(i) In general.--In the case of a taxpayer using the
calendar year as its taxable year, the phaseout percentage
shall be determined under the following table:

The phaseout percentage is:
Years:
2004.............................................................. 80
2005.............................................................. 80
2006..............................................................60.

(ii) Special rule for 2003.--The phaseout percentage for
2003 shall be the amount that bears the same ratio to 100
percent as the number of days after the date of the enactment
of this Act bears to 365.
(iii) Special rule for fiscal year taxpayers.--In the case
of a taxpayer not using the calendar year as its taxable
year, the phaseout percentage is the weighted average of the
phaseout percentages determined under the preceding
provisions of this paragraph with respect to calendar years
any portion of which is included in the taxpayer's taxable
year. The weighted average shall be determined on the basis
of the respective portions of the taxable year in each
calendar year.
(C) Short taxable year.--The Secretary shall prescribe
guidance for the computation of the transition amount in the
case of a short taxable year.
(4) Base period amount.--For purposes of this subsection,
the base period amount is the FSC/ETI benefit for the
taxpayer's taxable year beginning in calendar year 2002.
(5) FSC/ETI benefit.--For purposes of this subsection, the
term ``FSC/ETI benefit'' means--
(A) amounts excludable from gross income under section 114
of such Code, and

[[Page S2033]]

(B) the exempt foreign trade income of related foreign
sales corporations from property acquired from the taxpayer
(determined without regard to section 923(a)(5) of such Code
(relating to special rule for military property), as in
effect on the day before the date of the enactment of the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000).

In determining the FSC/ETI benefit there shall be excluded
any amount attributable to a transaction with respect to
which the taxpayer is the lessor unless the leased property
was manufactured or produced in whole or in significant part
by the taxpayer.
(6) Special rule for agricultural and horticultural
cooperatives.--Determinations under this subsection with
respect to an organization described in section 943(g)(1) of
such Code, as in effect on the day before the date of the
enactment of this Act, shall be made at the cooperative level
and the purposes of this subsection shall be carried out in a
manner similar to section 199(h)(2) of such Code, as added by
this Act. Such determinations shall be in accordance with
such requirements and procedures as the Secretary may
prescribe.
(7) Certain rules to apply.--Rules similar to the rules of
section 41(f) of such Code shall apply for purposes of this
subsection.
(8) Coordination with binding contract rule.--The deduction
determined under paragraph (1) for any taxable year shall be
reduced by the phaseout percentage of any FSC/ETI benefit
realized for the taxable year by reason of subsection (c)(2)
or section 5(c)(1)(B) of the FSC Repeal and Extraterritorial
Income Exclusion Act of 2000, except that for purposes of
this paragraph the phaseout percentage for 2003 shall be
treated as being equal to 100 percent.
(9) Special rule for taxable year which includes date of
enactment.--In the case of a taxable year which includes the
date of the enactment of this Act, the deduction allowed
under this subsection to any current FSC/ETI beneficiary
shall in no event exceed--
(A) 100 percent of such beneficiary's base period amount
for calendar year 2003, reduced by
(B) the FSC/ETI benefit of such beneficiary with respect to
transactions occurring during the portion of the taxable year
ending on the date of the enactment of this Act.

SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED
STATES PRODUCTION ACTIVITIES.

(a) In General.--Part VI of subchapter B of chapter 1
(relating to itemized deductions for individuals and
corporations) is amended by adding at the end the following
new section:

``SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION
ACTIVITIES.

``(a) Allowance of Deduction.--
``(1) In general.--There shall be allowed as a deduction an
amount equal to 9 percent of the qualified production
activities income of the taxpayer for the taxable year.
``(2) Phasein.--In the case of taxable years beginning in
2003, 2004, 2005, 2006, 2007, or 2008, paragraph (1) shall be
applied by substituting for the percentage contained therein
the transition percentage determined under the following
table:

``Taxable years beginning in:             The transition percentage is:
2003 or 2004........................................................  1
2005................................................................  2
2006................................................................  3
2007 or 2008........................................................ 6.

``(b) Deduction Limited to Wages Paid.--
``(1) In general.--The amount of the deduction allowable
under subsection (a) for any taxable year shall not exceed 50
percent of the W-2 wages of the employer for the taxable
year.
``(2) W-2 wages.--For purposes of paragraph (1), the term
`W-2 wages' means the sum of the aggregate amounts the
taxpayer is required to include on statements under
paragraphs (3) and (8) of section 6051(a) with respect to
employment of employees of the taxpayer during the taxpayer's
taxable year.
``(3) Special rules.--
``(A) Pass-thru entities.--In the case of an S corporation,
partnership, estate or trust, or other pass-thru entity, the
limitation under this subsection shall apply at the entity
level.
``(B) Acquisitions and dispositions.--The Secretary shall
provide for the application of this subsection in cases where
the taxpayer acquires, or disposes of, the major portion of a
trade or business or the major portion of a separate unit of
a trade or business during the taxable year.
``(c) Qualified Production Activities Income.--For purposes
of this section--
``(1) In general.--The term `qualified production
activities income' means an amount equal to the portion of
the modified taxable income of the taxpayer which is
attributable to domestic production activities.
``(2) Reduction for taxable years beginning before 2013.--
The amount otherwise determined under paragraph (1) (the
`unreduced amount') shall not exceed--
``(A) in the case of taxable years beginning before 2010,
the product of the unreduced amount and the domestic/
worldwide fraction, and
``(B) in the case of taxable years beginning in 2010, 2011,
or 2012, an amount equal to the sum of--
``(i) the product of the unreduced amount and the domestic/
worldwide fraction, plus
``(ii) the applicable percentage of an amount equal to the
unreduced amount minus the amount determined under clause
(i).

For purposes of subparagraph (B)(ii), the applicable
percentage is 25 percent for 2010, 50 percent for 2011, and
75 percent for 2012.
``(d) Determination of Income Attributable to Domestic
Production Activities.--For purposes of this section--
``(1) In general.--The portion of the modified taxable
income which is attributable to domestic production
activities is so much of the modified taxable income for the
taxable year as does not exceed--
``(A) the taxpayer's domestic production gross receipts for
such taxable year, reduced by
``(B) the sum of--
``(i) the costs of goods sold that are allocable to such
receipts,
``(ii) other deductions, expenses, or losses directly
allocable to such receipts, and
``(iii) a proper share of other deductions, expenses, and
losses that are not directly allocable to such receipts or
another class of income.
``(2) Allocation method.--The Secretary shall prescribe
rules for the proper allocation of items of income,
deduction, expense, and loss for purposes of determining
income attributable to domestic production activities.
``(3) Special rules for determining costs.--
``(A) In general.--For purposes of determining costs under
clause (i) of paragraph (1)(B), any item or service brought
into the United States shall be treated as acquired by
purchase, and its cost shall be treated as not less than its
fair market value immediately after it entered the United
States. A similar rule shall apply in determining the
adjusted basis of leased or rented property where the lease
or rental gives rise to domestic production gross receipts.
``(B) Exports for further manufacture.--In the case of any
property described in subparagraph (A) that had been exported
by the taxpayer for further manufacture, the increase in cost
or adjusted basis under subparagraph (A) shall not exceed the
difference between the value of the property when exported
and the value of the property when brought back into the
United States after the further manufacture.
``(4) Modified taxable income.--The term `modified taxable
income' means taxable income computed without regard to the
deduction allowable under this section.
``(e) Domestic Production Gross Receipts.--For purposes of
this section--
``(1) In general.--The term `domestic production gross
receipts' means the gross receipts of the taxpayer which are
derived from--
``(A) any sale, exchange, or other disposition of, or
``(B) any lease, rental, or license of,
qualifying production property which was manufactured,
produced, grown, or extracted in whole or in significant part
by the taxpayer within the United States.
``(2) Special rules for certain property.--In the case of
any qualifying production property described in subsection
(f)(1)(C)--
``(A) such property shall be treated for purposes of
paragraph (1) as produced in significant part by the taxpayer
within the United States if more than 50 percent of the
aggregate development and production costs are incurred by
the taxpayer within the United States, and
``(B) if a taxpayer acquires such property before such
property begins to generate substantial gross receipts, any
development or production costs incurred before the
acquisition shall be treated as incurred by the taxpayer for
purposes of subparagraph (A) and paragraph (1).
``(f) Qualifying Production Property.--For purposes of this
section--
``(1) In general.--Except as otherwise provided in this
paragraph, the term `qualifying production property' means--
``(A) any tangible personal property,
``(B) any computer software, and
``(C) any property described in section 168(f) (3) or (4),
including any underlying copyright or trademark.
``(2) Exclusions from qualifying production property.--The
term `qualifying production property' shall not include--
``(A) consumable property that is sold, leased, or licensed
by the taxpayer as an integral part of the provision of
services,
``(B) oil or gas,
``(C) electricity,
``(D) water supplied by pipeline to the consumer,
``(E) utility services, or
``(F) any film, tape, recording, book, magazine, newspaper,
or similar property the market for which is primarily topical
or otherwise essentially transitory in nature.
``(g) Domestic/Worldwide Fraction.--For purposes of this
section--
``(1) In general.--The term `domestic/worldwide fraction'
means a fraction (not greater than 1)--
``(A) the numerator of which is the value of the domestic
production of the taxpayer, and
``(B) the denominator of which is the value of the
worldwide production of the taxpayer.
``(2) Value of domestic production.--The value of domestic
production is the excess (if any) of--
``(A) the domestic production gross receipts, over
``(B) the cost of purchased inputs allocable to such
receipts that are deductible under this chapter for the
taxable year.
``(3) Purchased inputs.--
``(A) In general.--Purchased inputs are any of the
following items acquired by purchase:
``(i) Services (other than services of employees) used in
manufacture, production, growth, or extraction activities.
``(ii) Items consumed in connection with such activities.
``(iii) Items incorporated as part of the property being
manufactured, produced, grown, or extracted.
``(B) Special rule.--Rules similar to the rules of
subsection (d)(3) shall apply for purposes of this
subsection.
``(4) Value of worldwide production.--
``(A) In general.--The value of worldwide production shall
be determined under the principles of paragraph (2), except
that--
``(i) worldwide production gross receipts shall be taken
into account, and

[[Page S2034]]

``(ii) paragraph (3)(B) shall not apply.
``(B) Worldwide production gross receipts.--The worldwide
production gross receipts is the amount that would be
determined under subsection (e) if such subsection were
applied without any reference to the United States.
``(h) Definitions and Special Rules.--
``(1) Application of section to pass-thru entities.--In the
case of an S corporation, partnership, estate or trust, or
other pass-thru entity--
``(A) subject to the provisions of paragraph (2) and
subsection (b)(3)(A), this section shall be applied at the
shareholder, partner, or similar level, and
``(B) the Secretary shall prescribe rules for the
application of this section, including rules relating to--
``(i) restrictions on the allocation of the deduction to
taxpayers at the partner or similar level, and
``(ii) additional reporting requirements.
``(2) Exclusion for patrons of agricultural and
horticultural cooperatives.--
``(A) In general.--If any amount described in paragraph (1)
or (3) of section 1385 (a)--
``(i) is received by a person from an organization to which
part I of subchapter T applies which is engaged in the
marketing of agricultural or horticultural products, and
``(ii) is allocable to the portion of the qualified
production activities income of the organization which is
deductible under subsection (a) and designated as such by the
organization in a written notice mailed to its patrons during
the payment period described in section 1382(d),

then such person shall be allowed an exclusion from gross
income with respect to such amount. The taxable income of the
organization shall not be reduced under section 1382 by the
portion of any such amount with respect to which an exclusion
is allowable to a person by reason of this paragraph.
``(B) Special rules.--For purposes of applying subparagraph
(A), in determining the qualified production activities
income of the organization under this section--
``(i) there shall not be taken into account in computing
the organization's modified taxable income any deduction
allowable under subsection (b) or (c) of section 1382
(relating to patronage dividends, per-unit retain
allocations, and nonpatronage distributions), and
``(ii) the organization shall be treated as having
manufactured, produced, grown, or extracted in whole or
significant part any qualifying production property marketed
by the organization which its patrons have so manufactured,
produced, grown, or extracted.
``(3) Special rule for affiliated groups.--
``(A) In general.--All members of an expanded affiliated
group shall be treated as a single corporation for purposes
of this section.
``(B) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group as defined in
section 1504(a), determined--
``(i) by substituting `50 percent' for `80 percent' each
place it appears, and
``(ii) without regard to paragraphs (2) and (4) of section
1504(b).

For purposes of determining the domestic/worldwide fraction
under subsection (g), clause (ii) shall be applied by also
disregarding paragraphs (3) and (8) of section 1504(b).
``(4) Coordination with minimum tax.--The deduction under
this section shall be allowed for purposes of the tax imposed
by section 55; except that for purposes of section 55,
alternative minimum taxable income shall be taken into
account in determining the deduction under this section.
``(5) Ordering rule.--The amount of any other deduction
allowable under this chapter shall be determined as if this
section had not been enacted.
``(6) Trade or business requirement.--This section shall be
applied by only taking into account items which are
attributable to the actual conduct of a trade or business.
``(7) Possessions, etc.--
``(A) In general.--For purposes of subsections (d) and (e),
the term `United States' includes the Commonwealth of Puerto
Rico, Guam, American Samoa, the Commonwealth of the Northern
Mariana Islands, and the Virgin Islands of the United States.
``(B) Special rules for applying wage limitation.--For
purposes of applying the limitation under subsection (b) for
any taxable year--
``(i) the determination of W-2 wages of a taxpayer shall be
made without regard to any exclusion under section 3401(a)(8)
for remuneration paid for services performed in a
jurisdiction described in subparagraph (A), and
``(ii) in determining the amount of any credit allowable
under section 30A or 936 for the taxable year, there shall
not be taken into account any wages which are taken into
account in applying such limitation.
``(8) Coordination with transition rules.--For purposes of
this section--
``(A) domestic production gross receipts shall not include
gross receipts from any transaction if the binding contract
transition relief of section 101(c)(2) of the Jumpstart Our
Business Strength (JOBS) Act applies to such transaction, and
``(B) any deduction allowed under section 101(e) of such
Act shall be disregarded in determining the portion of the
taxable income which is attributable to domestic production
gross receipts.''.
(b) Minimum Tax.--Section 56(g)(4)(C) (relating to
disallowance of items not deductible in computing earnings
and profits) is amended by adding at the end the following
new clause:
``(v) Deduction for domestic production.--Clause (i) shall
not apply to any amount allowable as a deduction under
section 199.''.
(c) Clerical Amendment.--The table of sections for part VI
of subchapter B of chapter 1 is amended by adding at the end
the following new item:

``Sec. 199. Income attributable to domestic production activities.''.

(d) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxable years ending after the date of the enactment
of this Act.
(2) Application of section 15.--Section 15 of the Internal
Revenue Code of 1986 shall apply to the amendments made by
this section as if they were changes in a rate of tax.

TITLE II--INTERNATIONAL TAX PROVISIONS

Subtitle A--International Tax Reform

SEC. 201. 20-YEAR FOREIGN TAX CREDIT CARRYOVER; 1-YEAR
FOREIGN TAX CREDIT CARRYBACK.

(a) General Rule.--Section 904(c) (relating to carryback
and carryover of excess tax paid) is amended--
(1) by striking ``in the second preceding taxable year,'',
and
(2) by striking ``, and in the first, second, third,
fourth, or fifth'' and inserting ``and in any of the first
20''.
(b) Excess Extraction Taxes.--Paragraph (1) of section
907(f) is amended--
(1) by striking ``in the second preceding taxable year,'',
(2) by striking ``, and in the first, second, third,
fourth, or fifth'' and inserting ``and in any of the first
20'', and
(3) by striking the last sentence.
(c) Effective Date.--
(1) Carryback.--The amendments made by subsections (a)(1)
and (b)(1) shall apply to excess foreign taxes arising in
taxable years beginning after the date of the enactment of
this Act.
(2) Carryover.--The amendments made by subsections (a)(2)
and (b)(2) shall apply to excess foreign taxes which (without
regard to the amendments made by this section) may be carried
to any taxable year ending after the date of the enactment of
this Act.

SEC. 202. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM
NONCONTROLLED SECTION 902 CORPORATIONS.

(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 taxpayer shall be treated as income described
in a subparagraph of paragraph (1) in proportion to the ratio
of--
``(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 controlled foreign
corporations.--In the case of any distribution from a
controlled foreign corporation to a United States
shareholder, rules similar to the rules of subparagraph (A)
shall apply in determining the extent to which earnings and
profits of the controlled foreign corporation 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 Secretary may prescribe
regulations regarding 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 substantiation.--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) 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 corporation to
such a taxable year for purposes of 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 adding ``and''
at the end of subclause (I), by striking subclause (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 include 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 striking
``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2002.

[[Page S2035]]

SEC. 203. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

(a) In General.--
(1) Subsection (a) of section 59 is amended by striking
paragraph (2) and by redesignating paragraphs (3) and (4) as
paragraphs (2) and (3), respectively.
(2) Section 53(d)(1)(B)(i)(II) is amended by striking ``and
if section 59(a)(2) did not apply''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2004.

SEC. 204. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

(a) General Rule.--Section 904 is amended by redesignating
subsections (g), (h), (i), (j), and (k) as subsections (h),
(i), (j), (k), and (l) respectively, and by inserting after
subsection (f) the following new subsection:
``(g) Recharacterization of Overall Domestic Loss.--
``(1) General rule.--For purposes of this subpart 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,

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 domestic 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 sentence, 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 apportioned or
allocated thereto (determined without regard to any carryback
from a subsequent taxable year).
``(B) Taxpayer must have elected foreign 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 income.--
``(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 income 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 subsection 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.

SEC. 205. INTEREST EXPENSE ALLOCATION RULES.

(a) Election To Allocate on Worldwide Basis.--Section 864
is amended by redesignating subsection (f) as subsection (g)
and by inserting after subsection (e) the following new
subsection:
``(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 interest 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 affiliated group.--The taxable
income of the domestic members of a worldwide affiliated
group from sources outside the United States shall be
determined by allocating and apportioning the interest
expense of such domestic members to such income 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
``(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 corporations
would have been allocated and apportioned to foreign source
income if this subsection were applied to a group consisting
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 affiliated 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
directly or indirectly by domestic partnerships, 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 subsection, except that paragraph (4) shall
be applied on a worldwide affiliated group basis.
``(4) Treatment of certain financial institutions.--
``(A) In general.--For purposes of paragraph (1), any
corporation described in subparagraph (B) shall be treated as
an includible corporation for purposes of section 1504 only
for purposes of applying this subsection separately to
corporations so described.
``(B) Description.--A corporation is described in this
subparagraph if--
``(i) such corporation is a financial institution described
in section 581 or 591,
``(ii) the business of such financial institution is
predominantly with persons other than related persons (within
the meaning of subsection (d)(4)) or their customers, and
``(iii) such financial institution is required by State or
Federal law to be operated 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
``(iii) any subsidiary of a financial institution described
in section 581 or 591, or of any such bank or financial
holding company, 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 institution group of
worldwide group.--
``(A) In general.--If a worldwide affiliated group elects
the application of this subsection, all financial
corporations which--
``(i) are members of such worldwide affiliated 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)
applies to the pre-election worldwide affiliated group of
which such group is a part.
``(B) Financial corporation.--For purposes of this
paragraph, the term `financial corporation' 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 sentence, there shall be disregarded any
item of income 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 financial 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 paragraph 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--

``(I) its average annual dividend (expressed as a
percentage of current earnings and profits) during the 5-
taxable-year period ending with the taxable year preceding
the taxable year, or
``(II) 25 percent of its average annual 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
principles similar to the principles of section 482),

an amount of indebtedness of the electing financial
institution group equal to the excess distribution or the
understatement or overstatement of income, as the case may
be, shall be recharacterized (for the taxable year and
subsequent taxable years) for purposes of this paragraph as
indebtedness of the worldwide affiliated group (excluding the
electing financial institution group). If a corporation has
not been in existence for 5 taxable years, this subparagraph
shall be applied with respect to the period it was in
existence.
``(D) Election.--An election under this paragraph with
respect to any financial institution 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

[[Page S2036]]

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 institution 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 affiliated group.--The term
`pre-election worldwide affiliated group' means, with respect
to a corporation, the worldwide affiliated group of which
such corporation would (but for an election under this
paragraph) be a member for purposes of applying paragraph
(1).
``(ii) Electing financial institution group.--The term
`electing financial institution group' means the group of
corporations to which this subsection applies separately
by reason of the application of paragraph (4)(A) and which
includes financial 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 regulations--
``(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 expense from being
taken into account more than once, and
``(iii) dealing with changes in members of any group
(through acquisitions or otherwise) treated under this
paragraph as an affiliated group for purposes of this
subsection.
``(6) Election.--An election to have this subsection apply
with respect to any worldwide affiliated group may be made
only by the common parent of the 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 common 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.--Paragraph (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 subparagraph (E), by
redesignating subparagraph (F) as subparagraph (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''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2008.

SEC. 206. DETERMINATION OF FOREIGN PERSONAL HOLDING 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 described in
paragraph (1), (2), or (8) of section 1221(a), or''.
(b) Definition and Special Rules.--Subsection (c) of
section 954 is amended by adding after paragraph (3) the
following new paragraph:
``(4) Definition and special rules relating to commodity
transactions.--
``(A) Commodity hedging transactions.--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 defined in section
1221(b)(2), determined--

``(I) without regard to subparagraph (A)(ii) thereof,
``(II) by applying subparagraph (A)(i) thereof by
substituting `ordinary property or property described in
section 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 accordance 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
computing 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 corporation.
``(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 parties.''.
(c) Modification of Exception for Dealers.--Clause (i) of
section 954(c)(2)(C) is amended by inserting ``and
transactions involving physical settlement'' after
``(including hedging transactions''.
(d) Effective Date.--The amendments made by this section
shall apply to transactions entered into after December 31,
2004.

Subtitle B--International Tax Simplification

SEC. 211. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES
AND FOREIGN INVESTMENT COMPANY RULES.

(a) General Rule.--The following provisions are hereby
repealed:
(1) Part III of subchapter G of chapter 1 (relating to
foreign personal holding companies).
(2) Section 1246 (relating to gain on foreign investment
company stock).
(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 paragraph (7) (as so
redesignated), and
(D) by striking ``; and'' at the end of paragraph (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--

``(I) some person other than the corporation has the right
to designate (by name or by description) the individual who
is to perform the services, or
``(II) the individual who is to perform the services is
designated (by name or by description) in the contract, 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 outstanding stock of the corporation is owned,
directly or indirectly, by or for the individual who has
performed, is to perform, or may be designated (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 subparagraph (G), and by
redesignating subparagraph (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 this Act, is
amended by striking ``which is a foreign personal holding
company (as defined in section 552), a controlled foreign
corporation (as defined 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 amended--
(A) by striking ``, or by a foreign personal holding
company, as defined in section 552'', and
(B) by striking ``, or foreign personal holding 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 this Act, is
amended by striking ``to a foreign personal holding company
(as defined in section 552), a controlled foreign corporation
(as defined in section 957), or'' and inserting ``to a
controlled foreign corporation (as defined in section 957)
or''.
(6) Section 312 is amended by striking subsection (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 paragraphs (4) and (5) as
paragraphs (3) and (4), respectively.
(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).
(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 subsection (c), and
(C) by striking ``subsection (a), (b), or (c)'' in
subsection (c) (as so redesignated) and inserting
``subsection (a) or (b)''.
(13) Subsection (d) of section 751 is amended by adding
``and'' at the end of paragraph (2), by striking paragraph
(3), by redesignating paragraph (4) as paragraph (3), and by
striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as
so redesignated) and inserting ``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''.
(B) Subparagraph (B) of section 898(b)(2) is amended by
striking ``and sections 551(f) and 554, whichever are
applicable,''.

[[Page S2037]]

(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 insurance income (as defined in section
953(c)(2)), the Secretary 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
section 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. shareholder 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 beginning 1 month earlier
than the majority U.S. shareholder 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 described 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 representative period as the
Secretary may prescribe.''.
(16) Clause (ii) of section 904(d)(2)(A) is amended to read
as follows:
``(ii) Certain amounts included.--Except as provided in
clause (iii), the term `passive income' includes, except as
provided in subparagraph (E)(iii) or paragraph (3)(I), any
amount includible in gross income under section 1293
(relating to certain passive foreign investment
companies).''.
(17)(A) Subparagraph (A) of section 904(g)(1), as
redesignated by section 204, 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(g), as so redesignated, is amended by striking ``foreign
personal holding or''.
(18) Section 951 is amended by striking subsections (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 amended by
inserting ``and before January 1, 2005,'' after ``August 26,
1937,''.
(21) Subsection (a) of section 1016 is amended by striking
paragraph (13).
(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 paragraph (10) and
by redesignating the following paragraphs accordingly.
(24) Subsection (d) of section 1248 is amended by striking
paragraph (5) and by redesignating paragraphs (6) and (7) as
paragraphs (5) and (6), respectively.
(25) Paragraph (2) of section 1260(c) is amended by
striking subparagraphs (H) and (I) and by redesignating
subparagraph (J) as subparagraph (H).
(26)(A) Subparagraph (F) of section 1291(b)(3) is amended
by striking ``551(d), 959(a),'' and inserting ``959(a)''.
(B) Subsection (e) of section 1291 is amended by inserting
``(as in effect on the day before the date of the enactment
of the Jumpstart Our Business Strength (JOBS) Act)'' after
``section 1246''.
(27) Paragraph (2) of section 1294(a) is amended 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 electing fund for the taxable year if any amount is
includible in the gross income of the taxpayer under section
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), respectively.
(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), the tax may be assessed, or a proceeding in
court for the collection of such tax may be done without
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 chapter 1 is
amended by striking the item relating to part III.
(34) The table of sections for part IV of subchapter 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 striking the item
relating to section 6035.
(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 of
United States shareholders with or within which such taxable
years of foreign corporations end.

SEC. 212. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

(a) In General.--Clause (ii) of section 954(b)(3)(A)
(relating to de minimis, etc., rules) is amended by striking
``$1,000,000'' and inserting ``$5,000,000''.
(b) Technical Amendments.--
(1) Clause (ii) of section 864(d)(5)(A) is amended by
striking ``$1,000,000'' and inserting ``$5,000,000''.
(2) Clause (i) of section 881(c)(5)(A) is amended by
striking ``$1,000,000'' and inserting ``$5,000,000''.
(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. 213. 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 considered to be owned by a person by reason of the
preceding 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 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 inserting ``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.

SEC. 214. APPLICATION OF UNIFORM CAPITALIZATION RULES TO
FOREIGN PERSONS.

(a) In General.--Section 263A(c) (relating to exceptions)
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 proprietors,
or beneficiaries, or for credit purposes.''.
(b) Effective Date.--
(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 accounting for its first taxable year
beginning after December 31, 2004--
(A) such change shall be treated as initiated by the
taxpayer,
(B) such change shall be treated as made with the consent
of the Secretary of the Treasury, and
(C) the net amount of the adjustments required 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. 215. 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 dividends) is
amended by adding at the end the following new subparagraph:
``(D) Dividends paid by a foreign corporation 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.

SEC. 216. REPEAL OF SPECIAL CAPITAL GAINS TAX ON ALIENS
PRESENT IN THE UNITED STATES FOR 183 DAYS OR
MORE.

(a) In General.--Subsection (a) of section 871 is amended
by striking paragraph (2) and by redesignating paragraph (3)
as paragraph (2).
(b) Conforming Amendment.--Section 1441(g) is amended is
amended by striking ``section 871(a)(3)'' and inserting
``section 871(a)(2)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2003.

[[Page S2038]]

Subtitle C--Additional International Tax Provisions

SEC. 221. ACTIVE LEASING INCOME FROM AIRCRAFT AND VESSELS.

(a) In General.--Section 954(c)(2) is amended by adding at
the end the following new subparagraph:
``(D) Certain rents, etc.--
``(i) In general.--Foreign personal holding company income
shall not include qualified leasing income derived from or in
connection with the leasing or rental of any aircraft or
vessel.
``(ii) Qualified leasing income.--For purposes of this
subparagraph, the term `qualified leasing income' means rents
and gains derived in the active conduct of a trade or
business of leasing with respect to which the controlled
foreign corporation conducts substantial activity, but only
if--

``(I) the leased property is used by the lessee or other
end-user in foreign commerce and predominantly outside the
United States, and
``(II) the lessee or other end-user is not a related person
(as defined in subsection (d)(3)).

Any amount not treated as foreign personal holding income
under this subparagraph shall not be treated as foreign base
company shipping income.''.
(b) Conforming Amendment.--Section 954(c)(1)(B) is amended
by inserting ``or (2)(D)'' after ``paragraph (2)(A)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years of foreign corporations
beginning after December 31, 2006, and to taxable years of
United States shareholders with or within which such taxable
years of foreign corporations end.

SEC. 222. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED
CONTROLLED FOREIGN CORPORATIONS 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 paragraph (4) the
following new paragraph:
``(5) Look-thru in the case of related controlled foreign
corporations.--For purposes of this subsection, dividends,
interest, rents, and royalties received or accrued from a
controlled foreign corporation which is a related person (as
defined in subsection (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). The Secretary shall prescribe
such regulations as may be appropriate 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
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. 223. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP
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 partnership sales.--
``(A) In general.--In the case of any sale by a controlled
foreign corporation of an interest in a partnership with
respect to which such corporation is a 25-percent owner, such
corporation shall be treated for purposes of this subsection
as selling the proportionate share of the assets of the
partnership attributable to such interest. The Secretary
shall prescribe such regulations as may be appropriate to
prevent abuse of the purposes 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' 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 corporation 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. 224. 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 corporation's
earnings and profits) is amended by redesignating
subparagraph (D) as subparagraph (E) and by inserting after
subparagraph (C) the following new subparagraph:
``(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 liability for which is denominated in any currency other
than in the taxpayer's functional 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 prescribed by the Secretary.
``(iii) Election.--Any such election shall apply to the
taxable year for which made and all subsequent taxable years
unless revoked with the consent of the Secretary.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2004.

SEC. 225. TREATMENT OF INCOME TAX BASE DIFFERENCES.

(a) In General.--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.--
``(i) In general.--A taxpayer may elect to treat 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 as tax imposed on
income described in subparagraph (C) or (I) of paragraph (1).
``(ii) Election irrevocable.--Any such election shall apply
to the taxable year for which made and all subsequent taxable
years unless revoked with the consent of the Secretary.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.

SEC. 226. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR
ACTIVE FINANCING.

(a) In General.--Section 954(h)(3) is amended by adding at
the end the following:
``(E) Direct conduct of activities.--For purposes of
subparagraph (A)(ii)(II), an activity shall be treated as
conducted directly by an eligible controlled foreign
corporation or qualified business unit in its home country if
the activity is performed by employees of a related person
and--
``(i) the related person is an eligible controlled foreign
corporation the home country of which is the same as the home
country of the corporation or unit to which subparagraph
(A)(ii)(II) is being applied,
``(ii) the activity is performed in the home country of the
related person, and
``(iii) the related person is compensated on an arm's-
length basis for the performance of the activity by its
employees and such compensation is treated as earned by such
person in its home country for purposes of the home country's
tax laws.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years of such foreign corporations
beginning after December 31, 2004, and to taxable years of
United States shareholders with or within which such taxable
years of such foreign corporations end.

SEC. 227. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN
ASSETS OF CONTROLLED FOREIGN CORPORATION.

(a) In General.--Section 956(c)(2) (relating to exceptions
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 controlled foreign
corporation in the ordinary course of its business as a
dealer in securities if--
``(i) the dealer accounts for the securities as securities
held primarily for sale to customers in the ordinary course
of business, and
``(ii) the dealer disposes of the securities (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 business; and
``(M) an obligation of a United States person 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 immediately after the acquisition of any obligation
of such partnership, estate, or trust by the controlled
foreign corporation.''.

(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. 228. 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 in which United
States persons do not hold directly or indirectly 20 percent
or more of either the capital or profits interests, any
interest not paid by a trade or business engaged in by the
partnership in the United States and not allocable to income
which is effectively connected (or treated as effectively
connected) 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 December 31,
2003.

SEC. 229. 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

[[Page S2039]]

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. 230. MODIFICATION OF THE TREATMENT OF CERTAIN REIT
DISTRIBUTIONS ATTRIBUTABLE TO GAIN FROM SALES
OR EXCHANGES OF UNITED STATES REAL PROPERTY
INTERESTS.

(a) In General.--Paragraph (1) of section 897(h) (relating
to look-through of distributions) is amended by adding at the
end the following new sentence: ``Notwithstanding the
preceding sentence, any distribution by a REIT with respect
to any class of stock which is regularly traded on an
established securities market located in the United States
shall not be treated as gain recognized from the sale or
exchange of a United States real property interest if the
shareholder did not own more than 5 percent of such class of
stock at any time during the taxable year.''.
(b) Conforming Amendment.--Paragraph (3) of section 857(b)
(relating to capital gains) is amended by adding at the end
the following new subparagraph:
``(F) Certain distributions.--In the case of a shareholder
of a real estate investment trust to whom section 897 does
not apply by reason of the second sentence of section
897(h)(1), the amount which would be included in computing
long-term capital gains for such shareholder under
subparagraph (B) or (D) (without regard to this
subparagraph)--
``(i) shall not be included in computing such shareholder's
long-term capital gains, and
``(ii) shall be included in such shareholder's gross income
as a dividend from the real estate investment trust.''.
(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. 231. TOLL TAX ON EXCESS QUALIFIED FOREIGN DISTRIBUTION
AMOUNT.

(a) In General.--Subpart F of part III of subchapter N of
chapter 1 is amended by adding at the end the following new
section:

``SEC. 965. TOLL TAX IMPOSED ON EXCESS QUALIFIED FOREIGN
DISTRIBUTION AMOUNT.

``(a) Toll Tax Imposed on Excess Qualified Foreign
Distribution Amount.--If a corporation elects the application
of this section, a tax shall be imposed on the taxpayer in an
amount equal to 5.25 percent of--
``(1) the taxpayer's excess qualified foreign distribution
amount, and
``(2) the amount determined under section 78 which is
attributable to such excess qualified foreign distribution
amount.

Such tax shall be imposed in lieu of the tax imposed under
section 11 or 55 on the amounts described in paragraphs (1)
and (2) for such taxable year.
``(b) Excess Qualified Foreign Distribution Amount.--For
purposes of this section--
``(1) In general.--The term `excess qualified foreign
distribution amount' means the excess (if any) of--
``(A) the aggregate dividends received by the taxpayer
during the taxable year which are--
``(i) from 1 or more corporations which are controlled
foreign corporations in which the taxpayer is a United States
shareholder on the date such dividends are paid, and
``(ii) described in a domestic reinvestment plan which--

``(I) is approved by the taxpayer's president, chief
executive officer, or comparable official before the payment
of such dividends and subsequently approved by the taxpayer's
board of directors, management committee, executive
committee, or similar body, and
``(II) provides for the reinvestment of such dividends in
the United States (other than as payment for executive
compensation), including as a source for the funding of
worker hiring and training, infrastructure, research and
development, capital investments, or the financial
stabilization of the corporation for the purposes of job
retention or creation, over

``(B) the base dividend amount.
``(2) Base dividend amount.--The term `base dividend
amount' means an amount designated under subsection (c)(7),
but not less than the average amount of dividends received
during the fixed base period from 1 or more corporations
which are controlled foreign corporations in which the
taxpayer is a United States shareholder on the date such
dividends are paid.
``(3) Fixed base period.--
``(A) In general.--The term `fixed base period' means each
of 3 taxable years which are among the 5 most recent taxable
years of the taxpayer ending on or before December 31, 2002,
determined by disregarding--
``(i) the 1 taxable year for which the taxpayer had the
highest amount of dividends from 1 or more corporations which
are controlled foreign corporations relative to the other 4
taxable years, and
``(ii) the 1 taxable year for which the taxpayer had the
lowest amount of dividends from such corporations relative to
the other 4 taxable years.
``(B) Shorter period.--If the taxpayer has fewer than 5
taxable years ending on or before December 31, 2002, then in
lieu of applying subparagraph (A), the fixed base period
shall include all the taxable years of the taxpayer ending on
or before December 31, 2002.
``(c) Definitions and Special Rules.--For purposes of this
section--
``(1) Dividends.--The term `dividend' has the meaning given
such term by section 316, except that the term shall include
amounts described in section 951(a)(1)(B), but shall not
include amounts described in sections 78 and 959.
``(2) Controlled foreign corporations and united states
shareholders.--The term `controlled foreign corporation' has
the meaning given such term by section 957(a) and the term
`United States shareholder' has the meaning given such term
by section 951(b).
``(3) Foreign tax credits.--The amount of any income, war,
profits, or excess profit taxes paid (or deemed paid under
sections 902 and 960) or accrued by the taxpayer with respect
to the excess qualified foreign distribution amount for which
a credit would be allowable under section 901 in the absence
of this section, shall be reduced by 85 percent. No deduction
shall be allowed under this chapter for the portion of any
tax for which credit is not allowable by reason of the
preceding sentence.
``(4) Foreign tax credit limitation.--For purposes of
section 904, there shall be disregarded 85 percent of--
``(A) the excess qualified foreign distribution amount,
``(B) the amount determined under section 78 which is
attributable to such excess qualified foreign distribution
amount, and
``(C) the amounts (including assets, gross income, and
other relevant bases of apportionment) which are attributable
to the excess qualified foreign distribution amount which
would, determined without regard to this section, be used to
apportion the expenses, losses, and deductions of the
taxpayer under section 861 and 864 in determining its taxable
income from sources without the United States.

For purposes of applying subparagraph (C), the principles of
section 864(e)(3)(A) shall apply.
``(5) Treatment of acquisitions and dispositions.--Rules
similar to the rules of section 41(f)(3) shall apply in the
case of acquisitions or dispositions of controlled foreign
corporations occurring on or after the first day of the
earliest taxable year taken into account in determining the
fixed base period.
``(6) Treatment of consolidated groups.--Members of an
affiliated group of corporations filing a consolidated return
under section 1501 shall be treated as a single taxpayer for
purposes of this section.
``(7) Designation of dividends.--Subject to subsection
(b)(2), the taxpayer shall designate the particular dividends
received during the taxable year from 1 or more corporations
which are controlled foreign corporations in which it is a
United States shareholder which are dividends excluded from
the excess qualified foreign distribution amount. The total
amount of such designated dividends shall equal the base
dividend amount.
``(8) Treatment of expenses, losses, and deductions.--Any
expenses, losses, or deductions of the taxpayer allowable
under subchapter B--
``(A) shall not be applied to reduce the amounts described
in subsection (a)(1), and
``(B) shall be applied to reduce other income of the
taxpayer (determined without regard to the amounts described
in subsection (a)(1)).
``(d) Election.--
``(1) In general.--An election under this section shall be
made on the taxpayer's timely filed income tax return for the
first taxable year (determined by taking extensions into
account) ending 120 days or more after the date of the
enactment of this section, and, once made, may be revoked
only with the consent of the Secretary.
``(2) All controlled foreign corporations.--The election
shall apply to all corporations which are controlled foreign
corporations in which the taxpayer is a United States
shareholder during the taxable year.
``(3) Consolidated groups.--If a taxpayer is a member of an
affiliated group of corporations filing a consolidated return
under section 1501 for the taxable year, an election under
this section shall be made by the common parent of the
affiliated group which includes the taxpayer and shall apply
to all members of the affiliated group.
``(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary and appropriate to carry out
the purposes of this section, including regulations under
section 55 and regulations addressing corporations which,
during the fixed base period or thereafter, join or leave an
affiliated group of corporations filing a consolidated
return.''.
(b) Conforming Amendment.--The table of sections for
subpart F of part III of subchapter N of chapter 1 is amended
by adding at the end the following new item:

``Sec. 965. Toll tax imposed on excess qualified foreign distribution
amount.''.

(c) Effective Date.--The amendments made by this section
shall apply only to the first taxable year of the electing
taxpayer ending 120 days or more after the date of the
enactment of this Act.

SEC. 232. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON
HORSE RACES AND DOG RACES FROM GROSS INCOME OF
NONRESIDENT ALIEN INDIVIDUALS.

(a) In General.--Subsection (b) of section 872 (relating to
exclusions) is amended by redesignating paragraphs (5), (6),
and (7) as paragraphs (6), (7), and (8), respectively, and
inserting after paragraph (4) the following new paragraph:
``(5) Income derived from wagering transactions in certain
parimutuel pools.--Gross income derived by a nonresident
alien individual from a legal wagering transaction initiated
outside the United States in a parimutuel pool with respect
to a live horse race or dog race in the United States.''.
(b) Conforming Amendment.--Section 883(a)(4) is amended by
striking ``(5), (6), and (7)'' and inserting ``(6), (7), and
(8)''.
(c) Effective Date.--The amendments made by this section
shall apply to wagers made after the date of the enactment of
this Act.

[[Page S2040]]

SEC. 233. LIMITATION OF WITHHOLDING TAX FOR PUERTO RICO
CORPORATIONS.

(a) In General.--Subsection (b) of section 881 is amended
by redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following new paragraph:
``(2) Commonwealth of puerto rico.--If dividends are
received during a taxable year by a corporation--
``(A) created or organized in, or under the law of, the
Commonwealth of Puerto Rico, and
``(B) with respect to which the requirements of
subparagraphs (A), (B), and (C) of paragraph (1) are met for
the taxable year,

subsection (a) shall be applied for such taxable year by
substituting `10 percent' for `30 percent'.''.
(b) Withholding.--Subsection (c) of section 1442 (relating
to withholding of tax on foreign corporations) is amended--
(1) by striking ``For purposes'' and inserting the
following:
``(1) Guam, american samoa, the northern mariana islands,
and the virgin islands.--For purposes'', and
(2) by adding at the end the following new paragraph:
``(2) Commonwealth of puerto rico.--If dividends are
received during a taxable year by a corporation--
``(A) created or organized in, or under the law of, the
Commonwealth of Puerto Rico, and
``(B) with respect to which the requirements of
subparagraphs (A), (B), and (C) of section 881(b)(1) are met
for the taxable year,
subsection (a) shall be applied for such taxable year by
substituting `10 percent' for `30 percent'.''.
(b) Conforming Amendments.--
(1) Subsection (b) of section 881 is amended by striking
``Guam and Virgin Islands Corporations'' in the heading and
inserting ``Possessions''.
(2) Paragraph (1) of section 881(b) is amended by striking
``In general'' in the heading and inserting ``Guam, american
samoa, the northern mariana islands, and the virgin
islands''.
(c) Effective Date.--The amendments made by this section
shall apply to dividends paid after the date of the enactment
of this Act.

SEC. 234. REPORT ON WTO DISPUTE SETTLEMENT PANELS AND THE
APPELLATE BODY.

Not later than March 31, 2004, the Secretary of Commerce,
in consultation with the United States Trade Representative,
shall transmit a report to the Committee on Finance of the
Senate and the Committee on Ways and Means of the House of
Representatives, regarding whether dispute settlement panels
and the Appellate Body of the World Trade Organization have--
(1) added to or diminished the rights of the United States
by imposing obligations or restrictions on the use of
antidumping, countervailing, and safeguard measures not
agreed to under the Agreement on Implementation of Article VI
of the General Agreement on Tariffs and Trade of 1994, the
Agreement on Subsidies and Countervailing Measures, and the
Agreement on Safeguards;
(2) appropriately applied the standard of review contained
in Article 17.6 of the Agreement on Implementation of Article
VI of the General Agreement on Tariffs and Trade of 1994; or
(3) exceeded their authority or terms of reference under
the Agreements referred to in paragraph (1).

SEC. 235. STUDY OF IMPACT OF INTERNATIONAL TAX LAWS ON
TAXPAYERS OTHER THAN LARGE CORPORATIONS.

(a) Study.--The Secretary of the Treasury or the
Secretary's delegate shall conduct a study of the impact of
Federal international tax rules on taxpayers other than large
corporations, including the burdens placed on such taxpayers
in complying with such rules.
(b) Report.--Not later than 180 days after the date of the
enactment of this Act, the Secretary shall report to the
Committee on Finance of the Senate and the Committee on Ways
and Means of the House of Representatives the results of the
study conducted under subsection (a), including any
recommendations for legislative or administrative changes to
reduce the compliance burden on taxpayers other than large
corporations and for such other purposes as the Secretary
determines appropriate.

SEC. 236. CONSULTATIVE ROLE FOR SENATE COMMITTEE ON FINANCE
IN CONNECTION WITH THE REVIEW OF PROPOSED TAX
TREATIES.

Paragraph 1(j) of Rule XXV of the Standing Rules of the
Senate is amended by adding at the end the following:
``(3)(A) Notwithstanding any other rule of the Senate, the
Committee on Foreign Relations shall consult with the
Committee on Finance with respect to any proposed treaty on
taxation prior to reporting such treaty to the Senate.
``(B) The Committee on Foreign Relations shall request in
writing the views of the Committee on Finance with respect to
any proposed treaty on taxation which is referred to the
Committee on Foreign Relations. Not less than 120 days after
the date on which such request is made, the Committee on
Finance shall respond to such request in writing. If the
Committee on Finance does not provide such written response
during such 120 day period, the Committee on Finance shall be
deemed to have waived the opportunity to submit such views.
``(C) The Committee on Foreign Relations shall consider the
views submitted by the Committee on Finance and shall include
such views in any report of the treaty to the Senate.''.

TITLE III--DOMESTIC MANUFACTURING AND BUSINESS PROVISIONS

Subtitle A--General Provisions

SEC. 301. EXPANSION OF QUALIFIED SMALL-ISSUE BOND PROGRAM.

(a) In General.--Subparagraph (F) of section 144(a)(4)
(relating to $10,000,000 limit in certain cases) is amended
to read as follows:
``(F) Additional capital expenditures not taken into
account.--With respect to any issue, in addition to any
capital expenditure described in subparagraph (C), capital
expenditures of not to exceed $10,000,000 shall not be taken
into account for purposes of applying subparagraph
(A)(ii).''.
(b) Effective Date.--The amendment made by this section
shall apply to bonds issued after the date of the enactment
of this Act.

SEC. 302. EXPENSING OF BROADBAND INTERNET ACCESS
EXPENDITURES.

(a) In General.--Part VI of subchapter B of chapter 1
(relating to itemized deductions for individuals and
corporations) is amended by inserting after section 190 the
following new section:

``SEC. 191. BROADBAND EXPENDITURES.

``(a) Treatment of Expenditures.--
``(1) In general.--A taxpayer may elect to treat any
qualified broadband expenditure which is paid or incurred by
the taxpayer as an expense which is not chargeable to capital
account. Any expenditure which is so treated shall be allowed
as a deduction.
``(2) Election.--An election under paragraph (1) shall be
made at such time and in such manner as the Secretary may
prescribe by regulation.
``(b) Qualified Broadband Expenditures.--For purposes of
this section--
``(1) In general.--The term `qualified broadband
expenditure' means, with respect to any taxable year, any
direct or indirect costs incurred during 2004 and properly
taken into account for such taxable year with respect to--
``(A) the purchase or installation of qualified equipment
(including any upgrades thereto), and
``(B) the connection of such qualified equipment to any
qualified subscriber.
``(2) Certain satellite expenditures excluded.--Such term
shall not include any costs incurred with respect to the
launching of any satellite equipment.
``(3) Leased equipment.--Such term shall include so much of
the purchase price paid by the lessor of qualified equipment
subject to a lease described in subsection (c)(2)(B) as is
attributable to expenditures incurred by the lessee which
would otherwise be described in paragraph (1).
``(c) When Expenditures Taken Into Account.--For purposes
of this section--
``(1) In general.--Qualified broadband expenditures with
respect to qualified equipment shall be taken into account
with respect to the first taxable year in which--
``(A) current generation broadband services are provided
through such equipment to qualified subscribers, or
``(B) next generation broadband services are provided
through such equipment to qualified subscribers.
``(2) Limitation.--
``(A) In general.--Qualified expenditures shall be taken
into account under paragraph (1) only with respect to
qualified equipment--
``(i) the original use of which commences with the
taxpayer, and
``(ii) which is placed in service, after December 31, 2003.
``(B) Sale-leasebacks.--For purposes of subparagraph (A),
if property--
``(i) is originally placed in service after December 31,
2003, by any person, and
``(ii) sold and leased back by such person within 3 months
after the date such property was originally placed in
service,

such property shall be treated as originally placed in
service not earlier than the date on which such property is
used under the leaseback referred to in clause (ii).
``(d) Special Allocation Rules.--
``(1) Current generation broadband services.--For purposes
of determining the amount of qualified broadband expenditures
under subsection (a)(1) with respect to qualified equipment
through which current generation broadband services are
provided, if the qualified equipment is capable of serving
both qualified subscribers and other subscribers, the
qualified broadband expenditures shall be multiplied by a
fraction--
``(A) the numerator of which is the sum of the number of
potential qualified subscribers within the rural areas and
the underserved areas which the equipment is capable of
serving with current generation broadband services, and
``(B) the denominator of which is the total potential
subscriber population of the area which the equipment is
capable of serving with current generation broadband
services.
``(2) Next generation broadband services.--For purposes of
determining the amount of qualified broadband expenditures
under subsection (a)(1) with respect to qualified equipment
through which next generation broadband services are
provided, if the qualified equipment is capable of serving
both qualified subscribers and other subscribers, the
qualified expenditures shall be multiplied by a fraction--
``(A) the numerator of which is the sum of--
``(i) the number of potential qualified subscribers within
the rural areas and underserved areas, plus
``(ii) the number of potential qualified subscribers within
the area consisting only of residential subscribers not
described in clause (i),

which the equipment is capable of serving with next
generation broadband services, and
``(B) the denominator of which is the total potential
subscriber population of the area which the equipment is
capable of serving with next generation broadband services.
``(e) Definitions.--For purposes of this section--
``(1) Antenna.--The term `antenna' means any device used to
transmit or receive signals through the electromagnetic
spectrum, including satellite equipment.

[[Page S2041]]

``(2) Cable operator.--The term `cable operator' has the
meaning given such term by section 602(5) of the
Communications Act of 1934 (47 U.S.C. 522(5)).
``(3) Commercial mobile service carrier.--The term
`commercial mobile service carrier' means any person
authorized to provide commercial mobile radio service as
defined in section 20.3 of title 47, Code of Federal
Regulations.
``(4) Current generation broadband service.--The term
`current generation broadband service' means the transmission
of signals at a rate of at least 1,000,000 bits per second to
the subscriber and at least 128,000 bits per second from the
subscriber.
``(5) Multiplexing or demultiplexing.--The term
`multiplexing' means the transmission of 2 or more signals
over a single channel, and the term `demultiplexing' means
the separation of 2 or more signals previously combined by
compatible multiplexing equipment.
``(6) Next generation broadband service.--The term `next
generation broadband service' means the transmission of
signals at a rate of at least 22,000,000 bits per second to
the subscriber and at least 5,000,000 bits per second from
the subscriber.
``(7) Nonresidential subscriber.--The term `nonresidential
subscriber' means any person who purchases broadband services
which are delivered to the permanent place of business of
such person.
``(8) Open video system operator.--The term `open video
system operator' means any person authorized to provide
service under section 653 of the Communications Act of 1934
(47 U.S.C. 573).
``(9) Other wireless carrier.--The term `other wireless
carrier' means any person (other than a telecommunications
carrier, commercial mobile service carrier, cable operator,
open video system operator, or satellite carrier) providing
current generation broadband services or next generation
broadband service to subscribers through the radio
transmission of energy.
``(10) Packet switching.--The term `packet switching' means
controlling or routing the path of any digitized transmission
signal which is assembled into packets or cells.
``(11) Provider.--The term `provider' means, with respect
to any qualified equipment--
``(A) a cable operator,
``(B) a commercial mobile service carrier,
``(C) an open video system operator,
``(D) a satellite carrier,
``(E) a telecommunications carrier, or
``(F) any other wireless carrier,

providing current generation broadband services or next
generation broadband services to subscribers through such
qualified equipment.
``(12) Provision of services.--A provider shall be treated
as providing services to 1 or more subscribers if--
``(A) such a subscriber has been passed by the provider's
equipment and can be connected to such equipment for a
standard connection fee,
``(B) the provider is physically able to deliver current
generation broadband services or next generation broadband
services, as applicable, to such a subscriber without
making more than an insignificant investment with respect
to such subscriber,
``(C) the provider has made reasonable efforts to make such
subscribers aware of the availability of such services,
``(D) such services have been purchased by 1 or more such
subscribers, and
``(E) such services are made available to such subscribers
at average prices comparable to those at which the provider
makes available similar services in any areas in which the
provider makes available such services.
``(13) Qualified equipment.--
``(A) In general.--The term `qualified equipment' means
equipment which provides current generation broadband
services or next generation broadband services--
``(i) at least a majority of the time during periods of
maximum demand to each subscriber who is utilizing such
services, and
``(ii) in a manner substantially the same as such services
are provided by the provider to subscribers through equipment
with respect to which no deduction is allowed under
subsection (a)(1).
``(B) Only certain investment taken into account.--Except
as provided in subparagraph (C) or (D), equipment shall be
taken into account under subparagraph (A) only to the extent
it--
``(i) extends from the last point of switching to the
outside of the unit, building, dwelling, or office owned or
leased by a subscriber in the case of a telecommunications
carrier,
``(ii) extends from the customer side of the mobile
telephone switching office to a transmission/receive antenna
(including such antenna) owned or leased by a subscriber in
the case of a commercial mobile service carrier,
``(iii) extends from the customer side of the headend to
the outside of the unit, building, dwelling, or office owned
or leased by a subscriber in the case of a cable operator or
open video system operator, or
``(iv) extends from a transmission/receive antenna
(including such antenna) which transmits and receives signals
to or from multiple subscribers, to a transmission/receive
antenna (including such antenna) on the outside of the unit,
building, dwelling, or office owned or leased by a subscriber
in the case of a satellite carrier or other wireless carrier,
unless such other wireless carrier is also a
telecommunications carrier.
``(C) Packet switching equipment.--Packet switching
equipment, regardless of location, shall be taken into
account under subparagraph (A) only if it is deployed in
connection with equipment described in subparagraph (B) and
is uniquely designed to perform the function of packet
switching for current generation broadband services or next
generation broadband services, but only if such packet
switching is the last in a series of such functions performed
in the transmission of a signal to a subscriber or the first
in a series of such functions performed in the transmission
of a signal from a subscriber.
``(D) Multiplexing and demultiplexing equipment.--
Multiplexing and demultiplexing equipment shall be taken into
account under subparagraph (A) only to the extent it is
deployed in connection with equipment described in
subparagraph (B) and is uniquely designed to perform the
function of multiplexing and demultiplexing packets or cells
of data and making associated application adaptions, but only
if such multiplexing or demultiplexing equipment is located
between packet switching equipment described in subparagraph
(C) and the subscriber's premises.
``(14) Qualified subscriber.--The term `qualified
subscriber' means--
``(A) with respect to the provision of current generation
broadband services--
``(i) any nonresidential subscriber maintaining a permanent
place of business in a rural area or underserved area, or
``(ii) any residential subscriber residing in a dwelling
located in a rural area or underserved area which is not a
saturated market, and
``(B) with respect to the provision of next generation
broadband services--
``(i) any nonresidential subscriber maintaining a permanent
place of business in a rural area or underserved area, or
``(ii) any residential subscriber.
``(15) Residential subscriber.--The term `residential
subscriber' means any individual who purchases broadband
services which are delivered to such individual's dwelling.
``(16) Rural area.--The term `rural area' means any census
tract which--
``(A) is not within 10 miles of any incorporated or census
designated place containing more than 25,000 people, and
``(B) is not within a county or county equivalent which has
an overall population density of more than 500 people per
square mile of land.
``(17) Rural subscriber.--The term `rural subscriber' means
any residential subscriber residing in a dwelling located in
a rural area or nonresidential subscriber maintaining a
permanent place of business located in a rural area.
``(18) Satellite carrier.--The term `satellite carrier'
means any person using the facilities of a satellite or
satellite service licensed by the Federal Communications
Commission and operating in the Fixed-Satellite Service under
part 25 of title 47 of the Code of Federal Regulations or the
Direct Broadcast Satellite Service under part 100 of title 47
of such Code to establish and operate a channel of
communications for distribution of signals, and owning or
leasing a capacity or service on a satellite in order to
provide such point-to-multipoint distribution.
``(19) Saturated market.--The term `saturated market' means
any census tract in which, as of the date of the enactment of
this section--
``(A) current generation broadband services have been
provided by a single provider to 85 percent or more of the
total number of potential residential subscribers residing in
dwellings located within such census tract, and
``(B) such services can be utilized--
``(i) at least a majority of the time during periods of
maximum demand by each such subscriber who is utilizing such
services, and
``(ii) in a manner substantially the same as such services
are provided by the provider to subscribers through equipment
with respect to which no deduction is allowed under
subsection (a)(1).
``(20) Subscriber.--The term `subscriber' means any person
who purchases current generation broadband services or next
generation broadband services.
``(21) Telecommunications carrier.--The term
`telecommunications carrier' has the meaning given such term
by section 3(44) of the Communications Act of 1934 (47 U.S.C.
153(44)), but--
``(A) includes all members of an affiliated group of which
a telecommunications carrier is a member, and
``(B) does not include a commercial mobile service carrier.
``(22) Total potential subscriber population.--The term
`total potential subscriber population' means, with respect
to any area and based on the most recent census data, the
total number of potential residential subscribers residing in
dwellings located in such area and potential nonresidential
subscribers maintaining permanent places of business located
in such area.
``(23) Underserved area.--The term `underserved area'
means--
``(A) any census tract which is located in--
``(i) an empowerment zone or enterprise community
designated under section 1391, or
``(ii) the District of Columbia Enterprise Zone established
under section 1400, or
``(B) any census tract--
``(i) the poverty level of which is at least 30 percent
(based on the most recent census data), and
``(ii) the median family income of which does not exceed--

``(I) in the case of a census tract located in a
metropolitan statistical area, 70 percent of the greater of
the metropolitan area median family income or the statewide
median family income, and
``(II) in the case of a census tract located in a
nonmetropolitan statistical area, 70 percent of the
nonmetropolitan statewide median family income.

``(24) Underserved subscriber.--The term `underserved
subscriber' means any residential subscriber residing in a
dwelling located in an underserved area or nonresidential
subscriber maintaining a permanent place of business located
in an underserved area.
``(f) Special Rules.--

[[Page S2042]]

``(1) Property used outside the united states, etc., not
qualified.--No expenditures shall be taken into account under
subsection (a)(1) with respect to the portion of the cost of
any property referred to in section 50(b) or with respect to
the portion of the cost of any property specified in an
election under section 179.
``(2) Basis reduction.--
``(A) In general.--For purposes of this title, the basis of
any property shall be reduced by the portion of the cost of
such property taken into account under subsection (a)(1).
``(B) Ordinary income recapture.--For purposes of section
1245, the amount of the deduction allowable under subsection
(a)(1) with respect to any property which is of a character
subject to the allowance for depreciation shall be treated as
a deduction allowed for depreciation under section 167.
``(3) Coordination with section 38.--No credit shall be
allowed under section 38 with respect to any amount for which
a deduction is allowed under subsection (a)(1).''.
(b) Special Rule for Mutual or Cooperative Telephone
Companies.--Section 501(c)(12)(B) (relating to list of exempt
organizations) is amended by striking ``or'' at the end of
clause (iii), by striking the period at the end of clause
(iv) and inserting ``, or'', and by adding at the end the
following:
``(v) from the sale of property subject to a lease
described in section 191(c)(2)(B), but only to the extent
such income does not in any year exceed an amount equal to
the qualified broadband expenditures which would be taken
into account under section 191 for such year if the mutual or
cooperative telephone company was not exempt from taxation
and was treated as the owner of the property subject to such
lease.''.
(c) Conforming Amendments.--
(1) Section 263(a)(1) (relating to capital expenditures) is
amended by striking ``or'' at the end of subparagraph (G), by
striking the period at the end of subparagraph (H) and
inserting ``, or'', and by adding at the end the following
new subparagraph:
``(I) expenditures for which a deduction is allowed under
section 191.''.
(2) Section 1016(a) of such Code is amended by striking
``and'' at the end of paragraph (27), by striking the period
at the end of paragraph (28) and inserting ``, and'', and by
adding at the end the following new paragraph:
``(29) to the extent provided in section 191(f)(2).''.
(3) The table of sections for part VI of subchapter A of
chapter 1 of such Code is amended by inserting after the item
relating to section 190 the following new item:
``Sec. 191. Broadband expenditures.''.

(d) Designation of Census Tracts.--
(1) In general.--The Secretary of the Treasury shall, not
later than 90 days after the date of the enactment of this
Act, designate and publish those census tracts meeting the
criteria described in paragraphs (16), (22), and (23) of
section 191(e) of the Internal Revenue Code of 1986 (as added
by this section). In making such designations, the Secretary
of the Treasury shall consult with such other departments and
agencies as the Secretary determines appropriate.
(2) Saturated market.--
(A) In general.--For purposes of designating and publishing
those census tracts meeting the criteria described in
subsection (e)(19) of such section 191--
(i) the Secretary of the Treasury shall prescribe not later
than 30 days after the date of the enactment of this Act the
form upon which any provider which takes the position that it
meets such criteria with respect to any census tract shall
submit a list of such census tracts (and any other
information required by the Secretary) not later than 60 days
after the date of the publication of such form, and
(ii) the Secretary of the Treasury shall publish an
aggregate list of such census tracts and the applicable
providers not later than 30 days after the last date such
submissions are allowed under clause (i).
(B) No subsequent lists required.--The Secretary of the
Treasury shall not be required to publish any list of census
tracts meeting such criteria subsequent to the list described
in subparagraph (A)(ii).
(e) Other Regulatory Matters.--
(1) Prohibition.--No Federal or State agency or
instrumentality shall adopt regulations or ratemaking
procedures that would have the effect of eliminating or
reducing any deduction or portion thereof allowed under
section 191 of the Internal Revenue Code of 1986 (as added by
this section) or otherwise subverting the purpose of this
section.
(2) Treasury regulatory authority.--It is the intent of
Congress in providing the election to deduct qualified
broadband expenditures under section 191 of the Internal
Revenue Code of 1986 (as added by this section) to provide
incentives for the purchase, installation, and connection of
equipment and facilities offering expanded broadband access
to the Internet for users in certain low income and rural
areas of the United States, as well as to residential users
nationwide, in a manner that maintains competitive neutrality
among the various classes of providers of broadband services.
Accordingly, the Secretary of the Treasury shall prescribe
such regulations as may be necessary or appropriate to carry
out the purposes of section 191 of such Code, including--
(A) regulations to determine how and when a taxpayer that
incurs qualified broadband expenditures satisfies the
requirements of section 191 of such Code to provide broadband
services, and
(B) regulations describing the information, records, and
data taxpayers are required to provide the Secretary to
substantiate compliance with the requirements of section 191
of such Code.
(f) Effective Date.--The amendments made by this section
shall apply to expenditures incurred after December 31, 2003.

