To strike provisions relating to energy tax incentives.

TEXT OF AMENDMENTS

SA 3121. Ms. LANDRIEU submitted an amendment intended to be proposed
by her to the 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; which was ordered
to lie on the table; as follows:

Beginning on page 441, strike line 1 through page 446, line
4, and insert the following:

SEC. 632. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT AND
READY RESERVE-NATIONAL GUARD REPLACEMENT
EMPLOYEE CREDIT.

(a) Ready Reserve-National Guard Credit.--
(1) In general.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business-related credits), as amended
by this Act, is amended by adding at the end the following:

``SEC. 45H. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT.

``(a) General Rule.--For purposes of section 38, the Ready
Reserve-National Guard

[[Page S5096]]

employee credit determined under this section for any taxable
year with respect to each Ready Reserve-National Guard
employee of an employer is an amount equal to 50 percent of
the lesser of--
``(1) the actual compensation amount with respect to such
employee for such taxable year, or
``(2) $30,000.
``(b) Definition of Actual Compensation Amount.--For
purposes of this section, the term `actual compensation
amount' means the amount of compensation paid or incurred by
an employer with respect to a Ready Reserve-National Guard
employee on any day when the employee was absent from
employment for the purpose of performing qualified active
duty.
``(c) Limitations.--No credit shall be allowed with respect
to any day that a Ready Reserve-National Guard employee who
performs qualified active duty was not scheduled to work (for
reason other than to participate in qualified active duty).
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified active duty.--The term `qualified active
duty' means--
``(A) active duty, other than the training duty specified
in section 10147 of title 10, United States Code (relating to
training requirements for the Ready Reserve), or section
502(a) of title 32, United States Code (relating to required
drills and field exercises for the National Guard), in
connection with which an employee is entitled to reemployment
rights and other benefits or to a leave of absence from
employment under chapter 43 of title 38, United States Code,
and
``(B) hospitalization incident to such duty.
``(2) Compensation.--The term `compensation' means any
remuneration for employment, whether in cash or in kind,
which is paid or incurred by a taxpayer and which is
deductible from the taxpayer's gross income under section
162(a)(1).
``(3) Ready reserve-national guard employee.--The term
`Ready Reserve-National Guard employee' means an employee who
is a member of the Ready Reserve of a reserve component of an
Armed Force of the United States as described in sections
10142 and 10101 of title 10, United States Code.
``(4) Certain rules to apply.--Rules similar to the rules
of section 52 shall apply.
``(e) Portion of Credit Refundable.--
``(1) In general.--In the case of an employer of a
qualified first responder, the aggregate credits allowed to a
taxpayer under subpart C shall be increased by the lesser
of--
``(A) the credit which would be allowed under this section
without regard to this subsection and the limitation under
section 38(c), or
``(B) the amount by which the aggregate amount of credits
allowed by this subpart (determined without regard to this
subsection) would increase if the limitation imposed by
section 38(c) for any taxable year were increased by the
amount of employer payroll taxes imposed on the taxpayer
during the calendar year in which the taxable year begins.

The amount of the credit allowed under this subsection shall
not be treated as a credit allowed under this subpart and
shall reduce the amount of the credit otherwise allowable
under subsection (a) without regard to section 38(c).
``(2) Employer payroll taxes.--For purposes of this
subsection--
``(A) In general.--The term `employer payroll taxes' means
the taxes imposed by--
``(i) section 3111(b), and
``(ii) sections 3211(a) and 3221(a) (determined at a rate
equal to the rate under section 3111(b)).
``(B) Special rule.--A rule similar to the rule of section
24(d)(2)(C) shall apply for purposes of subparagraph (A).
``(3) Qualified first responder.--For purposes of this
subsection, the term `qualified first responder' means any
person who is--
``(A) employed as a law enforcement official, a
firefighter, or a paramedic, and
``(B) a Ready Reserve-National Guard employee.''.
(2) Credit to be part of general business credit.--
Subsection (b) of section 38 (relating to general business
credit), as amended by this Act, is amended by striking
``plus'' at the end of paragraph (15), by striking the period
at the end of paragraph (16) and inserting ``, plus'', and by
adding at the end the following:
``(17) the Ready Reserve-National Guard employee credit
determined under section 45H(a).''.
(3) Denial of double benefit.--Section 280C(a) (relating to
rule for employment credits) is amended by inserting
``45H(a),'' after ``45A(a),''.
(4) Conforming amendment.--The table of sections for
subpart D of part IV of subchapter A of chapter 1, as amended
by this Act, is amended by inserting after the item relating
to section 45G the following:

``Sec. 45H. Ready Reserve-National Guard employee credit.''.

(5) Effective date.--The amendments made by this subsection
shall apply to amounts paid or incurred after September 30,
2004, in taxable years ending after such date.
(b) Application of Annual Exclusion Limit Under Section 911
to Housing Costs.--
(1) In general.--Section 911(c) (relating to housing cost
amount) is amended by adding at the end the following new
paragraph:
``(4) Limit on exclusion for employer provided housing
costs.--The housing cost amount for any individual for any
taxable year attributable to employer provided amounts shall
not exceed the excess (if any) of--
``(A) the product of--
``(i) the exclusion amount determined under subsection
(b)(2)(D) for the taxable year, and
``(ii) a fraction equal to the number of days of the
taxable year within the applicable period described in
subparagraph (A) or (B) of subsection (d)(1) divided by the
number of days in the taxable year, over
``(B) the foreign earned income of the individual excluded
under subsection (a)(1) for the taxable year.''.
(2) Conforming amendment.--Section 911(c)(1) is amended by
striking ``The'' and inserting ``Except as provided in
paragraph (4), the''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after December 31,
2004.
______

SA 3122. Ms. LANDRIEU submitted an amendment intended to be proposed
by her to the 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; which was ordered
to lie on the table; as follows:

Beginning on page 441, strike line 1 through page 446, line
4, and insert the following:

SEC. 632. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT AND
READY RESERVE-NATIONAL GUARD REPLACEMENT
EMPLOYEE CREDIT.

(a) Ready Reserve-National Guard Credit.--
(1) In general.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business-related credits), as amended
by this Act, is amended by adding at the end the following:

``SEC. 45H. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT.

``(a) General Rule.--For purposes of section 38, the Ready
Reserve-National Guard employee credit determined under this
section for any taxable year with respect to each Ready
Reserve-National Guard employee of an employer is an amount
equal to 50 percent of the actual compensation amount with
respect to such employee for such taxable year.
``(b) Definition of Actual Compensation Amount.--For
purposes of this section, the term `actual compensation
amount' means the amount of compensation paid or incurred by
an employer with respect to a Ready Reserve-National Guard
employee on any day when the employee was absent from
employment for the purpose of performing qualified active
duty.
``(c) Limitations.--No credit shall be allowed with respect
to any day that a Ready Reserve-National Guard employee who
performs qualified active duty was not scheduled to work (for
reason other than to participate in qualified active duty).
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified active duty.--The term `qualified active
duty' means--
``(A) active duty, other than the training duty specified
in section 10147 of title 10, United States Code (relating to
training requirements for the Ready Reserve), or section
502(a) of title 32, United States Code (relating to required
drills and field exercises for the National Guard), in
connection with which an employee is entitled to reemployment
rights and other benefits or to a leave of absence from
employment under chapter 43 of title 38, United States Code,
and
``(B) hospitalization incident to such duty.
``(2) Compensation.--The term `compensation' means any
remuneration for employment, whether in cash or in kind,
which is paid or incurred by a taxpayer and which is
deductible from the taxpayer's gross income under section
162(a)(1).
``(3) Ready reserve-national guard employee.--The term
`Ready Reserve-National Guard employee' means an employee who
is a member of the Ready Reserve of a reserve component of an
Armed Force of the United States as described in sections
10142 and 10101 of title 10, United States Code.
``(4) Certain rules to apply.--Rules similar to the rules
of section 52 shall apply.
``(e) Portion of Credit Refundable.--
``(1) In general.--In the case of an employer of a
qualified first responder, the aggregate credits allowed to a
taxpayer under subpart C shall be increased by the lesser
of--
``(A) the credit which would be allowed under this section
without regard to this subsection and the limitation under
section 38(c), or
``(B) the amount by which the aggregate amount of credits
allowed by this subpart (determined without regard to this
subsection) would increase if the limitation imposed by
section 38(c) for any taxable year were increased by the
amount of employer payroll taxes imposed on the taxpayer
during the calendar year in which the taxable year begins.

[[Page S5097]]

The amount of the credit allowed under this subsection shall
not be treated as a credit allowed under this subpart and
shall reduce the amount of the credit otherwise allowable
under subsection (a) without regard to section 38(c).
``(2) Employer payroll taxes.--For purposes of this
subsection--
``(A) In general.--The term `employer payroll taxes' means
the taxes imposed by--
``(i) section 3111(b), and
``(ii) sections 3211(a) and 3221(a) (determined at a rate
equal to the rate under section 3111(b)).
``(B) Special rule.--A rule similar to the rule of section
24(d)(2)(C) shall apply for purposes of subparagraph (A).
``(3) Qualified first responder.--For purposes of this
subsection, the term `qualified first responder' means any
person who is--
``(A) employed as a law enforcement official, a
firefighter, or a paramedic, and
``(B) a Ready Reserve-National Guard employee.''.
(2) Credit to be part of general business credit.--
Subsection (b) of section 38 (relating to general business
credit), as amended by this Act, is amended by striking
``plus'' at the end of paragraph (15), by striking the period
at the end of paragraph (16) and inserting ``, plus'', and by
adding at the end the following:
``(17) the Ready Reserve-National Guard employee credit
determined under section 45H(a).''.
(3) Denial of double benefit.--Section 280C(a) (relating to
rule for employment credits) is amended by inserting
``45H(a),'' after ``45A(a),''.
(4) Conforming amendment.--The table of sections for
subpart D of part IV of subchapter A of chapter 1, as amended
by this Act, is amended by inserting after the item relating
to section 45G the following:

``Sec. 45H. Ready Reserve-National Guard employee credit.''.

(5) Effective date.--The amendments made by this subsection
shall apply to amounts paid or incurred after September 30,
2004, in taxable years ending after such date.
(b) Application of Annual Exclusion Limit Under Section 911
to Housing Costs.--
(1) In general.--Section 911(c) (relating to housing cost
amount) is amended by adding at the end the following new
paragraph:
``(4) Limit on exclusion for employer provided housing
costs.--The housing cost amount for any individual for any
taxable year attributable to employer provided amounts shall
not exceed the excess (if any) of--
``(A) the product of--
``(i) the exclusion amount determined under subsection
(b)(2)(D) for the taxable year, and
``(ii) a fraction equal to the number of days of the
taxable year within the applicable period described in
subparagraph (A) or (B) of subsection (d)(1) divided by the
number of days in the taxable year, over
``(B) the foreign earned income of the individual excluded
under subsection (a)(1) for the taxable year.''.
(2) Conforming amendment.--Section 911(c)(1) is amended by
striking ``The'' and inserting ``Except as provided in
paragraph (4), the''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after December 31,
2004.
______

SA 3123. Ms. LANDRIEU submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

Beginning on page 441, strike line 1 through page 446, line
4, and insert the following:

SEC. 632. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT AND
READY RESERVE-NATIONAL GUARD REPLACEMENT
EMPLOYEE CREDIT.

(a) Ready Reserve-National Guard Credit.--
(1) In general.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business-related credits), as amended
by this Act, is amended by adding at the end the following:

``SEC. 45H. READY RESERVE-NATIONAL GUARD EMPLOYEE CREDIT.

``(a) General Rule.--For purposes of section 38, the Ready
Reserve-National Guard employee credit determined under this
section for any taxable year with respect to each Ready
Reserve-National Guard employee of an employer is an amount
equal to 50 percent of the lesser of--
``(1) the actual compensation amount with respect to such
employee for such taxable year, or
``(2) $30,000.
``(b) Definition of Actual Compensation Amount.--For
purposes of this section, the term `actual compensation
amount' means the amount of compensation paid or incurred by
an employer with respect to a Ready Reserve-National Guard
employee on any day when the employee was absent from
employment for the purpose of performing qualified active
duty.
``(c) Limitations.--No credit shall be allowed with respect
to any day that a Ready Reserve-National Guard employee who
performs qualified active duty was not scheduled to work (for
reason other than to participate in qualified active duty).
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Qualified active duty.--The term `qualified active
duty' means--
``(A) active duty, other than the training duty specified
in section 10147 of title 10, United States Code (relating to
training requirements for the Ready Reserve), or section
502(a) of title 32, United States Code (relating to required
drills and field exercises for the National Guard), in
connection with which an employee is entitled to reemployment
rights and other benefits or to a leave of absence from
employment under chapter 43 of title 38, United States Code,
and
``(B) hospitalization incident to such duty.
``(2) Compensation.--The term `compensation' means any
remuneration for employment, whether in cash or in kind,
which is paid or incurred by a taxpayer and which is
deductible from the taxpayer's gross income under section
162(a)(1).
``(3) Ready reserve-national guard employee.--The term
`Ready Reserve-National Guard employee' means an employee who
is a member of the Ready Reserve of a reserve component of an
Armed Force of the United States as described in sections
10142 and 10101 of title 10, United States Code.
``(4) Certain rules to apply.--Rules similar to the rules
of section 52 shall apply.
``(e) Portion of Credit Refundable.--
``(1) In general.--In the case of an employer of a
qualified first responder, the aggregate credits allowed to a
taxpayer under subpart C shall be increased by the lesser
of--
``(A) the credit which would be allowed under this section
without regard to this subsection and the limitation under
section 38(c), or
``(B) the amount by which the aggregate amount of credits
allowed by this subpart (determined without regard to this
subsection) would increase if the limitation imposed by
section 38(c) for any taxable year were increased by the
amount of employer payroll taxes imposed on the taxpayer
during the calendar year in which the taxable year begins.

The amount of the credit allowed under this subsection shall
not be treated as a credit allowed under this subpart and
shall reduce the amount of the credit otherwise allowable
under subsection (a) without regard to section 38(c).
``(2) Employer payroll taxes.--For purposes of this
subsection--
``(A) In general.--The term `employer payroll taxes' means
the taxes imposed by--
``(i) section 3111(b), and
``(ii) sections 3211(a) and 3221(a) (determined at a rate
equal to the rate under section 3111(b)).
``(B) Special rule.--A rule similar to the rule of section
24(d)(2)(C) shall apply for purposes of subparagraph (A).
``(3) Qualified first responder.--For purposes of this
subsection, the term `qualified first responder' means any
person who is--
``(A) employed as a law enforcement official, a
firefighter, or a paramedic, and
``(B) a Ready Reserve-National Guard employee.''.
(2) Credit to be part of general business credit.--
Subsection (b) of section 38 (relating to general business
credit), as amended by this Act, is amended by striking
``plus'' at the end of paragraph (15), by striking the period
at the end of paragraph (16) and inserting ``, plus'', and by
adding at the end the following:
``(17) the Ready Reserve-National Guard employee credit
determined under section 45H(a).''.
(3) Denial of double benefit.--Section 280C(a) (relating to
rule for employment credits) is amended by inserting
``45H(a),'' after ``45A(a),''.
(4) Conforming amendment.--The table of sections for
subpart D of part IV of subchapter A of chapter 1, as amended
by this Act, is amended by inserting after the item relating
to section 45G the following:

``Sec. 45H. Ready Reserve-National Guard employee credit.''.
(5) Effective date.--The amendments made by this subsection
shall apply to amounts paid or incurred after September 30,
2004, in taxable years ending after such date.
(b) Ready Reserve-National Guard Replacement Employee
Credit.--
(1) In general.--Subpart B of part IV of subchapter A of
chapter 1 (relating to foreign tax credit, etc.), as amended
by this Act, is amended by adding after section 30C the
following new section:

``SEC. 30D. READY RESERVE-NATIONAL GUARD REPLACEMENT EMPLOYEE
CREDIT.

