H.R. 5962House111th Congress (2009-2011)In Committee

American Business Competitiveness Act of 2010

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HouseIntro Referral Latest Action

Sponsor introductory remarks on measure. (CR H6461-6462, E1531)

July 30, 2010

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HouseIntro Referral

Introduced in House

July 29, 2010

HouseIntro Referral

Referred to the House Committee on Ways and Means.

Ways and Means Committee

July 29, 2010

HouseIntro Referral

Sponsor introductory remarks on measure. (CR H6461-6462, E1531)

July 30, 2010

Floor Debate

1 member

What members said about H.R. 5962 on the floor

1 Democrat

Rep. Daniel B. MaffeiD-NY-25 · Jul 30, 2010

Madam Speaker, no one likes to pay taxes. The people in my district and all throughout our country work hard to make a living, and especially in tough economic times, it is difficult to give up a…

Madam Speaker, no one likes to pay taxes. The people in my district and all throughout our country work hard to make a living, and especially in tough economic times, it is difficult to give up a portion of that hard-earned money. But, most citizens also appreciate that our taxes allow us to have the country we do--our taxes allow us to send our children to school, to keep our country safe, to provide Social Security, and to maintain our way of life.

In the words of Franklin Delano Roosevelt, ``Taxes, after all, are dues that we pay for the privileges of membership in an organized society.''

Yet, while many of our hard-working citizens understand this fact, they do not understand why our current tax code is riddled with loopholes. They don't like that certain people and certain industries-- especially those with high-paid lobbyists and heavy influence in Washington--get special breaks. They do not understand why some people and some companies get out of paying their fair share of taxes, or why we reward companies with tax breaks for sending jobs overseas.

The worst of these special breaks allow companies to take advantage of U.S. tax deductions on income they make overseas. It actually rewards companies for taking business--and jobs--out of our country and sending them to China or India or elsewhere. Under current law, corporations can defer taxes on business income they earn through foreign companies while they take deductions related to that income when they pay U.S. taxes. In effect, we are encouraging corporations to ship jobs overseas--and then telling the American taxpayer to give them a special tax break! Not only is this provision unfair to taxpayers, it is unfair to companies that keep their operations in the U.S. and try to preserve American jobs.

Those are the businesses that employ our hard-working citizens and keep our economy afloat. Those businesses look at our complicated tax code and cannot understand why their competitors that ship jobs overseas are favored with special breaks. And they don't understand why the United States has a higher corporate tax rate than most other industrialized nations--which brings me to my second point. At the same time we're creating loopholes for some, we're putting our entire business community at a competitive disadvantage in the worldwide market.

China's corporate tax rate is 25%.

The United Kingdom's corporate tax rate is 28%.

Japan's corporate tax rate is 30%.

The United States' top marginal corporate tax rate? 35%.

The bill I'm proposing today aims to fix both of these problems. First, it will eliminate the irresponsible tax loopholes that only benefit certain sectors of certain industries. One loophole my bill closes, for instance, currently allows foreign corporations to avoid paying taxes on income they earn in the United States by funneling the money through different countries where we have tax treaties. This misuse must stop. We must strive to make our tax system fairer.

And secondly, I do not believe that the revenue raised by closing these loopholes should just be thrown back into the federal budget. Instead, I think we should use this revenue to help boost the competitiveness of our entire business community, by sharply reducing our corporate tax rate, to 23%. This is a major tax cut that would allow companies from upstate New York and around the country to better compete in the global economy--and it would ensure that all companies benefit, not just those with good lobbyists. Between revenue raised by closing these egregious tax loopholes and added economic stimulus of lower corporate tax rates, this legislation provides a good balance.

This competitive tax rate will give us back an edge--an edge over China and other countries whose tax laws have attracted corporations to move American jobs overseas in the first place. Our taxpayers, our businesses and our country deserve better, and this bill is a crucial first step toward making our tax system fairer for everyone.