SEC. 303. EXEMPTION OF NATURAL AGING PROCESS IN DETERMINATION
OF PRODUCTION PERIOD FOR DISTILLED SPIRITS
UNDER SECTION 263A.

(a) In General.--Section 263A(f) of the Internal Revenue
Code of 1986 (relating to general exceptions) is amended by
adding at the end the following new paragraph:
``(5) Exemption of natural aging process in determination
of production period for distilled spirits.--For purposes of
this subsection, the production period for distilled spirits
shall be determined without regard to any period allocated to
the natural aging process.''.
(b) Effective Date.--The amendment made by this section
shall apply to production periods beginning after the date of
the enactment of this Act.

SEC. 304. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER
SECTION 355.

(a) In General.--Section 355(b) (defining active conduct of
a trade or business) is amended by adding at the end the
following new paragraph:
``(3) Special rules relating to active business
requirement.--
``(A) In general.--For purposes of determining whether a
corporation meets the requirement of paragraph (2)(A), all
members of such corporation's separate affiliated group shall
be treated as one corporation. For purposes of the preceding
sentence, a corporation's separate affiliated group is the
affiliated group which would be determined under section
1504(a) if such corporation were the common parent and
section 1504(b) did not apply.
``(B) Control.--For purposes of paragraph (2)(D), all
distributee corporations which are members of the same
affiliated group (as defined in section 1504(a) without
regard to section 1504(b)) shall be treated as one
distributee corporation.''.
(b) Conforming Amendments.--
(1) Subparagraph (A) of section 355(b)(2) is amended to
read as follows:
``(A) it is engaged in the active conduct of a trade or
business,''.
(2) Section 355(b)(2) is amended by striking the last
sentence.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply--
(A) to distributions after the date of the enactment of
this Act, and
(B) for purposes of determining the continued qualification
under section 355(b)(2)(A) of the Internal Revenue Code of
1986 (as amended by subsection (b)(1)) of distributions made
before such date, as a result of an acquisition, disposition,
or other restructuring after such date.
(2) Transition rule.--The amendments made by this section
shall not apply to any distribution pursuant to a transaction
which is--
(A) made pursuant to an agreement which was binding on such
date of enactment and at all times thereafter,
(B) described in a ruling request submitted to the Internal
Revenue Service on or before such date, or
(C) described on or before such date in a public
announcement or in a filing with the Securities and Exchange
Commission.
(3) Election to have amendments apply.--Paragraph (2) shall
not apply if the distributing corporation elects not to have
such paragraph apply to distributions of such corporation.
Any such election, once made, shall be irrevocable.

SEC. 305. EXCLUSION OF CERTAIN INDEBTEDNESS OF SMALL BUSINESS
INVESTMENT COMPANIES FROM ACQUISITION
INDEBTEDNESS.

(a) In General.--Section 514(c) (relating to acquisition
indebtedness) is amended by adding at the end the following
new paragraph:
``(10) Certain indebtedness of small business investment
companies.--For purposes of this section, the term
`acquisition indebtedness' does not include any indebtedness
incurred by a small business investment company licensed
under the Small Business Investment Act of 1958 which is
evidenced by a debenture--
``(A) issued by such company under section 303(a) of such
Act, and
``(B) held or guaranteed by the Small Business
Administration.''.
(b) Effective Date.--The amendment made by this section
shall apply to any indebtedness incurred after December 31,
2003, by a small business investment company described in
section 514(c)(10) of the Internal Revenue Code of 1986 (as
added by this section) with respect to property acquired by
such company after such date.

SEC. 306. MODIFIED TAXATION OF IMPORTED ARCHERY PRODUCTS.

(a) Bows.--Paragraph (1) of section 4161(b) (relating to
bows) is amended to read as follows:
``(1) Bows.--
``(A) In general.--There is hereby imposed on the sale by
the manufacturer, producer, or importer of any bow which has
a peak draw weight of 30 pounds or more, a tax equal to 11
percent of the price for which so sold.
``(B) Archery equipment.--There is hereby imposed on the
sale by the manufacturer, producer, or importer--
``(i) of any part or accessory suitable for inclusion in or
attachment to a bow described in subparagraph (A), and
``(ii) of any quiver or broadhead suitable for use with an
arrow described in paragraph (2),

a tax equal to 11 percent of the price for which so sold.''.
(b) Arrows.--Subsection (b) of section 4161 (relating to
bows and arrows, etc.) is amended by redesignating paragraph
(3) as paragraph (4) and inserting after paragraph (2) the
following:
``(3) Arrows.--
``(A) In general.--There is hereby imposed on the sale by
the manufacturer, producer, or importer of any arrow, a tax
equal to 12 percent of the price for which so sold.

[[Page S2043]]

``(B) Exception.--In the case of any arrow of which the
shaft or any other component has 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 regard to this subparagraph), over
``(II) the amount of tax paid with respect to the tax
imposed under paragraph (1) or (2) on such shaft or
component.

``(C) Arrow.--For purposes of this paragraph, the term
`arrow' means any shaft described 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.--''.
(d) Effective Date.--The amendments made by this section
shall apply to articles sold by the manufacturer, producer,
or importer after December 31, 2003.

SEC. 307. MODIFICATION TO COOPERATIVE MARKETING RULES TO
INCLUDE VALUE ADDED PROCESSING INVOLVING
ANIMALS.

(a) In General.--Section 1388 (relating to definitions and
special rules) is amended by adding at the end the following
new subsection:
``(k) Cooperative Marketing Includes Value-Added Processing
Involving Animals.--For purposes of section 521 and this
subchapter, the marketing of the products of members or other
producers shall include the feeding of such products to
cattle, hogs, fish, chickens, or other animals and the sale
of the resulting animals or animal products.''.
(b) Conforming Amendment.--Section 521(b) is amended by
adding at the end the following new paragraph:
``(7) Cross Reference.--

``For treatment of value-added processing involving animals, see
section 1388(k).''.
(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. 308. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO
FARMERS' COOPERATIVE ORGANIZATIONS.

(a) In General.--Section 7428(a)(1) (relating to
declaratory judgments of tax exempt organizations) is amended
by striking ``or'' at the end of subparagraph (B) and by
adding at the end the following new subparagraph:
``(D) with respect to the initial classification or
continuing classification of a cooperative as an organization
described in section 521(b) which is exempt from tax under
section 521(a), or''.
(b) Effective Date.--The amendments made by this section
shall apply with respect to pleadings filed after the date of
the enactment of this Act.

SEC. 309. TEMPORARY SUSPENSION OF PERSONAL HOLDING COMPANY
TAX.

(a) In General.--Section 541 (relating to imposition of
personal holding company tax) is amended by adding at the end
the following new sentence: ``The preceding sentence shall
not apply with respect to any taxable year to which section
1(h)(11) (as in effect on the date of the enactment of this
sentence) applies.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2003.

SEC. 310. INCREASE IN SECTION 179 EXPENSING.

(a) In General.--Section 179(b)(2) (relating to reduction
in limitation) is amended by inserting ``50 percent of''
before ``the amount''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2002.

SEC. 311. THREE-YEAR CARRYBACK OF NET OPERATING LOSSES.

(a) In General.--Paragraph (1) of section 172(b) (relating
to years to which loss may be carried) is amended by adding
at the end the following new subparagraph:
``(I) Special rule for 2003.--In the case of a net
operating loss for any taxable year ending during 2003,
subparagraph (A)(i) shall be applied by substituting `3' for
`2'.''.
(b) Election To Disregard 3-Year Carryback.--Section 172
(relating to net operating loss deduction) is amended by
redesignating subsection (k) as subsection (l) and by
inserting after subsection (j) the following new subsection:
``(k) Election To Disregard 3-Year Carryback for Certain
Net Operating Losses.--Any taxpayer entitled to a 3-year
carryback under subsection (b)(1)(I) from any loss year may
elect to have the carryback period with respect to such loss
year determined without regard to subsection (b)(1)(I). Such
election shall be made in such manner as may be prescribed by
the Secretary and shall be made by the due date (including
extensions of time) for filing the taxpayer's return for the
taxable year of the net operating loss. Such election, once
made for any taxable year, shall be irrevocable for such
taxable year.''.
(c) Temporary Suspension of 90 Percent Limit on Certain NOL
Carryovers.--
(1) In general.--Section 56(d)(1)(A)(ii)(I) (relating to
general rule defining alternative tax net operating loss
deduction) is amended--
(A) by striking ``or 2002'' and inserting ``, 2002, or
2003'', and
(B) by striking ``and 2002'' and inserting ``, 2002, and
2003''.
(d) Technical Corrections.--
(1) Subparagraph (H) of section 172(b)(1) is amended by
striking ``a taxpayer which has''.
(2) Section 102(c)(2) of the Job Creation and Worker
Assistance Act of 2002 (Public Law 107-147) is amended by
striking ``before January 1, 2003'' and inserting ``after
December 31, 1990''.
(3)(A) Subclause (I) of section 56(d)(1)(A)(i) is amended
by striking ``attributable to carryovers''.
(B) Subclause (I) of section 56(d)(1)(A)(ii) is amended--
(i) by striking ``for taxable years'' and inserting ``from
taxable years'', and
(ii) by striking ``carryforwards'' and inserting
``carryovers''.
(e) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to net operating
losses for taxable years ending after December 31, 2002.
(2) Technical corrections.--The amendments made by
subsection (d) shall take effect as if included in the
amendments made by section 102 of the Job Creation and Worker
Assistance Act of 2002.
(3) Election.--In the case of a net operating loss for a
taxable year ending during 2003--
(A) any election made under section 172(b)(3) of such Code
may (notwithstanding such section) be revoked before April
15, 2004, and
(B) any election made under section 172(k) (as added by
this section) of such Code shall (notwithstanding such
section) be treated as timely made if made before April 15,
2004.

Subtitle B--Manufacturing Relating to Films

SEC. 321. SPECIAL RULES FOR CERTAIN FILM AND TELEVISION
PRODUCTIONS.

(a) In General.--Part VI of subchapter B of chapter 1 is
amended by inserting after section 180 the following new
section:

``SEC. 181. TREATMENT OF QUALIFIED FILM AND TELEVISION
PRODUCTIONS.

``(a) Election To Treat Certain Costs of Qualified Film and
Television Productions as Expenses.--
``(1) In general.--A taxpayer may elect to treat the cost
of any qualified film or television production as an expense
which is not chargeable to capital account. Any cost so
treated shall be allowed as a deduction.
``(2) Dollar limitation.--
``(A) In general.--The aggregate cost which may be taken
into account under paragraph (1) with respect to each
qualified film or television production shall not exceed
$15,000,000.
``(B) Higher dollar limitation for productions in certain
areas.--In the case of any qualified film or television
production the aggregate cost of which is significantly
incurred in an area eligible for designation as--
``(i) a low-income community under section 45D, or
``(ii) a distressed county or isolated area of distress by
the Delta Regional Authority established under section
2009aa-1 of title 7, United States Code,

subparagraph (A) shall be applied by substituting
`$20,000,000' for `$15,000,000'.
``(b) Amortization of Remaining Costs.--
``(1) In general.--If an election is made under subsection
(a) with respect to any qualified film or television
production, that portion of the basis of such production in
excess of the amount taken into account under subsection (a)
shall be allowed as a deduction ratably over the 36-month
period beginning with the month in which such production is
placed in service.
``(2) No other deduction or amortization deduction
allowable.--With respect to the basis of any qualified film
or television production described in paragraph (1), no other
depreciation or amortization deduction shall be allowable.
``(c) Election.--
``(1) In general.--An election under subsection (a) with
respect to any qualified film or television production shall
be made in such manner as prescribed by the Secretary and by
the due date (including extensions) for filing the taxpayer's
return of tax under this chapter for the taxable year in
which costs of the production are first incurred.
``(2) Revocation of election.--Any election made under
subsection (a) may not be revoked without the consent of the
Secretary.
``(d) Qualified Film or Television Production.--For
purposes of this section--
``(1) In general.--The term `qualified film or television
production' means any production described in paragraph (2)
if 75 percent of the total compensation of the production is
qualified compensation.
``(2) Production.--
``(A) In general.--A production is described in this
paragraph if such production is property described in section
168(f)(3). For purposes of a television series, only the
first 44 episodes of such series may be taken into account.
``(B) Exception.--A production is not described in this
paragraph if records are required under section 2257 of title
18, United States Code, to be maintained with respect to any
performer in such production.
``(3) Qualified compensation.--For purposes of paragraph
(1)--
``(A) In general.--The term `qualified compensation' means
compensation for services performed in the United States by
actors, directors, producers, and other relevant production
personnel.
``(B) Participations and residuals excluded.--The term
`compensation' does not include participations and residuals
(as defined in section 167(g)(7)(B)).
``(e) Application of Certain Other Rules.--For purposes of
this section, rules similar to the rules of subsections
(b)(2) and (c)(4) of section 194 shall apply.
``(f) Termination.--This section shall not apply to
qualified film and television productions commencing after
December 31, 2008.''.
(b) Conforming Amendment.--The table of sections for part
VI of subchapter B of chapter 1 is amended by inserting after
the item relating to section 180 the following new item:

[[Page S2044]]

``Sec. 181. Treatment of qualified film and television productions.''.

(c) Effective Date.--The amendments made by this section
shall apply to qualified film and television productions (as
defined in section 181(d)(1) of the Internal Revenue Code of
1986, as added by this section) commencing after the date of
the enactment of this Act.

SEC. 322. MODIFICATION OF APPLICATION OF INCOME FORECAST
METHOD OF DEPRECIATION.

(a) In General.--Section 167(g) (relating to depreciation
under income forecast method) is amended by adding at the end
the following new paragraph:
``(7) Treatment of participations and residuals.--
``(A) In general.--For purposes of determining the
depreciation deduction allowable with respect to a property
under this subsection, the taxpayer may include
participations and residuals with respect to such property in
the adjusted basis of such property for the taxable year in
which the property is placed in service, but only to the
extent that such participations and residuals relate to
income estimated (for purposes of this subsection) to be
earned in connection with the property before the close of
the 10th taxable year referred to in paragraph (1)(A).
``(B) Participations and residuals.--For purposes of this
paragraph, the term `participations and residuals' means,
with respect to any property, costs the amount of which by
contract varies with the amount of income earned in
connection with such property.
``(C) Special rules relating to recomputation years.--If
the adjusted basis of any property is determined under this
paragraph, paragraph (4) shall be applied by substituting
`for each taxable year in such period' for `for such period'.
``(D) Other special rules.--
``(i) Participations and residuals.--Notwithstanding
subparagraph (A), the taxpayer may exclude participations and
residuals from the adjusted basis of such property and deduct
such participations and residuals in the taxable year that
such participations and residuals are paid.
``(ii) Coordination with other rules.--Deductions computed
in accordance with this paragraph shall be allowable
notwithstanding paragraph (1)(B) or sections 263, 263A, 404,
419, or 461(h).
``(E) Authority to make adjustments.--The Secretary shall
prescribe appropriate adjustments to the basis of property
and to the look-back method for the additional amounts
allowable as a deduction solely by reason of this
paragraph.''.
(b) Determination of Income.--Section 167(g)(5) (relating
to special rules) is amended by redesignating subparagraphs
(E) and (F) as subparagraphs (F) and (G), respectively, and
inserting after subparagraph (D) the following new
subparagraph:
``(E) Treatment of distribution costs.--For purposes of
this subsection, the income with respect to any property
shall be the taxpayer's gross income from such property.''.
(c) Effective Date.--The amendments made by this section
shall apply to property placed in service after the date of
the enactment of this Act.

Subtitle C--Manufacturing Relating to Timber

SEC. 331. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.

(a) In General.--So much of subsection (b) of section 194
(relating to amortization of reforestation expenditures) as
precedes paragraph (2) is amended to read as follows:
``(b) Treatment as Expenses.--
``(1) Election to treat certain reforestation expenditures
as expenses.--
``(A) In general.--In the case of any qualified timber
property with respect to which the taxpayer has made (in
accordance with regulations prescribed by the Secretary) an
election under this subsection, the taxpayer shall treat
reforestation expenditures which are paid or incurred during
the taxable year with respect to such property as an expense
which is not chargeable to capital account. The reforestation
expenditures so treated shall be allowed as a deduction.
``(B) Dollar limitation.--The aggregate amount of
reforestation expenditures which may be taken into account
under subparagraph (A) with respect to each qualified timber
property for any taxable year shall not exceed $10,000
($5,000 in the case of a separate return by a married
individual (as defined in section 7703)).''.
(b) Net Amortizable Basis.--Section 194(c)(2) (defining
amortizable basis) is amended by inserting ``which have not
been taken into account under subsection (b)'' after
``expenditures''.
(c) Conforming Amendments.--
(1) Section 194(b) is amended by striking paragraphs (3)
and (4).
(2) Section 194(b)(2) is amended by striking ``paragraph
(1)'' both places it appears and inserting ``paragraph
(1)(B)''.
(3) Section 194(c) is amended by striking paragraph (4) and
inserting the following new paragraphs:
``(4) Treatment of trusts and estates.--
``(A) In general.--Except as provided in subparagraph (B),
this section shall not apply to trusts and estates.
``(B) Amortization deduction allowed to estates.--The
benefit of the deduction for amortization provided by
subsection (a) shall be allowed to estates in the same manner
as in the case of an individual. The allowable deduction
shall be apportioned between the income beneficiary and the
fiduciary under regulations prescribed by the Secretary. Any
amount so apportioned to a beneficiary shall be taken into
account for purposes of determining the amount allowable as a
deduction under subsection (a) to such beneficiary.
``(5) Application with other deductions.--No deduction
shall be allowed under any other provision of this chapter
with respect to any expenditure with respect to which a
deduction is allowed or allowable under this section to the
taxpayer .''.
(4) The heading for section 194 is amended by striking
``AMORTIZATION'' and inserting ``TREATMENT''.
(5) The item relating to section 194 in the table of
sections for part VI of subchapter B of chapter 1 is amended
by striking ``Amortization'' and inserting ``Treatment''.
(d) Repeal of Reforestation Credit.--
(1) In general.--Section 46 (relating to amount of credit)
is amended--
(A) by adding ``and'' at the end of paragraph (1),
(B) by striking ``, and '' at the end of paragraph (2) and
inserting a period, and
(C) by striking paragraph (3).
(2) Conforming amendments.--
(A) Section 48 is amended--
(i) by striking subsection (b),
(ii) by striking ``this subsection'' in paragraph (5) of
subsection (a) and inserting ``subsection (a)'', and
(iii) by redesignating such paragraph (5) as subsection
(b).
(B) The heading for section 48 is amended by striking ``;
REFORESTATION CREDIT''.
(C) The item relating to section 48 in the table of
sections for subpart E of part IV of subchapter A of chapter
1 is amended by striking ``, reforestation credit''.
(D) Section 50(c)(3) is amended by striking ``or
reforestation credit''.
(e) Effective Date.--The amendments made by this section
shall apply with respect to expenditures paid or incurred
after the date of the enactment of this Act.

SEC. 332. ELECTION TO TREAT CUTTING OF TIMBER AS A SALE OR
EXCHANGE.

Any election under section 631(a) of the Internal Revenue
Code of 1986 made for a taxable year ending on or before the
date of the enactment of this Act may be revoked by the
taxpayer for any taxable year ending after such date. For
purposes of determining whether the taxpayer may make a
further election under such section, such election (and any
revocation under this section) shall not be taken into
account.

SEC. 333. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO
APPLY TO OUTRIGHT SALES BY LANDOWNERS.

(a) In General.--The first sentence of section 631(b)
(relating to disposal of timber with a retained economic
interest) is amended by striking ``retains an economic
interest in such timber'' and inserting ``either retains an
economic interest in such timber or makes an outright sale of
such timber''.
(b) Conforming Amendments.--
(1) The third sentence of section 631(b) is amended by
striking ``The date of disposal'' and inserting ``In the case
of disposal of timber with a retained economic interest, the
date of disposal''.
(2) The heading for section 631(b) is amended by striking
``With a Retained Economic Interest''.
(c) Effective Date.--The amendments made by this section
shall apply to sales after the date of the enactment of this
Act.

SEC. 334. MODIFICATION OF SAFE HARBOR RULES FOR TIMBER REITS.

(a) Expansion of Prohibited Transaction Safe Harbor.--
Section 857(b)(6) (relating to income from prohibited
transactions) is amended by redesignating subparagraphs (D)
and (E) as subparagraphs (E) and (F), respectively, and by
inserting after subparagraph (C) the following new
subparagraph:
``(D) Certain sales not to constitute prohibited
transactions.--For purposes of this part, the term
`prohibited transaction' does not include a sale of property
which is a real estate asset (as defined in section
856(c)(5)(B)) if--
``(i) the trust held the property for not less than 4 years
in connection with the trade or business of producing timber,
``(ii) the aggregate expenditures made by the trust, or a
partner of the trust, during the 4-year period preceding the
date of sale which--

``(I) are includible in the basis of the property (other
than timberland acquisition expenditures), and
``(II) are directly related to operation of the property
for the production of timber or for the preservation of the
property for use as timberland,

do not exceed 30 percent of the net selling price of the
property,
``(iii) the aggregate expenditures made by the trust, or a
partner of the trust, during the 4-year period preceding the
date of sale which--

``(I) are includible in the basis of the property (other
than timberland acquisition expenditures), and
``(II) are not directly related to operation of the
property for the production of timber, or for the
preservation of the property for use as timberland,

do not exceed 5 percent of the net selling price of the
property,
``(iv)(I) during the taxable year the trust does not make
more than 7 sales of property (other than sales of
foreclosure property or sales to which section 1033 applies),
or
``(II) the aggregate adjusted bases (as determined for
purposes of computing earnings and profits) of property
(other than sales of foreclosure property or sales to which
section 1033 applies) sold during the taxable year does not
exceed 10 percent of the aggregate bases (as so determined)
of all of the assets of the trust as of the beginning of the
taxable year,
``(v) in the case that the requirement of clause (iv)(I) is
not satisfied, substantially all of the

[[Page S2045]]

marketing expenditures with respect to the property were made
through an independent contractor (as defined in section
856(d)(3)) from whom the trust itself does not derive or
receive any income, and
``(vi) the sales price of the property sold by the trust is
not based in whole or in part on income or profits, including
income or profits derived from the sale or operation of such
property.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.

TITLE IV--ADDITIONAL PROVISIONS

Subtitle A--Provisions Designed To Curtail Tax Shelters

SEC. 401. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) In General.--Section 7701 is amended by redesignating
subsection (n) as subsection (o) and by inserting after
subsection (m) the following new subsection:
``(n) Clarification of Economic Substance Doctrine; Etc.--
``(1) General rules.--
``(A) In general.--In any case in which a court determines
that the economic substance doctrine is relevant for purposes
of this title to a transaction (or series of transactions),
such transaction (or series of transactions) shall have
economic substance only if the requirements of this paragraph
are met.
``(B) Definition of economic substance.--For purposes of
subparagraph (A)--
``(i) In general.--A transaction has economic substance
only if--

``(I) the transaction changes in a meaningful way (apart
from Federal tax effects) the taxpayer's economic position,
and
``(II) the taxpayer has a substantial nontax purpose for
entering into such transaction and the transaction is a
reasonable means of accomplishing such purpose.

In applying subclause (II), a purpose of achieving a
financial accounting benefit shall not be taken into account
in determining whether a transaction has a substantial nontax
purpose if the origin of such financial accounting benefit is
a reduction of income tax.
``(ii) Special rule where taxpayer relies on profit
potential.--A transaction shall not be treated as having
economic substance by reason of having a potential for profit
unless--

``(I) the present value of the reasonably expected pre-tax
profit from the transaction is substantial in relation to the
present value of the expected net tax benefits that would be
allowed if the transaction were respected, and
``(II) the reasonably expected pre-tax profit from the
transaction exceeds a risk-free rate of return.

``(C) Treatment of fees and foreign taxes.--Fees and other
transaction expenses and foreign taxes shall be taken into
account as expenses in determining pre-tax profit under
subparagraph (B)(ii).
``(2) Special rules for transactions with tax-indifferent
parties.--
``(A) Special rules for financing transactions.--The form
of a transaction which is in substance the borrowing of money
or the acquisition of financial capital directly or
indirectly from a tax-indifferent party shall not be
respected if the present value of the deductions to be
claimed with respect to the transaction is substantially in
excess of the present value of the anticipated economic
returns of the person lending the money or providing the
financial capital. A public offering shall be treated as a
borrowing, or an acquisition of financial capital, from a
tax-indifferent party if it is reasonably expected that at
least 50 percent of the offering will be placed with tax-
indifferent parties.
``(B) Artificial income shifting and basis adjustments.--
The form of a transaction with a tax-indifferent party shall
not be respected if--
``(i) it results in an allocation of income or gain to the
tax-indifferent party in excess of such party's economic
income or gain, or
``(ii) it results in a basis adjustment or shifting of
basis on account of overstating the income or gain of the
tax-indifferent party.
``(3) Definitions and special rules.--For purposes of this
subsection--
``(A) Economic substance doctrine.--The term `economic
substance doctrine' means the common law doctrine under which
tax benefits under subtitle A with respect to a transaction
are not allowable if the transaction does not have economic
substance or lacks a business purpose.
``(B) Tax-indifferent party.--The term `tax-indifferent
party' means any person or entity not subject to tax imposed
by subtitle A. A person shall be treated as a tax-indifferent
party with respect to a transaction if the items taken into
account with respect to the transaction have no substantial
impact on such person's liability under subtitle A.
``(C) Exception for personal transactions of individuals.--
In the case of an individual, this subsection shall apply
only to transactions entered into in connection with a trade
or business or an activity engaged in for the production of
income.
``(D) Treatment of lessors.--In applying paragraph
(1)(B)(ii) to the lessor of tangible property subject to a
lease--
``(i) the expected net tax benefits with respect to the
leased property shall not include the benefits of--

``(I) depreciation,
``(II) any tax credit, or
``(III) any other deduction as provided in guidance by the
Secretary, and

``(ii) subclause (II) of paragraph (1)(B)(ii) shall be
disregarded in determining whether any of such benefits are
allowable.
``(4) Other common law doctrines not affected.--Except as
specifically provided in this subsection, the provisions of
this subsection shall not be construed as altering or
supplanting any other rule of law, and the requirements of
this subsection shall be construed as being in addition to
any such other rule of law.
``(5) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this subsection. Such regulations may include
exemptions from the application of this subsection.''.
(b) Effective Date.--The amendments made by this section
shall apply to transactions entered into after the date of
the enactment of this Act.

SEC. 402. PENALTY FOR FAILING TO DISCLOSE REPORTABLE
TRANSACTION.

(a) In General.--Part I of subchapter B of chapter 68
(relating to assessable penalties) is amended by inserting
after section 6707 the following new section:

``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE
TRANSACTION INFORMATION WITH RETURN OR
STATEMENT.

``(a) Imposition of Penalty.--Any person who fails to
include on any return or statement any information with
respect to a reportable transaction which is required under
section 6011 to be included with such return or statement
shall pay a penalty in the amount determined under subsection
(b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraphs (2) and
(3), the amount of the penalty under subsection (a) shall be
$50,000.
``(2) Listed transaction.--The amount of the penalty under
subsection (a) with respect to a listed transaction shall be
$100,000.
``(3) Increase in penalty for large entities and high net
worth individuals.--
``(A) In general.--In the case of a failure under
subsection (a) by--
``(i) a large entity, or
``(ii) a high net worth individual,

the penalty under paragraph (1) or (2) shall be twice the
amount determined without regard to this paragraph.
``(B) Large entity.--For purposes of subparagraph (A), the
term `large entity' means, with respect to any taxable year,
a person (other than a natural person) with gross receipts in
excess of $10,000,000 for the taxable year in which the
reportable transaction occurs or the preceding taxable year.
Rules similar to the rules of paragraph (2) and subparagraphs
(B), (C), and (D) of paragraph (3) of section 448(c) shall
apply for purposes of this subparagraph.
``(C) High net worth individual.--For purposes of
subparagraph (A), the term `high net worth individual' means,
with respect to a reportable transaction, a natural person
whose net worth exceeds $2,000,000 immediately before the
transaction.
``(c) Definitions.--For purposes of this section--
``(1) Reportable transaction.--The term `reportable
transaction' means any transaction with respect to which
information is required to be included with a return or
statement because, as determined under regulations prescribed
under section 6011, such transaction is of a type which the
Secretary determines as having a potential for tax avoidance
or evasion.
``(2) Listed transaction.--Except as provided in
regulations, the term `listed transaction' means a reportable
transaction which is the same as, or substantially similar
to, a transaction specifically identified by the Secretary as
a tax avoidance transaction for purposes of section 6011.
``(d) Authority To Rescind Penalty.--
``(1) In general.--The Commissioner of Internal Revenue may
rescind all or any portion of any penalty imposed by this
section with respect to any violation if--
``(A) the violation is with respect to a reportable
transaction other than a listed transaction,
``(B) the person on whom the penalty is imposed has a
history of complying with the requirements of this title,
``(C) it is shown that the violation is due to an
unintentional mistake of fact;
``(D) imposing the penalty would be against equity and good
conscience, and
``(E) rescinding the penalty would promote compliance with
the requirements of this title and effective tax
administration.
``(2) Discretion.--The exercise of authority under
paragraph (1) shall be at the sole discretion of the
Commissioner and may be delegated only to the head of the
Office of Tax Shelter Analysis. The Commissioner, in the
Commissioner's sole discretion, may establish a procedure to
determine if a penalty should be referred to the Commissioner
or the head of such Office for a determination under
paragraph (1).
``(3) No appeal.--Notwithstanding any other provision of
law, any determination under this subsection may not be
reviewed in any administrative or judicial proceeding.
``(4) Records.--If a penalty is rescinded under paragraph
(1), the Commissioner shall place in the file in the Office
of the Commissioner the opinion of the Commissioner or the
head of the Office of Tax Shelter Analysis with respect to
the determination, including--
``(A) the facts and circumstances of the transaction,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
``(5) Report.--The Commissioner shall each year report to
the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the Senate--
``(A) a summary of the total number and aggregate amount of
penalties imposed, and rescinded, under this section, and
``(B) a description of each penalty rescinded under this
subsection and the reasons therefor.

[[Page S2046]]

``(e) Penalty Reported to SEC.--In the case of a person--
``(1) which is required to file periodic reports under
section 13 or 15(d) of the Securities Exchange Act of 1934 or
is required to be consolidated with another person for
purposes of such reports, and
``(2) which--
``(A) is required to pay a penalty under this section with
respect to a listed transaction,
``(B) is required to pay a penalty under section 6662A with
respect to any reportable transaction at a rate prescribed
under section 6662A(c), or
``(C) is required to pay a penalty under section 6662B with
respect to any noneconomic substance transaction,

the requirement to pay such penalty shall be disclosed in
such reports filed by such person for such periods as the
Secretary shall specify. Failure to make a disclosure in
accordance with the preceding sentence shall be treated as a
failure to which the penalty under subsection (b)(2) applies.
``(f) Coordination With Other Penalties.--The penalty
imposed by this section is in addition to any penalty imposed
under this title.''.
(b) Conforming Amendment.--The table of sections for part I
of subchapter B of chapter 68 is amended by inserting after
the item relating to section 6707 the following:

``Sec. 6707A. Penalty for failure to include reportable transaction
information with return or statement.''.

(c) Effective Date.--The amendments made by this section
shall apply to returns and statements the due date for which
is after the date of the enactment of this Act.

SEC. 403. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS
AND OTHER REPORTABLE TRANSACTIONS HAVING A
SIGNIFICANT TAX AVOIDANCE PURPOSE.

(a) In General.--Subchapter A of chapter 68 is amended by
inserting after section 6662 the following new section:

``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON
UNDERSTATEMENTS WITH RESPECT TO REPORTABLE
TRANSACTIONS.

``(a) Imposition of Penalty.--If a taxpayer has a
reportable transaction understatement for any taxable year,
there shall be added to the tax an amount equal to 20 percent
of the amount of such understatement.
``(b) Reportable Transaction Understatement.--For purposes
of this section--
``(1) In general.--The term `reportable transaction
understatement' means the sum of--
``(A) the product of--
``(i) the amount of the increase (if any) in taxable income
which results from a difference between the proper tax
treatment of an item to which this section applies and the
taxpayer's treatment of such item (as shown on the taxpayer's
return of tax), and
``(ii) the highest rate of tax imposed by section 1
(section 11 in the case of a taxpayer which is a
corporation), and
``(B) the amount of the decrease (if any) in the aggregate
amount of credits determined under subtitle A which results
from a difference between the taxpayer's treatment of an item
to which this section applies (as shown on the taxpayer's
return of tax) and the proper tax treatment of such item.

For purposes of subparagraph (A), any reduction of the excess
of deductions allowed for the taxable year over gross income
for such year, and any reduction in the amount of capital
losses which would (without regard to section 1211) be
allowed for such year, shall be treated as an increase in
taxable income.
``(2) Items to which section applies.--This section shall
apply to any item which is attributable to--
``(A) any listed transaction, and
``(B) any reportable transaction (other than a listed
transaction) if a significant purpose of such transaction is
the avoidance or evasion of Federal income tax.
``(c) Higher Penalty for Nondisclosed Listed and Other
Avoidance Transactions.--
``(1) In general.--Subsection (a) shall be applied by
substituting `30 percent' for `20 percent' with respect to
the portion of any reportable transaction understatement with
respect to which the requirement of section 6664(d)(2)(A) is
not met.
``(2) Rules applicable to assertion and compromise of
penalty.--
``(A) In general.--Only upon the approval by the Chief
Counsel for the Internal Revenue Service or the Chief
Counsel's delegate at the national office of the Internal
Revenue Service may a penalty to which paragraph (1) applies
be included in a 1st letter of proposed deficiency which
allows the taxpayer an opportunity for administrative review
in the Internal Revenue Service Office of Appeals. If such a
letter is provided to the taxpayer, only the Commissioner of
Internal Revenue may compromise all or any portion of such
penalty.
``(B) Applicable rules.--The rules of paragraphs (2), (3),
(4), and (5) of section 6707A(d) shall apply for purposes of
subparagraph (A).
``(d) Definitions of Reportable and Listed Transactions.--
For purposes of this section, the terms `reportable
transaction' and `listed transaction' have the respective
meanings given to such terms by section 6707A(c).
``(e) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as
defined in section 6662(d)(2))--
``(A) the amount of such understatement (determined without
regard to this paragraph) shall be increased by the aggregate
amount of reportable transaction understatements and
noneconomic substance transaction understatements for
purposes of determining whether such understatement is a
substantial understatement under section 6662(d)(1), and
``(B) the addition to tax under section 6662(a) shall apply
only to the excess of the amount of the substantial
understatement (if any) after the application of subparagraph
(A) over the aggregate amount of reportable transaction
understatements and noneconomic substance transaction
understatements.
``(2) Coordination with other penalties.--
``(A) Application of fraud penalty.--References to an
underpayment in section 6663 shall be treated as including
references to a reportable transaction understatement and a
noneconomic substance transaction understatement.
``(B) No double penalty.--This section shall not apply to
any portion of an understatement on which a penalty is
imposed under section 6662B or 6663.
``(3) Special rule for amended returns.--Except as provided
in regulations, in no event shall any tax treatment included
with an amendment or supplement to a return of tax be taken
into account in determining the amount of any reportable
transaction understatement or noneconomic
substance transaction understatement if the amendment or
supplement is filed after the earlier of the date the
taxpayer is first contacted by the Secretary regarding the
examination of the return or such other date as is
specified by the Secretary.
``(4) Noneconomic substance transaction understatement.--
For purposes of this subsection, the term `noneconomic
substance transaction understatement' has the meaning given
such term by section 6662B(c).
``(5) Cross reference.--

``For reporting of section 6662A(c) penalty to the Securities and
Exchange Commission, see section 6707A(e).''.

(b) Determination of Other Understatements.--Subparagraph
(A) of section 6662(d)(2) is amended by adding at the end the
following flush sentence:

``The excess under the preceding sentence shall be determined
without regard to items to which section 6662A applies and
without regard to items with respect to which a penalty is
imposed by section 6662B.''.
(c) Reasonable Cause Exception.--
(1) In general.--Section 6664 is amended by adding at the
end the following new subsection:
``(d) Reasonable Cause Exception for Reportable Transaction
Understatements.--
``(1) In general.--No penalty shall be imposed under
section 6662A with respect to any portion of a reportable
transaction understatement if it is shown that there was a
reasonable cause for such portion and that the taxpayer acted
in good faith with respect to such portion.
``(2) Special rules.--Paragraph (1) shall not apply to any
reportable transaction understatement unless--
``(A) the relevant facts affecting the tax treatment of the
item are adequately disclosed in accordance with the
regulations prescribed under section 6011,
``(B) there is or was substantial authority for such
treatment, and
``(C) the taxpayer reasonably believed that such treatment
was more likely than not the proper treatment.

A taxpayer failing to adequately disclose in accordance with
section 6011 shall be treated as meeting the requirements of
subparagraph (A) if the penalty for such failure was
rescinded under section 6707A(d).
``(3) Rules relating to reasonable belief.--For purposes of
paragraph (2)(C)--
``(A) In general.--A taxpayer shall be treated as having a
reasonable belief with respect to the tax treatment of an
item only if such belief--
``(i) is based on the facts and law that exist at the time
the return of tax which includes such tax treatment is filed,
and
``(ii) relates solely to the taxpayer's chances of success
on the merits of such treatment and does not take into
account the possibility that a return will not be audited,
such treatment will not be raised on audit, or such treatment
will be resolved through settlement if it is raised.
``(B) Certain opinions may not be relied upon.--
``(i) In general.--An opinion of a tax advisor may not be
relied upon to establish the reasonable belief of a taxpayer
if--

``(I) the tax advisor is described in clause (ii), or
``(II) the opinion is described in clause (iii).

``(ii) Disqualified tax advisors.--A tax advisor is
described in this clause if the tax advisor--

``(I) is a material advisor (within the meaning of section
6111(b)(1)) who participates in the organization, management,
promotion, or sale of the transaction or who is related
(within the meaning of section 267(b) or 707(b)(1)) to any
person who so participates,
``(II) is compensated directly or indirectly by a material
advisor with respect to the transaction,
``(III) has a fee arrangement with respect to the
transaction which is contingent on all or part of the
intended tax benefits from the transaction being sustained,
or
``(IV) as determined under regulations prescribed by the
Secretary, has a disqualifying financial interest with
respect to the transaction.

``(iii) Disqualified opinions.--For purposes of clause (i),
an opinion is disqualified if the opinion--

``(I) is based on unreasonable factual or legal assumptions
(including assumptions as to future events),
``(II) unreasonably relies on representations, statements,
findings, or agreements of the taxpayer or any other person,
``(III) does not identify and consider all relevant facts,
or

[[Page S2047]]

``(IV) fails to meet any other requirement as the Secretary
may prescribe.''.

(2) Conforming amendment.--The heading for subsection (c)
of section 6664 is amended by inserting ``for Underpayments''
after ``Exception''.
(d) Conforming Amendments.--
(1) Subparagraph (C) of section 461(i)(3) is amended by
striking ``section 6662(d)(2)(C)(iii)'' and inserting
``section 1274(b)(3)(C)''.
(2) Paragraph (3) of section 1274(b) is amended--
(A) by striking ``(as defined in section
6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
(B) by adding at the end the following new subparagraph:
``(C) Tax shelter.--For purposes of subparagraph (B), the
term `tax shelter' means--
``(i) a partnership or other entity,
``(ii) any investment plan or arrangement, or
``(iii) any other plan or arrangement,

if a significant purpose of such partnership, entity, plan,
or arrangement is the avoidance or evasion of Federal income
tax.''.
(3) Section 6662(d)(2) is amended by striking subparagraphs
(C) and (D).
(4) Section 6664(c)(1) is amended by striking ``this part''
and inserting ``section 6662 or 6663''.
(5) Subsection (b) of section 7525 is amended by striking
``section 6662(d)(2)(C)(iii)'' and inserting ``section
1274(b)(3)(C)''.
(6)(A) The heading for section 6662 is amended to read as
follows:

``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON
UNDERPAYMENTS.''.

(B) The table of sections for part II of subchapter A of
chapter 68 is amended by striking the item relating to
section 6662 and inserting the following new items:

``Sec. 6662. Imposition of accuracy-related penalty on underpayments.
``Sec. 6662A. Imposition of accuracy-related penalty on understatements
with respect to reportable transactions.''.

(e) Effective Date.--The amendments made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.

SEC. 404. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO
TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

(a) In General.--Subchapter A of chapter 68 is amended by
inserting after section 6662A the following new section:

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO
TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

``(a) Imposition of Penalty.--If a taxpayer has an
noneconomic substance transaction understatement for any
taxable year, there shall be added to the tax an amount equal
to 40 percent of the amount of such understatement.
``(b) Reduction of Penalty for Disclosed Transactions.--
Subsection (a) shall be applied by substituting `20 percent'
for `40 percent' with respect to the portion of any
noneconomic substance transaction understatement with respect
to which the relevant facts affecting the tax treatment of
the item are adequately disclosed in the return or a
statement attached to the return.
``(c) Noneconomic Substance Transaction Understatement.--
For purposes of this section--
``(1) In general.--The term `noneconomic substance
transaction understatement' means any amount which would be
an understatement under section 6662A(b)(1) if section 6662A
were applied by taking into account items attributable to
noneconomic substance transactions rather than items to which
section 6662A would apply without regard to this paragraph.
``(2) Noneconomic substance transaction.--The term
`noneconomic substance transaction' means any transaction
if--
``(A) there is a lack of economic substance (within the
meaning of section 7701(n)(1)) for the transaction giving
rise to the claimed benefit or the transaction was not
respected under section 7701(n)(2), or
``(B) the transaction fails to meet the requirements of any
similar rule of law.
``(d) Rules Applicable To Compromise of Penalty.--
``(1) In general.--If the 1st letter of proposed deficiency
which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals has
been sent with respect to a penalty to which this section
applies, only the Commissioner of Internal Revenue may
compromise all or any portion of such penalty.
``(2) Applicable rules.--The rules of paragraphs (2), (3),
(4), and (5) of section 6707A(d) shall apply for purposes of
paragraph (1).
``(e) Coordination With Other Penalties.--Except as
otherwise provided in this part, the penalty imposed by this
section shall be in addition to any other penalty imposed by
this title.
``(f) Cross References.--

``(1) For coordination of penalty with understatements under section
6662 and other special rules, see section 6662A(e).
``(2) For reporting of penalty imposed under this section to the
Securities and Exchange Commission, see section 6707A(e).''.

(b) Clerical Amendment.--The table of sections for part II
of subchapter A of chapter 68 is amended by inserting after
the item relating to section 6662A the following new item:

``Sec. 6662B. Penalty for understatements attributable to transactions
lacking economic substance, etc.''.

(c) Effective Date.--The amendments made by this section
shall apply to transactions entered into after the date of
the enactment of this Act.

SEC. 405. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY
FOR NONREPORTABLE TRANSACTIONS.

(a) Substantial Understatement of Corporations.--Section
6662(d)(1)(B) (relating to special rule for corporations) is
amended to read as follows:
``(B) Special rule for corporations.--In the case of a
corporation other than an S corporation or a personal holding
company (as defined in section 542), there is a substantial
understatement of income tax for any taxable year if the
amount of the understatement for the taxable year exceeds the
lesser of--
``(i) 10 percent of the tax required to be shown on the
return for the taxable year (or, if greater, $10,000), or
``(ii) $10,000,000.''.
(b) Reduction for Understatement of Taxpayer Due to
Position of Taxpayer or Disclosed Item.--
(1) In general.--Section 6662(d)(2)(B)(i) (relating to
substantial authority) is amended to read as follows:
``(i) the tax treatment of any item by the taxpayer if the
taxpayer had reasonable belief that the tax treatment was
more likely than not the proper treatment, or''.
(2) Conforming amendment.--Section 6662(d) is amended by
adding at the end the following new paragraph:
``(3) Secretarial list.--For purposes of this subsection,
section 6664(d)(2), and section 6694(a)(1), the Secretary may
prescribe a list of positions for which the Secretary
believes there is not substantial authority or there is no
reasonable belief that the tax treatment is more likely than
not the proper tax treatment. Such list (and any revisions
thereof) shall be published in the Federal Register or the
Internal Revenue Bulletin.''.
(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. 406. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES
RELATING TO TAXPAYER COMMUNICATIONS.

(a) In General.--Section 7525(b) (relating to section not
to apply to communications regarding corporate tax shelters)
is amended to read as follows:
``(b) Section Not To Apply to Communications Regarding Tax
Shelters.--The privilege under subsection (a) shall not apply
to any written communication which is--
``(1) between a federally authorized tax practitioner and--
``(A) any person,
``(B) any director, officer, employee, agent, or
representative of the person, or
``(C) any other person holding a capital or profits
interest in the person, and
``(2) in connection with the promotion of the direct or
indirect participation of the person in any tax shelter (as
defined in section 1274(b)(3)(C)).''.
(b) Effective Date.--The amendment made by this section
shall apply to communications made on or after the date of
the enactment of this Act.

SEC. 407. DISCLOSURE OF REPORTABLE TRANSACTIONS.

(a) In General.--Section 6111 (relating to registration of
tax shelters) is amended to read as follows:

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

``(a) In General.--Each material advisor with respect to
any reportable transaction shall make a return (in such form
as the Secretary may prescribe) setting forth--
``(1) information identifying and describing the
transaction,
``(2) information describing any potential tax benefits
expected to result from the transaction, and
``(3) such other information as the Secretary may
prescribe.

Such return shall be filed not later than the date specified
by the Secretary.
``(b) Definitions.--For purposes of this section--
``(1) Material advisor.--
``(A) In general.--The term `material advisor' means any
person--
``(i) who provides any material aid, assistance, or advice
with respect to organizing, managing, promoting, selling,
implementing, or carrying out any reportable transaction, and
``(ii) who directly or indirectly derives gross income in
excess of the threshold amount for such aid, assistance, or
advice.
``(B) Threshold amount.--For purposes of subparagraph (A),
the threshold amount is--
``(i) $50,000 in the case of a reportable transaction
substantially all of the tax benefits from which are provided
to natural persons, and
``(ii) $250,000 in any other case.
``(2) Reportable transaction.--The term `reportable
transaction' has the meaning given to such term by section
6707A(c).
``(c) Regulations.--The Secretary may prescribe regulations
which provide--
``(1) that only 1 person shall be required to meet the
requirements of subsection (a) in cases in which 2 or more
persons would otherwise be required to meet such
requirements,
``(2) exemptions from the requirements of this section, and
``(3) such rules as may be necessary or appropriate to
carry out the purposes of this section.''.
(b) Conforming Amendments.--
(1) The item relating to section 6111 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:

``Sec. 6111. Disclosure of reportable transactions.''.

(2)(A) So much of section 6112 as precedes subsection (c)
thereof is amended to read as follows:

[[Page S2048]]

``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS
MUST KEEP LISTS OF ADVISEES.

``(a) In General.--Each material advisor (as defined in
section 6111) with respect to any reportable transaction (as
defined in section 6707A(c)) shall maintain, in such manner
as the Secretary may by regulations prescribe, a list--
``(1) identifying each person with respect to whom such
advisor acted as such a material advisor with respect to such
transaction, and
``(2) containing such other information as the Secretary
may by regulations require.

This section shall apply without regard to whether a material
advisor is required to file a return under section 6111 with
respect to such transaction.''.
(B) Section 6112 is amended by redesignating subsection (c)
as subsection (b).
(C) Section 6112(b), as redesignated by subparagraph (B),
is amended--
(i) by inserting ``written'' before ``request'' in
paragraph (1)(A), and
(ii) by striking ``shall prescribe'' in paragraph (2) and
inserting ``may prescribe''.
(D) The item relating to section 6112 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:

``Sec. 6112. Material advisors of reportable transactions must keep
lists of advisees.''.

(3)(A) The heading for section 6708 is amended to read as
follows:

``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH
RESPECT TO REPORTABLE TRANSACTIONS.''.

(B) The item relating to section 6708 in the table of
sections for part I of subchapter B of chapter 68 is amended
to read as follows:

``Sec. 6708. Failure to maintain lists of advisees with respect to
reportable transactions.''.

(c) Required Disclosure Not Subject to Claim of
Confidentiality.--Subparagraph (A) of section 6112(b)(1), as
redesignated by subsection (b)(2)(B), is amended by adding at
the end the following new flush sentence:

``For purposes of this section, the identity of any person on
such list shall not be privileged.''.
(d) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to transactions
with respect to which material aid, assistance, or advice
referred to in section 6111(b)(1)(A)(i) of the Internal
Revenue Code of 1986 (as added by this section) is provided
after the date of the enactment of this Act.
(2) No claim of confidentiality against disclosure.--The
amendment made by subsection (c) shall take effect as if
included in the amendments made by section 142 of the Deficit
Reduction Act of 1984.

SEC. 408. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER
TAX SHELTERS.

(a) In General.--Section 6707 (relating to failure to
furnish information regarding tax shelters) is amended to
read as follows:

``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING
REPORTABLE TRANSACTIONS.

``(a) In General.--If a person who is required to file a
return under section 6111(a) with respect to any reportable
transaction--
``(1) fails to file such return on or before the date
prescribed therefor, or
``(2) files false or incomplete information with the
Secretary with respect to such transaction,

such person shall pay a penalty with respect to such return
in the amount determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph (2), the
penalty imposed under subsection (a) with respect to any
failure shall be $50,000.
``(2) Listed transactions.--The penalty imposed under
subsection (a) with respect to any listed transaction shall
be an amount equal to the greater of--
``(A) $200,000, or
``(B) 50 percent of the gross income derived by such person
with respect to aid, assistance, or advice which is provided
with respect to the listed transaction before the date the
return including the transaction is filed under section 6111.

Subparagraph (B) shall be applied by substituting `75
percent' for `50 percent' in the case of an intentional
failure or act described in subsection (a).
``(c) Certain Rules To Apply.--The provisions of section
6707A(d) shall apply to any penalty imposed under this
section.
``(d) Reportable and Listed Transactions.--The terms
`reportable transaction' and `listed transaction' have the
respective meanings given to such terms by section
6707A(c).''.
(b) Clerical Amendment.--The item relating to section 6707
in the table of sections for part I of subchapter B of
chapter 68 is amended by striking ``tax shelters'' and
inserting ``reportable transactions''.
(c) Effective Date.--The amendments made by this section
shall apply to returns the due date for which is after the
date of the enactment of this Act.

SEC. 409. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN
LISTS OF INVESTORS.

(a) In General.--Subsection (a) of section 6708 is amended
to read as follows:
``(a) Imposition of Penalty.--
``(1) In general.--If any person who is required to
maintain a list under section 6112(a) fails to make such list
available upon written request to the Secretary in accordance
with section 6112(b)(1)(A) within 20 business days after the
date of the Secretary's request, such person shall pay a
penalty of $10,000 for each day of such failure after such
20th day.
``(2) Reasonable cause exception.--No penalty shall be
imposed by paragraph (1) with respect to the failure on any
day if such failure is due to reasonable cause.''.
(b) Effective Date.--The amendment made by this section
shall apply to requests made after the date of the enactment
of this Act.

SEC. 410. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT
RELATED TO TAX SHELTERS AND REPORTABLE
TRANSACTIONS.

(a) In General.--Section 7408 (relating to action to enjoin
promoters of abusive tax shelters, etc.) is amended by
redesignating subsection (c) as subsection (d) and by
striking subsections (a) and (b) and inserting the following
new subsections:
``(a) Authority To Seek Injunction.--A civil action in the
name of the United States to enjoin any person from further
engaging in specified conduct may be commenced at the request
of the Secretary. Any action under this section shall be
brought in the district court of the United States for the
district in which such person resides, has his principal
place of business, or has engaged in specified conduct. The
court may exercise its jurisdiction over such action (as
provided in section 7402(a)) separate and apart from any
other action brought by the United States against such
person.
``(b) Adjudication and Decree.--In any action under
subsection (a), if the court finds--
``(1) that the person has engaged in any specified conduct,
and
``(2) that injunctive relief is appropriate to prevent
recurrence of such conduct,

the court may enjoin such person from engaging in such
conduct or in any other activity subject to penalty under
this title.
``(c) Specified Conduct.--For purposes of this section, the
term `specified conduct' means any action, or failure to take
action, subject to penalty under section 6700, 6701, 6707, or
6708.''.
(b) Conforming Amendments.--
(1) The heading for section 7408 is amended to read as
follows:

``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO
TAX SHELTERS AND REPORTABLE TRANSACTIONS.''.

(2) The table of sections for subchapter A of chapter 67 is
amended by striking the item relating to section 7408 and
inserting the following new item:

``Sec. 7408. Actions to enjoin specified conduct related to tax
shelters and reportable transactions.''.

(c) Effective Date.--The amendment made by this section
shall take effect on the day after the date of the enactment
of this Act.

SEC. 411. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME
TAX RETURN PREPARER.

(a) Standards Conformed to Taxpayer Standards.--Section
6694(a) (relating to understatements due to unrealistic
positions) is amended--
(1) by striking ``realistic possibility of being sustained
on its merits'' in paragraph (1) and inserting ``reasonable
belief that the tax treatment in such position was more
likely than not the proper treatment'',
(2) by striking ``or was frivolous'' in paragraph (3) and
inserting ``or there was no reasonable basis for the tax
treatment of such position'', and
(3) by striking ``Unrealistic'' in the heading and
inserting ``Improper''.
(b) Amount of Penalty.--Section 6694 is amended--
(1) by striking ``$250'' in subsection (a) and inserting
``$1,000'', and
(2) by striking ``$1,000'' in subsection (b) and inserting
``$5,000''.
(c) Effective Date.--The amendments made by this section
shall apply to documents prepared after the date of the
enactment of this Act.

SEC. 412. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN
FINANCIAL ACCOUNTS.

(a) In General.--Section 5321(a)(5) of title 31, United
States Code, is amended to read as follows:
``(5) Foreign financial agency transaction violation.--
``(A) Penalty authorized.--The Secretary of the Treasury
may impose a civil money penalty on any person who violates,
or causes any violation of, any provision of section 5314.
``(B) Amount of penalty.--
``(i) In general.--Except as provided in subparagraph (C),
the amount of any civil penalty imposed under subparagraph
(A) shall not exceed $5,000.
``(ii) Reasonable cause exception.--No penalty shall be
imposed under subparagraph (A) with respect to any violation
if--

``(I) such violation was due to reasonable cause, and
``(II) the amount of the transaction or the balance in the
account at the time of the transaction was properly reported.

``(C) Willful violations.--In the case of any person
willfully violating, or willfully causing any violation of,
any provision of section 5314--
``(i) the maximum penalty under subparagraph (B)(i) shall
be increased to the greater of--

``(I) $25,000, or
``(II) the amount (not exceeding $100,000) determined under
subparagraph (D), and

``(ii) subparagraph (B)(ii) shall not apply.
``(D) Amount.--The amount determined under this
subparagraph is--
``(i) in the case of a violation involving a transaction,
the amount of the transaction, or
``(ii) in the case of a violation involving a failure to
report the existence of an account or any identifying
information required to be provided

[[Page S2049]]

with respect to an account, the balance in the account at the
time of the violation.''.
(b) Effective Date.--The amendment made by this section
shall apply to violations occurring after the date of the
enactment of this Act.

SEC. 413. FRIVOLOUS TAX SUBMISSIONS.

(a) Civil Penalties.--Section 6702 is amended to read as
follows:

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

``(a) Civil Penalty for Frivolous Tax Returns.--A person
shall pay a penalty of $5,000 if--
``(1) such person files what purports to be a return of a
tax imposed by this title but which--
``(A) does not contain information on which the substantial
correctness of the self-assessment may be judged, or
``(B) contains information that on its face indicates that
the self-assessment is substantially incorrect; and
``(2) the conduct referred to in paragraph (1)--
``(A) is based on a position which the Secretary has
identified as frivolous under subsection (c), or
``(B) reflects a desire to delay or impede the
administration of Federal tax laws.
``(b) Civil Penalty for Specified Frivolous Submissions.--
``(1) Imposition of penalty.--Except as provided in
paragraph (3), any person who submits a specified frivolous
submission shall pay a penalty of $5,000.
``(2) Specified frivolous submission.--For purposes of this
section--
``(A) Specified frivolous submission.--The term `specified
frivolous submission' means a specified submission if any
portion of such submission--
``(i) is based on a position which the Secretary has
identified as frivolous under subsection (c), or
``(ii) reflects a desire to delay or impede the
administration of Federal tax laws.
``(B) Specified submission.--The term `specified
submission' means--
``(i) a request for a hearing under--

``(I) section 6320 (relating to notice and opportunity for
hearing upon filing of notice of lien), or
``(II) section 6330 (relating to notice and opportunity for
hearing before levy), and

``(ii) an application under--

``(I) section 6159 (relating to agreements for payment of
tax liability in installments),
``(II) section 7122 (relating to compromises), or
``(III) section 7811 (relating to taxpayer assistance
orders).

``(3) Opportunity to withdraw submission.--If the Secretary
provides a person with notice that a submission is a
specified frivolous submission and such person withdraws such
submission within 30 days after such notice, the penalty
imposed under paragraph (1) shall not apply with respect to
such submission.
``(c) Listing of Frivolous Positions.--The Secretary shall
prescribe (and periodically revise) a list of positions which
the Secretary has identified as being frivolous for purposes
of this subsection. The Secretary shall not include in such
list any position that the Secretary determines meets the
requirement of section 6662(d)(2)(B)(ii)(II).
``(d) Reduction of Penalty.--The Secretary may reduce the
amount of any penalty imposed under this section if the
Secretary determines that such reduction would promote
compliance with and administration of the Federal tax laws.
``(e) Penalties in Addition to Other Penalties.--The
penalties imposed by this section shall be in addition to any
other penalty provided by law.''.
(b) Treatment of Frivolous Requests for Hearings Before
Levy.--
(1) Frivolous requests disregarded.--Section 6330 (relating
to notice and opportunity for hearing before levy) is amended
by adding at the end the following new subsection:
``(g) Frivolous Requests for Hearing, etc.--Notwithstanding
any other provision of this section, if the Secretary
determines that any portion of a request for a hearing under
this section or section 6320 meets the requirement of clause
(i) or (ii) of section 6702(b)(2)(A), then the Secretary may
treat such portion as if it were never submitted and such
portion shall not be subject to any further administrative or
judicial review.''.
(2) Preclusion from raising frivolous issues at hearing.--
Section 6330(c)(4) is amended--
(A) by striking ``(A)'' and inserting ``(A)(i)'';
(B) by striking ``(B)'' and inserting ``(ii)'';
(C) by striking the period at the end of the first sentence
and inserting ``; or''; and
(D) by inserting after subparagraph (A)(ii) (as so
redesignated) the following:
``(B) the issue meets the requirement of clause (i) or (ii)
of section 6702(b)(2)(A).''.
(3) Statement of grounds.--Section 6330(b)(1) is amended by
striking ``under subsection (a)(3)(B)'' and inserting ``in
writing under subsection (a)(3)(B) and states the grounds for
the requested hearing''.
(c) Treatment of Frivolous Requests for Hearings Upon
Filing of Notice of Lien.--Section 6320 is amended--
(1) in subsection (b)(1), by striking ``under subsection
(a)(3)(B)'' and inserting ``in writing under subsection
(a)(3)(B) and states the grounds for the requested hearing'',
and
(2) in subsection (c), by striking ``and (e)'' and
inserting ``(e), and (g)''.
(d) Treatment of Frivolous Applications for Offers-in-
Compromise and Installment Agreements.--Section 7122 is
amended by adding at the end the following new subsection:
``(e) Frivolous Submissions, etc.--Notwithstanding any
other provision of this section, if the Secretary determines
that any portion of an application for an offer-in-compromise
or installment agreement submitted under this section or
section 6159 meets the requirement of clause (i) or (ii) of
section 6702(b)(2)(A), then the Secretary may treat such
portion as if it were never submitted and such portion shall
not be subject to any further administrative or judicial
review.''.
(e) Clerical Amendment.--The table of sections for part I
of subchapter B of chapter 68 is amended by striking the item
relating to section 6702 and inserting the following new
item:

``Sec. 6702. Frivolous tax submissions.''.

(f) Effective Date.--The amendments made by this section
shall apply to submissions made and issues raised after the
date on which the Secretary first prescribes a list under
section 6702(c) of the Internal Revenue Code of 1986, as
amended by subsection (a).

SEC. 414. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE
DEPARTMENT OF TREASURY.

(a) Censure; Imposition of Penalty.--
(1) In general.--Section 330(b) of title 31, United States
Code, is amended--
(A) by inserting ``, or censure,'' after ``Department'',
and
(B) by adding at the end the following new flush sentence:

``The Secretary may impose a monetary penalty on any
representative described in the preceding sentence. If the
representative was acting on behalf of an employer or any
firm or other entity in connection with the conduct giving
rise to such penalty, the Secretary may impose a monetary
penalty on such employer, firm, or entity if it knew, or
reasonably should have known, of such conduct. Such penalty
shall not exceed the gross income derived (or to be derived)
from the conduct giving rise to the penalty and may be in
addition to, or in lieu of, any suspension, disbarment, or
censure of the representative.''.
(2) Effective date.--The amendments made by this subsection
shall apply to actions taken after the date of the enactment
of this Act.
(b) Tax Shelter Opinions, etc.--Section 330 of such title
31 is amended by adding at the end the following new
subsection:
``(d) Nothing in this section or in any other provision of
law shall be construed to limit the authority of the
Secretary of the Treasury to impose standards applicable to
the rendering of written advice with respect to any entity,
transaction plan or arrangement, or other plan or
arrangement, which is of a type which the Secretary
determines as having a potential for tax avoidance or
evasion.''.

