To strengthen America's military, to repeal the extension of tax rates for capital gains and dividends, to reduce the deficit, and for other purposes.

SA 2737. Mr. REED (for himself, Ms. Stabenow, Mr. Lautenberg, Mrs.
Clinton, Mr. Kerry, and Mr. Salazar) proposed an amendment to amendment
SA 2707 proposed by Mr. Frist (for Mr. Grassley (for himself and Mr.
Baucus)) to the bill H.R. 4297, to provide for reconciliation pursuant
to section 201(b) of the concurrent resolution on the budget for fiscal
year 2006; as follows:

On page 28, after line 11, insert the following:

TITLE IV--STRENGTHENING AMERICA'S MILITARY

SEC. 401. SHORT TITLE.

This title may be cited as the ``Strengthening America's
Military Act''.

Subtitle A--Military Funding

SEC. 411. FUNDING FOR MILITARY OPERATIONS.

There is appropriated, out of any money in the Treasury
which is not otherwise appropriated, for the fiscal years
2006 through 2010, the following amounts, to be used for
resetting and recapitalizing equipment being used in theaters
of operations:
(1) $16,900,000,000 for operations and maintenance of the
Army.
(2) $1,800,000,000 for aircraft for the Army.
(3) $6,300,000,000 for other Army procurement.
(4) $10,000,000,000 for wheeled and tracked combat vehicles
for the Army.
(5) $467,000,000 for the Army working capital fund.
(6) $6,000,000 for missiles for the Department of Defense.
(7) $100,000,000 for defense wide procurement for the
Department of Defense.
(8) $4,500,000,000 for Marine Corps procurement.
(9) $4,500,000,000 for operations and maintenance of the
Marine Corps.
(10) $2,700,000,000 for Navy aircraft procurement.

Subtitle B--Repeal of Extension of Tax Rate for Capital Gains and
Dividends

SEC. 421. REPEAL OF EXTENSION OF TAX RATE FOR CAPITAL GAINS
AND DIVIDENDS.

The amendment made by section 203 of this Act is repealed.

Subtitle C--Provisions Relating to Tax Shelters

SEC. 431. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) In General.--Section 7701 is amended by redesignating
subsection (o) as subsection (p) and by inserting after
subsection (n) the following new subsection:
``(o) 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. 432. 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

[[Page S682]]

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(o)(1)) for the transaction giving
rise to the claimed benefit or the transaction was not
respected under section 7701(o)(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) and
(3) 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) Coordination With Other Understatements and
Penalties.--
(1) The second sentence of section 6662(d)(2)(A) is amended
by inserting ``and without regard to items with respect to
which a penalty is imposed by section 6662B'' before the
period at the end.
(2) Subsection (e) of section 6662A is amended--
(A) in paragraph (1), by inserting ``and noneconomic
substance transaction understatements'' after ``reportable
transaction understatements'' both places it appears,
(B) in paragraph (2)(A), by inserting ``and a noneconomic
substance transaction understatement'' after ``reportable
transaction understatement'',
(C) in paragraph (2)(B), by inserting ``6662B or'' before
``6663'',
(D) in paragraph (2)(C)(i), by inserting ``or section
6662B'' before the period at the end,
(E) in paragraph (2)(C)(ii), by inserting ``and section
6662B'' after ``This section'',
(F) in paragraph (3), by inserting ``or noneconomic
substance transaction understatement'' after ``reportable
transaction understatement'', and
(G) by adding at the end the following new paragraph:
``(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).''.
(3) Subsection (e) of section 6707A is amended--
(A) by striking ``or'' at the end of subparagraph (B), and
(B) by striking subparagraph (C) and inserting the
following new subparagraphs:
``(C) is required to pay a penalty under section 6662B with
respect to any noneconomic substance transaction, or
``(D) is required to pay a penalty under section 6662(h)
with respect to any transaction and would (but for section
6662A(e)(2)(C)) have been subject to penalty under section
6662A at a rate prescribed under section 6662A(c) or under
section 6662B,''.
(c) 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''.

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

SEC. 433. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONECONOMIC SUBSTANCE
TRANSACTIONS.

(a) In General.--Section 163(m) (relating to interest on
unpaid taxes attributable to nondisclosed reportable
transactions) is amended--
(1) by striking ``attributable'' and all that follows and
inserting the following: ``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)).'', and
(2) by inserting ``and Noneconomic Substance Transactions''
in the heading thereof after ``Transactions''.
(b) Effective Date.--The amendments made by this section
shall apply to transactions after the date of the enactment
of this Act in taxable years ending after such date.

SEC. 434. MODIFICATIONS OF EFFECTIVE DATES OF LEASING
PROVISIONS OF THE AMERICAN JOBS CREATION ACT OF
2004.

(a) In General.--Section 849(b) of the American Jobs
Creation Act of 2004 is amended by striking paragraphs (1)
and (2), by redesignating paragraphs (3) and (4) as
paragraphs (1) and (2), respectively, and by adding at the
end the following new paragraph:
``(3) Leases to foreign entities.--In the case of tax-
exempt use property leased to a tax-exempt entity which is a
foreign person or entity, the amendments made by this part
shall apply to taxable years beginning after December 31,
2004, with respect to leases entered into on or before March
12, 2004.''.
(b) Effective Date.--The amendments made by this section
shall take effect as if included in the enactment of the
American Jobs Creation Act of 2004.

SEC. 435. REVALUATION OF LIFO INVENTORIES OF LARGE INTEGRATED
OIL COMPANIES.

(a) General Rule.--Notwithstanding any other provision of
law, if a taxpayer is an applicable integrated oil company
for its last taxable year ending in calendar year 2005, the
taxpayer shall--
(1) increase, effective as of the close of such taxable
year, the value of each historic LIFO layer of inventories of
crude oil, natural gas, or any other petroleum product
(within the meaning of section 4611) by the layer adjustment
amount, and
(2) decrease its cost of goods sold for such taxable year
by the aggregate amount of the increases under paragraph (1).
If the aggregate amount of the increases under paragraph (1)
exceed the taxpayer's cost of goods sold for such taxable
year, the taxpayer's gross income for such taxable year shall
be increased by the amount of such excess.
(b) Layer Adjustment Amount.--For purposes of this
section--
(1) In general.--The term ``layer adjustment amount''
means, with respect to any historic LIFO layer, the product
of--
(A) $18.75, and
(B) the number of barrels of crude oil (or in the case of
natural gas or other petroleum products, the number of
barrel-of-oil equivalents) represented by the layer.
(2) Barrel-of-oil equivalent.--The term ``barrel-of-oil
equivalent'' has the meaning given such term by section
29(d)(5) (as in effect before its redesignation by the Energy
Tax Incentives Act of 2005).
(c) Application of Requirement.--
(1) No change in method of accounting.--Any adjustment
required by this section shall not be treated as a change in
method of accounting.
(2) Underpayments of estimated tax.--No addition to the tax
shall be made under section 6655 of the Internal Revenue Code
of 1986 (relating to failure by corporation to pay estimated
tax) with respect to any underpayment of an installment
required to be paid with respect to the taxable year
described in subsection (a) to the extent such underpayment
was created or increased by this section.
(d) Applicable Integrated Oil Company.--For purposes of
this section, the term ``applicable integrated oil company''
means an integrated oil company (as defined in section
291(b)(4) of the Internal Revenue Code of 1986) which--
(1) had gross receipts in excess of $1,000,000,000 for its
last taxable year ending during calendar year 2005, and
(2) uses the last-in, first-out (LIFO) method of accounting
with respect to its crude oil inventories for such taxable
year.
For purposes of paragraph (1), all persons treated as a
single employer under subsections (a) and (b) of section 52
of the Internal Revenue Code of 1986 shall be treated as 1
person and, in the case of a short taxable year, the rule
under section 448(c)(3)(B) shall apply.