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Introduced in HouseIssued July 29, 2010

111th CONGRESS

2d Session

H. R. 5962

IN THE HOUSE OF REPRESENTATIVES

July 29, 2010

Mr. Maffei introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to reduce the maximum corporate income tax rate and to offset the revenue cost by repealing certain corporate tax benefits.

Short title; amendment of 1986 code

(a)

Short title

This Act may be cited as the American Business Competitiveness Act of 2010.

(b)

Amendment of 1986 code

Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c)

Table of contents

Sec. 1. Short title; amendment of 1986 code.

Title I—Corporate income tax rate reduction

Sec. 101. Reduction in top corporate marginal rate.

Title II—Provisions related to foreign source income

Sec. 201. Allocation of expenses and taxes on basis of repatriation of foreign income.

Sec. 202. Repeal of worldwide allocation of interest.

Sec. 203. Limitation on treaty benefits for certain deductible payments.

Title III—Modification of accounting rules

Sec. 301. Repeal of last-in, first-out method of inventory.

Sec. 302. Repeal of lower of cost or market method of inventory.

Sec. 303. Special rule for service providers on accrual method not applicable to C corporations.

Title IV—Modification to expensing and depreciation rules

Sec. 401. Small business expensing provisions made permanent.

Sec. 402. Amortization of goodwill and other intangibles.

Title V—Codification of economic substance doctrine

Sec. 501. Codification of economic substance doctrine.

Title VI—Modifications to deductions for dividends received

Sec. 601. Modifications to deductions for dividends received.

Title VII—Other provisions

Sec. 701. Recognition of ordinary income on sale or exercise of stock option in S corporation with an ESOP.

Sec. 702. Treatment of securities of a controlled corporation exchanged for assets in certain reorganizations.

Corporate income tax rate reduction

101.

Reduction in top corporate marginal rate

(a)

General rule

Paragraph (1) of section 11(b) (relating to amount of tax) is amended—

(1)

by inserting “and” at the end of subparagraph (A),

(2)

by striking subparagraphs (B), (C), and (D) and inserting the following:

(B)

23 percent of so much of the taxable income as exceeds $50,000.

, and

(3)

by striking “$11,750” and all that follows and inserting $9,500..

(b)

Personal service corporations

Paragraph (2) of section 11(b) is amended by striking 35 percent and inserting 23 percent.

(c)

Conforming amendments

(1)

Section 1201 is amended by striking 35 percent each place it appears and inserting 23 percent.

(2)

Paragraphs (1) and (2) of section 1445(e) are each amended by striking 35 percent and inserting 23 percent.

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010, except that the amendments made by subsection (c) shall take effect on January 1, 2011.

Provisions related to foreign source income

201.

Allocation of expenses and taxes on basis of repatriation of foreign income

(a)

In general

Part III of subchapter N of chapter 1 is amended by inserting after subpart G the following new subpart:

Special Rules for Allocation of Foreign-Related Deductions and Foreign Tax Credits

Sec. 975. Deductions allocated to deferred foreign income may not offset United States source income.

Sec. 976. Amount of foreign taxes computed on overall basis.

Sec. 977. Application of subpart.

975.

Deductions allocated to deferred foreign income may not offset United States source income

(a)

Current year deductions

For purposes of this chapter, foreign-related deductions for any taxable year—

(1)

shall be taken into account for such taxable year only to the extent that such deductions are allocable to currently-taxed foreign income, and

(2)

to the extent not so allowed, shall be taken into account in subsequent taxable years as provided in subsection (b).

Foreign-related deductions shall be allocated to currently-taxed foreign income in the same proportion which currently-taxed foreign income bears to the sum of currently-taxed foreign income and deferred foreign income.