SEC. 415. PENALTY ON PROMOTERS OF TAX SHELTERS.

(a) Penalty on Promoting Abusive Tax Shelters.--Section
6700(a) is amended by adding at the end the following new
sentence: ``Notwithstanding the first sentence, if an
activity with respect to which a penalty imposed under this
subsection involves a statement described in paragraph
(2)(A), the amount of the penalty shall be equal to 50
percent of the gross income derived (or to be derived) from
such activity by the person on which the penalty is
imposed.''.
(b) Effective Date.--The amendment made by this section
shall apply to activities after the date of the enactment of
this Act.

SEC. 416. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH
REQUIRED LISTED TRANSACTIONS NOT REPORTED.

(a) In General.--Section 6501(c) (relating to exceptions)
is amended by adding at the end the following new paragraph:
``(10) Listed transactions.--If a taxpayer fails to include
on any return or statement for any taxable year any
information with respect to a listed transaction (as defined
in section 6707A(c)(2)) which is required under section 6011
to be included with such return or statement, the time for
assessment of any tax imposed by this title with respect to
such transaction shall not expire before the date which is 1
year after the earlier of--
``(A) the date on which the Secretary is furnished the
information so required; or
``(B) the date that a material advisor (as defined in
section 6111) meets the requirements of section 6112 with
respect to a request by the Secretary under section 6112(b)
relating to such transaction with respect to such
taxpayer.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years with respect to which the period
for assessing a deficiency did not expire before the date of
the enactment of this Act.

SEC. 417. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND
NONECONOMIC SUBSTANCE TRANSACTIONS.

(a) In General.--Section 163 (relating to deduction for
interest) is amended by redesignating subsection (m) as
subsection (n) and by inserting after subsection (l) the
following new subsection:
``(m) Interest on Unpaid Taxes Attributable To Nondisclosed
Reportable Transactions and Noneconomic Substance
Transactions.--No deduction shall be allowed under this
chapter for any interest paid or accrued under section 6601
on any underpayment of tax which is attributable to--
``(1) the portion of any reportable transaction
understatement (as defined in section 6662A(b)) with respect
to which the requirement of section 6664(d)(2)(A) is not met,
or
``(2) any noneconomic substance transaction understatement
(as defined in section 6662B(c)).''.
(b) Effective Date.--The amendments made by this section
shall apply to transactions in taxable years beginning after
the date of the enactment of this Act.

SEC. 418. AUTHORIZATION OF APPROPRIATIONS FOR TAX LAW
ENFORCEMENT.

There is authorized to be appropriated $300,000,000 for
each fiscal year beginning after

[[Page S2050]]

September 30, 2003, for the purpose of carrying out tax law
enforcement to combat tax avoidance transactions and other
tax shelters, including the use of offshore financial
accounts to conceal taxable income.

Subtitle B--Other Corporate Governance Provisions

SEC. 421. AFFIRMATION OF CONSOLIDATED RETURN REGULATION
AUTHORITY.

(a) In General.--Section 1502 (relating to consolidated
return regulations) is amended by adding at the end the
following new sentence: ``In prescribing such regulations,
the Secretary may prescribe rules applicable to corporations
filing consolidated returns under section 1501 that are
different from other provisions of this title that would
apply if such corporations filed separate returns.''.
(b) Result Not Overturned.--Notwithstanding subsection (a),
the Internal Revenue Code of 1986 shall be construed by
treating Treasury regulation Sec. 1.1502-20(c)(1)(iii) (as in
effect on January 1, 2001) as being inapplicable to the type
of factual situation in 255 F.3d 1357 (Fed. Cir. 2001).
(c) Effective Date.--The provisions of this section shall
apply to taxable years beginning before, on, or after the
date of the enactment of this Act.

SEC. 422. SIGNING OF CORPORATE TAX RETURNS BY CHIEF EXECUTIVE
OFFICER.

(a) In General.--Section 6062 (relating to signing of
corporation returns) is amended by inserting after the first
sentence the following new sentences: ``The return of a
corporation with respect to income shall also include a
declaration signed by the chief executive officer of such
corporation (or other such officer of the corporation as the
Secretary may designate if the corporation does not have a
chief executive officer), under penalties of perjury, that
the chief executive officer ensures that such return
complies with this title and that the chief executive
officer was provided reasonable assurance of the accuracy
of all material aspects of such return. The preceding
sentence shall not apply to any return of a regulated
investment company (within the meaning of section 851).''.
(b) Effective Date.--The amendment made by this section
shall apply to returns filed after the date of the enactment
of this Act.

SEC. 423. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES,
AND OTHER AMOUNTS.

(a) In General.--Subsection (f) of section 162 (relating to
trade or business expenses) is amended to read as follows:
``(f) Fines, Penalties, and Other Amounts.--
``(1) In general.--Except as provided in paragraph (2), no
deduction otherwise allowable shall be allowed under this
chapter for any amount paid or incurred (whether by suit,
agreement, or otherwise) to, or at the direction of, a
government or entity described in paragraph (4) in relation
to the violation of any law or the investigation or inquiry
by such government or entity into the potential violation of
any law.
``(2) Exception for amounts constituting restitution.--
Paragraph (1) shall not apply to any amount which the
taxpayer establishes constitutes restitution for damage or
harm caused by the violation of any law or the potential
violation of any law. This paragraph shall not apply to any
amount paid or incurred as reimbursement to the government or
entity for the costs of any investigation or litigation.
``(3) Exception for amounts paid or incurred as the result
of certain court orders.--Paragraph (1) shall not apply to
any amount paid or incurred by order of a court in a suit in
which no government or entity described in paragraph (4) is a
party.
``(4) Certain nongovernmental regulatory entities.--An
entity is described in this paragraph if it is--
``(A) a nongovernmental entity which exercises self-
regulatory powers (including imposing sanctions) in
connection with a qualified board or exchange (as defined in
section 1256(g)(7)), or
``(B) to the extent provided in regulations, a
nongovernmental entity which exercises self-regulatory powers
(including imposing sanctions) as part of performing an
essential governmental function.''.
(b) Effective Date.--The amendment made by this section
shall apply to amounts paid or incurred after April 27, 2003,
except that such amendment shall not apply to amounts paid or
incurred under any binding order or agreement entered into on
or before April 27, 2003. Such exception shall not apply to
an order or agreement requiring court approval unless the
approval was obtained on or before April 27, 2003.

SEC. 424. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.

(a) Disallowance of Deduction.--
(1) In general.--Section 162(g) (relating to treble damage
payments under the antitrust laws) is amended by adding at
the end the following new paragraph:
``(2) Punitive damages.--No deduction shall be allowed
under this chapter for any amount paid or incurred for
punitive damages in connection with any judgment in, or
settlement of, any action. This paragraph shall not apply to
punitive damages described in section 104(c).''.
(2) Conforming amendments.--
(A) Section 162(g) is amended--
(i) by striking ``If'' and inserting:
``(1) Treble damages.--If'', and
(ii) by redesignating paragraphs (1) and (2) as
subparagraphs (A) and (B), respectively.
(B) The heading for section 162(g) is amended by inserting
``or Punitive Damages'' after ``Laws''.
(b) Inclusion in Income of Punitive Damages Paid by Insurer
or Otherwise.--
(1) In general.--Part II of subchapter B of chapter 1
(relating to items specifically included in gross income) is
amended by adding at the end the following new section:

``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR
OTHERWISE.

``Gross income shall include any amount paid to or on
behalf of a taxpayer as insurance or otherwise by reason of
the taxpayer's liability (or agreement) to pay punitive
damages.''.
(2) Reporting requirements.--Section 6041 (relating to
information at source) is amended by adding at the end the
following new subsection:
``(f) Section To Apply to Punitive Damages Compensation.--
This section shall apply to payments by a person to or on
behalf of another person as insurance or otherwise by reason
of the other person's liability (or agreement) to pay
punitive damages.''.
(3) Conforming amendment.--The table of sections for part
II of subchapter B of chapter 1 is amended by adding at the
end the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise.''.

(c) Effective Date.--The amendments made by this section
shall apply to damages paid or incurred on or after the date
of the enactment of this Act.

SEC. 425. INCREASE IN CRIMINAL MONETARY PENALTY LIMITATION
FOR THE UNDERPAYMENT OR OVERPAYMENT OF TAX DUE
TO FRAUD.

(a) In General.--Section 7206 (relating to fraud and false
statements) is amended--
(1) by striking ``Any person who--'' and inserting ``(a) In
General.--Any person who--'', and
(2) by adding at the end the following new subsection:
``(b) Increase in Monetary Limitation for Underpayment or
Overpayment of Tax Due to Fraud.--If any portion of any
underpayment (as defined in section 6664(a)) or overpayment
(as defined in section 6401(a)) of tax required to be shown
on a return is attributable to fraudulent action described in
subsection (a), the applicable dollar amount under subsection
(a) shall in no event be less than an amount equal to such
portion. A rule similar to the rule under section 6663(b)
shall apply for purposes of determining the portion so
attributable.''.
(b) Increase in Penalties.--
(1) Attempt to evade or defeat tax.--Section 7201 is
amended--
(A) by striking ``$100,000'' and inserting ``$250,000'',
(B) by striking ``$500,000'' and inserting ``$1,000,000'',
and
(C) by striking ``5 years'' and inserting ``10 years''.
(2) Willful failure to file return, supply information, or
pay tax.--Section 7203 is amended--
(A) in the first sentence--
(i) by striking ``misdemeanor'' and inserting ``felony'',
and
(ii) by striking ``1 year'' and inserting ``10 years'', and
(B) by striking the third sentence.
(3) Fraud and false statements.--Section 7206(a) (as
redesignated by subsection (a)) is amended--
(A) by striking ``$100,000'' and inserting ``$250,000'',
(B) by striking ``$500,000'' and inserting ``$1,000,000'',
and
(C) by striking ``3 years'' and inserting ``5 years''.
(c) Effective Date.--The amendments made by this section
shall apply to underpayments and overpayments attributable to
actions occurring after the date of the enactment of this
Act.

Subtitle C--Enron-Related Tax Shelter Provisions

SEC. 431. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN
LOSSES.

(a) In General.--Section 362 (relating to basis to
corporations) is amended by adding at the end the following
new subsection:
``(e) Limitations on Built-In Losses.--
``(1) Limitation on importation of built-in losses.--
``(A) In general.--If in any transaction described in
subsection (a) or (b) there would (but for this subsection)
be an importation of a net built-in loss, the basis of each
property described in subparagraph (B) which is acquired in
such transaction shall (notwithstanding subsections (a) and
(b)) be its fair market value immediately after such
transaction.
``(B) Property described.--For purposes of subparagraph
(A), property is described in this subparagraph if--
``(i) gain or loss with respect to such property is not
subject to tax under this subtitle in the hands of the
transferor immediately before the transfer, and
``(ii) gain or loss with respect to such property is
subject to such tax in the hands of the transferee
immediately after such transfer.

In any case in which the transferor is a partnership, the
preceding sentence shall be applied by treating each partner
in such partnership as holding such partner's proportionate
share of the property of such partnership.
``(C) Importation of net built-in loss.--For purposes of
subparagraph (A), there is an importation of a net built-in
loss in a transaction if the transferee's aggregate adjusted
bases of property described in subparagraph (B) which is
transferred in such transaction would (but for this
paragraph) exceed the fair market value of such property
immediately after such transaction.''.
``(2) Limitation on transfer of built-in losses in section
351 transactions.--
``(A) In general.--If--
``(i) property is transferred by a transferor in any
transaction which is described in subsection (a) and which is
not described in paragraph (1) of this subsection, and

[[Page S2051]]

``(ii) the transferee's aggregate adjusted bases of such
property so transferred would (but for this paragraph) exceed
the fair market value of such property immediately after such
transaction,

then, notwithstanding subsection (a), the transferee's
aggregate adjusted bases of the property so transferred shall
not exceed the fair market value of such property immediately
after such transaction.
``(B) Allocation of basis reduction.--The aggregate
reduction in basis by reason of subparagraph (A) shall be
allocated among the property so transferred in proportion to
their respective built-in losses immediately before the
transaction.
``(C) Exception for transfers within affiliated group.--
Subparagraph (A) shall not apply to any transaction if the
transferor owns stock in the transferee meeting the
requirements of section 1504(a)(2). In the case of property
to which subparagraph (A) does not apply by reason of the
preceding sentence, the transferor's basis in the stock
received for such property shall not exceed its fair market
value immediately after the transfer.''.
(b) Comparable Treatment Where Liquidation.--Paragraph (1)
of section 334(b) (relating to liquidation of subsidiary) is
amended to read as follows:
``(1) In general.--If property is received by a corporate
distributee in a distribution in a complete liquidation to
which section 332 applies (or in a transfer described in
section 337(b)(1)), the basis of such property in the hands
of such distributee shall be the same as it would be in the
hands of the transferor; except that the basis of such
property in the hands of such distributee shall be the fair
market value of the property at the time of the
distribution--
``(A) in any case in which gain or loss is recognized by
the liquidating corporation with respect to such property, or
``(B) in any case in which the liquidating corporation is a
foreign corporation, the corporate distributee is a domestic
corporation, and the corporate distributee's aggregate
adjusted bases of property described in section 362(e)(1)(B)
which is distributed in such liquidation would (but for this
subparagraph) exceed the fair market value of such property
immediately after such liquidation.''.
(c) Effective Date.--The amendments made by this section
shall apply to transactions after February 13, 2003.

SEC. 432. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK
HELD BY PARTNERSHIP IN CORPORATE PARTNER.

(a) In General.--Section 755 is amended by adding at the
end the following new subsection:
``(c) No Allocation of Basis Decrease to Stock of Corporate
Partner.--In making an allocation under subsection (a) of any
decrease in the adjusted basis of partnership property under
section 734(b)--
``(1) no allocation may be made to stock in a corporation
(or any person which is related (within the meaning of
section 267(b) or 707(b)(1)) to such corporation) which is a
partner in the partnership, and
``(2) any amount not allocable to stock by reason of
paragraph (1) shall be allocated under subsection (a) to
other partnership property in such manner as the Secretary
may prescribe.

Gain shall be recognized to the partnership to the extent
that the amount required to be allocated under paragraph (2)
to other partnership property exceeds the aggregate adjusted
basis of such other property immediately before the
allocation required by paragraph (2).''.
(b) Effective Date.--The amendment made by this section
shall apply to distributions after February 13, 2003.

SEC. 433. REPEAL OF SPECIAL RULES FOR FASITS.

(a) In General.--Part V of subchapter M of chapter 1
(relating to financial asset securitization investment
trusts) is hereby repealed.
(b) Conforming Amendments.--
(1) Paragraph (6) of section 56(g) is amended by striking
``REMIC, or FASIT'' and inserting ``or REMIC''.
(2) Clause (ii) of section 382(l)(4)(B) is amended by
striking ``a REMIC to which part IV of subchapter M applies,
or a FASIT to which part V of subchapter M applies,'' and
inserting ``or a REMIC to which part IV of subchapter M
applies,''.
(3) Paragraph (1) of section 582(c) is amended by striking
``, and any regular interest in a FASIT,''.
(4) Subparagraph (E) of section 856(c)(5) is amended by
striking the last sentence.
(5)(A) Section 860G(a)(1) is amended by adding at the end
the following new sentence: ``An interest shall not fail to
qualify as a regular interest solely because the specified
principal amount of the regular interest (or the amount of
interest accrued on the regular interest) can be reduced as a
result of the nonoccurrence of 1 or more contingent payments
with respect to any reverse mortgage loan held by the REMIC
if, on the startup day for the REMIC, the sponsor reasonably
believes that all principal and interest due under the
regular interest will be paid at or prior to the liquidation
of the REMIC.''.
(B) The last sentence of section 860G(a)(3) is amended by
inserting ``, and any reverse mortgage loan (and each balance
increase on such loan meeting the requirements of
subparagraph (A)(iii)) shall be treated as an obligation
secured by an interest in real property'' before the period
at the end.
(6) Paragraph (3) of section 860G(a) is amended by adding
``and'' at the end of subparagraph (B), by striking ``, and''
at the end of subparagraph (C) and inserting a period, and by
striking subparagraph (D).
(7) Section 860G(a)(3), as amended by paragraph (6), is
amended by adding at the end the following new sentence:
``For purposes of subparagraph (A), if more than 50 percent
of the obligations transferred to, or purchased by, the REMIC
are originated by the United States or any State (or any
political subdivision, agency, or instrumentality of the
United States or any State) and are principally secured by an
interest in real property, then each obligation transferred
to, or purchased by, the REMIC shall be treated as secured by
an interest in real property.''.
(8)(A) Section 860G(a)(3)(A) is amended by striking ``or''
at the end of clause (i), by inserting ``or'' at the end of
clause (ii), and by inserting after clause (ii) the following
new clause:
``(iii) represents an increase in the principal amount
under the original terms of an obligation described in clause
(i) or (ii) if such increase--

``(I) is attributable to an advance made to the obligor
pursuant to the original terms of the obligation,
``(II) occurs after the startup day, and
``(III) is purchased by the REMIC pursuant to a fixed price
contract in effect on the startup day.''.

(B) Section 860G(a)(7)(B) is amended to read as follows:
``(B) Qualified reserve fund.--For purposes of subparagraph
(A), the term `qualified reserve fund' means any reasonably
required reserve to--
``(i) provide for full payment of expenses of the REMIC or
amounts due on regular interests in the event of defaults on
qualified mortgages or lower than expected returns on cash
flow investments, or
``(ii) provide a source of funds for the purchase of
obligations described in clause (ii) or (iii) of paragraph
(3)(A).

The aggregate fair market value of the assets held in any
such reserve shall not exceed 50 percent of the aggregate
fair market value of all of the assets of the REMIC on the
startup day, and the amount of any such reserve shall be
promptly and appropriately reduced to the extent the amount
held in such reserve is no longer reasonably required for
purposes specified in clause (i) or (ii) of paragraph
(3)(A).''.
(9) Subparagraph (C) of section 1202(e)(4) is amended by
striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
(10) Section 1272(a)(6)(B) is amended by adding at the end
the following new flush sentence:

``For purposes of clause (iii), the Secretary shall prescribe
regulations permitting the use of a current prepayment
assumption, determined as of the close of the accrual period
(or such other time as the Secretary may prescribe during the
taxable year in which the accrual period ends).''.
(11) Subparagraph (C) of section 7701(a)(19) is amended by
adding ``and'' at the end of clause (ix), by striking ``,
and'' at the end of clause (x) and inserting a period, and by
striking clause (xi).
(12) 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 paragraph (2), the
amendments made by this section shall take effect on February
14, 2003.
(2) Exception for existing fasits.--
(A) In general.--Paragraph (1) shall not apply to any FASIT
in existence on the date of the enactment of this Act to the
extent that regular interests issued by the FASIT before such
date continue to remain outstanding in accordance with the
original terms of issuance.
(B) Transfer of additional assets not permitted.--Except as
provided in regulations prescribed by the Secretary of the
Treasury or the Secretary's delegate, subparagraph (A) shall
cease to apply as of the earliest date after the date of the
enactment of this Act that any property is transferred to the
FASIT.

SEC. 434. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON
CONVERTIBLE DEBT.

(a) In General.--Paragraph (2) of section 163(l) is amended
by striking ``or a related party'' and inserting ``or equity
held by the issuer (or any related party) in any other
person''.
(b) Capitalization Allowed With Respect to Equity of
Persons Other Than Issuer and Related Parties.--Section
163(l) is amended by redesignating paragraphs (4) and (5) as
paragraphs (5) and (6) and by inserting after paragraph (3)
the following new paragraph:
``(4) Capitalization allowed with respect to equity of
persons other than issuer and related parties.--If the
disqualified debt instrument of a corporation is payable in
equity held by the issuer (or any related party) in any other
person (other than a related party), the basis of such equity
shall be increased by the amount not allowed as a deduction
by reason of paragraph (1) with respect to the instrument.''.
(c) Exception for Certain Instruments Issued by Dealers in
Securities.--Section 163(l), as amended by subsection (b), is
amended by redesignating paragraphs (5) and (6) as paragraphs
(6) and (7) and by inserting after paragraph (4) the
following new paragraph:
``(5) Exception for certain instruments issued by dealers
in securities.--For purposes of this subsection, the term
`disqualified debt instrument' does not include indebtedness
issued by a dealer in securities (or a related party) which
is payable in, or by reference to, equity (other than equity
of the issuer or a related party) held by such dealer in its
capacity as a dealer in securities. For purposes of this
paragraph, the term `dealer in securities' has the meaning
given such term by section 475.''.
(c) Conforming Amendments.--Paragraph (3) of section 163(l)
is amended--
(1) by striking ``or a related party'' in the material
preceding subparagraph (A) and inserting ``or any other
person'', and

[[Page S2052]]

(2) by striking ``or interest'' each place it appears.
(d) Effective Date.--The amendments made by this section
shall apply to debt instruments issued after February 13,
2003.

SEC. 435. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER
SECTION 269.

(a) In General.--Subsection (a) of section 269 (relating to
acquisitions made to evade or avoid income tax) is amended to
read as follows:
``(a) In General.--If--
``(1)(A) any person or persons acquire, directly or
indirectly, control of a corporation, or
``(B) any corporation acquires, directly or indirectly,
property of another corporation and the basis of such
property, in the hands of the acquiring corporation, is
determined by reference to the basis in the hands of the
transferor corporation, and
``(2) the principal purpose for which such acquisition was
made is evasion or avoidance of Federal income tax,

then the Secretary may disallow such deduction, credit, or
other allowance. For purposes of paragraph (1)(A), control
means the ownership of stock possessing at least 50 percent
of the total combined voting power of all classes of stock
entitled to vote or at least 50 percent of the total value of
all shares of all classes of stock of the corporation.''.
(b) Effective Date.--The amendment made by this section
shall apply to stock and property acquired after February 13,
2003.

SEC. 436. MODIFICATION OF INTERACTION BETWEEN SUBPART F AND
PASSIVE FOREIGN INVESTMENT COMPANY RULES.

(a) Limitation on Exception From PFIC Rules for United
States Shareholders of Controlled Foreign Corporations.--
Paragraph (2) of section 1297(e) (relating to passive foreign
investment company) is amended by adding at the end the
following flush sentence:

``Such term shall not include any period if the earning of
subpart F income by such corporation during such period would
result in only a remote likelihood of an inclusion in gross
income under section 951(a)(1)(A)(i).''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years of controlled foreign
corporations beginning after February 13, 2003, and to
taxable years of United States shareholders with or within
which such taxable years of controlled foreign corporations
end.

Subtitle D--Provisions to Discourage Expatriation

SEC. 441. TAX TREATMENT OF INVERTED CORPORATE ENTITIES

(a) In General.--Subchapter C of chapter 80 (relating to
provisions affecting more than one subtitle) is amended by
adding at the end the following new section:

``SEC. 7874. RULES RELATING TO INVERTED CORPORATE ENTITIES

``(a) Inverted Corporations Treated as Domestic
Corporations.--
``(1) In general.--If a foreign incorporated entity is
treated as an inverted domestic corporation, then,
notwithstanding section 7701(a)(4), such entity shall be
treated for purposes of this title as a domestic corporation.
``(2) Inverted domestic corporation.--For purposes of this
section, a foreign incorporated entity shall be treated as an
inverted domestic corporation if, pursuant to a plan (or a
series of related transactions)--
``(A) the entity completes after March 20, 2002, the direct
or indirect acquisition of substantially all of the
properties held directly or indirectly by a domestic
corporation or substantially all of the properties
constituting a trade or business of a domestic partnership,
``(B) after the acquisition at least 80 percent of the
stock (by vote or value) of the entity is held--
``(i) in the case of an acquisition with respect to a
domestic corporation, by former shareholders of the domestic
corporation by reason of holding stock in the domestic
corporation, or
``(ii) in the case of an acquisition with respect to a
domestic partnership, by former partners of the domestic
partnership by reason of holding a capital or profits
interest in the domestic partnership, and
``(C) the expanded affiliated group which after the
acquisition includes the entity does not have substantial
business activities in the foreign country in which or under
the law of which the entity is created or organized when
compared to the total business activities of such expanded
affiliated group.

Except as provided in regulations, an acquisition of
properties of a domestic corporation shall not be treated as
described in subparagraph (A) if none of the corporation's
stock was readily tradeable on an established securities
market at any time during the 4-year period ending on the
date of the acquisition.
``(b) Preservation of Domestic Tax Base in Certain
Inversion Transactions to Which Subsection (a) Does Not
Apply.--
``(1) In general.--If a foreign incorporated entity would
be treated as an inverted domestic corporation with respect
to an acquired entity if either--
``(A) subsection (a)(2)(A) were applied by substituting
`after December 31, 1996, and on or before March 20, 2002'
for `after March 20, 2002' and subsection (a)(2)(B) were
applied by substituting `more than 50 percent' for `at least
80 percent', or
``(B) subsection (a)(2)(B) were applied by substituting
`more than 50 percent' for `at least 80 percent',

then the rules of subsection (c) shall apply to any inversion
gain of the acquired entity during the applicable period and
the rules of subsection (d) shall apply to any related party
transaction of the acquired entity during the applicable
period. This subsection shall not apply for any taxable year
if subsection (a) applies to such foreign incorporated entity
for such taxable year.
``(2) Acquired entity.--For purposes of this section--
``(A) In general.--The term `acquired entity' means the
domestic corporation or partnership substantially all of the
properties of which are directly or indirectly acquired in an
acquisition described in subsection (a)(2)(A) to which this
subsection applies.
``(B) Aggregation rules.--Any domestic person bearing a
relationship described in section 267(b) or 707(b) to an
acquired entity shall be treated as an acquired entity with
respect to the acquisition described in subparagraph (A).
``(3) Applicable period.--For purposes of this section--
``(A) In general.--The term `applicable period' means the
period--
``(i) beginning on the first date properties are acquired
as part of the acquisition described in subsection (a)(2)(A)
to which this subsection applies, and
``(ii) ending on the date which is 10 years after the last
date properties are acquired as part of such acquisition.
``(B) Special rule for inversions occurring before march
21, 2002.--In the case of any acquired entity to which
paragraph (1)(A) applies, the applicable period shall be the
10-year period beginning on January 1, 2003.
``(c) Tax on Inversion Gains May Not Be Offset.--If
subsection (b) applies--
``(1) In general.--The taxable income of an acquired entity
(or any expanded affiliated group which includes such 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.
``(2) Credits not allowed against tax on inversion gain.--
Credits shall be allowed against the tax imposed by this
chapter on an acquired entity for any taxable year described
in paragraph (1) only to the extent such tax exceeds the
product of--
``(A) the amount of the inversion gain for the taxable
year, and
``(B) the highest rate of tax specified in 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.
``(3) Special rules for partnerships.--In the case of an
acquired entity which is a partnership--
``(A) the limitations of this subsection shall apply at the
partner rather than the partnership level,
``(B) the inversion gain of any partner for any taxable
year shall be equal to the sum of--
``(i) the partner's distributive share of inversion gain of
the partnership for such taxable year, plus
``(ii) income or gain required to be recognized for the
taxable year by the partner under section 367(a), 741, or
1001, or under any other provision of chapter 1, by reason of
the transfer during the applicable period of any partnership
interest of the partner in such partnership to the foreign
incorporated entity, and
``(C) the highest rate of tax specified in the rate
schedule applicable to the partner under chapter 1 shall be
substituted for the rate of tax under paragraph (2)(B).
``(4) Inversion gain.--For purposes of this section, the
term `inversion gain' means any income or gain required to be
recognized under section 304, 311(b), 367, 1001, or 1248, or
under any other provision of chapter 1, by reason of the
transfer during the applicable period of stock or other
properties by an acquired entity--
``(A) as part of the acquisition described in subsection
(a)(2)(A) to which subsection (b) applies, or
``(B) after such acquisition to a foreign related person.

The Secretary may provide that income or gain from the sale
of inventories or other transactions in the ordinary course
of a trade or business shall not be treated as inversion gain
under subparagraph (B) to the extent the Secretary determines
such treatment would not be inconsistent with the purposes of
this section.
``(5) Coordination with section 172 and minimum tax.--Rules
similar to the rules of paragraphs (3) and (4) of section
860E(a) shall apply for purposes of this section.
``(6) Statute of limitations.--
``(A) In general.--The statutory period for the assessment
of any deficiency attributable to the inversion gain of any
taxpayer for any pre-inversion year shall not expire before
the expiration of 3 years from the date the Secretary is
notified by the taxpayer (in such manner as the Secretary may
prescribe) of the acquisition described in subsection
(a)(2)(A) to which such gain relates and such deficiency may
be assessed before the expiration of such 3-year period
notwithstanding the provisions of any other law or rule of
law which would otherwise prevent such assessment.
``(B) Pre-inversion year.--For purposes of subparagraph
(A), the term `pre-inversion year' means any taxable year
if--
``(i) any portion of the applicable period is included in
such taxable year, and
``(ii) such year ends before the taxable year in which the
acquisition described in subsection (a)(2)(A) is completed.
``(d) Special Rules Applicable to Acquired Entities to
Which Subsection (b) Applies.--
``(1) Increases in accuracy-related penalties.--In the case
of any underpayment of tax of an acquired entity to which
subsection (b) applies--
``(A) section 6662(a) shall be applied with respect to such
underpayment by substituting `30 percent' for `20 percent',
and
``(B) if such underpayment is attributable to one or more
gross valuation understatements,

[[Page S2053]]

the increase in the rate of penalty under section 6662(h)
shall be to 50 percent rather than 40 percent.
``(2) Modifications of limitation on interest deduction.--
In the case of an acquired entity to which subsection (b)
applies, section 163(j) shall be applied--
``(A) without regard to paragraph (2)(A)(ii) thereof, and
``(B) by substituting `25 percent' for `50 percent' each
place it appears in paragraph (2)(B) thereof.
``(e) Other Definitions and Special Rules.--For purposes of
this section--
``(1) Rules for application of subsection (a)(2).--In
applying subsection (a)(2) for purposes of subsections (a)
and (b), the following rules shall apply:
``(A) Certain stock disregarded.--There shall not be taken
into account in determining ownership for purposes of
subsection (a)(2)(B)--
``(i) stock held by members of the expanded affiliated
group which includes the foreign incorporated entity, or
``(ii) stock of such entity which is sold in a public
offering or private placement related to the acquisition
described in subsection (a)(2)(A).
``(B) Plan deemed in certain cases.--If a foreign
incorporated entity acquires directly or indirectly
substantially all of the properties of a domestic corporation
or partnership during the 4-year period beginning on the date
which is 2 years before the ownership requirements of
subsection (a)(2)(B) are met with respect to such domestic
corporation or partnership, such actions shall be treated
as pursuant to a plan.
``(C) Certain transfers disregarded.--The transfer of
properties or liabilities (including by contribution or
distribution) shall be disregarded if such transfers are part
of a plan a principal purpose of which is to avoid the
purposes of this section.
``(D) Special rule for related partnerships.--For purposes
of applying subsection (a)(2) to the acquisition of a
domestic partnership, except as provided in regulations, all
partnerships which are under common control (within the
meaning of section 482) shall be treated as 1 partnership.
``(E) Treatment of certain rights.--The Secretary shall
prescribe such regulations as may be necessary--
``(i) to treat warrants, options, contracts to acquire
stock, convertible debt instruments, and other similar
interests as stock, and
``(ii) to treat stock as not stock.
``(2) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group as defined in
section 1504(a) but without regard to section 1504(b)(3),
except that section 1504(a) shall be applied by substituting
`more than 50 percent' for `at least 80 percent' each place
it appears.
``(3) Foreign incorporated entity.--The term `foreign
incorporated entity' means any entity which is, or but for
subsection (a)(1) would be, treated as a foreign corporation
for purposes of this title.
``(4) Foreign related person.--The term `foreign related
person' means, with respect to any acquired entity, a foreign
person which--
``(A) bears a relationship to such entity described in
section 267(b) or 707(b), or
``(B) is under the same common control (within the meaning
of section 482) as such entity.
``(5) Subsequent acquisitions by unrelated domestic
corporations.--
``(A) In general.--Subject to such conditions, limitations,
and exceptions as the Secretary may prescribe, if, after an
acquisition described in subsection (a)(2)(A) to which
subsection (b) applies, a domestic corporation stock of which
is traded on an established securities market acquires
directly or indirectly any properties of one or more acquired
entities in a transaction with respect to which the
requirements of subparagraph (B) are met, this section shall
cease to apply to any such acquired entity with respect to
which such requirements are met.
``(B) Requirements.--The requirements of the subparagraph
are met with respect to a transaction involving any
acquisition described in subparagraph (A) if--
``(i) before such transaction the domestic corporation did
not have a relationship described in section 267(b) or
707(b), and was not under common control (within the meaning
of section 482), with the acquired entity, or any member of
an expanded affiliated group including such entity, and
``(ii) after such transaction, such acquired entity--

``(I) is a member of the same expanded affiliated group
which includes the domestic corporation or has such a
relationship or is under such common control with any member
of such group, and
``(II) is not a member of, and does not have such a
relationship and is not under such common control with any
member of, the expanded affiliated group which before such
acquisition included such entity.

``(f) 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-thru or other
noncorporate entities, or other intermediaries, or
``(2) transactions designed to have persons cease to be (or
not become) members of expanded affiliated groups or related
persons.''.
(b) Information Reporting.--The Secretary of the Treasury
shall exercise the Secretary's authority under the Internal
Revenue Code of 1986 to require entities involved in
transactions to which section 7874 of such Code (as added by
subsection (a)) applies to report to the Secretary,
shareholders, partners, and such other persons as the
Secretary may prescribe such information as is necessary to
ensure the proper tax treatment of such transactions.
(c) Conforming Amendment.--The table of sections for
subchapter C of chapter 80 is amended by adding at the end
the following new item:

``Sec. 7874. Rules relating to inverted corporate entities.''.

(d) Transition Rule for Certain Regulated Investment
Companies and Unit Investment Trusts.--Notwithstanding
section 7874 of the Internal Revenue Code of 1986 (as added
by subsection (a)), a regulated investment company, or other
pooled fund or trust specified by the Secretary of the
Treasury, may elect to recognize gain by reason of section
367(a) of such Code with respect to a transaction under which
a foreign incorporated entity is treated as an inverted
domestic corporation under section 7874(a) of such Code by
reason of an acquisition completed after March 20, 2002, and
before January 1, 2004.

SEC. 442. IMPOSITION OF MARK-TO-MARKET TAX ON INDIVIDUALS WHO
EXPATRIATE.

(a) In General.--Subpart A of part II of subchapter N of
chapter 1 is amended by inserting after section 877 the
following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

``(a) General Rules.--For purposes of this subtitle--
``(1) Mark to market.--Except as provided in subsections
(d) and (f), all property of a covered expatriate to whom
this section applies shall be treated as sold on the day
before the expatriation date for its fair market value.
``(2) Recognition of gain or loss.--In the case of any sale
under paragraph (1)--
``(A) notwithstanding any other provision of this title,
any gain arising from such sale shall be taken into account
for the taxable year of the sale, and
``(B) any loss arising from such sale shall be taken into
account for the taxable year of the sale to the extent
otherwise provided by this title, except that section 1091
shall not apply to any such loss.

Proper adjustment shall be made in the amount of any gain or
loss subsequently realized for gain or loss taken into
account under the preceding sentence.
``(3) Exclusion for certain gain.--
``(A) In general.--The amount which, but for this
paragraph, would be includible in the gross income of any
individual by reason of this section shall be reduced (but
not below zero) by $600,000. For purposes of this paragraph,
allocable expatriation gain taken into account under
subsection (f)(2) shall be treated in the same manner as an
amount required to be includible in gross income.
``(B) Cost-of-living adjustment.--
``(i) In general.--In the case of an expatriation date
occurring in any calendar year after 2003, the $600,000
amount under subparagraph (A) shall be increased by an amount
equal to--

``(I) such dollar amount, multiplied by
``(II) the cost-of-living adjustment determined under
section 1(f)(3) for such calendar year, determined by
substituting `calendar year 2002' for `calendar year 1992' in
subparagraph (B) thereof.

``(ii) Rounding rules.--If any amount after adjustment
under clause (i) is not a multiple of $1,000, such amount
shall be rounded to the next lower multiple of $1,000.
``(4) Election to continue to be taxed as united states
citizen.--
``(A) In general.--If a covered expatriate elects the
application of this paragraph--
``(i) this section (other than this paragraph and
subsection (i)) shall not apply to the expatriate, but
``(ii) in the case of property to which this section would
apply but for such election, the expatriate shall be subject
to tax under this title in the same manner as if the
individual were a United States citizen.
``(B) Requirements.--Subparagraph (A) shall not apply to an
individual unless the individual--
``(i) provides security for payment of tax in such form and
manner, and in such amount, as the Secretary may require,
``(ii) consents to the waiver of any right of the
individual under any treaty of the United States which would
preclude assessment or collection of any tax which may be
imposed by reason of this paragraph, and
``(iii) complies with such other requirements as the
Secretary may prescribe.
``(C) Election.--An election under subparagraph (A) shall
apply to all property to which this section would apply but
for the election and, once made, shall be irrevocable. Such
election shall also apply to property the basis of which is
determined in whole or in part by reference to the property
with respect to which the election was made.
``(b) Election To Defer Tax.--
``(1) In general.--If the taxpayer elects the application
of this subsection with respect to any property treated as
sold by reason of subsection (a), the payment of the
additional tax attributable to such property shall be
postponed until the due date of the return for the taxable
year in which such property is disposed of (or, in the case
of property disposed of in a transaction in which gain is not
recognized in whole or in part, until such other date as the
Secretary may prescribe).
``(2) Determination of tax with respect to property.--For
purposes of paragraph (1), the additional tax attributable to
any property is an amount which bears the same ratio to the
additional tax imposed by this chapter for the taxable year
solely by reason of subsection (a) as the gain taken into
account under subsection (a) with respect to such property
bears to the total gain taken into account under subsection
(a) with respect to all property to which subsection (a)
applies.

[[Page S2054]]

``(3) Termination of postponement.--No tax may be postponed
under this subsection later than the due date for the return
of tax imposed by this chapter for the taxable year which
includes the date of death of the expatriate (or, if earlier,
the time that the security provided with respect to the
property fails to meet the requirements of paragraph (4),
unless the taxpayer corrects such failure within the time
specified by the Secretary).
``(4) Security.--
``(A) In general.--No election may be made under paragraph
(1) with respect to any property unless adequate security is
provided to the Secretary with respect to such property.
``(B) Adequate security.--For purposes of subparagraph (A),
security with respect to any property shall be treated as
adequate security if--
``(i) it is a bond in an amount equal to the deferred tax
amount under paragraph (2) for the property, or
``(ii) the taxpayer otherwise establishes to the
satisfaction of the Secretary that the security is adequate.
``(5) Waiver of certain rights.--No election may be made
under paragraph (1) unless the taxpayer consents to the
waiver of any right under any treaty of the United States
which would preclude assessment or collection of any tax
imposed by reason of this section.
``(6) Elections.--An election under paragraph (1) shall
only apply to property described in the election and, once
made, is irrevocable. An election may be made under paragraph
(1) with respect to an interest in a trust with respect to
which gain is required to be recognized under subsection
(f)(1).
``(7) Interest.--For purposes of section 6601--
``(A) the last date for the payment of tax shall be
determined without regard to the election under this
subsection, and
``(B) section 6621(a)(2) shall be applied by substituting
`5 percentage points' for `3 percentage points' in
subparagraph (B) thereof.
``(c) Covered Expatriate.--For purposes of this section--
``(1) In general.--Except as provided in paragraph (2), the
term `covered expatriate' means an expatriate.
``(2) Exceptions.--An individual shall not be treated as a
covered expatriate if--
``(A) the individual--
``(i) became at birth a citizen of the United States and a
citizen of another country and, as of the expatriation date,
continues to be a citizen of, and is taxed as a resident of,
such other country, and
``(ii) has not been a resident of the United States (as
defined in section 7701(b)(1)(A)(ii)) during the 5 taxable
years ending with the taxable year during which the
expatriation date occurs, or
``(B)(i) the individual's relinquishment of United States
citizenship occurs before such individual attains age 18\1/
2\, and
``(ii) the individual has been a resident of the United
States (as so defined) for not more than 5 taxable years
before the date of relinquishment.
``(d) Exempt Property; Special Rules for Pension Plans.--
``(1) Exempt property.--This section shall not apply to the
following:
``(A) United states real property interests.--Any United
States real property interest (as defined in section
897(c)(1)), other than stock of a United States real property
holding corporation which does not, on the day before the
expatriation date, meet the requirements of section
897(c)(2).
``(B) Specified property.--Any property or interest in
property not described in subparagraph (A) which the
Secretary specifies in regulations.
``(2) Special rules for certain retirement plans.--
``(A) In general.--If a covered expatriate holds on the day
before the expatriation date any interest in a retirement
plan to which this paragraph applies--
``(i) such interest shall not be treated as sold for
purposes of subsection (a)(1), but
``(ii) an amount equal to the present value of the
expatriate's nonforfeitable accrued benefit shall be treated
as having been received by such individual on such date as a
distribution under the plan.
``(B) Treatment of subsequent distributions.--In the case
of any distribution on or after the expatriation date to or
on behalf of the covered expatriate from a plan from which
the expatriate was treated as receiving a distribution under
subparagraph (A), the amount otherwise includible in gross
income by reason of the subsequent distribution shall be
reduced by the excess of the amount includible in gross
income under subparagraph (A) over any portion of such amount
to which this subparagraph previously applied.
``(C) Treatment of subsequent distributions by plan.--For
purposes of this title, a retirement plan to which this
paragraph applies, and any person acting on the plan's
behalf, shall treat any subsequent distribution described in
subparagraph (B) in the same manner as such distribution
would be treated without regard to this paragraph.
``(D) Applicable plans.--This paragraph shall apply to--
``(i) any qualified retirement plan (as defined in section
4974(c)),
``(ii) an eligible deferred compensation plan (as defined
in section 457(b)) of an eligible employer described in
section 457(e)(1)(A), and
``(iii) to the extent provided in regulations, any foreign
pension plan or similar retirement arrangements or programs.
``(e) Definitions.--For purposes of this section--
``(1) Expatriate.--The term `expatriate' means--
``(A) any United States citizen who relinquishes
citizenship, and
``(B) any long-term resident of the United States who--
``(i) ceases to be a lawful permanent resident of the
United States (within the meaning of section 7701(b)(6)), or
``(ii) commences to be treated as a resident of a foreign
country under the provisions of a tax treaty between the
United States and the foreign country and who does not waive
the benefits of such treaty applicable to residents of the
foreign country.
``(2) Expatriation date.--The term `expatriation date'
means--
``(A) the date an individual relinquishes United States
citizenship, or
``(B) in the case of a long-term resident of the United
States, the date of the event described in clause (i) or (ii)
of paragraph (1)(B).
``(3) Relinquishment of citizenship.--A citizen shall be
treated as relinquishing United States citizenship on the
earliest of--
``(A) the date the individual renounces such individual's
United States nationality before a diplomatic or consular
officer of the United States pursuant to paragraph (5) of
section 349(a) of the Immigration and Nationality Act (8
U.S.C. 1481(a)(5)),
``(B) the date the individual furnishes to the United
States Department of State a signed statement of voluntary
relinquishment of United States nationality confirming the
performance of an act of expatriation specified in paragraph
(1), (2), (3), or (4) of section 349(a) of the Immigration
and Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
``(C) the date the United States Department of State issues
to the individual a certificate of loss of nationality, or
``(D) the date a court of the United States cancels a
naturalized citizen's certificate of naturalization.

Subparagraph (A) or (B) shall not apply to any individual
unless the renunciation or voluntary relinquishment is
subsequently approved by the issuance to the individual of a
certificate of loss of nationality by the United States
Department of State.
``(4) Long-term resident.--The term `long-term resident'
has the meaning given to such term by section 877(e)(2).
``(f) Special Rules Applicable to Beneficiaries' Interests
in Trust.--
``(1) In general.--Except as provided in paragraph (2), if
an individual is determined under paragraph (3) to hold an
interest in a trust on the day before the expatriation date--
``(A) the individual shall not be treated as having sold
such interest,
``(B) such interest shall be treated as a separate share in
the trust, and
``(C)(i) such separate share shall be treated as a separate
trust consisting of the assets allocable to such share,
``(ii) the separate trust shall be treated as having sold
its assets on the day before the expatriation date for their
fair market value and as having distributed all of its assets
to the individual as of such time, and
``(iii) the individual shall be treated as having
recontributed the assets to the separate trust.

Subsection (a)(2) shall apply to any income, gain, or loss of
the individual arising from a distribution described in
subparagraph (C)(ii). In determining the amount of such
distribution, proper adjustments shall be made for
liabilities of the trust allocable to an individual's share
in the trust.
``(2) Special rules for interests in qualified trusts.--
``(A) In general.--If the trust interest described in
paragraph (1) is an interest in a qualified trust--
``(i) paragraph (1) and subsection (a) shall not apply, and
``(ii) in addition to any other tax imposed by this title,
there is hereby imposed on each distribution with respect to
such interest a tax in the amount determined under
subparagraph (B).
``(B) Amount of tax.--The amount of tax under subparagraph
(A)(ii) shall be equal to the lesser of--
``(i) the highest rate of tax imposed by section 1(e) for
the taxable year which includes the day before the
expatriation date, multiplied by the amount of the
distribution, or
``(ii) the balance in the deferred tax account immediately
before the distribution determined without regard to any
increases under subparagraph (C)(ii) after the 30th day
preceding the distribution.
``(C) Deferred tax account.--For purposes of subparagraph
(B)(ii)--
``(i) Opening balance.--The opening balance in a deferred
tax account with respect to any trust interest is an amount
equal to the tax which would have been imposed on the
allocable expatriation gain with respect to the trust
interest if such gain had been included in gross income under
subsection (a).
``(ii) Increase for interest.--The balance in the deferred
tax account shall be increased by the amount of interest
determined (on the balance in the account at the time the
interest accrues), for periods after the 90th day after the
expatriation date, by using the rates and method applicable
under section 6621 for underpayments of tax for such periods,
except that section 6621(a)(2) shall be applied by
substituting `5 percentage points' for `3 percentage points'
in subparagraph (B) thereof.
``(iii) Decrease for taxes previously paid.--The balance in
the tax deferred account shall be reduced--

``(I) by the amount of taxes imposed by subparagraph (A) on
any distribution to the person holding the trust interest,
and
``(II) in the case of a person holding a nonvested
interest, to the extent provided in regulations, by the
amount of taxes imposed by subparagraph (A) on distributions
from the trust

[[Page S2055]]

with respect to nonvested interests not held by such
person.
``(D) Allocable expatriation gain.--For purposes of this
paragraph, the allocable expatriation gain with respect to
any beneficiary's interest in a trust is the amount of gain
which would be allocable to such beneficiary's vested and
nonvested interests in the trust if the beneficiary held
directly all assets allocable to such interests.
``(E) Tax deducted and withheld.--
``(i) In general.--The tax imposed by subparagraph (A)(ii)
shall be deducted and withheld by the trustees from the
distribution to which it relates.
``(ii) Exception where failure to waive treaty rights.--If
an amount may not be deducted and withheld under clause (i)
by reason of the distributee failing to waive any treaty
right with respect to such distribution--

``(I) the tax imposed by subparagraph (A)(ii) shall be
imposed on the trust and each trustee shall be personally
liable for the amount of such tax, and
``(II) any other beneficiary of the trust shall be entitled
to recover from the distributee the amount of such tax
imposed on the other beneficiary.

``(F) Disposition.--If a trust ceases to be a qualified
trust at any time, a covered expatriate disposes of an
interest in a qualified trust, or a covered expatriate
holding an interest in a qualified trust dies, then, in lieu
of the tax imposed by subparagraph (A)(ii), there is hereby
imposed a tax equal to the lesser of--
``(i) the tax determined under paragraph (1) as if the day
before the expatriation date were the date of such cessation,
disposition, or death, whichever is applicable, or
``(ii) the balance in the tax deferred account immediately
before such date.

Such tax shall be imposed on the trust and each trustee shall
be personally liable for the amount of such tax and any other
beneficiary of the trust shall be entitled to recover from
the covered expatriate or the estate the amount of such tax
imposed on the other beneficiary.
``(G) Definitions and special rules.--For purposes of this
paragraph--
``(i) Qualified trust.--The term `qualified trust' means a
trust which is described in section 7701(a)(30)(E).
``(ii) Vested interest.--The term `vested interest' means
any interest which, as of the day before the expatriation
date, is vested in the beneficiary.
``(iii) Nonvested interest.--The term `nonvested interest'
means, with respect to any beneficiary, any interest in a
trust which is not a vested interest. Such interest shall be
determined by assuming the maximum exercise of discretion in
favor of the beneficiary and the occurrence of all
contingencies in favor of the beneficiary.
``(iv) Adjustments.--The Secretary may provide for such
adjustments to the bases of assets in a trust or a deferred
tax account, and the timing of such adjustments, in order to
ensure that gain is taxed only once.
``(v) Coordination with retirement plan rules.--This
subsection shall not apply to an interest in a trust which is
part of a retirement plan to which subsection (d)(2) applies.
``(3) Determination of beneficiaries' interest in trust.--
``(A) Determinations under paragraph (1).--For purposes of
paragraph (1), a beneficiary's interest in a trust shall be
based upon all relevant facts and circumstances, including
the terms of the trust instrument and any letter of wishes or
similar document, historical patterns of trust distributions,
and the existence of and functions performed by a trust
protector or any similar adviser.
``(B) Other determinations.--For purposes of this section--
``(i) Constructive ownership.--If a beneficiary of a trust
is a corporation, partnership, trust, or estate, the
shareholders, partners, or beneficiaries shall be deemed to
be the trust beneficiaries for purposes of this section.
``(ii) Taxpayer return position.--A taxpayer shall clearly
indicate on its income tax return--

``(I) the methodology used to determine that taxpayer's
trust interest under this section, and
``(II) if the taxpayer knows (or has reason to know) that
any other beneficiary of such trust is using a different
methodology to determine such beneficiary's trust interest
under this section.

``(g) Termination of Deferrals, etc.--In the case of any
covered expatriate, notwithstanding any other provision of
this title--
``(1) any period during which recognition of income or gain
is deferred shall terminate on the day before the
expatriation date, and
``(2) any extension of time for payment of tax shall cease
to apply on the day before the expatriation date and the
unpaid portion of such tax shall be due and payable at the
time and in the manner prescribed by the Secretary.
``(h) Imposition of Tentative Tax.--
``(1) In general.--If an individual is required to include
any amount in gross income under subsection (a) for any
taxable year, there is hereby imposed, immediately before the
expatriation date, a tax in an amount equal to the amount of
tax which would be imposed if the taxable year were a short
taxable year ending on the expatriation date.
``(2) Due date.--The due date for any tax imposed by
paragraph (1) shall be the 90th day after the expatriation
date.
``(3) Treatment of tax.--Any tax paid under paragraph (1)
shall be treated as a payment of the tax imposed by this
chapter for the taxable year to which subsection (a) applies.
``(4) Deferral of tax.--The provisions of subsection (b)
shall apply to the tax imposed by this subsection to the
extent attributable to gain includible in gross income by
reason of this section.
``(i) Special Liens for Deferred Tax Amounts.--
``(1) Imposition of lien.--
``(A) In general.--If a covered expatriate makes an
election under subsection (a)(4) or (b) which results in the
deferral of any tax imposed by reason of subsection (a), the
deferred amount (including any interest, additional amount,
addition to tax, assessable penalty, and costs attributable
to the deferred amount) shall be a lien in favor of the
United States on all property of the expatriate located in
the United States (without regard to whether this section
applies to the property).
``(B) Deferred amount.--For purposes of this subsection,
the deferred amount is the amount of the increase in the
covered expatriate's income tax which, but for the election
under subsection (a)(4) or (b), would have occurred by reason
of this section for the taxable year including the
expatriation date.
``(2) Period of lien.--The lien imposed by this subsection
shall arise on the expatriation date and continue until--
``(A) the liability for tax by reason of this section is
satisfied or has become unenforceable by reason of lapse of
time, or
``(B) it is established to the satisfaction of the
Secretary that no further tax liability may arise by reason
of this section.
``(3) Certain rules apply.--The rules set forth in
paragraphs (1), (3), and (4) of section 6324A(d) shall apply
with respect to the lien imposed by this subsection as if it
were a lien imposed by section 6324A.
``(j) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this section.''.
(b) Inclusion in Income of Gifts and Bequests Received by
United States Citizens and Residents From Expatriates.--
Section 102 (relating to gifts, etc. not included in gross
income) is amended by adding at the end the following new
subsection:
``(d) Gifts and Inheritances From Covered Expatriates.--
``(1) In general.--Subsection (a) shall not exclude from
gross income the value of any property acquired by gift,
bequest, devise, or inheritance from a covered expatriate
after the expatriation date. For purposes of this subsection,
any term used in this subsection which is also used in
section 877A shall have the same meaning as when used in
section 877A.
``(2) Exceptions for transfers otherwise subject to estate
or gift tax.--Paragraph (1) shall not apply to any property
if either--
``(A) the gift, bequest, devise, or inheritance is--
``(i) shown on a timely filed return of tax imposed by
chapter 12 as a taxable gift by the covered expatriate, or
``(ii) included in the gross estate of the covered
expatriate for purposes of chapter 11 and shown on a timely
filed return of tax imposed by chapter 11 of the estate of
the covered expatriate, or
``(B) no such return was timely filed but no such return
would have been required to be filed even if the covered
expatriate were a citizen or long-term resident of the United
States.''.
(c) Definition of Termination of United States
Citizenship.--Section 7701(a) is amended by adding at the end
the following new paragraph:
``(48) Termination of united states citizenship.--
``(A) In general.--An individual shall not cease to be
treated as a United States citizen before the date on which
the individual's citizenship is treated as relinquished under
section 877A(e)(3).
``(B) Dual citizens.--Under regulations prescribed by the
Secretary, subparagraph (A) shall not apply to an individual
who became at birth a citizen of the United States and a
citizen of another country.''.
(d) Ineligibility for Visa or Admission to United States.--
(1) In general.--Section 212(a)(10)(E) of the Immigration
and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to
read as follows:
``(E) Former citizens not in compliance with expatriation
revenue provisions.--Any alien who is a former citizen of the
United States who relinquishes United States citizenship
(within the meaning of section 877A(e)(3) of the Internal
Revenue Code of 1986) and who is not in compliance with
section 877A of such Code (relating to expatriation).''.
(2) Availability of information.--
(A) In general.--Section 6103(l) (relating to disclosure of
returns and return information for purposes other than tax
administration) is amended by adding at the end the following
new paragraph:
``(19) Disclosure to deny visa or admission to certain
expatriates.--Upon written request of the Attorney General or
the Attorney General's delegate, the Secretary shall disclose
whether an individual is in compliance with section 877A (and
if not in compliance, any items of noncompliance) to officers
and employees of the Federal agency responsible for
administering section 212(a)(10)(E) of the Immigration and
Nationality Act solely for the purpose of, and to the extent
necessary in, administering such section 212(a)(10)(E).''.
(B) Safeguards.--
(i) Technical amendments.--Paragraph (4) of section 6103(p)
of the Internal Revenue Code of 1986, as amended by section
202(b)(2)(B) of the Trade Act of 2002 (Public Law 107-210;
116 Stat. 961), is amended by striking ``or (17)'' after
``any other person described in subsection (l)(16)'' each
place it appears and inserting ``or (18)''.
(ii) Conforming amendments.--Section 6103(p)(4) (relating
to safeguards), as amended by clause (i), is amended by
striking ``or (18)''

[[Page S2056]]

after ``any other person described in subsection (l)(16)''
each place it appears and inserting ``(18), or (19)''.
(3) Effective dates.--
(A) In general.--Except as provided in subparagraph (B),
the amendments made by this subsection shall apply to
individuals who relinquish United States citizenship on or
after the date of the enactment of this Act.
(B) Technical amendments.--The amendments made by paragraph
(2)(B)(i) shall take effect as if included in the amendments
made by section 202(b)(2)(B) of the Trade Act of 2002 (Public
Law 107-210; 116 Stat. 961).
(e) Conforming Amendments.--
(1) Section 877 is amended by adding at the end the
following new subsection:
``(g) Application.--This section shall not apply to an
expatriate (as defined in section 877A(e)) whose expatriation
date (as so defined) occurs on or after February 5, 2003.''.
(2) Section 2107 is amended by adding at the end the
following new subsection:
``(f) Application.--This section shall not apply to any
expatriate subject to section 877A.''.
(3) Section 2501(a)(3) is amended by adding at the end the
following new subparagraph:
``(F) Application.--This paragraph shall not apply to any
expatriate subject to section 877A.''.
(4)(A) Paragraph (1) of section 6039G(d) is amended by
inserting ``or 877A'' after ``section 877''.
(B) The second sentence of section 6039G(e) is amended by
inserting ``or who relinquishes United States citizenship
(within the meaning of section 877A(e)(3))'' after
``877(a))''.
(C) Section 6039G(f) is amended by inserting ``or
877A(e)(2)(B)'' after ``877(e)(1)''.
(f) Clerical Amendment.--The table of sections for subpart
A of part II of subchapter N of chapter 1 is amended by
inserting after the item relating to section 877 the
following new item:

``Sec. 877A. Tax responsibilities of expatriation.''.

(g) Effective Date.--
(1) In general.--Except as provided in this subsection, the
amendments made by this section shall apply to expatriates
(within the meaning of section 877A(e) of the Internal
Revenue Code of 1986, as added by this section) whose
expatriation date (as so defined) occurs on or after February
5, 2003.
(2) Gifts and bequests.--Section 102(d) of the Internal
Revenue Code of 1986 (as added by subsection (b)) shall apply
to gifts and bequests received on or after February 5, 2003,
from an individual or the estate of an individual whose
expatriation date (as so defined) occurs after such date.
(3) Due date for tentative tax.--The due date under section
877A(h)(2) of the Internal Revenue Code of 1986, as added by
this section, shall in no event occur before the 90th day
after the date of the enactment of this Act.

SEC. 443. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN
INVERTED CORPORATIONS.

(a) In General.--Subtitle D is amended by adding at the end
the following new chapter:

``CHAPTER 48--STOCK COMPENSATION OF INSIDERS IN INVERTED CORPORATIONS

``Sec. 5000A. Stock compensation of insiders in inverted corporations
entities.

``SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN INVERTED
CORPORATIONS.

``(a) Imposition of Tax.--In the case of an individual who
is a disqualified individual with respect to any inverted
corporation, there is hereby imposed on such person a tax
equal to 20 percent of the value (determined under subsection
(b)) of the specified stock compensation held (directly or
indirectly) by or for the benefit of such individual or a
member of such individual's family (as defined in section
267) at any time during the 12-month period beginning on the
date which is 6 months before the inversion 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 any 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 compensation held on
the inversion date, on such date,
``(B) in the case of such compensation which is canceled
during the 6 months before the inversion date, on the day
before such cancellation, and
``(C) in the case of such compensation which is granted
after the inversion date, on the date such compensation is
granted.
``(c) Tax To Apply Only if Shareholder Gain Recognized.--
Subsection (a) shall apply to any disqualified individual
with respect to an inverted 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)(A) (determined by substituting `July
10, 2002' for `March 20, 2002') 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 inversion
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 inversion date with respect
to the stock acquired pursuant to such exercise, and
``(2) any specified stock compensation which is exercised,
sold, exchanged, distributed, cashed out, or otherwise paid
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 corporation, any
individual who, at any time during the 12-month period
beginning on the date which is 6 months before the inversion
date--
``(A) is subject to the requirements of section 16(a) of
the Securities Exchange Act of 1934 with respect to such
corporation, or
``(B) would be subject to such requirements if such
corporation were an issuer of equity securities referred to
in such section.
``(2) Inverted corporation; inversion date.--
``(A) Inverted corporation.--The term `inverted
corporation' means any corporation to which subsection (a) or
(b) of section 7874 applies determined--
``(i) by substituting `July 10, 2002' for `March 20, 2002'
in section 7874(a)(2)(A), and
``(ii) without regard to subsection (b)(1)(A).

Such term includes any predecessor or successor of such a
corporation.
``(B) Inversion date.--The term `inversion date' means,
with respect to a corporation, the date on which the
corporation first becomes an inverted corporation.
``(3) Specified stock compensation.--
``(A) In general.--The term `specified stock compensation'
means payment (or right to payment) granted by the inverted
corporation (or by any member of the expanded affiliated
group which includes such corporation) to any person in
connection with the performance 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 member).
``(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 percent' for `at least 80 percent' each place it
appears.
``(f) Special Rules.--For purposes of this section--
``(1) Cancellation of restriction.--The cancellation of a
restriction which by its terms will never lapse shall be
treated as a grant.
``(2) Payment or reimbursement of tax by corporation
treated as specified stock compensation.--Any payment of the
tax imposed by this section directly or indirectly by the
inverted corporation or by any member of the expanded
affiliated group which includes such corporation--
``(A) shall be treated as specified stock compensation, and
``(B) shall not be allowed as a deduction under any
provision of chapter 1.
``(3) Certain restrictions ignored.--Whether there is
specified stock compensation, and the value thereof, shall be
determined without regard to any restriction other than a
restriction which by its terms will never lapse.
``(4) Property transfers.--Any transfer of property shall
be treated as a payment and any right to a transfer of
property shall be treated as a right to a payment.
``(5) Other administrative provisions.--For purposes of
subtitle F, any tax imposed by this section shall be treated
as a tax imposed by subtitle A.
``(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this section.''.
(b) Denial of Deduction.--
(1) In general.--Paragraph (6) of section 275(a) is amended
by inserting ``48,'' after ``46,''.
(2) $1,000,000 limit on deductible compensation reduced by
payment of excise tax on specified stock compensation.--
Paragraph (4) of section 162(m) is amended by adding at the
end the following new subparagraph:
``(G) Coordination with excise tax on specified stock
compensation.--The dollar limitation contained in paragraph
(1) with respect to any covered employee shall be reduced
(but not below zero) by the amount of any payment (with
respect to such employee) of the tax imposed by section 5000A
directly or indirectly by the inverted corporation (as
defined in such section) or by any member of the expanded
affiliated group (as defined in such section) which includes
such corporation.''.
(c) Conforming Amendments.--
(1) The last sentence of section 3121(v)(2)(A) is amended
by inserting before the period ``or to any specified stock
compensation (as defined in section 5000A) on which tax is
imposed by section 5000A''.
(2) The table of chapters for subtitle D is amended by
adding at the end the following new item:

``Chapter 48. Stock compensation of insiders in inverted
corporations.''.