SEC. 436. MODIFICATION OF EFFECTIVE DATE OF EXCEPTION FROM
SUSPENSION RULES FOR CERTAIN LISTED AND
REPORTABLE TRANSACTIONS.

(a) In General.--Paragraph (2) of section 903(d) of the
American Jobs Creation Act of 2004 is amended to read as
follows:
``(2) Exception for reportable or listed transactions.--
``(A) In general.--The amendments made by subsection (c)
shall apply with respect to interest accruing after October
3, 2004.
``(B) Special rule for certain listed and reportable
transactions.--
``(i) In general.--Except as provided in clause (ii), the
amendments made by subsection (c) shall also apply with
respect to interest accruing on or before October 3, 2004.
``(ii) Participants in settlement initiatives.--Clause (i)
shall not apply to any transaction if, as of January 23,
2006--

[[Page S683]]

``(I) the taxpayer is participating in a settlement
initiative described in Internal Revenue Service Announcement
2005-80 with respect to such transaction, or
``(II) the taxpayer has entered into a settlement agreement
pursuant to such an initiative.

``(iii) Termination of exception.--Clause (ii)(I) shall not
apply to any taxpayer if, after January 23, 2006, the
taxpayer withdraws from, or terminates, participation in the
initiative or the Secretary of the Treasury or the
Secretary's delegate determines that a settlement agreement
will not be reached pursuant to the initiative within a
reasonable period of time.''.
(b) Effective Date.--The amendment made by this section
shall take effect as if included in the provisions of the
American Jobs Creation Act of 2004 to which it relates.

SEC. 437. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST
ON UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE
FINANCIAL ARRANGEMENTS.

(a) Determination of Penalty.--
(1) In general.--Notwithstanding any other provision of
law, in the case of an applicable taxpayer--
(A) the determination as to whether any interest or
applicable penalty is to be imposed with respect to any
arrangement described in paragraph (2), or to any
underpayment of Federal income tax attributable to items
arising in connection with any such arrangement, shall be
made without regard to the rules of subsections (b), (c), and
(d) of section 6664 of the Internal Revenue Code of 1986, and
(B) if any such interest or applicable penalty is imposed,
the amount of such interest or penalty shall be equal to
twice that determined without regard to this section.
(2) Applicable taxpayer.--For purposes of this subsection--
(A) In general.--The term ``applicable taxpayer'' means a
taxpayer which--
(i) has underreported its United States income tax
liability with respect to any item which directly or
indirectly involves--

(I) any financial arrangement which in any manner relies on
the use of offshore payment mechanisms (including credit,
debit, or charge cards) issued by banks or other entities in
foreign jurisdictions, or
(II) any offshore financial arrangement (including any
arrangement with foreign banks, financial institutions,
corporations, partnerships, trusts, or other entities), and

(ii) has neither signed a closing agreement pursuant to the
Voluntary Offshore Compliance Initiative established by the
Department of the Treasury under Revenue Procedure 2003-11
nor voluntarily disclosed its participation in such
arrangement by notifying the Internal Revenue Service of such
arrangement prior to the issue being raised by the Internal
Revenue Service during an examination.
(B) Authority to waive.--The Secretary of the Treasury or
the Secretary's delegate may waive the application of
paragraph (1) to any taxpayer if the Secretary or the
Secretary's delegate determines that the use of such offshore
payment mechanisms is incidental to the transaction and, in
addition, in the case of a trade or business, such use is
conducted in the ordinary course of the type of trade or
business of the taxpayer.
(C) Issues raised.--For purposes of subparagraph (A)(ii),
an item shall be treated as an issue raised during an
examination if the individual examining the return--
(i) communicates to the taxpayer knowledge about the
specific item, or
(ii) has made a request to the taxpayer for information and
the taxpayer could not make a complete response to that
request without giving the examiner knowledge of the specific
item.
(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) Fees and expenses.--The Secretary of the Treasury may
retain and use an amount not in excess of 25 percent of all
additional interest, penalties, additions to tax, and fines
collected under this section to be used for enforcement and
collection 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
paragraph.
(c) Report by Secretary.--The Secretary shall each year
conduct a study and report to Congress on the implementation
of this section during the preceding year, including
statistics on the number of taxpayers affected by such
implementation and the amount of interest and applicable
penalties asserted, waived, and assessed during such
preceding year.
(d) 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. 438. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT
OF TAX LIABILITY.

(a) In General.--Section 6701(a) (relating to imposition of
penalty) is amended--
(1) by inserting ``the tax liability or'' after ``respect
to,'' in paragraph (1),
(2) by inserting ``aid, assistance, procurement, or advice
with respect to such'' before ``portion'' both places it
appears in paragraphs (2) and (3), and
(3) by inserting ``instance of aid, assistance,
procurement, or advice or each such'' before ``document'' in
the matter following paragraph (3).
(b) Amount of Penalty.--Subsection (b) of section 6701
(relating to penalties for aiding and abetting understatement
of tax liability) is amended to read as follows:
``(b) Amount of Penalty; Calculation of Penalty; Liability
for Penalty.--
``(1) Amount of penalty.--The amount of the penalty imposed
by subsection (a) shall not exceed 100 percent of the gross
income derived (or to be derived) from such aid, assistance,
procurement, or advice provided by the person or persons
subject to such penalty.
``(2) Calculation of penalty.--The penalty amount
determined under paragraph (1) shall be calculated with
respect to each instance of aid, assistance, procurement, or
advice described in subsection (a), each instance in which
income was derived by the person or persons subject to such
penalty, and each person who made such an understatement of
the liability for tax.
``(3) Liability for penalty.--If more than 1 person is
liable under subsection (a) with respect to providing such
aid, assistance, procurement, or advice, all such persons
shall be jointly and severally liable for the penalty under
such subsection.''.
(c) Penalty Not Deductible.--Section 6701 is amended by
adding at the end the following new subsection:
``(g) Penalty Not Deductible.--The payment of any penalty
imposed under this section or the payment of any amount to
settle or avoid the imposition of such penalty shall not be
deductible by the person who is subject to such penalty or
who makes such payment.''.
(d) Effective Date.--The amendments made by this section
shall apply to activities after the date of the enactment of
this Act.