``(a) Allowance of Credit.--
``(1) In general.--In the case of an eligible taxpayer,
there shall be allowed as a credit against the tax imposed by
this chapter for the taxable year the sum of the employment
credits for each qualified replacement employee under this
section.
``(2) Employment credit.--The employment credit with
respect to a qualified replacement employee of the taxpayer
for any taxable year is equal to 50 percent of the lesser
of--
``(A) the individual's qualified compensation attributable
to service rendered as a qualified replacement employee, or

[[Page S5098]]

``(B) $12,000.
``(b) Qualified Compensation.--The term `qualified
compensation' means--
``(1) compensation which is normally contingent on the
qualified replacement employee's presence for work and which
is deductible from the taxpayer's gross income under section
162(a)(1),
``(2) compensation which is not characterized by the
taxpayer as vacation or holiday pay, or as sick leave or pay,
or as any other form of pay for a nonspecific leave of
absence, and
``(3) group health plan costs (if any) with respect to the
qualified replacement employee.
``(c) Qualified Replacement Employee.--For purposes of this
section--
``(1) In general.--The term `qualified replacement
employee' means an individual who is hired to replace a Ready
Reserve-National Guard employee or a Ready Reserve-National
Guard self-employed taxpayer, but only with respect to the
period during which such Ready Reserve-National Guard
employee or Ready Reserve-National Guard self-employed
taxpayer participates in qualified active duty, including
time spent in travel status.
``(2) Ready reserve-national guard employee.--The term
`Ready Reserve-National Guard employee' has the meaning given
such term by section 45H(d)(3).
``(3) Ready reserve-national guard self-employed
taxpayer.--The term `Ready Reserve-National Guard self-
employed taxpayer' means a taxpayer who--
``(A) has net earnings from self-employment (as defined in
section 1402(a)) for the taxable year, and
``(B) is a member of the Ready Reserve of a reserve
component of an Armed Force of the United States as described
in section 10142 and 10101 of title 10, United States Code.
``(d) Coordination With Other Credits.--The amount of
credit otherwise allowable under sections 51(a) and 1396(a)
with respect to any employee shall be reduced by the credit
allowed by this section with respect to such employee.
``(e) Limitations.--
``(1) Application with other credits.--The credit allowed
under subsection (a) for any taxable year shall not exceed
the excess (if any) of--
``(A) the regular tax for the taxable year reduced by the
sum of the credits allowable under subpart A and sections 27,
29, and 30, over
``(B) the tentative minimum tax for the taxable year.
``(2) Disallowance for failure to comply with employment or
reemployment rights of members of the reserve components of
the armed forces of the united states.--No credit shall be
allowed under subsection (a) to a taxpayer for--
``(A) any taxable year, beginning after the date of the
enactment of this section, in which the taxpayer is under a
final order, judgment, or other process issued or required by
a district court of the United States under section 4323 of
title 38 of the United States Code with respect to a
violation of chapter 43 of such title, and
``(B) the 2 succeeding taxable years.
``(f) General Definitions and Special Rules.--For purposes
of this section--
``(1) Eligible taxpayer.--The term `eligible taxpayer'
means a small business employer or a Ready Reserve-National
Guard self-employed taxpayer.
``(2) Small business employer.--
``(A) In general.--The term `small business employer'
means, with respect to any taxable year, any employer who
employed an average of 50 or fewer employees on business days
during such taxable year.
``(B) Controlled groups.--For purposes of subparagraph (A),
all persons treated as a single employer under subsection
(b), (c), (m), or (o) of section 414 shall be treated as a
single employer.
``(3) Qualified active duty.--The term `qualified active
duty' has the meaning given such term by section 45H(d)(1).
``(4) Special rules for certain manufacturers.--
``(A) In general.--In the case of any qualified
manufacturer--
``(i) subsection (a)(2)(B) shall be applied by substituting
`$20,000' for `$12,000', and
``(ii) paragraph (2)(A) of this subsection shall be applied
by substituting `100' for `50'.
``(B) Qualified manufacturer.--For purposes of this
paragraph, the term `qualified manufacturer' means any person
if--
``(i) the primary business of such person is classified in
sector 31, 32, or 33 of the North American Industrial
Classification System, and
``(ii) all of such person's facilities which are used for
production in such business are located in the United States.
``(5) Carryback and carryforward allowed.--
``(A) In general.--If the credit allowable under subsection
(a) for a taxable year exceeds the amount of the limitation
under subsection (e)(1) for such taxable year (in this
paragraph referred to as the `unused credit year'), such
excess shall be a credit carryback to each of the 3 taxable
years preceding the unused credit year and a credit
carryforward to each of the 20 taxable years following the
unused credit year.
``(B) Rules.--Rules similar to the rules of section 39
shall apply with respect to the credit carryback and credit
carryforward under subparagraph (A).
``(6) Certain rules to apply.--Rules similar to the rules
of subsections (c), (d), and (e) of section 52 shall
apply.''.
(2) No deduction for compensation taken into account for
credit.--Section 280C(a) (relating to rule for employment
credits), as amended by this Act, is amended--
(A) by inserting ``or compensation'' after ``salaries'',
and
(B) by inserting ``30D,'' before ``45A(a),''.
(3) Conforming amendment.--Section 55(c)(2), as amended by
this Act, is amended by inserting ``30D(e)(1),'' after
``30C(e),''.
(4) Clerical amendment.--The table of sections for subpart
B of part IV of subchapter A of chapter 1, as amended by this
Act, is amended by adding after the item relating to section
30C the following new item:

``Sec. 30D. Credit for replacement of activated military reservists.''.
(5) Effective date.--The amendments made by this subsection
shall apply to amounts paid or incurred after September 30,
2004, in taxable years ending after such date.
(c) Application of Annual Exclusion Limit Under Section 911
to Housing Costs.--
(1) In general.--Section 911(c) (relating to housing cost
amount) is amended by adding at the end the following new
paragraph:
``(4) Limit on exclusion for employer provided housing
costs.--The housing cost amount for any individual for any
taxable year attributable to employer provided amounts shall
not exceed the excess (if any) of--
``(A) the product of--
``(i) the exclusion amount determined under subsection
(b)(2)(D) for the taxable year, and
``(ii) a fraction equal to the number of days of the
taxable year within the applicable period described in
subparagraph (A) or (B) of subsection (d)(1) divided by the
number of days in the taxable year, over
``(B) the foreign earned income of the individual excluded
under subsection (a)(1) for the taxable year.''
(2) Conforming amendment.--Section 911(c)(1) is amended by
striking ``The'' and inserting ``Except as provided in
paragraph (4), the''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after December 31,
2003.
______

SA 3124. Ms. LANDRIEU submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

Beginning on page 441, strike line 10 through page 442,
line 13, and insert the following:
``(a) General Rule.--For purposes of section 38, the Ready
Reserve-National Guard employee credit determined under this
section for any taxable year with respect to each Ready
Reserve-National Guard employee of an employer is an amount
equal to 50 percent of the lesser of--
``(1) the actual compensation amount with respect to such
employee for such taxable year, or
``(2) $30,000.
``(b) Definition of Actual Compensation Amount.--For
purposes of this section, the term `actual compensation
amount' means the amount of compensation paid or incurred by
an employer with respect to a Ready Reserve-National Guard
employee on any day when the employee was absent from
employment for the purpose of performing qualified active
duty.
``(c) Limitations.--No credit shall be allowed with respect
to any day that a Ready Reserve-National Guard employee who
performs qualified active duty was not scheduled to work (for
reason other than to participate in qualified active duty).
______

SA 3125. Mr. DASCHLE submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

On page 557, between lines 9 and 10, insert the following:

SEC. __. MODIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT TAX
FOR CERTAIN TERMINATION PAYMENTS RECEIVED BY
FORMER INSURANCE SALESMEN.

(a) Internal Revenue Code.--Paragraph (4) of section
1402(k) of the Internal Revenue Code of 1986 (relating to
codification of treatment of certain termination payments
received by former insurance salesmen) is amended--
(1) by striking ``during the last year of such agreement''
in subparagraph (A), and
(2) by striking ``length of service or'' in subparagraph
(B).

[[Page S5099]]

(b) Social Security Act.--Paragraph (4) of section 211(j)
of the Social Security Act is amended--
(1) by striking ``during the last year of such agreement''
in subparagraph (A), and
(2) by striking ``length of service or'' in subparagraph
(B).
(c) Effective Date.--The amendments made by this section
shall apply to payments after the date of the enactment of
this Act.
______

SA 3126. Mr. KYL submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

Strike all after the enacting clause and insert the
following:

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.

TITLE II--REDUCTION OF TOP CORPORATE TAX RATE

Sec. 201. Reduction in corporate income tax rate.

TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

Sec. 301. Reduction in corporate AMT rate.
Sec. 302. Increase in exemption from AMT for small corporations.
Sec. 303. Foreign tax credit under alternative minimum tax.

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. 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.
Sec. 442. Imposition of mark-to-market tax on individuals who
expatriate.
Sec. 443. Excise tax on stock compensation of insiders in 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. Class lives for utility grading costs.
Sec. 473. Expansion of limitation on depreciation of certain passenger
automobiles.
Sec. 474. Consistent amortization of periods for intangibles.
Sec. 475. Reform of tax treatment of leasing operations.
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. 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.

[[Page S5100]]

(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 ``114 or''.
(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 the
Internal Revenue Code of 1986, 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:
80 ...........................................................
60............................................................
(ii) Special rule for 2004.--The phaseout percentage for
2004 shall be the amount that bears the same ratio to 80
percent as the number of days after the date of the enactment
of this Act bears to 366.
(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 average FSC/ETI benefit for the
taxpayer's taxable years beginning in calendar years 2000,
2001, and 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 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 2004 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 2004, 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.

TITLE II--REDUCTION OF TOP CORPORATE TAX RATE

SEC. 201. REDUCTION IN CORPORATE INCOME TAX RATE.

(a) In General.--Subsection (b) of section 11 (relating to
tax imposed on corporations) is amended by redesignating
paragraph (2) as paragraph (6) and by striking paragraph (1)
and inserting the following new paragraphs:
``(1) For taxable years beginning after 2009.--In the case
of taxable years beginning after 2009, the amount of the tax
imposed by subsection (a) shall be determined in accordance
with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 33% of the excess over $75,000...........................
``(2) For taxable years beginning in 2006, 2007, 2008, or
2009.--In the case of taxable years beginning in 2006, 2007,
2008, or 2009, the amount of the tax imposed by subsection
(a) shall be determined in accordance with the following
table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 33.5% of the excess over $75,000.........................
``(3) For taxable years beginning in 2005.--In the case of
taxable years beginning in 2005, the amount of the tax
imposed by subsection (a) shall be determined in accordance
with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 34% of the excess over $75,000...........................
``(4) For taxable years beginning in 2004.--In the case of
taxable years beginning in 2004, the amount of the tax
imposed by subsection (a) shall be determined in accordance
with the following table:

The tax is:e income is:
15% of taxable income..................................................
$7,500, plus 25% of the excess over $50,000............................
$13,750, plus 34% of the excess over $75,000...........................
$3,388,250, plus 34.5% of the excess over $10,000,000..................

[[Page S5101]]

``(5) Phaseout of lower rates for certain taxpayers.--
``(A) General rule.--In the case of a corporation which has
taxable income in excess of $100,000 for any taxable year,
the amount of tax determined under paragraph (1), (2), (3) or
(4) for such taxable year shall be increased by the lesser of
(i) 5 percent of such excess, or (ii) $11,000 ($11,750 in the
case of taxable years beginning before 2006 and $11,375 in
the case of taxable years beginning after 2005 and before
2010).
``(B) Higher income corporations.--In the case of a
corporation which has taxable income in excess of $15,000,000
for taxable years beginning in 2004, the amount of the tax
determined under the foregoing provisions of this subsection
shall be increased by an additional amount equal to the
lesser of (i) 3 percent of such excess, or (ii) $50,000.''.
(b) Conforming Amendments.--
(1) Section 904(b)(3)(D)(ii) is amended to read as follows:
``(ii) in the case of a corporation, section 1201(a)
applies to such taxable year.''.
(2) Section 1201(a) is amended by striking ``the last 2
sentences of section 11(b)(1)'' and inserting ``section
11(b)(5)''.
(3) Section 1561(a) is amended--
(A) by striking ``the last 2 sentences of section
11(b)(1)'' and inserting ``section 11(b)(5)'', and
(B) by striking ``such last 2 sentences'' and inserting
``section 11(b)(5)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2003.

TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

SEC. 301. REDUCTION IN CORPORATE AMT RATE.

(a) In General.--Section 55(b)(1)(B)(i) (relating to amount
of tentative tax for corporations) is amended by striking
``20 percent'' and inserting ``19 percent (19.5 percent for
taxable years beginning in 2004 or 2005)''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2003.

SEC. 302. INCREASE IN EXEMPTION FROM AMT FOR SMALL
CORPORATIONS.

(a) In General.--Paragraph (1) of section 55(e) (relating
to exemption for small corporations) is amended--
(1) by striking ``$7,500,000'' in the heading and the text
of subparagraph (A) and inserting ``$15,000,000'',
(2) by striking subparagraph (B), and
(3) by redesignating subparagraphs (C) and (D) as
subparagraphs (B) and (C), respectively.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2003.

SEC. 303. 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.

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

[[Page S5102]]

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.
``(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:

[[Page S5103]]

``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
``(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

[[Page S5104]]

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:

``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

[[Page S5105]]

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 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

[[Page S5106]]

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 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. 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.

[[Page S5107]]

``(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
``(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) Clause (xi) of section 7701(a)(19)(C) is amended--
(A) by striking ``and any regular interest in a FASIT,'',
and
(B) by striking ``or FASIT'' each place it appears.
(11) Subparagraph (A) of section 7701(i)(2) is amended by
striking ``or a FASIT''.
(12) The table of parts for subchapter M of 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.--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.

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

(a) In General.--Paragraph (2) of section 163(l) is amended
by inserting ``or equity held by the issuer (or any related
party) in any other person'' after ``or a related party''.
(b) Capitalization Allowed With Respect to 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.''.

[[Page S5108]]

(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
(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

[[Page S5109]]

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, 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 2004, 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 2003' 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,

[[Page S5110]]

``(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.
``(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.--

[[Page S5111]]

``(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 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

[[Page S5112]]

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)'' 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 January 1, 2004.''.
(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 January
1, 2004.
(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 January 1, 2004,
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

[[Page S5113]]

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 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.

[[Page S5114]]

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 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.

[[Page S5115]]

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--
``(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.--Paragraph (3) of section 1092(d) (relating
to definitions and special rules) is amended to read as
follows:
``(3) Special rules for stock.--For purposes of paragraph
(1)--
``(A) In general.--The term `personal property' includes--
``(i) any stock which is a part of a straddle at least 1 of
the offsetting positions of which is a position with respect
to such stock or substantially similar or related property,
or
``(ii) any stock of a corporation formed or availed of to
take positions in personal property which offset positions
taken by any shareholder.
``(B) Rule for application.--For purposes of determining
whether subsection (e) applies to any transaction with
respect to stock described in subparagraph (A)(ii), all
includible corporations of an affiliated group (within the
meaning of section 1504(a)) shall be treated as 1
taxpayer.''.
(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.

[[Page S5116]]

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 755(c), as added by this Act, is amended by
striking ``section 734(b)'' and inserting ``section 734(a)''.
(4) Section 761(e)(2) is amended by striking ``optional''.
(5) Section 774(a) is amended by striking ``743(b)'' both
places it appears and inserting ``743(a)''.
(6) 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''.
(7) 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. CLASS LIVES FOR UTILITY GRADING COSTS.

(a) Gas Utility Property.--Section 168(e)(3)(E) (defining
15-year property) is 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. 473. 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. 474. 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:

[[Page S5117]]

``(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. 475. REFORM OF TAX TREATMENT OF LEASING OPERATIONS.

(a) Clarification of Recovery Period for Tax-Exempt Use
Property Subject to Lease.--Subparagraph (A) of section
168(g)(3) (relating to special rules for determining class
life) is amended by inserting ``(notwithstanding any other
subparagraph of this paragraph)'' after ``shall''.
(b) Limitation on Depreciation Period for Software Leased
to Tax-Exempt Entity.--Paragraph (1) of section 167(f) is
amended by adding at the end the following new subparagraph:
``(C) Tax-exempt use property subject to lease.--In the
case of computer software which would be tax-exempt use
property as defined in subsection (h) of section 168 if such
section applied to computer software, the useful life under
subparagraph (A) shall not be less than 125 percent of the
lease term (within the meaning of section 168(i)(3)).''
(c) Lease Term To Include Related Service Contracts.--
Subparagraph (A) of section 168(i)(3) (relating to lease
term) is amended by striking ``and'' at the end of clause
(i), by redesignating clause (ii) as clause (iii), and by
inserting after clause (i) the following new clause:
``(ii) the term of a lease shall include the term of any
service contract or similar arrangement (whether or not
treated as a lease under section 7701(e))--

``(I) which is part of the same transaction (or series of
related transactions) which includes the lease, and
``(II) which is with respect to the property subject to the
lease or substantially similar property, and''.