(d) Effective Date.--The amendments made by this section
shall take effect on July 11, 2002; except that periods
before such date shall not be taken into account in applying
the periods in subsections (a) and (e)(1) of section 5000A of
the Internal Revenue Code of 1986, as added by this section.

SEC. 444. REINSURANCE OF UNITED STATES RISKS IN FOREIGN
JURISDICTIONS.

(a) In General.--Section 845(a) (relating to allocation in
case of reinsurance agreement involving tax avoidance or
evasion) is amended by

[[Page S2057]]

striking ``source and character'' and inserting ``amount,
source, or character''.
(b) Effective Date.--The amendments made by this section
shall apply to any risk reinsured after April 11, 2002.

SEC. 445. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

(a) In General.--Subpart B of part III of subchapter A of
chapter 61 is amended by inserting after section 6043 the
following new section:

``SEC. 6043A. TAXABLE MERGERS AND ACQUISITIONS.

``(a) In General.--The acquiring corporation in any taxable
acquisition shall make a return (according to the forms or
regulations prescribed by the Secretary) setting forth--
``(1) a description of the acquisition,
``(2) the name and address of each shareholder of the
acquired corporation who is required to recognize gain (if
any) as a result of the acquisition,
``(3) the amount of money and the fair market value of
other property transferred to each such shareholder as part
of such acquisition, and
``(4) such other information as the Secretary may
prescribe.

To the extent provided by the Secretary, the requirements of
this section applicable to the acquiring corporation shall be
applicable to the acquired corporation and not to the
acquiring corporation.
``(b) Nominee Reporting.--Any person who holds stock as a
nominee for another person shall furnish in the manner
prescribed by the Secretary to such other person the
information provided by the corporation under subsection (d).
``(c) Taxable Acquisition.--For purposes of this section,
the term `taxable acquisition' means any acquisition by a
corporation of stock in or property of another corporation if
any shareholder of the acquired corporation is required to
recognize gain (if any) as a result of such acquisition.
``(d) Statements To Be Furnished to Shareholders.--Every
person required to make a return under subsection (a) shall
furnish to each shareholder whose name is required to be set
forth in such return a written statement showing--
``(1) the name, address, and phone number of the
information contact of the person required to make such
return,
``(2) the information required to be shown on such return
with respect to such shareholder, and
``(3) such other information as the Secretary may
prescribe.

The written statement required under the preceding sentence
shall be furnished to the shareholder on or before January 31
of the year following the calendar year during which the
taxable acquisition occurred.''.
(b) Assessable Penalties.--
(1) Subparagraph (B) of section 6724(d)(1) (relating to
definitions) is amended by redesignating clauses (ii) through
(xvii) as clauses (iii) through (xviii), respectively, and by
inserting after clause (i) the following new clause:
``(ii) section 6043A(a) (relating to returns relating to
taxable mergers and acquisitions),''.
(2) Paragraph (2) of section 6724(d) is amended by
redesignating subparagraphs (F) through (AA) as subparagraphs
(G) through (BB), respectively, and by inserting after
subparagraph (E) the following new subparagraph:
``(F) subsections (b) and (d) of section 6043A (relating to
returns relating to taxable mergers and acquisitions).''.
(c) Clerical Amendment.--The table of sections for subpart
B of part III of subchapter A of chapter 61 is amended by
inserting after the item relating to section 6043 the
following new item:

``Sec. 6043A. Returns relating to taxable mergers and acquisitions.''.

(d) Effective Date.--The amendments made by this section
shall apply to acquisitions after the date of the enactment
of this Act.

Subtitle E--International Tax

SEC. 451. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF
DETERMINING INVESTMENT OF EARNINGS IN UNITED
STATES PROPERTY.

(a) In General.--Subparagraph (A) of section 956(c)(2) is
amended to read as follows:
``(A) obligations of the United States, money, or deposits
with--
``(i) any bank (as defined by section 2(c) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(c)), without
regard to subparagraphs (C) and (G) of paragraph (2) of such
section), or
``(ii) any corporation not described in clause (i) with
respect to which a bank holding company (as defined by
section 2(a) of such Act) or financial holding company (as
defined by section 2(p) of such Act) owns directly or
indirectly more than 80 percent by vote or value of the stock
of such corporation;''.
(b) Effective Date.--The amendment made by this section
shall take effect on the date of the enactment of this Act.

SEC. 452. PROHIBITION ON NONRECOGNITION OF GAIN THROUGH
COMPLETE LIQUIDATION OF HOLDING COMPANY.

(a) In General.--Section 332 is amended by adding at the
end the following new subsection:
``(d) Recognition of Gain on Liquidation of Certain Holding
Companies.--
``(1) In general.--In the case of any distribution to a
foreign corporation in complete liquidation of an applicable
holding company--
``(A) subsection (a) and section 331 shall not apply to
such distribution, and
``(B) such distribution shall be treated as a distribution
to which section 301 applies.
``(2) Applicable holding company.--For purposes of this
subsection--
``(A) In general.--The term `applicable holding company'
means any domestic corporation--
``(i) which is a common parent of an affiliated group,
``(ii) stock of which is directly owned by the distributee
foreign corporation,
``(iii) substantially all of the assets of which consist of
stock in other members of such affiliated group, and
``(iv) which has not been in existence at all times during
the 5 years immediately preceding the date of the
liquidation.
``(B) Affiliated group.--For purposes of this subsection,
the term `affiliated group' has the meaning given such term
by section 1504(a) (without regard to paragraphs (2) and (4)
of section 1504(b)).
``(3) Coordination with subpart f.--If the distributee of a
distribution described in paragraph (1) is a controlled
foreign corporation (as defined in section 957), then
notwithstanding paragraph (1) or subsection (a), such
distribution shall be treated as a distribution to which
section 331 applies.
``(4) Regulations.--The Secretary shall provide such
regulations as appropriate to prevent the abuse of this
subsection, including regulations which provide, for the
purposes of clause (iv) of paragraph (2)(A), that a
corporation is not in existence for any period unless it is
engaged in the active conduct of a trade or business or owns
a significant ownership interest in another corporation so
engaged.''.
(b) Effective Date.--The amendment made by this section
shall apply to distributions in complete liquidation
occurring on or after the date of the enactment of this Act.

SEC. 453. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL
ISSUE DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS
IN TRANSACTIONS WITH RELATED FOREIGN PERSONS.

(a) Original Issue Discount.--Section 163(e)(3) (relating
to special rule for original issue discount on obligation
held by related foreign person) is amended by redesignating
subparagraph (B) as subparagraph (C) and by inserting after
subparagraph (A) the following new subparagraph:
``(B) Special rule for certain foreign entities.--
``(i) In general.--In the case of any debt instrument
having original issue discount which is held by a related
foreign person which is a foreign personal holding company
(as defined in section 552), a controlled foreign corporation
(as defined in section 957), or a passive foreign investment
company (as defined in section 1297), a deduction shall be
allowable to the issuer with respect to such original issue
discount for any taxable year before the taxable year in
which paid only to the extent such original issue discount is
included during such prior taxable year in the gross income
of a United States person who owns (within the meaning of
section 958(a)) stock in such corporation.
``(ii) Secretarial authority.--The Secretary may by
regulation exempt transactions from the application of clause
(i), including any transaction which is entered into by a
payor in the ordinary course of a trade or business in which
the payor is predominantly engaged.''.
(b) Interest and Other Deductible Amounts.--Section
267(a)(3) is amended--
(1) by striking ``The Secretary'' and inserting:
``(A) In general.--The Secretary'', and
(2) by adding at the end the following new subparagraph:
``(B) Special rule for certain foreign entities.--
``(i) In general.--Notwithstanding subparagraph (A), in the
case of any amount payable to a foreign personal holding
company (as defined in section 552), a controlled foreign
corporation (as defined in section 957), or a passive foreign
investment company (as defined in section 1297), a deduction
shall be allowable to the payor with respect to such amount
for any taxable year before the taxable year in which paid
only to the extent such amount is included during such prior
taxable year in the gross income of a United States person
who owns (within the meaning of section 958(a)) stock in such
corporation.
``(ii) Secretarial authority.--The Secretary may by
regulation exempt transactions from the application of clause
(i), including any transaction which is entered into by a
payor in the ordinary course of a trade or business in which
the payor is predominantly engaged and in which the payment
of the accrued amounts occurs within 8\1/2\ months after
accrual or within such other period as the Secretary may
prescribe.''.
(c) Effective Date.--The amendments made by this section
shall apply to payments accrued on or after the date of the
enactment of this Act.

SEC. 454. EFFECTIVELY CONNECTED INCOME TO INCLUDE CERTAIN
FOREIGN SOURCE INCOME.

(a) In General.--Section 864(c)(4)(B) (relating to
treatment of income from sources without the United States as
effectively connected income) is amended by adding at the end
the following new flush sentence:

``Any income or gain which is equivalent to any item of
income or gain described in clause (i), (ii), or (iii) shall
be treated in the same manner as such item for purposes of
this subparagraph.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.

SEC. 455. RECAPTURE OF OVERALL FOREIGN LOSSES ON SALE OF
CONTROLLED FOREIGN CORPORATION.

(a) In General.--Section 904(f)(3) (relating to
dispositions) is amending by adding at the end the following
new subparagraph:
``(D) Application to dispositions of stock in controlled
foreign corporations.--In the

[[Page S2058]]

case of any disposition by a taxpayer of any share of stock
in a controlled foreign corporation (as defined in section
957), this paragraph shall apply to such disposition in the
same manner as if it were a disposition of property described
in subparagraph (A), except that the exception contained in
subparagraph (C)(i) shall not apply.''.
(b) Effective Date.--The amendment made by this section
shall apply to dispositions after the date of the enactment
of this Act.

SEC. 456. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON
WITHHOLDING TAXES ON INCOME OTHER THAN
DIVIDENDS.

(a) In General.--Section 901 is amended by redesignating
subsection (l) as subsection (m) and by inserting after
subsection (k) the following new subsection:
``(l) Minimum Holding Period for Withholding Taxes on Gain
and Income Other Than Dividends etc.--
``(1) In general.--In no event shall a credit be allowed
under subsection (a) for any withholding tax (as defined in
subsection (k)) on any item of income or gain with respect to
any property if--
``(A) such property is held by the recipient of the item
for 15 days or less during the 30-day period beginning on the
date which is 15 days before the date on which the right to
receive payment of such item arises, or
``(B) to the extent that the recipient of the item is under
an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in
substantially similar or related property.

This paragraph shall not apply to any dividend to which
subsection (k) applies.
``(2) Exception for taxes paid by dealers.--
``(A) In general.--Paragraph (1) shall not apply to any
qualified tax with respect to any property held in the active
conduct in a foreign country of a business as a dealer in
such property.
``(B) Qualified tax.--For purposes of subparagraph (A), the
term `qualified tax' means a tax paid to a foreign country
(other than the foreign country referred to in subparagraph
(A)) if--
``(i) the item to which such tax is attributable is subject
to taxation on a net basis by the country referred to in
subparagraph (A), and
``(ii) such country allows a credit against its net basis
tax for the full amount of the tax paid to such other foreign
country.
``(C) Dealer.--For purposes of subparagraph (A), the term
`dealer' means--
``(i) with respect to a security, any person to whom
paragraphs (1) and (2) of subsection (k) would not apply by
reason of paragraph (4) thereof if such security were stock,
and
``(ii) with respect to any other property, any person with
respect to whom such property is described in section
1221(a)(1).
``(D) Regulations.--The Secretary may prescribe such
regulations as may be appropriate to carry out this
paragraph, including regulations to prevent the abuse of the
exception provided by this paragraph and to treat other taxes
as qualified taxes.
``(3) Exceptions.--The Secretary may by regulation provide
that paragraph (1) shall not apply to property where the
Secretary determines that the application of paragraph (1) to
such property is not necessary to carry out the purposes of
this subsection.
``(4) Certain rules to apply.--Rules similar to the rules
of paragraphs (5), (6), and (7) of subsection (k) shall apply
for purposes of this subsection.
``(5) Determination of holding period.--Holding periods
shall be determined for purposes of this subsection without
regard to section 1235 or any similar rule.''.
(b) Conforming Amendment.--The heading of subsection (k) of
section 901 is amended by inserting ``on Dividends'' after
``Taxes''.
(c) Effective Date.--The amendments made by this section
shall apply to amounts paid or accrued more than 30 days
after the date of the enactment of this Act.

Subtitle F--Other Revenue Provisions

PART I--FINANCIAL INSTRUMENTS

SEC. 461. TREATMENT OF STRIPPED INTERESTS IN BOND AND
PREFERRED STOCK FUNDS, ETC.

(a) In General.--Section 1286 (relating to tax treatment of
stripped bonds) is amended by redesignating subsection (f) as
subsection (g) and by inserting after subsection (e) the
following new subsection:
``(f) Treatment of Stripped Interests in Bond and Preferred
Stock Funds, etc.--In the case of an account or entity
substantially all of the assets of which consist of bonds,
preferred stock, or a combination thereof, the Secretary may
by regulations provide that rules similar to the rules of
this section and 305(e), as appropriate, shall apply to
interests in such account or entity to which (but for this
subsection) this section or section 305(e), as the case may
be, would not apply.''.
(b) Cross Reference.--Subsection (e) of section 305 is
amended by adding at the end the following new paragraph:
``(7) Cross reference.--

``For treatment of stripped interests in certain accounts or entities
holding preferred stock, see section 1286(f).''.

(c) Effective Date.--The amendments made by this section
shall apply to purchases and dispositions after the date of
the enactment of this Act.

SEC. 462. APPLICATION OF EARNINGS STRIPPING RULES TO
PARTNERSHIPS AND S CORPORATIONS.

(a) In General.--Section 168(j) (relating to limitation on
deduction for interest on certain indebtedness) is amended by
redesignating paragraph (8) as paragraph (9) and by inserting
after paragraph (7) the following new paragraph:
``(8) Application to partnerships and s corporations.--
``(A) In general.--This subsection shall apply to
partnerships and S corporations in the same manner as it
applies to C corporations.
``(B) Allocations to certain corporate partners.--If a C
corporation is a partner in a partnership--
``(i) the corporation's allocable share of indebtedness and
interest income of the partnership shall be taken into
account in applying this subsection to the corporation, and
``(ii) if a deduction is not disallowed under this
subsection with respect to any interest expense of the
partnership, this subsection shall be applied separately in
determining whether a deduction is allowable to the
corporation with respect to the corporation's allocable share
of such interest expense.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.

SEC. 463. RECOGNITION OF CANCELLATION OF INDEBTEDNESS INCOME
REALIZED ON SATISFACTION OF DEBT WITH
PARTNERSHIP INTEREST.

(a) In General.--Paragraph (8) of section 108(e) (relating
to general rules for discharge of indebtedness (including
discharges not in title 11 cases or insolvency)) is amended
to read as follows:
``(8) Indebtedness satisfied by corporate stock or
partnership interest.--For purposes of determining income of
a debtor from discharge of indebtedness, if--
``(A) a debtor corporation transfers stock, or
``(B) a debtor partnership transfers a capital or profits
interest in such partnership,
to a creditor in satisfaction of its recourse or nonrecourse
indebtedness, such corporation or partnership shall be
treated as having satisfied the indebtedness with an amount
of money equal to the fair market value of the stock or
interest. In the case of any partnership, any discharge of
indebtedness income recognized under this paragraph shall be
included in the distributive shares of taxpayers which were
the partners in the partnership immediately before such
discharge.''.
(b) Effective Date.--The amendment made by this section
shall apply with respect to cancellations of indebtedness
occurring on or after the date of the enactment of this Act.

SEC. 464. MODIFICATION OF STRADDLE RULES.

(a) Rules Relating to Identified Straddles.--
(1) In general.--Subparagraph (A) of section 1092(a)(2)
(relating to special rule for identified straddles) is
amended to read as follows:
``(A) In general.--In the case of any straddle which is an
identified straddle--
``(i) paragraph (1) shall not apply with respect to
identified positions comprising the identified straddle,
``(ii) if there is any loss with respect to any identified
position of the identified straddle, the basis of each of the
identified offsetting positions in the identified straddle
shall be increased by an amount which bears the same ratio to
the loss as the unrecognized gain with respect to such
offsetting position bears to the aggregate unrecognized gain
with respect to all such offsetting positions, and
``(iii) any loss described in clause (ii) shall not
otherwise be taken into account for purposes of this
title.''.
(2) Identified straddle.--Section 1092(a)(2)(B) (defining
identified straddle) is amended--
(A) by striking clause (ii) and inserting the following:
``(ii) to the extent provided by regulations, the value of
each position of which (in the hands of the taxpayer
immediately before the creation of the straddle) is not less
than the basis of such position in the hands of the taxpayer
at the time the straddle is created, and'', and
(B) by adding at the end the following new flush sentence:

``The Secretary shall prescribe regulations which specify the
proper methods for clearly identifying a straddle as an
identified straddle (and the positions comprising such
straddle), which specify the rules for the application of
this section for a taxpayer which fails to properly identify
the positions of an identified straddle, and which specify
the ordering rules in cases where a taxpayer disposes of less
than an entire position which is part of an identified
straddle.''.
(3) Unrecognized gain.--Section 1092(a)(3) (defining
unrecognized gain) is amended by redesignating subparagraph
(B) as subparagraph (C) and by inserting after subparagraph
(A) the following new subparagraph:
``(B) Special rule for identified straddles.--For purposes
of paragraph (2)(A)(ii), the unrecognized gain with respect
to any identified offsetting position shall be the excess of
the fair market value of the position at the time of the
determination over the fair market value of the position at
the time the taxpayer identified the position as a position
in an identified straddle.''
(4) Conforming amendment.--Section 1092(c)(2) is amended by
striking subparagraph (B) and by redesignating subparagraph
(C) as subparagraph (B).
(b) Physically Settled Positions.--Section 1092(d)
(relating to definitions and special rules) is amended by
adding at the end the following new paragraph:
``(8) Special rules for physically settled positions.--For
purposes of subsection (a), if a taxpayer settles a position
which is part of a straddle by delivering property to which
the position relates (and such position, if terminated, would
result in a realization of a loss), then such taxpayer shall
be treated as if such taxpayer--

[[Page S2059]]

``(A) terminated the position for its fair market value
immediately before the settlement, and
``(B) sold the property so delivered by the taxpayer at its
fair market value.''.
(c) Repeal of Stock Exception.--
(1) In general.--Section 1092(d)(3) is repealed.
(2) Conforming amendment.--Section 1258(d)(1) is amended by
striking ``; except that the term `personal property' shall
include stock''.
(d) Repeal of Qualified Covered Call Exception.--Section
1092(c)(4) is amended by adding at the end the following new
subparagraph:
``(I) Termination.--This paragraph shall not apply to any
position established on or after the date of the enactment of
this subparagraph.''.
(e) Effective Date.--The amendments made by this section
shall apply to positions established on or after the date of
the enactment of this Act.

SEC. 465. DENIAL OF INSTALLMENT SALE TREATMENT FOR ALL
READILY TRADEABLE DEBT.

(a) In General.--Section 453(f)(4)(B) (relating to
purchaser evidences of indebtedness payable on demand or
readily tradeable) is amended by striking ``is issued by a
corporation or a government or political subdivision thereof
and''.
(b) Effective Date.--The amendment made by this section
shall apply to sales occurring on or after the date of the
enactment of this Act.

PART II--CORPORATIONS AND PARTNERSHIPS

SEC. 466. MODIFICATION OF TREATMENT OF TRANSFERS TO CREDITORS
IN DIVISIVE REORGANIZATIONS.

(a) In General.--Section 361(b)(3) (relating to treatment
of transfers to creditors) is amended by adding at the end
the following new sentence: ``In the case of a reorganization
described in section 368(a)(1)(D) with respect to which stock
or securities of the corporation to which the assets are
transferred are distributed in a transaction which qualifies
under section 355, this paragraph shall apply only to the
extent that the sum of the money and the fair market value of
other property transferred to such creditors does not exceed
the adjusted bases of such assets transferred.''.
(b) Liabilities in Excess of Basis.--Section 357(c)(1)(B)
is amended by inserting ``with respect to which stock or
securities of the corporation to which the assets are
transferred are distributed in a transaction which qualifies
under section 355'' after ``section 368(a)(1)(D)''.
(c) Effective Date.--The amendments made by this section
shall apply to transfers of money or other property, or
liabilities assumed, in connection with a reorganization
occurring on or after the date of the enactment of this Act.

SEC. 467. CLARIFICATION OF DEFINITION OF NONQUALIFIED
PREFERRED STOCK.

(a) In General.--Section 351(g)(3)(A) is amended by adding
at the end the following: ``Stock shall not be treated as
participating in corporate growth to any significant extent
unless there is a real and meaningful likelihood of the
shareholder actually participating in the earnings and growth
of the corporation.''.
(b) Effective Date.--The amendment made by this section
shall apply to transactions after May 14, 2003.

SEC. 468. MODIFICATION OF DEFINITION OF CONTROLLED GROUP OF
CORPORATIONS.

(a) In General.--Section 1563(a)(2) (relating to brother-
sister controlled group) is amended by striking
``possessing--'' and all that follows through ``(B)'' and
inserting ``possessing''.
(b) Application of Existing Rules to Other Code
Provisions.--Section 1563(f) (relating to other definitions
and rules) is amended by adding at the end the following new
paragraph:
``(5) Brother-sister controlled group definition for
provisions other than this part.--
``(A) In general.--Except as specifically provided in an
applicable provision, subsection (a)(2) shall be applied to
an applicable provision as if it read as follows:
`(2) Brother-sister controlled group.--Two or more
corporations if 5 or fewer persons who are individuals,
estates, or trusts own (within the meaning of subsection
(d)(2) stock possessing--
`(A) at least 80 percent of the total combined voting power
of all classes of stock entitled to vote, or at least 80
percent of the total value of shares of all classes of stock,
of each corporation, and
`(B) more than 50 percent of the total combined voting
power of all classes of stock entitled to vote or more than
50 percent of the total value of shares of all classes of
stock of each corporation, taking into account the stock
ownership of each such person only to the extent such stock
ownership is identical with respect to each such
corporation.'
``(B) Applicable provision.--For purposes of this
paragraph, an applicable provision is any provision of law
(other than this part) which incorporates the definition of
controlled group of corporations under subsection (a).''.
(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. 469. MANDATORY BASIS ADJUSTMENTS IN CONNECTION WITH
PARTNERSHIP DISTRIBUTIONS AND TRANSFERS OF
PARTNERSHIP INTERESTS.

(a) In General.--Section 754 is repealed.
(b) Adjustment to Basis of Undistributed Partnership
Property.--Section 734 is amended--
(1) by striking ``, with respect to which the election
provided in section 754 is in effect,'' in the matter
preceding paragraph (1) of subsection (b),
(2) by striking ``(as adjusted by section 732(d))'' both
places it appears in subsection (b),
(3) by striking the last sentence of subsection (b),
(4) by striking subsection (a) and by redesignating
subsections (b) and (c) as subsections (a) and (b),
respectively, and
(5) by striking ``optional'' in the heading.
(c) Adjustment to Basis of Partnership Property.--Section
743 is amended--
(1) by striking ``with respect to which the election
provided in section 754 is in effect'' in the matter
preceding paragraph (1) of subsection (b),
(2) by striking subsection (a) and by redesignating
subsections (b) and (c) as subsections (a) and (b),
respectively,
(3) by adding at the end the following new subsection:
``(c) Election To Adjust Basis for Transfers Upon Death of
Partner.--Subsection (a) shall not apply and no adjustments
shall be made in the case of any transfer of an interest in a
partnership upon the death of a partner unless an election to
do so is made by the partnership. Such an election shall
apply with respect to all such transfers of interests in the
partnership. Any election under section 754 in effect on the
date of the enactment of this subsection shall constitute an
election made under this subsection. Such election may be
revoked by the partnership, subject to such limitations as
may be provided by regulations prescribed by the
Secretary.'', and
(4) by striking ``optional'' in the heading.
(d) Conforming Amendments.--
(1) Subsection (d) of section 732 is repealed.
(2) Section 755(a) is amended--
(A) by striking ``section 734(b) (relating to the optional
adjustment'' and inserting ``section 734(a) (relating to the
adjustment'', and
(B) by striking ``section 743(b) (relating to the optional
adjustment'' and inserting ``section 743(a) (relating to the
adjustment''.
(3) Section 761(e)(2) is amended by striking ``optional''.
(4) Section 774(a) is amended by striking ``743(b)'' both
places it appears and inserting ``743(a)''.
(5) The item relating to section 734 in the table of
sections for subpart B of part II of subchapter K of chapter
1 is amended by striking ``Optional''.
(6) The item relating to section 743 in the table of
sections for subpart C of part II of subchapter K of chapter
1 is amended by striking ``Optional''.
(e) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to transfers and
distributions made after the date of the enactment of this
Act.
(2) Repeal of section 732(d).--The amendments made by
subsections (b)(2) and (d)(1) shall apply to--
(A) except as provided in subparagraph (B), transfers made
after the date of the enactment of this Act, and
(B) in the case of any transfer made on or before such date
to which section 732(d) applies, distributions made after the
date which is 2 years after such date of enactment.

PART III--DEPRECIATION AND AMORTIZATION

SEC. 471. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS
FRANCHISES.

(a) In General.--Section 197(e) (relating to exceptions to
definition of section 197 intangible) is amended by striking
paragraph (6) and by redesignating paragraphs (7) and (8) as
paragraphs (6) and (7), respectively.
(b) Conforming Amendments.--
(1)(A) Section 1056 (relating to basis limitation for
player contracts transferred in connection with the sale of a
franchise) is repealed.
(B) The table of sections for part IV of subchapter O of
chapter 1 is amended by striking the item relating to section
1056.
(2) Section 1245(a) (relating to gain from disposition of
certain depreciable property) is amended by striking
paragraph (4).
(3) Section 1253 (relating to transfers of franchises,
trademarks, and trade names) is amended by striking
subsection (e).
(c) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to property
acquired after the date of the enactment of this Act.
(2) Section 1245.--The amendment made by subsection (b)(2)
shall apply to franchises acquired after the date of the
enactment of this Act.

SEC. 472. SERVICE CONTRACTS TREATED IN SAME MANNER AS LEASES
FOR RULES RELATING TO TAX-EXEMPT USE PROPERTY.

(a) In General.--Section 168(h)(7) (defining lease) is
amended by adding at the end the following: ``Such term shall
also include any service contract or other similar
arrangement.''.
(b) Lease Term.--Section 168(i)(3) (relating to lease term)
is amended by adding at the end the following new
subparagraph:
``(C) Special rule for service contracts.--In the case of
any service contract or other similar arrangement treated as
a lease under subsection (h)(7), the lease term shall be
determined in the same manner as a lease.''.
(c) Conforming Amendments.--Section 168(g)(3)(A) is
amended--
(1) by inserting ``(as defined in subsection (h)(7)'' after
``lease'' the first place it appears, and
(2) by inserting ``(as determined under subsection
(i)(3))'' after ``term''.
(d) Effective Date.--The amendments made by this section
shall apply to leases and service contracts or other similar
arrangements entered into after the date of the enactment of
this Act.

SEC. 473. CLASS LIVES FOR UTILITY GRADING COSTS.

(a) Gas Utility Property.--Section 168(e)(3)(E) (defining
15-year property) is

[[Page S2060]]

amended by striking ``and'' at the end of clause (ii), by
striking the period at the end of clause (iii) and inserting
``, and'', and by adding at the end the following new clause:
``(iv) initial clearing and grading land improvements with
respect to gas utility property.''.
(b) Electric Utility Property.--Section 168(e)(3) is
amended by adding at the end the following new subparagraph:
``(F) 20-year property.--The term `20-year property' means
initial clearing and grading land improvements with respect
to any electric utility transmission and distribution
plant.''.
(c) Conforming Amendments.--The table contained in section
168(g)(3)(B) is amended--
(1) by inserting ``or (E)(iv)'' after ``(E)(iii)'', and
(2) by adding at the end the following new item:

``(F).......................................................25''.....

(d) Effective Date.--The amendments made by this section
shall apply to property placed in service after the date of
the enactment of this Act.

SEC. 474. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN
PASSENGER AUTOMOBILES.

(a) In General.--Section 179(b) (relating to limitations)
is amended by adding at the end the following new paragraph:
``(6) Limitation on cost taken into account for certain
passenger vehicles.--
``(A) In general.--The cost of any sport utility vehicle
for any taxable year which may be taken into account under
this section shall not exceed $25,000.
``(B) Sport utility vehicle.--For purposes of subparagraph
(A)--
``(i) In general.--The term `sport utility vehicle' means
any 4-wheeled vehicle which--

``(I) is manufactured primarily for use on public streets,
roads, and highways,

``(II) is not subject to section 280F, and
``(III) is rated at not more than 14,000 pounds gross
vehicle weight.

``(ii) Certain vehicles excluded.--Such term does not
include any vehicle which--

``(I) does not have the primary load carrying device or
container attached,
``(II) has a seating capacity of more than 12 individuals,
``(III) is designed for more than 9 individuals in seating
rearward of the driver's seat,
``(IV) is equipped with an open cargo area, or a covered
box not readily accessible from the passenger compartment, of
at least 72.0 inches in interior length, or
``(V) has an integral enclosure, fully enclosing the driver
compartment and load carrying device, does not have seating
rearward of the driver's seat, and has no body section
protruding more than 30 inches ahead of the leading edge of
the windshield.''.

(c) Effective Date.--The amendments made by this section
shall apply to property placed in service after the date of
the enactment of this Act.

SEC. 475. CONSISTENT AMORTIZATION OF PERIODS FOR INTANGIBLES.

(a) Start-Up Expenditures.--
(1) Allowance of deduction.--Paragraph (1) of section
195(b) (relating to start-up expenditures) is amended to read
as follows:
``(1) Allowance of deduction.--If a taxpayer elects the
application of this subsection with respect to any start-up
expenditures--
``(A) the taxpayer shall be allowed a deduction for the
taxable year in which the active trade or business begins in
an amount equal to the lesser of--
``(i) the amount of start-up expenditures with respect to
the active trade or business, or
``(ii) $5,000, reduced (but not below zero) by the amount
by which such start-up expenditures exceed $50,000, and
``(B) the remainder of such start-up expenditures shall be
allowed as a deduction ratably over the 180-month period
beginning with the month in which the active trade or
business begins.''.
(2) Conforming amendment.--Subsection (b) of section 195 is
amended by striking ``Amortize'' and inserting ``Deduct'' in
the heading.
(b) Organizational Expenditures.--Subsection (a) of section
248 (relating to organizational expenditures) is amended to
read as follows:
``(a) Election to Deduct.--If a corporation elects the
application of this subsection (in accordance with
regulations prescribed by the Secretary) with respect to any
organizational expenditures--
``(1) the corporation shall be allowed a deduction for the
taxable year in which the corporation begins business in an
amount equal to the lesser of--
``(A) the amount of organizational expenditures with
respect to the taxpayer, or
``(B) $5,000, reduced (but not below zero) by the amount by
which such organizational expenditures exceed $50,000, and
``(2) the remainder of such organizational expenditures
shall be allowed as a deduction ratably over the 180-month
period beginning with the month in which the corporation
begins business.''.
(c) Treatment of Organizational and Syndication Fees or
Partnerships.--
(1) In general.--Section 709(b) (relating to amortization
of organization fees) is amended by redesignating paragraph
(2) as paragraph (3) and by amending paragraph (1) to read as
follows:
``(1) Allowance of deduction.--If a taxpayer elects the
application of this subsection (in accordance with
regulations prescribed by the Secretary) with respect to any
organizational expenses--
``(A) the taxpayer shall be allowed a deduction for the
taxable year in which the partnership begins business in an
amount equal to the lesser of--
``(i) the amount of organizational expenses with respect to
the partnership, or
``(ii) $5,000, reduced (but not below zero) by the amount
by which such organizational expenses exceed $50,000, and
``(B) the remainder of such organizational expenses shall
be allowed as a deduction ratably over the 180-month period
beginning with the month in which the partnership begins
business.
``(2) Dispositions before close of amortization period.--In
any case in which a partnership is liquidated before the end
of the period to which paragraph (1)(B) applies, any deferred
expenses attributable to the partnership which were not
allowed as a deduction by reason of this section may be
deducted to the extent allowable under section 165.''.
(2) Conforming amendment.--Subsection (b) of section 709 is
amended by striking ``Amortization'' and inserting
``Deduction'' in the heading.
(d) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred after the date of the
enactment of this Act.

SEC. 476. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED
BY GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

(a) In General.--Subpart C of part II of subchapter E of
chapter 1 (relating to taxable year for which deductions
taken) is amended by adding at the end the following new
section:

``SEC. 470. DEDUCTIONS ALLOCABLE TO PROPERTY USED BY
GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

``(a) General Rule.--The aggregate amount of deductions
otherwise allowable to the taxpayer with respect to tax-
exempt use property for any taxable year shall not exceed
the aggregate amount of income includible in gross income
of the taxpayer for the taxable year with respect to such
property.
``(b) Disallowed Deduction Carried to Next Year.--Except as
otherwise provided in this section, any deduction with
respect to any tax-exempt use property which is disallowed
under subsection (a) shall, subject to the limitation under
subsection (a), be treated as a deduction with respect to
such property in the next taxable year.
``(c) Tax-Exempt Use Property.--For purposes of this
section--
``(1) In general.--The term `tax-exempt use property' has
the meaning given such term by section 168(h), except that
such section shall be applied without regard to paragraphs
(2)(C)(ii) and (3).
``(2) Special rules for service contracts and similar
arrangements.--If tangible property is subject to a service
contract or other similar arrangement between a taxpayer (or
any related person) and any tax-exempt entity, such contract
or arrangement shall be treated in the same manner as if it
were a lease for purposes of determining whether such
property is tax-exempt use property under paragraph (1).
``(d) Special Rules.--
``(1) Allocable deductions.--Subsection (a) shall apply
to--
``(A) any deduction directly allocable to any tax-exempt
use property, and
``(B) a proper share of other deductions that are not
directly allocable to such property.
``(2) Property ceasing to be tax-exempt use property.--If
property of a taxpayer ceases to be tax-exempt use property
in the hands of the taxpayer--
``(A) any unused deduction allocable to such property under
subsection (b) shall only be allowable as a deduction for any
taxable year to the extent of any net income of the taxpayer
allocable to such property, and
``(B) any portion of such unused deduction remaining after
application of subparagraph (A) shall, subject to the
limitation of subparagraph (A), be treated as a deduction
allocable to such property in the next taxable year.
``(3) Disposition of entire interest in property.--If
during the taxable year a taxpayer disposes of the taxpayer's
entire interest in tax-exempt use property, rules similar to
the rules of section 469(g) shall apply for purposes of this
section.
``(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the provisions of this section.''.
(b) Conforming Amendment.--The table of sections for
subpart C of part II of subchapter E of chapter 1 is amended
by adding at the end the following new item:
``Sec. 470. Deductions allocable to property used by governments or
other tax-exempt entities.''.

(c) Effective Date.--The amendments made by this section
shall apply to leases and service contracts or similar
arrangements entered into after the date of the enactment of
this Act.

PART IV--ADMINISTRATIVE PROVISIONS

SEC. 481. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX
FOR CERTAIN DEEMED ASSET SALES.

(a) In General.--Paragraph (13) of section 338(h) (relating
to tax on deemed sale not taken into account for estimated
tax purposes) is amended by adding at the end the following:
``The preceding sentence shall not apply with respect to a
qualified stock purchase for which an election is made under
paragraph (10).''.
(b) Effective Date.--The amendment made by subsection (a)
shall apply to transactions occurring after the date of the
enactment of this Act.

SEC. 482. EXTENSION OF IRS USER FEES.

(a) In General.--Section 7528(c) (relating to termination)
is amended by striking ``December 31, 2004'' and inserting
``September 30, 2013''.
(b) Effective Date.--The amendment made by this section
shall apply to requests after the date of the enactment of
this Act.

[[Page S2061]]

SEC. 483. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST
ON UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE
FINANCIAL ARRANGEMENT.

(a) General Rule.--If--
(1) a taxpayer eligible to participate in--
(A) the Department of the Treasury's Offshore Voluntary
Compliance Initiative, or
(B) the Department of the Treasury's voluntary disclosure
initiative which applies to the taxpayer by reason of the
taxpayer's underreporting of United States income tax
liability through financial arrangements which rely on the
use of offshore arrangements which were the subject of the
initiative described in subparagraph (A), and
(2) any interest or applicable penalty is imposed with
respect to any arrangement to which any initiative described
in paragraph (1) applied or to any underpayment of Federal
income tax attributable to items arising in connection with
any arrangement described in paragraph (1),
then, notwithstanding any other provision of law, the amount
of such interest or penalty shall be equal to twice that
determined without regard to this section.
(b) Definitions and Rules.--For purposes of this section--
(1) Applicable penalty.--The term ``applicable penalty''
means any penalty, addition to tax, or fine imposed under
chapter 68 of the Internal Revenue Code of 1986.
(2) Voluntary offshore compliance initiative.--The term
``Voluntary Offshore Compliance Initiative'' means the
program established by the Department of the Treasury in
January of 2003 under which any taxpayer was eligible to
voluntarily disclose previously undisclosed income on assets
placed in offshore accounts and accessed through credit card
and other financial arrangements.
(3) Participation.--A taxpayer shall be treated as having
participated in the Voluntary Offshore Compliance Initiative
if the taxpayer submitted the request in a timely manner and
all information requested by the Secretary of the Treasury or
his delegate within a reasonable period of time following the
request.
(c) Effective Date.--The provisions of this section shall
apply to interest, penalties, additions to tax, and fines
with respect to any taxable year if as of the date of the
enactment of this Act, the assessment of any tax, penalty, or
interest with respect to such taxable year is not prevented
by the operation of any law or rule of law.

SEC. 484. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT
AGREEMENTS.

(a) In General.--
(1) Section 6159(a) (relating to authorization of
agreements) is amended--
(A) by striking ``satisfy liability for payment of'' and
inserting ``make payment on'', and
(B) by inserting ``full or partial'' after ``facilitate''.
(2) Section 6159(c) (relating to Secretary required to
enter into installment agreements in certain cases) is
amended in the matter preceding paragraph (1) by inserting
``full'' before ``payment''.
(b) Requirement To Review Partial Payment Agreements Every
Two Years.--Section 6159, as amended by this Act, is amended
by redesignating subsections (d), (e), and (f) as subsections
(e), (f), and (g), respectively, and inserting after
subsection (c) the following new subsection:
``(d) Secretary Required To Review Installment Agreements
for Partial Collection Every Two Years.--In the case of an
agreement entered into by the Secretary under subsection (a)
for partial collection of a tax liability, the Secretary
shall review the agreement at least once every 2 years.''.
(c) Effective Date.--The amendments made by this section
shall apply to agreements entered into on or after the date
of the enactment of this Act.

SEC. 485. EXTENSION OF CUSTOMS USER FEES.

Section 13031(j)(3) of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended
by striking ``March 31, 2004'' and inserting ``September 30,
2013''.

SEC. 486. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON
POTENTIAL UNDERPAYMENTS.

(a) In General.--Subchapter A of chapter 67 (relating to
interest on underpayments) is amended by adding at the end
the following new section:

``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON
POTENTIAL UNDERPAYMENTS, ETC.

``(a) Authority To Make Deposits Other Than As Payment of
Tax.--A taxpayer may make a cash deposit with the Secretary
which may be used by the Secretary to pay any tax imposed
under subtitle A or B or chapter 41, 42, 43, or 44 which has
not been assessed at the time of the deposit. Such a deposit
shall be made in such manner as the Secretary shall
prescribe.
``(b) No Interest Imposed.--To the extent that such deposit
is used by the Secretary to pay tax, for purposes of section
6601 (relating to interest on underpayments), the tax shall
be treated as paid when the deposit is made.
``(c) Return of Deposit.--Except in a case where the
Secretary determines that collection of tax is in jeopardy,
the Secretary shall return to the taxpayer any amount of the
deposit (to the extent not used for a payment of tax) which
the taxpayer requests in writing.
``(d) Payment of Interest.--
``(1) In general.--For purposes of section 6611 (relating
to interest on overpayments), a deposit which is returned to
a taxpayer shall be treated as a payment of tax for any
period to the extent (and only to the extent) attributable to
a disputable tax for such period. Under regulations
prescribed by the Secretary, rules similar to the rules of
section 6611(b)(2) shall apply.
``(2) Disputable tax.--
``(A) In general.--For purposes of this section, the term
`disputable tax' means the amount of tax specified at the
time of the deposit as the taxpayer's reasonable estimate of
the maximum amount of any tax attributable to disputable
items.
``(B) Safe harbor based on 30-day letter.--In the case of a
taxpayer who has been issued a 30-day letter, the maximum
amount of tax under subparagraph (A) shall not be less than
the amount of the proposed deficiency specified in such
letter.
``(3) Other definitions.--For purposes of paragraph (2)--
``(A) Disputable item.--The term `disputable item' means
any item of income, gain, loss, deduction, or credit if the
taxpayer--
``(i) has a reasonable basis for its treatment of such
item, and
``(ii) reasonably believes that the Secretary also has a
reasonable basis for disallowing the taxpayer's treatment of
such item.
``(B) 30-day letter.--The term `30-day letter' means the
first letter of proposed deficiency which allows the taxpayer
an opportunity for administrative review in the Internal
Revenue Service Office of Appeals.
``(4) Rate of interest.--The rate of interest allowable
under this subsection shall be the Federal short-term rate
determined under section 6621(b), compounded daily.
``(e) Use of Deposits.--
``(1) Payment of tax.--Except as otherwise provided by the
taxpayer, deposits shall be treated as used for the payment
of tax in the order deposited.
``(2) Returns of deposits.--Deposits shall be treated as
returned to the taxpayer on a last-in, first-out basis.''.
(b) Clerical Amendment.--The table of sections for
subchapter A of chapter 67 is amended by adding at the end
the following new item:
``Sec. 6603. Deposits made to suspend running of interest on potential
underpayments, etc.''.

(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to deposits made after the date of the enactment of
this Act.
(2) Coordination with deposits made under revenue procedure
84-58.--In the case of an amount held by the Secretary of the
Treasury or his delegate on the date of the enactment of this
Act as a deposit in the nature of a cash bond deposit
pursuant to Revenue Procedure 84-58, the date that the
taxpayer identifies such amount as a deposit made pursuant to
section 6603 of the Internal Revenue Code (as added by this
Act) shall be treated as the date such amount is deposited
for purposes of such section 6603.

SEC. 487. QUALIFIED TAX COLLECTION CONTRACTS.

(a) Contract Requirements.--
(1) In general.--Subchapter A of chapter 64 (relating to
collection) is amended by adding at the end the following new
section:

``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

``(a) In General.--Nothing in any provision of law shall be
construed to prevent the Secretary from entering into a
qualified tax collection contract.
``(b) Qualified Tax Collection Contract.--For purposes of
this section, the term `qualified tax collection contract'
means any contract which--
``(1) is for the services of any person (other than an
officer or employee of the Treasury Department)--
``(A) to locate and contact any taxpayer specified by the
Secretary,
``(B) to request full payment from such taxpayer of an
amount of Federal tax specified by the Secretary and, if such
request cannot be met by the taxpayer, to offer the taxpayer
an installment agreement providing for full payment of such
amount during a period not to exceed 3 years, and
``(C) to obtain financial information specified by the
Secretary with respect to such taxpayer,
``(2) prohibits each person providing such services under
such contract from committing any act or omission which
employees of the Internal Revenue Service are prohibited from
committing in the performance of similar services,
``(3) prohibits subcontractors from--
``(A) having contacts with taxpayers,
``(B) providing quality assurance services, and
``(C) composing debt collection notices, and
``(4) permits subcontractors to perform other services only
with the approval of the Secretary.
``(c) Fees.--The Secretary may retain and use an amount not
in excess of 25 percent of the amount collected under any
qualified tax collection contract for the costs of services
performed under such contract. The Secretary shall keep
adequate records regarding amounts so retained and used. The
amount credited as paid by any taxpayer shall be determined
without regard to this subsection.
``(d) No Federal Liability.--The United States shall not be
liable for any act or omission of any person performing
services under a qualified tax collection contract.
``(e) Application of Fair Debt Collection Practices Act.--
The provisions of the Fair Debt Collection Practices Act (15
U.S.C. 1692 et seq.) shall apply to any qualified tax
collection contract, except to the extent superseded by
section 6304, section 7602(c), or by any other provision of
this title.
``(f) Cross References.--
``(1) For damages for certain unauthorized collection
actions by persons performing services under a qualified tax
collection contract, see section 7433A.
``(2) For application of Taxpayer Assistance Orders to
persons performing services under a qualified tax collection
contract, see section 7811(a)(4).''.
(2) Conforming amendments.--

[[Page S2062]]

(A) Section 7809(a) is amended by inserting ``6306,''
before ``7651''.
(B) The table of sections for subchapter A of chapter 64 is
amended by adding at the end the following new item:
``Sec. 6306. Qualified Tax Collection Contracts.''.

(b) Civil Damages for Certain Unauthorized Collection
Actions by Persons Performing Services Under Qualified Tax
Collection Contracts.--
(1) In general.--Subchapter B of chapter 76 (relating to
proceedings by taxpayers and third parties) is amended by
inserting after section 7433 the following new section:

``SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED
COLLECTION ACTIONS BY PERSONS PERFORMING
SERVICES UNDER QUALIFIED TAX COLLECTION
CONTRACTS.

``(a) In General.--Subject to the modifications provided by
subsection (b), section 7433 shall apply to the acts and
omissions of any person performing services under a qualified
tax collection contract (as defined in section 6306(b)) to
the same extent and in the same manner as if such person were
an employee of the Internal Revenue Service.
``(b) Modifications.--For purposes of subsection (a)--
``(1) Any civil action brought under section 7433 by reason
of this section shall be brought against the person who
entered into the qualified tax collection contract with the
Secretary and shall not be brought against the United States.
``(2) Such person and not the United States shall be liable
for any damages and costs determined in such civil action.
``(3) Such civil action shall not be an exclusive remedy
with respect to such person.
``(4) Subsections (c), (d)(1), and (e) of section 7433
shall not apply.''.
(2) Clerical amendment.--The table of sections for
subchapter B of chapter 76 is amended by inserting after the
item relating to section 7433 the following new item:

``Sec. 7433A. Civil damages for certain unauthorized collection actions
by persons performing services under a qualified tax
collection contract.''.
(c) Application of Taxpayer Assistance Orders to Persons
Performing Services Under a Qualified Tax Collection
Contract.--Section 7811 (relating to taxpayer assistance
orders) is amended by adding at the end the following new
subsection:
``(g) Application to Persons Performing Services Under a
Qualified Tax Collection Contract.--Any order issued or
action taken by the National Taxpayer Advocate pursuant to
this section shall apply to persons performing services under
a qualified tax collection contract (as defined in section
6306(b)) to the same extent and in the same manner as such
order or action applies to the Secretary.''.
(d) Ineligibility of Individuals Who Commit Misconduct To
Perform Under Contract.--Section 1203 of the Internal Revenue
Service Restructuring Act of 1998 (relating to termination of
employment for misconduct) is amended by adding at the end
the following new subsection:
``(e) Individuals Performing Services Under a Qualified Tax
Collection Contract.-- An individual shall cease to be
permitted to perform any services under any qualified tax
collection contract (as defined in section 6306(b) of the
Internal Revenue Code of 1986) if there is a final
determination by the Secretary of the Treasury under such
contract that such individual committed any act or omission
described under subsection (b) in connection with the
performance of such services.''.
(e) Effective Date.--The amendments made to this section
shall take effect on the date of the enactment of this Act.

PART V--MISCELLANEOUS PROVISIONS

SEC. 491. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF
TAXABLE VACCINES.

(a) In General.--Section 4132(a)(1) (defining taxable
vaccine) is amended by redesignating subparagraphs (I), (J),
(K), and (L) as subparagraphs (J), (K), (L), and (M),
respectively, and by inserting after subparagraph (H) the
following new subparagraph:
``(I) Any vaccine against hepatitis A.''.
(b) Conforming Amendment.--Section 9510(c)(1)(A) is amended
by striking ``October 18, 2000'' and inserting ``May 8,
2003''.
(c) Effective Date.--
(1) Sales, etc.--The amendments made by this section shall
apply to sales and uses on or after the first day of the
first month which begins more than 4 weeks after the date of
the enactment of this Act.
(2) Deliveries.--For purposes of paragraph (1) and section
4131 of the Internal Revenue Code of 1986, in the case of
sales on or before the effective date described in such
paragraph for which delivery is made after such date, the
delivery date shall be considered the sale date.

SEC. 492. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL
RESIDENCE ACQUIRED IN A LIKE-KIND EXCHANGE
WITHIN 5 YEARS OF SALE.

(a) In General.--Section 121(d) (relating to special rules
for exclusion of gain from sale of principal residence) is
amended by adding at the end the following new paragraph:
``(10) Property acquired in like-kind exchange.--If a
taxpayer acquired property in an exchange to which section
1031 applied, subsection (a) shall not apply to the sale or
exchange of such property if it occurs during the 5-year
period beginning with the date of the acquisition of such
property.''.
(b) Effective Date.--The amendment made by this section
shall apply to sales or exchanges after the date of the
enactment of this Act.

SEC. 493. CLARIFICATION OF EXEMPTION FROM TAX FOR SMALL
PROPERTY AND CASUALTY INSURANCE COMPANIES.

(a) In General.--Section 501(c)(15)(A) is amended to read
as follows:
``(A) Insurance companies (as defined in section 816(a))
other than life (including interinsurers and reciprocal
underwriters) if--
``(i) the gross receipts for the taxable year do not exceed
$600,000, and
``(ii) more than 50 percent of such gross receipts consist
of premiums.''.
(b) Controlled Group Rule.--Section 501(c)(15)(C) is
amended by inserting ``, except that in applying section 1563
for purposes of section 831(b)(2)(B)(ii), subparagraphs (B)
and (C) of section 1563(b)(2) shall be disregarded'' before
the period at the end.
(c) Conforming Amendment.--Clause (i) of section
831(b)(2)(A) is amended by striking ``exceed $350,000 but''.
(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2003.

SEC. 494. DEFINITION OF INSURANCE COMPANY FOR SECTION 831.

(a) In General.--Section 831 is amended by redesignating
subsection (c) as subsection (d) and by inserting after
subsection (b) the following new subsection:
``(c) Insurance Company Defined.--For purposes of this
section, the term `insurance company' has the meaning given
to such term by section 816(a)).''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2003.

SEC. 495. LIMITATIONS ON DEDUCTION FOR CHARITABLE
CONTRIBUTIONS OF PATENTS AND SIMILAR PROPERTY.

(a) Deduction Allowed Only to the Extent of Basis.--Section
170(e)(1)(B) (relating to certain contributions of ordinary
income and capital gain property) is amended by striking
``or'' at the end of clause (i), by adding ``or'' at the end
of clause (ii), and by inserting after clause (ii) the
following new clause:
``(iii) of any patent, copyright, trademark, trade name,
trade secret, know-how, software, or similar property, or
applications or registrations of such property,''.
(b) Treatment of Contributions Where Donor Receives
Interest.--Section 170(e) is amended by adding at the end the
following new paragraph:
``(7) Special rules for contributions of patents and
similar property where donor receives interest.--
``(A) Disallowance of deduction.--No deduction shall be
allowed under this section with respect to a contribution of
property described in paragraph (1)(B)(iii) if the taxpayer
after the contribution has any interest in the property other
than a qualified interest.
``(B) Contributions with qualified interest.--If a taxpayer
after a contribution of property described in paragraph
(1)(B)(iii) has a qualified interest in the property--
``(i) any payment pursuant to the qualified interest shall
be treated as ordinary income and shall be includible in
gross income of the taxpayer for the taxable year in which
the payment is received by the taxpayer, and
``(ii) subsection (f)(3) and section 1011(b) shall not
apply to the transfer of the property from the taxpayer to
the donee.
``(C) Qualified interest.--For purposes of this paragraph--
``(i) In general.--The term `qualified interest' means,
with respect to any taxpayer, a right to receive from the
donee a percentage (not greater than 50 percent) of any
royalty payment received by the donee with respect to
property described in paragraph (1)(B)(iii) (other than
copyrights which are described in section 1221(a)(3) or
1231(b)(1)(C)) contributed by the taxpayer to the donee.
``(ii) Secretarial authority.--

``(I) In general.--Except as provided in subclause (II),
the Secretary may by regulation or other administrative
guidance treat as a qualified interest the right to receive
other payments from the donee, but only if the donee does not
possess a right to receive any payment (whether royalties or
otherwise) from a third party with respect to the contributed
property.
``(II) Exceptions.--The Secretary may not treat as a
qualified interest the right to receive any payment which
provides a benefit to the donor which is greater than the
benefit retained by the donee or the right to receive any
portion of the proceeds from the sale of the property
contributed.

``(iii) Limitation.--An interest shall be treated as a
qualified interest under this subparagraph only if the
taxpayer has no right to receive any payment described in
clause (i) or (ii)(I) after the earlier of the date on which
the legal life of the contributed property expires or the
date which is 20 years after the date of the contribution.''.
(c) Reporting Requirements.--
(1) In general.--Section 6050L(a) (relating to returns
regarding certain dispositions of donated property) is
amended--
(A) by striking ``If'' and inserting:
``(1) Dispositions of donated property.--If'',
(B) by redesignating paragraphs (1) through (5) as
subparagraphs (A) through (E), respectively, and
(C) by adding at the end the following new paragraph:
``(2) Payments of qualified interests.--Each donee of
property described in section 170(e)(1)(B)(iii) which makes a
payment to a donor pursuant to a qualified interest (as
defined in section 170(e)(7)) during any calendar year shall
make a return (in accordance with forms and regulations
prescribed by the Secretary) showing--
``(A) the name, address, and TIN of the payor and the payee
with respect to such a payment,

[[Page S2063]]

``(B) a description, and date of contribution, of the
property to which the qualified interest relates,
``(C) the dates and amounts of any royalty payments
received by the donee with respect to such property,
``(D) the date and the amount of the payment pursuant to
the qualified interest, and
``(E) a description of the terms of the qualified
interest.''.
(2) Conforming amendments.--
(A) The heading for section 6050L is amended by striking
``certain dispositions of''.
(B) The item relating to section 6050L in the table of
sections for subpart B of part III of subchapter A of chapter
61 is amended by striking ``certain dispositions of''.
(d) Anti-Abuse Rules.--The Secretary of the Treasury may
prescribe such regulations or other administrative guidance
as may be necessary or appropriate to prevent the avoidance
of the purposes of section 170(e)(1)(B)(iii) of the Internal
Revenue Code of 1986 (as added by subsection (a)), including
preventing--
(1) the circumvention of the reduction of the charitable
deduction by embedding or bundling the patent or similar
property as part of a charitable contribution of property
that includes the patent or similar property,
(2) the manipulation of the basis of the property to
increase the amount of the charitable deduction through the
use of related persons, pass-thru entities, or other
intermediaries, or through the use of any provision of law or
regulation (including the consolidated return regulations),
and
(3) a donor from changing the form of the patent or similar
property to property of a form for which different deduction
rules would apply.
(e) Effective Date.--The amendments made by this section
shall apply to contributions made after October 1, 2003.

SEC. 496. REPEAL OF 10-PERCENT REHABILITATION TAX CREDIT.

Section 47 is amended by adding at the end the following
new subsection:
``(e) Termination.--This section shall not apply to
expenditures described in subsection (a)(1) incurred in
taxable years beginning after December 31, 2003.''.

SEC. 497. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED
INCOME IS TAXED AS IF PARENT'S INCOME.

(a) In General.--Section 1(g)(2)(A) (relating to child to
whom subsection applies) is amended by striking ``age 14''
and inserting ``age 18''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2003.

The PRESIDING OFFICER. The Senator from Iowa.
Mr. GRASSLEY. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. GRASSLEY. Mr. President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRASSLEY. Mr. President, I am happy to be, once again, on the
floor with a very important piece of legislation. With the cooperation
of the Democratic leadership of the Senate Finance Committee, Senator
Baucus, we bring to the floor a bill that was voted out of committee 19
to 2. Senator Baucus and I always work together as much as we can--that
is, most of the time--to bring to the Senate a bill that can get
through the Chamber because as so many people who watch the Senate
regularly know, the Senate, unlike the House of Representatives, can't
function if it does not function in a bipartisan way.
So we proceed, then, with this bipartisan bill: the Jumpstart Our
Business Strength Act. If I refer to the acronym JOBS, it is jumpstart
our business strength.
Since March 2000, long before President Bush took office, the
manufacturing sector has been under significant economic pressure.
Obviously, that has affected manufacturing workers. A recent CBO study
estimates that going way back to March 2000, an estimated 3 million
workers have lost their manufacturing jobs.
The Congressional Budget Office attributes this job decline to the
recession that began in November 2000 and the weak economy in demand
that followed, part of it a result of September 11 and recovery not
coming as normal as recoveries do.
But we always tend to look at bad news. Bad news tends to make the
front pages of the newspaper. Good news tends to make the back pages,
if there is good news printed at all.
There is good news on the horizon. That is, that new manufacturing
orders, just this past December, surged to their highest levels in 50
years. They haven't been that high since July of 1950. And January was
the sixth consecutive month that manufacturing activity expanded. In
December, the manufacturing employment index grew for the second
consecutive month, but the overall economy during that month added
1,000 jobs only. That was, of course, disappointing. But it wasn't
disappointing from the standpoint of the manufacturing employment index
growing because it seems that is the lagging sector of this recovery.

I believe we are on the right path for a strong recovery. In fact,
there has been a recovery underway since economists ruled that the last
recession ended October 1, 2001. But when a recovery ends, it is not
always visible. Of course, it is visible in most segments of the
economy by very strong indices that are there to prove that. But one
area that is not is manufacturing employment. We do now have those 2
consecutive months of increased employment.
I believe we are on the right path to strong recovery, but we must do
more to ensure manufacturing stays on the path of recovery.
Manufacturing is so vital to the overall health of our economy,
including follow-on sectors that benefit: the service and financial
sectors.
As government policymakers, which we are, we have to act to
revitalize the manufacturing sector. Today we have some good news on
manufacturing, and that is, the legislation we bring to the Senate,
because it is going to help enhance employment in the manufacturing
sector.
As I have said previously, but I cannot emphasize too much, by a vote
of 19 to 2 this bill was voted out of the Senate Finance Committee. Our
bill is a bipartisan balance of domestic tax relief and international
tax reforms, all meant to strengthen American business. Not as an end
in itself, but as business strengthens, jobs are created. We are
talking about jobs for Americans.
Most importantly, this bill is revenue neutral. That is important,
when we read in the newspapers about facing a budget deficit. This bill
then will not add one dime to the Federal deficit. The JOBS bill will
repeal the current FSC/ETI regime and use all the money from repeal to
provide a 3-point tax rate cut on income from U.S.-based manufacturing.
I emphasize U.S.-based manufacturing. We start those cuts phasing in
next year. This 3-point rate cut is only for manufacturing and only for
manufacturing in the United States. This bill will not help American
manufacturers that want to manufacture offshore.
I point out how our bill would approach this effort to help create
jobs in American manufacturing and do it on American soil as opposed to
the way that the Ways and Means Committee of the other body, and even
other bills that will be offered in the upcoming debate, would face
these issues. Our bill reducing taxes applies to all that manufacture
in America.
I wish to make clear to our colleagues this is a bill to help
manufacturing in the United States. American companies that manufacture
overseas will not get the benefit of the corporate rate reduction.
Foreign corporations that want to come over here to America and build
plants and employ people in this country would get the benefit. But
this bill is about helping American manufacturing that takes place in
the United States of America.
I wish to differentiate the approach we use from the approach the
Ways and Means Committee uses.
Unlike the pending Ways and Means bill, and other bills that will be
offered during the upcoming debate, these cuts apply to all who
manufacture in America, regardless of size. So this is going to include
sole proprietors, partnerships, farmers, individuals, family
businesses, multinational corporations, and foreign companies that set
up manufacturing plants in the United States. All of these enterprises
will benefit as long as they manufacture.
So the objectives of this bill are pretty simple. Three: Jobs, jobs,
jobs, meaning jobs that pay money because of manufacturing in America.
Manufacturing is important to all States, and I want to point out
some benefits. For my State of Iowa--the figures I have are for 2001--
Iowa's gross State product was $91 billion. Of that, $19 billion or 21
percent of the State's wealth was created by manufacturing. From 2001
to 2002, Iowa's exports grew by nearly 15 percent. We shipped nearly $5
billion of goods out of Iowa, and that was during the year 2002.

[[Page S2064]]

In Iowa, we have 222,000 jobs in manufacturing. So that shows how
important it is for the United States to be competitive in
manufacturing both home and abroad because of 222,000 jobs just in my
State. Those kinds of export numbers translate into very good and
lasting jobs at home. Many of our country's manufacturing jobs are
dependent upon the current FSC/ETI international taxing regime.
I have a map behind me that makes this very clear. It shows by State
the jobs that are existing today because of the current FSC/ETI
provision: South Carolina, 47,000 jobs; my State of Iowa, 35,000 jobs;
California, 429,000 jobs; Texas, 262,000; New York, 215,000; Illinois,
156,000; Washington State, 107,000 jobs generated by FSC/ETI.
As my colleagues probably know, FSC/ETI stands for Foreign Sales
Corporation, extraterritorial income. This is what was determined to be
contrary to our international trade agreements, and that is why we have
this legislation before us because if we do not do something about this
issue, these numbers of jobs that are dependent upon this legislation
are in jeopardy because our manufacturing will not be competitive with
our foreign competition.
Of course, what this is all about is passing legislation that will be
in agreement with our trade agreements and, consequently, still protect
American manufacturing as the FSC/ETI has done over the last 25 to 30
years.
FSC/ETI reduces the income tax on goods manufactured in the U.S. and
sold overseas. FSC/ETI is critical to the manufacturing sector. It can
reduce taxes on exports by as much as 3 to 8 tax rate percentage
points.
The nonpartisan Joint Committee on Taxation says that 89 percent of
the Foreign Sales Corporation benefits go to manufacturing companies.
Many of those companies are the largest manufacturing employers in the
Nation. This reduced rate of tax on exports of U.S.-manufactured goods
keeps our companies competitive in the international marketplace. It
allows our companies to compete with the European Union countries,
which happen to have a taxing system where they get a rebate on their
value-added tax on exports.
If we did not have the Foreign Sales Corporation, we would be
exporting more of our taxes, making us uncompetitive with the European
Community that has a different taxing system, value-added tax, that
they do not export.