Subtitle D--Provisions to Close Corporate and Individual Loopholes

SEC. 441. TAX TREATMENT OF INVERTED ENTITIES.

(a) In General.--Section 7874 is amended--
(1) by striking ``March 4, 2003'' in subsection
(a)(2)(B)(i) and in the matter following subsection
(a)(2)(B)(iii) and inserting ``March 20, 2002'',
(2) by striking ``at least 60 percent'' in subsection
(a)(2)(B)(ii) and inserting ``more than 50 percent'',
(3) by striking ``80 percent'' in subsection (b) and
inserting ``at least 80 percent'',
(4) by striking ``60 percent'' in subsection (b) and
inserting ``more than 50 percent'',
(5) by adding at the end of subsection (a)(2) the following
new sentence: ``Except as provided in regulations, an
acquisition of properties of a domestic corporation shall not
be treated as described in subparagraph (B) 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.'', and
(6) by redesignating subsection (g) as subsection (h) and
by inserting after subsection (f) the following new
subsection:
``(g) Special Rules Applicable to Expatriated Entities.--
``(1) Increases in accuracy-related penalties.--In the case
of any underpayment of tax of an expatriated entity--
``(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 expatriated entity, 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.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years ending after March 20, 2002.

SEC. 442. GRANT OF TREASURY REGULATORY AUTHORITY TO ADDRESS
FOREIGN TAX CREDIT TRANSACTIONS INVOLVING
INAPPROPRIATE SEPARATION OF FOREIGN TAXES FROM
RELATED FOREIGN INCOME.

(a) In General.--Section 901 (relating to taxes of foreign
countries and of possessions of United States) is amended by
redesignating subsection (m) as subsection (n) and by
inserting after subsection (l) the following new subsection:
``(m) Regulations.--The Secretary may prescribe regulations
disallowing a credit under subsection (a) for all or a
portion of any foreign tax, or allocating a foreign tax among
2 or more persons, in cases where the foreign tax is imposed
on any person in respect of income of another person or in
other cases involving the inappropriate separation of the
foreign tax from the related foreign income.''.
(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. 443. TREATMENT OF CONTINGENT PAYMENT CONVERTIBLE DEBT
INSTRUMENTS.

(a) In General.--Section 1275(d) (relating to regulation
authority) is amended--
(1) by striking ``The Secretary'' and inserting the
following:

[[Page S684]]

``(1) In general.--The Secretary'', and
(2) by adding at the end the following new paragraph:
``(2) Treatment of contingent payment convertible debt.--
``(A) In general.--In the case of a debt instrument which--
``(i) is convertible into stock of the issuing corporation,
into stock or debt of a related party (within the meaning of
section 267(b) or 707(b)(1)), or into cash or other property
in an amount equal to the approximate value of such stock or
debt, and
``(ii) provides for contingent payments,
any regulations which require original issue discount to be
determined by reference to the comparable yield of a
noncontingent fixed-rate debt instrument shall be applied as
if the regulations require that such comparable yield be
determined by reference to a noncontingent fixed-rate debt
instrument which is convertible into stock.
``(B) Special rule.--For purposes of subparagraph (A), the
comparable yield shall be determined without taking into
account the yield resulting from the conversion of a debt
instrument into stock.''.
(b) Cross Reference.--Section 163(e)(6) (relating to cross
references) is amended by adding at the end the following:
``For the treatment of contingent payment convertible debt,
see section 1275(d)(2).''.
(c) Effective Date.--The amendments made by this section
shall apply to debt instruments issued on or after the date
of the enactment of this Act.

SEC. 444. APPLICATION OF EARNINGS STRIPPING RULES TO PARTNERS
WHICH ARE CORPORATIONS.

(a) In General.--Section 163(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) Treatment of corporate partners.--Except to the
extent provided by regulations, in applying this subsection
to a corporation which owns (directly or indirectly) an
interest in a partnership--
``(A) such corporation's distributive share of interest
income paid or accrued to such partnership shall be treated
as interest income paid or accrued to such corporation,
``(B) such corporation's distributive share of interest
paid or accrued by such partnership shall be treated as
interest paid or accrued by such corporation, and
``(C) such corporation's share of the liabilities of such
partnership shall be treated as liabilities of such
corporation.''.
(b) Additional Regulatory Authority.--Section 163(j)(9)
(relating to regulations), as redesignated by subsection (a),
is amended by striking ``and'' at the end of subparagraph
(B), by striking the period at the end of subparagraph (C)
and inserting ``, and'', and by adding at the end the
following new subparagraph:
``(D) regulations providing for the reallocation of shares
of partnership indebtedness, or distributive shares of the
partnership's interest income or interest expense, as may be
appropriate to carry out the purposes of this subsection.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning on or after the date
of the enactment of this Act.

SEC. 445. 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 or
paid to come into compliance with law.--Paragraph (1) shall
not apply to any amount which--
``(A) the taxpayer establishes--
``(i) constitutes restitution (including remediation of
property) for damage or harm caused by or which may be caused
by the violation of any law or the potential violation of any
law, or
``(ii) is paid to come into compliance with any law which
was violated or involved in the investigation or inquiry, and
``(B) is identified as restitution or as an amount paid to
come into compliance with the law, as the case may be, in the
court order or settlement agreement.
Identification pursuant to subparagraph (B) alone shall not
satisfy the requirement under subparagraph (A). 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.
``(5) Exception for taxes due.--Paragraph (1) shall not
apply to any amount paid or incurred as taxes due.''.
(b) Reporting of Deductible Amounts.--
(1) In general.--Subpart B of part III of subchapter A of
chapter 61 is amended by inserting after section 6050T the
following new section:

``SEC. 6050U. INFORMATION WITH RESPECT TO CERTAIN FINES,
PENALTIES, AND OTHER AMOUNTS.

``(a) Requirement of Reporting.--
``(1) In general.--The appropriate official of any
government or entity which is described in section 162(f)(4)
which is involved in a suit or agreement described in
paragraph (2) shall make a return in such form as determined
by the Secretary setting forth--
``(A) the amount required to be paid as a result of the
suit or agreement to which paragraph (1) of section 162(f)
applies,
``(B) any amount required to be paid as a result of the
suit or agreement which constitutes restitution or
remediation of property, and
``(C) any amount required to be paid as a result of the
suit or agreement for the purpose of coming into compliance
with any law which was violated or involved in the
investigation or inquiry.
``(2) Suit or agreement described.--
``(A) In general.--A suit or agreement is described in this
paragraph if--
``(i) it is--

``(I) a suit with respect to a violation of any law over
which the government or entity has authority and with respect
to which there has been a court order, or
``(II) an agreement which is entered into with respect to a
violation of any law over which the government or entity has
authority, or with respect to an investigation or inquiry by
the government or entity into the potential violation of any
law over which such government or entity has authority, and