(d) Effective Date.--The amendments made by this section
shall apply to leases entered into after December 31, 2003.

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. LIMITATIONS ON LOSSES FROM TAX-EXEMPT USE
PROPERTY.

``(a) Limitation on Losses.--Except as otherwise provided
in this section, a tax-exempt use loss for any taxable year
shall not be allowed.
``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt
use loss with respect to any tax-exempt use property which is
disallowed under subsection (a) for any taxable year shall be
treated as a deduction with respect to such property in the
next taxable year.
``(c) Definitions.--For purposes of this section--
``(1) Tax-exempt use loss.--The term `tax-exempt use loss'
means, with respect to any taxable year, the amount (if any)
by which--
``(A) the sum of--
``(i) the aggregate deductions (other than interest)
directly allocable to a tax-exempt use property, plus
``(ii) the aggregate deductions for interest properly
allocable to such property, exceed
``(B) the aggregate income from such property.
``(2) Tax-exempt use property.--The term `tax-exempt use
property' has the meaning given to such term by section
168(h) (without regard to paragraph (1)(C) or (3)(C) thereof
and determined as if property described in section
167(f)(1)(B) were tangible property).
``(d) Exception for Certain Leases.--This section shall not
apply to any lease of property which meets the requirements
of all of the following paragraphs:
``(1) Property not financed with tax-exempt bonds.--A lease
of property meets the requirements of this paragraph if no
part of the property was financed (directly or indirectly)
from the proceeds of an obligation the interest on which is
exempt from tax under section 103(a) and which (or any
refunding bond of which) is outstanding when the lease is
entered into. The Secretary may by regulations provide for a
de minimis exception from this paragraph.
``(2) Availability of funds.--
``(A) In general.--A lease of property meets the
requirements of this paragraph if (at any time during the
lease term) not more than an allowable amount of funds are--
``(i) subject to any arrangement referred to in
subparagraph (B), or
``(ii) otherwise reasonably expected to remain available,

to or for the benefit of the lessor or any lender, or to or
for the benefit of the lessee to satisfy the lessee's
obligations or options under the lease.
``(B) Arrangements.--The arrangements referred to in this
subparagraph are--
``(i) a defeasance arrangement, a loan by the lessee to the
lessor or any lender, a deposit arrangement, a letter of
credit collateralized with cash or cash equivalents, a
payment undertaking agreement, a lease prepayment, a sinking
fund arrangement, or any similar arrangement (whether or not
such arrangement provides credit support), and
``(ii) any other arrangement identified by the Secretary in
regulations.
``(C) Allowable amount.--
``(i) In general.--Except as otherwise provided in this
subparagraph, the term `allowable amount' means an amount
equal to 20 percent of the lessor's adjusted basis in the
property at the time the lease is entered into.
``(ii) Higher amount permitted in certain cases.--To the
extent provided in regulations, a higher percentage shall be
permitted under clause (i) where necessary because of the
credit-worthiness of the lessee. In no event may such
regulations permit a percentage of more than 50 percent.
``(iii) Option to purchase.--If under the lease the lessee
has the option to purchase the property for other than the
fair market value of the property (determined at the time of
exercise), the allowable amount at the time such option may
be exercised may not exceed 50 percent of the price at which
such option may be exercised.
``(3) Lessor must make substantial equity investment.--A
lease of property meets the requirements of this paragraph
if--
``(A) the lessor--
``(i) has at the time the lease is entered into an
unconditional at-risk equity investment (as determined by the
Secretary) in the property of at least 20 percent of the
lessor's adjusted basis in the property as of that time, and
``(ii) maintains such investment throughout the term of the
lease, and
``(B) the fair market value of the property at the end of
the lease term is reasonably expected to be equal to at least
20 percent of such basis.
``(4) Lessee may not bear more than minimal risk of loss.--
``(A) In general.--A lease of property meets the
requirements of this paragraph if there is no arrangement
under which more than a minimal risk of loss (as determined
under regulations) in the value of the property is borne by
the lessee.
``(B) Certain arrangements fail requirement.--In no event
will the requirements of this paragraph be met if there is
any arrangement under which the lessee bears--
``(i) any portion of the loss that would occur if the fair
market value of the leased property at the time the lease is
terminated were 25 percent less than its projected fair
market value at the end of the lease term, or
``(ii) more than 50 percent of the loss that would occur if
the fair market value of the leased property at the time the
lease is terminated were zero.
``(5) Regulatory requirements.--A lease of property meets
the requirements of this paragraph if such lease of property
meets such requirements as the Secretary may prescribe by
regulations.
``(e) Special Rules.--
``(1) Treatment of former tax-exempt use property.--
``(A) In general.--In the case of any former tax-exempt use
property--
``(i) any deduction allowable under subsection (b) with
respect to such property for any taxable year shall be
allowed only to the extent of any net income (without regard
to such deduction) from such property for such taxable year,
and
``(ii) any portion of such unused deduction remaining after
application of clause (i) shall be treated as allowable under
subsection (b) with respect to such property in the next
taxable year.
``(B) Former tax-exempt use property.--For purposes of this
subsection, the term `former tax-exempt use property' means
any property which--
``(i) is not tax-exempt use property for the taxable year,
but
``(ii) was tax-exempt use property for any prior taxable
year.
``(2) 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 (or former tax-
exempt use property), rules similar to the rules of section
469(g) shall apply for purposes of this section.
``(3) Coordination with section 469.--This section shall be
applied before the application of section 469.
``(f) Other Definitions.--For purposes of this section--
``(1) Related parties.--The terms `lessor', `lessee', and
`lender' include any related

[[Page S5118]]

party (within the meaning of section 197(f)(9)(C)(i)).
``(2) Lease term.--The term `lease term' has the meaning
given to such term by section 168(i)(3).
``(3) Lender.--The term `lender' means, with respect to any
lease, a person that makes a loan to the lessor which is
secured (or economically similar to being secured) by the
lease or the leased property.
``(4) Loan.--The term `loan' includes any similar
arrangement.
``(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the provisions of this section, including regulation which--
``(1) allow in appropriate cases the aggregation of
property subject to the same lease, and
``(2) provide for the determination of the allocation of
interest expense for purposes 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. Limitations on losses from tax-exempt use property.''
(c) Effective Date.--The amendments made by this section
shall apply to leases entered into after December 31, 2003.

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.

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.--

[[Page S5119]]

(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.--
(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:

[[Page S5120]]

``(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,
``(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. 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.
______

SA 3127. Mr. KYL submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

Beginning on page 558, line 1, strike all through page
559, line 5.
______

SA 3128. Mr. BUNNING submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

At the end of part V of title IV, insert:

SEC. __. CLARIFICATION OF STATUS OF CERTAIN ORGANIZATIONS AND
RETIREMENT PLANS.

(a) In General.--For purposes of any provision of law--
(1) the organization described in subsection (c)(5)
maintaining the retirement plan of the eligible organization
shall be treated as an organization described in section
414(e)(3)(A) of the Internal Revenue Code of 1986 with
respect to its maintenance of benefit plans of the eligible
organization, and
(2) subject to the provisions of subsection (b), any
retirement plan which, as of January 1, 2003, was maintained
by the organization described in paragraph (1) shall be
treated as a church plan (within the meaning of section
414(e) of such Code) which is maintained by an organization
described in section 414(e)(3)(A) of such Code.
(b) Special Rules Relating to Retirement Plans.--
(1) Tax-deferred retirement plan.--In the case of a
retirement plan which allows contributions to be made under a
salary reduction agreement and which is treated as a church
plan under subsection (a)--
(A) such treatment shall not apply for purposes of
section 415(c)(7) of the Internal Revenue Code of 1986, and
(B) any account maintained for a participant or
beneficiary of such plan shall be treated as a retirement
income account described in section 403(b)(9) of such Code,
except that such account shall not, for purposes of section
403(b)(12) of such Code, be treated as a contract purchased
by a church for purposes of section 403(b)(1)(D) of such
Code.
(2) Money purchase pension plan.--In the case of a
retirement plan subject to the requirements of section 401(a)
of such Code and treated as a church plan under subsection
(a)--
(A) such plan (but not any reserves held by the
organization described in subsection (c)(5) maintaining the
retirement plan of the eligible organization)--
(i) shall be treated as a defined contribution plan which
is a money purchase pension plan, and
(ii) shall be treated as having made an election under
section 410(d) of such Code for plan years beginning after
December 31, 2005, except that notwithstanding the election--

(I) nothing in the Employee Retirement Income Security
Act of 1974 shall prohibit the plan from commingling for
investment purposes its assets with any other assets of the
organization described in subsection (c)(5) maintaining the
retirement plan of the eligible organization (or of plans
maintained by it), and
(II) nothing in this section shall be construed as
subjecting such other assets to any provision of such Act,

(B) notwithstanding section 401(a)(11) or 417 of such
Code or section 205 of such Act, such plan may offer a lump-
sum distribution option to participants who have not attained
age 55 without offering such participants an annuity option,
and
(C) any account maintained for a participant or
beneficiary of such plan shall, for purposes of section
401(a)(9) of such Code, be treated as a retirement income
account described in section 403(b)(9) of such Code.
(c) Eligible Organization.--For purposes of this section,
the term ``eligible organization'' means any organization if,
as of January 1, 2003--
(1) more than 1 church recognizes employment at the
organization by a duly ordained, commissioned, or licensed
minister as service in the exercise of the minister's
ministry,
(2) at least 1 nationally or internationally recognized
church association includes the organization (or its national
or international representative body) in its directory of
participating or founding organizations,

[[Page S5121]]

(3) such organization or national representative body
thereof is part of an ecumenical movement (founded in the
nineteenth century) to promote worldwide fellowship united by
common loyalty to certain religious values,
(4) such organization's national representative body has
chartered at least 1 organization that provides educational,
recreational, social and religious support to the armed
forces of the United States, and
(5) the organization has a retirement plan which is
administered by an organization--
(A) which was established by State law by a special act
of the legislature and subject to certain provisions of the
State's insurance law,
(B) the principal purpose or function of which is the
administration or funding of a plan or program for the
provision of retirement benefits or welfare benefits, or
both, for employees of the eligible organization,
(C) is treated as an entity exempt from tax under section
501(m) of the Internal Revenue Code of 1986 without regard to
the application of subsection (a), and
(D) whose organizing documents are amended no later than
January 1, 2006, to require that, for plan years beginning on
or after such date, the greater of 2 trustees or 10 percent
of the membership of its board of trustees be associated with
a church.
For purposes of paragraph (5)(D), association with a church
may include past or present service as an officer or board
member of a church (within the meaning of section
3121(w)(3)(A) of such Code) or a church-controlled
organization (within the meaning of section 3121(w)(3)(B) of
such Code).
(d) Effective Date.--The provisions of this section shall
apply to plan years beginning after December 31, 2003.
______

SA 3129. Mr. McCAIN submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

Strike title VIII.
______

SA 3130. Mr. McCAIN submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

Beginning on page 797, line 17, strike all through page 810, line 9.
______

SA 3131. Mr. McCAIN submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

Beginning on page 773, line 4, strike all through page 827, line 14.
______

SA 3132. Mr. McCAIN submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

Strike all after the enacting clause and insert the
following:

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.

[[Page S5122]]

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.
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.

[[Page S5123]]

(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
Years:                                                   percentage is:
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
(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                                      The transition
beginning in:                                        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--

[[Page S5124]]

``(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
``(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

[[Page S5125]]

``(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.

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.--

[[Page S5126]]

``(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 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

[[Page S5127]]

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,''.
(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:

[[Page S5128]]

``(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.

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).

[[Page S5129]]

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 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.''.

[[Page S5130]]

(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.

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:

[[Page S5131]]

``(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.
``(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.

[[Page S5132]]

``(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

[[Page S5133]]

``(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.--
``(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.

[[Page S5134]]

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.
``(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

[[Page S5135]]

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:

``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.

[[Page S5136]]

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 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.

[[Page S5137]]

``(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.
``(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

[[Page S5138]]

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
``(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

[[Page S5139]]

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:

``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

[[Page S5140]]

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 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

[[Page S5141]]

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 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.

[[Page S5142]]

(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
``(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.

<divide>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

[[Page S5143]]

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
(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

[[Page S5144]]

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, 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.--

[[Page S5145]]

``(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.
``(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

[[Page S5146]]

``(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 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).

[[Page S5147]]

``(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)'' 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

[[Page S5148]]

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 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,

[[Page S5149]]

``(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 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.''.

[[Page S5150]]

(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

[[Page S5151]]

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--
``(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

[[Page S5152]]

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 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.

[[Page S5153]]

``(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.

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.

[[Page S5154]]

``(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.--
(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

[[Page S5155]]

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,
``(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.
______

SA 3133. Mr. GRASSLEY submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

On page 59, line 13, insert ``section 453(a) of'' after
``by''.
On page 60, line 3, insert ``section 453(a) of'' after
``by''.
On page 68, strike lines 10 through 14, and insert the
following:
(d) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), 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.
(2) Subsection (c)(29).--The amendments made by subsection
(c)(29) shall apply to disclosures of return or return
information with respect to taxable years beginning after
December 31, 2004.
On page 98, line 3, strike ``September 24, 2004'' and
insert ``December 31, 2004''.
On page 98, between lines 3 and 4, insert the following:

SECTION 237. INTEREST PAYMENTS DEDUCTIBLE WHERE DISQUALIFIED
GUARANTEE HAS NO ECONOMIC EFFECT.

(a) In General.--Section 163(j)(6)(D)(ii) (relating to
exceptions to disqualified guarantee) is amended--
(1) by striking ``or'' at the end of subclause (I),
(2) by striking the period at the end of subclause (II) and
inserting ``, or'',
(3) by inserting after subclause (II) the following new
subclause:

``(III) in the case of a guarantee by a foreign person, to
the extent of the amount that the taxpayer establishes to the
satisfaction of the Secretary that the taxpayer could have
borrowed from an unrelated person without the guarantee.''.

(b) Effective Date.--The amendments made by this section
shall apply to guarantees issued on or after the date of the
enactment of this Act.
On page 125, line 25, strike ``December 31, 2003'' and
insert ``the date which is 30 days after the date of the
enactment of this Act''.
Beginning on page 135, line 17, strike all through page
136, line 2, and insert the following:
``(i) which is--

``(I) described in section 501(c)(3) or 501(c)(6) and is
exempt from tax under section 501(a) and is organized and
operated primarily to conduct research, or
``(II) organized and operated primarily to conduct research
in the public interest (within the meaning of section
501(c)(3)),

On page 137, lines 18 and 19, strike ``which is energy
research''.
On page 139, lines 9 and 10, strike ``Energy Tax Incentives
Act of 2003'' and insert ``Jumpstart Our Business Strength
(JOBS) Act''.
On page 14, line 18, of Senate amendment number 3118, as
passed, strike ``2'' and insert ``3''.
On page 14, line 21, of Senate amendment number 3118, as
passed, insert ``for such taxable year'' after ``United
States''.
Beginning on page 212, line 9, strike all through page 213,
line 3, and insert the following:
(1) In general.--Section 162(g) (relating to treble damage
payments under the antitrust laws) is amended--
(A) by redesignating paragraphs (1) and (2) as
subparagraphs (A) and (B), respectively,
(B) by striking ``If'' and inserting:
``(1) Treble damages.--If'', and
(C) by adding at the end the following new paragraph:
``(2) Punitive damages.--No deduction shall be allowed
under this chapter for any amount paid or incurred for
punitive damages in connection with any judgment in, or
settlement of, any action. This paragraph shall not apply to
punitive damages described in section 104(c).''.
(2) Conforming amendment.--The heading for section 162(g)
is amended by inserting ``or Punitive Damages'' after
``Laws''.
On page 225, line 14, strike ``paragraph (3)(A)'' and
insert ``this subparagraph''.
On page 228, line 1, strike ``(c)'' and insert ``(d)''.
On page 228, line 8, strike ``(d)'' and insert ``(e)''.
On page 230, line 17, add a period at the end.
On page 245, strike lines 5 through 7, and insert the
following:
(1) In general.--Section 14 of the Securities Exchange Act
of 1934 (15 U.S.C. 78n) is amended by adding at the end the
following new subsection:
On page 286, strike lines 6 through 10, and insert the
following:

[[Page S5156]]

(1) Subparagraph (B) of section 6724(d)(1) (defining
information return) is amended by redesignating clauses (ii)
through (xviii) as clauses (iii) through (xix), respectively,
and by inserting after clause (i) the following new clause:
On page 286, strike lines 14 through 18, and insert the
following:
(2) Paragraph (2) of section 6724(d) (relating to
definitions) is amended by redesignating subparagraphs (F)
through (BB) as subparagraphs (G) through (CC), respectively,
and by inserting after subparagraph (E) the following new
subparagraph:
On page 301, line 7, strike ``168(j)'' and insert
``163(j)''.
On page 311, line 10, insert beginning double quotation
marks before the beginning single quotation mark.
On page 311, line 14, insert beginning double quotation
marks before the beginning single quotation mark.
On page 311, line 19, insert beginning double quotation
marks before the beginning single quotation mark.
On page 345, strike lines 13 through 19, and insert the
following:
``(c) Fees and Expenses.--The Secretary may retain and
use--
``(1) 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, and
``(2) an amount not in excess of 25 percent of such amount
collected for collection enforcement activities of the
Internal Revenue Service.