Several years ago, the European Union filed a claim with the World
Trade Organization challenging FSC/ETI as an illegal export subsidy.
Hence, we are here repealing such an important provision because under
trading rules, according to the decision, we cannot have a subsidy if
it is contingent upon the act of exporting. The World Trade
Organization ruled that the FSC/ETI is an illegal export subsidy and
has authorized the European Union to impose up to $4 billion a year of
sanctions against U.S. exports.
The European Union has already started this because March 1, this
year, was the date to do it. The sanctions start at 5 percent of the $4
billion, and they are going to increase 1 percent for each month if we
do not repeal the FSC/ETI provisions. They are going to cap out at 17
percent. So by November, these sanctions will be 12 percent. How are we
going to compete when the tax benefits that were supposed to level the
playing field are not only used, but the European Union, in a legal way
under our trade agreements, is levying sanctions. Just as the United
States when the European Union lost a case on our beef--they did not
take our beef--we leveled sanctions against European products that are
coming into this country, all in a legal way but not necessarily in the
best way to conduct international trade.
So eventually, these sanctions are going to get up to 17 percent, and
at that point the European Union will review the effectiveness of the
sanctions, and further increases are possible.
The European Union has been consistent in its message, that the FSC/
ETI must be repealed; the same way that we were insistent upon Europe
and we won a case in the World Trade Organization that they take our
beef.
This is a serious threat against American manufacturing, and Europe
knows where to hit us. One of those is agricultural products, plus
paper products, and also a number of important manufacturing
industries, and they are hitting us right now in our soft underbelly.
These sanctions are going to undermine the economic recovery that is
underway, as I indicated before--underway with 2 months in a row of a
positive upturn in the manufacturing index. So I believe it is
important for the United States to fulfill its obligations under our
trading rules.
Now, it so happens that we win a lot more cases than we lose, and it
also is true that the United States has been a leader--in fact, the
entire world recognizes us as a leader, and they wait for us
sometimes--in reducing trade barriers around the world. We have shown
leadership for the last 60 or 70 years in this area going back to the
reciprocity agreements of the 1930s of reducing trade barriers.
As we expect Europe to import our beef when we win a case, it seems
to me that we must show leadership in complying with these rules. What
the World Trade Organization is all about is to bring the rule of law
to what would otherwise be a jungle of international trade. That is
because we get more business activity when there is predictability and
understanding of how we are going to do business. Just as that is true
in our domestic policy for business expansion, it is true in
international trade; if there is predictability, we will get more
business expansion around the world.

Domestic law has made that possible within the United States. We need
to support a regime that does the same thing in international trade
because we have seen under that regime of rule of law in international
trade for the last 50 or 60 years the expansion of the world economic
pie.
We are not talking about something that is just good for the United
States. It is good for the United States. But we are talking about
something that is good for the entire world.
We have a growing world population. If you don't have a growing world
economic pie, there will be less for more people and less for more
people means political, economic, and social instability, and chaos.
So we have seen under this regime of rule of law in international
trade that the world economic pie has grown tremendously, and to a
great extent because of international trade.
The United States has led the way. We need to continue leading the
way. There are some lobbyists who are suggesting this is no big deal,
this doesn't have to be done now, it can be done tomorrow, it can be
done next year, and somehow these sanctions don't mean anything. They
do mean something because they are going to make our products
uncompetitive and then we can't sell. If these were put on John Deere
tractors in Waterloo, IA, one-fourth of the jobs could go.
One-fourth of the jobs at John Deere tractor in my home State are
related to trade. But we do have to abide by the rule of law in
international trade unless we want chaos, unless we want the jungle.
These lobbyists say sanctions don't matter. They argue: After all,
sanctions only start at 5 percent. They would say: There has been a
decline in the dollar. That is going to take care of that problem. With
a decline in the dollar, add on 5 percent, no difference.
But I will bet these lobbyists who are spreading this word that
Congress doesn't have to act don't represent anybody--any workers or
any firms--on this retaliation list. But for those industries that I
have already talked about, and there are a lot more, sanctions do
matter because they will not be able to export if they can't compete.
Five percent right now, and for sure 17 percent a year from now, is
going to make a big difference.
In regard to the lower value of the dollar against the euro, that
somehow merely restores the status quo of the 1990s for a lot of
American companies so they can export more. The recent decline in the
dollar helped these companies regain lost market share in Europe, and
we have lobbyists saying they ought to be back in that position that
they were in just a year ago, not being able to sell because of the
high cost of the dollar?
Why would Congress want to deprive these companies and their
employees, where these are good American jobs, of the opportunity to
export? That is beyond me. These are good jobs, because

[[Page S2065]]

statistics show conclusively that jobs connected with exports pay 15
percent above the national average.

Besides, there is no guarantee that the value of the dollar will not
go up tomorrow because our official policy is a strong dollar policy.
Our official policy is also to let the marketplace decide the value of
the dollar. But if it does go up, it is going to leave American
exporters in even a worse situation than they are today with that 5
percent and next month 6 percent.
It is plain wrong for us in Congress, when we can do something about
it--and this bill does something about it--to gamble the future of
these American working men and women on the volatile international
currency market.
There is another fancy suggestion from these high-paid lobbyists,
that all we have to do is cut a Government check to these U.S.
exporters that are hurt by the sanctions.
That suggestion is just as stupid as the previous one. First, it is
likely that the World Trade Organization would find such a scheme to be
a prohibited export subsidy anyway, just as they originally did. That
would continue the cycle of noncompliance and retaliation.
These birds don't believe in the rule of law on international trade.
They like the jungle of international trade. In fact, most lobbyists
like a jungle because they are the ones who think they are smart enough
to sort it out. We are not going to allow that jungle to grow just so
lobbyists can prosper.
But this scheme, as the original suggestions, is unworkable. It would
probably require a new government bureaucracy to administer. You know
what. This JOBS bill is about creating manufacturing jobs, not jobs in
a government bureaucracy.
It has also been suggested that the U.S. Government could simply pay
compensation to some foreign government rather than comply with our
international trade obligations. I suppose, in the era of foreign aid,
you might say that suggestion is theoretically possible. But it is not
very realistic.
Under the World Trade Organization dispute settlement system, there
is only one way, just one way, a nation can bring itself into
compliance with an adverse ruling, conforming with the WTO-inconsistent
measure, and that is with a report adopted by the dispute settlement
body. That would dictate that as long as FSC/ETI is not repealed, the
United States remains in violation of these international trade
commitments. So paying compensation to some government, in my reading
of the obligations under the trade commitments, is not going to bring
the United States into compliance.
Furthermore, it has to be remembered that compensation in lieu of
retaliation is only a viable option if the prevailing parties agree.
I think that is something the European Union is not inclined to do.
Even if it were possible, I am not going to suggest on the Senate
floor that the United States taxpayers ought to be writing a check to
the country of France. I, for one, don't think Congress is going to buy
these arguments that we don't have to deal with this now and there are
other ways around. These proposals are shell games expounded by
Washington lobbyists trying to confuse Congress, confuse the public,
and thus avoiding a real permanent solution to a longstanding FSC/ETI
dispute with the European Union. This is not realistic. They will not
stop the imposition of European sanctions.
People suggesting these alternatives ought to face facts. Gambling
America's exports on the volatile currency market won't work. Cutting
government checks to U.S. exporters won't work. Transferring taxpayers'
money to foreign governments such as France won't work. These are shell
games. There is only one real solution for American workers. This is
something that has been worked out in a bipartisan way for the Senate
to consider by the Senator from Montana and this Senator. This is the
JOBS Act that is before us, and the best solution is to pass the JOBS
Act now. I hope my Senate colleagues and our counterparts in the House
of Representatives will act on the Finance Committee's FSC/ETI
legislation. It is all of our responsibility--Democrat and Republican
alike--to pass this bipartisan legislation.
If we, as a body, fail to act, American workers will suffer with
fewer jobs, and the United States will lose an opportunity to
rejuvenate and remain globally competitive in the mainstay of its
economy--the manufacturing sector of our economy.
Our majority leader, Senator Frist, should be commended for bringing
this bill to the floor so that the Senate can act now to end sanctions
before they seriously damage the economy and before they damage our
transatlantic relations. The bill needs to be passed so we can end the
sanctions as soon as possible.
Repealing FSC/ETI raises around $55 billion over 10 years. Eighty-
nine percent of it comes from jobs in the manufacturing industry. If
that money is not sent back to help the manufacturing sector to be
competitive with Europe, FSC/ETI repeal will be a $50 billion tax
increase on manufacturing. The old rule of economics is if you tax
something more, you get less of it. So there is going to be less jobs
in manufacturing.
I think we can all agree that a $50 billion tax increase on
manufacturing will not stimulate job growth in that sector. That is why
the JOBS bill passed by the Finance Committee uses every penny from the
FSC/ETI bill repeal. To give this 3-percentage tax rate cut on all
income derived from manufacturing--that is done in the United States--
there is no benefit to American companies manufacturing overseas. There
would be a benefit to international companies that come here to create
jobs in America in manufacturing. Our 3-point rate reduction is not
export contingent under the World Trade Organization rules. Unlike the
FSC/ETI regime, this 3-point rate reduction applies to goods
manufactured in the United States and which are sold domestically in
the United States, or if they are exported for sale outside the United
States. If you make it here, we cut your taxes regardless of whether
you are a U.S. or foreign corporation--bringing those manufacturing
jobs, then, to the United States of America. The JOBS bill starts
phasing in the 3-point percentage tax rate reduction immediately in
2004.

If you look at this next chart behind me, you see on average,
European Union manufacturing income is taxed at 21 percent but U.S.
manufacturing income is taxed at 24 percent. As you can see, the 3-
point rate cut on manufacturing income in the JOBS bill keeps us even
with the European Union on manufacturing tax burdens.
We included in the JOBS bill several international tax reforms that
are aimed specifically to help manufacturing. The whole JOBS bill is
slanted towards manufacturing. Flaws in our international tax rules
seriously undermine America's ability to compete in the global
marketplace. International tax reform, like doing something with FSC/
ETI, is long overdue.
Our current system is built upon a framework dating back to President
Kennedy in the early 1960s. We clean up problems that cause foreign
earnings to be double taxed by the United States and the foreign
countries where those profits are earned. We reform subpart (f) to
ensure that active foreign businesses are taxed when the money is
brought home and not when the United States companies are locked in
battle with foreign companies that do not pay taxes.
You will hear a lot of noise in the upcoming debate about these
international provisions. But let me tell you right now that the
international provisions in our bipartisan JOBS bill are targeted to
benefit U.S. manufacturing companies. Members may be surprised to learn
our international provisions can actually harm a company's expansion in
the United States of America where we want companies to expand so that
jobs are created here and so that those jobs are not exported. It is a
simple thing to do. Just fix our tax laws so that jobs are created in
America as opposed to overseas.
We will have plenty of opportunity to talk about that issue in the
upcoming debate.
In an era of expanding global markets, in an era of falling trade
barriers, and in an era of technological innovations that melt away
traditional notions of national borders, it is critical that our
international tax laws keep pace with these new business realities.
We also include a provision for manufacturing that is not making
money

[[Page S2066]]

right now. We allow a 3-year net operating loss carryback. This will
allow companies to reclaim prior taxes paid. This will give them cash
liquidity to weather the current storm.
I understand there may be some effort to expand this 3-year carryback
to a 5-year carryback.
The JOBS bill also includes the Homeland Reinvestment Act sponsored
by Senator Smith of Oregon, Senator Ensign of Nevada, and Senator Boxer
of California. That is a bipartisan group to which anybody ought to be
drawn.
This subpart of our JOBS bill, which is sponsored by Senators Smith,
Ensign, and Boxer, is intended to encourage companies to bring their
foreign earnings back to the United States by temporarily providing the
reduced rate of tax. This bill will tax foreign earnings at 5\1/4\
percentage points instead of the 35 percent that would normally apply.
Advocates of this Homeland Investment Act claim that those moneys
will be invested overseas instead of the United States, if we don't tax
them at a lower rate than the 35 percent.
These colleagues view this measure as I do, very much stimulative to
the economy and helping with our unemployment problem.
One last point I will make is that our bipartisan manufacturing tax
bill is revenue neutral. I don't think it does harm to emphasize,
sometimes we pass a tax bill and less money comes into the Federal
Treasury and we might have a bigger deficit. This bill does not do
that. Not one dime is added to the current deficit.
Thank God, the President has been in the forefront of this, asking
for a bill that would be revenue neutral. We have delivered for our
colleagues who believe in revenue neutrality of tax bills. We have
delivered for the President.
The JOBS bill provides over $112 billion in business tax relief which
is paid for by shutting down tax shelters and by closing abusive
loopholes. Let me emphasize that because people are reading about this
every day in the newspaper, companies setting up shell corporations
overseas, with nothing but a cabinet and maybe an address, a post
office box, for the sole purpose of avoiding taxation. They dash and
stash the cash, whereas we have all these other patriotic companies
staying in America.
There are other schemes I will not go into, but we deal with those
schemes in this legislation, bringing in additional revenue that can be
used, then, to make our international taxing regime more fair and do it
in a way that creates jobs in the United States of America, not
overseas.
It is a fact of life with most bills that come to the Senate, there
is never complete agreement on an approach. There is always 20 percent
on the right and 20 percent on the left that might disagree with
something that comes to this Senate. What this Senate is all about is
moving things to the center, to get a consensus to get something
passed. In the process, there is never complete agreement.
For instance, some Members did not favor including this Homeland
Reinvestment Act which Senators Smith, Ensign, and Boxer have written.
We have included it in this bill. So we may have votes on that.
Our bill contains a temporary haircut on the rate reduction some
Members would like to remove and others would like to retain. We will
probably have that divisive issue before the Senate. Some Members
prefer a reduction in the top corporate rate in place of all these
international tax reforms and manufacturing rate cut deductions. Now,
that is a more simple approach than we have, but this approach misses a
couple of factors.
First, the top level rate cut would only go to the biggest
corporations of America. It would not go to the local family-held S
corporation or partnership as our finance bill does. We think we ought
to help small business in the process.
Second, FSC/ETI repeal will not create a large tax increase on the
service industry. That repeal will be a $50 billion tax increase on
manufacturing. If we redirect the FSC/ETI repeal money to an across-
the-board corporate cut, as a couple of my colleagues will offer an
amendment to do, then the manufacturing sector will be the revenue
offset for the services sector of tax cuts. It is a fact that we have
a struggling manufacturing sector and I don't think a sector of our
economy that is slowly recovering ought to be hit with this sort of a
revenue offset for the benefit of the service industry. We have to face
what is the current crisis in manufacturing.

Working families are living in financial fear. We owe a secure future
to these hard-working men and women. For them, we have a secure future.
Their employers must be able to compete and thrive both at home and
abroad. Then their future is secure. Their employers cannot thrive if
these companies are burdened with excessive tax rates at home and
international tax barriers abroad.
Our bipartisan JOBS bill presents the best opportunity to end that
burden and to make a downpayment on putting Americans back to work.
Let's hope the Senate gets to work, puts American manufacturing back in
the game. That is why I am here, urging my colleagues to support a
bipartisan JOBS Act and cooperate to get this bill on the President's
desk.
In closing, I have one message for the 39 Democrats who are not on
the Finance Committee and may not see this, other than just a piece of
legislation voted out of the Senate Finance Committee. I say to the 39
Democrats who are not on the committee, they have an opportunity to
help us very quickly move a bill to the other body, very quickly help
us pass a bill to help manufacturing, help us pass a bill to create
jobs for American men and women in manufacturing, which is slow to
recover. They have an opportunity to help with bipartisanship in the
other body because there are bills in the other body, but they are
short of the number of votes they need. Part of the reason is maybe the
other body does not see the need to pass a bipartisan bill as we do in
the Senate. There are Republicans and Democrats in the other body who
are working on a way to do this, a way that is not far removed from our
legislation.
If we have a real strong vote over here and we get this done quickly,
we might be able to help the House of Representatives pass some
legislation and to do it in a bipartisan way. Helping to pass
legislation in a bipartisan way is not a bad goal for Senators, since
we practice that.
Also, those 39 Democrats will have an opportunity to help the Senate
Finance Committee do something we want to do because we can get it done
in this bipartisan way and it is not exactly the way the White House
wants us to get it done. Here again, we share governing
responsibilities with the President and with the House of
Representatives, and so Democrats working with Senator Baucus and
myself, Democrats who are not on the committee, can help get a bill to
the President, help the President to see maybe the aspects about this
bill they do not like, they ought to take a second look at to see the
good work, and help get a bipartisan bill through the House of
Representatives.
I don't say that in a defensive way because I don't know of any
reason the other 39 Democrats do not want to help us accomplish what we
want to accomplish. What I have just said is not for that purpose, but
only said for the purpose of those Democrats who are not on this
committee, there is a larger aspect than just the language of the
legislation that is before the Senate. It benefits them for a lot of
goals they want to accomplish that sometimes cannot be accomplished as
a minority part of this body.
The PRESIDING OFFICER. The Senator from Montana.
Mr. BAUCUS. Mr. President, I would like to make a few remarks about
the JOBS bill before the Senate. With this bill, we join in the work of
improving the economic well-being of Americans.
This bill is about creating good jobs in America. This bill is about
improving the standard of living of all Americans.
Let me begin with the economic context for this bill. In a series of
statements over the coming week, I will address particular aspects of
the legislation. We begin with the dignity and importance of work. Our
jobs often define who we are. They are where we spend much of our
waking hours. As the preacher teaches in the book Ecclesiastes, ``A man
can do nothing better than to . . . find satisfaction in his work. This
. . . I see, is from the hand of God. . . .''

[[Page S2067]]

Job creation is fundamental to our ability to live a good life. It is
through the creation of good jobs that Americans have come to enjoy
remarkable advancements in income and comforts. The American job
creation machine makes our shores the shores to which immigrants swarm.
We don't see people heading for the door. Rather, people from around
the world want to live in America.
Ours is a dynamic economy. This economic growth is the key to our
Nation's success.
I point out this chart. I will raise it up so people can see it. This
chart shows the picture I have just basically described. In 1900, in
the wake of the industrial revolution, America already stood at the
pinnacle of the world economy. Already in 1900, believe it or not, we
had the highest per capita income in the world, slightly more than
Britain or Australia, and almost double that of France or Germany.
But even adjusted for inflation in today's dollars, not 1900 dollars,
America's per capita GDP--a rough measure of our average income--was
only about $5,000 a year in today's dollars. Measured by today's
standards, we lived in poverty: Walking and horseback was how one got
around; electricity lit only 3 percent of homes in 1900; only one-third
of Americans had running water; only 15 percent had flush toilets; life
expectancy was 47 years.
In 1900, America had one of the best educated populations in the
world. But 1 in 10 were illiterate. The typical adult had left school
after the eighth grade. There were only 382 Ph.Ds awarded in the entire
country in 1900.
Even though in 1900 our economy was at the top of the world,
Americans had an average income then that the average person in Mexico
has today.
If our economy had not grown, our standard of living would be
unacceptable by today's measures. Economic growth made a huge
difference.
Because of economic growth, inflation-adjusted, our per capita income
today is roughly seven times now what it was 104 years ago.
With economic growth, electricity became available across the
country, and automobiles made us a mobile nation and made much more of
the Nation within reach of work.
It is incredible to see how much we have grown in real per capita GDP
since 1900. You can see a dip on the chart in 1929. But we have grown
at a rapid rate.
The next chart is very interesting as well. This is private sector
employment. American economic growth created 108 million new jobs, net,
since 1900. In 1900, the American economy employed 27 million people in
its civilian labor force. By January 2004, 104 years later, the
American economy employed almost 140 million Americans.
Two-thirds of Americans participate in the labor force--substantially
higher rates than in Europe. That is up from 55.5 percent in 1900.
Americans are hard-working people. We work.
The American economy has, on average, created more than a million net
new jobs every year since 1900. Since 1935, we have done better;
America has created 1.5 million jobs every year. That is a net figure.
America's economic growth springs from our people, our freedom, our
unity. The American people are smart and as hard working as any in the
world. Our free market has given this great people the freedom to
achieve their best potential. Our unity has protected its huge internal
market from robbers, foreign and domestic.
We are lucky to be Americans, very lucky. Our Nation is still a
magnet for immigrants. This country is still a beacon to countries
around the world.
We can pride ourselves in our independent judiciary, which helped
make this country strong. We can be proud of our system of government--
this long-lived democracy. We have a dynamic, mobile society.
In a number of ways, America has it right. More times than not,
Americans have struck about the right balance between government
protections and private freedoms, to contribute to economic growth.
Our society provides an environment for success. Bill Gates, for
example, might be a pauper in Sri Lanka. But America provides the
environment and infrastructure and, of course, the political system and
markets where a Bill Gates can succeed. We should not take this lesson
for granted. This is not true in all countries. Our society, economy
and, yes, the Government contributed to the successes of people such as
Bill Gates.
Government does have a role to play, for good or evil, either to
foster or to impede this economic growth.
Government can impede growth. By running large continuing budget
deficits, the Government can suck vital capital out of the economy,
robbing individuals and businesses of funds that can be used for
investment.
Thus, the record budget deficits that the Government is now running
pose a threat to our Nation's economic growth. We have to recognize
that. These deficits decrease national savings, decrease private sector
investment, and raise interest rates. The resulting slower economic
growth and increased cost of borrowing harm businesses, large and
small.
Foreign governments can impede our growth when they deny Americans
access to their markets, when they don't let us sell products in their
country, when they artificially depress the value of their currency,
flooding our lands with their imports and denying our exports a fair
opportunity to compete.
Our Government can foster growth by investing in education, by
opening markets at home and abroad, and by removing barriers to our
economic greatness. We can foster growth in America.
That is what this bill is about--removing barriers to economic growth
and creating jobs.
It is no secret that in the past few years the engine of American job
creation has ground to low gear; manufacturing has been particularly
hard hit.
This next chart shows the story of private sector job creation in the
American economy over the last decade. Beginning in March of 1993, here
at the lower left, the American economy steadily created new jobs
throughout the rest of the decade. The economy grew. People had jobs
and families had more money in their pockets. In fact, from January of
1993 to January 2001, about 20 million--net jobs--were created in
America.
Private sector employment peaked at 111.6 million jobs in December of
2000. The Bureau of Labor Statistics reports that since the end of the
year 2000, the private sector of the American economy lost 3 million
jobs. You can see that on the chart. Our peak was here in 2000 and we
have lost jobs--3 million. Three million jobs were lost in the American
economy since that peak in December of 2000. In January of this year--
the month for which we have the latest statistics--the American economy
employed 108 million private sector workers, which means 1 out of every
40 private sector jobs have disappeared since the end of 2000.
The manufacturing sector has disproportionately borne the brunt of
these job losses.
This next chart shows the story. This is manufacturing jobs from 1993
to 2004. We can see the dramatic decline in roughly 2001, since July of
2000.
Since July of 2000, the American economy has lost 3 million
manufacturing jobs. That is a net loss. The Bureau of Labor Statistics
reports that in January, America employed 14.3 million workers in
manufacturing, and that is down from the 42nd straight month from the
high of 17.3 million in July of 2000. That is a drop of 17.5 percent in
manufacturing employment. More than one in every six American
manufacturing jobs has disappeared since July of 2000. Again, one in
every six manufacturing jobs in America has disappeared since July of
2000.
Manufacturing jobs have disappeared in all 21 industries that
constitute the manufacturing sector. It is in all sectors. We lost jobs
in computer and electronics products. We lost jobs in transportation
equipment. We lost jobs in machinery. We lost jobs in fabricated
metals. We lost jobs across the board.
My home State of Montana has suffered more than most. It has had a
19-percent reduction in manufacturing jobs since January of 2000.
This next chart also shows job losses happening all across the
country; not just across all manufacturing sectors but all across
America. Every State in the Nation but one has lost manufacturing jobs
since July 2000. The darker the shade, the greater the job loss; the
lighter the shade--orange and yellow--there is less job loss. But every
State in the Nation has lost jobs, except one.
The manufacturing jobs we are losing are good jobs. This next chart
shows

[[Page S2068]]

manufacturing jobs pay more than service jobs on the average. We all
know we are moving from a manufacturing society to a service job
society. Regrettably, those new jobs, service jobs, pay quite a bit
less than manufacturing jobs, and that has been true from 1994 all the
way up through the current date.
This next chart shows manufacturing employment is now at its lowest
absolute level since July of 1950. Fewer Americans are employed in
manufacturing today than at any time in more than half a century. We
can see from the line from 1950 to today there is essentially the same
number of jobs. Clearly, we are not doing very well.
Why do I mention all this? First, it is fact. Second, we have to deal
with it. We have to do something about it, and that brings us to the
bill before us, the JOBS bill. We have targeted the provisions of this
bill directly at manufacturing employment. Why? Because that has been
the greatest problem.
This bill will not be a complete solution. By no stretch of the
imagination will this bill be a complete solution to job loss in
America. To help create and keep manufacturing jobs, we also need to do
many other things in addition to passing this bill. We need to open
foreign markets to American goods much more aggressively than we have
done in the last couple of years. We need to improve education, to
preserve the comparative advantage of American workers. Clearly, we
have to be the smartest--hopefully at least try to be the smartest--in
the world. To do that, we have to educate our kids and keep education
at all levels, and to retrain workers.
We also need to make health care more affordable. Health care costs
in the United States are too high. They place a big burden on
employment, on businesses. The cost of health insurance and the cost of
health care is way too high and should be lowered. We also need to
provide assistance to displaced workers. They need to be retrained.

This bill will do two things that will make an important contribution
to creating and keeping manufacturing jobs in America. This bill will
contribute to economic growth and increased demand. This bill will help
reduce manufacturers' tax burdens. It will reduce the tax rate for
domestic manufacturers by 3 percentage points. Basically, it is a 9-
percent reduction for domestic manufacturing income, which translates
to about a 3-percentage point break for corporations. The JOBS Act will
thus help all manufacturers who produce goods in the United States.
Cutting taxes for domestic manufacturers will help prevent layoffs.
It will help. It will not solve the entire problem, but it is going to
certainly help. It will help preserve jobs, and this bill is paid for.
It will not contribute to the deficit. It thus will not raise interest
rates. It thus will not levy that hidden tax of higher borrowing costs
for business.
This is an important bill. It comes none too soon. American
manufacturing is calling out for help. This bill is part of the answer.
To ensure continued prosperity and well-being, the American economy
needs to start growing again, and this bill is part of that solution.
This bill is an important first step to address the economic
circumstances in which we find our country. Over the days to come, I
look forward to working with my colleagues on this bill. I particularly
thank the chairman of the committee, Chairman Grassley, who has done a
terrific job in putting this bill together in a way that focuses
directly on the problem.
We know we are here in large respect because of the WTO ruling which
says we must repeal the so-called FSC/ETI regime because it is WTO
illegal and replace it with a system that helps our domestic
manufacturers in a way that is legal under WTO. There are various ways
to fashion a replacement bill, and the other body has a replacement
bill which gives the break to American corporations, C corporations,
big corporations. We have a different bill. Our bill says if you are a
C corporation, if you are an S corporation, sole proprietorship,
partnership--whatever--if you manufacture products domestically in the
United States of America, whether you export is irrelevant. You get the
same reduction in your tax rate. That is to help small business as well
as big business. So business together across the board is helped, not
just big business.
We all know that is important because most new jobs are created by
small businesses. There are many more small business people in this
country than there are big business. Small business tends to be more
creative in creating new jobs and expanding rather than big
corporations.
I will stop here. There is much more to say about this bill.
One final point. I mentioned it is paid for. It is paid for by
measures which in themselves should be good public policy and we should
pass, anyway. What are they? They are corporate tax loophole closures.
They are shelters legislation. They are post-Enron provisions that have
not yet been enacted into law. There is something else called silos, to
shut down another abusive international transaction.
Not only is this bill paid for, it is paid for in ways that will help
restore consumer and investment confidence in American business which,
in and of itself, will help create and keep jobs in America.
I yield the floor.
Mr. GRASSLEY. I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant bill clerk proceeded to call the roll.
Mr. BAUCUS. Madam President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. BAUCUS. Madam President, I have a few more comments I would like
to make about this bill. I hope, though, we can get an agreement put
together, a list of several amendments that would then be in order. I
know various Senators and leadership are now discussing that. It would
be my hope we could reach that agreement fairly soon so we can get on
with this bill.
Let me just discuss for a few minutes what this JOBS bill is really
all about. It is a bill which the Finance Committee reported last
November. It is something we simply must pass due to the WTO decision.
I hope we can get it enacted into law as soon as possible.
I think this bill is important for three reasons. First of all, it
will cut taxes for domestic manufacturers. That is important. The bill
will also simplify taxes for American companies operating overseas.
That, too, is important. And it will bring us into compliance with an
unfavorable ruling of the World Trade Organization--no small matter.
The JOBS bill, the bill before us, reduces the tax rate for domestic
manufacturers by 3 percentage points. So if you are in the top bracket,
it is 3 percentage points. If you are a company or corporation in a
lower bracket, it is still about the same. Actually, it is a 9-percent
deduction for the cost of producing or manufacturing products in the
United States, which translates to about a 3-point reduction. Cutting
taxes for domestic manufacturers will help prevent layoffs. It will
help preserve jobs. As we all know, this country has lost 3 million--
think of that, 3 million--manufacturing jobs since July of 2000. That
is net loss. We have lost a lot more and gained some, but the net loss
is 3 million manufacturing jobs lost since July of 2000.
When I talk to manufacturers in my home State, as I know the
Presiding Officer does in her own State, they say the rising cost of
doing business is one of the biggest impediments to business. It is a
big problem business has. By cutting the cost of doing business, this
bill will help alleviate the job loss.
This bill will help companies do their job. This bill helps small
businesses as well as larger businesses. The Tax Code treats different
kinds of businesses differently, as we all know. C corporations, as you
well know, are companies that exist as a separate entity from their
owners, thus limiting the owners' liability. The corporations can be
liable for various actions, but the stockholders themselves, the
owners, are not. That is the reason why companies organize themselves,
very often, in that manner.
This chart shows about 26 percent of companies in the United States
are organized as C corporations; that is, they limit their owners'
liability, the shareholders themselves. The owners are not liable.
Sole proprietorships and partnerships are businesses where the owners
of the

[[Page S2069]]

business are fully liable for its debts. S corporations are smaller
businesses that are incorporated for liability purposes but taxed as a
partnership. The S corporations, partnerships, and sole proprietorships
are collectively known as passthrough entities. These are generally
smaller businesses, while C corporations are larger concerns.
Why do I mention all of that? I mention all that because, as I
earlier stated, about a quarter of companies are organized as C
corporations, but about three-quarters of American companies are
organized differently, either as sole proprietorships, as partnerships,
or as S corporations. We want to make sure that not just standard,
garden-variety C corporations get the benefit of this bill but that all
companies that manufacture domestically get the benefit of this bill,
so we have changed the underlying bill.
Currently, today, under the FSC/ETI regime, which has been declared
illegal by the WTO, the C corporations are the ones that get the
benefit of the tax break. It helps them export products overseas. But
in the Finance Committee, we felt, not just big companies but all
companies should get the benefit of reduced taxes.
Nearly three-fourths of the manufacturers in this country are S
corporations, partnerships, and sole proprietorships. About three-
quarters of all new jobs that are created are by these small
businesses. This chart shows that. About one-half of all employees in
this country are employed not by big C corporations, they are employed
by the other passthrough entities I mentioned. About three-quarters of
all the jobs created and held in the United States are not by the big
companies but by all the other smaller companies.
That is why we have extended this bill to include so-called
passthrough entities. Our smaller businesses are the backbone of my
State's economy and certainly the backbone of the economy of the
Presiding Officer's State. I think they deserve tax relief just as much
as larger businesses do.
In addition, by including partnerships and sole proprietorships, more
of our agricultural producers will become eligible for this tax relief.
The JOBS bill that is before us also includes long overdue
international tax reform. We are not just talking about the domestic
manufacturing reduction rate; we are also talking about international
tax simplification. That is for bigger American companies that do
operate overseas. We want to make sure our American companies are
competing on equal ground with rivals from other countries. One way to
do that is to limit double taxation. When our companies are taxed
twice, that makes them less competitive. We have included international
tax simplification and reform provisions that will help American
companies compete with foreign companies overseas.
A number of provisions will help companies better utilize their
foreign tax credits. Foreign tax credits prevent income from being
taxed twice. There is a repatriation provision that encourages
companies to bring back overseas profits for investments in the United
States. There is also a provision that will ease the tax compliance
burden for small businesses looking to gain access to overseas markets.
These are worthwhile, and they are measures that will help restore
fairness and integrity to our American tax system.
As I mentioned, the bill repeals the current FSC/ETI laws. Why? To
bring us into compliance with WTO obligations. Our bill replaces a tax
incentive that was dependent on exports with a tax incentive that is
not dependent on exports. A company can utilize this tax benefit in
this bill whether the product it manufacturers is exported. So long as
it is manufactured in the United States, that company qualifies. We
will partially offset the loss of tax benefits to U.S. exporting
companies, therefore, by the repeal of the current law, which I said is
inconsistent with WTO, and will also provide benefits to all American
manufacturers, providing a needed boost to our economy.
Another point: This legislation is completely paid for. Repealing the
old FSC/ETI regime will cover most of the cost for the new tax
incentive. By repealing the current law, that almost pays for what we
are doing here.
The international provisions are paid for; that is, the additional
provisions of the bill are paid for with offsets that curb abusive tax
shelters. We have offsets in this bill. They will not just create
revenue, but they are also good provisions, good tax policy in and of
themselves--clamping down on shelters, the inversions provisions, post-
Enron reforms, something else called SILOs, which is a gimmick,
frankly, that international American companies are using to shelter
their income. All that is shut down, and that pays for the rest of the
bill. Again, these shelter provisions are absolutely critical to be
enacted.
Let me mention in a little bit more detail the three reasons for
supporting this bill. I mentioned it is fully offset and the revenue
goes to manufacturing. I think that is a principle we should maintain.
We should not put incentives in this bill or change this bill in a way
that deviates from that. We should also not change this bill in any way
that reduces or diminishes stopping the abuses of tax shelters. That is
a principle we should absolutely maintain.
I might say something about our budget deficit. Our current budget
deficit is projected at about $521 billion this year. We all know that
is basically an understatement. It is going to be much worse. Why?
Because the administration's budget, as well as the budget resolution
pending in the Senate Budget Committee, does not include several
factors which more accurately reflect the true deficit our country is
facing. What are those? First, both the budgets of the administration
and the Budget Committee, which will be coming before the floor on
Monday, will not include the cost of the war in Iraq. It will not
include war costs. In fact, defense spending is going to be cut a
little bit. One might wonder why, when costs are going up. My guess is
the administration will come back with a supplemental next year with a
big increase in Iraq costs and war costs. This budget does not include
that and it should. That would be more honest.
Second, the budget does not include the cost of making expiring tax
cuts permanent. That is the view of the administration, that they
should be permanent. The budget does not include that.
It doesn't include providing alternative minimum tax relief. We all
know this Congress is going to have to enact alternative minimum tax
relief soon, and it is very expensive. That also is not included, to
say nothing of the cost of paying for the baby boomers when they start
to retire in the not too distant future.
Deficits are going to be a lot larger than contemplated in either the
administration budget or the budget resolution that will come to the
floor.
I say that because it is all the more reason why this bill must be
budget neutral. I say that also because there are other Members of
Congress who have a different view about that. They would not like this
to be budget neutral. They would like there to be further tax cuts but
not paid for. I think that is not wise. Frankly, psychologically, as
well as actually, the American people will appreciate us having a
budget-neutral bill and trying to work toward a balanced budget. That
means people around the country are saying those guys and gals in
Washington maybe have their heads screwed on straight. Maybe they are
doing something right back there. Maybe they are not frittering away
taxpayer money.

The more we do what is right, by keeping this budget neutral, not
succumbing to the siren song of lowering taxes but not paying for them,
the better off we will be in so many respects.
Another point: We have a heck of a job ahead of us, a huge challenge.
What is it? It is how to create more jobs in America, how to keep jobs
in America, and how to help those who have lost jobs--no easy task. It
is extremely difficult. We all know the statistics. Three million
manufacturing jobs lost in the last several years. We have to do
something about that. The real question is, what do we do? What is the
right thing to do? Some say it is OK. That is the way things are. That
is international competition. That is globalization. It just happens.
In the long run we are all better off. Some say that.
Essentially that was a statement of Mr. Mankiw the other day that has
been bandied about so much. He said that is the way it is. There will
be new

[[Page S2070]]

technologies. Companies will be able to compete better. They have to
lower their costs, and they can lower their costs if they can compete
any place in the world. If that means jobs overseas, lowering costs,
that makes American companies more competitive.
I have a different view. I think we have to face up to the challenge
of creating more jobs and retraining Americans so they can have jobs,
and keeping those jobs in America. That is, we cannot be passive. We
have two choices: try or do nothing.
I say we try to create more jobs in America; we try to keep more jobs
in America; we try to retrain people and help people who have lost
jobs. We have to do something about it.
The administration thus far has been passive. It has gone AWOL. It
does not seem to really care. I do not see any affirmative programs to
create jobs in America. We need them. It is a hugely complex problem in
both the short term and long term. In the long term, it is education--
science, math, engineering. Did you know we don't graduate nearly as
many engineers as does Japan, Europe? And China graduates about three
times the number of engineers we do. Did you know that? How long can we
continue that? In the long term, we cannot. It is unsustainable.
I must also say the amount of financial aid or the amount of support
in basic research has dropped tremendously in America. The number of
engineers who graduate in America is now about 30 percent less than it
was not too many years ago. The figure is worse than that. We are not
going to be able to compete in the long run if we continue that. It
can't be done. There are lots of other long-term measures we have to
undertake.
There are also in the midterm things we could be doing and we are
not. What are they? No. 1, we are not opening foreign markets. Look at
India, look at other countries in the world that are closed to America,
particularly the country of India. We hear about all the call centers
going to India. We don't hear about goods being exported to India for a
very good reason: India is by and large closed. They are closed to
intellectual property rights, closed to so many markets, so many
products. India is closed. What are we doing about that? Not much.
The same can be said for other countries--China. Remember the WTO?
They are a member of the WTO. We gave them PNTR. China has a lot more
to do.
What are we doing in trade? Basically looking to countries--with no
disrespect--such as Bahrain and Morocco. These smaller countries don't
have huge commercial benefit to the United States. It is easier to
reach trade agreements with those countries. It is much more difficult
to go after where the real problem is. As I mentioned, this country is
not doing that, and it should do that. It should start working more
aggressively to open markets so we can sell products overseas. When we
start selling products overseas, that means more jobs in America. It is
pretty doggone simple, but it is not being done.
I might also add that there are other things we could be doing that
we are not doing. I mentioned education. We are cutting education in
this country. We are not fully financing No Child Left Behind. How are
we going to compete in the world if we don't give full due to
education? We have all gone overseas and visited high schools in
countries worldwide. I have. The graduates in Pusan, Korea, are bright
as the dickens, and they are hungry.
We have great schools and great teachers. But there is so much more
we can do. In my State--and this may be true in other States--teachers
are leaving because their salaries are so low. They cannot teach. A lot
of schools in the country are cutting back on gifted children programs.
They don't have any money. Why are we cutting back on gifted kids? That
certainly helps all kids, including the underprivileged.
Madam President, I will yield the floor because I see our Democratic
leader in the Chamber. He has a lot to tell us. Certainly, it will add
immensely to this discussion. I urge us to think critically about the
real problem. We cannot close our borders and put our heads in the
sand. We have to meet this challenge head on. This is part of that
effort.
I yield the floor.
The PRESIDING OFFICER. The Democratic leader is recognized.
Mr. DASCHLE. Madam President, I compliment the Senator from Montana
for his words. I have not heard all of his remarks this morning, but I
could not agree more that this is a problem that has to be addressed
head on. As he noted, this legislation gives us an opportunity to do
so. It may not be the ultimate solution, but it is a critical building
block in our effort to restore the economy and create new jobs.
I hope that very shortly we can get on with the debate. We had an
agreement not to offer amendments, of course, until people have had a
chance to make opening statements. I intend to make a short one. I hope
in the not too distant future we can begin the real debate. We don't
have a lot of time. We have 3 days. Senator Frist is right that we have
a lot to do in a short period of time. If we are going to maximize the
use of these 3 days, it is time to get on with amendments. I know
Senator Hatch is prepared to offer the first one. We hope that
certainly before the end of this noon hour, we will have offered the
first amendment.
Mr. President, these are very difficult times for millions of
American families.
Nine million Americans can't find jobs. We have the highest long-
term unemployment rate in 20 years. And in the last 3\1/2\ years, our
economy has lost 2.9 million jobs; 2.8 million of those jobs were
manufacturing jobs.
These aren't abstract numbers. They have real world, dramatic
impacts in South Dakota and across our country. And the millions of
affected families are looking to us for answers. They don't want hand-
outs; they want jobs.
Unfortunately, American has lost manufacturing jobs every month
since this administration took office--every single month. This is
unprecedented. It's also dangerous for our economy.
Manufacturing is more productive, it pays higher wages, and provides
more benefits than other sectors of the economy. Manufacturing jobs are
the kind of jobs you can raise a family on. They're the kind of jobs
that make it possible for middle-class families to put their kids
through college, and put something away for retirement.
We have clear choices in facing this problem. We can let jobs move
overseas--or we can fight to keep them here. We can try to create jobs
here, or we can do nothing in the face of globalization.
We can provide help for workers who are losing their jobs, or we can
look the other way. And we can strengthen worker protections, or we can
strip away overtime and other benefits that have been a hallmark of the
American workplace.
A couple of weeks ago, President Bush and his economic advisors
weighted in on this issue and told Americans it was a good idea to ship
jobs overseas and we ought not worry about it. I don't see it that way,
and I know people in South Dakota don't see it that way. And we need to
do something about it.
Today's legislation is the second step in this process. The first
step was the creation and the passage of a very important highway bill,
which will create hundreds of thousands, if not millions, of new jobs
over the course of the next 6 years. This is the second step.
The foreign sales corporation regime was created to counterbalance
provisions in the Tax Code that create incentives to move operations
overseas. It provided tax advantages for American companies that keep
their jobs in America and ship their products overseas.
But the World Trade Organization has decided that these advantages
were an unfair subsidy and needed to be eliminated. And if they weren't
eliminated, international sanctions would follow. Those sanctions
kicked in beginning March 1.
The question before us is what to replace the old export tax regime
with?
The Bush administration is completely focused on overseas activities
and has proposed nothing to encourage manufacturing job creation at
home.
But thanks to Chairman Grassley and Senator Baucus, we have another
solution before us.
The centerpiece of their legislation is creating tax incentives for
manufacturers that will keep and create good jobs in America. Their
proposal is one of the most important opportunities we

[[Page S2071]]

will have this year to begin addressing America's manufacturing crisis.
Just as importantly, this bill gives us an overdue opportunity to do
more.
We need to accelerate and increase domestic manufacturing tax
incentives, and establish a strong job creation tax credit.
We need to prohibit tax deductions for outsourcing expenses, and
require notice to employees about outsourcing plans. Every community
has a right to know how many employees are losing their jobs, why then
are losing their jobs, and where those jobs are being sent.
We need to restrict outsourcing of government contracts.
We need to help workers who are hurt by outsourcing, and make sure
they have access to training and health care while they get back on
their feet.
And we need to reverse some of the Bush administration's worst
policies--like eliminating overtime for 8 million workers, including
veterans who have been given training in the military and are now
ineligible for overtime pay as a result of this regulation. We need to
do that. American workers have the same rights they have always had.
That fact needs to be reemphasized with the legislation we will offer
on this bill.
We can't wait until next year to make these improvements. Millions of
American families need them today. And I have seen firsthand, in South
Dakota, why this is so important.
I recently toured a manufacturing plant in Sioux Falls. Graco
Incorporated is the world's leading manufacturer of fluid-handling
systems and equipment. They've been in business for 78 years. They
employ about 165 people.
The plant manager showed me two, nearly identical parts. The first
was made in Sioux Falls. The other--made overseas--wasn't quite as
high-quality, but it cost a little less because the people who made it
were paid less, with no benefits.
The manager showed me those two parts. Then he introduced me to the
workers who would lose their jobs if Graco took the easy, offshoring
route. He said, ``I don't want to be the one to have to tell them they
don't have jobs anymore.''
The people at Graco are resisting the temptation to export their
workers' jobs. They're doing everything they can think of to be good,
responsible corporate citizens of my State. The last thing the Federal
Government should do is make that job any harder.
Our responsibility is to make it easier for Graco and thousands of
other companies to keep and create jobs here at home.
As I said, this bill is one step in a long process. By itself, it
will not completely reverse the unpredecented decline in American
manufacturing that has occurred since 2001. That will require a
comprehensive plan and sustained bipartisan cooperation over a period
of time.
In the short term, we have to work together to restore fiscal sanity
to the budget.
The Federal deficit this year will be half-a-trillion dollars--with
no end in sight to the red ink. This debt could cripple our economy and
destroy our children's future.

In the longer term, our Government should assist people with
education and training so they can seize the opportunities that rapid
change creates. We need to help people who are displaced by change, and
we need to make sure America remains on the cutting edge of innovation.
The administration is not facing either of these challenges. We have
the largest budget deficits in all of American history, and the
administration is drastically underfunding training and education.
The President's budget recommends $9.3 billion less for the
President's own educational reform plan than the new law calls for.
By choosing tax cuts for those at the top over assistance for States,
the President has forced drastic increases in tuition at public
colleges and universities.
The administration has fought Democratic efforts to help dislocated
workers upgrade their skills at community colleges.
At a time when other countries are feverishly trying to challenge
America's preeminence in critical technology, the administration,
through neglect and politicization has weakened America's science and
technology infrastructure and undercut America's scientific edge.
The decline in American manufacturing isn't just happening on
President Bush's watch. It is happening in part because of President
Bush's policies.
Our choices are clear. We can follow the administration's path and
make it easier and cheaper for companies to ship American jobs
overseas, or we can fight to keep good jobs in America. We can turn our
back on millions of workers and families who cannot find jobs, or we
can help them get back on their feet and get back to work.
It is our hope that, in a bipartisan way, we can find ways to ensure
that these goals can be achieved, not only with this legislation but
certainly beginning with the amendments we will offer throughout the
debate on this bill and hopefully with final passage accorded this
legislation someday soon.
I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. REID. Madam President, before the distinguished Democratic leader
leaves the floor, I would like, through you, to pose this to him: We
have been here now for approximately 2 hours on this very important
legislation. The Democratic leader has talked about how important it
is, the distinguished chairman of the committee has talked about how
important it is, our ranking member has talked about how important it
is, and we are doing nothing. We have a gentleman's agreement that this
would be for debate only, but I think the Democratic leader would agree
with me, and I think everybody should be put on notice that this cannot
go on all day long, that this is ridiculous; would the Senator agree to
that?
Mr. DASCHLE. Madam President, I respond to the Senator from Nevada,
the distinguished assistant Democratic leader, that the schedule is
clear. We have this afternoon, we have tomorrow, and, let's face it,
honestly, we only have Friday morning, and we will be under great
pressure, I am sure, not to have any amendments offered beyond
midmorning on Friday.
So for all intents and purposes, we have a little bit more than a day
to debate this critical legislation prior to the time the majority
leader has already indicated we are going to be moving to the budget,
setting aside this legislation.
We are going to be assessed $4 billion in tariffs beginning this week
if we do not correct the current situation. So this legislation is
urgent. It needs to be addressed.
I think we have some very critical amendments that ought to be
offered in this very narrow window to accommodate concerns on both
sides of the aisle. I hope we can do so. Frankly, as the Senator
suggests with his question, we need to do it soon.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. REID. Madam President, it is true also, is it not, that we have
made--and I would like to hear the Democratic leader respond to this--a
fair response? The majority has an amendment they want to offer,
sponsored by Senator Hatch, dealing with extension of some tax credits.
We then said we would like to offer an amendment to stop what--it is
not a crime but it is close to it in our country today with all the
outsourcing of all these contracts, and we want to make sure the U.S.
Government contracts are not outsourced unless there are certain
limitations placed upon them.
Then they would come back with another amendment sponsored by Senator
Bunning. Then we would come back with another amendment sponsored by
Senator Harkin dealing with overtime, and this is no secret; this is an
issue about which we have great concern as to what the administration
is doing with American workers with overtime.
Is there anything in this agreement the Democratic leader sees that
should prevent us from moving forward on this critical legislation? We
have even agreed to time limits; is that not true?
Mr. DASCHLE. The Senator from Nevada is correct. We have agreed with
our Republican colleagues to limit the amount of time devoted to each
of these amendments.
I see the distinguished chair of the Finance Committee, and it looks
as if

[[Page S2072]]

he may be about to propound a unanimous consent request. Perhaps we can
yield the floor to accommodate his interests in doing so. I think we
all hope to achieve the same goal. Let's move this bill forward. Let's
have a good debate about amendments, up or down, and let's see if we
can complete our work on this legislation in a timely way.
I yield the floor.
The PRESIDING OFFICER. The Senator from Iowa.
Mr. GRASSLEY. Madam President, I ask the following unanimous consent
request. We have perfecting amendments that have been cleared on both
sides. Therefore, I ask unanimous consent that the first-degree and
second-degree perfecting amendments that are at the desk be considered
and agreed to en bloc and that the motions to reconsider be laid upon
the table; provided further that the committee substitute be agreed to
and considered as original text for the purpose of further amendment. I
further ask unanimous consent that the next first-degree amendments in
order be the following: a Senator Hatch and Senator Murray amendment on
R&D, with a Bingaman second-degree amendment which is relevant to the
first degree; then Senator Dodd dealing with outsourcing; then Senator
Bunning and Senator Stabenow dealing with accelerating manufacturers'
tax cut; and then the fourth amendment will be Senator Daschle or his
designee.
The PRESIDING OFFICER. Is there objection? The Senator from Nevada.
Mr. REID. Madam President, reserving the right object, I wish to
express my appreciation to the chairman of the committee. He, in the
statement he has made so far, along with the ranking member,
underscored the importance of moving this legislation, and this is
movement in that direction.
As we indicated in the dialog between Senator Daschle and this
Senator, we will agree on time limits anytime the Senator wants to work
something out in that regard. We will be happy to do that. This is a
very good first step, and we do not object.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment (No. 2646) was agreed to.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
The amendment (No. 2645), as amended, was agreed to.
(The amendment is printed in today's Record under ``Text of
Amendments.'')
The committee amendment in the nature of a substitute, as amended,
was agreed to.
Mr. REID. Madam President, we now have an amendment that will be
offered as soon as Senator Hatch arrives. Senator Byrd saw we were not
doing a lot on the floor, and he asks, through me, that he be able to
speak for up to 20 minutes at this time.
Mr. GRASSLEY. Madam President, I feel as if I owe that to the Senator
from West Virginia because I already made arrangements for him to speak
before we completed this agreement.
Mr. REID. Madam President, I propound that in the form of a unanimous
consent request, with the understanding that the first amendment be
offered as soon as he finishes. That will be good.
The PRESIDING OFFICER. Without objection, it is so ordered. The
Senator from West Virginia.
Mr. BYRD. Madam President, I thank the distinguished Democratic whip
and I thank the distinguished chairman of the committee for his
courtesy.

Independent Commissions on National Security Issues

Most of us are familiar with the Aesop's fables, having read some of
them at one or more times during our lives. Aesop once told the story
of a jaybird that ventured into a yard where peacocks used to walk.
There the jay found a number of feathers fallen from the majestic birds
when they had last molted. He tied them all to his tail and strutted
toward the peacocks. His cheat was quickly discovered, and the peacocks
harassed the imposter until all his borrowed plumes had fallen away.
When the jay could do no more than return to his own kind, having
watched him from afar, they were equally affronted by the jay's
actions.
The moral of the story, said Aesop, is that it takes more than just
fine feathers to make fine birds.
It is an age-old lesson that the Congress should hold in its mind as
we consider how best to investigate the distorted and misleading
intelligence that the administration used to build its case for war in
Iraq.
On February 6, the President announced the creation of his own
commission to investigate our intelligence agencies to find out, in the
words of Dr. David Kay, why we were almost all wrong about the
administration's prewar claims of huge Iraqi stockpiles of weapons of
mass destruction. If Congress is serious about getting to the bottom of
this apparent intelligence failure and the administration's rush to
war, we must realize that once stripped of its dazzling plumage, the
White House proposal for its own so-called independent commission is a
real, honest to goodness turkey. It is not only fine feathers that make
fine birds.
The President has described the panel that he created as being an
independent commission. Well, nothing could be further from the truth.
This commission is 100 percent under the thumb of the White House. Who
created the panel's charter? The President. Who chooses the panel
members? The President. To whom does the panel report? The President.
Whom shall the panel advise and assist? The President. Who is in charge
of determining what classified reports the panel may see? The
President. Who gets to decide whether the Congress may see the panel's
report? The President.
To describe this commission as independent is to turn that word's
definition on its head. In fact, the deeper one delves into the text of
the Executive order that creates the President's so-called independent
commission, the more one finds that the commission is ill-equipped to
discover just what went wrong with the prewar intelligence on Iraq.
At first glance, the charter of the President's commission appears
very broad. It is to assess whether the intelligence community of the
United States is sufficiently authorized, organized, equipped, trained,
and resourced to tackle the threats of terrorism and weapons of mass
destruction. As part of that goal, the commission is to compare prewar
intelligence on Iraq with what has so far been discovered.
That mission sounds like a mouthful, but it really misses the point
of why the American people are calling for a commission to investigate
in this matter.
The public has a right to know why our intelligence on Iraq was so
wrong, how the administration may have misrepresented its intelligence,
who is going to be held accountable for misleading our country into
war, and what will be done to fix the problems with our intelligence.
Those are exactly the questions an independent intelligence panel
should be investigating, and yet the President's commission only skirts
those key issues.
What is more, even though the President promised that his commission
will investigate current intelligence on North Korea, Iran, and
Pakistan, his Executive order, in fact, does not bother to direct the
commission to review intelligence on those countries. Instead, the
President's Executive order directs the commission to focus its
energies on Libya and Afghanistan. Libya and Afghanistan are not
countries that the President has labeled as part of his axis of evil. A
real independent intelligence commission would shine new light on how
we assess the threats of North Korea and Iran, not be distracted by
sideshows that will keep the commission busy until March 31, 2005.
The President has carefully drafted this Executive order to allow
himself to serve as the gatekeeper on what information the so-called
independent commission might have access to. While the President
directs Federal agencies to cooperate with this commission, he also has
created a giant loophole that would prevent the most important
intelligence products from being read by his commission.

The Executive order reads as follows: The President may at any time
modify the security rules or procedures of the commission to provide
the necessary protection to classified information.
I was born at night but not last night. All of America knows that the
White House is in a dispute with the September 11 Commission over
intelligence reports that were read by the President. The commission
wants

[[Page S2073]]

them. The White House will not give them. The Executive order drafted
by the President to create an intelligence commission makes sure that
his own commission will never see documents that the President does not
want them to see.
At least the 9/11 Commission has the power to issue subpoenas for
critical information. The President's intelligence commission does not
even have that power. The deck is being stacked against a full and open
inquiry on the prewar intelligence on Iraq. Congress is not even
assured of having access to the commission's report.
The President has required that the commission send its report to him
in March 2005 and then within 90 days the President will consult with
the Congress concerning the commission's report and recommendations.
Why can the Congress not simply read the commission's report? Why
should the White House be given the opportunity to reword, reshape,
redact, or even flat out censor the so-called independent commission's
report before Congress can get their hands on it?
It is quite possible that if this so-called independent commission is
allowed to proceed as the President has directed, Congress will never
have the chance to review the commission's work.
Tucked away in the President's Executive order is a provision that
intends to exempt this commission from judicial review. Let us not
forget that the Office of the Vice President fought tooth and nail in
Federal courts, and is still doing so, to keep the General Accounting
Office, an arm of the Congress, from learning about the meetings of the
Vice President's energy task force.
Could this provision be an attempt to hide the work of the
President's intelligence commission from Congress? I would not put such
a scheme beyond the White House, which has already demonstrated its
zeal for secrecy.
The administration's case for war in Iraq appears to have been built
upon cherry-picked intelligence, produced and massaged to hype the
American people into going along with a war of choice. The President's
so-called independent commission would allow the White House to do the
exact same number on the commission's report as it did on prewar
intelligence and analysis; namely, pick out only the parts that it
wants the public to see and bury the rest.
It is bitter irony that a report on whether the administration
covered up evidence that contradicted a rush to war might itself be
covered up under the terms of the President's Executive order.
So what is next? An independent commission to investigate the
President's own commission? Is that so? I wonder. Let us not make the
mistake of ignoring the shortcomings of the White House's version of an
intelligence commission on Iraq, only to be haunted by those problems
later.
The revelation by Dr. Kay that he does not believe any stockpiles of
weapons of mass destruction existed in Iraq has dealt a blow to the
President's case for war. It has shaken the American people's faith in
their Government. We owe it to the American people to get to the bottom
of what went wrong with our intelligence agencies and whether the
administration misused the intelligence that it was provided.
The President has simultaneously promised a commission to investigate
these matters and stacked the deck against the independence of his very
own panel. That is not the right way to gain the confidence of the
American people in their Government. It is yet another in a string of
attempts by this White House to mislead the American people on issues
of national security.
Congress must step in and correct the grievous error that the
President has made in creating a commission that is not equipped
properly to do its job. Congress should use the independent 9/11
Commission, a commission that has shown itself to be fair, independent,
and bipartisan, as a starting point for how to create an independent
panel to investigate the Iraq intelligence failures. If the
administration is serious about getting to the bottom of this debacle,
this new commission might even be created in just a matter of days.
The American people deserve answers on why the administration relied
on faulty intelligence to take this country to war without presence of
an imminent threat. A commission that is designed to keep the inquiry
under the thumb of the same White House that misled Congress and the
public about the nature of the threat from Saddam Hussein will never be
able to operate independently. So Congress should not allow the
President to get away with posting a fox at the door to the hen house.
The structure of the 9/11 Commission is a solid foundation upon which
to conduct an inquiry into the administration's prewar intelligence
claims. The 9/11 Commission has been doing yeoman's work in digging
into all of the events that led up to those catastrophic attacks on New
York and Washington. In fact, the only real problem that the 9/11
Commission has faced is the lack of cooperation from the White House.
After refusing to meet with the full membership of the 9/11
Commission, the President and Vice President have reluctantly proposed
to meet only with the chairman and vice chairman of the panel. And for
how long? Just 1 hour.
The National Security Adviser has flatly refused to participate in
any public discussions with the Commission. The White House position on
dealing with the 9/11 Commission is so unreasonable that the
administration is drawing criticism from both sides of that panel.
There is even talk that former Senator Bob Kerrey, who once served as
Chairman of the Senate Intelligence Committee, could resign because of
the administration's refusal to let the Commission do its work. What
could possibly be the reason for this stonewalling by the White House?
It is as if a whole swath of the Washington establishment has
completely forgotten the horror of the terrorist attacks that killed
3,000 innocent people. But the American people have not forgotten. The
American people have their priorities straight. They place getting at
the truth of how that tragedy was carried out above election year
politics.
Enough with the stonewalling. Enough with the foot dragging. Enough
with the election year politics. The Senate acted correctly a few days
ago to extend the life of the 9/11 Commission so that it can get its
work done, and the House should promptly follow suit. Now Congress
should act quickly to create an independent Iraq intelligence
commission. The confidence of the American people in their Government,
the people's government, hangs in the balance.
Madam President, I yield the floor and I suggest the absence of a
quorum.
The PRESIDING OFFICER (Mr. Hagel). The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. HATCH. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.

Amendment No. 2647

Mr. HATCH. Mr. President, I send an amendment to the desk.
The PRESIDING OFFICER. The clerk will report.
The assistant journal clerk read as follows:

The Senator from Utah [Mr. Hatch], for himself, Mrs.
Murray, Mr. Baucus, Ms. Cantwell, Mr. Smith, Mr. Bunning, and
Mr. Grassley, proposes an amendment numbered 2647.

Mr. HATCH. Mr. President, I ask unanimous consent that reading of the
amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:

(Purpose: To extend and modify the research credit)

At the end of subtitle A of title III add the following:

SEC. __. EXTENSION AND MODIFICATION OF RESEARCH CREDIT.