``(ii) the aggregate amount involved in all court orders
and agreements with respect to the violation, investigation,
or inquiry is $600 or more.
``(B) Adjustment of reporting threshold.--The Secretary may
adjust the $600 amount in subparagraph (A)(ii) as necessary
in order to ensure the efficient administration of the
internal revenue laws.
``(3) Time of filing.--The return required under this
subsection shall be filed not later than--
``(A) 30 days after the date on which a court order is
issued with respect to the suit or the date the agreement is
entered into, as the case may be, or
``(B) the date specified by the Secretary.
``(b) Statements to Be Furnished to Individuals Involved in
the Settlement.--Every person required to make a return under
subsection (a) shall furnish to each person who is a party to
the suit or agreement a written statement showing--
``(1) the name of the government or entity, and
``(2) the information supplied to the Secretary under
subsection (a)(1).
The written statement required under the preceding sentence
shall be furnished to the person at the same time the
government or entity provides the Secretary with the
information required under subsection (a).
``(c) Appropriate Official Defined.--For purposes of this
section, the term `appropriate official' means the officer or
employee having control of the suit, investigation, or
inquiry or the person appropriately designated for purposes
of this section.''.
(2) Conforming 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 6050T
the following new item:

``Sec. 6050U. Information with respect to certain fines, penalties, and
other amounts.''.

(c) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred on or after the date
of the enactment of this Act, except that such amendments
shall not apply to amounts paid or incurred under any binding
order or agreement entered into before such date. Such
exception shall not apply to an order or agreement requiring
court approval unless the approval was obtained before such
date.

SEC. 446. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.

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

[[Page S685]]

(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. 447. LIMITATION OF EMPLOYER DEDUCTION FOR CERTAIN
ENTERTAINMENT EXPENSES.

(a) In General.--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, to the extent that the
expenses do not exceed the amount of the expenses which are
treated by the taxpayer, with respect to the recipient of the
entertainment, amusement, or recreation, as compensation to
an 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).''.
(b) Persons Not Employees.--Paragraph (9) of section 274(e)
is amended by striking ``to the extent that the expenses are
includible in the gross income'' and inserting ``to the
extent that the expenses do not exceed the amount of the
expenses which are includible in the gross income''.
(c) Effective Date.--The amendments made by this section
shall apply to expenses incurred after the date of the
enactment of this Act.

SEC. 448. 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 2005, 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 2004' 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
``(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.

[[Page S686]]

``(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).
``(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

[[Page S687]]

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:
``(49) 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:
``(21) 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.--Section 6103(p)(4) (relating to
safeguards) is amended by striking ``or (20)'' each place it
appears and inserting ``(20), or (21)''.
(3) Effective dates.--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.
(e) Conforming Amendments.--
(1) Section 877 is amended by adding at the end the
following new subsection:
``(h) 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 the date of the
enactment of this subsection.''.
(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:
``(C) Application.--This paragraph shall not apply to any
expatriate subject to section 877A.''.
(4) Section 6039G(a) is amended by inserting ``or 877A''
after ``section 877(b)''.
(5) The second sentence of section 6039G(d) is amended by
inserting ``or who relinquishes United States citizenship
(within the meaning of section 877A(e)(3))'' after ``section
877(a))''.
(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 the date
of the enactment of this Act.
(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 the date of the
enactment of this Act, 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. 449. MODIFICATION OF EXCLUSION FOR CITIZENS LIVING
ABROAD.

(a) Inflation Adjustment of Foreign Earned Income
Limitation.--Clause (ii) of section 911(b)(2)(D) (relating to
inflation adjustment) is amended--

[[Page S688]]

(1) by striking ``2007'' and inserting ``2005'', and
(2) by striking ``2006'' in subclause (II) and inserting
``2004''.
(b) Modification of Housing Cost Amount.--
(1) Minimum amount.--Clause (i) of section 911(c)(1)(B) is
amended to read as follows:
``(i) 16 percent of the amount (computed on a daily basis)
in effect under subsection (b)(2)(D) for the calendar year in
which such taxable year begins, multiplied by''.
(2) Maximum amount of exclusion.--
(A) In general.--Subparagraph (A) of section 911(c)(1) is
amended by inserting ``to the extent such expenses do not
exceed the amount determined under paragraph (2)'' after
``the taxable year''.
(B) Limitation.--Subsection (c) of section 911 is amended
by redesignating paragraphs (2) and (3) as paragraphs (3) and
(4), respectively, and by inserting after paragraph (1) the
following new paragraph:
``(2) Limitation.--The amount determined under this
paragraph is an amount equal to the product of--
``(A) 30 percent of the amount (computed on a daily basis)
in effect under subsection (b)(2)(D) for the calendar year in
which the taxable year of the individual begins, multiplied
by
``(B) the number of days of such taxable year within the
applicable period described in subparagraph (A) or (B) of
subsection (d)(1).''.
(C) Conforming amendments.--
(i) Section 911(d)(4) is amended by striking ``and
(c)(1)(B)(ii)'' and inserting ``, (c)(1)(B)(ii), and
(c)(2)(B)''
(ii) Section 911(d)(7) is amended by striking ``subsection
(c)(3)'' and inserting ``subsection (c)(4)''.
(c) Rates of Tax Applicable to Nonexcluded Income.--Section
911 (relating to exclusion of certain income of citizens and
residents of the United States living abroad) is amended by
redesignating subsection (f) as subsection (g) and by
inserting after subsection (e) the following new subsection:
``(f) Determination of Tax Liability on Nonexcluded
Amounts.--If any amount is excluded from the gross income of
a taxpayer under subsection (a) for any taxable year, then,
notwithstanding section 1 or 55--
``(1) the tax imposed by section 1 on the taxpayer for such
taxable year shall be equal to the excess (if any) of--
``(A) the tax which would be imposed by section 1 for the
taxable year if the taxpayer's taxable income were equal to
the sum of--
``(i) the taxpayer's taxable income for the taxable year
(determined without regard to this subsection), plus
``(ii) the amount excluded under subsection (a) for the
taxable year, over
``(B) the tax which would be imposed by section 1 for the
taxable year if the taxpayer's taxable income were equal to
the amount excluded under subsection (a) for the taxable
year, and
``(2) the tax imposed by section 55 for such taxable year
shall be equal to the excess (if any) of--
``(A) the amount which would be the tentative minimum tax
under section 55 for the taxable year if the taxpayer's
alternative minimum taxable income were equal to the sum of--
``(i) the taxpayer's alternative minimum taxable income for
the taxable year (determined without regard to this
subsection), plus
``(ii) the amount excluded under subsection (a) for the
taxable year, over
``(B) the sum of--
``(i) the amount which would be the tentative minimum tax
under section 55 for the taxable year if the taxpayer's
alternative minimum taxable income were equal to the amount
excluded under subsection (a) for the taxable year, plus
``(ii) the amount which would be the regular tax for the
taxable year if the tax imposed by section 1 were the tax
computed under paragraph (1).
For purposes of this subsection, the amount excluded under
subsection (a) shall be reduced by the aggregate amount of
any deductions or exclusions disallowed under subsection
(d)(6) with respect to such excluded amount.''.
(d) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2005.

SEC. 450. LIMITATION ON ANNUAL AMOUNTS WHICH MAY BE DEFERRED
UNDER NONQUALIFIED DEFERRED COMPENSATION
ARRANGEMENTS.