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.
On page 346, between lines 4 and 5, insert the following:
``(f) Application of Section.--In no event may the term of
any qualified tax collection contract extend beyond the date
which is 5 years after the date of the enactment of this
section.
On page 346, line 5, strike ``(f)'' and insert ``(g)''.
On page 349, between lines 11 and 12, insert the following:
(e) Biennial Report.--The Secretary of the Treasury shall
biennially submit (beginning in 2005) to the Committee on
Finance of the Senate and the Committee on Ways and Means of
the House of Representatives a report with respect to
qualified tax collection contracts under section 6306 of the
Internal Revenue Code of 1986 (as added by this section)
which includes--
(1) a complete cost benefit analysis,
(2) the impact of such contracts on collection enforcement
staff levels in the Internal Revenue Service,
(3) the amounts collected and the collection costs incurred
(directly and indirectly),
(4) an evaluation of contractor performance,
(5) a disclosure safeguard report in a form similar to that
required under section 6103(p)(5) of such Code, and
(6) a measurement plan which includes a comparison of the
best practices used by the private collectors with the
Internal Revenue Service's own collection techniques) and
mechanisms to identify and capture information on successful
collection techniques used by the contractors which could be
adopted by the Internal Revenue Service.
On page 349, line 12, strike ``(e)'' and insert ``(f)''.
Beginning on page 349, line 15, strike all through page
353, line 24, and insert the following:

SEC. 488. WHISTLEBLOWER REFORMS.

(a) In General.--Section 7623 (relating to expenses of
detection of underpayments and fraud, etc.) is amended--
(1) by striking ``The Secretary'' and inserting ``(a) In
General.--The Secretary'',
(2) by striking ``and'' at the end of paragraph (1) and
inserting ``or'',
(3) by striking ``(other than interest)'', and
(4) by adding at the end the following new subsections:
``(b) Awards to Whistleblowers.--
``(1) In general.--If the Secretary proceeds with any
administrative or judicial action described in subsection (a)
based on information brought to the Secretary's attention by
an individual, such individual shall, subject to paragraph
(2), receive as an award at least 15 percent but not more
than 30 percent of the collected proceeds (including
penalties, interest, additions to tax, and additional
amounts) resulting from the action (including any related
actions) or from any settlement in response to such action.
The determination of the amount of such award by the
Whistleblower Office shall depend upon the extent to which
the individual substantially contributed to such action.
``(2) Award in case of less substantial contribution.--
``(A) In general.--In the event the action described in
paragraph (1) is one which the Whistleblower Office
determines to be based principally on disclosures of specific
allegations (other than information provided by the
individual described in paragraph (1)) resulting from a
judicial or administrative hearing, from a governmental
report, hearing, audit, or investigation, or from the news
media, the Whistleblower Office may award such sums as it
considers appropriate, but in no case more than 10 percent of
the collected proceeds (including penalties, interest,
additions to tax, and additional amounts) resulting from the
action (including any related actions) or from any settlement
in response to such action, taking into account the
significance of the individual's information and the role of
such individual and any legal representative of such
individual in contributing to such action.
``(B) Nonapplication of paragraph where individual is
original source of information.--Subparagraph (A) shall not
apply if the information resulting in the initiation of the
action described in paragraph (1) was originally provided by
the individual described in paragraph (1).
``(3) Appeal of award determination.--Any determination
regarding an award under paragraph (1) or (2) shall be
subject to the filing by the individual described in such
paragraph of a petition for review with the Tax Court under
rules similar to the rules under section 7463 (without regard
to the amount in dispute) and such review shall be subject to
the rules under section 7461(b)(1).
``(4) Application of this subsection.--This subsection
shall apply with respect to any action--
``(A) against any taxpayer, but in the case of any
individual, only if such individual's gross income exceeds
$200,000 for any taxable year subject to such action, and
``(B) if the tax, penalties, interest, additions to tax,
and additional amounts in dispute exceed $20,000.
``(5) Additional rules.--
``(A) No contract necessary.--No contract with the Internal
Revenue Service is necessary for any individual to receive an
award under this subsection.
``(B) Representation.--Any individual described in
paragraph (1) or (2) may be represented by counsel.
``(C) Award not subject to individual alternative minimum
tax.--No award received under this subsection shall be
included in gross income for purposes of determining
alternative minimum taxable income.
``(c) Whistleblower Office.--
``(1) In general.--There is established in the Internal
Revenue Service an office to be known as the `Whistleblower
Office' which--
``(A) shall analyze information received from any
individual described in subsection (b) and either investigate
the matter itself or assign it to the appropriate Internal
Revenue Service office,
``(B) shall monitor any action taken with respect to such
matter,
``(C) shall inform such individual that it has accepted the
individual's information for further review,
``(D) may require such individual and any legal
representative of such individual to not disclose any
information so provided,
``(E) may ask for additional assistance from such
individual or any legal representative of such individual,
and
``(F) shall determine the amount to be awarded to such
individual under subsection (b).
``(2) Funding for office.--From the amounts available for
expenditure under subsection (a), the Whistleblower Office
shall be credited with an amount equal to the awards made
under subsection (b). These funds shall be used to maintain
the Whistleblower Office and also to reimburse other Internal
Revenue Service offices for related costs, such as costs of
investigation and collection.
``(3) Request for assistance.--
``(A) In general.--Any assistance requested under paragraph
(1)(E) shall be under the direction and control of the
Whistleblower Office or the office assigned to investigate
the matter under subparagraph (A). To the extent the
disclosure of any returns or return information to the
individual or legal representative is required for the
performance of such assistance, such disclosure shall be
pursuant to a contract entered into between the Secretary and
the recipients of such disclosure subject to section 6103(n).
``(B) Funding of assistance.--From the funds made available
to the Whistleblower Office under paragraph (2), the
Whistleblower Office may reimburse the costs incurred by any
legal representative in providing assistance described in
subparagraph (A).''.
(b) Effective Date.--The amendments made by this section
shall apply to information provided on or after the date of
the enactment of this Act.
On page 354, line 12, strike ``May 8, 2003'' and insert
``the date of the enactment of the Jumpstart Our Business
Strength (JOBS) Act''.
Beginning on page 355, line 17, strike all through page
357, line 24, and insert the following:

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

(a) Premiums as Percentage of Gross Receipts Increased.--
Section 501(c)(15)(A)(i)(II) is amended by striking ``50
percent'' and inserting ``60 percent''.
(b) Limitation on Net Written Premiums Increased.--Section
831(b)(2) (relating to companies to which this subsection
applies) is amended--
(1) by striking ``$1,200,000'' and inserting
``$1,890,000'', and
(2) by adding at the end the following new subparagraph:
``(C) Inflation adjustments.--
``(i) In general.--In the case of any taxable year
beginning in a calendar year after 2005, the dollar amount in
subparagraph (A)(i) 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 the calendar

[[Page S5157]]

year in which the taxable year begins, by substituting
`calendar year 2004' for `calendar year 1992' in subparagraph
(B) thereof.

``(ii) Rounding.--If the amount in subparagraph (A)(i) as
increased under clause (i) is not a multiple of $10,000, such
amount shall be rounded to the nearest multiple of
$10,000.''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2004.
(2) Transition rule for companies in receivership or
liquidation.--In the case of a company or association which--
(A) for the taxable year which includes April 1, 2004,
meets the requirements of section 501(c)(15)(A) of the
Internal Revenue Code of 1986, as in effect for the last
taxable year beginning before January 1, 2004, and
(B) on April 1, 2004, is in a receivership, liquidation, or
similar proceeding under the supervision of a State court,

the amendments made by this section shall apply to taxable
years beginning after the earlier of the date such proceeding
ends (or, if later, December 31, 2004) or December 31, 2007.
Beginning on page 358, line 1, strike all through page 363,
line 21, and insert the following:

SEC. 494. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS
AND SIMILAR PROPERTY.

(a) In General.--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 (other than software
described in section 197(e)(3)(A)(i)), or similar property,
or applications or registrations of such property,''.
(b) Additional Deduction for Certain Contributions of
Patents and Similar Property.--Section 170(e) is amended by
adding at the end the following new paragraph:
``(7) Additional deduction for certain contributions of
patents and similar property.--
``(A) In general.--In the case of a charitable contribution
of any property described in paragraph (1)(B)(iii) (other
than copyrights described in section 1221(a)(3) or
1231(b)(1)(C) or property contributed to or for the use of an
organization described in paragraph (1)(B)(ii)), if--
``(i) the lesser of--

``(I) 5 percent of the fair market value of such property
(determined at the time of such contribution), or
``(II) $1,000,000, exceeds

``(ii) the amount of such contribution as determined under
paragraph (1),

then the amount of the charitable contribution of such
property otherwise taken into account under this section
shall equal the amount determined under clause (i).''.
(c) Certain Donee Income From Intellectual Property Treated
as an Additional Charitable Contribution.--Section 170 is
amended by redesignating subsection (m) as subsection (n) and
by inserting after subsection (l) the following new
subsection:
``(m) Certain Donee Income From Intellectual Property
Treated as an Additional Charitable Contribution.--
``(1) Treatment as additional contribution.--In the case of
a taxpayer who makes a qualified intellectual property
contribution, the deduction allowed under subsection (a) for
each taxable year of the taxpayer ending on or after the date
of such contribution shall be increased (subject to the
limitations under subsection (b)) by the applicable
percentage of qualified donee income with respect to such
contribution which is properly allocable to such year under
this subsection.
``(2) Qualified donee income.--For purposes of this
subsection, the term `qualified donee income' means any net
income received by or accrued to the donee which is properly
allocable to the qualified intellectual property.
``(3) Allocation of qualified donee income to taxable years
of donor.--For purposes of this subsection, qualified donee
income shall be treated as properly allocable to a taxable
year of the donor if such income is received by or accrued to
the donee for the taxable year of the donee which ends within
or with such taxable year of the donor.
``(4) 10-year limitation.--Income shall not be treated as
properly allocable to qualified intellectual property for
purposes of this subsection if such income is received by or
accrued to the donee after the 10-year period beginning on
the date of the contribution of such property.
``(5) Benefit limited to life of intellectual property.--
Income shall not be treated as properly allocable to
qualified intellectual property for purposes of this
subsection if such income is received by or accrued to the
donee after the expiration of the legal life of such
property.
``(6) Applicable percentage.--For purposes of this
subsection, the term `applicable percentage' means the
percentage determined under the following table which
corresponds to a taxable year of the donor ending on or after
the date of the qualified intellectual property contribution:

Applicable Percentage:r Ending On or After Date of Contribution:
1st or 2d....................................................100 ....

3rd...........................................................90 ....

4th...........................................................80 ....

5th...........................................................70 ....

6th...........................................................60 ....

7th...........................................................50 ....

8th...........................................................40 ....

9th...........................................................30 ....

10th..........................................................20 ....

11th or 12th..................................................10.....

``(7) Qualified intellectual property contribution.--For
purposes of this subsection, the term `qualified intellectual
property contribution' means any charitable contribution of
qualified intellectual property--
``(A) the amount of which taken into account under this
section--
``(i) is reduced by reason of subsection (e)(1), or
``(ii) determined under subsection (e)(7), and
``(B) with respect to which the donor informs the donee at
the time of such contribution that the donor intends to treat
such contribution as a qualified intellectual property
contribution for purposes of this subsection and section
6050L.
``(8) Qualified intellectual property.--For purposes of
this subsection, the term `qualified intellectual property'
means property described in subsection (e)(1)(B)(iii) (other
than copyrights described in section 1221(a)(3) or
1231(b)(1)(C) or property contributed to or for the use of an
organization described in subsection (e)(1)(B)(ii)).
``(9) Other special rules.--
``(A) Application of limitations on charitable
contributions.--Any increase under this subsection of the
deduction provided under subparagraph (a) shall be treated
for purposes of subsection (b) as a deduction which is
attributable to a charitable contribution to the donee to
which such increase relates.
``(B) Net income determined by donee.--The net income taken
into account under paragraph (2) shall not exceed the amount
of such income reported under section 6050L(b)(1).
``(C) Deduction limited to 12 taxable years.--Except as may
be provided under subparagraph (D)(i), this subsection shall
not apply with respect to any qualified intellectual property
contribution for any taxable year of the donor after the 12th
taxable year of the donor which ends on or after the date of
such contribution.
``(D) Regulations.--The Secretary may issue regulations or
other guidance to carry out the purposes of this subsection,
including regulations or guidance--
``(i) modifying the application of this subsection in the
case of a donor or donee with a short taxable year, and
``(ii) providing for the determination of an amount to be
treated as net income of the donee which is properly
allocable to qualified intellectual property in the case of a
donee who uses such property to further a purpose or function
constituting the basis of the donee's exemption under section
501 (or, in the case of a governmental unit, any purpose
described in section 170(c)) and does not possess a right to
receive any payment from a third party with respect to such
property.''.
(d) Reporting Requirements.--Section 6050L (relating to
returns relating to certain dispositions of donated property)
is amended to read as follows:

``SEC. 6050L. RETURNS RELATING TO CERTAIN DONATED PROPERTY.

``(a) Dispositions of Donated Property.--
``(1) In general.--If the donee of any charitable deduction
property sells, exchanges, or otherwise disposes of such
property within 2 years after its receipt, the donee shall
make a return (in accordance with forms and regulations
prescribed by the Secretary) showing--
``(A) the name, address, and TIN of the donor,
``(B) a description of the property,
``(C) the date of the contribution,
``(D) the amount received on the disposition, and
``(E) the date of such disposition.
``(2) Definitions.--For purposes of this subsection--
``(A) Charitable deduction property.--The term `charitable
deduction property' means any property (other than publicly
traded securities) contributed in a contribution for which a
deduction was claimed under section 170 if the claimed value
of such property (plus the claimed value of all similar items
of property donated by the donor to 1 or more donees) exceeds
$5,000.
``(B) Publicly traded securities.--The term `publicly
traded securities' means securities for which (as of the date
of the contribution) market quotations are readily available
on an established securities market.
``(b) Qualified Intellectual Property Contributions.--
``(1) In general.--Each donee with respect to a qualified
intellectual property contribution shall make a return (at
such time and in such form and manner as the Secretary may by
regulations prescribe) with respect to each specified taxable
year of the donee showing--
``(A) the name, address, and TIN of the donor,
``(B) a description of the qualified intellectual property
contributed,
``(C) the date of the contribution, and

[[Page S5158]]