(a) Extension.--
(1) In general.--Section 41(h)(1)(B) (relating to
termination) is amended by striking ``June 30, 2004'' and
inserting ``December 31, 2005''.
(2) Conforming amendment.--Section 45C(b)(1)(D) is amended
by striking ``June 30, 2004'' and inserting ``December 31,
2005''.
(b) Increase in Rates of Alternative Incremental Credit.--
Subparagraph (A) of section 41(c)(4) (relating to election of
alternative incremental credit) is amended--
(1) by striking ``2.65 percent'' and inserting ``3
percent'',
(2) by striking ``3.2 percent'' and inserting ``4
percent'', and

[[Page S2074]]

(3) by striking ``3.75 percent'' and inserting ``5
percent''.
(c) Alternative Simplified Credit for Qualified Research
Expenses.--
(1) In general.--Subsection (c) of section 41 (relating to
base amount) is amended by redesignating paragraphs (5) and
(6) as paragraphs (6) and (7), respectively, and by inserting
after paragraph (4) the following new paragraph:
``(5) Election of alternative simplified credit.--
``(A) In general.--At the election of the taxpayer, the
credit determined under subsection (a)(1) shall be equal to
12 percent of so much of the qualified research expenses for
the taxable year as exceeds 50 percent of the average
qualified research expenses for the 3 taxable years preceding
the taxable year for which the credit is being determined.
``(B) Special rule in case of no qualified research
expenses in any of 3 preceding taxable years.--
``(i) Taxpayers to which subparagraph applies.--The credit
under this paragraph shall be determined under this
subparagraph if the taxpayer has no qualified research
expenses in any 1 of the 3 taxable years preceding the
taxable year for which the credit is being determined.
``(ii) Credit rate.--The credit determined under this
subparagraph shall be equal to 6 percent of the qualified
research expenses for the taxable year.
``(C) Election.--An election under this paragraph shall
apply to the taxable year for which made and all succeeding
taxable years unless revoked with the consent of the
Secretary. An election under this paragraph may not be made
for any taxable year to which an election under paragraph (4)
applies.''
(2) Coordination with election of alternative incremental
credit.--
(A) In general.--Section 41(c)(4)(B) (relating to election)
is amended by adding at the end the following: ``An election
under this paragraph may not be made for any taxable year to
which an election under paragraph (5) applies.''
(B) Transition rule.--In the case of an election under
section 41(c)(4) of the Internal Revenue Code of 1986 which
applies to the taxable year which includes the date of the
enactment of this Act, such election shall be treated as
revoked with the consent of the Secretary of the Treasury if
the taxpayer makes an election under section 41(c)(5) of such
Code (as added by paragraph (1)) for such year.
(f) Effective Dates.--
(1) Subsection (a).--The amendments made by subsection (a)
shall apply to amounts paid or incurred after the date of the
enactment of this Act.
(2) Subsections (b) and (c).--The amendments made by
subsections (b) and (c) shall apply to taxable years
beginning after December 31, 2004.

Mr. HATCH. Mr. President, the amendment I am offering today is an
important and appropriate one for any bill that has the word ``jobs''
in its title. It is a bill to extend and expand a tax provision that is
central to creating and retaining U.S. jobs--the research credit. I am
joined in this effort by Senators Murray, Baucus, Cantwell, Smith,
Bunning, and Grassley.
This bipartisan amendment will help to ensure that businesses
continue to increase research activities--and to create new jobs--in
the United States. As many of our colleagues are aware, the current
research credit expires in just a few weeks, on June 30, 2004.
I believe that if we fail to act to extend this credit, we surely
will see the negative effects manifest in lower economic growth, fewer
jobs, fewer innovative products, and opportunities lost as research is
taken from this country to other nations that offer more attractive
incentives.
Our colleagues many times have expressed their resounding support
for the research credit and I hope they will again. This amendment not
only would extend the credit for 18 months, until December 31, 2005,
but also would allow businesses to choose a new way to calculate the
credit so that more research-intensive companies can lower their costs
of U.S.-based research activities.
The American taxpayer relies on us to make the right policy choices
for the long-term health of our economy. We have faced and are still
facing major challenges both to our national security and to our
economic security. Time and again we have looked to the industries on
the cutting edge of new and improved technologies to help us meet those
challenges.
My home State of Utah is a good example of how State economies
benefit from the research tax credit. Utah is home to a large number of
firms that invest a high percentage of their revenue on research and
development.
In Utah, 5 percent of the workers--51,000 people--work in the
research-intensive high technology sector. That includes over 10,000
people working just to design computer systems, and over 6,000
producing medical equipment. And there is a lot of R&D taking place
outside of Utah's high-tech sector.

Just to give one example, more than 7,000 people work in Utah's
chemical industry, and workers in that industry benefit from research
and development taking place in Utah and throughout the country.
Aerospace and the pharmaceutical industries are two more examples of
big Utah employer groups that reap the benefits of R&D.
I want Utah companies to be able to buy better manufacturing
equipment, more reliable electronics, and have access to more efficient
quality control techniques. The workers who use new inventions will get
just as many benefits as workers who create those new inventions. And
the evidence clearly shows, that the research credit will increase
innovation.
In short, there are tens of thousands of employees working in Utah's
thousands of technology based companies, with tens of thousands more
working in other sectors that engage in R&D. Beyond that, practically
all of Utah's hundreds of thousands of workers benefit from higher
productivity coming from the innovations that researchers both inside
and outside of Utah produce. Research and development is clearly the
lifeblood of our economy throughout the Nation.
Since 1981, when the research credit was first enacted, the Federal
Government has joined in partnership with businesses, large and small,
in those industries to ensure that the research dollars were expended
in the United States so that the jobs were created here. We as a nation
have reaped the benefits of that research.
It seems clear to me that if we want to keep our Nation and our
economy strong and growing, it is vital that we maintain and even
enhance our position as the world leader in technological advances. Our
Nation simply must continue to invest in research and development,
especially in the private sector. And, the Federal Government must
affirm its role as a partner in those private-sector endeavors.
I believe the best way to ensure that private-sector investment in
R&D continues at the health rate needed to fuel further productivity
gains is to extend the current-law research credit and make that credit
more widely available. Ideally, the credit should be made permanent.
I have long advocated a permanent credit and this body is
overwhelmingly on record for a permanent research credit. During the
Senate's debate on the 2001 tax cut bill, I offered an amendment to
provide for such a permanent credit that the Senate adopted.
Unfortunately, that provision was dropped in conference and we lost a
great opportunity.
Given our budget deficit situation, I do not believe it is possible
politically to make the research credit permanent on this bill.
Ironically, though, a permanent credit costs no more than one that is
regularly extended. Because of the urgency and importance of this
matter, however, this amendment seeks only a temporary extension.
Let me point out a few key points for our colleagues so they can
understand the importance of the research credit. These are according
to the staff of the Joint Committee on Taxation.
The primary category of expenditures that qualify for the research
credit are wages paid to employees performing research in the Unites
States. In 2001, more than 15,000 taxpayers claimed the research tax
credit--42 percent of these businesses were engaged in manufacturing.
However, of the total $6.5 billion in research credits claimed in
2001, 66 percent of those dollars were claimed by manufacturers. When
you look at the size of the companies claiming the credit in 2001, you
see that 68 percent of the firms claiming it had assets of $10 million
or less.
The research credit translates into real jobs in the United States
and, as the statistics show, it is our small- and medium-size domestic
manufacturers that most benefit from the research credit.
A great deal of the reason our economy grew so rapidly in the second
half of the last decade was because of a strong surge in our
productivity rate. This surge is continuing into the present and has
been a marvel to most economists.

[[Page S2075]]

This increase in productivity has allowed the economy to continue to
grow at a rapid pace without the increase in inflation that usually
accompanies such growth. Moreover, increases in productivity growth are
the key to future economic security, particularly in light of the huge
entitlement challenges we face in the coming years. A very large factor
in that productivity growth is innovation, which of course, requires
R&D.
As I mentioned, this amendment would extend the current credit until
December 31, 2005, giving businesses that utilize this important
incentive some certainty in the short-term so that they can hire the
needed personnel to take research activities off the drawing board now.
Over the years, the research credit has proven to be a powerful
incentive for companies to increase their research and development
activities. Unfortunately, it does not work perfectly. Part of the
reason is that this is an incremental credit, designed to reward extra
research efforts, not just what a company might do anyway. From a good
tax policy point of view, I believe this is the best way to provide an
incentive tax credit.

However, it is difficult to craft an incremental credit that works as
it should in every case. While the regular credit works very well for
many companies, it does not help some other firms that still incur
significant research expenditures. This is because the credit's base
period of 1984 through 1988 is growing more distant and some firms'
business models have changed.
There is no good policy reason why research should be more expensive
for some industries than it is for others. To partially solve this
problem Congress enacted the alternative incremental research credit,
AIRC, in 1996, and now we propose a way to address the rest of that
problem.
In addition to increasing the AIRC rates, this amendment allows
taxpayers to elect, in lieu of the regular credit or the AIRC, an
alternative simplified credit that is based on a rolling average of the
prior 3 years' qualified research expenses. This provides companies
that are increasing their R&D with another way to take advantage of the
credit when the 20-year-old base period proves to be irrelevant.
This is an important amendment. It is important to our economy, both
now and in the future. It is important to good, high paying jobs in the
United States.
We need to continue to be the world's leader in innovation. We cannot
afford to allow other countries to lure away the research that has
always been done in the United States. We cannot afford to have the
lapses in the research pipeline that would result if we do not take
care of extending this credit before it expires on June 30. I urge all
of my colleagues to support this amendment. It is the right thing to
do. We have done it before. We certainly should do it now. I wish it
were permanent. But under the circumstances, this is the best we can
do. I have every confidence my fellow Members of the Senate will vote
for this amendment.

I yield the floor.
The PRESIDING OFFICER. The Senator from Washington.
Mrs. MURRAY. I rise today to join with Senator Hatch to strengthen
and extend the research and development tax credit. We are all
concerned about our slow economy. Every day we learn of more American
jobs that are being shipped overseas. We worry about American companies
losing out in the global marketplace and the impact that has on our
workers and on our economy.
Today, we are offering a way to fight back and help our workers and
companies continue to lead the world in innovation. Today, I am proud
to offer an amendment that will support high-wage jobs for American
workers at home and make our products more competitive around the
world.
Anyone who wants to support good-paying American jobs, and anyone who
wants to help American companies compete and win in the global
marketplace should vote for the Hatch-Murray amendment. We all know
research and development is a critical part of any business's success,
but investing in R&D is not cheap. Our foreign trade competitors offer
substantial tax and financial incentives to encourage American
companies to make their research investments elsewhere. But we need
those jobs in the United States and this amendment gives us a chance to
support American workers in the face of foreign competition.
That is why the R&D tax credit is so important. It provides a real
incentive for companies to increase their investment in U.S.-based
research and development. The credit helps stimulate innovation, wages,
and exports which all contribute to a stronger economy and a higher
standard of living for American workers.
This is about investing in America. Because this tax credit is only
available for R&D performed in the United States, it provides a
discount on qualifying expenditures, and it is a proven incentive for
U.S. companies to increase their R&D investment in the United States.
Unfortunately, the existing research and development tax credit will
expire this June. Unless we take action, in just a few months we will
be throwing away one of the best incentives for spurring investments at
home. I have always supported making the R&D tax credit permanent, but
because of budget constraints, we are not in a position to do that
today. But we can do the next best thing and extend and strengthen this
incentive.
The Hatch-Murray amendment does three things: First, it extends the
traditional credit for 18 months through December 31, 2005; second, it
increases the alternative incremental credit rate starting in January
of 2005; and finally, again starting in January of 2005, it provides an
alternative simplified credit to encourage even more research-intensive
businesses to spend more on research in the United States.
The R&D tax credit is a great example of how we make the Tax Code
work for American workers and American families right here at home.
I have a letter from the R&D Tax Credit Coalition, and I ask
unanimous consent to have it printed in the Record after my remarks.
The PRESIDING OFFICER. Without objection, it is so ordered.
(See exhibit No. 1)
Mrs. MURRAY. Mr. President, this letter is actually signed by over
500 companies and associations and urges Congress to permanently extend
the R&D tax credit and make the modifications contained in S. 664.
I share with my colleagues a portion of the letter:

The technological innovations made possible by the R&D
Credit enable companies to bring more products and services
to market, increase employment, and raise the standard of
living for all Americans.
R&D helps manufacturers and services companies with U.S.
operations maintain a competitive edge over lower-cost
foreign competitors.
It allows a small, medium or large company to reduce its
financial risk in expensive, labor-intensive R&D investments.
Since the credit was created in 1981, investments in
technology and innovation have spurred economic growth and
contributed greatly to our country's high standard of living.
Continued R&D spending is a necessary element in our
country's ability to invest for our future.

This is not some abstract economic principle. It is a real incentive
that creates jobs and helps workers in America. I have seen it
firsthand at companies throughout Washington State. This year,
Microsoft plans to invest $6.8 billion on R&D. Because this tax credit
is targeted almost exclusively at wages, the credit will translate into
additional jobs in Washington State and in the United States. That will
mean jobs not just at Microsoft but at many other local companies.
In fact, according to a February 25, 2003, article in the Seattle
Times, one study found that every job at Microsoft supports 3.4 other
jobs in the economy. It also found that from 1990 to 2001 Microsoft was
responsible for more than a fourth, 28.3 percent, of King County's
growth. That is an example of how one company's investment in R&D is
supporting good family wage jobs throughout the region.
That is just one company. There are many other companies engaged in
R&D in Washington State and in the United States. Their investment in
R&D will help our workers and help our economy.
I want to share some other figures that show the importance of R&D
investment, especially in Washington State.
In the year 2000, companies performed almost $200 billion in R&D;
$9.8

[[Page S2076]]

billion of that research was performed in Washington State.
Let me shed some light on types of employers that are doing that
work. Thirty-three percent of the research done in Washington State was
performed by manufacturers. We have seen a terrible loss of
manufacturing jobs over the years, and this credit is one way to help
them stem the tide. Mr. President, 11.4 percent of the research done in
Washington State was done in the professional, scientific, and
technical service industries.
This is about moving our economy forward. Technological innovations
have accounted for more than one-third of our Nation's economic growth
during the last decade. We know innovation is critical to sustained
growth in the future.
Extending and improving the R&D tax credit is one of the most
important steps we can take right now to foster investment at home and
job creation throughout the country.
I urge my colleagues to give American workers a fair shot in the
global marketplace by voting for the Hatch-Murray amendment.
Mr. President, I yield the floor.

Exhibit 1

R&D Credit Coalition,

Washington, DC, February 9, 2004.
Hon. Bill Thomas,
Chairman, Committee on Ways and Means, House of
Representatives, Washington, DC.
Hon. Charles Grassley,
Chairman, Committee on Finance, U.S. Senate, Washington, DC.
Hon. Charles Rangel,
Ranking Member, Committee on Ways and Means, House of
Representatives, Washington, DC.
Hon. Max Baucus,
Ranking Member, Committee on Finance, U.S. Senate,
Washington, DC.
Dear Chairmen Thomas and Grassley, and Ranking Members
Rangel and Baucus: We urge you to make the enactment of a
permanent research tax credit (R&D Credit) with the
modifications contained in companion bills H.R. 463/S. 664 an
early legislative priority in 2004.
As you know, the technological innovations made possible
by the R&D Credit enable companies to bring more products and
services to market, increase employment, and raise the
standard of living for all Americans. R&D helps manufacturers
and services companies with U.S. operations maintain a
competitive edge over lower-cost foreign competitors. It
allows a small, medium or large company to reduce its
financial risk in expensive, labor-intensive R&D investments.
Since the credit was created in 1981, investments in
technology and innovation have spurred economic growth and
contributed greatly to our country's high standard of living.
Continued R&D spending is a necessary element in our
country's ability to invest for our future.
The growth of our economy is inextricably tied to the
ability to companies to make a sustained commitment to long-
term research. Congress has consistently demonstrated support
for the R&D credit. This year, in order to provide stability
and to ensure that all companies performing intensive
research in the United States are able to benefit from the
credit, Congress should make the credit permanent, increase
the Alternative Incremental Credit (AIRC) rates, and provide
an alternative simplified credit calculation.

Mr. HATCH. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant journal clerk proceeded to call the roll.
Mr. HARKIN. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. HARKIN. Mr. President, just a parliamentary inquiry: I understand
we are on the FSC bill, and we are on an amendment that has been laid
down; is that correct?
The PRESIDING OFFICER. The Senator is correct.
Mr. HARKIN. I thank the Chair.
America is stuck in a jobless recovery and this jobless recovery is
not an accident. It is in large measure the result of failed economic
policies, policies that the administration stubbornly clings to despite
the loss of nearly 3 million private sector jobs over the last 3 years.
This administration has embraced outsourcing. It is against extending
unemployment insurance for the long-term unemployed. It is adamant
against raising the minimum wage. And it is determined--any day now--to
eliminate time-and-a-half overtime pay for millions of American
workers.
It is time for Congress to step in and chart a new course. It is time
for Washington to listen to ordinary working Americans. They are
telling us loudly and clearly that their No. 1 issue is economic
security. They are telling us that they fear losing their jobs, health
care, and retirement.
Now they also fear losing their right, which has been their right
since 1938, to time-and-a-half compensation for work over 40 hours a
week. They fear, with good reason, that under the Department of Labor's
new rules, they will be obligated to work a 50-, 55-, 60-hour week with
zero additional compensation. For millions of working Americans and
their families, this is unacceptable. It is, indeed, the last straw.
Accordingly, at the appropriate time, I will offer an amendment to
this bill that will stop the administration from implementing its
proposed new rules to eliminate overtime pay protection for millions of
American workers.
This amendment will be very familiar to my colleagues. Late last year
a similar amendment I offered passed the Senate by a vote of 54 to 45.
It was endorsed in the House by a vote of 226 to 203. It also won the
overwhelming support of the American public. Yet despite this clear
expression of the will of Congress and of the public, my overtime
amendment was stripped from the omnibus appropriations bill in
conference.
Today this overtime amendment is back by popular demand. It amazes me
that wherever I travel, anywhere in the country, people come up to me
to talk about this overtime issue. They know now what the
administration is trying to do. They are upset. Working families are
angry and they want action. They want us to take action to stop the
implementation of these new rules that will take away their protection
so that they can get time and a half when they work overtime.
Frankly, at this point the administration has zero credibility on
this issue. The Department of Labor claims that it simply wants to give
employers clear guidance as to who is eligible for overtime pay. But
ordinary Americans are not buying this happy talk. They know that the
administration is proposing a radical rewrite of the Nation's overtime
rules. They know these new rules will strip millions of workers of
their right to fair compensation.
The people are right. They are correct. Plain and simply, the new
overtime rules are a frontal attack on the 40-hour workweek, pushed
aggressively by the administration without a single public hearing.
Yes, that is correct. Last year these proposed rules came out,
drastically changing our overtime pay protections, the rules that had
been implemented since 1938, without one public hearing anywhere in the
United States.

These new proposed rules could effectively end overtime pay in dozens
of occupations, including nursing, police officers, firefighters,
clerical workers, air traffic controllers, social workers, journalists.
Indeed, the new criteria for excluding employees from overtime are
deliberately vague and elastic so as to stretch across vast swaths of
the workforce.
Listen to Mary Schlichte, a nurse in Cedar Rapids, IA:

Many nurses just like me work long hours in a field with
very stressful working conditions and little compensation. .
. . Our patients rely on us. Our families depend on us. We
need overtime pay so we can stay in the profession we love
and still make our ends meet.

Ms. Schlichte told me about her Cedar Rapids nurse colleagues who
also rely on overtime pay. One nurse is married to a struggling farmer.
She relies on her overtime pay to cover their insurance premiums. They
already fear losing their farm, and now they fear losing their health
care coverage also.
Dixie Harms is a longtime trainer of nurses in Des Moines. Ms. Harms
told me:

If overtime is changed for hospital nurses, we will see a
mass exodus of registered nurses from the hospital setting
because they will get fed up and refuse to volunteer so many
hours to what they really love doing.

Two and a half years ago, after the terrible September 11 attacks,
many in this body spoke eloquently about the heroism of our
firefighters, police officers, public safety workers. Ever since,
America's first responders have worked long hours to protect us from
terrorists threats. But now the administration apparently wants to deny
them time-

[[Page S2077]]

and-a-half compensation for those longer hours. Simply put, this is
wrong.
Since passage of the Fair Labor Standards Act in 1938, overtime
rights and the 40-hour workweek have been sacrosanct, respected by
Presidents of both parties. But nothing, it seems, is sacred to this
administration when it comes to workers' rights.
For 65 years, the 40-hour workweek has allowed workers to spend time
with their families instead of toiling past dark and on weekends. At a
time when the family dinner is becoming an oxymoron, this standard is
more important than ever.
These radical revisions are antiworker and antifamily. Given the fact
we are stuck in a jobless recovery, the timing of this attack on
overtime could not be worse. It is yet another instance of this
administration's economic malpractice.
Bear in mind that time-and-a-half pay accounts for some 25 percent of
the total income of Americans who work overtime. With average U.S.
incomes declining, the proposed changes would slash the paychecks of
millions of American workers.
Moreover, the proposed new rules are all but guaranteed to hurt job
creation in the United States. This is basic logic. If employers can
more easily deny overtime pay, they will push their current employees
to work longer hours without compensation.
With 9 million Americans currently out of work, these proposed
regulations will give employers yet another disincentive to hire new
workers. Why hire a new worker if you can get your present workers to
work overtime and not have to pay them time and a half? That would be
cheaper than hiring a new worker.
It is bad enough to deny 8 million workers their overtime rights, but
what is really striking about these proposed rules is the mean-
spiritedness of the language included in these proposed rules from the
Department of Labor.
For example, the department is offering employers what amounts to
kind of a cheat sheet--helpful hints on how to avoid paying overtime to
the lowest paid workers, the same workers who are supposedly helped by
the new rules.
Let me be clear about this. There is a part of the proposed changes
that we all support, and that is raising the minimum pay level by which
a worker would not be exempt from any overtime rules. For example,
right now, if you make below about $7,000 a year, no matter what your
job is, you cannot be exempted from overtime, from overtime rules--even
if you are a professional or if you fall into one of the exempt
categories. If you make below about $6,900 or $7,000 a year, you have
to be paid time and a half overtime, no matter what your job is. The
administration is proposing to raise that to about $21,900, close to
$22,000 a year. It has not been raised for a long time, so that is all
well and good. But, in so doing, the administration has put out
technical advice to employers on how they can get around paying the
lowest paid workers time and a half.
For example, the department suggested in writing that an employer
might cut a worker's hourly wage so that any new overtime payments will
not result in a net gain to the employee. It also recommends if the
worker's salary is close to the threshold, you might want to raise
their salary slightly to meet that threshold and then their protection
for time and a half would end, and then they could be exempt.
This is kind of disgraceful. This would be like the IRS putting out
advice to would-be scofflaws, or people or entities that might want to
get around paying their fair share of taxes, telling them how to avoid
paying their taxes, saying here is how you can effectively cheat. What
would we say if the IRS started putting out advice to employers, saying
here is how to get around paying your fair share of taxes?
That is what they are doing on overtime. They are putting out advice
to employers, saying here is how you get around it. It is disgraceful.
There is one part of this new proposed rule that I find probably more
disgraceful than just about anything. I know that when I say this,
people are going to say: Harkin, this cannot be right, this cannot
happen.
The more I dig into the nuts and bolts and fine print of this
proposed rule for changing overtime, the more astounded I am at what we
are finding, in terms of who is now being exempted, or trying to be
exempted from overtime pay.
Would you believe it if I told you that the administration, for the
first time since 1938, is changing the rules to make it harder for
veterans to get overtime pay than their counterparts who did not serve
in the military? Let me repeat that. Mr. President, generally, people
would not believe me if I told them this administration, in their
proposed rules, is making it harder for a veteran to qualify for
overtime than someone who didn't serve in the military. People say:
Harkin, that cannot be right.
Read the proposed regulation. I have the old one. Here is the old
rule that covers overtime pay. There is a section called ``Learned
Professions,'' and it is talking about who basically would be not
barred from exemption. It talks about members of the professions, such
as graduates of law school and different things like that. It says here
the word ``customarily'' implies that in the vast majority of cases a
specific academic training is a prerequisite for entrance into the
profession. It makes the exemption available to the lawyer, the
chemist, and things like that. But it does not in any way mention
veterans in the old rule. There is no mention of veterans.

Here is the new rule. I have it blown up on the chart. It says:

However, the word ``customarily'' means that the exemption
is also available to employees in such professions who have
substantially the same knowledge level as the degreed
employees, but who attained such knowledge through a
combination of work experience, training in the Armed Forces,
attending a technical school.

Et cetera, et cetera. These words, ``training in the Armed Forces''
have never been in the rules before. In other words, since 1938, we
have gone through World War II, the Korean war, cold war, Vietnam war,
the gulf war, Dominican Republic war, Grenada, and a whole bunch of
other things. And our veterans--people who have served in the military,
who went in there, who the Army asks to ``be all that you can be in the
U.S. Army.'' How many ads do we see enticing young people to come into
the military because they can get training which will increase their
ability to earn more money later on in life, after they get out of the
military--specialized training that will make them more desirable in
the workforce?
Well, guess what. They are running those same ads to be all you can
be, learn a specialized training, and be more valuable in the
workforce, and at the same time the administration is promulgating a
rule saying: Wait a minute, if you get training in the Armed Forces,
guess what. You are now covered under this new rule that says you can
be exempted from the overtime pay protection because now you fall into
the same kind of category as lawyers and architects and people who went
to school for a long time to receive specialized training.
Again, don't take my word for it. Read it. ``Training in the Armed
Forces''--those five words have never been in the rules before, never.
We said before if you get training in the Armed Forces, you can now be
exempt from overtime pay. That is what is coming down the pike. That is
what is in these rules. That is why so many of us feel so strongly that
this proposed overtime rule should not be adopted.
According to the proposed rules, employers can consider specialized
training and knowledge gained in the military as equivalent to what is
learned in professional schools. This will allow employers to
reclassify veterans as ineligible for overtime. I started looking at
some of the comments made regarding this. I wondered where it is coming
from. Here are comments on behalf of the Boeing company:

Boeing observes that many of its most skilled technical
workers received a significant portion of their knowledge and
training outside the university classroom, typically in a
branch of the military service, where through a combination
of classroom training and field experience they become
``learned experts'' on very sophisticated aerospace products
or services. Oftentimes, such experts are actually more
knowledgeable than colleagues with advanced degrees--

Master's degrees and Ph.D.s.

and are viewed by the customers as the company's experts on
the product. Boeing thus supports the Department's--

[[Page S2078]]

That is the Department of Labor--

focus on the knowledge used by the employee in performing her
job, rather than the source of the knowledge or skill.

What Boeing is saying is we have a lot of people who work for us who
got their training in the military. They have become skilled in their
profession. But because they did not go to graduate school, because
they got their training in the military, we still have to pay these
people overtime. We have to pay them time and a half, and we do not
want to pay them time and a half. We want to treat them just like
Ph.D.s and all those other people. So, therefore, they support the
proposed rule change that would allow them, Boeing, to reclassify these
former veterans as being exempt from overtime pay protections.
This is a letter from Thomas Corey, the national president of the
Vietnam Veterans of America:

Therefore, we would like to make you aware that the
proposed modification of the rules would give employers the
ability to prohibit veterans from receiving overtime pay
based on the training they received in the military. . . .
The proposed rule changes will make these veterans and their
families unfairly economically vulnerable in comparison with
their non-veteran peers.

Let me repeat that:

The proposed rule changes will make these veterans and
their families unfairly economically vulnerable in comparison
with their non-veteran peers. We hope you will agree that the
men and women who have served our Nation so well in military
service should not be penalized for having served.

That is Thomas Corey, national president, Vietnam Veterans of
America. I think that is the crux of it. You could have two people,
both skilled in a certain area, let's say aerospace or whatever it
might be. One got his training in the military and one got his training
in some other way outside the military. So the person outside the
military would be covered under overtime. The person who served in the
military would not be covered by overtime.
I wish someone would make some sense out of that. It is just a slap
in the face to the men and women who served in the military and were
told: Be all you can be, get specialized training in the military, but
what they are not telling them is once you do that, they are going to
take away your right to overtime pay once you get out of the military.
This is outrageous--outrageous not just to our veterans but to most
Americans. Veterans organizations are deeply disturbed by this, not
just the Vietnam veterans but all veterans organizations.
Picture this: The Commander in Chief has mobilized thousand of
reservists and National Guard troops from Iowa and from across America.
They left their regular jobs as police officers, firefighters, nurses,
clerical workers, on and on, and are deployed in Iraq for a year or
more. But if the administration has its way, when these troops come
back home from Iraq or wherever to resume their civilian jobs, they are
going to find that if they received specialized training in the
military, they have been stripped of their right to time-and-a-half
overtime pay.

It is punishing veterans precisely because they were dedicated
soldiers who pursued specialized instruction and training while in the
military. The Department of Labor is preparing quite a welcome home
present for many of the guardsmen and reservists returning from Iraq.
It might read this way:

Dear Returning Veteran: While you were away we reclassified
your job so that you no longer qualify for time-and-a-half
overtime pay. Thank you for serving our country.

There is another group I talked about last year--and it is still true
this year--who are disproportionately harmed by the proposed new
overtime rules--women.
The fact is, women tend to dominate in retail services and sales
positions which would be particularly affected by the new rules.
Married women in America increased their working hours by nearly 40
percent from 1979 to 2000. As women have increased their time in the
paid labor market, their contribution to family income has also risen.
These contributions are especially important to lower and middle-income
families--important for housing, health care, heating bills and, of
course, for sending kids to school.
Yet now the administration's new rules would take away overtime
protections from millions of American women. Women in the paid
workforce would be forced to work longer hours for less pay and, of
course, this means more time away from families, more childcare
expenses with no additional compensation. Not surprising, prominent
women's groups are adamantly opposed to the new overtime rules.
The American Association of University Women, the National
Organization of Women, the National Partnership for Women and Families,
the YWCA, and Nine to Five, and the National Association of Working
Women are all strongly supporting my amendment to stop the
administration from implementing these new overtime rules.
There is a broader context to this discussion of overtime. There is a
bigger picture. As I said, the No. 1 issue for Americans today is
economic security, and with good reason, because it is abundantly clear
that America is stuck in a jobless recovery.
Since this administration took office, nearly 3 million private
sector jobs have been lost, including one in every seven jobs in
manufacturing. George W. Bush has presided over the largest job loss of
any President since Herbert Hoover. Yet the President remains wedded to
policies that are making the problem worse. He remains wedded to
policies that are destroying jobs, driving down wages, and threatening
the economic security of the American people.
A couple of weeks ago, the White House issued its annual economic
report signed by the President explaining why we should welcome the
``offshoring'' of U.S. jobs. The President's top economic adviser
assured us that the outsourcing of high-end, white-collar jobs to Asia
is ``a plus for the economy in the long run.''
The President's economic report praises the virtues of a ``level
playing field for goods and services,'' arguing that when a good or
service is produced more cheaply abroad, it makes more sense to import
it than to make or provide it domestically. That is from the
President's report.
We have a very serious question to ask ourselves: Do we really want
American workers competing on a ``level playing field,'' head to head
with factory workers in China working for 20 cents an hour, with
software engineers in India working for $10,000 a year, going head to
head with countries that employ abusive child labor to make products?
In reality, is this not a race to the bottom, with nations competing
to slash salaries and benefits in order to win more jobs? Outsourcing
is not the only thing hurting job creation and suppressing wages. These
new overtime rules will have the same effect. Eight million workers
will be stripped of their right and their protection to overtime pay.
Of course, the employers can deny overtime pay. As I said, they
simply push their current employees to work longer hours without
compensation. This is a powerful disincentive to hire new workers. So
as with outsourcing, the idea of sending so many of these jobs
overseas, where they are paying 20 cents an hour, no health benefits,
no retirement benefits, no Social Security, no environmental
protections, killing overtime pay is the same thing. Just keep in mind
if an employer can work an employee more than 40 hours and not pay time
and a half, we can see that an employer would then say, well, why
should I hire new workers? I will just work my present workers longer.
If I can get 4 or 5 more hours a week out of each employee and not pay
time and a half overtime, that is better than hiring somebody else.
That is exactly what this proposed overtime rule is all about. It is
terrible for job creation. I do not know why this administration does
not see that. Yet in the face of facts, in the face of all of the
reports we have gotten, in the face of what Americans are saying, which
is that they want their overtime protected, the administration is
surging ahead. They are going to strip people in this country of their
right to overtime pay.
Since we have had no public hearings on it, we are not certain why
the administration is doing this. Why are they moving ahead with the
most profound change in our overtime laws since 1938? Now, I use my
words carefully. I said the ``most profound change.'' There have been
changes in overtime rules and laws since 1938,

[[Page S2079]]

since the Fair Labor Standards Act was passed, of course. Many
occupations that existed then no longer exist, and they were taken off.
I understand.
New occupations came in like computer software writers, computer
engineers, which were not around in the late 1930s, 1940s, 1950s, or
1960s. So there have been changes.
Every time we have made a change in the overtime rules, we have done
it through open hearings, through open collaboration between the
administration and Congress and labor, all working together to do what
is right for our people and our country.
So, yes, we have made a number of changes since 1938, but as far as
my research shows, this is the first time since 1938 that an
administration has made this profound a change, and it is the first
time since 1938 that the administration has proposed these changes
without having one public hearing. It is the first time since 1938 that
any administration, Republican or Democrat, has proposed changes such
as this in the overtime rules without consultation and working closely
with Congress to develop a consensus as to what has to be done.
I am left with, perhaps, some conclusions: The administration really
does not want to create a lot of new jobs; that by driving down labor
costs, perhaps we can increase corporate profitability. It allows
corporations to export cheap labor overseas with outsourcing. The
administration puts pressure on U.S. workers to accept lower wages,
less generous benefits, longer working hours. This is true of
outsourcing, and it is true of eliminating overtime.
Right now, American workers work longer than any workers in any
industrialized country in the world. We now work longer than workers in
Japan, Germany, Great Britain, and our neighbor to the north, Canada.
Guess what we are being told. Guess what our workers are being told by
this administration. That they are going to work even longer, and they
will not have any right to overtime pay.

There is more. The President refuses to extend benefits for the long-
time unemployed, and opposes any increase in the minimum wage. It has
been frozen at $5.15 an hour for years. This is not a living wage; it
is a poverty wage. It keeps downward pressure on wages all across the
spectrum.
All this means, again, is fewer jobs for U.S. citizens. It means
downward pressure on wages for all of our workers.
Something is missing. What is missing is ordinary, hard-working
Americans are not participating in this so-called economic recovery.
More and more Americans live in fear of losing their jobs, their health
benefits, and losing their retirement. The truth is, we cannot build a
sustainable recovery by exporting jobs, by driving down wages, and by
making Americans work longer hours without compensation.
Moreover, such a recovery, if it even could take place, is not
desirable. As one individual said, my time with my family in the
evenings and on the weekends is premium time. Yes, I work during the
week to make a living, but the time with my family is premium time. If
I am going to be asked to give up my premium time with my family, do I
not deserve to have premium pay, time and a half, something out of the
ordinary?
As this person said to me, I get my wages, which are ordinary, for my
ordinary working hours that I have agreed to work, but I should not get
ordinary pay for my premium time, which is the time I spend with my
family. That is why I say a recovery that means that our American
workers are going to work longer, spend more time away from their
families, and not get paid any more for it is not a desirable recovery.
A true recovery must include all working Americans. It can only be
built on a foundation of good jobs with good wages in America, not
overseas. It can only be built on a foundation that includes a minimum
wage that is a living wage, not a poverty wage. It can only be built on
a foundation that preserves American workers' rights to time and a half
overtime pay.
Shortly, I will be offering this amendment. Obviously, this FSC bill
is touted as a JOBS bill. That is all well and good. Let us have an
open and good discussion about that. We have some amendments to offer
that a number of us believe will help increase jobs in this country.
The one I will be offering will be protecting the overtime rights of
American workers. So I am hopeful we can move on to that.
On this issue, the administration ignores the pleas of the public. It
has brushed aside the clear wishes of both Houses of Congress. Last
year, we passed the amendment in the Senate to disallow the Bush
regulations on taking away overtime pay protections. The House
emphatically approved of that. Yet it was stripped out in
conference. Again, this is not acceptable. I hope we can have a strong
bipartisan vote in support of my amendment that would disallow taking
away overtime pay protection for American workers. We can save the
administration from making a terrible mistake. We can protect American
workers' time-honored right to overtime compensation, and we can
support an economic recovery that includes all Americans, a recovery
that respects and preserves the American way.

I yield the floor.
The PRESIDING OFFICER (Mr. Sununu). The Senator from New Mexico.

Amendment No. 2651 to Amendment No. 2647

Mr. BINGAMAN. Mr. President, I send an amendment to the desk and ask
for its immediate consideration.
The PRESIDING OFFICER. The clerk will report.
The assistant legislative clerk read as follows:

The Senator from New Mexico [Mr. Bingaman] proposes an
amendment numbered 2651 to amendment No. 2647.

Mr. BINGAMAN. I ask unanimous consent the reading of the amendment be
dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:

(Purpose: To expand the research credit)

At the end of the amendment add the following:

SEC. __. EXPANSION OF RESEARCH CREDIT.

(a) Credit for Expenses Attributable to Certain
Collaborative Research Consortia.--
(1) In general.--Section 41(a) (relating to credit for
increasing research activities) is amended by striking
``and'' at the end of paragraph (1), by striking the period
at the end of paragraph (2) and inserting ``, and'', and by
adding at the end the following new paragraph:
``(3) 20 percent of the amounts paid or incurred by the
taxpayer in carrying on any trade or business of the taxpayer
during the taxable year (including as contributions) to a
research consortium.''.
(2) Research consortium defined.--Section 41(f) (relating
to special rules) is amended by adding at the end the
following new paragraph:
``(6) Research consortium.--
``(A) In general.--The term `research consortium' means any
organization--
``(i) which is--

``(I) described in section 501(c)(3) and is exempt from tax
under section 501(a) and is organized and operated primarily
to conduct energy research, or
``(II) organized and operated primarily to conduct research
in the public interest (within the meaning of section
501(c)(3)),

``(ii) which is not a private foundation,
``(iii) to which at least 5 unrelated persons paid or
incurred during the calendar year in which the taxable year
of the organization begins amounts (including as
contributions) to such organization for research, and
``(iv) to which no single person paid or incurred
(including as contributions) during such calendar year an
amount equal to more than 50 percent of the total amounts
received by such organization during such calendar year for
research.
``(B) Treatment of persons.--All persons treated as a
single employer under subsection (a) or (b) of section 52
shall be treated as related persons for purposes of
subparagraph (A)(iii) and as a single person for purposes of
subparagraph (A)(iv).''.
(3) Conforming amendment.--Section 41(b)(3)(C) is amended
by inserting ``(other than a research consortium)'' after
``organization''.
(b) Repeal of Limitation on Contract Research Expenses Paid
to Small Businesses, Universities, and Federal
Laboratories.--Section 41(b)(3) (relating to contract
research expenses) is amended by adding at the end the
following new subparagraph:
``(D) Amounts paid to eligible small businesses,
universities, and federal laboratories.--
``(i) In general.--In the case of amounts paid by the
taxpayer to--

``(I) an eligible small business,
``(II) an institution of higher education (as defined in
section 3304(f)), or
``(III) an organization which is a Federal laboratory,

for qualified research which is energy research, subparagraph
(A) shall be applied by substituting `100 percent' for `65
percent'.
``(ii) Eligible small business.--For purposes of this
subparagraph, the term `eligible

[[Page S2080]]

small business' means a small business with respect to which
the taxpayer does not own (within the meaning of section 318)
50 percent or more of--

``(I) in the case of a corporation, the outstanding stock
of the corporation (either by vote or value), and
``(II) in the case of a small business which is not a
corporation, the capital and profits interests of the small
business.

``(iii) Small business.--For purposes of this
subparagraph--

``(I) In general.--The term `small business' means, with
respect to any calendar year, any person if the annual
average number of employees employed by such person during
either of the 2 preceding calendar years was 500 or fewer.
For purposes of the preceding sentence, a preceding calendar
year may be taken into account only if the person was in
existence throughout the year.
``(II) Startups, controlled groups, and predecessors.--
Rules similar to the rules of subparagraphs (B) and (D) of
section 220(c)(4) shall apply for purposes of this clause.

``(iv) Federal laboratory.--For purposes of this
subparagraph, the term `Federal laboratory' has the meaning
given such term by section 4(6) of the Stevenson-Wydler
Technology Innovation Act of 1980 (15 U.S.C. 3703(6)), as in
effect on the date of the enactment of the Energy Tax
Incentives Act of 2003.''.
(c) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred after December 31,
2004.

Mr. BINGAMAN. Mr. President, I thank my colleagues, Senator Hatch and
Senator Murray, for their leadership on extending and strengthening the
research and development, R&D tax credit. The ability of our Nation to
remain a world leader in technology and innovation is directly related
to the investment we make in research and development. The R&D tax
credit is an important component of this strategy as it creates an
incentive for private companies to invest in research they might not
otherwise have invested in but for that tax credit. This is an
efficient way to accomplish a goal in our society that is increasing
funding for research.
Senator Domenici and I have been working here for the last several
years to make some changes in the R&D tax credit law. The amendment I
have sent to the desk incorporates those changes we have worked on. The
amendment is based on legislation we filed in each of the last several
Congresses, most recently S. 515 in the 107th Congress. This amendment
addresses two weaknesses in the current R&D tax credit.
The first part of the amendment provides participants in a research
consortium with a flat 20-percent research credit. A consortium is
defined as a group of five or more unrelated companies which are
working together on a specific type of mutually beneficial research.
Under current law, these companies are unable to take advantage of the
full R&D tax credit. That does not make good sense. We should be
encouraging companies to work together to share the costs of research
instead of requiring that each of them bear the full capital
expenditure to which they would be entitled in order to get the
research tax credit. The amendment I have sent to the desk which
Senator Domenici and I have been working on would correct this and
would encourage this type of private research teaming.
The second part of the amendment would be to get rid of a restriction
that allows companies to only consider 65 percent of their research
expenses for purposes of calculating their tax credit when the funds
are paid to an outside party such as a Federal laboratory or university
or a small business.
Again, as with consortiums, this provision makes no sense as it
exists in current law. In many if not most cases it is far more
efficient and economical for a company to have their research done at a
facility that is already equipped to do this type of experimentation
and development. We ought to be encouraging businesses to utilize these
resources instead of discouraging that use. For this reason, the
amendment would allow a company to consider 100 percent of all of their
expenses when contracting with a lab or university or small business to
handle their research projects.
The amendment would come into effect at the end of the year. It would
continue for as long as the R&D provisions are in effect which, under
the Hatch-Murray amendment which is what this proposal would amend, is
the end of 2005.
I look forward to working with my colleagues, Senators Hatch and
Murray, on their R&D amendment. I very much appreciate their support
for these small changes Senator Domenici and I would like to see made
in this bill.
I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada.
Mr. REID. Mr. President, I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
Mr. ALEXANDER. Mr. President, I ask unanimous consent the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Is there objection?
Mr. REID. I object.
The PRESIDING OFFICER. Objection is heard.
Mr. ENSIGN. Mr. President, I ask unanimous consent the order for the
quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. ENSIGN. I ask unanimous consent the time until 3:30 be equally
divided in the usual form and that if the Bingaman amendment has not
been previously disposed of, the Senate would then vote in relation to
the Bingaman second-degree, to be followed immediately by a vote in
relation to the Hatch first-degree, as amended if amended, provided
further no additional second degrees be in order prior to the vote.
The PRESIDING OFFICER. Is there objection?
Mr. REID. No objection.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. ENSIGN. Mr. President, I understand the Senator from Tennessee is
going to seek recognition. I ask unanimous consent that following the
Senator from Tennessee, I be recognized to speak on the R&D amendment.
Mr. REID. Reserving the right to object, we have no problem with that
except we now have an hour and 10 minutes. We don't want those two
Senators to use the entire 70 minutes so we should have some idea how
long they are going to speak.
Mr. ENSIGN. For myself, I would only need 5 minutes.
Senator Alexander?
Mr. REID. I think it would be appropriate if my friends agree the
time be equally divided between now and 3:30 between the proponents and
opponents of the measure.
The PRESIDING OFFICER. Under the order, the time is equally divided.
Mr. ENSIGN. I ask to be recognized after Senator Alexander.
The PRESIDING OFFICER. Without objection, it is so ordered. Who
yields time?
Mr. ENSIGN. I yield to Senator Alexander.
Mr. ALEXANDER. Mr. President, my intention was to ask unanimous
consent to speak as in morning business for 7 or 8 minutes, which may
not be appropriate at this moment.
The PRESIDING OFFICER. Under controlled time that is the Senator's
right. The Senator is recognized.
Mr. ALEXANDER. I ask unanimous consent to speak as in morning
business for up to 7 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
(The remarks of Mr. Alexander are printed in today's Record under
``Morning Business.'')
Mr. ALEXANDER. I thank the Chair. I yield the floor.
The PRESIDING OFFICER. The Senator from Nevada is recognized.
Mr. ENSIGN. Mr. President, I want to speak on the R&D tax credit that
is in this bill--the proposal to extend that tax credit which is
scheduled to expire. I want to talk about some of the benefits.
This is a tax credit that has been supported by both sides of the
aisle and by both bodies. There are many benefits to keeping this R&D
tax credit as part of our Tax Code; first of all, the industries that
benefit from this tax credit. I am the chairman of the Republican High-
Tech Task Force in the Senate, and I hear about this issue all the time
from very important parts of our economy and how important it is to the
creation of jobs.
The industries that benefit from this include--it is not limited to
the aerospace industry--the agriculture industry, biotechnology,
chemical industry, electronic, energy, information technology,
manufacturing, medical technology, pharmaceuticals, software and
telecommunications, as well as others.

[[Page S2081]]

It is not just big business that benefits from this R&D tax credit;
it is also many small businesses. The companies that perform
significant amounts of R&D perform that research and development in the
United States. They pay very good wages to the people who do the
research and development.
This tax credit should be made permanent in the long run. That is my
goal--to someday make this tax credit permanent. We keep extending it.
I think it has been extended 10 different times over the years. It was
allowed to actually lapse once, but it has never been made permanent. I
believe it should be made permanent. Unfortunately, we can't do that in
the context of what we are doing today. But we should at least make
sure that R&D tax credit is extended for the 18 months the bill calls
for.
Why is it important? New vaccines, faster Internet, and other
communications capabilities, safer transportation, enhanced energy-
efficient appliances, higher quality entertainment, better homes,
improved national security. The list of societal benefits as a result
of R&D is endless.
R&D is the lifeblood of the U.S. economy. We really should encourage
not only adoption of the extension but also eventually making permanent
this tax credit.
The revenue analysis, according to the economic benefit of the R&D
tax credit prepared by Coopers & Lybrand in 1998 says:

In the long run, $1.75 of additional tax revenue would be
generated for each dollar the Federal Government spends on
the credit, creating a win-win situation for both the
taxpayers and the government.

I will conclude with this: We should do the right thing for the
economy and allow companies some level of predictability. We keep
telling them we are going to extend it, we are going to extend it. But,
frankly, it is hard when research and development is usually planned
long term. It is hard to do that when we keep coming up to the deadline
and then finally extending the tax credit.
I encourage us to do what we are doing today--extending it for 18
months but also be looking for ways to make this R&D tax credit
permanent.
I yield the floor.
Mr. BAUCUS. Mr. President, I yield myself about 10 minutes.
The PRESIDING OFFICER. The Senator is recognized for 10 minutes.
Mr. BAUCUS. Mr. President, I ask my friend from Wyoming how much time
he has. It is my understanding that there was an agreement before I
came to the floor.
The PRESIDING OFFICER. Under the previous order, the time until 3:30
is equally divided between the majority and minority leader.
Mr. BAUCUS. Mr. President, I will be very brief.
I am very happy to be supporting the pending amendment. This is an
amendment that the author of the amendment, Senator Hatch, and I have
introduced many times over many years. I have been a cosponsor of this
amendment for years. Senator Hatch has been a cosponsor of this
amendment for years. It is critically important that we finally get a
major research and development tax stimulus enacted into law. This
provision has been in law for various years, but it has always been
extended--on and off again. It has been a yo-yo tax provision--a yo-yo
incentive. Sometimes companies get it, sometimes they don't. Sometimes
we enact it--all the way back to the expiration previous times--
sometimes we don't. It is very irresponsible, in my judgment, for this
Congress not to give permanent research and development tax credit to
American companies. Other countries do. The Government of Canada, for
example, has a R&D tax credit which is much more generous than the one
we give to American companies.
There are other countries that also have stimulus incentives to
research and development--more generous than we have in our country.
I urge adoption of this amendment.
I also agree with my good friend from Nevada. This provision should
be permanently extended. It makes no sense not to be permanently
extended. It should be a permanent fixture in the law.
I say that because the stakes are getting so high. We are losing jobs
to overseas companies in lots of ways.
One way to create jobs in America is to have a very aggressive
research and development tax credit for research and development in
America. It is clear that jobs tend to be where the research is. The
more research we have in America, the more likely it is we will have
more jobs in America. It will also help to maintain jobs.
We do not want jobs to go overseas. This will help us maintain jobs
in America. We should not erect barriers to our companies going
overseas. We should not stick our heads in the sand. That does not
work. We are facing an immense challenge, and one good way is to pass
this amendment.
In addition to passing the underlying bill, this JOBS bill before the
Senate is not going to be the silver bullet many would like but it will
help significantly.
With respect to the R&D credit, 62 percent of total industry research
and development is performed in manufacturing industries. That includes
computer and electronic products, transportation, equipment, and
chemicals. It is disproportionately helpful to manufacturing jobs. We
clearly want more manufacturing jobs in this country. Manufacturing
jobs are important to the entire economy.
The multiplier effect in manufacturing jobs is extremely high. For
every 16 million manufacturing jobs in this country, another 9 million
are created in retail, wholesale, finance, and other sectors. That is
not as true in other sectors. Most of the R&D effect is manufacturing,
and manufacturing has a very high multiplier effect, which is all the
more reason to get this passed.
Workers employed in manufacturing plants with more technologies also
earn 63 percent more than workers in plants using lower level
technologies. It is a question not only of the number of jobs but the
wages the jobs pay, the amount of income those workers will receive.
I can go on at great length as to why this is so important. I am not
going to expand anymore on it because I think Senators realize how
important it is. I expect this to pass by a very large margin, and well
it should.
Once we pass this amendment, it is incumbent upon us to start looking
for other ways we can help give stimulus and help American companies
keep jobs in America. I am certainly going to be a part of this. It is
something we desperately have to do.
What is the remaining time?
The PRESIDING OFFICER. The majority has 27 minutes remaining and the
minority has 30 minutes remaining.
Mr. BAUCUS. I yield the floor.
The PRESIDING OFFICER. The Senator from Wyoming.
Mr. ENZI. I will talk about an amendment that has not been laid down.
There were comments about overtime a while ago, and I want people to
know the rest of the story.
The bill we are on has the catchy name of FSC/ETI. What we are trying
to do is comply with some World Trade Organization requirements that
allow penalties to be put on our exports overseas and agricultural
products are a big one. They always get targeted when this sort of
thing happens. We need to correct our law so we are not being
penalized, so we do not eliminate business that the United States can
have.
Penalties went into effect on March 1 and go up 1 percent per month
on U.S. businesses if we do not change the law. We are trying to change
the law. It needs to be done quickly. It should be done pretty cleanly.
It obviously is not going to be.
We keep talking about jobs, but our actions do not match our words. I
point out one very important jobs program we have that affects
Americans who want to improve their skills and get a better job. We
have the Workforce Investment Act, and that has the potential each and
every year to retrain 900,000 people so they have the skills and
talents to handle the jobs available, the well-paying jobs available in
this country that we are having to fill from overseas.
Do you know what has happened to that bill? Let me give Members a
brief history. We passed it out of the Health, Education, Labor, and
Pensions Committee unanimously. How often do you think that happens in
that committee? It can be a very contentious committee. It passed out
of the committee unanimously. What happened in the Senate? We passed it
in the Senate by

[[Page S2082]]

unanimous consent. That means not one person in the Senate wanted to
amend the bill; not one person in the Senate wanted to vote against the
bill. It was unanimous. That is as bipartisan as we can possibly get.
Where is that bill now? We cannot appoint a conference committee.
That is the committee made up of Republicans and Democrats who would
meet with Republicans and Democrats from the House to work out
differences between what they passed and what we passed. We cannot have
a conference committee to do that.
That is 900,000 jobs in this country that are being stalled out;
900,000 opportunities we are not going to give to Americans. Instead,
we are going to talk about a whole bunch of amendments to this bill
that are going to slow down this bill and increase penalties on
American businesses trying to ship goods overseas. In fact, all
American businesses.
Keep that in mind. If we want to take care of jobs in this country
and make sure jobs stay in this country, we would get a conference
committee appointed on the Workforce Investment Act and get that thing
resolved and get people trained and to work.
One of the examples of what will happen on this is the overtime
amendment that we have been promised. I could wait until it actually
came up, but there were some comments made and there is a need to
respond on the 40 minutes we have already heard about the overtime
amendment.
It is time to strip the rhetoric from the reality and consider who is
really helped and hurt by this amendment which prohibits the Department
of Labor from updating the rules exempting white-collar employees from
overtime pay. It is not all that simple.

When I am back in Wyoming, I like to hold town meetings to find out
what is on the minds of my constituents. At each town meeting, there is
usually someone in attendance who is quite concerned about government
regulations. I am often told to rein big government in, keep the rules
and regulations simple, keep them current and responsive, and make sure
they make sense in today's ever changing workplace.
Most of the people I talk to are small businessmen, but that is most
of business in this country. They are being killed by the rules and
regulations, and, in some cases, by trial attorneys.
Today we are reviewing an amendment that takes the opposite approach.
Instead of keeping it simple and current, it will prohibit the
Secretary of Labor from updating the rules exempting white-collar
employees from the Fair Labor Standards Act and overtime requirement in
some cases, an attempt to reject the new, turn back the clock, and look
to yesterday for the answer to tomorrow's problems. It is an approach
that is doomed to failure before it is even applied. I am opposed to
the amendment.
There is no question that the workplace has dramatically changed
during the last half century. The regulations governing white-collar
exemptions remain substantially the same as they were 50 years ago. The
existing rules take us back to the time when workers held titles such
as straw boss, keypunch operator, legman, and other occupations that no
longer exist today.
Our economy has evolved. New occupations have emerged that were not
even contemplated when the regulations were written. A 1999 study by
the General Accounting Office recommended that the Department of Labor:
Comprehensively review current regulations and restructure white-collar
exemptions to better accommodate today's workplace and to anticipate
future workplace trends. That is precisely what the Department of
Labor's proposal to update and clarify the white-collar regulations
will do.
While the Department's proposal will update and clarify, this
amendment will do neither. Instead, it will set the clock back to 1954
and try to force the square peg of the 21st century jobs into the round
hole of the workplace of 50 years ago.
I am a former shoe salesman and I know how to tell when something
will not fit. This just will not fit. It is like trying to force a size
10 foot into a size 6 shoe. It will not fit no matter how hard you try.
Through the course of the debate on overtime over the next several
days, we will hear a lot of numbers. Some of them are statistics and we
know how statistics work. I am an accountant so I will try to give some
good numbers and hope you will put up with me with the numbers, but
there are numbers you need to know.
Let us be clear about what this amendment will do. The amendment will
undermine the Department of Labor's efforts to extend overtime
protection to 1.3 million low-wage workers. Under the current rules,
only those rare workers earning less than $8,060 a year are protected
for overtime pay. That is how old this rule is. You are protected if
you are making less than $8,060 a year. Now the administration's
proposed rule will raise that threshold to $22,100 a year.

Doesn't that sound more common sense in today's market? Doesn't that
sound like a number that covers more people? If the old rule covered
those making less than $8,060, a new rule, covering those making less
than $22,100, would cover more people.
As a result, 20 percent of the lowest paid workers would be
guaranteed overtime pay. The overtime provisions of the Fair Labor
Standards Act were originally intended to protect lower income workers.
The proposed rules will provide lower income workers with the
protection they deserve.
That also makes it easier for businesses to know when they are
complying with the law. And that is important, particularly for small
businesses. They need to know. They should not have a bunch of
different criteria that they need a special accountant or attorney to
interpret for them so they can tell whether they are violating the law.
This rule, the one proposed--proposed; it is not finalized yet--by
the Department of Labor will make it easier for businesses to know when
they are complying.
By undermining the administration's efforts to better protect lower
income workers, who will this amendment protect? The supporters of the
amendment--the amendment that is going to be laid down, I guess--claim
that an estimated 8 million workers will become ineligible for overtime
under the proposed rules. However, this estimate is based on a study by
the Economic Policy Institute, and it is riddled with errors. For
example, the study includes in its calculations at least 18 percent of
the workforce who work 35 hours or less a week. These part-time workers
do not work more than 40 hours a week and, therefore, they do not
receive overtime in the first place.
The study also claims the proposed rule will deny overtime pay to
white-collar employees earning more than $65,000 a year. However, not
all the employees earning over $65,000 are exempt under the proposed
rules--only those performing office or nonmanual work and one or more
exempt duties. This means workers, such as police officers,
firefighters, plumbers, Teamsters, carpenters, and electricians will
not--will not--lose their overtime pay. The Department of Labor
acknowledges the possibility that 644,000 highly educated workers
making over $65,000 a year might lose their overtime. Mr. President,
1.3 million get picked up on the bottom end; 644,000 drop out on the
top.
Supporters of this amendment claim that the proposed rules will strip
overtime pay for first responders and nurses. If we look behind the
rhetoric, we find there will be virtually no change in status for first
responders and nurses under the Department of Labor proposal. Under
both the current and proposed regulations, only registered nurses are
exempt from overtime pay.
Supporters of this amendment claim that military personnel and
veterans will lose their overtime pay under the proposed rules.
However, military personnel and veterans are not affected by the
proposed rules by virtue of their military status or training. Nothing
in the current or proposed regulation makes any mention of veteran
status.
Who will this amendment protect, if not low-income workers, first
responders, nurses, veterans, or millions of other working Americans?
The antiquated and confusing white-collar exemptions have created a
windfall--a windfall--for trial lawyers. Ambiguities and outdated terms
have generated significant confusion regarding which employees are
exempt from the overtime requirements. The confusion

[[Page S2083]]

has generated significant litigation and overtime pay awards for highly
paid, white-collar employees. Wage and hour cases now exceed
discrimination suits as the leading type of employment law class
action. Let me repeat that again. Wage and hour cases now exceed
discrimination suits as the leading type of employment law class
action.

This amendment--the amendment that Senator Harkin is going to put
in--will not preserve overtime for millions of working Americans. The
amendment will not help employers and employees clearly and fairly
determine who is entitled to overtime. The only clear winners from this
amendment will be the trial lawyers who will continue to benefit from
the current state of confusion. We are spending taxpayers' dollars
sorting through what could be solved with clarity.
I stress that these are proposed rules--proposed rules. The
Department of Labor has received, and is currently reviewing, around
80,000 comments to their proposed regulations. We should allow the
regulatory process to continue and give the Department a chance to
complete its review of the proposed rules. Once the review is
completed, the Department will align the white-collar regulations with
the realities of the 21st century workplace, the intent of the Fair
Labor Standards Act, and--this is most important--what they have
learned from the comments.
They have 80,000 comments. I expect them to read those. I expect them
to react to those, and make sure that it becomes a part of the rule.
Now, supporters of this amendment are, in effect, denying the public
a voice in the regulatory process. This amendment will deny the
Department of Labor an opportunity to respond to public comments. I
happen to believe that public comments play a critical role in the
regulatory process.
I will tell you, I go back to Wyoming most weekends. I go out on
Friday, travel to a different part of the State, and come back on
Sunday. It is the most valuable thing I do around here, and that is
because I get to talk to the person who has the problem firsthand. Do
you know what? They are working on that all day, every day. And the
advantage is they have usually thought of some kind of a solution. Now,
when I bring it back, quite often, the comment is: It is too simple. It
will never work. Where did you come up with a crazy idea like that? And
I have to explain: From the guy with the problem who works on this
every day and knows the commonsense approach to solving that problem.
Those are the people writing in with comments. Those are the people
who are saying: This is where it is right. This is where it is wrong.
Fix it where it is wrong. Leave it in the new context where it is
right. That is how the process is supposed to work.
We want the Department of Labor to look at those comments and
respond--respond by changing the rule, or respond by letting the people
know how that will not work or how it is covered a different way. We
have to have that process work.
Now, I hope if there are substantial changes it gets put out one more
time for comments. There is not anything around that says they cannot
reissue them for comment. The public comments are what help us get it
right. We do not do these jobs, so we do not know all the right
answers. But the people out there working on them do. The answers can
be made right.
Now, if the final rule has gone astray, after all of this process, we
can use the Congressional Review Act to reverse it. And we have done
that before. That is where we say: You did not pay attention to the
process. You did not pay attention to the comments. We are going to
jerk you back to reality. But now is not the time or the vehicle for
making that determination.
I hope my colleague will not put down the amendment, but if he does,
I hope my other colleagues will support me in allowing the Department
to move forward with the review and response that they need to be
doing. They do need to be paying attention to all of this debate. But
we do need to bring that rule into the current century and make sure
people are working at jobs and the rules are understandable,
particularly with small businesses that are trying to provide a
service, not figure out Government regulations.
I yield the floor and reserve the remainder of my time.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, I ask unanimous consent to yield myself such
time as I may consume from the time under the control of the Democratic
side.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. DODD. Let me say to those who may be listening in the offices of
Members who want to come over and wish to be heard on this matter, I
will be prepared to yield some time. I am here to discuss an amendment
that will come up after 3:30. I thought I would move things along while
we have this dead time, while we are waiting for this vote to occur, to
discuss upcoming amendments and encourage those who may want to
participate in some of those debates to come to the floor and share
some of their thoughts.
I will be offering at the appropriate time, sometime after 3:30, an
amendment that deals with the outsourcing of jobs. I note the presence
of the Presiding Officer who comes from the same region of the country
I do. We have all been feeling it in our States, not just in the
Northeast, but across the country, the tremendous pinch that is
occurring as a result of job loss and the growing number of jobs that
are being outsourced. I am told by those who cover these issues that
the coalition opposed to any legislative efforts to stop outsourcing is
coming up with some new language. They don't like the word,
``outsourcing,'' so they are calling it worldwide sourcing, to take
some of the sting out of the language. They may succeed in taking the
sting out of the language by changing the vocabulary, but you cannot
take the sting out of finding out that your job has been lost and that
others offshore are taking those jobs because it enhances the bottom
line in a quarterly report someplace. We need to address that.