(a) In General.--Section 409A (relating to inclusion of
gross income under nonqualified deferred compensation plans)
is amended by redesignating subsections (c), (d), and (e) as
subsections (d), (e), and (f), respectively, and by inserting
after subsection (b) the following new subsection:
``(c) Annual Limitation on Aggregate Deferred Amounts.--
``(1) Limitation.--If the aggregate amount of compensation
which--
``(A) is deferred for any taxable year with respect to a
participant under 1 or more nonqualified deferred
compensation plans maintained by the same employer, and
``(B) is not otherwise includible in gross income of the
participant for the taxable year,
exceeds the applicable dollar amount for the taxable year,
then such excess shall be included in the participant's gross
income for the taxable year.
``(2) Inclusion of earnings.--If--
``(A) an amount is includible under paragraph (1) in the
gross income of a participant for any taxable year, and
``(B) any portion of any assets set aside in a trust or
other arrangement under a nonqualified deferred compensation
plan are properly allocable to such amount,

then any increase in value in, or earnings with respect to,
such portion for the taxable year or any succeeding taxable
year shall be included in gross income of the participant for
such taxable year or succeeding taxable year.
``(3) Applicable dollar amount.--For purposes of this
subsection--
``(A) In general.--The term `applicable dollar amount'
means, with respect to any participant, the lesser of--
``(i) the average annual compensation which--

``(I) was payable during the base period to the participant
by the employer described in paragraph (1)(A), and
``(II) was includible in the participant's gross income for
taxable years in the base period, or

``(ii) $1,000,000.
``(B) Base period.--The term `base period' means, with
respect to any computation year, the 5-taxable year period
ending with the taxable year preceding the taxable year in
which the election described in subsection (a)(4)(B) is made
by the participant to have compensation for services
performed in the computation year deferred under a
nonqualified deferred compensation plan, except that if the
election is made after the beginning of the computation year,
such period shall be the 5-taxable year period ending with
the taxable year preceding the computation year. For purposes
of this subparagraph, the term `computation year' means any
taxable year of the participant for which the limitation
under paragraph (1) is being determined.''.
(b) Conforming Amendments.--Sections 6041(g)(1) and
6051(a)(13) are each amended by striking ``409A(d)'' and
inserting ``409A(e)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2005, except that taxable years beginning on or before such
date shall be taken into account in determining the average
annual compensation of a participant during any base period
for purposes of section 409A(c)(2) of the Internal Revenue
Code of 1986 (as added by such amendments).

SEC. 451. 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) Treatment of Distributions From Qualified Disability
Trusts.--Section 1(g)(4) (relating to net unearned income) is
amended by adding at the end the following new subparagraph:
``(C) Treatment of distributions from qualified disability
trusts.--For purposes of this subsection, in the case of any
child who is a beneficiary of a qualified disability trust
(as defined in section 642(b)(2)(C)(ii)), any amount included
in the income of such child under sections 652 and 662 during
a taxable year shall be considered earned income of such
child for such taxable year.''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31,
2005.

Subtitle E--Oil and Gas Provisions

SEC. 461. EXTENSION OF SUPERFUND TAXES.

(a) Excise Taxes.--Section 4611(e) is amended to read as
follows:
``(e) Application of Hazardous Substance Superfund
Financing Rate.--The Hazardous Substance Superfund financing
rate under this section shall apply after December 31, 1986,
and before January 1, 1996, and after December 31, 2005, and
before January 1, 2015.''
(b) Corporate Environmental Income Tax.--Section 59A(e) is
amended to read as follows:
``(e) Application of Tax.--The tax imposed by this section
shall apply to taxable years beginning after December 31,
1986, and before January 1, 1996, and to taxable years
beginning after December 31, 2005, and before January 1,
2015.''
(c) Effective Dates.--
(1) Excise taxes.--The amendments made by subsection (a)
shall take effect on the date of the enactment of this Act.
(2) Income tax.--The amendment made by subsection (b) shall
apply to taxable years beginning after December 31, 2005.

SEC. 462. MODIFICATIONS OF FOREIGN TAX CREDIT RULES
APPLICABLE TO DUAL CAPACITY TAXPAYERS.

(a) In General.--Section 901 (relating to credit for taxes
of foreign countries and of possessions of the United States)
is amended by redesignating subsection (m) as subsection (n)
and by inserting after subsection (l) the following new
subsection:
``(m) Special Rules Relating To Dual Capacity Taxpayers.--
``(1) General rule.--Notwithstanding any other provision of
this chapter, any amount paid or accrued by a dual capacity
taxpayer to a foreign country or possession of the United
States for any period shall not be considered a tax--
``(A) if, for such period, the foreign country or
possession does not impose a generally applicable income tax,
or
``(B) to the extent such amount exceeds the amount
(determined in accordance with regulations) which--
``(i) is paid by such dual capacity taxpayer pursuant to
the generally applicable income tax imposed by the country or
possession, or

[[Page S689]]

``(ii) would be paid if the generally applicable income tax
imposed by the country or possession were applicable to such
dual capacity taxpayer.
Nothing in this paragraph shall be construed to imply the
proper treatment of any such amount not in excess of the
amount determined under subparagraph (B).
``(2) Dual capacity taxpayer.--For purposes of this
subsection, the term `dual capacity taxpayer' means, with
respect to any foreign country or possession of the United
States, a person who--
``(A) is subject to a levy of such country or possession,
and
``(B) receives (or will receive) directly or indirectly a
specific economic benefit (as determined in accordance with
regulations) from such country or possession.
``(3) Generally applicable income tax.--For purposes of
this subsection--
``(A) In general.--The term `generally applicable income
tax' means an income tax (or a series of income taxes) which
is generally imposed under the laws of a foreign country or
possession on income derived from the conduct of a trade or
business within such country or possession.
``(B) Exceptions.--Such term shall not include a tax unless
it has substantial application, by its terms and in practice,
to--
``(i) persons who are not dual capacity taxpayers, and
``(ii) persons who are citizens or residents of the foreign
country or possession.''
(b) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to taxes paid or accrued in taxable years beginning
after the date of the enactment of this Act.
(2) Contrary treaty obligations upheld.--The amendments
made by this section shall not apply to the extent contrary
to any treaty obligation of the United States.

SEC. 463. RULES RELATING TO FOREIGN OIL AND GAS INCOME.