``(D) the amount of net income of the donee for the taxable
year which is properly allocable to the qualified
intellectual property (determined without regard to paragraph
(9)(B) of section 170(m) and with the modifications described
in paragraphs (4) and (5) of such section).
``(2) Definitions.--For purposes of this subsection--
``(A) In general.--Terms used in this subsection which are
also used in section 170(m) have the respective meanings
given such terms in such section.
``(B) Specified taxable year.--The term `specified taxable
year' means, with respect to any qualified intellectual
property contribution, any taxable year of the donee any
portion of which is part of the 10-year period beginning on
the date of such contribution.
``(c) Statement to Be Furnished to Donors.--Every person
making a return under subsection (a) or (b) shall furnish a
copy of such return to the donor at such time and in such
manner as the Secretary may by regulations prescribe.''.
(e) Processing Fee.--Section 170, as amended by subsection
(b), is amended by redesignating subsection (n) as subsection
(o) and by inserting after subsection (m) the following new
subsection:
``(n) Processing Fee.--In the case of a deduction allowed
for any taxable year under this section with respect to a
charitable contribution of any property described in
subsection (e)(1)(B)(iii) (other than copyrights described in
section 1221(a)(3) or 1231(b)(1)(C) or property contributed
to or for the use of an organization described in subsection
(e)(1)(B)(ii)), the taxpayer shall include, with the
taxpayer's return of tax including such deduction, a fee
equal to 1 percent of the amount of such deduction. Such fee
shall be credited by the Secretary to the operations of the
Exempt Organizations unit within the Internal Revenue
Service.''.
(f) Modification of Substantial Valuations Misstatement
Penalty for Charitable Contributions of Property.--
(1) Substantial misstatements.--Section 6662(e)(1)(A)
(relating to substantial valuation misstatements under
chapter 1) is amended by inserting ``(50 percent or more in
the case of a charitable contribution of any property
described in section 170(e)(1)(B)(iii))'' after ``200 percent
or more''.
(2) Gross misstatements.--Section 6662(h)(2)(A) (defining
gross valuation misstatements) is amended by striking clause
(ii) and inserting the following new clauses:
``(ii) `100 percent or more' for `50 percent or more',
``(iii) `25 percent or less' for `50 percent or less',
and''.
(g) Anti-Abuse Rules.--The Secretary of the Treasury--
(1) may prescribe such regulations or other guidance as may
be necessary or appropriate to prevent the avoidance of the
purposes of paragraphs (1)(B)(iii) and (7) of section 170(e)
of the Internal Revenue Code of 1986 (as added by subsections
(a) and (b)), including preventing--
(A) 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,
(B) 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
(C) a donor from changing the form of the patent or similar
property to property of a form for which different deduction
rules would apply, and
(2) shall prescribe guidance on appraisal standards for
contributions of property described in section
170(e)(1)(B)(iii) of the Internal Revenue Code of 1986 (as
added by this section).
(h) Effective Date.--The amendments made by this section
shall apply to contributions made after the date of the
enactment of this Act.
Beginning on page 363, line 22, strike all through page
364, line 3.
On page 420, strike lines 1 through 8, and insert the
following:
``(A) In general.--The term `motorsports entertainment
complex' means a racing track facility which--
``(i) is permanently situated on land, and
``(ii) during the 36-month period following the first day
of the month in which the asset is placed in service, is
scheduled to host 1 or more racing events for automobiles (of
any type), trucks, or motorcycles which are open to the
public for the price of admission.
On page 421, at the end of line 9, add end quotation marks
and a period.
On page 421, strike lines 10 through 20.
On page 421, line 24, strike ``Act.'' and insert ``Act and
before January 1, 2008.''.
On page 425, line 19, strike ``45E'' and insert ``45D''.
On page 425, line 20, strike ``45d'' and insert ``45e''.
On page 438, in the matter following line 22, strike
``Native American new markets tax credit'' and insert ``New
markets tax credit for Native American reservations''.
On page 440, line 1, strike ``(f)'' and insert ``(h)''.
On page 484, line 4, strike ``45F'' and insert ``45H''.
On page 488, line 2, strike ``grade'' and insert ``at
grade''.
On page 488, line 5, strike ``rail'' and insert ``train''.
On page 502, line 19, strike ``3(20)'' and insert
``103(20)''.
On page 502, line 20, strike ``1974'' and insert ``1994''.
On page 504, between lines 6 and 7, insert the following:

SEC. 639. CREDIT FOR INVESTMENT IN TECHNOLOGY TO MAKE MOTION
PICTURES MORE ACCESSIBLE TO THE DEAF AND HARD
OF HEARING.

(a) In General.--
(1) Allowance of credit.--Subpart D of part IV of
subchapter A of chapter 1 (relating to business related
credits), as amended by this Act, is amended by adding at the
end the following new section:

``SEC. 45T. EXPENDITURES TO PROVIDE ACCESS TO MOTION PICTURES
FOR THE DEAF AND HARD OF HEARING.

``(a) General Rule.--For purposes of section 38, in the
case of an eligible taxpayer, the motion picture
accessibility credit for any taxable year shall be an amount
equal to 50 percent of the qualified expenditures made by the
eligible taxpayer during the taxable year.
``(b) Eligible Taxpayer.--For purposes of this section, the
term `eligible taxpayer' means a taxpayer who is in the
business of--
``(1) showing motion pictures to the public in theaters, or
``(2) producing or distributing such motion pictures.
``(c) Qualified Expenditures.--For purposes of this
section, the term `qualified expenditures' means amounts paid
or incurred by the taxpayer for the purpose of making motion
pictures accessible to individuals who are deaf or hard of
hearing through the use of captioning technology.
``(d) Basis Adjustment.--For purposes of this subtitle, if
a credit is allowed under this section with respect to any
property, the basis of such property shall be reduced by the
amount of the credit so allowed.
``(e) No Double Benefit.--In the case of the credit
determined under this section, no deduction or credit shall
be allowed for such amount under any other provision of this
chapter.''.
(2) Conforming amendments.--
(A) Section 38(b) (relating to general business credit), as
amended by this Act, is amended by striking ``plus'' at the
end of paragraph (30), by striking the period at the end of
paragraph (31) and inserting ``, plus'', and by adding at the
end the following new paragraph:
``(32) the motion picture accessibility credit determined
under section 45T(a).''.
(B) Subsection (a) of section 1016, as amended by this Act,
is amended by striking ``and'' at the end of paragraph (38),
by striking the period at the end of paragraph (39) and
inserting ``, and'', and by adding at the end the following
new paragraph:
``(40) in the case of property with respect to which a
credit was allowed under section 45T, to the extent provided
in section 45T(d).''.
(b) Limitation on Carryback.--Section 39(d) (relating to
transition rules) is amended by adding at the end the
following new paragraph:
``(16) No carryback of motion picture accessibility credit
before effective date.--No portion of the unused business
credit for any taxable year which is attributable to the
motion picture accessibility credit determined under section
45T may be carried to a taxable year beginning before January
1, 2004.''.
(c) Clerical Amendment.--The table of sections for subpart
D of part IV of subchapter A of chapter 1, as amended by this
Act, is amended by inserting after the item relating to
section 45S the following new item:

``Sec. 45T. Expenditures to provide access to motion pictures for the
deaf and hard of hearing.''.

(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2003.
On page 504, line 14, insert ``, as amended by this Act,''
after ``income)''.
On page 504, line 16, strike ``(18)'' and insert ``(19)''.
On page 522, line 17, strike ``(18)'' and insert ``(19)''.
On page 524, line 18, insert ``or a claim made under
section 1862(b)(3)(A) of the Social Security Act (42 U.S.C.
1395y(b)(3)(A))'' after ``Code''.
On page 535, line 8, strike ``December 31, 2003'' and
insert ``December 31, 2001''.
On page 557, between lines 9 and 10, insert the following:

SEC. 660. REPEAL OF APPLICATION OF BELOW-MARKET LOAN RULES TO
AMOUNTS PAID TO CERTAIN CONTINUING CARE
FACILITIES.

(a) In General.--Section 7872(c)(1) (relating to below-
market loans to which section applies) is amended--
(1) by striking subparagraph (F), and
(2) by striking ``(C), or (F)'' in subparagraph (E) and
inserting ``or (C)''.
(b) Full Exception.--Section 7872(g) (relating to exception
for certain loans to qualified continuing care facilities) is
amended--
(1) by striking ``made by a lender to a qualified
continuing care facility pursuant to a continuing care
contract'' in paragraph (1) and inserting ``owed by a
facility which on the last day of such year is a qualified
continuing care facility, if such loan was made pursuant to a
continuing care contract and'',
(2) by striking ``increased personal care services or'' in
paragraph (3)(C),
(3) by adding at the end of paragraph (3) the following new
flush sentence:

[[Page S5159]]

``The Secretary shall issue guidance which limits such term
to contracts which provide to an individual or individual's
spouse only facilities, care, and services described in this
paragraph which are customarily offered by continuing care
facilities.'',
(4) by inserting ``independent living unit'' after ``all of
the'' in paragraph (4)(A)(ii),
(5) by striking paragraphs (2) and (5),
(6) by redesignating paragraphs (3) and (4) as paragraphs
(2) and (3), respectively, and
(7) by striking ``Certain'' in the heading thereof.
(c) Effective Date.--The amendments made by this section
shall apply to calendar years beginning after 2004.
On page 559, strike lines 6 through 17, and insert the
following:

SEC. 663. FREEZE OF PROVISIONS REGARDING SUSPENSION OF
INTEREST WHERE SECRETARY FAILS TO CONTACT
TAXPAYER.

(a) In General.--Section 6404(g) (relating to suspension of
interest and certain penalties where Secretary fails to
contact taxpayer) is amended by striking ``1-year period (18-
month period in the case of taxable years beginning before
January 1, 2004)'' both places it appears and inserting ``18-
month period''.
(b) Exception for Gross Misstatement.--Section 6404(g)(2)
(relating to exceptions) is amended by striking ``or'' at the
end of subparagraph (C), by redesignating subparagraph (D) as
subparagraph (E), and by inserting after subparagraph (C) the
following new subparagraph:
``(D) any interest, penalty, addition to tax, or additional
amount with respect to any gross misstatement; or''.
(c) Exception for Listed and Reportable Transactions.--
Section 6404(g)(2) (relating to exceptions), as amended by
subsection (b), is amended by striking ``or'' at the end of
subparagraph (D), by redesignating subparagraph (E) as
subparagraph (F), and by inserting after subparagraph (D) the
following new subparagraph:
``(E) any interest, penalty, addition to tax, or additional
amount with respect to any reportable transaction or listed
transaction (as defined in 6707A(c)); or''.
(d) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2003.
(2) Exception for reportable or listed transactions.--The
amendments made by subsection (c) shall apply with respect to
interest accruing after May 5, 2004.
Beginning on page 559, line 20, strike all through page
578, line 16, and insert the following:

SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION
PLANS.

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

``SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED
COMPENSATION UNDER NONQUALIFIED DEFERRED
COMPENSATION PLANS.

``(a) Rules Relating to Constructive Receipt.--
``(1) In general.--
``(A) Gross income inclusion.--If at any time during a
taxable year a nonqualified deferred compensation plan--
``(i) fails to meet the requirements of paragraphs (2),
(3), (4), and (5), or
``(ii) is not operated in accordance with such
requirements,

all compensation deferred under the plan for the taxable year
and all preceding taxable years shall be includible in gross
income for the taxable year to the extent not subject to a
substantial risk of forfeiture and not previously included in
gross income.
``(B) Interest and additional tax payable with respect to
previously deferred compensation.--
``(i) In general.--If compensation is required to be
included in gross income under subparagraph (A) for a taxable
year, the tax imposed by this chapter for the taxable year of
inclusion shall be increased by the sum of--

``(I) the amount of interest determined under clause (ii),
and
``(II) an amount equal to 10 percent of the compensation
which is required to be included in gross income.

``(ii) Interest.--For purposes of clause (i), the interest
determined under this clause for any taxable year is
the amount of interest at the underpayment rate on the
underpayments that would have occurred had the deferred
compensation been includible in gross income for the
taxable year in which first deferred or, if later, the
first taxable year in which such deferred compensation is
not subject to a substantial risk of forfeiture.
``(2) Distributions.--
``(A) In general.--The requirements of this paragraph are
met if the plan provides that compensation deferred under the
plan may not be distributed earlier than--
``(i) except as provided in subparagraph (B)(i), separation
from service (as determined by the Secretary),
``(ii) the date the participant becomes disabled (within
the meaning of subparagraph (C)),
``(iii) death,
``(iv) a specified time (or pursuant to a fixed schedule)
specified under the plan as of the date of the deferral of
such compensation,
``(v) to the extent provided by the Secretary, a change in
the ownership or effective control of the corporation, or in
the ownership of a substantial portion of the assets of the
corporation, or
``(vi) the occurrence of an unforeseeable emergency.
``(B) Special rules.--
``(i) Separation from service of specified employees.--In
the case of specified employees, the requirement of
subparagraph (A)(i) is met only if distributions may not be
made earlier than 6 months after the date of separation from
service. For purposes of the preceding sentence, a specified
employee is a key employee (as defined in section 416(i)) of
a corporation the stock in which is publicly traded on an
established securities market or otherwise.
``(ii) Changes in ownership or control.--In the case of a
participant who is subject to the requirements of section
16(a) of the Securities Exchange Act of 1934, the requirement
of subparagraph (A)(v) is met only if distributions may not
be made earlier than 1 year after the date of the change in
ownership or effective control.
``(iii) Unforeseeable emergency.--For purposes of
subparagraph (A)(vi)--

``(I) In general.--The term `unforeseeable emergency' means
a severe financial hardship to the participant or beneficiary
resulting from a sudden and unexpected illness or accident of
the participant or beneficiary, the participant's or
beneficiary's spouse, or the participant's or beneficiary's
dependent (as defined in section 152(a)), loss of the
participant's or beneficiary's property due to casualty, or
other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the
participant or beneficiary.
``(II) Limitation on distributions.--The requirement of
subparagraph (A)(vi) is met only if, as determined under
regulations of the Secretary, the amounts distributed with
respect to an emergency do not exceed the amounts necessary
to satisfy such emergency plus amounts necessary to pay taxes
reasonably anticipated as a result of the distribution, after
taking into account the extent to which such hardship is or
may be relieved through reimbursement or compensation by
insurance or otherwise or by liquidation of the participant's
or beneficiary's assets (to the extent the liquidation of
such assets would not itself cause severe financial
hardship).

``(C) Disabled.--For purposes of subparagraph (A)(ii), a
participant shall be considered disabled if the participant--
``(i) is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or
can be expected to last for a continuous period of not less
than 12 months, or
``(ii) is, by reason of any medically determinable physical
or mental impairment which can be expected to result in death
or can be expected to last for a continuous period of not
less than 12 months, receiving income replacement benefits
for a period of not less than 3 months under an accident and
health plan covering employees of the participant's employer.
``(3) Investment options.--The requirements of this
paragraph are met if the plan provides that the investment
options a participant may elect under the plan--
``(A) are comparable to the investment options which a
participant may elect under the defined contribution plan of
the employer which--
``(i) meets the requirement of section 401(a) and includes
a trust exempt from taxation under section 501(a), and
``(ii) has the fewest investment options, or
``(B) if there is no such defined contribution plan, meet
such requirements as the Secretary may prescribe (including
requirements limiting such options to permissible investment
options specified by the Secretary).
``(4) Acceleration of benefits.--The requirements of this
paragraph are met if the plan does not permit the
acceleration of the time or schedule of any payment under the
plan, except as provided by the Secretary in regulations.
``(5) Elections.--
``(A) In general.--The requirements of this paragraph are
met if the requirements of subparagraphs (B) and (C) are met.
``(B) Initial deferral decision.--The requirements of this
subparagraph are met if the plan provides that compensation
for services performed during a taxable year may be deferred
at the participant's election only if the election to defer
such compensation is made during the preceding taxable year
or at such other time as provided in regulations. In the case
of the first year in which a participant becomes eligible to
participate in the plan, such election may be made with
respect to services to be performed subsequent to the
election within 30 days after the date the participant
becomes eligible to participate in such plan.
``(C) Changes in time and form of distribution.--The
requirements of this subparagraph are met if, in the case of
a plan which permits under a subsequent election a delay in a
payment or a change in the form of payment--
``(i) the plan requires that such election may not take
effect until at least 12 months after the date on which the
election is made,
``(ii) in the case an election related to a payment not
described in clause (ii), (iii), or (vi) of paragraph (2)(A),
the plan requires that the first payment with respect to
which such election is made be deferred for a period of not
less than 5 years from the date such payment would otherwise
have been made, and

[[Page S5160]]

``(iii) the plan requires that any election related to a
payment described in paragraph (2)(A)(iv) may not be made
less than 12 months prior to the date of the first scheduled
payment under such paragraph.

A plan shall be treated as failing to meet the requirements
of this subparagraph if the plan permits more than 1
subsequent election to delay any payment.
``(b) Rules Relating to Funding.--
``(1) Offshore property in a trust.--In the case of assets
set aside (directly or indirectly) in a trust (or other
arrangement determined by the Secretary) for purposes of
paying deferred compensation under a nonqualified deferred
compensation plan, such assets shall be treated for purposes
of section 83 as property transferred in connection with the
performance of services whether or not such assets are
available to satisfy claims of general creditors--
``(A) at the time set aside if such assets are located
outside of the United States, or
``(B) at the time transferred if such assets are
subsequently transferred outside of the United States.