I fully understand that outsourcing to some degree is going to go on.
I expect that to be the case. But I don't think the Federal Government
ought to be subsidizing that effort. I am one who has believed in and
supported free and fair trade agreements over the years. I take great
pride in that. In a global economy, you have to do that. But I also
understand if we don't have the services or provide the manufactured
goods with which to trade globally because we have given up a
significant part of our manufacturing base or given up a critical area
of technology in the service areas, for instance, we are necessarily
going to be great competitors in a global marketplace in the 21st
century.
You may say we are nowhere near that yet. The rest of the world
doesn't even come close to producing the quality and high value goods
we do in the United States. They can't come close to providing the high
technology we do.
I think we have all learned over the last number of years that
technology and productivity is highly portable, and it is moving at
warp speed. What was true a year ago, 5 years ago, certainly 10 years
ago, is no longer the case. I suspect this rate of speed of change is
going to continue to grow.
At this particular juncture, I think it is important that we speak to
this issue and that we try to find some balance on how we maintain our
global leadership role, continue to provide opportunities for American
workers, while simultaneously not allowing the exportation of jobs
overseas.
I was terribly disheartened to read a report, the Economic Report of
the President, February 2004, just last month, this publication that
comes out. It is designed to give an overall economic report of the
Nation, with various suggestions and ideas. I am not making up these
quotes from some news article or some demagogue or pundit out there
when talking about these issues. These are actual conclusions reached
by the top economic advisers to the President of the United States when
it comes to the issue of manufacturing and outsourcing.
First on outsourcing, chapter 12, on page 229 of this economic report
of President Bush and his economic team, it says:

[[Page S2084]]

When a good or a service is produced more cheaply abroad,
it makes more sense to import it than to make or provide it
domestically.

I would suggest that is a conclusion with which some economists may
agree. Some have drawn the conclusion that that is inherently a far
better idea, just thinking in terms of quarters or yearly reports, I
suppose, and the bottom line. That may be OK. But if you are worried
about generational change, if you are worried about trying to establish
a bedrock of job opportunities, stability, and security in the 21st
century, then it absolutely makes no sense to export that job rather
than to provide it domestically.
I note in this morning's Wall Street Journal--so you don't think
these ideas are merely being spouted by a Democrat in disagreement with
the President's economic report--a March 3, 2004, article, ``Lesson in
India.'' I ask unanimous consent to print the full article in the
Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From the Wall Street Journal, Mar. 3, 2004]

Lesson in India: Not Every Job Translates Overseas

(By Scott Thurm)

When sales of their security software slowed in 2001,
executives at ValiCert Inc. began laying off engineer in
Silicon Valley to hire replacements in India for $7,000 a
year.
ValiCert expected to save millions annually while cranking
out new software for banks, insurers and government agencies.
Senior Vice President David Jevans recalls optimistic
predictions that the company would ``cut the budget by half
here and hire twice as many people there.'' Colleagues would
swap work across the globe every 12 hours, helping ValiCert
``put more people on it and get it done sooner,'' he says.
The reality was different. The Indian engineers, who knew
little about ValiCert's software or how it was used, omitted
features Americans considered intuitive. U.S. programmers,
accustomed to quick chats over cubicle walls, spent months
writing detailed instructions for overseas assignments,
delaying new products. Fear and distrust thrived as
ValiCert's finances deteriorated, and co-workers, 14 time
zones apart, traded curt e-mails. In the fall of 2002,
executives brought back to the U.S. a key project that had
been assigned to India, irritating some Indian employees.
``At times, we were thinking, `What have we done here?' ''
recalls John Vigouroux, who joined ValiCert in July 2002 and
became chief executive three months later.
Shifting work to India eventually did help cut ValiCert's
engineering costs by two-thirds, keeping the company and its
major products alive--and saving 65 positions which remained
in the U.S. But not before ValiCert experienced a harrowing
period of instability and doubt, and only after its
executives significantly refined the company's global
division of labor.
The successful formula that emerged was to assign the India
team bigger projects, rather than tasks requiring continual
interaction with U.S. counterparts. The crucial jobs of
crafting new products and features stayed in Silicon Valley.
In the end, exporting some jobs ultimately led to adding a
small but important number of new, higher-level positions in
the U.S.
In F2003, ValiCert agreed to be acquired by Tumbleweed
Communications Corp., a maker of antispam software with its
own offshore operation in Bulgaria. Today, the combined
Tumbleweed is growing, and again hiring software architects
in Silicon Valley with six-figure salaries, as well as
engineers overseas. Without India, Mr. Vigouroux says, ``I
don't know if we'd be around today.''
ValiCert's experience offers important insights into the
debate over the movement of service jobs to lower-cost
countries, such as India. Such shifts can save companies
money and hurt U.S. workers. But the process is difficult,
and the savings typically aren't as great as a simple wage
comparison suggests. Some jobs cannot easily or profitable be
exported, and trying to do so can risk a customer backlash:
In recent months, Dell Inc. and Lehman Brothers Holdings
Inc., for example, moved several dozen call-center and help-
desk jobs back to the U.S., after employee and customer
complaints.
Founded in 1996, ValiCert specializes in software to
securely exchange information over the Internet. Banks use
ValiCert's software to safeguard electronic funds transfers,
health insurers to protect patient medical records. Although
still unprofitable, ValiCert conducted an initial public
offering in July 2000, in the dying embers of the dot-com
boom. In two months, the stock doubled to $25.25.
In 2001, however, sales growth slowed, as corporate
customers reduced technology purchases. ValiCert had
projected that it would break even with quarterly revenue of
$18 million, according to Srinivasan ``Chini'' Krishnan,
founder and then-chairman. Quarterly expenses had grown to
$14 million, but revenue was stalled at less than half that
figure. Executives began considering shifting work to India.
The ``motivation was pure survival,'' says Mr. Krishnan, who
left the company after the Tumbleweed merger.
India was a natural choice because of its large pool of
software engineers. Moreover, both Mr. Krishnan and
ValiCert's then-head of engineering grew up in India and were
familiar with large tech-outsourcing firms.
Some, including Mr. Jevans, harbored doubts. The Apple
Computer Inc. veteran says he preferred ``small teams of
awesome people'' working closely together. Nonetheless, that
summer, ValiCert hired Infosys Technologies Ltd., an Indian
specialist in contract software-programming, to supply about
15 people in India to review software for bugs, and to update
two older products.
With no manager in India, ValiCert employees in the U.S.
managed the Infosys workers directly, often late at night or
early in the morning because of the time difference. ValiCert
also frequently changed the tasks assigned to Infosys,
prompting Infosys to shuffle the employees and frustrating
ValiCert's efforts to build a team there.
Within a few months, ValiCert abandoned Infosys and created
its own Indian subsidiary, with as many as 60 employees. Most
employees would be paid less than $10,000 a year. Even after
accounting for benefits, office operating costs and
communications links back to the U.S., ValiCert estimated the
annual cost of an Indian worker at roughly $30,000. That's
about half what ValiCert was paying Infosys per worker, and
less than one-sixth of the $200,000 comparable annual cost in
Silicon Valley.
To run the new office in India, ValiCert hired Sridhar
Vutukuri, an outspoken 38-year-old engineer who had headed a
similar operation for another Silicon Valley start-up. He set
up shop in January 2002 in a ground-floor office in bustling
Bangalore, the tech hub of southern India. The office looked
much like ValiCert's California home, except for the smaller
cubicles and Indian designs on the partitions. There were no
savings on the rent. At $1 a square foot, it matched what
ValiCert paid for its Mountain View, Calif., home offices,
amid a Silicon Valley office glut.
Misunderstandings started right away. U.S. executives
wanted programmers with eight to 10 years of experience,
typical of ValiCert's U.S. employees. But such ``career
programmers'' are rare in India, where the average age of
engineers is 26. Most seek management jobs after four or five
years. Expertise is security technology, key to ValiCert's
products, was even rarer.
By contrast, Mr. Vutukuri quickly assembled a group to test
ValiCert's software for bugs, tapping a large pool of Indian
engineers that had long performed this mundane work.
But the Indian manager heading that group ran into
resistance. It was ValiCert's first use of code-checkers who
didn't report to the same managers who wrote the programs.
Those U.S. managers fumed when the team in India recommended
in June 2002 delaying a new product's release because it had
too many bugs.
By midsummer, when Mr. Vutukuri had enough programmers for
ValiCert to begin sending bigger assignments to India, U.S.
managers quickly overwhelmed the India team by sending a
half-dozen projects at once.
Accustomed to working closely with veteran engineers
familiar with ValiCert's products, the U.S. managers offered
only vague outlines for each assignment. The less-experienced
Indian engineers didn't include elements in the programs that
were considered standard among U.S. customers. U.S.
programmers rewrote the software, delaying its release by
months.
In India, engineer grew frustrated with long silences,
punctuated by rejection. Suresh Marur, the head of one
programming team, worked on five projects during 2002. All
were either cancelled for delayed. Programmers who had worked
around the clock for days on one project quit for new jobs in
Bangalore's vibrant market. Of nine people on Mr. Marur's
team in mid-2002, only three still work for ValiCert. ``The
first time people understand,'' he says. ``The second time
people understand. The third time it gets to be more of a
problem.''
In the U.S., executives lurched from crisis to crisis, as
ValiCert's revenue dipped further. Each quarter brought more
layoffs. By year end, the California office, which once
employed 75 engineers, was reduced to 17; the India office,
meanwhile, swelled to 45. Engineers ``felt the sword of
Damocles was swinging above their cube,'' recalls John
Thielens, a product manager.
Executives knew they could save more money by exporting
more jobs. But they were developing a keener sense of how
critical it was to keep core managers in the U.S. who knew
ValiCert, its products, and how they were used by customers.
``Even if you could find someone'' with the right skills in
India, says Mr. Krishnan, the ValiCert founder, ``it wouldn't
make business sense to move the job.''
Frustrations came to a head in September 2002, when a
prospective customer discovered problems with the log-on
feature of a ValiCert program. The anticipated purchase was
delayed, causing ValiCert to miss third-quarter financial
targets. The India team had recently modified the program,
and the glitch prompted U.S. managers to question ValiCert's
entire offshore strategy.
Relations had long been strained between the U.S. and
Indian product teams. John Hines, the Netscape Communications
Corp. veteran who headed the tight-knit U.S. product team,
thrives on quick responses to customer requests. As his team
shrank to six

[[Page S2085]]

engineers from 20, Mr. Hines was assigned three engineers in
India. But he viewed the Indians' inexperience and the
communication delays, as more a hindrance than a help.
``Things we could do in two days would take a week,'' he
says.
Mr. Vigouroux, who became CEO in October 2002, admits to a
touch of ``panic'' at this point. ValiCert's cash was running
low. ``We didn't have a lot of time,'' he says. He conferred
with Mr. Hines, who said he wanted to be rid of India, even
if it meant a smaller team. Mr. Vigouroux agreed to hire one
engineer in California. When he learned of the decision, Mr.
Vutukuri says he felt as if he had failed.
By contrast, Matt Lourie, who heads ValiCert's other big
programming group, welcomed additional help in India. He was
struggling to keep pace with customer demands for new
features on his product and new versions for different types
of computers.
At the same time, ValiCert executives were streamlining
operations and changing how they divided work between
California and India. They gave the India team entire
projects--such as creating a PC version of a program
initially built for bigger workstations--rather than small
pieces of larger projects. U.S. managers began writing more
detailed specifications for each assignment to India.
ValiCert also killed its three smallest-selling products to
focus resources on the remaining two. To improve morale in
the U.S., Mr. Vigouroux crowded the remaining employees into
one corner of the half-vacant office and installed a ship's
bell that he rang each time ValiCert recorded $10,000 in
revenue. He made sure the India employees received company-
wide e-mails, and conducted multiple sessions of monthly
employee meetings so the India group could listen at a
convenient hour. Engineering-team leaders began conferring
twice a week by telephone, shifting the time of the calls
every six months so that it's early morning in one office and
early evening in the other.
Toward the end of 2002, Mr. Vigouroux began to ring the
bell daily, as customers such as Washington Mutual Inc. and
MasterCard International Inc. purchased ValiCert's software.
By early the next year, ValiCert executives believed the
company had stabilized. Revenue increased to $3 million in
the fourth quarter of 2002, up 27% from the previous quarter.
Expenses declined, and the company neared profitability.
Investors detected a pulse, and the stock rose to 46 cents on
the Nasdaq Stock Market at the end of January, from a low of
20 cents in August 2002.
But with just $3 million in cash, ValiCert remained
precarious. Mr. Vigouroux started meeting with potential new
investors and began talks with Tumbleweed CEO Jeffrey C.
Smith.
Tumbleweed also had been through significant layoffs and
retrenchment, and in February 2003, the companies agreed to
merge. The combined Redwood City, Calif., company's 150
engineers today are almost evenly divided among California,
the Tumbleweed operation in Bulgaria, and the India office
started by ValiCert. In Bulgaria, engineers write and test
software, and scan millions of e-mails daily for traces of
spam. In India, engineers test software, fix bugs and create
new versions of one product. Last September, Tumbleweed
released its first product developed entirely in India, a
program that lets two computers communicate automatically and
securely. Mr. Marur's team had worked on it for over 18
months.
Core development for new products remains in California,
where engineers are closer to marketing teams and
Tumbleweed's customers. Since July, Mr. Lourie's U.S. team
has grown to nine engineers, from six.
Tumbleweed's fourth-quarter revenue grew 69% from a year
earlier, as its net loss shrank to $700,000, and cash
increased by $2.4 million. Shares have risen five-fold in the
past year.
Brent Haines, 36, is a new hire. He joined in October as a
$120,000-a-year software architect, charged largely with
coordinating the work of the U.S. and India teams. That often
means exchanging e-mail from home with engineers in India
between 11 p.m. and 3 a.m. California time, as Mr. Haines
reviews programming code and suggests changes. Such
collaboration requires extensive planning, he says,
``something very unnatural to people in software.''
``Nine months ago, people would have said [moving offshore]
was the biggest . . . disaster,'' says Mr. Thielens, the
product manager. ``Now we're starting to understand how we
can benefit.''

Mr. DODD. This is a story written by Scott Thurm. It is about a
company, ValiCert, that learned key roles must remain in the U.S. for
outsourcing to work. And the thrust of the article is this company
rushed, like everybody else. Forty percent of the top 1,000 companies
in America are now outsourcing their jobs, sort of like chasing into
Mexico back in the 1980s when the financial service sector thought that
was the place to be, without much thought. Once these trends begin,
they are sort of like sheep following one after another without much
thought involved.
This company ValiCert went racing off to outsource its jobs, reduced
its employment, saved a lot of money, according to the article,
expected to save millions annually while cranking out new software for
banks.
I am quoting from the article now:

When sales of their securities software slowed in 2001,
executives at ValiCert began laying off engineers in Silicon
Valley to hire replacements in India for $7,000 a year.
ValiCert expected to save millions while cranking out new
software for banks and insurers and government agencies.
Senior Vice President David Jevans recalls optimistic
predictions that the company would ``cut the budget by half
here and hire twice as many people there [in India].''
Colleagues would swap work across the globe every 12 hours,
helping ValiCert ``put more people on it and get it done
sooner,'' he says.
The reality was different. The Indian engineers, who knew
little about ValiCert's software or how it was used, omitted
features Americans considered intuitive. U.S. programmers,
accustomed to quick chats over cubicle walls, spent months
writing detailed instructions for overseas assignments,
delaying new products. Fear and distrust thrived, and
ValiCert's finances deteriorated and co-workers, 14 time
zones apart, traded curt e-mails. In the fall of 2002,
executives brought back to the U.S. a key project that had
been assigned to India, irritating some Indian employees.
``At times we were thinking, what have we done here?'' . .
.

The article goes on; I won't read all of it; the point being sort of
buyer beware. This notion that you might be hiring people for a
fraction of what it would cost to hire someone in the Silicon Valley
and it is going to allow you to make millions because of laid-off
American workers and you hire someone 8 or 10 time zones away, has
been, certainly in the case of this particular company, proven to be
untrue.
So to the point that when a good or service is produced more cheaply
abroad, it makes more sense to import it than to provide it
domestically, I would suggest that the people who wrote the economic
report for the President may want to talk to the people at ValiCert. I
don't suspect that is one company. I suspect that is true of many
companies. So it is not Biblical.
I agree that in certain cases you will make a lot more money by
firing people in the United States and getting rid of them. Why should
you worry about that? Your job is to provide a bottom line. That is
your job.
My job is a little different than your job. My job, as a Senator, is
to not only watch out for you and your company, to make sure you live
in an environment where you can make a profit, I have an obligation to
those people who work for you as well. I didn't get elected to the
Senate just to guarantee you a bottom line. My job is setting public
policy, not quarter by quarter, not just bottom line and yearly report
to yearly report, but longer than that. That is what we are supposed to
do in a Chamber such as this, to think a little longer, to worry about
this country, those who are the children of the 21st century and what
kind of a Nation are they going to inherit after you and I have left.
They are going to ask us about what we did at the beginning of the 21st
century when we saw the trend lines reaching out to cause literally
millions of people to lose their jobs.
One report indicates that in the next 10 years or so we may lose as
many as 4 million jobs, a loss of $140 billion in wages, just by
outsourcing alone.
That number may be low, according to those who have done this. I will
get to the charts in a minute and identify the source of that. I will
get to the amendment at an appropriate time and talk about the
specifics of it. I know I am going to hear that your amendment goes too
far, it is too heavyhanded, because I am going to suggest that maybe
the use of Federal tax dollars--we ought to have second thoughts about
subsidizing this rushing to go overseas to outsource. I cannot stop a
private company with its own dollars deciding to do that. You can make
it less of an attractive thing through the Tax Code or more attractive
for people to stay here, but I certainly cannot stop you from doing it.
But I ought to be able to say something about how American taxpayer
money is being used. If their money is being used to cause somebody to
lose their job and to hire someone for the attraction of the salary
someplace else, maybe taxpayers have a right to be heard on this issue.
This amendment says Federal tax, for the purpose of outsourcing--with
the exceptions of national security and other provisional

[[Page S2086]]

waivers, which I will explain--ought not to be something we are
supporting. If you want to do it as a private company, that is your
business. I don't think you ought to necessarily have a right to Uncle
Sam's taxpayer money to do that at the expense of critical jobs that
are important for this Nation's future.
I will go on in this economic report because I may not have time,
when we get to the amendment, to talk about it. I cited chapter 12,
page 229, where you have this emphatic statement that it automatically,
in every case, as I read this, makes more sense to import. They don't
talk about outsourcing. They act as if it were a good or a service. I
know economists like to suggest that is all it is. But I think people
in Ohio, Connecticut, or Pennsylvania are more than a good or a
service. They may have a family, a home mortgage they are trying to
pay, and they may have other obligations; and they worry about their
future retirement and health care. So to have the cold eye of an
economist saying a person out there who has a job in America may find
it gone because the quarterly report would look a lot better if we can
hire that person for $7,000 a year rather than paying you $40,000,
$50,000, $60,000, or $70,000 a year, and you are really nothing more
than a good or a service--I think many of us here believe otherwise.
These are not just goods or services; these are human beings who help
to strengthen this country, provide us the kinds of liberties and
opportunities we enjoy as Americans. I think it is about time we stood
up for them and what their interests may be--not at the expense of
others, but to merely strike a balance. This is not about being against
trade, being an isolationist at all. It is merely saying strike some
balance before this sort of giddy trend, where company after company is
sort of playing follow the leader and runs amuck as they send these
jobs willy-nilly offshore; we ought to say let's look at what we are
doing and at what ultimate price we may pay.
The second point I want to make out of this economic report is a
reference with regard to what is manufacturing. I don't have the page
number, unfortunately, on this, but I will get it before I finish my
remarks. It is a highlighted box, and the title of the box that is
framed out here is ``What Is Manufacturing?'' This economic report says
the definition of a manufactured product, however, is not
straightforward. When a fast food restaurant sells a hamburger, for
example, is it providing a service or manufacturing a product? You may
say that is only a question. You know, if this is your question and the
example you would cite in your question, what are you thinking of? Do
you think it is a debatable item as to whether or not producing a
hamburger or a hot dog involves manufacturing? This is not some op-ed
piece; this is the official economic report of this administration's
economic policy. In bold print in this economic report they suggest
there is a legitimate question over whether or not working at
McDonald's or Burger King flipping hamburgers ought to be classified as
a manufacturing job. If you don't think we are in trouble on these
issues, just read that.

That is an example of the kind of terribly naive at best, at worst
rather callous, thinking when it comes to talking about the importance
of manufacturing. I don't belittle a job somebody holds down working in
a fast food restaurant. For many people out there, that is the only job
they can get to provide for themselves and their families. They would
be the first to tell you that they hardly think of themselves as being
in the manufacturing business. Yet, in the administration's official
report, it raises the question of whether or not it is a manufacturing
job. At least this Member gets a sense they are lost on this issue,
when they raise questions as foolish as that.
Let me go to some of these charts, if I may. Let me just give you a
suggestion of what is happening on the issue of manufacturing. The
first chart I raise here points to the fact that in the last 36 months,
we have now lost in the United States of America 2.8 million
manufacturing jobs--since January 2001, up until now, the winter of
2004. That is 2.8 million manufacturing jobs that have gone in this
country. I believe that is the single largest loss of manufacturing
jobs that has occurred since the Great Depression. I understand
transitions in the economy. Things happen and move in different
directions. But I don't think you can wash your hands of this and say I
am sorry, but that is the trend line and that is the way life is--sort
of a laissez-faire approach.
We ought to analyze why things are happening, where are the jobs
going, and what are the implications for our country. I understand
where the CEO of a company is coming from, and the board of directors
or the administration of a company. Their concern is the bottom line
and whether you have a profit to show the next quarter. I think Members
of Congress ought to have a different set of questions from whether the
quarterly report is all right--whether this trend line is going to
continue, and what it means to our country. If this trend line
continues and we end up losing a manufacturing sector, we will deeply
regret it.
I come from a State where I have 5,400 small manufacturers--or I
did--in Connecticut. Most of them are small operators, with 5, 10, 15
people, third and fourth generation, producing not just flowers or some
other item but, rather, significant products, many of which are used in
the aircraft engine industry of my State, the manufacture of the
sophisticated submarines we produce in Connecticut, or other high value
products. These manufacturers employ highly skilled people, producing
very valuable pieces of equipment used in some of our most
sophisticated defense and nondefense products. So when I see these jobs
and these businesses going, I have to be reminded that we are not going
to create this overnight. You don't reconstitute the manufacturing base
overnight. Again, I accept we have to make changes and you cannot say
we are going to stop this altogether. But I think we have an obligation
to express our concerns and worries about where we are headed, if we
don't speak up and begin to address what this may mean for our country.
I am very worried about where these trend lines are going and what it
may mean. If we end up continuing to lose jobs and manufacturers, I am
concerned about what it may mean for our country if we end up having to
import not only the jobs but the products themselves. That is another
subject matter we can discuss later. We ought to worry about it as a
country. If we don't do something soon in this area, that is going to
be a continuing problem.
Let me point out further, to give some idea of where this is all
happening, because it is not, as I mentioned, just my State of
Connecticut. I mentioned my friend and colleague, the Presiding
Officer, comes from New Hampshire up in our area. Just to highlight,
his small New England State as well had some 22,300 jobs in the
manufacturing sector lost in New Hampshire. In my State of Connecticut,
it is about 32,800, about 10,000 more. That is in the last 36 months.
The trend lines are: Pennsylvania, 132,000; Ohio, 153,000 jobs have
been lost; California, 272,000 manufacturing jobs lost; the State of
Washington, 59,000; Oregon, 21,000; Texas, 149,000; Florida, 52,000;
Georgia, 67,000; 142,000 jobs lost in the small State of North
Carolina. This is all in the last 36 months.
I won't go through State after State, but you get some sense of this.
It is not isolated to our corner in Connecticut, our small State, or
the area of New England: New York State, 115,000 jobs; Michigan,
121,000; Wisconsin, 168,000; Illinois, 115,000 jobs. It is a worrisome
trend. It is going on all across the country.
Again, we cannot say this is transitional, I am sorry, America, you
are going to have to live with this. We ought to respond in a way that
acknowledges this trend and tries to offer some ideas on how we might
turn this trend around.
I will be glad to share with my colleagues, if they are curious about
their States--I will not go through all 50 States, but there is not a
State in the country that has not lost manufacturing jobs. Some have
lost very few. The State of Wyoming lost 700 jobs; North Dakota, 500.
That may be the lowest. Arizona, 34,000; New Mexico, 5,000; Colorado,
37,000; Kansas, 19,000; Arkansas, 29,000; Missouri, 38,000. These job
losses have been very painful.
We talk about these jobs, and I think the tendency is to talk about
them in

[[Page S2087]]

and of themselves, the job loss in any manufacturing sector in any
given State. Each manufacturing job supports three other U.S. jobs.
When we end up losing these jobs in the manufacturing sector, there is
a ripple effect.
I won't dwell on this, but I think most of my colleagues are aware of
this already. When someone loses their source of income in the area of
manufacturing, the effects are felt in retail trade, personal/business
services, and other manufacturing sectors with the inability of people
to purchase goods. It is not as if these jobs exist or, when they are
lost, the only people paying that price are the people who lost the
job. In effect, it is being felt across the economy as well.
Mr. President, 14 million additional jobs are in danger.
Now we get into the question of jobs going offshore. I want to give
some indication of what is happening. Let's get back to the outsourcing
question. I mentioned manufacturing because a lot of these jobs are
moving in that area.
We are told--and this is from Time magazine in their February 22
issue--that by the year 2015, more than 3 million American jobs are
projected to be shipped overseas. We begin to see these trend lines. In
2005, it moves up to 588,000 which will be outsourced overseas. A few
years later that number of jobs goes to 1.6 million, and projections
are, with no effort being made to change this direction, the number
gets up to 3 million. We are worried that if we do not speak up now and
do something about this trend, we are going to find a continued erosion
and continued loss of these jobs overseas.

Let me point out where they are coming from because this may be
helpful as well to those interested in this subject matter. There are
14 million additional jobs in danger of being shipped overseas, as I
mentioned. Where are they coming from? Office support areas, some 8
million jobs; business and financial support, 2 million; in the area of
computer and math professionals, close to 3 million; in the area of
paralegal, legal assistance, diagnostic support, medical transcriptions
and the like, the numbers are in the thousands, to give some idea where
we are going with all of this.
It isn't just these low-wage jobs that are going. They are also going
in the more sophisticated areas as well. I mentioned earlier the story
in the Wall Street Journal talking about ValiCert. They were talking
about jobs in Silicon Valley. I guarantee you we are not talking about
low-wage jobs at all. Those are jobs that are fairly well paid, and
they are being lost. The trend lines are not good in just raw numbers,
but also in sectors of the economy where these jobs are being lost.
At the appropriate time, I will offer a very specific amendment to
address the issue. Very briefly, the amendment would do the following:
It will restrict anyone from using Federal tax dollars to ship jobs
offshore in three different ways. First, the Federal Government may not
use Federal taxpayer dollars to procure goods or services to fulfill
contracts that use overseas workers at the expense of American jobs.
Second, we tell State and local governments that any Federal dollars
they receive in the form of a grant or in the form of an appropriation
by formula or in any other way are not to be used to promote the loss
of American jobs.
I point out that today 40 States outsource jobs. I am told that in
the State of Minnesota, if you lose your job and you call up the
unemployment office, you are going to talk to someone in India about
what your rights and benefits are. I do not need to tell you the
reaction of those people in that State who lost their job and they are
talking to someone offshore to tell them what their benefits are.
The third way is, any agency seeking to privatize a government
contract being paid with U.S. taxpayer dollars may not enter that
contract if it again displaces American workers in favor of offshore
workers.
In all these cases, we have exceptions on the grounds of national
security and we allow the Governor or a Federal agency head to, in
effect, waive these provisions if there is bona fide lack of goods and
services in the United States. There is an escape clause here.
The obvious question arises, one, on national security, or, two, if
no one is producing these goods and services here, what are we supposed
to do? Rather than have the President have to waive the provision, we
allow a Governor or head of an agency who would be in charge of this
particular area to do so.
Let me take a few minutes to explain why this is a timely amendment
and why it is deserving of our support. A gentleman by the name of John
Bowman dedicated 25 years of his life to becoming an information
technology professional, and he was very good at it, I might add. He,
like hundreds of thousands of Americans, lost his job because of
outsourcing. John looked around and realized what happened to him was
not an isolated incident. It was part of a massive trend, and he
decided to do something about it.

John will tell you he would be the last person in the world leading a
grassroots organization that has practically become a grassroots
movement in this country, not just in my State but all across the
Nation. These are white-collar professional people, highly trained, who
are watching their jobs lost day after day, flying offshore, being
outsourced.
Fortunately, John is now being joined in this fight from people of
all walks of life--labor unions, small business owners, Republicans and
Democrats alike. I had a meeting in my State a few days ago on this
issue. I had people in the same room that I could not put in the same
town in Connecticut a year ago--people from the manufacturing sector,
from labor unions, and the private sector coming together. They differ
on a lot of issues, but on this one they are joined in common cause.
They recognize what we are experiencing is different from what we
experienced before.
Today, advances in technology and fewer trade restrictions have made
it far easier to move goods, information, and jobs around the globe.
Foreign countries are aggressively enticing American businesses with
promises of lower wages, lax worker protections, and weak environmental
laws. Countries such as India and China have figured out if you want to
compete in the global marketplace in the best jobs, you need to invest
in the best education and training of your workers. Rather than trying
to find a meaningful way to address these new circumstances, this
administration would rather pretend the world is still functioning as
it always did and actually that our economy is on a path to recovery.
As a matter of fact, our country is hemorrhaging jobs at an alarming
rate. As I mentioned already, according to one estimate, by the year
2015, 3.3 million, close to 4 million jobs and $136 billion in annual
wages will have moved offshore if we do not do something about it. Four
hundred of the largest 1,000 companies are already sending jobs
offshore, with more planning to do so every single day.
In a short time I will get a chance to go into this in more detail as
to why I think this is an important amendment and why I hope my
colleagues will support it.
I realize it is a loud shout at this moment, and I know others will
argue that maybe it is louder than it need be, but I do not know any
other way to express my deep concern about what is happening in my
State and all across this country if we do not begin to say that at
least with taxpayer money you are going to have to act differently. You
may decide to do it on your own dime, but you are not going to do it on
the dimes of my taxpayers, to send jobs overseas when they are not
necessary. You do not need to do that in order to survive.
I see my colleague from Montana in the Chamber. I yield the floor and
at an appropriate time I will come back to this discussion.
The PRESIDING OFFICER. Under the previous order, the time for the
minority has expired. The majority controls an additional 9 minutes 20
seconds.
Who yields time?
Mr. GRASSLEY. I suggest the absence of a quorum and that it come off
of our time.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant journal clerk proceeded to call the roll.
Mr. HATCH. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.

[[Page S2088]]

The PRESIDING OFFICER. Without objection, it is so ordered.

Amendment No. 2647

Mr. HATCH. Mr. President, there are several aspects of U.S. job
creation and retention on which many of us may disagree. I do not
believe, however, that the need for an effective research credit is one
of them. It will do more for workers, more for jobs, more for high
technology, more for opportunities, and more for the economy than most
anything else we could pass. In this jobs bill it seems very
appropriate for us to add this particular amendment to it.
This amendment has strong support from both sides of the aisle. It
has the unified support of the whole business community. It is the
right thing to do for U.S. workers, for the U.S. economy, and for our
children and our grandchildren. This amendment will open a door for
small businesses, where most of the jobs are created anyway, to create
more jobs, more opportunities, more good products, more high
technology, more ways of keeping the United States at the forefront,
economically, in this world than almost anything else we could do.
This jobs bill, which itself is an excellent bill that will do a lot
for jobs, will be much better for having this amendment added to it. I
hope my colleagues will all vote for it. It is a worthwhile thing to
do. It is something that every one of us ought to vote for.
I thank those who have cosponsored this with me, those who have
amended it with their excellent suggestions and the members of the
Senate Finance Committee who have been champions of this for many
years. I believe over the long run this type of amendment is going to
pay off in great dividends.
I yield the floor, and I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant journal clerk proceeded to call the roll.
Mr. REID. Mr. President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.

Vote on Amendment No. 2651

The PRESIDING OFFICER. Under the previous order, the hour of 3:30
having arrived, the question is on agreeing to amendment No. 2651.
The amendment (No. 2651) was agreed to.

Vote on Amendment No. 2647

The PRESIDING OFFICER. The question is on agreeing to amendment No.
2647, as amended.
Mr. BAUCUS. I ask for the yeas and nays.
The PRESIDING OFFICER. Is there a sufficient second?
There appears to be a sufficient second.
The clerk will call the roll.
The assistant journal clerk called the roll.
Mr. REID. I announce that the Senator from Louisiana (Mr. Breaux),
the Senator from North Carolina (Mr. Edwards), the Senator from Florida
(Mr. Graham), the Senator from South Dakota (Mr. Johnson), the Senator
from Massachusetts (Mr. Kerry), and the Senator from Florida (Mr.
Nelson) are necessarily absent.
I further announce that the Senator from Delaware (Mr. Biden) is
absent on official business.
I further announce that, if present and voting, the Senator from
South Dakota (Mr. Johnson) and the Senator from Massachusetts (Mr.
Kerry) would each vote ``yea.''
The PRESIDING OFFICER (Mr. Cornyn). Are there any other Senators in
the Chamber desiring to vote?
The result was announced--yeas 93, nays 0, as follows:

[Rollcall Vote No. 31 Leg.]

YEAS--93

Akaka
Alexander
Allard
Allen
Baucus
Bayh
Bennett
Bingaman
Bond
Boxer
Brownback
Bunning
Burns
Byrd
Campbell
Cantwell
Carper
Chafee
Chambliss
Clinton
Cochran
Coleman
Collins
Conrad
Cornyn
Corzine
Craig
Crapo
Daschle
Dayton
DeWine
Dodd
Dole
Domenici
Dorgan
Durbin
Ensign
Enzi
Feingold
Feinstein
Fitzgerald
Frist
Graham (SC)
Grassley
Gregg
Hagel
Harkin
Hatch
Hollings
Hutchison
Inhofe
Inouye
Jeffords
Kennedy
Kohl
Kyl
Landrieu
Lautenberg
Leahy
Levin
Lieberman
Lincoln
Lott
Lugar
McCain
McConnell
Mikulski
Miller
Murkowski
Murray
Nelson (NE)
Nickles
Pryor
Reed
Reid
Roberts
Rockefeller
Santorum
Sarbanes
Schumer
Sessions
Shelby
Smith
Snowe
Specter
Stabenow
Stevens
Sununu
Talent
Thomas
Voinovich
Warner
Wyden

NOT VOTING--7

Biden
Breaux
Edwards
Graham (FL)
Johnson
Kerry
Nelson (FL)
The amendment (No. 2647) was agreed to.
Mr. GRASSLEY. I move to reconsider the vote.
Mr. BAUCUS. I move to lay that motion on the table.
The motion to lay on the table was agreed to.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, may I inquire what is the business before
the Senate?
The PRESIDING OFFICER. The bill, as amended, is currently pending.

Amendment No. 2660

Mr. DODD. I send an amendment to the desk and ask for its immediate
consideration.
The PRESIDING OFFICER. The clerk will report.
The assistant legislative clerk read as follows:

The Senator from Connecticut [Mr. Dodd] proposes an
amendment numbered 2660.

Mr. DODD. Mr. President, I ask unanimous consent that the reading of
the amendment be dispensed with.
The PRESIDING OFFICER. Without objection, it is so ordered.
The amendment is as follows:
(Data not supplied.)
Mr. DODD. Mr. President, I offer this amendment on behalf of myself,
Senator Coleman of Minnesota, Senator Kennedy, Senator Corzine, Senator
Mikulski, and others.
Let me say to the floor managers, if I may, I know they are
interested in the time. I am prepared to agree to a 1-hour time
agreement. I do not necessarily expect to take the hour. I know there
are others who may want to be heard. I know you want to move things
along, so I am prepared to have a time agreement and move on my
amendment, give my remarks, and then others can speak, and then vote on
it, if you would like.
The PRESIDING OFFICER. The Senator from Montana.
Mr. BAUCUS. Mr. President, with this amendment, we are moving along
on this bill. I very much appreciate the Senator's generosity in
suggesting a time agreement. At this point, apparently, that is not
advisable. But I thank the Senator for making his generous offer and
for proceeding nevertheless.
The PRESIDING OFFICER. The Senator from Connecticut.
Mr. DODD. Mr. President, I will move forward. If, at any moment you
would like to have a time agreement, let me know and I will try to
accommodate you so you can move on to other matters.
I have already spoken about the amendment during the time between
2:30 and around 3:30, describing, in a sense, what the amendment would
do and the rationale for the amendment. I will be glad to go back over
this amendment again for my colleagues and then engage in any debate or
discussion about it.
In a sense, I am preaching to the choir when I talk about this issue
to my colleagues on both sides of the aisle because we all painfully
know what has happened in the last 36 months in our country. We have
lost around 2.8 million manufacturing jobs in the United States. I have
laid out on this chart I have in the Chamber how that breaks down State
by State across the country.
In my home State of Connecticut, we have lost some 32,000 jobs in the
manufacturing sector; California, 272,000; Ohio has lost around 153,000
jobs; in Illinois, 115,000; Texas--the Presiding Officer's State--
150,000 jobs.
So certainly we all appreciate the fact there has been a tremendous
erosion in a very critical area in our economy.
We also know there is another phenomena occurring, and at an
accelerated pace; that is, the outsourcing of many jobs, including some
manufacturing jobs, around the globe, and it is accelerating at warp
speed.

[[Page S2089]]

We now know there are literally 400 of the top 1,000 companies in the
United States outsourcing their jobs to India or China or other nations
around the globe. Mr. President, 40 of the 50 States now outsource
jobs.
My amendment simply says--and there are waivers in here and the like.
I understand, although I do not like it, if a company decides on its
own dime it is going to outsource a job. I disagree with that. I think
they are wrong to do it, but it certainly is their right to do it. We
can offer tax incentives to encourage people to stay here, tax
disincentives so they do not go offshore, but ultimately a company can
decide for itself.
It is another matter with taxpayer money, with the money that
American taxpayers send to Washington. The idea that we would use their
dollars to outsource an American job is something on which I think we
ought to speak loudly and clearly. We ought to say: Look, we disagree
with that. We don't think you ought to be able to do that.

So this amendment, in three different areas, very simply says: First,
the Federal Government may not use Federal taxpayer money to procure
goods and services to fulfill contracts that use overseas workers at
the expense of American jobs. Second, we tell State and local
governments that any Federal dollars they receive in the form of a
grant, in the form of an appropriation, or any other way, that they are
not to use those Federal dollars to promote the loss of American jobs
for the creation of offshore jobs. And, third, we say any agency
seeking to privatize a Government contract being paid with U.S.
taxpayer dollars may not enter into that contract if it, again,
displaces American workers in favor of offshore workers.
Now, very quickly, in anticipation of some of the arguments we may
hear, we provide waivers and exceptions on grounds of national
security, and we also allow Governors or Federal agency heads to waive
these provisions if there is a bona fide lack of comparable goods or
services in the United States.
In this legislation, we also, of course, make it clear that the
Government procurement agreements between the United States and some 27
other nations, that are predominantly Western Europe countries, are not
affected by the prohibitions contained in this bill. Those 27 nations
do not include, I would point out, India or the People's Republic of
China.
So the major sources of outsourcing are not affected by those
provisions. Thus, we are in complete compliance with the WTO and every
other formal agreement we have. We are not in violation of any of those
agreements as a result of this amendment.
Now, I had a meeting in my State--and I assume my colleagues may have
had similar kinds of gatherings--where people came together who you
could not have put in the same county a year ago on this issue. I am
talking about my chambers of commerce, my manufacturing associations,
and my labor unions--all coming together saying: When is Washington
going to say something about this outsourcing that is going on?
If we continue to allow these jobs to flow out of our country, then I
think we run the risk, at critical junctures, of having the human
talent necessary for us to provide those services and to produce those
goods which will allow us to compete effectively in the 21st century.
Once you lose jobs, particularly in the manufacturing sector, or some
of the high-skilled areas, it is very difficult to go back and re-
create those jobs, to re-create those manufacturing centers.
Let me point out an article that appeared in the Wall Street Journal
this morning. In fact, I have already included it in the Record. But
the ValiCert company--and I think this is a front-page story or nearly
a front-page story in the Wall Street Journal--discovered that
outsourcing was no great success for them. They did it and discovered
that the value they were getting for the jobs and products being
produced did not equal that produced here in the United States. They
have reversed that decision.
So when you read in this economic report, prepared for the President
of the United States, last month, in February-- and I will quote the
report for my colleagues where they state, in absolute terms, on page
229 of this report:

When a good or service is produced more cheaply abroad, it
makes more sense to import it than to make or provide it
domestically.

Well, tell that to the ValiCert company. They did not discover that.
Certainly, while that may be true of a bottom line of a company, if you
are trying to preserve jobs in this country, which is a responsibility
we bear in this body, and not just to those companies but to the people
who work for them--an American job is not just a good or a service. An
American job has implications that go beyond just the dollar amount
lost of income in wages or salaries. It means also that a family may
not pay their home mortgage and may not be able to provide the goods
and services that allow our economy to grow and expand. It means
families are under more strain and stress because they have lost the
source of income to provide for themselves.
So this ought not be a partisan issue. This ought to be something on
which we stand united. This is not being an isolationist. I am a free
trader. I have been so in the years I have been here. I have supported
many, many free trade agreements, and I opposed some as well, but I
honestly believe if you are going to be an effective trader, a free and
fair trader in the 21st century, then you ought not squander and give
up the very jobs that make it possible for you to compete in this
global economy.
So I am deeply concerned that if we do not say something,
particularly with U.S. taxpayer money that is being used to subsidize
this outsourcing of jobs, then we are failing to understand what is
going on across this country. In State after State after State, the
trend lines are there in manufacturing. It is also occurring in other
sectors in the economy.
Let me share with my colleagues, as shown on this chart, indication
of where the outsourcing of these jobs is occurring. Presently, it is
occurring in areas such as office support. The estimate is 14 million
additional jobs, by the way, will be lost and shipped overseas over the
next several years. The estimates are about 8 million will occur in
office support areas; in computer and math professionals, close to 3
million jobs lost in that area; business and financial services, over 2
million jobs; paralegals, diagnostic support services, medical
transcriptions, over 94,000.
So it is not just low-wage, low-salary jobs that are going but very
sophisticated, high-technology jobs that could be leaving our country
as well. That makes us weaker. It is not in the national security
interests of the United States to be losing these critical jobs at a
time when we need them most in order to provide for the economic growth
of our own Nation.
So while I understand, from a business perspective, your job is to
look at quarterly reports, to try to improve the bottom line, our job
in the Senate and the Congress of the United States goes beyond looking
at quarterly reports.
We should look generationally. I don't want my generation to be the
first generation of Americans which leaves the coming generation less
well off than every other succeeding generation has left their children
and their grandchildren. We are at risk of doing that if we don't step
up at this juncture and say we need to stop or at least discourage this
outsourcing of jobs that is occurring at a rapid pace every single day.
It is hard not to pick up a U.S. newspaper in any city and read where
one corporation, one business after another, is making the decision to
outsource more jobs. I think we ought to say, let's slow down. Let's
have some balance. Let's not use taxpayer money to allow these jobs to
be lost. That is the thrust of the amendment.
I hope we will have overwhelming support for this idea. This bill is
an appropriate place to be debating it. It is something that could make
a huge difference for those who are worrying whether we are paying
attention at all. We have just debated over the last 5 weeks medical
malpractice, providing immunization for gun manufacturers. We have had
a bill on pensions. But we have not spent 5 minutes debating the issue
of what is happening to America's jobs. That is the big issue.
Look at any survey right now. Ask the American people what they worry

[[Page S2090]]

about the most. It is the loss of jobs. They are outraged we have
nothing to say when it comes to outsourcing of jobs to other nations,
and we are not standing up and defending our own workforce.
In this same economic report I cited earlier, to give you some idea
of why people get discouraged, I mentioned earlier the quote suggesting
it was an automatic thing that outsourcing of jobs was good or, as they
call it, importing of jobs. That is the way they describe it. I
mentioned already a company identified in a Wall Street Journal article
this morning, ``Lesson in India, Not Every Job Translates Overseas.'' I
encourage my colleagues to look at that article as one example of a
company that discovered outsourcing was bad for business, not good.
In this same economic report prepared by the President's top economic
advisors, they raised the following question:

The definition of a manufactured product, however, is not
straightforward. When a fast food restaurant sells a
hamburger, for example, is it providing a service or inputs
for manufacturing a product?

If this was some sort of cartoon in the paper, I might have laughed
at it, but it is part of an official document, an economic report
prepared by the President's top economic advisers which suggests
through the question that flipping a hamburger or cooking a hot dog is
a manufacturing job. You get some idea and sense of where the outrage
of the American public is coming on why we are unable to speak to this
issue.
Again, I don't care if you are a Democrat or Republican, what your
politics or ideology is. We have to stand up and defend our country in
a moment like this. I worry about losing these jobs.
I mentioned earlier I had some 5,400 manufacturers in my State
employing well over 240,000 people. We have lost about 35,000 jobs in
the last 36 months. My manufacturers produce critical components for
some of the most sophisticated defense technologies in the Nation. If
you lose that manufacturing base, it is not just the loss of a
manufacturing job or the loss of a good little company, it is also a
critical issue when it comes to national security needs. Many of these
small manufacturers produce critical components and parts for some of
the most sophisticated defense technologies in our Nation.

I mentioned earlier my friend and colleague from Texas. The number of
jobs there, 150,000. I know this Senator has many of these small
companies that are producing those parts for defense companies, defense
technologies. There is a ripple effect. We know as well, beyond the
implications for our national security, for every one of these jobs
that are lost in the manufacturing sector, there are jobs lost in other
sectors. It is not just that job that is lost or that family that is
affected. Each manufacturing job supports three other U.S. jobs. So
when we lose these jobs, we also feel it in the retail trade, in the
professional services, and in manufacturing as well.
I apologize if I get heated about this subject, but it is painful to
read some of this cold-eyed analysis that suggests somehow you just
have to stomach this or weather this, that this is just one of these
cyclical or structural occurrences in the national economy, and these
statistics, as troublesome as they are, are nothing more than that,
statistics.
Behind every one of those statistics, behind every one of those
numbers I cite, is usually a head of household or people trying to keep
their families together. They are not just statistics. These are
American citizens. These are human beings who are doing everything they
can to live by the rules and provide for their families. They want to
know whether their Congress--they don't identify themselves when they
get up in the morning as a Democrat or Republican; they get up in the
morning and worry about their families and their future--gets it, if we
understand it, and whether we are willing to do anything about it.
This is an attempt by myself and my colleague from Minnesota and
others to say at least when it comes to your tax dollar, we are going
to say to the States, localities, and other businesses with waiver
provisions here, you are not going to use those dollars to outsource an
American job, not on our watch. You may decide to do it with your own
money, but you will not do it with American taxpayer money. That is why
we offer this amendment.
I yield the floor to my colleague from Minnesota for any comments he
would like to make.
The PRESIDING OFFICER. The Senator from Minnesota.
Mr. COLEMAN. Mr. President, I rise in support of the amendment
offered by my colleague from Connecticut. I am proud of working with
the President to grow jobs. I firmly believe, from my days as a mayor,
when you cut taxes, you shape an environment in which folks invest. And
when they invest, mom and dad have a job. The best welfare program is a
job. The best housing program is a job. Access to health care comes
with a job, most often. So we have to do what is necessary to grow
jobs. We are moving in that direction. Clearly, more needs to be done.
Changing the economy at times reminds me of turning around one of
those oar boats in Lake Superior: You have to get it moving in the
right direction. I believe we are moving in the right direction, but
more has to be done.
We have an opportunity with the Dodd amendment to do more, to make
sure we use taxpayer dollars wisely, in a way that prevents the
outsourcing of American jobs and grows jobs here.
The underlying bill we are dealing with, the Jumpstart JOBS Act, is
moving us in that direction. We have to do more. We are doing it right
here.
I am one who has supported and supports expanding markets. I
understand the importance of trade in terms of growing jobs. This
initiative is not designed to step in the way of our efforts to expand
and broaden our capacity to find new markets for our products. On the
contrary, what it does is ensures those firms which have exemplary
goods and services to sell have a fair shake at contracts involving
Federal dollars.
This issue has come up in Minnesota. From conversations with my
Governor, it is clear--and I understood this when I was a former
mayor--we have an obligation to get the best possible value for
taxpayers. We have to look at the bottom line. But at the same time we
have to be concerned about the impact on our State and national economy
of foreign offshoring when other options are available, when the work
can be done here.
I call this commonsense legislation. Again, I support trade as a way
to create wealth and jobs. But for a government at any level to
contract out with foreign entities for delivery of federally funded
U.S. programs is tantamount to Detroit, MI buying a fleet of foreign-
made squad cars. It doesn't make any sense. It flies in the face of
common sense.
Recent news reports noted that under a $16.8 million contract with an
Arizona firm, calls to a Minnesota toll-free number for help with lost
and stolen food stamp cards are being routed to Bombay, India. Under a
$13.3 million contract, software programs in India are helping build a
Web-based system to automate eligibility for Medicaid and other health
care benefits to low-income Minnesotans.
The administration of U.S. Government programs ought to be done here
at home in the U.S. Even if some of the work is outsourced to private
vendors, the thought of our Medicaid or food stamp programs being run
out of someplace in India would offend most Minnesotans' sensibilities,
and it offends mine.
We have an opportunity to talk about what we do with taxpayer
dollars. Would you use those taxpayer dollars in a way that fosters the
growth and development of American jobs or do we send them overseas? I
think common sense says we use them here.

My colleague and I may disagree at times on tax policy or on a range
of issues. But this is an issue that should cut across partisan lines.
We have an interest in growing jobs in this country and this is a way
to make commonsense use of taxpayer dollars. I am proud to stand in
support of my colleague's amendment to this bill.
I yield the floor.
The PRESIDING OFFICER. The Senator from New Jersey is recognized.
Mr. CORZINE. Mr. President, I also rise to support the amendment of
the Senator from Connecticut. It is very hard for people in my State
and across this country to read the President's

[[Page S2091]]

economic report and hear economic theory that is pronounced in
economics 101, that somehow or another 19th century comparative
advantage is the basis on which we ought to be working jobs in this
country.
Folks are very concerned when they don't have work. That is a very
simple principle of economics. We are seeing so many of our
manufacturing jobs go, and now 40 out of 50 of our States are taking
jobs that are government jobs and shipping them overseas and
undermining our economy here. That is not highfalutin economics. That
is taking money out of the pockets of people who drive our economy and
make a difference in our communities. It has all those multiplier
effects other economists might talk about. Then you don't collect tax
revenues, you don't have people spending money back into the economy
and driving it. A Senator talked about manufacturing jobs, but there is
a leverage or multiplier effect on government jobs as well.
This is really out of touch with the American people, when we believe
our policy ought to be to encourage outsourcing. Here, with taxpayer
dollars, in the Federal Government, we have an opportunity to say, no,
this is not the direction we ought to take. We should not be moving
jobs overseas that would be very properly done here at home. We see it
in the manufacturing sector. I am not sure I totally agree we ought to
let everybody look at their quarterly bottom line and move. I think we
need to understand there are national security interests at stake on
jobs we have right here at home. We need to make sure we have a
manufacturing sector that can actually produce steel, manufacture the
weapons that protect our men and women when they go to war. We need to
have that strength and it needs to be substantial.

We need to work to make sure our technology is under our control, the
privacy of the information that flows in. I think we ought to push back
against all this outsourcing for a lot of reasons that don't just deal
with economics. But it is absolutely unfathomable that we would take
State and local folks, Federal Government people, and ship their jobs
overseas at the cost of not being able to have the overall economic
impact of this. I think, particularly with the waivers the Senator from
Connecticut has built into these programs, we have a program that will
make a difference.
It is not enough to talk about translating hamburger-flipping jobs
into reclassifying manufacturing as a means to solve an outsourcing
problem. It is incredible, absolutely incredible, the illogic we see
running through this economic report.
I think the Senator from Connecticut has put together a response that
makes sense. We are going to use U.S. taxpayer dollars to make sure
when we have Government jobs, they stay here. I am proud to be a
cosponsor. I think it is absolutely essential the American people know
we are fighting for their best interests at home on the floor of the
Senate. This is the most direct, clear method of pushing back against
what is a very wrongheaded approach to creating jobs in America.
Again, I am pleased to be a cosponsor.
Mr. DODD. If my colleague will yield, I thank my colleague from New
Jersey for his support, and my colleague from Minnesota as well.
My colleague from New Jersey is no stranger to these issues. I made
note before of what is happening in Minnesota and other States. In
Connecticut, we have lost 32,000 manufacturing jobs. New Jersey has
lost over 55,000 manufacturing jobs.
Mr. CORZINE. If the Senator will yield for a quick statement, on
Friday, we closed the last Ford production facility in New Jersey, and
we are on track to have complete closure of the auto industry in New
Jersey, which used to be one of the heartlands of auto production,
outside of Michigan. It is very much reflected in the kinds of numbers
the Senator is talking about.
We were supposed to be replacing those jobs with technology,
information systems and telecommunications equipment, and now we see
those jobs moving offshore just as much, and some are reflected in
those numbers. That is why it is so important to stanch some of that
movement by the kind of action that would be taken in reflection of the
amendment of the Senator.
Mr. DODD. I mentioned earlier there was an article in this morning's
Wall Street Journal entitled ``Lesson in India: Not Every Job
Translates Overseas.'' I want to ask my colleague a question. Because
of his background in business, he understands those issues better than
most of us. This reads:

When sales of their security software slowed in 2001,
executives at ValiCert Inc. began laying off engineers in
Silicon Valley to hire replacements in India for $7,000 a
year.

It says:

The reality was different. The Indian engineers, who knew
little about ValiCert's software or how it was used, omitted
features Americans considered intuitive. U.S. programmers,
accustomed to quick chats over cubicle walls, spent months
writing detailed instructions for overseas assignments,
delaying new products. Fear and distrust thrived as
ValiCert's finances deteriorated, and co-workers, 14 time
zones apart, traded curt e-mails. In the fall 2002,
executives brought back to the U.S. a key project that had
been assigned to India, irritating many Indian employees.
``At times, we are thinking, `What have we done here?' ''
recalls John Vigouroux, who joined ValiCert in July 2002 and
became chief executive three months later.

Tell me a bit about this. I think the assumption is made
automatically, and certainly in this economic report prepared for the
President by his administration, it makes a categorical statement that
outsourcing of jobs is always a good thing because it improves the
bottom line. Here is an example of a company which had a very different
example. Aside from the obvious reduction in payroll by hiring people
in another country to do the job, and firing Americans, are there also
examples where this kind of activity has actually been bad for business
and not necessarily automatically good for business, as suggested by
this report?
Mr. CORZINE. Well, the Senator from Connecticut raises a good point
because I think when business decides it wants to outsource 14 time
zones away or 12 time zones away, there are enormous synergies in
business that are lost--the ability for people to work in similar
space, to get the economies of the consolidation of ideas, working with
people. It doesn't work nearly as well. As a matter of fact, a lot of
businesses are consolidating so they can make a lot of their operations
much more sympathetic with each other. These are business principles a
lot of folks follow.
I don't think it is as obvious as is commented in the economic report
of the President, but I guarantee sometimes the short-term benefits
that somebody might see on a quarterly report, because they have
lowered their loss, are grossly offset by long-term costs because they
lose the technological innovation of having people work together. They
lose the economies of scale, and the potential long-term costs, aside
from the social costs the Senators from Connecticut, Minnesota, and New
Jersey have been talking about, are huge.
Mr. DODD. I thank my colleague for those comments. They are very
enlightening. It is further indication that these trend lines are
moving forward.
There has been a report in Time magazine that indicates we are
looking at, some indicate over the coming years as many as 14 million,
15 million jobs to be outsourced if we do not begin to do something
about it. In the near term, I think the number is between 3 and 4
million with a loss, by the way, just looking at revenue loss, of wages
lost--forget everything else, forget what happens when a person loses
their job and the ripple effects that occur--just in lost wages it is
about $140 billion.
We know what kind of budget deficit we are in already. I don't think
this figure has been projected onto those numbers at all. We look at
revenues coming in, and we look at what expenditures for which we have
to account, and a loss of $136 billion to $140 billion in wages, lost
because of outsourcing over the next decade or less, ought to be a
matter of deep concern, even if you are not affected or moved by what
happens to families or heads of households who are trying to provide
for the needs of their families.
The fact that we lose that much salary and wages going out ought to
be of great concern. I mention that as an additional implication of
what is caused by outsourcing.
Again, I said earlier, we can offer incentives for people to stay, we
can offer

[[Page S2092]]

disincentives in the Tax Code for them not to go, but I don't know, for
the life of me, why we ought to be taking American taxpayers' money--we
insult the taxpayer to say, I am going to use your money to fire
someone in this company and hire someone someplace else to do the job
at a fraction of the cost because it is going to improve your bottom
line.
I don't know how the Senator feels, but the societal implications are
profound. Our job is not only to make sure there is wealth creation in
the country, but also we bear a responsibility beyond quarterly reports
to see to it, from a generational standpoint, that we are going to
leave this country at least as in good a shape as we inherited from our
parents.
Mr. CORZINE. Will the Senator yield?
Mr. DODD. I will be happy to yield.
Mr. CORZINE. The $140 billion the Senator from Connecticut spoke
about with regard to salaries on the chart the Senator previously
showed, there is a multiplier effect. It is almost three times that
value to the economy. The Senator had the chart which showed the full
implications. It is remarkable what is given up when our Nation loses
these jobs overseas. It is not just those salaries. When you take the
full implication, because you also have to look at the tax revenues
that come back into the coffers of State, local, and Federal
governments, these numbers could be even larger. This is just showing
the impact of what the multiplier effect is for the economy.

These numbers are huge. So the undermining of the well-being of our
economy by this outsourcing element is just way more profound than I
think is being discussed and is an extraordinary misrepresentation and
a mistake for the administration to believe that this is something we
ought to be embracing and encouraging.
There is another element that needs to be thought about. Every time
those outsourcing jobs cost an American job, then that individual has
to compete for another job. Right now, for all but the top 20 percent
of our economy, we are seeing declining real wages.
The fact is, people are competing for lesser quality jobs that pay
less than the jobs that are leaving. I think we have seen estimates
that it is about 20 percent less that an individual makes in the next
job they take after they have been laid off. It is profoundly wrong for
the administration to embrace such a dangerous idea both for the
economic power and also the real hurt that I think it brings to the
individual loss.
Mr. DODD. I thank my colleague. It is worthwhile to make the point
that actually watching the buying power, the wealth of individuals
being reduced, overall our country suffers from that--obviously the
families do--but when you reduce that buying power, that wealth,
implications are being felt throughout our economy.
These happen from a structural standpoint. But when you allow it to
go on with Federal money being used--again, as I say, I would not be
party, as much as I may object, to companies that want to do this. I
think they are wrong to do it. They are making a mistake. It is harmful
to our country. On their dime, I guess they have a right to do it. But
on our dime, they ought not have the right to do it, and this is the
American taxpayers' dime.
I don't think we ought to be saying to them, You can take your
Federal taxpayer money and pay somebody offshore to do it, losing an
American job that could be done here. I don't think that is right, and
that is the purpose of this amendment. I thank my colleague.
Mr. BAUCUS. My good friend from New Jersey has to leave the floor. I
compliment the Senator for what he is trying to do. This clearly is the
issue, the problem that faces our country as it will certainly for the
rest of the year and probably for the indefinite future.
I am wondering, in addition to the approach suggested today--and
there probably are additional proposals, too. This is a complex problem
and requires a complex solution. It reminds me of a quote I am fond of
making. H.L. Mencken once said: For every complicated problem there is
a simple solution, and it is usually wrong.
In my judgment, this administration not only is sort of laissez-faire
but kind of going AWOL on this issue. I don't see a plan. I don't see a
way to deal with job loss that passes the smell test. In addition,
wouldn't it help to be much more aggressive in enforcing our trade
laws?
One thing that bothers me, frankly, is that we are going about
getting trade agreements with minuscule economies. The big bang for the
buck is enforcing our trade laws, say, with respect to India or China
or maybe the European Union. There are lots of examples.
We hear about all the call centers in India. We don't hear much about
many products by American companies being sold in India, and the
Indians are very much violating the intellectual property agreements.
Billions of dollars are being lost to American companies that could be
spent in America because other countries are not living up to their
international obligations.

I was wondering if the Senators agree that is one of the additional
ways we can take to keep more jobs in America? Let's open up markets in
other countries so we can export more.
Mr. CORZINE. The Senator from Montana is exactly right, some of the
regulatory restrictions or ability to actually penetrate some of these
markets, while they may meet the letter of the law with regard to trade
agreements, are virtually impossible, particularly in the services
where we supposedly have the comparative advantage.
I think unless we are prepared to deal on all fronts--enforcing our
trade agreements, particularly with large economies--we are not going
to see even the theoretical benefits coming back of open trade markets.
The situation is very true in the old industry that I worked in,
financial services. It is very hard to penetrate these large economies
about which the Senator has talked.
So we give up the jobs in outsourcing, but we are not getting the
ability to actually provide the services that would make up for some of
those jobs back here at home.
It goes back to a miscast presentation of a concept that is fine in
Economics 101 books on comparative advantage but makes no sense in the
everyday lives of working men and women in America.
Mr. BAUCUS. The point I am trying to make is, we Americans pride
ourselves on being fair and open, but I don't know that other countries
are as fair and open when it comes to trade.
We are not pure. We do not wear a white hat. Other countries are not
necessarily Darth Vaders and wear black hats. But I think it is also
true the shade of gray of our hat is a lot lighter shade of gray than
the shade of gray of their hats. They do not agree to fair trade in the
main. I am talking about the bigger countries. India is the best
example, the most blatant example.
Mr. DODD. I thank my colleague from Montana, as well, for his
comments. I think they are poignant. While we do not specifically
address those issues, he is absolutely correct. It is another piece of
this puzzle on which we need to do a far better job. I have had some
recent discussions with ambassadors from some of the Latin American
countries and have suggested to them they ought to start talking to us
about having labor standards and environmental standards from their
perspective.
Mr. BAUCUS. Absolutely.
Mr. DODD. If free and fair trade is to work well, it ought to be
raising the quality of life and the level of wealth accumulation by
people in these countries with whom we are about to enter into trading
agreements. That is good for us, and it is good for them. Instead of us
having to fight for it here, they ought to be fighting for it and
insisting upon it on behalf of their own constituents.
Mr. BAUCUS. Let me ask the Senator a question on that same point.
Would the Senator agree that in the main, most of the countries we are
talking about--we are talking about environmental standards and labor
standards in these countries--generally do not most of those countries
want to sign free trade agreements with the United States because it
adds to their prestige; it helps them market their products and helps
them gain standing in the world? Would the Senator agree with that?
Mr. DODD. I say to my friend from Montana, it is as obvious as
anything. These are the shelves--this is the marketplace you want to
be. If you are any

[[Page S2093]]

other country in the world, you want to be able to access the greatest
consumer market in the history of mankind, which is the United States
of America. This is the most inviolable place to which you can sale
your services and your goods.
Mr. BAUCUS. Would the Senator also agree that it is the case that
most of these countries probably want to enjoy the status or the
prestige of having a free trade agreement with the United States?
Certainly we are not going to negotiate an agreement that gives away
the store. This is a bargain for an exchange. Is it not also true that
it therefore is a mistake for the United States to in effect be
negotiating against itself; that is, for some in the administration to
say, no, we do not want those labor standards, we do not want those
environmental standards, whereas in truth those countries, frankly, are
the ones we should be talking with because they themselves want these
agreements and would be much more willing to agree to them?
Mr. DODD. Absolutely. The whole point of these trading agreements,
because we are a high value country, obviously, and we do not want to
dumb down our system, we want to see improving quality products, you
need to sell them to somebody. If the countries with whom you are
entering trading agreements do not have a population that can afford to
buy your higher value goods and services, then the trading arrangement
is going to be all one way and not the other. So it is very much in our
own interest, from a larger perspective, to be able to have it.