(a) Separate Basket for Foreign Tax Credit.--
(1) Separate basket.--
(A) Years before 2007.--Paragraph (1) of section 904(d)
(relating to separate application of section with respect to
certain categories of income), as in effect for years
beginning before 2007, is amended by striking ``and'' at the
end of subparagraph (H), by redesignating subparagraph (I) as
subparagraph (J), and by inserting after subparagraph (H) the
following new subparagraph:
``(I) foreign oil and gas income, and''.
(B) 2007 and after.--Paragraph (1) of section 904(d), as in
effect for years beginning after 2006, 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:
``(C) foreign oil and gas income.''
(2) Definition.--
(A) Years before 2007.--Paragraph (2) of section 904(d), as
in effect for years beginning before 2007, 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) Foreign oil and gas income.--The term `foreign oil
and gas income' has the meaning given such term by section
954(g).''
(B) 2007 and after.--Section 904(d)(2), as in effect for
years after 2006, is amended by redesignating subparagraphs
(J) and (K) as subparagraphs (K) and (L) and by inserting
after subparagraph (I) the following:
``(J) Foreign oil and gas income.--For purposes of this
section--
``(i) In general.--The term `foreign oil and gas income'
has the meaning given such term by section 954(g).
``(ii) Coordination.--Passive category income and general
category income shall not include foreign oil and gas income
(as so defined).''
(3) Conforming amendments.--
(A) Section 904(d)(3)(F)(i) is amended by striking ``or
(E)'' and inserting ``(E), or (I)''.
(B) Section 907(a) is hereby repealed.
(C) Section 907(c)(4) is hereby repealed.
(D) Section 907(f) is hereby repealed.
(4) Effective dates.--
(A) In general.--The amendments made by this section shall
apply to taxable years beginning after the date of the
enactment of this Act.
(B) Years after 2006.--The amendments made by paragraphs
(1)(B) and (2)(B) shall apply to taxable years beginning
after December 31, 2006.
(C) Transitional rules.--
(i) Separate basket treatment.--Any taxes paid or accrued
in a taxable year beginning on or before the date of the
enactment of this Act, with respect to income which was
described in subparagraph (I) of section 904(d)(1) of such
Code (as in effect on the day before the date of the
enactment of this Act), shall be treated as taxes paid or
accrued with respect to foreign oil and gas income to the
extent the taxpayer establishes to the satisfaction of the
Secretary of the Treasury that such taxes were paid or
accrued with respect to foreign oil and gas income.
(ii) Carryovers.--Any unused oil and gas extraction taxes
which under section 907(f) of such Code (as so in effect)
would have been allowable as a carryover to the taxpayer's
first taxable year beginning after the date of the enactment
of this Act (without regard to the limitation of paragraph
(2) of such section 907(f) for first taxable year) shall be
allowed as carryovers under section 904(c) of such Code in
the same manner as if such taxes were unused taxes under such
section 904(c) with respect to foreign oil and gas extraction
income.
(iii) Losses.--The amendment made by paragraph (3)(C) shall
not apply to foreign oil and gas extraction losses arising in
taxable years beginning on or before the date of the
enactment of this Act.
(b) Elimination of Deferral for Foreign Oil and Gas
Extraction Income.--
(1) General rule.--Paragraph (1) of section 954(g)
(defining foreign base company oil related income) is amended
to read as follows:
``(1) In general.--Except as otherwise provided in this
subsection, the term `foreign oil and gas income' means any
income of a kind which would be taken into account in
determining the amount of--
``(A) foreign oil and gas extraction income (as defined in
section 907(c)), or
``(B) foreign oil related income (as defined in section
907(c)).''
(2) Conforming amendments.--
(A) Subsections (a)(5), (b)(5), and (b)(6) of section 954,
and section 952(c)(1)(B)(ii)(I), are each amended by striking
``base company oil related income'' each place it appears
(including in the heading of subsection (b)(8)) and inserting
``oil and gas income''.
(B) Subsection (b)(4) of section 954 is amended by striking
``base company oil-related income'' and inserting ``oil and
gas income''.
(C) The subsection heading for subsection (g) of section
954 is amended by striking ``Foreign Base Company Oil Related
Income'' and inserting ``Foreign Oil and Gas Income''.
(D) Subparagraph (A) of section 954(g)(2) is amended by
striking ``foreign base company oil related income'' and
inserting ``foreign oil and gas income''.
(3) Effective date.--The amendments made by this subsection
shall apply to taxable years of foreign corporations
beginning after the date of the enactment of this Act, and to
taxable years of United States shareholders ending with or
within such taxable years of foreign corporations.

SEC. 464. MODIFICATION OF CREDIT FOR PRODUCING FUEL FROM A
NONCONVENTIONAL SOURCE.

(a) Taxable Years Ending Before 2006.--
(1) Modification of phaseout.--
(A) In general.--Section 29(b)(1)(A) is amended by
inserting ``the calendar year preceding'' before ``the
calendar year''.
(B) Conforming amendments.--Section 29(b)((2) is amended--
(i) by striking ``The'' and inserting ``With respect to any
calendar year, the'', and
(ii) by striking ``for the calendar year in which the sale
occurs'' and inserting ``for such calendar year''.
(2) No inflation adjustment for the credit amount in
2005.--Section 29(b)(2), as amended by paragraph (1), is
amended by adding at the end the following new sentence:
``This paragraph shall not apply with respect to the $3
amount in subsection (a) for calendar year 2005 and the
amount in effect under subsection (a) for sales in such
calendar year shall be the amount which was in effect for
sales in calendar year 2004.''.
(b) Taxable Years Ending After 2005.--
(1) Modification of phaseout.--
(A) In general.--Section 45K(b)(1)(A) is amended by
inserting ``the calendar year preceding'' before ``the
calendar year''.
(B) Conforming amendments.--Section 45K(b)((2) is amended--
(i) by striking ``The'' and inserting ``With respect to any
calendar year, the'', and
(ii) by striking ``for the calendar year in which the sale
occurs'' and inserting ``for such calendar year''.
(2) No inflation adjustment for the credit amount in 2005,
2006, and 2007.--Section 45K(b)(2), as amended by paragraph
(1), is amended by adding at the end the following new
sentence: ``This paragraph shall not apply with respect to
the $3 amount in subsection (a) for calendar years 2005,
2006, and 2007 and the amount in effect under subsection (a)
for sales in each such calendar year shall be the amount
which was in effect for sales in calendar year 2004.''.
(3) Treatment of coke and coke gas.--
(A) Nonapplication of phaseout.--Section 45K(g)(2) is
amended by adding at the end the following new subparagraph:
``(D) Nonapplication of phaseout.--Subsection (b)(1) shall
not apply.''.
(B) Application of inflation adjustment .--Section
45K(g)(2)(B) is amended by inserting ``and the last sentence
of subsection (b)(2) shall not apply.''.
(C) Clarification of qualifying facility.--Section
45K(g)(1) is amended by inserting ``(other than from
petroleum based products)'' after ``coke or coke gas''.
(c) Effective Date.--The amendments made by this section
shall apply to fuel sold after December 31, 2004.

SEC. 465. ELIMINATION OF AMORTIZATION OF GEOLOGICAL AND
GEOPHYSICAL EXPENDITURES FOR MAJOR INTEGRATED
OIL COMPANIES.

(a) In General.--Section 167(h) is amended by adding at the
end the following new paragraph:
``(5) Nonapplication to major integrated oil companies.--
This subsection shall not apply with respect to any expenses
paid or incurred for any taxable year by any integrated oil
company (as defined in section 291(b)(4)) which has an
average daily worldwide production of crude oil of at least
500,000 barrels for such taxable year.''.