This paragraph shall not apply to assets located in a foreign
jurisdiction if substantially all of the services to which
the nonqualified deferred compensation relates are performed
in such jurisdiction.
``(2) Employer's financial health.--In the case of a
nonqualified deferred compensation plan, there is a transfer
of property within the meaning of section 83 as of the
earlier of--
``(A) the date on which the plan first provides that assets
will become restricted to the provision of benefits under the
plan in connection with a change in the employer's financial
health, or
``(B) the date on which assets are so restricted.
``(3) Income inclusion for offshore trusts and employer's
financial health.--For each taxable year that assets treated
as transferred under this subsection remain set aside in a
trust or other arrangement subject to paragraph (1) or (2),
any increase in value in, or earnings with respect to, such
assets shall be treated as an additional transfer of property
under this subsection (to the extent not previously included
in income).
``(4) Interest on tax liability payable with respect to
transferred property.--
``(A) In general.--If amounts are required to be included
in gross income by reason of paragraph (1) or (2) for a
taxable year, the tax imposed by this chapter for such
taxable year shall be increased by the sum of--
``(i) the amount of interest determined under subparagraph
(B), and
``(ii) an amount equal to 10 percent of the amounts
required to be included in gross income.
``(B) Interest.--For purposes of subparagraph (A), the
interest determined under this subparagraph for any taxable
year is the amount of interest at the underpayment rate on
the underpayments that would have occurred had the amounts so
required to be included in gross income by paragraph (1) or
(2) been includible in gross income for the taxable year in
which first deferred or, if later, the first taxable year in
which such amounts are not subject to a substantial risk of
forfeiture.
``(c) No Inference on Earlier Income Inclusion.--Nothing in
this section shall be construed to prevent the inclusion of
amounts in gross income under any other provision of this
chapter or any other rule of law earlier than the time
provided in this section. Any amount included in gross income
under this section shall not be required to be included in
gross income under any other provision of this chapter or any
other rule of law later than the time provided in this
section.
``(d) Other Definitions and Special Rules.--For purposes of
this section--
``(1) Nonqualified deferred compensation plan.--The term
`nonqualified deferred compensation plan' means any plan that
provides for the deferral of compensation, other than--
``(A) a qualified employer plan, and
``(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death benefit plan.
``(2) Qualified employer plan.--The term `qualified
employer plan' means--
``(A) any plan, contract, pension, account, or trust
described in subparagraph (A) or (B) of section 219(g)(5),
and
``(B) any eligible deferred compensation plan (within the
meaning of section 457(b)) of an employer described in
section 457(e)(1)(A).
``(3) Plan includes arrangements, etc.--The term `plan'
includes any agreement or arrangement, including an agreement
or arrangement that includes one person.
``(4) Substantial risk of forfeiture.--The rights of a
person to compensation are subject to a substantial risk of
forfeiture if such person's rights to such compensation are
conditioned upon the future performance of substantial
services by any individual.
``(5) Treatment of earnings.--References to deferred
compensation shall be treated as including references to
income (whether actual or notional) attributable to such
compensation or such income.
``(6) Exception for nonelective deferred compensation.--
This section shall not apply to any nonelective deferred
compensation to which section 457 does not apply by reason of
section 457(e)(12), but only if such compensation is provided
under a nonqualified deferred compensation plan which was in
existence on May 1, 2004, and which was providing nonelective
deferred compensation described in section 457(e)(12) on such
date. If, after May 1, 2004, a plan described in the
preceding sentence adopts a plan amemdment which provides a
material change in the classes of individuals eligible to
participate in the plan, this paragraph shall not apply to
any nonelective deferred compensation provided under the plan
on or after the date of the adoption of the amendment.
``(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out
the purposes of this section, including regulations--
``(1) providing for the determination of amounts of
deferral in the case of a nonqualified deferred compensation
plan which is a defined benefit plan,
``(2) relating to changes in the ownership and control of a
corporation or assets of a corporation for purposes of
subsection (a)(2)(A)(v),
``(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in an
improper deferral of United States tax and will not result in
assets being effectively beyond the reach of creditors,
``(4) defining financial health for purposes of subsection
(b)(2), and
``(5) disregarding a substantial risk of forfeiture in
cases where necessary to carry out the purposes of this
section.''.
(b) Application of Golden Parachute Payment Provisions.--
Section 280G of such Code (relating to golden parachute
payments) is amended by redesignating subsection (e) as
subsection (f) and by inserting after subsection (d) the
following new subsection:
``(e) Special Rules for Certain Payments From Nonqualified
Deferred Compensation Plans.--
``(1) In general.--Notwithstanding any other provision of
this section, an applicable payment shall be treated as an
excess parachute payment for purposes of this section and
section 4999.
``(2) Coordination with other payments.--
``(A) Applicable payments which are parachute payments.--If
any applicable payment is a parachute payment (determined
without regard to subsection (b)(2)(A)(ii))--
``(i) except as provided in paragraph (4), this section
shall be applied to such payment in the same manner as if
this subsection had not been enacted, and
``(ii) if such application results in an excess parachute
payment, any tax under section 4999 on the excess parachute
payment shall be in addition to the tax imposed by reason of
paragraph (1).
``(B) Applicable payments which are not parachute
payments.--An applicable payment not described in
subparagraph (A) shall be taken into account in determining
whether any payment described in subparagraph (A) or any
payment which is not an applicable payment is a parachute
payment under subsection (b)(2).
``(3) Applicable payment.--For purposes of this subsection,
the term `applicable payment' means any distribution
(including any distribution treated as a parachute payment
without regard to this subsection) from a nonqualified
deferred compensation plan (as defined in section 409A(d))
which is made--
``(A) to a participant who is subject to the requirements
of section 16(a) of the Securities Exchange Act of 1934, and
``(B) during the 1-year period following a change in the
ownership or effective control of the corporation or in the
ownership of a substantial portion of the assets of the
corporation.

Such terms shall not include any distribution by reason of
the death of the participant or the participant becoming
disabled (within the meaning of section 409A(a)(2)(C)).
``(4) No double counting.--Under regulations, proper
adjustments shall be made in the application of this
subsection to prevent a deduction from being disallowed more
than once.''.
(c) W-2 Forms.--
(1) In general.--Subsection (a) of section 6051 (relating
to receipts for employees) is amended by striking ``and'' at
the end of paragraph (11), by striking the period at the end
of paragraph (12) and inserting ``, and'', and by inserting
after paragraph (12) the following new paragraph:
``(13) the total amount of deferrals under a nonqualified
deferred compensation plan (within the meaning of section
409A(d)).''.
(2) Threshold.--Subsection (a) of section 6051 is amended
by adding at the end the following: ``In the case of the
amounts required to be shown by paragraph (13), the Secretary
may (by regulation) establish a minimum amount of deferrals
below which paragraph (13) does not apply.''.
(d) Conforming and Clerical Amendments.--
(1) Section 414(b) is amended by inserting ``409A,'' after
``408(p),''.
(2) Section 414(c) is amended by inserting ``409A,'' after
``408(p),''.
(3) The table of sections for such subpart A is amended by
adding at the end the following new item:

``Sec. 409A. Inclusion in gross income of deferred compensation under
nonqualified deferred compensation plans.''.

(e) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to amounts deferred

[[Page S5161]]

in taxable years beginning after December 31, 2004.
(2) Earnings attributable to amount previously deferred.--
The amendments made by this section shall apply to earnings
on deferred compensation only to the extent that such
amendments apply to such compensation.
(f) Guidance Relating to Change of Ownership or Control.--
Not later than 90 days after the date of the enactment of
this Act, the Secretary of the Treasury shall issue guidance
on what constitutes a change in ownership or effective
control for purposes of section 409A of the Internal Revenue
Code of 1986, as added by this section.
(g) Guidance Relating to Termination of Certain Existing
Arrangements.--Not later than 90 days after the date of the
enactment of this Act, the Secretary of the Treasury shall
issue guidance providing a limited period during which an
individual participating in a nonqualified deferred
compensation plan adopted on or before December 31, 2004,
may, without violating the requirements of paragraphs (2),
(3), (4), and (5) of section 409A(a) of the Internal Revenue
Code of 1986 (as added by this section), terminate
participation or cancel an outstanding deferral election with
regard to amounts earned after December 31, 2004, if such
amounts are includible in income as earned.

SEC. 672. PROHIBITION ON DEFERRAL OF GAIN FROM THE EXERCISE
OF STOCK OPTIONS AND RESTRICTED STOCK GAINS
THROUGH DEFERRED COMPENSATION ARRANGEMENTS.

(a) In General.--Section 83 (relating to property
transferred in connection with performance of services) is
amending by adding at the end the following new subsection:
``(i) Prohibition on Additional Deferral Through Deferred
Compensation Arrangements.--If a taxpayer exchanges--
``(1) an option to purchase employer securities--
``(A) to which subsection (a) applies, or
``(B) which is described in subsection (e)(3), or
``(2) employer securities or any other property based on
employer securities transferred to the taxpayer,

for a right to receive future payments, then, notwithstanding
any other provision of this title, there shall be included in
gross income for the taxable year of the exchange an amount
equal to the present value of such right (or such other
amount as the Secretary may by regulations specify). For
purposes of this subsection, the term `employer securities'
includes any security issued by the employer.''.
(b) Controlled Group Rules.--Section 414(t)(2) is amended
by inserting ``83(i),'' after ``79,''.
(c) Effective Date.--The amendments made by this section
shall apply to any exchange after December 31, 2004.
On page 581, strike lines 1 through 20, and insert the
following:

SEC. 675. APPLICATION OF BASIS RULES TO EMPLOYER AND EMPLOYEE
CONTRIBUTIONS ON BEHALF OF NONRESIDENT ALIENS.

(a) In General.--Section 72 (relating to annuities and
certain proceeds of endowment and life insurance contracts)
is amended by redesignating subsection (w) as subsection (x)
and by inserting after subsection (v) the following new
subsection:
``(w) Application of Basis Rules to Employer and Employee
Contributions Made on Behalf of Nonresident Aliens.--
``(1) In general.--Notwithstanding any other provision of
this section, for purposes of determining the portion of any
distribution which is includible in gross income of a
distributee who is a citizen or resident of the United
States, the investment in the contract shall not include any
applicable nontaxable contributions.
``(2) Applicable nontaxable contribution.--For purposes of
this subsection, the term `applicable nontaxable
contribution' means any employer or employee contribution--
``(A) which was made with respect to compensation for labor
or personal services by an employee who, at the time the
services were performed, was a nonresident alien for purposes
of the laws of the United States in effect at such time, but
only if such compensation is treated as from sources without
the United States, and
``(B) which was not subject to income tax under the laws of
the United States or any foreign country.
``(3) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions
of this subsection, including regulations treating
contributions as not subject to tax under the laws of any
foreign country where appropriate to carry out the purposes
of this subsection.''.
(b) Effective Date.--The amendments made by this section
shall apply to distributions on or after the date of the
enactment of this Act.
On page 596, strike lines 8 through 10, and insert the
following:
(b) Effective Date.--The amendment made by this section
shall take effect on the date of the enactment of this Act.
On page 596, line 22, strike ``Section 904(h)'' and insert
``Section 904(i), as redesignated by this Act,''.
Beginning on page 598, line 17, strike all through 601,
line 7, and insert the following:
(a) Amendments of ERISA.--
(1) Section 101(e)(3) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1021(e)(3)) is amended by
striking ``Pension Funding Equity Act of 2004'' and inserting
``Jumpstart Our Business Strength (JOBS) Act''.
(2) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is
amended by striking ``Pension Funding Equity Act of 2004''
and inserting ``Jumpstart Our Business Strength (JOBS) Act''.
(3) Paragraph (13) of section 408(b) of such Act (29 U.S.C.
1108(b)(3)) is amended by striking ``Pension Funding Equity
Act of 2004'' and inserting ``Jumpstart Our Business Strength
(JOBS) Act''.
(b) Minimum Cost Requirements.--
(1) In general.--Section 420(c)(3)(E) is amended by adding
at the end the following new clause:
``(ii) Insignificant cost reductions permitted.--

``(I) In general.--An eligible employer shall not be
treated as failing to meet the requirements of this paragraph
for any taxable year if, in lieu of any reduction of retiree
health coverage permitted under the regulations prescribed
under clause (i), the employer reduces applicable employer
cost by an amount not in excess of the reduction in costs
which would have occurred if the employer had made the
maximum permissible reduction in retiree health coverage
under such regulations. In applying such regulations to any
subsequent taxable year, any reduction in applicable employer
cost under this clause shall be treated as if it were an
equivalent reduction in retiree health coverage.
``(II) Eligible employer.--For purposes of subclause (I),
an employer shall be treated as an eligible employer for any
taxable year if, for the preceding taxable year, the
qualified current retiree health liabilities of the employer
were at least 5 percent of the gross receipts of the
employer. For purposes of this subclause, the rules of
paragraphs (2), (3)(B), and (3)(C) of section 448(c) shall
apply in determining the amount of an employer's gross
receipts.''.

(2) Conforming amendment.--Section 420(c)(3)(E) is amended
by striking ``The Secretary'' and inserting:
``(i) In general.--The Secretary''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years ending after the date of the
enactment of this Act.
On page 606, line 18, insert ``, as amended by section
882(c) of this Act,'' after ``penalties)''.
On page 606, line 21, strike ``6717'' and insert ``6720a''.
On page 607, line 18, insert ``, as amended by section
882(c) of this Act,'' after ``chapter 68''.
On page 607, in the matter after line 20, strike ``6717''
and insert ``6720A''.
On page 608, line 4, insert ``, as amended by this Act,''
after ``vaccine)''.
On page 608, line 6, strike ``(M)'' and insert ``(N)''.
On page 608, strike lines 8 through 11.
On page 612, line 10, strike the end quotation marks and
second period.
On page 624, line 7, strike ``or''.
On page 624, line 11, strike the period and insert ``,
or''.
On page 624, between lines 11 and 12, insert the following:

``(VI) the Tennessee Valley Authority.

On page 624, lines 13 and 14, strike ``A person described
in subparagraph (A)(ii)'' and insert ``A person described in
subclause (I), (II), (III), (IV), or (V) of subparagraph
(A)(ii)''.
On page 625, between lines 21 and 22, insert the following:
``(D) Use by tva.--
``(i) In general.--Notwithstanding any other provision of
law, in the case of a person described in subparagraph
(A)(ii)(VI), any credit to which subparagraph (A)(i) applies
may be applied as a credit against the payments required to
be made in any fiscal year under section 15d(e) of the
Tennessee Valley Authority Act of 1933 (16 U.S.C. 831n-4(e))
as an annual return on the appropriations investment and an
annual repayment sum.
``(ii) Treatment of credits.--The aggregate amount of
credits described in subparagraph (A)(i) with respect to such
person shall be treated in the same manner and to the same
extent as if such credits were a payment in cash and shall be
applied first against the annual return on the appropriations
investment.
``(iii) Credit carryover.--With respect to any fiscal year,
if the aggregate amount of credits described subparagraph
(A)(i) with respect to such person exceeds the aggregate
amount of payment obligations described in clause (i), the
excess amount shall remain available for application as
credits against the amounts of such payment obligations in
succeeding fiscal years in the same manner as described in
this subparagraph.
On page 625, line 22, strike ``(D)'' and insert ``(E)''.
On page 626, line 3, strike ``(E)'' and insert ``(F)''.
On page 626, line 8, strike ``(g)'' and insert ``(f)''.
On page 627, line 14, insert ``, as amended by this Act,''
after ``etc.)''.
On page 627, line 16, strike ``30B'' and insert ``30C''.
On page 652, strike lines 2 through 17, and insert the
following:
(1) Section 1016(a) is amended by striking ``and'' at the
end of paragraph (31), by striking the period at the end of
paragraph (32) and inserting ``, and'', and by adding at the
end the following new paragraph:

[[Page S5162]]

``(33) to the extent provided in section 30C(f)(4).''.
(2) Section 55(c)(2), as amended by this Act, is amended by
inserting ``30C(e),'' after ``30(b)(2),''.
(3) Section 6501(m) is amended by inserting ``30C(f)(9),''
after ``30(d)(4),''.
(4) The table of sections for subpart B of part IV of
subchapter A of chapter 1, as amended by this Act, is amended
by inserting after the item relating to section 30B the
following new item:

``Sec. 30C. Alternative motor vehicle credit.''.

(c) Effective Date.--The amendments made by
On page 658, line 3, strike ``30C'' and insert ``30D''.
On page 659, line 21, strike ``30B'' and insert ``30C''.
Beginning on page 662, line 21, strike all through page
663, line 9, and insert the following:
(1) Section 1016(a), as amended by this Act, is amended by
striking ``and'' at the end of paragraph (32), by striking
the period at the end of paragraph (33) and inserting ``,
and'', and by adding at the end the following new paragraph:
``(34) to the extent provided in section 30D(f).''.
(2) Section 55(c)(2), as amended by this Act, is amended by
inserting ``30D(e),'' after ``30C(e),''.
(3) The table of sections for subpart B of part IV of
subchapter A of chapter 1, as amended by this Act, is amended
by inserting after the item relating to section 30C the
following new item:

``Sec. 30D. Clean-fuel vehicle refueling property credit.''.