(b)

Deductions related to repatriated deferred foreign income

(1)

In general

If there is repatriated foreign income for a taxable year, the portion of the previously deferred deductions allocated to the repatriated foreign income shall be taken into account for the taxable year as a deduction allocated to income from sources outside the United States. Any such amount shall not be included in foreign-related deductions for purposes of applying subsection (a) to such taxable year.

(2)

Portion of previously deferred deductions

For purposes of paragraph (1), the portion of the previously deferred deductions allocated to repatriated foreign income is—

(A)

the amount which bears the same proportion to such deductions, as

(B)

the repatriated income bears to the previously deferred foreign income.

(c)

Definitions and special rule

For purposes of this section—

(1)

Foreign-related deductions

The term foreign-related deductions means the total amount of deductions and expenses which would be allocated or apportioned to gross income from sources without the United States for the taxable year if both the currently-taxed foreign income and deferred foreign income were taken into account.

(2)

Currently-taxed foreign income

The term currently-taxed foreign income means the amount of gross income from sources without the United States for the taxable year (determined without regard to repatriated foreign income for such year).

(3)

Deferred foreign income

The term deferred foreign income means the excess of—

(A)

the amount that would be includible in gross income under subpart F of this part for the taxable year if—

(i)

all controlled foreign corporations were treated as one controlled foreign corporation, and

(ii)

all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952), over

(B)

the sum of—

(i)

all dividends received during the taxable year from controlled foreign corporations, plus

(ii)

amounts includible in gross income under section 951(a).

(4)

Previously deferred foreign income

The term previously deferred foreign income means the aggregate amount of deferred foreign income for all prior taxable years to which this part applies, determined as of the beginning of the taxable year, reduced by the repatriated foreign income for all such prior taxable years.

(5)

Repatriated foreign income

The term repatriated foreign income means the amount included in gross income on account of distributions out of previously deferred foreign income.

(6)

Previously deferred deductions

The term previously deferred deductions means the aggregate amount of foreign-related deductions not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

(7)

Treatment of certain foreign taxes

(A)

Paid by controlled foreign corporation

Section 78 shall not apply for purposes of determining currently-taxed foreign income and deferred foreign income.

(B)

Paid by taxpayer

For purposes of determining currently-taxed foreign income, gross income from sources without the United States shall be reduced by the aggregate amount of taxes described in the applicable paragraph of section 901(b) which are paid by the taxpayer (without regard to sections 902 and 960) during the taxable year.

(8)

Coordination with section 976

In determining currently-taxed foreign income and deferred foreign income, the amount of deemed foreign tax credits shall be determined with regard to section 976.

976.

Amount of foreign taxes computed on overall basis

(a)

Current year allowance

For purposes of this chapter, the amount taken into account as foreign income taxes for any taxable year shall be an amount which bears the same ratio to the total foreign income taxes for that taxable year as—

(1)

the currently-taxed foreign income for such taxable year, bears to

(2)

the sum of the currently-taxed foreign income and deferred foreign income for such year.

The portion of the total foreign income taxes for any taxable year not taken into account under the preceding sentence for a taxable year shall only be taken into account as provided in subsection (b) (and shall not be taken into account for purposes of applying sections 902 and 960).

(b)

Allowance related to repatriated deferred foreign income

(1)

In general

If there is repatriated foreign income for any taxable year, the portion of the previously deferred foreign income taxes paid or accrued during such taxable year shall be taken into account for the taxable year as foreign taxes paid or accrued. Any such taxes so taken into account shall not be included in foreign income taxes for purposes of applying subsection (a) to such taxable year.

(2)

Portion of previously deferred foreign income taxes

For purposes of paragraph (1), the portion of the previously deferred foreign income taxes allocated to repatriated deferred foreign income is—

(A)

the amount which bears the same proportion to such taxes, as

(B)

the repatriated deferred income bears to the previously deferred foreign income.