[[Page S690]]

(b) Effective Date.--The amendment made by this section
shall take effect as if included in the amendment made by
section 1329(a) of the Energy Policy Act of 2005.

Subtitle F--Tax Administration Provisions

SEC. 471. IMPOSITION OF WITHHOLDING ON CERTAIN PAYMENTS MADE
BY GOVERNMENT ENTITIES.

(a) In General.--Section 3402 is amended by adding at the
end the following new subsection:
``(t) Extension of Withholding to Certain Payments Made by
Government Entities.--
``(1) General rule.--The Government of the United States,
every State, every political subdivision thereof, and every
instrumentality of the foregoing (including multi-State
agencies) making any payment for goods and services which is
subject to withholding shall deduct and withhold from such
payment a tax in an amount equal to 3 percent of such
payment.
``(2) Exceptions.--Paragraph (1) shall not apply to any
payment--
``(A) except as provided in subparagraph (B), which is
subject to withholding under any other provision of this
chapter or chapter 3,
``(B) which is subject to withholding under section 3406
and from which amounts are being withheld under such section,
``(C) of interest,
``(D) for real property,
``(E) to any tax-exempt entity, foreign government, or
other entity subject to the requirements of paragraph (1),
``(F) made pursuant to a classified or confidential
contract (as defined in section 6050M(e)(3)), and
``(G) made by a political subdivision of a State (or any
instrumentality thereof) which makes less than $100,000,000
of such payments annually.
``(3) Coordination with other sections.--For purposes of
sections 3403 and 3404 and for purposes of so much of
subtitle F (except section 7205) as relates to this chapter,
payments to any person of any payment for goods and services
which is subject to withholding shall be treated as if such
payments were wages paid by an employer to an employee.''.
(b) Effective Date.--The amendment made by this section
shall apply to payments made after December 31, 2005.

SEC. 472. INCREASE IN CERTAIN CRIMINAL PENALTIES.

(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 ``$500,000'',
(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 ``Any person'' and inserting the following:
``(a) In General.--Any person'', and
(ii) by striking ``$25,000'' and inserting ``$50,000'',
(B) in the third sentence, by striking ``section'' and
inserting ``subsection'', and
(C) by adding at the end the following new subsection:
``(b) Aggravated Failure to File.--
``(1) In general.--In the case of any failure described in
paragraph (2), the first sentence of subsection (a) shall be
applied by substituting--
``(A) `felony' for `misdemeanor',
``(B) `$500,000 ($1,000,000' for `$25,000 ($100,000', and
``(C) `10 years' for `1 year'.
``(2) Failure described.--A failure described in this
paragraph is a failure to make a return described in
subsection (a) for a period of 3 or more consecutive taxable
years.''.
(3) Fraud and false statements.--Section 7206(a) (as
redesignated by subsection (a)) is amended--
(A) by striking ``$100,000'' and inserting ``$500,000'',
(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 actions, and failures to act, occurring after
the date of the enactment of this Act.

SEC. 473. REPEAL OF SUSPENSION OF INTEREST AND CERTAIN
PENALTIES WHERE SECRETARY FAILS TO CONTACT
TAXPAYER.

(a) In General.--Section 6404 (relating to abatements) is
amended by striking subsection (g) and by redesignating
subsections (h) and (i) as subsections (g) and (h),
respectively.
(b) Effective Date.--The amendments made by this section
shall apply to returns of tax filed after December 31, 2005.

SEC. 474. INCREASE IN PENALTY FOR BAD CHECKS AND MONEY
ORDERS.

(a) In General.--Section 6657 (relating to bad checks) is
amended--
(1) by striking ``$750'' and inserting ``$1,250'', and
(2) by striking ``$15'' and inserting ``$25''.
(b) Effective Date.--The amendments made by this section
apply to checks or money orders received after the date of
the enactment of this Act.

SEC. 475. 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

[[Page S691]]

under subsection (a)(3)(B) and states the grounds for the
requested hearing''.
(c) Treatment of Frivolous Requests for Hearings Upon
Filing of Notice of Lien.--Section 6320 is amended--
(1) in subsection (b)(1), by striking ``under subsection
(a)(3)(B)'' and inserting ``in writing under subsection
(a)(3)(B) and states the grounds for the requested hearing'',
and
(2) in subsection (c), by striking ``and (e)'' and
inserting ``(e), and (g)''.
(d) Treatment of Frivolous Applications for Offers-in-
Compromise and Installment Agreements.--Section 7122 is
amended by adding at the end the following new subsection:
``(e) Frivolous Submissions, Etc.--Notwithstanding any
other provision of this section, if the Secretary determines
that any portion of an application for an offer-in-compromise
or installment agreement submitted under this section or
section 6159 meets the requirement of clause (i) or (ii) of
section 6702(b)(2)(A), then the Secretary may treat such
portion as if it were never submitted and such portion shall
not be subject to any further administrative or judicial
review.''.
(e) Clerical Amendment.--The table of sections for part I
of subchapter B of chapter 68 is amended by striking the item
relating to section 6702 and inserting the following new
item:

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

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

SEC. 476. PARTIAL PAYMENTS REQUIRED WITH SUBMISSION OF
OFFERS-IN-COMPROMISE.

(a) In General.--Section 7122 (relating to compromises), as
amended by this Act, is amended by redesignating subsections
(c), (d), and (e) as subsections (d), (e), and (f),
respectively, and by inserting after subsection (b) the
following new subsection:
``(c) Rules for Submission of Offers-in-Compromise.--
``(1) Partial payment required with submission.--
``(A) Lump-sum offers.--
``(i) In general.--The submission of any lump-sum offer-in-
compromise shall be accompanied by the payment of 20 percent
of amount of such offer.
``(ii) Lump-sum offer-in-compromise.--For purposes of this
section, the term `lump-sum offer-in-compromise' means any
offer of payments made in 5 or fewer installments.
``(B) Periodic payment offers.--The submission of any
periodic payment offer-in-compromise shall be accompanied by
the payment of the amount of the first proposed installment
and each proposed installment due during the period such
offer is being evaluated for acceptance and has not been
rejected by the Secretary. Any failure to make a payment
required under the preceding sentence shall be deemed a
withdrawal of the offer-in-compromise.
``(2) Rules of application.--
``(A) Use of payment.--The application of any payment made
under this subsection to the assessed tax or other amounts
imposed under this title with respect to such tax may be
specified by the taxpayer.
``(B) No user fee imposed.--Any user fee which would
otherwise be imposed under this section shall not be imposed
on any offer-in-compromise accompanied by a payment required
under this subsection.
``(C) Waiver authority.--The Secretary may issue
regulations waiving any payment required under paragraph (1)
in a manner consistent with the practices established in
accordance with the requirements under subsection (d)(3).''.
(b) Additional Rules Relating to Treatment of Offers.--
(1) Unprocessable offer if payment requirements are not
met.--Paragraph (3) of section 7122(d) (relating to standards
for evaluation of offers), as redesignated by subsection (a),
is amended by striking ``; and'' at the end of subparagraph
(A) and inserting a comma, by striking the period at the end
of subparagraph (B) and inserting ``, and'', and by adding at
the end the following new subparagraph:
``(C) any offer-in-compromise which does not meet the
requirements of subsection (c) shall be returned to the
taxpayer as unprocessable.''.
(2) Deemed acceptance of offer not rejected within certain
period.--Section 7122, as amended by subsection (a), is
amended by adding at the end the following new subsection:
``(g) Deemed Acceptance of Offer Not Rejected Within
Certain Period.--Any offer-in-compromise submitted under this
section shall be deemed to be accepted by the Secretary if
such offer is not rejected by the Secretary before the date
which is 24 months after the date of the submission of such
offer (12 months for offers-in-compromise submitted after the
date which is 5 years after the date of the enactment of this
subsection). For purposes of the preceding sentence, any
period during which any tax liability which is the subject of
such offer-in-compromise is in dispute in any judicial
proceeding shall not be taken in to account in determining
the expiration of the 24-month period (or 12-month period, if
applicable).''.
(c) Effective Date.--The amendments made by this section
shall apply to offers-in-compromise submitted on and after
the date which is 60 days after the date of the enactment of
this Act.