Too often it is U.S. interests that are insisting that labor and
environmental agreements not be included because they want to be able
to enter those markets and hire people at those depressed wages and be
able to operate plants that do not face environmental regulations. So
they see it as advantageous for them. They then turn around and sell
those goods back here.
They are not thinking about an American corporation that wants to
sell its quality product there. It is very shortsighted and, of course,
it only leads to further encourage the outsourcing of jobs, which is
exactly what is going on.
Mr. BAUCUS. The point being that the other countries themselves are
much less concerned about this.
Mr. DODD. And they should be more concerned about it.
Mr. BAUCUS. Exactly.
Mr. DODD. My colleague would be interested to know, in my
conversations, very informally at this point, but I am finding a great
deal of receptivity to the point the Senator from Montana is making;
that, in fact, they should be insisting upon these points. The politics
of their own countries are changing and they are insisting if you are
going to enter these agreements, that this be a part of it as well.
Mr. BAUCUS. Absolutely.
Mr. DODD. We may be looking at a new era where it is not going to be
just people in this Chamber calling for these kinds of things, but, in
fact, people in these other countries are going to be insisting upon it
as well.
Mr. BAUCUS. I do not know how much time the Senator has, but I might
ask, if the Senator does not mind, to address another subject with
respect to jobs. Would the Senator agree, as we try to find a solution
to this problem, that one of the issues we have to face and have to
focus on is high health care costs that American companies pay and
face? It is a very complex problem, clearly, but a lot of companies
unfortunately are lowering their employee health benefits or their
retiree health benefits because they say it is necessary in order to do
business; the world is just so competitive.
The first casualty is those who lose their health benefits. They are
scared to death, frankly, about lowered health benefits or no health
benefits. On top of that, it is partly, it seems to me, because we do
have high health care costs in America.
In fact, the last study I saw is that we pay twice as much per capita
on health than does the next highest country. I do not know if we are
twice as healthy as people in other countries, but we pay a lot, and
that has to be the cost of doing business.
What I am getting at, is part of the solution of this some way to
address efficiencies in health care and quality of health care,
recognizing that employees of companies in other countries have their
health covered by the government, where that is not true in our
country; that that, too, is a part of the problem here? If we are
honest with ourselves, we are going to have to figure out some way to
get our hand on that one, too.
Mr. DODD. I appreciate the comments of my colleague from Montana. He
is absolutely correct. I did not even get into the issue of what
happens here. Obviously, when you fire someone, lay someone off, you
hire someone offshore to do the job, there is absolutely no requirement
that the fired or laid-off worker is necessarily going to be able to
get any kind of health care coverage from the former employer. Even
when you have retired with full benefits there is no guarantee, as we
learned through the discussion of the Medicare bill that was before us
only a few months ago.

So in addition to the lost jobs and wages--that is all I have been
talking about today--there are benefits that are incredible, and when
people lose those benefits it adds to the roles of the 44 million
people in this country who have no health insurance.
They get health care. It might be showing up in an emergency room,
which increases the costs of everyone else who has health care, as we
all know. Fortunately, in this country if people get sick they can show
up someplace and get some kind of coverage.
Mr. BAUCUS. Usually that is true.
Mr. DODD. It is not free, and it adds tremendously to the cost of
others as well. So the implications, in addition to laying someone
off--as we see now the thousands of jobs that have gone--the Senator
from Montana is very accurate in pointing this out when looking at this
issue.
Here we are taking Federal taxpayer money. That is what my amendment
addresses. It says: With Federal taxpayer money you can lay someone off
and hire someone else and pay them basically with Federal dollars. So
we are, in a sense, not only causing that person to lose their job in
this country but also their health care benefits and other benefits
they may have, not to mention what it does to a family.
Talk about keeping families together, the single largest reason why
families break up is economics. Every study in the world that has been
done on that institution says it is economics.
As a matter of Federal policy, in effect we are saying we are going
to outsource these jobs, causing a great disruption in America and
families' lives. The Senator from Montana is so right to point out that
the health care implications, because we have not yet sorted this out,
are huge.
Again, I come back to the point, I do not accept it, I do not like
it, but if someone on their dime wants to lay someone off and hire
someone else, I do not like it and I wish I could do something about it
and I certainly want to support measures that I know of the Senator
from Montana and the Senator from California, such as giving tax
incentives to encourage people to stay here, but when someone does it
with Uncle Sam's nickel, with the taxpayers' money, then I say, no. I
have some control over that.
I am offering an amendment today that says when it comes to U.S.
taxpayer money, you are not going to lay somebody off and hire somebody
else 12 time zones away to do the job. You may do it on your dime but
not on their dime.
I will mention one other subject matter that I know my colleague from
Montana and my colleague from California care about, and that is
privacy. That is one of the things we have not talked about at all on
this issue.
I pointed out earlier--I apologize to my colleague from California
because she cannot see this chart, but I was talking earlier about
where these jobs are going, from what sectors of our economy they are
coming from, the 14 million additional jobs in danger of being shipped
overseas. One of the areas we are talking about is in the area of
medical, diagnostic and medical services. This covers a little more
than almost 300,000 jobs in that area.
We all know what is happening. Today, with information technology, x-
rays can be transmitted at the speed of light or faster.
Mr. BAUCUS. We are going to give you a Nobel Prize for that.
Mr. DODD. All sorts of medical information.

[[Page S2094]]

We have provisions of law in this country that say you cannot share
certain private medical information with insurance companies or
employers without consent. Medical information is now being processed
by someone who has been hired 12 time zones away--all of a sudden that
information is no longer well-protected. So as we see the increase in
these diagnostic support services and medical transcriptions going
offshore, then the very protections we ought to have as Americans are
also being lost. I don't cover that in my amendment here, but we may
offer some language on this bill at some point that would say you have
to give people at least the opportunity to say I don't want my medical
records being processed or handled by someone offshore. I want it kept
in the United States because I don't want someone to be able to go in
and find out highly sensitive information about me and my family that
could be used against me.
Today the laws of the United States do not adequately protect you
when this information is being processed and handled offshore. That is
one of the major areas we are seeing these jobs moving.
Mrs. BOXER. Will my colleague yield for a question?
Mr. DODD. I am happy to yield.
Mrs. BOXER. First let me say how happy I am to hear you and our
ranking member have this conversation. This is so important. In a way
it is kind of a problem that snuck up on us. I took a look at the loss
of manufacturing jobs in California and my heart sank.
Mr. DODD. There were 272,000 jobs lost.
Mrs. BOXER. Think about it, 272,000 jobs.
There is one area covered in your amendment. Since no one has
mentioned it, I want to read into the record a letter and then answer
the comment, and then I am done with my role here today other than to
say thank you again for your leadership.
This is an interesting issue. It is covered. Your amendment is not
reflected on the charts because it deals with agriculture, something in
your State you don't have as much of as I have.
I want to read a letter I just wrote to Ann Veneman. I believe this
will get you a lot of votes from agriculture country.

Dear Madam Secretary: I was shocked to learn that the U.S.
Department of Agriculture purchased 70,000 metric tons of
rice for the Iraqi people from abroad rather than purchasing
this product from U.S. sources. At a time when U.S. farmers
are facing increased economic pressures and food surpluses,
our taxpayer money should be spent on U.S. commodities, not
the commodities of other nations.
California, like many other States across our nation, is
experiencing a surplus of commodities such as rice that could
provide valuable nutrition to the Iraqi people while
alleviating potential crop losses for our nation's farmers.

Then I talk about California's high quality of rice.

As we work to alleviate food shortages experienced by the
Iraqi people, we have a unique opportunity to assist our own
farmers. I request USDA reconsider this decision and instead
purchase the needed quantity of rice from U.S. farmers. In
the future, USDA should use taxpayer dollars to purchase U.S.
rice before it spends taxpayer dollars on foreign
commodities.

I wrote this letter on February 24. I am so pleased. I discussed this
with your staff. Your amendment would cover this.
Here we have the sons and daughters of America's working people,
including people on the farms for sure, going off to Iraq and putting
their lives on the line. Now their families either see their jobs going
abroad or in this case they are ready and willing to feed the Iraqi
people. They are excited about it, they have great products, they have
surpluses, and our administration, the Bush administration, goes
outside.
I wanted to first of all ask if you were aware of this issue, and,
second, say to you whether you were or you were not, I thank you on
behalf of the people who make a living from agriculture, because we
have our serious problems. We have the best products in the world and
we have farmers who are ready to feed the hungry.
Mr. DODD. Let me say to my colleague I was not aware of it. I
apologize for not being aware of it.
I know agriculture is a huge industry in the State of California,
particularly in the area of rice. It is significant. So I am pleased to
know we are covering this kind of activity as well.
Again, this is not being isolationist.
Mrs. BOXER. No.
Mr. DODD. Every time you try to stand up for an American job you are
called an isolationist. There is a new coalition. They want to change
the language, by the way. There was an article this morning that says,
``Business coalition rewrites lexicon for jobs outsourcing.'' They
point out, they say the coalition is now rallying around ``worldwide
sourcing'' as a less provocative term.
I apologize for sounding provocative, but we didn't make this up.
What ought to be provocative is the fact that people like my colleague
from California have constituents who are losing their jobs because we
are not doing enough to protect these jobs--not from a protectionist
standpoint, but protect them when in fact there is no loss to be
incurred as a result of standing up and saying we ought to be doing
what we can to protect these positions in our country. I commend her
for it.
I thank you for raising it. It is an important point and I am glad
our amendment covers it.
Mrs. BOXER. I will talk to those from agriculture states because they
may not be aware this administration is taking the dollars this body
voted on--I had problems with voting on it, but most people voted for
it--they are taking that taxpayer money and taking it right out of this
country. It is outrageous.
I thank you again for your leadership.
Mr. DODD. My staff gave me some other information. I have mentioned
others. Tax experts now say Indian-chartered accountants, the
subcontinent version of certified professional accountants, will
prepare somewhere between 150,000 and 200,000 tax returns this year.
That is up from 20,000 last year.
I am not making up these numbers. The trend lines are moving at a
very rapid pace. In this case here I am not suggesting these are
necessarily being paid for with Federal tax dollars. I don't know that.
If it is not, obviously we are not covering the situation and these
firms that want to continue doing it unfortunately will be able to
continue. But if they were doing it with Federal tax money, I say no,
just as my colleague from California says no.

If someone with their own dime wants to decide they are going to ship
rice or whatever products and use someone else offshore, that is one
thing. But when they are using taxpayer money to do that, that is when
we have an obligation to stand up and say no.
Mrs. BOXER. Thank you.
Mr. DODD. I appreciate her very much for raising that issue.
Let me say I see my colleague from Iowa on the floor, and others.
This Senator is prepared to vote. I talked about this. I have had
colleagues come over and share some thoughts on it. I know there are
other matters. I know Senators want to move on. I am certainly not
engaged in any filibuster. I am prepared to ask for the yeas and nays
and vote on this amendment and move on to other questions. Is there
some opportunity? I don't want to go into a quorum call if other
Members want to come over and discuss other matters, but if we want to
vote on it, I would like to do it. What chance do we have, I ask my
friend from Iowa?
Mr. GRASSLEY. I will be glad to respond to that. Some Members on our
side have not studied the amendment as much as they felt they should
and have some questions about it. I would say there are two things. One
is understanding completely the impact of your amendment, which
obviously is a legitimate concern. The other is that kind of makes a
determination whether some Members on our side would want to take some
action, maybe with an amendment to the amendment. That decision has not
been made. My guess is that decision is not going to be made today.
That decision will be made tomorrow.
Mr. DODD. I appreciate that.
Mr. GRASSLEY. Maybe I am being more candid than a Republican ought to
be, but that is the way it looks to me. You have always been
transparent with me. I think I ought to be transparent with you.
Mr. DODD. I thank my colleague and the manager of this bill for his
candor

[[Page S2095]]

on the subject matter. He will certainly understand if I share with
him--I know these were not his views, he is expressing the views of
others who didn't understand the impact of this amendment. Let me say
to him, my good friend--and he is a good friend. We have been in
Congress together for many years--the impact of not doing something
here is huge, on workers losing their jobs. I know my colleague knows
that and shares my concern about it as well.
It is not terribly complicated what I am suggesting here. It is
straightforward. It says when it comes to taxpayer money, it can't be
used to subsidize someone offshore at the cost of an American job.
I know the coalition of the Chamber of Commerce and the National
Association of Manufacturers and some other groups out there don't
particularly like this amendment because 400 of the top 1,000
corporations are now outsourcing jobs, and I am sorry if they are
disappointed by this amendment, but there are an awful lot of people
losing their jobs.
That is the only reason I raise it. I have to wait until tomorrow. We
will have to wait, obviously. I am disappointed because I thought it
was pretty straight forward. Nonetheless, I appreciate my friend's
candor.
I see my colleague from California.
Mrs. BOXER. Mr. President, I wanted to ask a question of my friend. I
would be happy to defer.
Mr. GRASSLEY. Mr. President, I think maybe I answered too casually
when I answered the Senator's question--that maybe I have a feeling
there were not legitimate concerns by people on my side. There are a
couple legitimate concerns. No. 1, the Senator's amendment does have
some mandate on States. That creates a lot of concern--I will bet not
only on my side but on his side as well. That is a very philosophical
point of view of the impact which we make in the Senate on 50 States,
and how many subdivisions I don't know. The other one is the extent to
which this might lead to legitimate legal retaliation as a result of
the Senator's amendment. That seems to me to be a reasonable, free, and
fair trade consideration in any action this body takes.
I want to make clear that it is not strictly political. There are
some concerns about his amendment. I enunciated at least two.
Mr. DODD. Mr. President, I yield to my colleague from California.
Mrs. BOXER. I have a question of my friend, Senator Grassley.
While the Senator was out, I was telling the Senate that I had
written to Ann Veneman because with taxpayer dollars the USDA went out
and bought rice from a foreign country instead of from my rice farmers.
I think that is wrong.
I ask this question of my friend: If there are legitimate concerns, I
am sure my friend will sit down and work them out with somebody because
you have been here a long time. There is no one who is more patient and
more willing to sit down and figure things out. But I have a feeling it
is deeper than that. I have a feeling you have touched a nerve today
which is a very important nerve to be touched. I think it is being
touched in the Presidential campaign. I think it is being touched in
the campaigns across our country, and it is being touched here today.
If we don't stand up and do something about this, as my friend
pointed out in his very chilling chart--and say there is some
complication, there is a message being sent, it may be too late.
I say to my friend, if he is willing and if there is some concerns
around the edges which can be worked out, I just hope he won't back off
this amendment in a substantial way. If there is a difference between
the parties, bring it on, I say. This is what people care about in my
State, and I know also in my friend's State. Can he give me a sense of
the thinking on how he is going to proceed since the majority will not
allow a vote today?
Mr. DODD. I will make two points.
I appreciate my friend from Iowa telling me what the substantive
concerns are about the amendment, one which I think we have addressed.
On the second question he raised, we included language which very
specifically makes clear that the government procurement agreements
between the United States and 27 other predominantly western European
countries would not be affected by this legislation. India and China
are not part of that problem. The major culprit in all of this is
outsourcing of jobs. But my colleague from Montana raised the question
that we could be found in violation of World Trade Organization
policies, if we didn't include this language. So I think we addressed
the concerns about whether or not we are going to run afoul of some
international agreements to which we are a signatory.

The second part about mandating States, if you are going to use
Federal money to lay off workers in your State and hire someone 12 time
zones away to do the job, I don't consider that a mandate. That is
Federal money. If you want to do it with State money, I can't keep you
from doing that. That is your choice. If you are going to do it with
Federal money that comes from grants and so forth, I think the American
taxpayer would like to know that Federal dollars are being used to lay
off one person in your State and hire someone 12 time zones away. You
can call that a mandate, but I call it common sense at this particular
juncture.
I think we have gone as far as we can go on this issue. We have
covered the ground.
I thank my colleague from Wisconsin, Senator Kohl, for joining me in
a bipartisan fashion on this amendment.
Today, 40 States outsource jobs. That is pretty alarming.
If you are unemployed in a State and you call up your unemployment
office to find out about your rights, and you are talking to someone 14
time zones away to find out your rights, that is offensive to people in
this country. They want to know what we are going to do about it. Do we
understand what they are going through?
This is the first opportunity we have had since we have been back
over the last 5 or 6 weeks to raise the one issue here. Night after
night, Lou Dobbs on CNN, to his great credit, is talking about this
issue. He is not talking about it and speaking to an audience that is
not interested. The audience across this country is deeply interested
in this subject matter. They want to know whether or not anybody is
doing anything about it. I can't stop a private company from
outsourcing with their own money. But I can stop you from using Federal
taxpayer money to fire somebody here and hire somebody 14 time zones
away. That I can try. I may not win, but I can try to do it. And that
is what we are trying to do.
Mrs. BOXER. I am really relieved to hear my friend's response to the
Senator from Iowa. As I understand his amendment, he has already gone a
very long way in answering the concerns that were raised. I hope we
will stick with it. I think the people in this country are watching.
They are not only watching CNN, but they want to know what we are
doing. It is an amendment that I have been looking forward to for a
long time. We have to make a stand, and I think what my friend is doing
is not overreaching.
I rise to say thank you to the Senator for sticking with it, and I
will do all I can to help him get it passed.
The PRESIDING OFFICER (Ms. Collins). The Senator from Iowa.
Mr. GRASSLEY. Madam President, first of all, the Senator from
Connecticut has been right in the sense that we have raised some
concerns, and we are working with him. He has made some modifications.
We are still hearing about some more concerns. I have expressed two of
those already. I would like to express another concern that I have
heard.
Yes, it preserves jobs in America if there is not outsourcing of
service jobs that are involved. But this is a legitimate concern on our
side: The extent to which there might be retaliation by countries that
outsource some things to the United States. That goes on as well. We
want to make sure if we are losing jobs, we don't have a greater loss
of jobs in retaliation for Americans who are already employed by a
company outside the United States which is using the services of
American people in America.
These are concerns that need to be addressed. These are things that
will be brought out in debate, and it may be possible to work on
continuing modifications of the Dodd amendment so that hopefully we can
get it passed without a great deal of opposition.

[[Page S2096]]

At this point, we are not prepared to vote.
Mr. DODD. Madam President, I don't believe I yielded the floor.
The PRESIDING OFFICER. The Senator from Connecticut has the floor.
Mr. DODD. My colleague from Nevada is in the Chamber. I didn't know
if he wanted to speak.
Mr. REID. If I could make a brief statement without the Senator
losing the floor----
The PRESIDING OFFICER. Is there objection? Without objection, it is
so ordered.
Mr. REID. For the minority, the majority leader has indicated there
will be no votes tonight. Everyone should know that.
Mr. GRASSLEY. That is what my Blackberry said 5 minutes ago.
Mr. DODD. For the purposes of those who don't know what a Blackberry
is, we will explain that.
I do not know whether my colleague from Texas has a question of me or
not. I know he would like to speak on the issue. Does he have a
question for this Senator on the subject matter?
Mr. CORNYN. If the Senator will yield, I will have a brief response
but not so much a question at this time.
Mr. DODD. I will wrap up myself. I would like to come back, if I
could.
Again, maybe I am wrong. But every survey I have seen over the last
number of weeks has indicated that people--even people who have jobs--
are worried about this issue.
To give you some indication of the disconnect that occurs when it
comes to this issue, I quote from the Los Angeles Times story, which
appeared elsewhere, but talking about this question, it says:

``The movement of American factory jobs and other white
collar work to other countries is part of a positive
transformation that will enrich the United States economy
over time even if it causes short term pain and
dislocation,'' the Bush administration said the other day.

It goes down and says from the economic report:

``Outsourcing is just a new way of doing international
trade,'' said Gregory Mankiw, Chairman of the President's
Council of Economic Advisers.

They prepared the report.

More things are tradable than were tradable in the past,
and that is a good thing.

The article goes on.
I remember the statement being made; Mr. Mankiw apologizing. He said
it was a bad choice of words, and we certainly accept his apology. The
problem is, it was not the words. It is not a bad choice of words; it
is a bad idea.

The idea of saying I am sorry I said only indicated to me they were
sorry they said it out loud. They did not change their mind about the
subject matter but merely said we got caught at something we should not
have said because it was bad politics to say it. I misspoke politically
but not substantively, and there is a fundamental disagreement on this
point that outsourcing is a good thing.
These are not just goods and services to be tradable in the open
marketplace. These are critical jobs which mean a huge difference to
the families affected. We bear no greater responsibility in this
Chamber than to do what we can to protect American families. When they
are being threatened by unnecessarily shipping their job overseas, it
is our obligation to speak out and try to do something about it that is
responsible.
I made the point over and over again, and I will make it again, I
have supported far more free trade agreements over my course of service
here than not because I believe that is where you have to be in the
21st century. But they have to be fair agreements. We have to negotiate
them far better.
The Senator from Montana and I have talked about how we might achieve
those desired results. I don't subscribe to the notion that it is
isolationist or protectionist to stand in the Senate and say I think it
is wrong to use Federal taxpayer money to cause someone in this country
to lose their job and hire someone 14 time zones away. I don't think
that is a good idea. Others may say that is their right, but we will
have a vote on whether you think it is right.
Examine it until you are blue in the face and try every cockamamie
idea to undermine what we are doing, but it is a bad idea to federally
subsidize the exportation of jobs that ought to be kept here, not for
protectionist reasons but if we provide services and jobs in the global
marketplace in the 21st century, you better have the people here who
can do it.
If we give up that kind of human capital that is so critical to our
long-term success of people, we are putting our Nation in jeopardy. It
is not a great quarterly answer. For that company which wants to make
more money next quarter, this is a dreadful idea. But if you are
thinking more than quarters, if you are thinking down the road about
what kind of a Nation we will be leaving the next generation who will
inhabit these seats we hold today as Members--we have an obligation to
them, as well. We owe an obligation, just as others who sat in these
seats bore an obligation to us and left us a pretty decent country--not
a perfect one, but a good one. We should see to it that coming
generations have the equal opportunity to bear the fruits we have
provided for two centuries.
We do not do it by remaining silent or giving phony reasons about why
jobs are being outsourced unnecessarily around the globe. That is why I
bring it up and that is why I hope we can have a vote and move on it.
It is not that difficult to understand.
I yield the floor, as I know my friend from Texas wants to be heard.
The PRESIDING OFFICER. The Senator from Texas.
Mr. CORNYN. Madam President, the distinguished Senator from
Connecticut has spoken passionately and eloquently about our concern
about job loss in this country and certainly it is something we are all
concerned and want to do something about. But I am sure none of us
would want to endorse a cure which is worse than the disease or cause
other problems that perhaps we have not thought through or that are not
intended.
I do detect a whiff of politics. I notice the chart says
manufacturing jobs lost under President Bush. Perhaps since the time
when we had primarily an agrarian economy, we have seen tremendous
shifts in our economy because of the efficiency of a flow market system
that is far more efficient than the command-and-control economy that is
used in other parts of the world that is inefficient and stifles
competition and innovation and the productivity that we have in this
country.
I certainly would not want to see us do anything that would harm the
good things we had going on in the economy in the effort to address a
real problem but perhaps with the wrong solution.
I appreciate the Senator from Wyoming mentioning this is something I
and no doubt other Members would like to study a little further to see
exactly what the details may be before we were asked to vote on it.
I am not an economist. I do understand why companies outsource, to
find a cheaper way of producing their product. Even though the
distinguished Senator from Connecticut says it is a bad idea, I am not
sure what you can do or what we could do, short of erecting a wall
around this country and saying we are no longer interested in
international trade. I don't know what we can do to avoid companies who
are seeking to produce a cheaper product in a more competitive
environment from outsourcing some of those jobs. I do think there is an
answer, but I am not sure the answer is what the distinguished Senator
from Connecticut is proposing.
In fact, by prohibiting the outsourcing of jobs we are basically
saying the American taxpayer has to pay a higher price than they would
otherwise have to pay. Certainly, that is something we need to explore,
whether the higher price is worth the proposed cure.
Also, the Senator from Iowa mentioned we are a country that has a
policy of free and fair trade. Of course, there is a question of
retaliation. But the truth is, we have seen a loss of manufacturing
jobs in this country for a lot of reasons other than outsourcing or
competition with China, India--now with the movement of white-collar
jobs particularly in the service sector to that country--and that is
simply because we have increased productivity. Technology has made it
possible to do the same or, indeed, more work using less people. That
is just a fact of life. I don't think anyone would want to go back to
the last century and say we are

[[Page S2097]]

not going to seek further improvements in technology or innovation
because we do not want to put people out of work.
The truth is, the solution is, we need to make sure we continue to
educate our workforce and not for minimum-wage jobs but for good high-
paying jobs. Members may recall the President addressed this issue in
his State of the Union speech and talked about the importance of
Americans competing in a global economy by educating and perhaps
retraining our workforce for new and better-paying jobs.
He mentioned his initiative, working with community colleges. I took
the President's words to heart because I am concerned--as no doubt all
100 Members of this body are--about job loss in this country. I went to
the community colleges in my State. I said, Tell me what you are doing
to train the American worker or perhaps to retrain the American worker
for good, high-paying jobs. I went to Amarillo in the Panhandle where I
found that Bell Helicopter and the Amarillo College helped create a
curriculum to train people to work on the V-22 Osprey which is produced
in that plant.
I remember a young woman, a single mom, Hispanic woman, with two
children, formerly working as a prison guard making about $9 an hour.
As a result of this program with Amarillo College and Bell Helicopter--
this is just one example--she is now working on a production line,
contributing to the transformation of our military and also improving
her standard of living, making about $16 an hour in a good job.
I have done the same thing in Austin where I went to the Austin
Community College and learned about partnerships they had entered into
to train nurses, surgical techs, dental hygienists. At the San Jacinto
Community College near Houston they have partnerships with Boeing and
NASA and others to train people for good, high-paying jobs.
Now, I realize we are in the political season, and I understand that
perhaps nothing said in this body or anywhere else in Washington is
perhaps totally devoid of politics, but the truth is, Americans can and
will always be willing to compete and win in the global competition in
this new economy.
Now is not the time for us to wring our hands and say: Oh, woe is us.
We just can't quite do it. We have to erect protectionist walls. We
have to come up with solutions which, perhaps maybe actually increase
prices to the American consumer while not actually solving the problem
that we are all concerned about; that is, job loss.
So I say as part of this debate--and, again, I know the Senator from
Connecticut has the best of intentions, and we share the same concern--
now is not the time for the American worker or for the Members of the
Congress to lose faith in free markets and the capitalist economy which
has made this Nation the envy of the world.
We are talking now again, thankfully, about addressing our
immigration issues in this country. I will note that there are not
people trying to get out of the United States of America because things
are so bad. To the contrary, people are risking life itself to come
here because we are still a beacon in terms of the opportunities
provided, in terms of the freedom, in terms of the ability of people,
working hard in this country, to have a good standard of living and a
better quality of life.
I hope the election year does not consume us so much that we look at
the glass always as half empty rather than half full, or look at
something as a lemon rather than an opportunity to make lemonade.
I think the President is exactly on the right track. I think if we
commit resources to train the American worker to be part of the
innovation that has always characterized and been the hallmark of the
American economy and the business providers in this country, to make
sure those workers are trained in this constantly evolving economy,
which is very efficient, and sometimes brutal, but to make sure we are
there and are working with local and State and Federal governments to
do everything we can to assist business partners and the education
community to train the American worker for good, high-paying jobs, I
think we have nothing to fear.
Finally, where I was raised we were taught that we would get our
formal education and then we would go to work and maybe even stay in
the same job for the rest of our adult life. But the truth is, today
that is just not possible. We need to change our frame of mind so that
we teach our younger people, look, learning is a lifetime endeavor, and
it may be that you will change jobs at different times during your
adult life because you want to improve your circumstances, you want to
get a better paying job to better provide for your family, and you can
do it in a free country where there is an opportunity to retrain, to
get an education throughout the course of your life.
I firmly believe now is not the time for the American people to lose
faith in the good thing we have going in this country, and that, as I
said a moment ago, is the envy of the entire world. I believe our focus
ought to be on that education, lifetime job training, and not on
erecting barriers around this country or perhaps other solutions,
although well intended, which will have a detrimental impact.
With that, Madam President, I yield the floor.
Mr. DODD. I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The assistant journal clerk proceeded to call the roll.
Mr. REID. Madam President, I ask unanimous consent that the order for
the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. REID. Madam President, I think the American people need to look
at what has transpired in recent weeks with this administration.
Senator Dodd has brought to the Senate's attention one issue; that is,
a high-ranking member of this administration has said that outsourcing
jobs--what does it mean? Shipping jobs overseas--is good for our
economy. That is what he said. Well, if that were the end of it, you
could well say, maybe that was just somebody who made a mistake.
Then we have today Tommy Thompson who says: We should not have
Americans be concerned about all the money we are giving to Iraq to
establish a health care system because we really have, in the United
States, a universal health care system because those people who have no
insurance get taken care of. That is what a Cabinet officer of this
President said.
Now, should we stop there? Let's go on and talk about what another
Cabinet officer said 2 weeks ago, the Secretary of Education. The
Secretary of Education said, to a group of assembled Governors, that
the National Education Association were terrorists. He did not say it
once to the Governors but twice. I have talked to Governors who were
there: The National Education Association are terrorists; the largest
teacher organization in the world, based in the United States, are
terrorists.
I think that is something I cannot comprehend: How the Secretary of
Education can say this about teachers.
Someone I went to high school with--we played baseball together; we
were on the first State championship baseball team in the history of
the State of Nevada; He was a pitcher; I was a catcher--Reynaldo
Martinez and I have been friends for these many years. He was my chief
of staff in the Senate. He retired a few years ago. He was a longtime
organizer for the National Education Association. To call Rey Martinez
a terrorist because he was a member of that organization is difficult
for me to comprehend.
For me personally, what is transpiring in Congress, because of the
position the administration has taken regarding highway
transportation--the former chairman of the Environment and Public Works
Committee, the former chairman of the Finance Committee, now the
ranking member of the Finance Committee, has worked, as I have worked,
on a number of highway bills. There is no bill we do in the Senate, in
the Congress, that is more important than a highway bill. It creates
millions of jobs over a 6-year bill. We produced a bill based on the
budget we passed a year ago. We have there, in the bill that we were
able to report out of committee, in keeping with the budget, and as
passed the Senate of the United States, a bill that is a very good
bill, that does not raise one penny of taxes, that takes care of
transit and highways. The President says he is going to veto the bill.
Outsourcing is good; 44 million Americans, don't worry, you have
universal

[[Page S2098]]

coverage because if you get sick, you can go to an emergency room, if
you are lucky, if there is one there; the National Education
Association personnel are terrorists; and he is going to veto the
transportation bill. Is there somebody in the bowels of the White House
trying to destroy the President? I cannot imagine the President would
come up with these ideas himself. I certainly hope not.
I commend and applaud my friend from Connecticut, the senior Senator
from Connecticut. He has brought to the attention of the Senate the
importance of focusing on the disastrous loss of manufacturing jobs.
Since this President has been in office, our Nation has lost a total of
2.8 million jobs. Every single month, with no exception, manufacturing
jobs are lost.

I guess I should be leading the cheers here because out of the 50
States, the great State of Nevada is the only one in white on this
chart. We hold the record. We created 200 new jobs in the last 3\1/2\
years. That is certainly better than losing 200, and it is certainly
better than the State of Texas, which has lost 150,000 jobs, or the
State of New York, 115,000 jobs. Even a small State such as Wyoming
lost 700 jobs. California has lost 273,000 jobs. So 200 may not look
like much, but for us in Nevada, we will take it.
Two hundred manufacturing jobs in 3\1/2\ years were created in the
State of Nevada--not much, until you compare it to the rest of the
country. Then we are doing pretty well. We are the only State in the
Union that had a net gain of manufacturing jobs during this Presidency.
Where have these jobs gone? Some are gone forever, but lots of them
have gone overseas. Our country cannot remain strong if we can't
manufacture steel, automobiles, airplanes, and appliances. I am very
happy that we do wonderfully well with our service industry. No place
represents that better than the State of Nevada, especially Las Vegas.
But we cannot remain the superpower of the world by flipping
hamburgers, which is something I forgot to mention.
Somebody in the administration suggested 2 weeks ago that we should
create a new manufacturing category; that is, people who work in fast
food restaurants. I am not making that up. They want to turn people who
work in McDonald's preparing meat patties, putting the sandwiches
together, into manufacturers.
Mr. DODD. If my colleague will yield, in chapter 2, page 73 of the
Economic Report of the President--this was prepared by the President's
economic advisors--they raise the issue here as if it were a legitimate
question. They say: The definition of a manufactured product, however,
is not straightforward. When a fast food restaurant sells a hamburger,
for example, is it providing a service or is it manufacturing a
product? They think that is a legitimate question, that manufacturing a
hamburger might actually be a manufacturing job. My colleague from
Nevada is absolutely right to raise this point.
Mr. REID. Mr. President, I have only talked about what has happened
in the last few weeks: Outsourcing is good, teachers are terrorists,
veto the transportation bill. We have universal coverage in America
because if you are one of the 44 million, you get taken care of some
day somewhere. That is universal coverage. That was the Secretary of
Health and Human Services who said that. And now they are trying to
develop a new category of manufacturing.
This reminds me of my friend Greg Maddux. In Las Vegas we are so
proud of him. He has won the Cy Young Award 4 years. He is slightly
built and my size. He is one of the greatest pitchers of all size. His
hands are smaller than mine. He is now going to Chicago. He needs to
win 11 more games to become a 300-game winner, which is a big deal in
baseball. Just a handful of people have done that. So he needs 11 more
games. Based on the President's assumption of how we can create
manufacturing jobs, maybe we can get him to 11 more quickly. What I
suggest is having four strikes instead of three. With four strikes--he
has great control--I guarantee you, even though he will be 37 years old
next month, I think he could win his 11 games much more quickly.

That is what is going on with this administration. If you don't like
what goes on, change the rules.
I have said before, I have two brothers older than I. One of them was
working in a Standard station in a place called Ashfork, AZ. He wanted
to take his little brother away from Searchlight. So we went to what I
thought was the big town of Ashfork, AZ. Frankly, it was not a lot of
fun for me because my brother had a girlfriend, and he didn't spend a
lot of time with me. So I was pushed off on his girlfriend's brother. I
could not beat him at anything. It didn't matter what it was. I never
beat him at anything because he always changed the rules in the middle
of the game. That is what is going on here with the administration. We
are going to change the definition of manufacturing.
The loss of jobs in our country is very bad. If it were only
manufacturing jobs that were going overseas, I would not like it, I
would complain about it. But this has been compounded because the loss
of manufacturing jobs is not the only problem. The Senator from
Connecticut and I were looking earlier today at a chart. I am sure he
has shown it. This chart talked about some of the diagnostic procedures
that were going overseas. Look at some of these things: 14 million jobs
in danger of being shipped overseas.
Mr. DODD. These charts belong to Senator Kennedy. He feels very
strongly about these charts. I wanted to make sure the record reflects
we are borrowing Senator Kennedy's charts. They are very good charts.
Mr. REID. As I was saying, Senator Dodd and I were looking at this
earlier today. We don't need to go through all of this, about the 14
million jobs, some of which have already been shipped overseas and some
going overseas. Diagnostic support services, we already know what these
are. They are actually shipping medical records to other countries and
having them catalogued. But they are also having some of these medical
records reviewed. Take, for example, a CAT scan. Ship it overseas. They
can have somebody there review it very quickly. Take, for example, an
X-ray, a simple X-ray, ship it overseas. They can do it quickly. You
will get the results back soon. I don't feel very good about that. I go
to my doctor in Las Vegas or Reno, Boulder City, Elko in Nevada. They
are shipping the X-rays they take of my body to India or some foreign
country to have somebody over there call my doctor or the hospital
staff and tell them what is wrong with me? I don't think so.
The additional problem with that, just from a basic fairness
standpoint, I won't disclose the Senator's name, but a Senator told me
she had two complaints from constituents in that State that privacy was
being violated, people had information that came from overseas about
her health condition. I hope the people making these decisions for our
President were not trained during the Reagan years.
Reagan, for whom I have the highest respect, didn't continue this. He
learned early on it was not a good idea when someone in his
administration said, let's have ketchup considered a vegetable for the
school lunch programs. Maybe that person is still around here someplace
and giving these great recommendations to this administration. I hope
not. Or if it is true that that person is around, maybe they should put
a stop to it. We do not want people who are being X-rayed, medical
records, lawyers who research cases and write briefs, technological
specialists to keep virtually every company running--all these jobs are
fleeing America in a mad global case for cheap labor.
Every time a job goes overseas, it hurts an American family.
It used to be that if you lost a job, you would find one pretty
quickly. Now the average time for getting a new job after losing a job
in America is almost 1 year. Losing the job is bad enough because you
lose self-esteem, you lose a sense of pride, you believe you have not
been appreciated, even though you were doing the best job you could,
but also that family probably loses their health insurance because they
cannot pay for the COBRA; they don't have money to do so.
My son left to go to Vegas, and he needed coverage of insurance for 2
weeks. It cost him $2,200. He is married, has two little girls, his
wife was pregnant. He had no choice. He had the money to pay for it. If
he had not had it, I would have helped him. That is not

[[Page S2099]]

the way it is with everybody. Many people are not able to buy insurance
for periods of time when they don't have it. Maybe they are buying a
home or were going to buy one and they lose the sense of a dream of
owning a home.
What about college? College is so expensive. It used to be that when
I was growing up, I could work in the summers and during the school
year to pay for my education. My parents were not in a position to help
me, and I basically educated myself with a few little scholarships I
had. You cannot do that anymore. You cannot work during the off-
season--unless you rob banks--to pay for a college education. It is too
expensive. So that is another thing a family would lose--the ability to
prepare for their children to attend college. That is why the loss of
American jobs is a crisis in our country. We need a real plan to
address that issue. We cannot afford to wait until the next business
cycle because the flight of jobs overseas is a result of powerful
economic forces.
American workers are not afraid of fair competition. I am not against
that, but I am against the mentality of chasing cheap labor around the
globe with no regard to long-term implications. When American companies
choose cheap labor, they are saying our environment doesn't matter.
They are saying conditions for their own workers do not matter, and
they are forgetting the great lesson learned from Henry Ford. Henry
Ford was not a person I liked everything he did or said, but he was a
good businessman. He realized in order for his company to sell cars,
the people who build them should be able to also buy those cars. In
other words, workers are also customers. A worker who earns a decent
living can afford to buy the products and services American companies
are selling. So every time a so-called American company chases cheap
labor by moving jobs overseas, we are all diminished. The market for
goods and services in our country is damaged.
As I have said, the President's top economic advisers said the
outsourcing of jobs is a good thing. Every day someone in the
administration says the economy is getting better. It might be looking
up to those who have the Wall Street Journal and the Financial Times
delivered to their homes but not to middle class Americans. They feel
that inside something is happening that goes beyond the normal business
cycle.
Middle class Americans are deeper in debt than ever. Consumer debt is
at an all-time high. Middle class Americans are afraid the Social
Security benefits will be swallowed in the sink hole of a half-
trillion-dollar deficit. And they are right. The debt would be much
bigger for the 3 years that this President has been in office but for
the fact that the debt is being disguised by the Social Security
surplus. Middle class Americans are worried their jobs might be
outsourced. They are being hit hard by the skyrocketing cost of health
care. Their deductibles and copayments keep going up, and they wonder
whether they are going to lose coverage entirely.

There are 77,000 people on strike in California who work in grocery
stores. They are not on strike because of working conditions, not
because of wages or hours; they are striking for one simple reason,
health benefits. They could not make ends meet by having to pay what
they were going to be told by their employer they had to pay for health
costs, so they went on strike--one of the longest strikes in modern
history.
All these problems are deeper than the business cycle. They all
demand a real economic plan, and part of that plan is the amendment
offered by the Senator from Connecticut. It is not everything. If we
had the opportunity, we could come up with a better plan. This is a
step in the right direction. What we have to do in Congress today is
understand that we are not going to completely rewrite Superfund,
endangered species, clean air and clean water, or the economic
situation this country faces. But we have the ability to do things to
improve Superfund and endangered species. We can do a little here and a
little there to help the economic situation in this country.
The amendment by the Senator from Connecticut is a good amendment. It
is a step in the right direction. That is why we chose this as our
first amendment. It sends a message to the American people that we want
to do something to stop the outflow of these jobs. Focusing on Federal
Government outsourcing is one of the things at which we need to take a
closer look.
We can start trying to improve our economy now, today, by cutting off
Government contracts to companies that plan to outsource their work.
Two years ago, the State of Florida ordered a $280 million contract to
a company that outsources its work to India. If Florida wants to do
that, it is their business. But when the American taxpayers hire
somebody to do a job, it should be done by an American worker who is
also a taxpayer.
For the fourth time in the last few minutes, I commend Senator Dodd
for this amendment and urge all of my colleagues to support it. I also
say this to the majority: If tomorrow, when we come back in session,
there is an effort made to prevent the Senator from Connecticut from
having a vote on this, we are going to keep offering it and offering it
until we get a vote on it. If we don't get it done on this bill, we
will get it done on the next bill. If we don't get it done on the next
bill, it will be offered on the next bill. This is our No. 1 amendment,
and we are going to continue pushing it.
The PRESIDING OFFICER. The Senator from Connecticut is recognized.
Mr. DODD. Madam President, I thank my colleague from Nevada for his
comments. He is absolutely right about changing the rules. I have
worried about that, when all of a sudden--and I have seen it happen in
the past--you don't like the numbers you have, so you come up with a
whole new definition and expand the numbers. That is what it looks like
when you start talking about what clearly are fast food service jobs,
manufacturing jobs, and we have seen those efforts being made.
This wasn't the first administration trying games like that. We have
had others in the past doing that. I appreciate his comments, and I
thank him for his support as well.
I have just a couple of other points. My friend and colleague from
Texas cited earlier some of the efforts in the area of job training,
vocational education. I wanted to respond by saying I don't disagree. I
think that is an important element. But the problem is that one of the
frustrations is the outsourcing of jobs that is occurring at a rather
remarkable rate now, and it seems to be accelerating and very little is
being offered to try to do something about this.
In fact, even in the area of protecting manufacturing jobs and doing
something about retraining, let me share with my colleagues what is
going on. In the manufacturing extension partnership, which is a very
important issue for the manufacturing firms of this country, this is
going to mean less help to an estimated 11,000 small businesses; 28,000
workers will either lose their jobs or not be hired as a result of
these cuts.
So there is cutting back in this area. Outsourcing is going to have a
huge impact on the manufacturing sector.
The Small Business Administration is being cut by $79 million,
hurting hundreds of thousands of small businesses struggling to create
jobs for Americans. There is a cut of $316 million for vocational
education. This is in addition to the more than $1.5 million in
proposed cuts to job training and vocational education made over the
last 3 years. We are also cutting $448 million for the Workforce
Investment Act programs.
My point is, as we watch these outsourcing of jobs and the loss of
2.8 million manufacturing jobs, I would be heartened if I thought we
were making an effort at least to commit additional resources to help
provide training for people who find themselves under normal cyclical
circumstances losing a job, but here we are in an abnormal situation
where there is an extraordinary loss of manufacturing jobs occurring
across the country in the last 36 months and we have an extraordinary
acceleration of outsourcing of jobs occurring over the same period of
time--I pointed out that now 400 of the top 1,000 businesses in America
are outsourcing, 40 of the 50 States, all for a very obvious reason.
You can save a lot of money right off the top by doing it. When you can
hire somebody in India at $7 a day as opposed to paying someone a
salary in Silicon Valley, you

[[Page S2100]]

do not have to have a Ph.D. in mathematics to know the outcome.
I understand the motivation behind it. The question I have is, are we
going to sit back and allow this to continue at the expense of losing
the kind of human investments that we ought to be making to guarantee
that we have a workforce capable of doing jobs and providing the
services that America ought to be providing in the coming years?
In addition to that, even if we were not doing an amendment or were
not going to support language that would say that Federal taxpayer
money ought not be used for this purpose, I would like to think that in
the area of vocational education, small business assistance,
manufacture extension partnerships, and certainly Workforce Investment
Act--all of these areas--that the administration would say: Look, this
is our answer to this. We don't agree with you, Senator, about not
using Federal funds.
Madam President, I ask unanimous consent that an article from the Los
Angeles Times be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:

[From the Nation; Feb. 10, 2004]

Bush Supports Shift of Jobs Overseas

(By Warren Vieth and Edwin Chen)

Washington.--The movement of American factory jobs and
white-collar work to other countries is part of a positive
transformation that will enrich the U.S. economy over time,
even if it causes short-term pain and dislocation, the Bush
administration said Monday.
The embrace of foreign outsourcing, an accelerating trend
that has contributed to U.S. job losses in recent years and
has become an issue in the 2004 elections, is contained in
the president's annual report to Congress on the health of
the economy.
``Outsourcing is just a new way of doing international
trade,'' said N. Gregory Mankiw, chairman of Bush's Council
of Economic Advisers, which prepared the report. ``More
things are tradable than were tradable in the past. An that's
a good thing.''
The report, which predicts that the nation will reverse a
three-year employment slide by creating 2.6 million jobs in
2004, is part of a weeklong effort by the administration to
highlight signs that the recovery is picking up speed. Bush's
economic stewardship has become a central issue in the
presidential campaign, and the White House is eager to
demonstrate that his policies are producing results.
In his message to Congress on Monday, Bush said the economy
``is strong and getting stronger,'' thanks in part to his tax
cuts and other economic programs. He said the nation had
survived a stock market melt-down, recession, terrorist
attacks, corporate scandals and war in Afghanistan and Iraq,
and was finally beginning to enjoy ``a mounting prosperity
that will reach every corner of America.''
The president repeated that message during an afternoon
discussion about the economy at SRC Automotive, an engine-
rebuilding plant in Springfield, Mo., where he lashed out at
lawmakers who oppose making his tax cuts permanent.
``When they say, `We're going to repeal Bush's tax cuts,'
that means they're going to raise your taxes, and that's
wrong. And that's bad economics,'' he said.
Democrats who want Bush's job were quick to challenge his
claims.
Sen. John F. Kerry of Massachusetts, the front-runner for
the Democratic presidential nomination, supports a rollback
of Bush's tax cuts for the wealthiest Americans and backs the
creation of tax incentives for companies that keep jobs in
the United States--although he supported the North American
Free Trade Agreement, which many union members say is
responsible for the migration of U.S. jobs, particularly in
the auto industry, to Mexico.
Campaigning Monday in Roanoke, Va., Kerry questioned the
credibility of the administration's job-creation forecast.
``I've got a feeling this report was prepared by the same
people who brought us the intelligence on Iraq,'' Kerry said.
``I don't think we need a new report about jobs in America. I
think we need a new president who's going to create jobs in
America and put Americans back to work.''
In an evening appearance at George Mason University in
Fairfax, Va., Sen. John Edwards of North Carolina mocked the
Bush administration's economic report.
Edwards, who also supports repealing tax cuts for the
richest Americans and offering incentives to corporations
that create new jobs in the United States, said it would
come as a ``news bulletin'' to the American people that
the economy was improving and that the outsourcing of jobs
was good for America.
``These people,'' he said of the Bush administration,
``what planet do they live on? They are so out of touch.''
The president's 411-page report contains a detailed
diagnosis of the forces the White House says are contributing
to America's economic slowdown and a wide-ranging defense of
the policies Bush has pursued to combat it.
It asserts that the last recession actually began in late
2000, before the president took office, instead of March
2001, as certified by the official recession-dating panel of
the National Bureau of Economic Research.
Much of the report repeats the administration's previous
economic prescriptions.
For instance, it says the Bush tax cuts must be made
permanent to have their full effect on the economy.
Social Security also must be restructured to let workers
put part of their retirement funds in private accounts, the
report argues. Doing so could add nearly $5 trillion to the
national debt by 2036, the president's advisors note, but the
additional borrowing would be repaid 20 years later and the
program's long-term health would be more secure.
The report devotes an entire chapter to an issue that has
become increasingly troublesome for the administration: the
loss of 2.8 million manufacturing jobs since Bush took
office, and critics' claims that his trade policies are
partly to blame.
His advisors acknowledge that international trade and
foreign outsourcing have contributed to the job slump. But
the report argues that technological progress and rising
productivity--the ability to produce more goods with fewer
workers--have played a bigger role than the flight of
production to China and other low-wage countries.
Although trade expansion inevitably hurts some domestic
workers, the benefits eventually will outweigh the costs as
Americans are able to buy cheaper goods and services and as
new jobs are created in growing sectors of the economy, the
report said.
The president's report endorses the relatively new
phenomenon of outsourcing high-end, white-collar work to
India and other countries, a trend that has stirred concern
within such affected occupations as computer programming and
medical diagnostics.
``Maybe we will outsource a few radiologists,'' Mankiw told
reporters. ``What does that mean? Well, maybe the next
generation of doctors will train fewer radiologists and will
train more general practitioners or surgeons. . . . Maybe
we've learned that we don't have a comparative advantage in
radiologists.''
Government should try to salve the short-term disruption by
helping displaced workers obtain the training they need to
enter new fields, such as health-care, Mankiw said, not by
erecting protectionist barriers on behalf of vulnerable
industries or professions. ``The market is the best
determination of where the jobs should be,'' he said.
Bush's quick visit to Missouri--his 15th to a state
considered a critical election battleground--was the first of
several events this week intended to underscore recent
economic gains. Although U.S. job creation remains relatively
sluggish, the nation's unemployment rate fell from 6.4% in
June to 5.6% in January, and the economy grew at the fastest
pace in 20 years during the last half of 2003.
The format of his visit to SRC Automotive--one that he
particularly likes--involved several employees and local
business owners sharing the stage with the president to
discuss their perspectives on the economy, with Bush
elaborating on their stories to emphasize particular aspects
of his economic program.
Today, Bush is scheduled to meet with economic leaders at
the White House. On Thursday, he goes to Pennsylvania's
capital, Harrisburg--in another swing state that he has
already visited more than two dozen times since becoming
president.

Mr. DODD. The headline in the Los Angeles Times--it is a viewpoint--
says: ``Bush Supports Shift of Jobs Overseas.'' It goes on to talk
about the report that I talked about all afternoon, this economic
report prepared by the Council of Economic Advisers, where they
conclude that the outsourcing of jobs is a good thing. The author of
that language apologized for his use of those words, but he has not
apologized, and I understand why, because he believes it is good
economic policy to be outsourcing.
There are some of us--I do not know if it is a majority--who disagree
with that conclusion, that outsourcing is necessarily good.
I cited already from the Wall Street Journal companies that painfully
discovered when they outsourced, while they thought they were going to
save money, it actually cost them dearly. It is not only not good, but
it fails to take into account--watching somebody's job be lost because
there is a cheaper labor pool that you don't have to pay health care
benefits to, despite the fact the person here is going to lose them--if
it is really good for America.
I am suggesting while this rush is occurring that we ought to put on
the brakes and stop, look, and listen so we will not necessarily be
caught up in a situation where a year or two or five from now we will
look back and say: Why didn't somebody say something or do something
when we knew this was happening, when we could sit, watch, and read on
a daily basis the pouring of

[[Page S2101]]

jobs out of this country to 14 time zones away, depriving people of
benefits and income they needed for their families; what did you do on
your watch? What did you do?
If the answer is we thought it was a good thing for the American
economy, then I think we will be suffering an indictment historically.
I see my colleague from Kentucky who wants to move on to matters of
the day. I yield the floor, with the right to be recognized at the
conclusion of his remarks.
Mr. McCONNELL. I say to my friend from Connecticut, he will hardly
have to hold his breath and he will be back up waxing eloquent to all
of our colleagues who I am sure, back in their offices, are watching
his speech and listening carefully to every word.

eliminating the ``haircut'' provision

Mr. SMITH. Madam President, I rise today in support of S. 1637, the
JOBS Act, which will halt European Union trade sanctions against
American industries and provide immediate tax relief for domestic
manufacturers.
U.S. manufacturing has experienced a crisis over the last three years
due to the global economic downturn, sharply diminished capital
spending, global overcapacity, and steady price declines for
manufactured goods. S. 1637 provides a strong incentive for companies
to keep and create jobs in the U.S.
However, I believe we can improve S. 1637 by eliminating the
``haircut'' provision that increases the taxes on U.S. manufacturers
for their U.S. companies merely because these companies also
manufacture products abroad. This concept is totally at odds with the
purpose of this legislation--to cut taxes on manufacturers that employ
American workers. U.S. companies with global operations employ more
than 23 million Americans--9 million of which are manufacturing jobs.
Foreign-owned companies with U.S. operations employ more than 2 million
manufacturing workers in the U.S.
The haircut is structured so that the more a company manufacturers
abroad, the less of a manufacturing rate cut it gets. The ``haircut''
makes the U.S. a less competitive location for current and future
investment. Thus, it is less likely that multinational manufacturing
companies will site new plants and new high-paying jobs in the U.S.
Furthermore, I am concerned that the ``haircut'' invites mirror
legislation in other countries. In this time of crisis for the U.S.
manufacturing industry, we cannot afford to let any more manufacturing
jobs slip away, particularly due to bad tax policy.
With my colleague, Senator Breaux, I am offering an amendment to the
JOBS Act which will eliminate the ``haircut'' and provide an equal tax
benefit for all manufacturers that employ American workers. Congress
should be in the business of rewarding all well-paid manufacturing jobs
that are created in the U.S.--not just those created by certain
domestic manufacturers.
Mr. KENNEDY. Madam President, we call this bill the ``Jumpstart Our
Business Strength Act''--the JOBS Act, because that is exactly what we
are debating this week--the critical issue facing so many millions of
Americans, the lack of jobs.
To hear President Bush, you would never know there was a problem with
jobs. According to the Bush administration, everything is sunshine and
roses.
Over and over again, the President says things that show he is out of
touch with the lives of ordinary Americans and can't understand the
economic hardships they are facing. Happy talk about economic recovery
doesn't jibe with the daily lives of the people on Main Street.
In his State of the Union Address in January, the President said ``.
. . this economy is strong, and growing stronger . . . Productivity is
high, and jobs are on the rise.''
A week later he said: ``The economy is growing, people are finding
work. There's an excitement in our economy . . . You can tell I'm
upbeat, and I've got reason to be. Not only the numbers say things are
looking pretty good, the American people are telling me they feel
pretty good.''
Then came his annual economic report and its ringing endorsement of
sending jobs overseas.
At the National Governors Association meeting last Monday, he said he
thinks the 5.6 percent unemployment rate is ``a good national number.''
Yesterday, Vice President Cheney said, ``The economy's in very good
shape, and going forward there's every reason to be optimistic that we
will have the kind of growth that we need to create jobs out there.''
In fact, he went on to say that if ``Democratic policies had been
pursued over the last two or three years.  . . . we would not have had
the kind of job growth that we've had.''
Job growth? Someone should tell the Vice President that we have lost
over two million jobs in the Bush economy.
The reality of the Bush economic record is very different from the
rhetoric.
Just a few weeks ago, the President said in his economic report that
the economy will create 2.6 million new jobs this year. The reality is
that no one in the White House or the Cabinet will endorse the 2.6
million number.
President Bush said his first tax cuts in 2001 would create 800,000
additional jobs by the end of 2002. The reality is, we lost 1.9 million
jobs instead.
His 2002 economic report predicted 3 million jobs would be created in
2003. Instead, more than 300,000 were lost.
He said the tax breaks enacted last year would create 510,000
additional jobs by the end of the year, but we lost 53,000 jobs last
year.
Even the few jobs being created are not as good as the jobs we have
lost. The new jobs pay on average $8,000 less than jobs lost in the
Bush economy. In 48 of the 50 States, jobs being created pay 21 percent
less than had been paid by industries losing jobs.
Employees have smaller paychecks, and are even less able to keep up
with the rising costs of education, let alone pay the bill for food,
rent and health care.
A big part of the job problem is the worsening crisis in
manufacturing. We have lost nearly 3 million manufacturing jobs since
the Bush administration took office. It is a nationwide problem,
affecting almost every State in the Union. Forty-nine of the 50 States
have lost manufacturing jobs under this President.
That is only part of the story. Fourteen million other jobs are newly
at risk of being sent overseas as well. Every day, we hear more stories
about how white collar jobs and service sector jobs in health care,
financial services, and information technology are going to other
countries.
What is the President's response? More empty rhetoric and broken
promises. Last year on Labor Day, the President met with workers and
promised to appoint a manufacturing czar to deal with the loss of
manufacturing jobs. How typical of the President to make a promise like
that on Labor Day and then forget all about it.
Six months later, there is still no manufacturing czar.
Administration officials say they're working on it, but the economy is
still hemorrhaging manufacturing jobs.
American workers deserve better than this. They deserve better than
to have their jobs exported with the President, as cheerleader in
chief, waving good bye.
We need to do more, to encourage good-paying manufacturing jobs to
stay here, and discourage corporations from sending jobs and new
investment overseas.
This bill contains provisions to encourage manufacturing in the
United States, and I commend Senator Grassley and Senator Baucus for
their bi-partisan work on this bill. But we can do more and we must do
more.
We need to provide incentives now for companies to keep and create
manufacturing jobs in the United States. A key weakness in this bill is
that the tax benefits for domestic manufacturing are phased in too
slowly. These companies and their workers need help now.
We need to stop rewarding multinational corporations that send jobs
to other countries.
This bill not only fails to do that, it creates $35 billion in new or
larger tax breaks for companies doing business abroad. Why on earth do
we want to make exporting of American jobs more attractive to
corporations? These international provisions should be removed from the
bill, and the tax dollars should be used to make the tax benefits for
domestic manufacturing more robust.

[[Page S2102]]

In many respects, the tax code already gives a greater subsidy to
profits from foreign operations over domestic plants. We ought to
change that too, instead of kowtowing to the clout of multinational
corporations. Our corporate tax laws should be rewritten to increase
the cost of exporting jobs and decrease the cost of maintaining jobs in
America.
And what about the urgent needs of Americans who have already lost
their jobs and their long-term unemployment benefits too?
Solid majorities in the Senate and the House have already sent a
message loud and clear to the White House and the Republican leadership
in Congress that we want to reinstate those benefits, which expired on
December 31st. Ninety thousand workers a week have lost their benefits
and still can't get a job. They're moving in with friends or family,
giving up health care, and struggling to pay every bill. Yet our
Republican colleagues say, in their best imitation of Marie Antoinette,
``let them eat cake.''
They tell the unemployed to look harder for work. They treat them as
slackers, and say they won't subsidize their idleness any longer. That
attitude is wrong. The unemployment insurance extension we enacted when
the economy began to decline has expired, and I urge my colleagues to
fix it, before these hard-working employees who have lost their jobs
through no fault of their own suffer any longer.
I also urge my colleagues to join me in strengthening this
legislation. We must improve incentives in the manufacturing industries
and give working Americans a chance for the jobs and the better future
they deserve.
Mr. SMITH. Madam President, I will offer an amendment which would
allow commercial fishermen to use income tax averaging to help mitigate
the negative effects of their fluctuating incomes.
Progressive tax systems, like the Federal income tax, often penalize
farmers and others whose incomes vary greatly from year to year.
Recognizing this fact, Congress, in 1997, gave farmers the option to
calculate their taxes by averaging their income over a 3-year period.
This was an important change in the Tax Code and has helped many in our
agriculture communities weather the up-and-downs of a sometimes erratic
farm economy.
Like farmers, our fishermen are often subject to dramatic swings in
income. Whether it's changing ocean conditions, harvest restrictions,
or bad weather that keeps them in port, the change in income can be
severe and beyond their control. For example, fishermen in Coos Bay, OR
have struggled with regulatory restrictions and reduced stocks over the
last several years. Unfortunately, our Tax Code doesn't allow for
flexibility, and fishermen, who experience both good and bad years, are
forced to pay more taxes than if they had steady income levels.
My amendment would resolve some of this inequality by extending to
commercial fishermen the same income averaging benefit given to
farmers. It would also fix a technical error in the original provision
that has led to some farmers being caught under alternative minimum
tax.
I thank the chairman for his leadership on this issue in the past and
including this important provision in his bill, the Tax Empowerment and
Relief for Farmers and Fishermen, TERFF, Act. I am pleased to see that
portions of the TERFF Act were incorporated into the bill now before
us, and I am hopeful that we will be able to address the issue of
income averaging for fishermen also at this time.
Our farmers and fishermen represent an important sector of our
economy. Unfortunately, they and their families often have to deal with
more than their fair share of challenges. Making the Tax Code more
consistent and more reflective of the variable nature of resource
industries will also make it more fair and provide some measure of
stability for these hard working individuals.
I encourage the Senate to consider and pass this important amendment.
The PRESIDING OFFICER (Mr. Alexander). The Senator from Kentucky.

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