(e) Effective Date.--The amendments made by
On page 665, line 7, strike ``section 30B(d)(4)'' and
insert ``section 30C(d)(4)''.
On page 670, line 12, insert ``, as amended by this Act,''
after the end parenthetical.
On page 670, line 14, strike ``(k)'' and insert ``(l)''.
On page 702, line 3, strike ``Section 904(h)'' and insert
``Section 904(i), as redesignated and amended by this Act,''.
On page 702, strike lines 8 through 15, and insert the
following:
(1) Section 1016(a), as amended by this Act, is amended by
striking ``and'' at the end of paragraph (33), by striking
the period at the end of paragraph (34) and inserting ``,
and'', and by adding at the end the following new paragraph:
``(35) to the extent provided in section 25C(f), in the
case of amounts with respect to which a credit has been
allowed under section 25C.''.
On page 715, line 22, strike ``(30)'' and insert ``(34)''.
On page 715, line 23, strike ``(31)'' and insert ``(35)''.
On page 716, line 1, strike ``(32)'' and insert ``(36)''.
On page 716, strike lines 9 through 15, and insert the
following:
(4) Section 263(a)(1), as amended by this Act, is amended
by striking ``or'' at the end of subparagraph (H), by
striking the period at the end of subparagraph (I) and
inserting ``, or'', and by inserting after subparagraph (I)
the following new subparagraph:
``(J) expenditures for which a deduction is allowed under
section 179B.''.
On page 717, line 13, insert ``, as amended by this Act,''
after ``rules)''.
On page 717, line 15, strike ``(15)'' and insert ``(16)''.
On page 719, line 7, strike ``(16)'' and insert ``(17)''.
On page 734, lines 16 and 17, strike ``Section 904(h), as
amended by this Act,'' and insert ``Section 904(i), as
redesignated and amended by this Act,''.
On page 734, line 25, strike ``(31)'' and insert ``(35)''.
On page 735, line 1, strike ``(32)'' and insert ``(36)''.
On page 735, line 3, strike ``(33)'' and insert ``(37)''.
Beginning on page 747, line 23, strike all through page
748, line 5, and insert the following:
(a) Allowance of Qualifying Advanced Clean Coal Technology
Unit Credit.--Section 46 (relating to amount of credit), as
amended by this Act, 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) the qualifying advanced clean coal technology unit
credit.''.
On page 780, strike lines 16 through 21, and insert the
following:
(a) In General.--Section 168(e)(3)(C) (defining 7-year
property), as amended by this Act, is amended by striking
``and'' at the end of clause (ii), by redesignating clause
(iii) as clause (iv), and by inserting after clause (ii) the
following new clause:
``(iii) any natural gas gathering line, and''.
On page 781, line 3, strike ``(17)'' and insert ``(18)''.
On page 782, in the matter following line 2, strike
``(C)(ii)'' and insert ``(C)(iii)''.
On page 783, line 22, strike the end quotation marks and
second period.
On page 784, line 4, strike ``(H)'' and insert ``(I)''.
On page 784, line 5, strike ``(I)'' and insert ``(J)''.
On page 784, line 7, strike ``(J)'' and insert ``(K)''.
On page 784, line 17, strike ``(32)'' and insert ``(36)''.
On page 784, line 18, strike ``(33)'' and insert ``(37)''.
On page 784, line 20, strike ``(34)'' and insert ``(38)''.
On page 785, line 1, strike ``(5)'' and insert ``(6)''.
On page 793, line 15, strike ``(33)'' and insert ``(37)''.
On page 793, line 16, strike ``(34)'' and insert ``(38)''.
On page 793, line 19, strike ``(35)'' and insert ``(39)''.
On page 795, line 5, insert ``, as amended by this Act,''
after ``production)''.
On page 805, line 3, strike the semicolon and insert a
colon.
On page 805, line 8, insert ``of subsection (f)'' before
``owned''.
On page 805, line 11, strike the end quotation marks and
second period.
On page 807, line 2, insert ``, as amended by this Act,''
after ``38(b)''.
On page 808, strike lines 8 through 12, and insert the
following:
(G) Subsection (a) of section 772, as amended by this Act,
is amended by striking paragraph (10) and by redesignating
paragraphs (11) and (12) as paragraphs (10) and (11),
respectively.
On page 810, strike lines 12 through 18, and insert the
following:
(a) In General.--Section 168(e)(3)(E) (defining 15-year
property), as amended by this Act, is amended by striking
``and'' at the end of clause (iii), by striking the period at
the end of clause (iv) and by inserting ``, and'', and by
adding at the end the following new clause:
``(v) any natural gas distribution line.''.
On page 810, in the matter after line 23, strike
``(E)(iv)'' and insert ``(E)(v)''.
On page 814, line 5, strike ``(18)'' and insert ``(19)''.
On page 818, strike lines 19 through 25, and insert the
following:
(a) In General.--Section 168(e)(3)(C) (defining 7-year
property), as amended by this Act, is amended by striking
``and'' at the end of clause (iii), by redesignating clause
(iv) as clause (v), and by inserting after clause (iii) the
following new clause:
``(iv) any Alaska natural gas pipeline, and''.
On page 819, line 5, strike ``(18)'' and insert ``(19)''.
On page 820, line 2, strike ``(C)(ii)'' and insert
``(C)(iii)''.
On page 820, in the matter following line 2, strike
``(C)(iii)'' and insert ``(C)(iv)''.
On page 820, line 3, strike the beginning quotation marks.
On page 840, line 14, insert ``, as amended by this Act,''
after ``modifications)''.
On page 840, line 17, strike ``(18)'' and insert ``(20)''.
On page 849, line 20, strike ``5211 and 5242'' and insert
``871 and 880''.
On page 855, lines 1 and 2, strike ``, as amended by
section 5101 of this Act,''.
On page 862, line 3, insert ``, as amended by this Act,''
after ``credit)''.
On page 862, strike lines 10 through 19, and insert the
following:
(1)(A) Section 87, as amended by this Act, is amended--
(i) by striking ``and'' at the end of paragraph (1),
(ii) by striking the period at the end of paragraph (2) and
inserting ``, and'',
(iii) by adding at the end the following new paragraph:
``(3) the biodiesel fuels credit determined with respect to
the taxpayer for the taxable year under section 40B(a).'',
and
(iv) by striking ``FUEL CREDIT'' in the heading and
inserting ``AND BIODIESEL FUELS CREDITS''.
Beginning on page 862, line 24, strike all through page
863, line 5, and insert the following:
(2) Section 196(c), as amended by this Act, is amended by
striking ``and'' at the end of paragraph (11), by striking
the period at the end of paragraph (12) and inserting ``,
and'', and by adding at the end the following new paragraph:
``(13) the biodiesel fuels credit determined under section
40B(a).''.
On page 872, strike lines 1 through 8, and insert the
following:
(M) Subparagraph (B) of section 6724(d)(1), as amended by
this Act, is amended by striking clause (xvi) and by
redesignating clauses (xvii), (xviii), and (xix) as clauses
(xvi), (xvii), and (xviii), respectively.
(N) Paragraph (2) of section 6724(d), as amended by this
Act, is amended by striking subparagraph (X) and by
redesignating subparagraphs (Y), (Z), (AA), (BB), and (CC) as
subparagraphs (X), (Y), (Z), (AA), and (BB), respectively.
On page 878, line 8, strike ``Penalty--'' and insert
``Penalty.--''.
On page 883, line 7, strike ``section 5211 of''.
On page 883, lines 17 and 18, strike ``section 5211 of''.
On page 884, lines 6 and 7, strike ``section 5221 of''.
On page 885, lines 8 and 9, strike ``section 5211 of''.
On page 885, lines 21 and 22, strike ``section 5221 of''.
On page 886, line 18, strike ``section 5232 of''.
On page 888, line 10, strike ``section 5232 of''.
On page 889, line 13, strike ``section 5241 of''.
On page 890, line 11, strike ``section 5241 of''.
On page 890, line 16, strike the second period.
On page 890, line 18, strike ``section 5242 of''.

[[Page S5163]]

On page 890, line 22, strike the second period.
On page 891, line 22, strike ``section 5242 of''.
On page 892, line 17, strike ``section 5242 of''.
On page 895, lines 18 and 19, strike ``section 5245 of''.
On page 898, lines 20 and 21, strike ``section 5102 of''.
On page 902, lines 24 and 25, strike ``section 5152 of''.
On page 903, line 10, strike ``section 5251 of''.
On page 904, line 15, strike ``section 5251 of''.
On page 906, lines 12 and 13, strike ``, as amended by
section 5001 of this Act,''.
On page 907, lines 12 and 13, strike ``, as amended by
section 5001 of this Act,''.
On page 909, line 19, strike ``section 5211 of''.
On page 910, lines 20 and 21, strike ``section 5211 of''.
On page 912, lines 9 and 10, strike ``section 5243 of''.
On page 912, lines 12 through 14, strike ``as added by
section 5242 of this Act and redesignated by section 5243 of
this Act'' and insert ``as added and redesignated by this
Act''.
On page 912, lines 20 and 21, strike ``section 5241 of''.
On page 912, line 24, strike the space after the beginning
quotation marks.
On page 913, strike lines 1 and 2, and insert the
following:
(II) in the heading, by inserting ``or reportable liquids''
after ``taxable fuel''.
On page 913, line 5, strike ``section 5241 of''.
On page 914, line 8, strike ``section 5252 of''.
On page 919, strike lines 3 through 9, and insert the
following:
``(C) Special rule for use by certain tax-exempt
organizations.--For purposes of subparagraph (A), the use-
based test shall be determined without regard to any use in a
vehicle by an organization which is described in section
501(c) and exempt from tax under section 501(a).''.
On page 931, after line 18, add the following:

SEC. 899B. CREDIT FOR QUALIFYING POLLUTION CONTROL EQUIPMENT.

(a) Allowance of Qualifying Pollution Control Equipment
Credit.--Section 46 (relating to amount of credit), as
amended by this Act, is amended by striking ``and'' at the
end of paragraph (2), by striking the period at the end of
paragraph (3) and inserting ``, and'', and by adding at the
end the following new paragraph:
``(4) the qualifying pollution control equipment credit.''.
(b) Amount of Qualifying Pollution Control Equipment
Credit.--Subpart E of part IV of subchapter A of chapter 1
(relating to rules for computing investment credit), as
amended by this Act, is amended by inserting after section
48A the following new section:

``SEC. 48B. QUALIFYING POLLUTION CONTROL EQUIPMENT CREDIT.

``(a) In General.--For purposes of section 46, the
qualifying pollution control equipment credit for any taxable
year is an amount equal to 15 percent of the basis of the
qualifying pollution control equipment placed in service at a
qualifying facility during such taxable year.
``(b) Qualifying Pollution Control Equipment.--For purposes
of this section, the term `qualifying pollution control
equipment' means any technology installed in or on a
qualifying facility to reduce air emissions of any pollutant
regulated by the Environmental Protection Agency under the
Clean Air Act, including thermal oxidizers, regenerative
thermal oxidizers, scrubber systems, evaporative control
systems, vapor recovery systems, flair systems, bag houses,
cyclones, continuous emissions monitoring systems, and low
nitric oxide burners.
``(c) Qualifying Facility.--For purposes of this section,
the term `qualifying facility' means any facility which
produces not less than 1,000,000 gallons of ethanol during
the taxable year.
``(d) Special Rule for Certain Subsidized Property.--Rules
similar to section 48(a)(4) shall apply for purposes of this
section.
``(e) Certain Qualified Progress Expenditures Rules Made
Applicable.--Rules similar to the rules of subsections (c)(4)
and (d) of section 46 (as in effect on the day before the
enactment of the Revenue Reconciliation Act of 1990) shall
apply for purposes of this subsection.''.
(c) Recapture of Credit Where Emissions Reduction Offset is
Sold.--Paragraph (1) of section 50(a) is amended by
redesignating subparagraph (B) as subparagraph (C) and by
inserting after subparagraph (A) the following new
subparagraph:
``(B) Special rule for qualifying pollution control
equipment.--For purposes of subparagraph (A), any investment
property which is qualifying pollution control equipment (as
defined in section 48B(b)) shall cease to be investment
credit property with respect to a taxpayer if such taxpayer
receives a payment in exchange for a credit for emission
reductions attributable to such qualifying pollution control
equipment for purposes of an offset requirement under part D
of title I of the Clean Air Act.''.
(d) Special Rule for Basis Reduction; Recapture of
Credit.--Paragraph (3) of section 50(c) (relating to basis
adjustment to investment credit property), as amended by this
Act, is amended by inserting ``or qualifying pollution
control equipment credit'' after ``energy credit''.
(e) Effective Date.--The amendments made by this section
shall apply to property placed in service after December 31,
2003, in taxable years ending after such date, under rules
similar to the rules of section 48(m) of the Internal Revenue
Code of 1986 (as in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of 1990).
______

SA 3134. Mr. HOLLINGS submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

On page 19, beginning with line 25, strike through line 3
on page 98 and insert the following:
``(a) Allowance of Deduction.--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.
``(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

[[Page S5164]]

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
``(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.
______

SA 3135. Mr. COLEMAN submitted an amendment intended to be proposed
by

[[Page S5165]]

him to the 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; which was ordered to lie on the
table; as follows:

At the end of the bill, add the following:

TITLE IX--NON-REVENUE PROVISIONS

SEC. 901. CUSTOMS SERVICES.

Section 13031(e)(1) of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (19 U.S.C. 58c(e)(1)) is amended--
(1) by striking ``(1) Notwithstanding section 451 of the
Tariff Act of 1930 (19 U.S.C. 1451) or any other provision of
law (other than paragraph (2)),'' and inserting:
``(1) In general.--
``(A) Scheduled flights.--Notwithstanding section 451 of
the Tariff Act of 1930 (19 U.S.C. 1451) or any other
provision of law (other than subparagraph (B) and paragraph
(2)),''; and
(2) by adding at the end the following:
``(B) Charter flights.--If a charter air carrier (as
defined in section 40102(13) of title 49, United States Code)
specifically requests that customs border patrol services for
passengers and their baggage be provided for a charter flight
arriving after normal operating hours at a customs border
patrol serviced airport and overtime funds for those services
are not available, the appropriate customs border patrol
officer may assign sufficient customs employees (if
available) to perform any such services, which could lawfully
be performed during regular hours of operation, and any
overtime fees incurred in connection with such service shall
be paid by the charter air carrier.''.
______

SA 3136. Mr. SANTORUM submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

At the appropriate place insert the following:

SEC. __. TAXATION OF CERTAIN SETTLEMENT FUNDS.

(a) In General.--Subsection (g) of section 468B (relating
to clarification of taxation of certain funds) is amended to
read as follows:
``(g) Clarification of Taxation of Certain Funds.--
``(1) In general.--Except as provided in paragraph (2),
nothing in any provision of law shall be construed as
providing that an escrow account, settlement fund, or similar
fund is not subject to current income tax. The Secretary
shall prescribe regulations providing for the taxation of any
such account or fund whether as a grantor trust or otherwise.
``(2) Exemption from tax for certain settlement funds.--An
escrow account, settlement fund, or similar fund shall be
treated as beneficially owned by the United States and shall
be exempt from taxation under this subtitle if--
``(A) it is established pursuant to a consent decree
entered by a judge of a United States District Court,
``(B) it is created for the receipt of settlement payments
as directed by a government entity for the sole purpose of
resolving or satisfying one or more claims asserting
liability under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980,
``(C) the authority and control over the expenditure of
funds therein (including the expenditure of contributions
thereto and any net earnings thereon) is with such government
entity, and
``(D) upon termination, any remaining funds will be
disbursed upon instructions by such government entity in
accordance with applicable law.

For purposes of this paragraph, the term `government entity'
means the United States, any State or political subdivision
thereof, the District of Columbia, any possession of the
United States, and any agency or instrumentality of any of
the foregoing.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31,
2003.
______

SA 3137. Mr. GRAHAM of South Carolina submitted an amendment intended
to be proposed by him to the 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; which was ordered to lie on the table; as follows:

At the end of the bill, add the following:

TITLE V--MISCELLANEOUS PROVISIONS

SEC. 501. NEGOTIATIONS REGARDING CURRENCY VALUATION.