(c)

Definitions and special rule

For purposes of this section—

(1)

Previously deferred foreign income taxes

The term previously deferred foreign income taxes means the aggregate amount of total foreign income taxes not taken into account under subsection (a) for all prior taxable years (determined as of the beginning of the taxable year), reduced by any amounts taken into account under subsection (b) for such prior taxable years.

(2)

Total foreign income taxes

The term total foreign income taxes means the sum of foreign income taxes paid or accrued during the taxable year (determined without regard to section 904(c)) plus the increase in foreign income taxes that would be paid or accrued during the taxable year under sections 902 and 960 if—

(A)

all controlled foreign corporations were treated as one controlled foreign corporation, and

(B)

all earnings and profits of all controlled foreign corporations were subpart F income (as defined in section 952).

(3)

Foreign income taxes

The term foreign income taxes means any income, war profits, or excess profits taxes paid by the taxpayer to any foreign country or possession of the United States.

(4)

Currently-taxed foreign income and deferred foreign income

The terms currently-taxed foreign income and deferred foreign income have the meanings given such terms by section 975(c).

977.

Application of subpart

This subpart—

(1)

shall be applied before subpart A, and

(2)

shall be applied separately with respect to the categories of income specified in section 904(d)(1).

(b)

Clerical amendment

The table of subparts for part III of subpart N of chapter 1 is amended by inserting after the item relating to subpart G the following new item:

Subpart H. Special Rules for Allocation of Foreign-Related Deductions and Foreign Tax Credits

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

202.

Repeal of worldwide allocation of interest

(a)

In general

Section 864 is amended by striking subsection (f) and by redesignating subsection (g) as subsection (f).

(b)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

203.

Limitation on treaty benefits for certain deductible payments

(a)

In general

Section 894 (relating to income affected by treaty) is amended by adding at the end the following new subsection:

(d)

Limitation on treaty benefits for certain deductible payments

(1)

In general

In the case of any deductible related-party payment, any withholding tax imposed under chapter 3 (and any tax imposed under subpart A or B of this part) with respect to such payment may not be reduced under any treaty of the United States unless any such withholding tax would be reduced under a treaty of the United States if such payment were made directly to the foreign parent corporation.

(2)

Deductible related-party payment

For purposes of this subsection, the term deductible related-party payment means any payment made, directly or indirectly, by any person to any other person if the payment is allowable as a deduction under this chapter and both persons are members of the same foreign controlled group of entities.

(3)

Foreign controlled group of entities

For purposes of this subsection—

(A)

In general

The term foreign controlled group of entities means a controlled group of entities the common parent of which is a foreign corporation.

(B)

Controlled group of entities

The term controlled group of entities means a controlled group of corporations as defined in section 1563(a)(1), except that—

(i)

more than 50 percent shall be substituted for at least 80 percent each place it appears therein, and

(ii)

the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563.

A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).

(4)

Foreign parent corporation

For purposes of this subsection, the term foreign parent corporation means, with respect to any deductible related-party payment, the common parent of the foreign controlled group of entities referred to in paragraph (3)(A).

(5)

Regulations

The Secretary may prescribe such regulations or other guidance as are necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance which provide for—

(A)

the treatment of two or more persons as members of a foreign controlled group of entities if such persons would be the common parent of such group if treated as one corporation, and

(B)

the treatment of any member of a foreign controlled group of entities as the common parent of such group if such treatment is appropriate taking into account the economic relationships among such entities.

(b)

Effective date

The amendment made by this section shall apply to payments made after the date of the enactment of this Act.

III

Modification of accounting rules

301.

Repeal of last-in, first-out method of inventory

(a)

In general

Subpart D of part II of subchapter E of chapter 1 is amended by striking sections 472 (relating to last-in, first-out inventories), 473 (relating to qualified liquidations of LIFO inventories), and 474 (relating to simplified dollar-value LIFO method for certain small businesses).

(b)

Conforming amendments

(1)

(A)

Section 312(n) is amended by striking paragraph (4) and by redesignating paragraphs (5) through (8) as paragraphs (4) through (7), respectively.