SEC. 477. WAIVER OF USER FEE FOR INSTALLMENT AGREEMENTS USING
AUTOMATED WITHDRAWALS.

(a) In General.--Section 6159 (relating to agreements for
payment of tax liability in installments) is amended by
redesignating subsection (e) as subsection (f) and by
inserting after subsection (d) the following:
``(e) Waiver of User Fees for Installment Agreements Using
Automated Withdrawals.--In the case of a taxpayer who enters
into an installment agreement in which automated installment
payments are agreed to, the Secretary shall waive the fee (if
any) for entering into the installment agreement.''.
(b) Effective Date.--The amendments made by this section
shall apply to agreements entered into on or after the date
which is 180 days after the date of the enactment of this
Act.

SEC. 478. TERMINATION OF INSTALLMENT AGREEMENTS.

(a) In General.--Section 6159(b)(4) (relating to failure to
pay an installment or any other tax liability when due or to
provide requested financial information) is amended by
striking ``or'' at the end of subparagraph (B), by
redesignating subparagraph (C) as subparagraph (E), and by
inserting after subparagraph (B) the following:
``(C) to make a Federal tax deposit under section 6302 at
the time such deposit is required to be made,
``(D) to file a return of tax imposed under this title by
its due date (including extensions), or''.
(b) Conforming Amendment.--The heading for section
6159(b)(4) is amended by striking ``Failure to pay an
installment or any other tax liability when due or to provide
requested financial information'' and inserting ``Failure to
make payments or deposits or file returns when due or to
provide requested financial information''.
(c) Effective Date.--The amendments made by this section
shall apply to failures occurring on or after the date of the
enactment of this Act.

Subtitle G--Additional Provisions

SEC. 481. MODIFICATION OF INDIVIDUAL ESTIMATED TAX SAFE
HARBOR.

(a) In General.--The table contained in section
6654(d)(1)(C) is amended by striking ``2002 or thereafter''
and inserting ``2002, 2003, 2004, or 2005'' and by adding at
the end the following new items:
``2006...........................................................111
2007 or thereafter.............................................110''.

(b) Effective Date.--The amendments made by this section
shall apply with respect to any installment payment for
taxable years beginning after December 31, 2005.

SEC. 482. LOAN AND REDEMPTION REQUIREMENTS ON POOLED
FINANCING REQUIREMENTS.

(a) Strengthened Reasonable Expectation Requirement.--
Subparagraph (A) of section 149(f)(2) (relating to reasonable
expectation requirement) is amended to read as follows:
``(A) In general.--The requirements of this paragraph are
met with respect to an issue if the issuer reasonably expects
that--
``(i) as of the close of the 1-year period beginning on the
date of issuance of the issue, at least 50 percent of the net
proceeds of the issue (as of the close of such period) will
have been used directly or indirectly to make or finance
loans to ultimate borrowers, and
``(ii) as of the close of the 3-year period beginning on
such date of issuance, at least 95 percent of the net
proceeds of the issue (as of the close of such period) will
have been so used.''.
(b) Written Loan Commitment and Redemption Requirements.--
Section 149(f) (relating to treatment of certain pooled
financing bonds) is amended by redesignating paragraphs (4)
and (5) as paragraphs (6) and (7), respectively, and by
inserting after paragraph (3) the following new paragraphs:
``(4) Written loan commitment requirement.--
``(A) In general.--The requirement of this paragraph is met
with respect to an issue if the issuer receives prior to
issuance written loan commitments identifying the ultimate
potential borrowers of at least 50 percent of the net
proceeds of such issue.
``(B) Exception.--Subparagraph (A) shall not apply with
respect to any issuer which is a State (or an integral part
of a State) issuing pooled financing bonds to make or finance
loans to subordinate governmental units of such State or to
State-created entities providing financing for water-
infrastructure projects through the federally-sponsored State
revolving fund program.
``(5) Redemption requirement.--The requirement of this
paragraph is met if to the extent that less than the
percentage of the proceeds of an issue required to be used
under clause (i) or (ii) of paragraph (2)(A) is used by the
close of the period identified in such clause, the issuer
uses an amount of proceeds equal to the excess of--
``(A) the amount required to be used under such clause,
over
``(B) the amount actually used by the close of such period,
to redeem outstanding bonds within 90 days after the end of
such period.''.
(c) Elimination of Disregard of Pooled Bonds in Determining
Eligibility for Small Issuer Exception to Arbitrage Rebate.--
Section 148(f)(4)(D)(ii) (relating to aggregation of issuers)
is amended by striking

[[Page S692]]

subclause (II) and by redesignating subclauses (III) and (IV)
as subclauses (II) and (III), respectively.
(d) Conforming Amendments.--
(1) Section 149(f)(1) is amended by striking ``paragraphs
(2) and (3)'' and inserting ``paragraphs (2), (3), (4), and
(5)''.
(2) Section 149(f)(7)(B), as redesignated by subsection
(b), is amended by striking ``paragraph (4)(A)'' and
inserting ``paragraph (6)(A)''.
(3) Section 54(l)(2) is amended by striking ``section
149(f)(4)(A)'' and inserting ``section 149(f)(6)(A)''.
(e) Effective Date.--The amendments made by this section
shall apply to bonds issued after the date of the enactment
of this Act.

SEC. 483. REPORTING OF INTEREST ON TAX-EXEMPT BONDS.

(a) In General.--Section 6049(b)(2) (relating to
exceptions) is amended by striking subparagraph (B) and by
redesignating subparagraphs (C) and (D) as subparagraphs (B)
and (C), respectively.
(b) Conforming Amendment.--Section 6049(b)(2)(C), as
redesignated by subsection (a), is amended by striking
``subparagraph (C)'' and inserting ``subparagraph (B)''.
(c) Effective Date.--The amendments made by this section
shall apply to interest earned after December 31, 2005.

____________________