(a) Findings.--Congress makes the following findings:
(1) The currency of the People's Republic of China, known
as the yuan or renminbi, is artificially pegged at a level
significantly below its market value. Economists estimate the
yuan to be undervalued by between 15 percent and 40 percent
or an average of 27.5 percent.
(2) The undervaluation of the yuan provides the People's
Republic of China with a significant trade advantage by
making exports less expensive for foreign consumers and by
making foreign products more expensive for Chinese consumers.
The effective result is a significant subsidization of
China's exports and a virtual tariff on foreign imports.
(3) The Government of the People's Republic of China has
intervened in the foreign exchange markets to hold the value
of the yuan within an artificial trading range. China's
foreign reserves are estimated to be over $350,000,000,000 as
of September 2003, and have increased by over
$110,000,000,000 in the last 12 months.
(4) China's undervalued currency, China's trade advantage
from that undervaluation, and the Chinese Government's
intervention in the value of its currency violates the spirit
and letter of the world trading system of which the People's
Republic of China is now a member.
(5) The Government of the People's Republic of China has
failed to promptly address concerns or to provide a
definitive timetable for resolution of these concerns raised
by the United States and the international community
regarding the value of its currency.
(6) Article XXI of the GATT 1994 (as defined in section
2(1)(B) of the Uruguay Round Agreements Act (19 U.S.C.
3501(1)(B))) allows a member of the World Trade Organization
to take any action which it considers necessary for the
protection of its essential security interests. Protecting
the United States manufacturing sector is essential to the
interests of the United States.
(b) Negotiations and Certification Regarding the Currency
Valuation Policy of the People's Republic of China.--
(1) In general.--Notwithstanding the provisions of title I
of Public Law 106-286 (19 U.S.C. 2431 note), on and after the
date that is 180 days after the date of enactment of this
Act, unless a certification described in paragraph (2) has
been made to Congress, in addition to any other duty, there
shall be imposed a rate of duty of 27.5 percent ad valorem on
any article that is the growth, product, or manufacture of
the People's Republic of China, imported directly or
indirectly into the United States.
(2) Certification.--The certification described in this
paragraph means a certification by the President to Congress
that the People's Republic of China is no longer acquiring
foreign exchange reserves to prevent the appreciation of the
rate of exchange between its currency and the United States
dollar for purposes of gaining an unfair competitive
advantage in international trade. The certification shall
also include a determination that the currency of the
People's Republic of China has undergone a substantial upward
revaluation placing it at or near its fair market value.
(3) Alternative certification.--If the President certifies
to Congress 180 days after the date of enactment of this Act
that the People's Republic of China has made a good faith
effort to revalue its currency upward placing it at or near
its fair market value, the President may delay the imposition
of the tariffs described in paragraph (1) for an additional
180 days. If at the end of the 180-day period the President
determines that China has developed and started actual
implementation of a plan to revalue its currency, the
President may delay imposition of the tariffs for an
additional 12 months, so that the People's Republic of China
shall have time to implement the plan.
(4) Negotiations.--Beginning on the date of enactment of
this Act, the Secretary of the Treasury, in consultation with
the United States Trade Representative, shall begin
negotiations with the People's Republic of China to ensure
that the People's Republic of China adopts a process that
leads to a substantial upward currency revaluation within 180
days after the date of enactment of this Act. Because various
Asian governments have also been acquiring substantial
foreign exchange reserves in an effort to prevent
appreciation of their currencies for purposes of gaining an
unfair competitive advantage in international trade, and
because the People's Republic of China has concerns about the
value of those currencies, the Secretary shall also seek to
convene a multilateral summit to discuss exchange rates with
representatives of various Asian governments and other
interested parties, including representatives of other G-7
nations.
______

SA 3138. Mrs. HUTCHISON submitted an amendment intended to be
proposed by her to the 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; which was ordered
to lie on the table; as follows:

On page 35, between lines 11 and 12, insert the following:

[[Page S5166]]

SEC. 103. DEDUCTION FOR UNITED STATES PRODUCTION ACTIVITIES
INCLUDES INCOME RELATED TO CERTAIN
ARCHITECTURAL AND ENGINEERING SERVICES.

(a) In General.--Paragraph (1) of section 199(e) (relating
to domestic production gross receipts), as added by section
102, is amended to read as follows:
``(1) In general.--
``(A) Receipts from qualifying production property.--The
term `domestic production gross receipts' means the gross
receipts of the taxpayer which are derived from--
``(i) any sale, exchange, or other disposition of, or
``(ii) 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.
``(B) Receipts from certain services.--
``(i) In general.--Such term also includes the applicable
percentage of gross receipts of the taxpayer which are
derived from any engineering or architectural services
performed in the United States for construction projects in
the United States.
``(ii) Applicable percentage.--For purposes of clause (i),
the applicable percentage shall be determined under the
following table:

The applicable percentage is--ear beginning in--
2004, 2005, 2006, 2007, or 2008...............................25 ....

2009, 2010, 2011, or 2012.....................................50 ....

2013 or thereafter...........................................100.....

(b) Limitation of Employer Deduction for Certain
Entertainment Expenses with Respect to Covered Employees.--
Paragraph (2) of section 274(e) (relating to expenses treated
as compensation) is amended to read as follows:
``(2) Expenses treated as compensation.--Expenses for
goods, services, and facilities--
``(A) in the case of a covered employee (within the meaning
of section 162(m)(3)), to the extent that the expenses do not
exceed the amount of the expenses treated by the taxpayer,
with respect to the recipient of the entertainment,
amusement, or recreation, as compensation to such covered
employee on the taxpayer's return of tax under this chapter
and as wages to such covered employee for purposes of chapter
24 (relating to withholding of income tax at source on
wages), and
``(B) in the case of any other employee, to the extent that
the expenses are treated by the taxpayer, with respect to the
recipient of the entertainment, amusement, or recreation, as
compensation to such employee on the taxpayer's return of tax
under this chapter and as wages to such employee for purposes
of chapter 24 (relating to withholding of income tax at
source on wages).''.
(c) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to taxable years ending after the date of the
enactment of this Act, and section 15 of the Internal Revenue
Code of 1986 shall apply to the amendment made by this
subsection as if it were a change in the rate of tax.
(2) Subsection (b).--The amendment made by subsection (b)
shall apply to expenses incurred after the date of the
enactment of this Act and before January 1, 2006.
______

SA 3139. Mr. SPECTER submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

On page 35, between lines 11 and 12, insert the following:

SEC. 103. MANUFACTURER'S TAX EQUITY CREDIT AGAINST PAYROLL
TAXES IN LIEU OF DEDUCTION.

(a) In General.--Subchapter C of chapter 21 is amended by
redesignating section 3128 as section 3129 and inserting
after section 3127 the following new section:

``SEC. 3128. MANUFACTURER'S TAX EQUITY CREDIT.

``(a) General Rule.--In the case of a qualified
manufacturer who elects application of this section for any
taxable year, there shall be allowed a credit against the
taxes imposed by this chapter during the taxable year an
amount equal to 10 percent of qualified health benefit plan
costs paid during the taxable year.
``(b) Qualified Manufacturer.--For purposes of this
section, the term `qualified manufacturer' means any taxpayer
50 percent or more of whose gross receipts from activities
performed within the United States during the taxable year
were domestic production gross receipts (within the meaning
of section 199(e)).
``(c) Qualified Health Benefit Plan Costs.--For purposes of
this section--
``(1) In general.--The term `qualified health benefit plan
costs' means any costs paid by the qualified manufacturer for
a qualified health benefit plan with respect to qualified
plan participants and their spouses and dependents (as
defined by section 152), but only if the amount of costs paid
by the qualified manufacturer is equal to or greater than 50
percent of the cost of coverage for such qualified plan
participants under such plan.
``(2) Qualified health benefit plan.--The term `qualified
health benefit plan' means an employee welfare benefit plan
(within the meaning of section 3(3) of the Employee
Retirement Income Security Act of 1974) which provides health
benefits.
``(3) Qualified plan participants.--The term `qualified
plan participants' means employees and former employees of
the qualified manufacturer--
``(A) who participate in a qualified health benefit plan of
the qualified manufacturer,
``(B) who are between the ages of 55 and 64, and
``(C)(i) in the case of a participant who is an employee of
such qualified manufacturer during the taxable year, whose
services for such qualified manufacturer for such year are
performed predominantly in the United States, and
``(ii) in the case of a participant who is a former
employee of such qualified manufacturer, whose services for
such qualified manufacturer were performed predominantly in
the United States during the period such participant was an
employee.
``(d) Denial of Deduction for Income Attributable to United
States Production.--No deduction shall be allowed under
section 199 for any qualified manufacturer for any taxable
year for which such qualified manufacturer elects the
application of this section.
``(e) Special Rule for Affiliated Groups.--Rules similar to
the rules of section 199(h)(3) shall apply for purposes of
this section.''.
(b) Transfer of Funds.--The Secretary of the Treasury shall
transfer from the general revenues of the Federal Government
an amount sufficient so as to ensure that the income and
balances of the trust funds under section 201 of the Social
Security Act are not reduced as a result of the application
of the amendment made by subsection (a).
(c) Determination of Benefits.--In making any determination
of benefits under title II of the Social Security Act and
part A of title XVIII of such Act, the Commissioner of Social
Security shall disregard the effect of the amendment made by
subsection (a) on any individual's earnings record.
(d) Conforming Amendment.--The table of sections for
subchapter C of chapter 21 is amended by striking the last 2
items and inserting the following:

``Sec. 3128. Manufacturer's tax equity credit.
``Sec. 3129. Short title.''.

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

SA 3140. Mr. FEINGOLD submitted an amendment intended to be proposed
by him to the 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; which was ordered
to lie on the table; as follows:

At the end of the bill, add the following:

TITLE IX--OFFICE OF FEDERAL PROCUREMENT POLICY ACT IMPROVEMENTS

SEC. 901. PREFERENCE FOR DOMESTIC BIDDERS.

The Office of Federal Procurement Policy Act (41 U.S.C. 403
et seq.), as amended by this Act, is further amended by
adding at the end the following new section:

``SEC. 43. PREFERENCE FOR DOMESTIC BIDDERS.

``(a) The head of an executive agency entering into a
contract shall give preference to a company submitting an
offer on the contract that manufactures in the United States
the article, material, or supply for which the offer is
solicited, if--
``(1) that company's offer is substantially the same as an
offer made by a company that does not manufacture the
article, material, or supply in the United States; or
``(2) that company is the only company that manufactures in
the United States the article, material, or supply for which
the offer is solicited.
``(b)(1) Not later than 60 days after the end of each
fiscal year, the head of each executive agency shall submit
to Congress a report on the acquisitions that were made of
articles, materials, or supplies by such executive agency in
that fiscal year from entities that manufacture the articles,
materials, or supplies outside the United States.
``(2) The report for a fiscal year under paragraph (1)
shall separately indicate the following information:
``(A) The dollar value of any articles, materials, or
supplies that were manufactured outside the United States.
``(B) An itemized list of all waivers granted with respect
to such articles, materials, or supplies under the Buy
American Act (41 U.S.C. 10a et seq.).
``(C) A summary of--
``(i) the total procurement funds expended on articles,
materials, and supplies manufactured inside the United
States; and
``(ii) the total procurement funds expended on articles,
materials, and supplies manufactured outside the United
States.
``(3) The head of each executive agency submitting a report
under paragraph (1) shall make the report publicly available
by posting on an Internet website.''.

[[Page S5167]]

SEC. 902. REQUIREMENTS FOR WAIVERS.

(a) Public Interest Waiver Under Buy American Act.--Section
18 of the Office of Federal Procurement Policy Act (41 U.S.C.
416) is amended by adding at the end the following new
subsection (e):
``(e) Limitation on Public Interest Waiver Under Buy
American Act.--A determination under section 2(a) of the Buy
American Act (41 U.S.C. 10a(a)) that it is not in the public
interest to enter into a contract in accordance with such Act
may not be made after a notice of solicitation of offers for
the contract is published in accordance with this section and
section 8(e) of the Small Business Act (15 U.S.C. 637(e)).''.
(b) Requirements Under Buy American Act.--The Office of
Federal Procurement Policy Act (41 U.S.C. 403 et seq.), as
amended by this Act, is further amended by adding at the end
the following new section:

``SEC. 44. REQUIREMENTS UNDER BUY AMERICAN ACT.

``(a) Use Outside the United States.--(1) Section 2(a) of
the Buy American Act (41 U.S.C. 10a(a)) shall apply without
regard to whether the articles, materials, or supplies to be
acquired are for use outside the United States if the
articles, materials, or supplies are not needed on an urgent
basis or if they are acquired on a regular basis.
``(2) In any case in which the articles, materials, or
supplies are to be acquired for use outside the United States
and are not needed on an urgent basis, before entering into a
contract an analysis shall be made of the difference in the
cost for acquiring the articles, materials, or supplies from
a company manufacturing the articles, materials, or supplies
in the United States (including the cost of shipping) and the
cost for acquiring the articles, materials, or supplies from
a company manufacturing the articles, materials, or supplies
outside the United States (including the cost of shipping).
``(b) Domestic Availability.--The head of an executive
agency may not make a determination under section 2(a) of the
Buy American Act (41 U.S.C. 10a) that an article, material,
or supply is not mined, produced, or manufactured, as the
case may be, in the United States in sufficient and
reasonably available commercial quantities and of
satisfactory quality, unless the head of that executive
agency has conducted a study and, on the basis of such study,
determined that--
``(1) domestic production cannot be initiated to meet the
procurement needs; and
``(2) a comparable article, material, or supply is not
available from a company in the United States.''.

SEC. 903. DUAL-USE TECHNOLOGIES.

The head of an executive agency (as defined in section 4(1)
of the Office of Federal Procurement Policy Act (41 U.S.C.
403(1)) may not enter into a contract, nor permit a
subcontract under a contract of the executive agency, with a
foreign entity that involves giving the foreign entity plans,
manuals, or other information related to a dual-use item or
technology on the Commerce Control List unless approval for
providing such plans, manuals, or information has been
obtained in accordance with the provisions of the Export
Administration Act of 1979 (50 U.S.C. App. 2401 et seq.) and
the Export Administration Regulations (15 C.F.R. part 730 et
seq.).

SEC. 904. CLERICAL AMENDMENT.

The table of contents in section 1(b) of the Office of
Federal Procurement Policy Act is amended by adding at the
end the following new items:

``Sec. 43. Preference for domestic bidders.
``Sec. 44. Requirements under Buy American Act.''.
______

SA 3141. Mr. KYL submitted an amendment intended to be proposed by
him to the 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; which was ordered to lie on the
table; as follows:

On page 557, between lines 9 and 10, insert the following:

SEC. 660. SENSE OF CONGRESS REGARDING THE WORLD TRADE
ORGANIZATION DECISION ON INTERNET GAMBLING.

(a) Findings.--Congress finds the following:
(1) Gambling through the Internet, which has grown rapidly,
opens up the possibility of immediate, individual, 24-hour
access in every home to the full range of wagering
opportunities on sporting events or casino-like contests.
(2) The number of Internet gambling websites has increased
from about 2 dozen to over 2,000 in the last 9 years, with an
estimated $5,000,000,000 wagered over the Internet in 2003
alone.
(3) Internet gambling fosters criminal activity, as up to
90 percent of pathological gamblers commit crimes to pay off
their wagering debts.
(4) The Department of State has noted that Internet
gambling ``represents yet another powerful vehicle for
criminals to launder funds from illicit sources as well as to
evade taxes'' and the chief of the Federal Bureau of
Investigation's Financial Crimes Section has testified that
Internet gambling is a ``haven for money laundering
activities''.
(5) There are Federal and State laws in the United States
which restrict Internet gambling services, and these laws are
consistent with the World Trade Organization obligations of
the United States.
(6) The United States is currently involved in World Trade
Organization proceedings in which the nation of Antigua and
Barbuda has challenged these laws.
(7) A World Trade Organization panel has ruled, as a result
of these proceedings, that the United States must allow
access to the United States market by foreign Internet
gambling businesses.
(8) The World Trade Organization is likely to authorize
Antigua and Barbuda to impose tariffs on products from the
United States unless the United States agrees to change its
antigambling laws.
(9) The United States benefits from participating in
international organizations such as the World Trade
Organization, but the United States must also be vigilant
about protecting American interests when decisions by such
organizations encroach upon United States sovereignty.
(b) Sense of Congress.--It is the sense of Congress that--
(1) the United States disagrees with the decision of the
World Trade Organization panel regarding the Internet
gambling laws of the United States, and
(2) the United States should vigorously defend its right to
enact legislation protecting United States interests against
organized crime and money laundering and protecting the
integrity of United States sporting events.

____________________