(B)

Section 312(n)(7), as redesignated by subparagraph (A), is amended—

(i)

by striking paragraphs (4) and (6) in subparagraph (A) and inserting paragraph (5), and

(ii)

by striking paragraph (5) in subparagraph (B) and inserting paragraph (4).

(C)

Section 56(g)(4)(D) is amended by striking clause (iii) and by redesignating clause (iv) as clause (iii).

(2)

Section 1363 is amended by striking subsection (d).

(c)

Effective date

(1)

In general

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

(2)

Change in method of accounting

In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after the date of the enactment of this Act—

(A)

such change shall be treated as initiated by the taxpayer,

(B)

such change shall be treated as made with the consent of the Secretary of the Treasury, and

(C)

if the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 is positive, such amount shall be taken into account over a period of 8 years beginning with such first taxable year.

302.

Repeal of lower of cost or market method of inventory

(a)

In general

Section 471 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

(c)

Inventories taken into account at cost

A method of determining inventories shall not be treated as clearly reflecting income unless such method provides that inventories shall be taken into account at cost.

(b)

Effective date

(1)

In general

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

(2)

Change in method of accounting

In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after the date of the enactment of this Act—

(A)

such change shall be treated as initiated by the taxpayer,

(B)

such change shall be treated as made with the consent of the Secretary of the Treasury, and

(C)

303.

Special rule for service providers on accrual method not applicable to C corporations

(a)

In general

Subparagraph (A) of section 448(d)(5) is amended by inserting (other than a C corporation) after any person.

(b)

Effective date

(1)

In general

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

(2)

Change in method of accounting

In the case of any taxpayer required by the amendments made by this section to change its method of accounting for its first taxable year beginning after the date of the enactment of this Act—

(A)

such change shall be treated as initiated by the taxpayer,

(B)

such change shall be treated as made with the consent of the Secretary of the Treasury, and

(C)

Modification to expensing and depreciation rules

401.

Small business expensing provisions made permanent

(a)

Increase in small business expensing made permanent

Subsection (b) of section 179 is amended—

(1)

by striking $25,000 ($250,000 in the case of taxable years beginning after 2007 and before 2011) in paragraph (1) and inserting $250,000, and

(2)

by striking $200,000 ($800,000 in the case of taxable years beginning after 2007 and before 2011) in paragraph (2) and inserting $800,000.

(b)

Expensing for computer software made permanent

Clause (ii) of section 179(d)(1)(A) is amended by striking and which is placed in service in a taxable year beginning after 2002 and before 2011,.

(c)

Effective date

(1)

In general

Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

(2)

Computer software

The amendment made by subsection (b) shall apply to property placed in service after the date of the enactment of this Act.

402.

Amortization of goodwill and other intangibles

(a)

In general

Subsection (a) of section 197 (relating to general rule) is amended by striking 15-year and inserting 20-year.

(b)

Certain interests or rights acquired separately

Clause (i) of section 197(e)(4)(D) is amended by striking 15 years and inserting 20 years.

(c)

Effective date

The amendments made by this section shall apply to property acquired after the date of the enactment of this Act.

Codification of economic substance doctrine

501.

Codification of economic substance doctrine

(a)

In general

Section 7701 is amended by redesignating subsection (p) as subsection (q) and by inserting after subsection (o) the following new subsection:

(p)

Clarification of economic substance doctrine

(1)

Application of doctrine

In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—

(A)

the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and

(B)

the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

(2)

Special rule where taxpayer relies on profit potential

(A)

In general

The potential for profit of a transaction shall be taken into account in determining whether the requirements of subparagraphs (A) and (B) of paragraph (1) are met with respect to the transaction only if 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.

(B)

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 (A).

(3)

State and local tax benefits

For purposes of paragraph (1), any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect.

(4)

Financial accounting benefits

For purposes of paragraph (1)(B), achieving a financial accounting benefit shall not be taken into account as a purpose for entering into a transaction if such transaction results in a Federal income tax benefit.

(5)

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)

Exception for personal transactions of individuals

In the case of an individual, paragraph (1) shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.

(C)

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.

(D)

Determination of application of doctrine not affected

The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.

(6)

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.

Modifications to deductions for dividends received

601.

Modifications to deductions for dividends received

(a)

General reduction in percentage of deduction

(1)

In general

Sections 243(a)(1), 243(c)(1), 244(a)(3), 244(b)(2), 245(c)(1)(B), 246(b)(3)(B), and 246A(a)(1), before amendment by subsection (c), are each amended by striking 70 percent and inserting 60 percent.

(2)

Conforming amendments

Paragraph (2) of section 861(a), before amendment by subsection (c), is amended by striking 100/70th both places it appears and inserting 100/60th.

(b)

Reduction in percentage for 20-Percent owned corporations

(1)

In general

Sections 243(c)(1), 245(c)(1)(B), 246(b)(3)(A), 246A(a)(1) is amended by striking 80 percent and inserting 70 percent.

(2)

Conforming amendment

Paragraph (2) of section 861(a) is amended by striking 100/80th and inserting 100/70th.

(c)

Repeal of NOL exception to limitation on aggregate deductions; establishment of carryforward

(1)

In general

Paragraph (2) of section 246(b) is amended to read as follows:

(2)

Carryforward

The aggregate amount of deductions disallowed under paragraph (1) for any taxable year shall be treated as an increase in the amount allowable as a deduction under section 243(a)(1) for the following taxable year (subject to the application of paragraph (1) to such following taxable year).

(2)

Conforming amendments

(A)

Subsection (d) of section 172 is amended by striking paragraph (5) and by redesignating paragraph (6) as paragraph (5).

(B)

Subparagraph (A) of section 172(b)(2) is amended by striking paragraphs (1), (4), and (5) and inserting paragraphs (1) and (4).

(C)

Paragraph (1) of section 246(b) is amended by striking Except as provided in paragraph (2), the and inserting The.

(D)

Paragraph (3) of section 246(b) is amended by striking paragraph (1) and inserting paragraphs (1) and (2).

(E)

Subparagraph (B) of section 805(a)(4) is amended by striking section 1212(a)(1), and all that follows and inserting section 1212(a)(1)..

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2008.

VII

Other provisions

701.

Recognition of ordinary income on sale or exercise of stock option in S corporation with an ESOP

(a)

In general

Subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new section:

409B.

Recognition of ordinary income on sale or exercise of stock option in S corporation with an ESOP

(a)

In general

If an S corporation in which an employee stock ownership plan is a stockholder grants an option with respect to its stock and such option is sold or exercised, there shall be included in the gross income of the holder of such option (determined immediately before such sale or exercise) as ordinary income an amount equal to the income inclusion amount.

(b)

Income inclusion amount

For purposes of this section, the term income inclusion amount means, with respect to the holder of any option, the excess (if any) of—

(1)

the sum of the net income amounts with respect to such option for all taxable years of the S corporation ending during the taxpayer’s holding period, over

(2)

the sum of the net loss amounts with respect to such option for all such taxable years.

(c)

Net income and loss amounts

For purposes of this section, with respect to any taxable year of the S corporation—

(1)

Net income amount

The term net income amount means the excess (if any) of—

(A)

the pass-thru income share for such taxable year, over

(B)

the pass-thru loss share for such taxable year.

(2)

Net loss amount

The term net loss amount means the excess (if any) of the amount described in paragraph (1)(B) over the amount described in paragraph (1)(A).

(d)

Pass-Thru income and loss shares

For purposes of this section, with respect to any taxable year of the S corporation—

(1)

Pass-Thru income share

The term pass-thru income share means the excess (if any) of—

(A)

the aggregate items of income taken into account under section 1366 by the employee stock ownership plan for such taxable year, over

(B)

the aggregate items of income which would have been so taken into account if such option had been exercised upon being granted.

(2)

Pass-Thru loss share

The term pass-thru loss share means the excess (if any) of—

(A)

the aggregate items of deduction and loss taken into account under section 1366 by the employee stock ownership plan for such taxable year, over

(B)

the aggregate items of deduction and loss which would have been so taken into account if such option had been exercised upon being granted.

(e)

Interest at underpayment rate

(1)

In general

In the case of any taxpayer who includes any amount in gross income for any taxable year under subsection (a), the tax imposed by this chapter on such taxpayer for such taxable year shall be increased by interest at the underpayment rate determined under section 6621 on the underpayments that would have occurred had the net income amounts with respect to each taxable year taken into account under subsection (c) been includible in the taxpayer’s gross income for each of taxable year of the taxpayer in or with which the taxable year so taken into account ends.

(2)

Reduction for previous net loss amounts

For purposes of paragraph (1), the net income amount for any taxable year shall be reduced by the excess of—

(A)

the aggregate net loss amounts for taxable years taken into account under subsection (c) with respect to the taxpayer, over

(B)

the amount of such aggregate previously taken into account under this paragraph to reduce any net income amount.

(f)

Other definitions and special rules

For purposes of this section—

(1)

Option

The term option includes any synthetic equity described in section 409(p)(6)(C).

(2)

Effect of starting or terminating an S corporation election

With respect to any option, a corporation which is an S corporation for any taxable year which ends while such option is outstanding shall be treated for purposes of this section (other than subsection (d)) as an S corporation for all taxable years which end while such option is outstanding.

(3)

Adjustments to basis

(A)

Increase in basis of acquired stock

The taxpayer’s basis in any stock acquired pursuant to the exercise of an option to which subsection (a) applies shall be increased by the amount included in gross income by the taxpayer under subsection (a) with respect to such option.

(B)

Increase in basis of option on sale

The taxpayer’s basis in any option shall be increased by the amount included in gross income by the taxpayer under subsection (a) with respect to such option.

(b)

Conforming amendments

(1)

Section 26(b)(2) is amended by striking and at the end of subparagraph (W), by striking the period at the end of subparagraph (X) and inserting , and, and by adding at the end the following new subparagraph:

(Y)

subsection (e) of section 409B (relating to interest on income recognized upon exercise of a stock option in an S corporation with an ESOP).

(2)

Section 1016(a) is amended by striking and at the end of paragraph (36), by striking the period at the end of paragraph (37) and inserting , and, and by adding at the end the following new paragraph:

(38)

to the extent provided in section 409B(f)(3).

(3)

The table of sections for subpart A of part I of subchapter D of chapter 1 is amended by adding at the end the following new item:

Sec. 409B. Recognition of ordinary income on sale or exercise of stock option in S corporation with an ESOP.

(c)

Effective date

The amendments made by this section shall apply to options granted after the date of the enactment of this Act.

702.

Treatment of securities of a controlled corporation exchanged for assets in certain reorganizations

(a)

In general

Section 361 (relating to nonrecognition of gain or loss to corporations; treatment of distributions) is amended by adding at the end the following new subsection:

(d)

Receipt of securities, etc., in exchange for assets in certain reorganizations

If—

(1)

property is transferred to a corporation (hereinafter in this subsection referred to as the controlled corporation) pursuant to a plan of reorganization described in section 368(a)(1)(D), and

(2)

pursuant to such plan of reorganization, stock or securities in the controlled corporation are distributed in a transaction which qualifies under section 355,

then any securities and nonqualified preferred stock (as defined in section 351(g)(2)) of the controlled corporation shall be treated as other property for purposes of subsections (a) and (b).

(b)

Effective date

The amendment made by subsection (a) shall apply to distributions after the date of the enactment of this Act.