Text: H.R.2896 — 108th Congress (2003-2004)All Bill Information (Except Text)

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[Congressional Bills 108th Congress]
[From the U.S. Government Printing Office]
[H.R. 2896 Reported in House (RH)]






                                                 Union Calendar No. 226
108th CONGRESS
  1st Session
                                H. R. 2896

                          [Report No. 108-393]

  To amend the Internal Revenue Code of 1986 to remove impediments in 
  such Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at home and 
                                abroad.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 25, 2003

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

                           November 21, 2003

  Reported with an amendment, committed to the Committee of the Whole 
       House on the State of the Union, and ordered to be printed
 [Strike out all after the enacting clause and insert the part printed 
                               in italic]
 [For text of introduced bill, see copy of bill as introduced on July 
                               25, 2003]

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to remove impediments in 
  such Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at home and 
                                abroad.

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

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``American Jobs 
Creation Act of 2003''.
    (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; etc.

            TITLE I--CORPORATE REFORM AND GROWTH INCENTIVES

          Subtitle A--Reduction in Corporate Income Tax Rates

Sec. 1001. Reduced corporate income tax rate for domestic production 
                            activities income.
Sec. 1002. Reduced corporate income tax rate for small corporations.

                  Subtitle B--Small Business Expensing

Sec. 1011. 2-year extension of increased expensing for small business.

                        Subtitle C--Depreciation

Sec. 1021. Recovery period for depreciation of certain leasehold 
                            improvements and restaurant property.

               Subtitle D--Alternative Minimum Tax Relief

Sec. 1031. Net operating losses and foreign tax credit under 
                            alternative minimum tax.
Sec. 1032. Expansion of exemption from alternative minimum tax for 
                            small corporations.
Sec. 1033. Income averaging for farmers not to increase alternative 
                            minimum tax.

          Subtitle E--S Corporation Reform and Simplification

Sec. 1041. Members of family treated as 1 shareholder.
Sec. 1042. Increase in number of eligible shareholders to 100.
Sec. 1043. Expansion of bank S corporation eligible shareholders to 
                            include IRAs.
Sec. 1044. Disregard of unexercised powers of appointment in 
                            determining potential current beneficiaries 
                            of ESBT.
Sec. 1045. Transfer of suspended losses incident to divorce, etc.
Sec. 1046. Use of passive activity loss and at-risk amounts by 
                            qualified subchapter S trust income 
                            beneficiaries.
Sec. 1047. Exclusion of investment securities income from passive 
                            income test for bank S corporations.
Sec. 1048. Treatment of bank director shares.
Sec. 1049. Relief from inadvertently invalid qualified subchapter S 
                            subsidiary elections and terminations.
Sec. 1050. Information returns for qualified subchapter S subsidiaries.
Sec. 1051. Repayment of loans for qualifying employer securities.

                Subtitle F--Protecting Employee Benefits

Sec. 1061. Treatment of nonqualified deferred compensation plans.
Sec. 1062. Exclusion of incentive stock options and employee stock 
                            purchase plan stock options from wages.
Sec. 1063. Extension of transfers of excess pension assets to retiree 
                            health accounts.

                 Subtitle G--Treatment of Active Income

Sec. 1071. Member states of the European Union treated as a single 
                            country for certain purposes
Sec. 1072. Look-thru treatment of payments between related controlled 
                            foreign corporations under foreign personal 
                            holding company income rules.
Sec. 1073. Look-thru treatment for sales of partnership interests.
Sec. 1074. Repeal of foreign personal holding company rules and foreign 
                            investment company rules.
Sec. 1075. Clarification of treatment of pipeline transportation 
                            income.
Sec. 1076. Determination of foreign personal holding company income 
                            with respect to transactions in 
                            commodities.
Sec. 1077. Repeal of CFC rules on foreign base company shipping income.
Sec. 1078. Modification of subpart F exemption for active financing.
Sec. 1079. Partial exclusion for income attributable to films used 
                            outside the United States.

          Subtitle H--Reduction of Double Taxation of Earnings

Sec. 1081. Interest expense allocation rules.
Sec. 1082. Recharacterization of overall domestic loss.
Sec. 1083. Reduction to 2 foreign tax credit baskets.
Sec. 1084. Look-thru rules to apply to dividends from noncontrolled 
                            section 902 corporations.
Sec. 1085. Attribution of stock ownership through partnerships to apply 
                            in determining section 902 and 960 credits.
Sec. 1086. Clarification of treatment of certain transfers of 
                            intangible property.
Sec. 1087. United States property not to include certain assets 
                            acquired by dealers in ordinary course of 
                            trade or business.
Sec. 1088. Election not to use average exchange rate for foreign tax 
                            paid other than in functional currency.
Sec. 1089. Repeal of withholding tax on dividends from certain foreign 
                            corporations.
Sec. 1090. Provide equal treatment for interest paid by foreign 
                            partnerships and foreign corporations.
Sec. 1091. Treatment of certain dividends of regulated investment 
                            companies.

                      Subtitle I--Other Provisions

Sec. 1101. Special rules for livestock sold on account of weather-
                            related conditions.
Sec. 1102. Payment of dividends on stock of cooperatives without 
                            reducing patronage dividends.
Sec. 1103. Vaccine tax to apply to Hepatitis A vaccine.
Sec. 1104. Expansion of human clinical trials qualifying for orphan 
                            drug credit.
Sec. 1105. Distributions from publicly traded partnerships treated as 
                            qualifying income of regulated investment 
                            companies.
Sec. 1106. Improvements related to real estate investment trusts.
Sec. 1107. Simplification of excise tax imposed on bows and arrows.
Sec. 1108. Repeal of excise tax on fishing tackle boxes.
Sec. 1109. Income tax credit to distilled spirits wholesalers for cost 
                            of carrying Federal excise taxes on bottled 
                            distilled spirits.
Sec. 1110. Capital gain treatment under section 631(b) to apply to 
                            outright sales by landowners.
Sec. 1111. Sonar devices suitable for finding fish.
Sec. 1112. Taxation of certain settlement funds.
Sec. 1113. Suspension of occupational taxes relating to distilled 
                            spirits, wine, and beer.

TITLE II--PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH CORPORATE EARNINGS 
                       STRIPPING AND EXPATRIATION

Sec. 2001. Reduction in potential for earnings stripping by further 
                            limiting deduction for interest on certain 
                            indebtedness.
Sec. 2002. Tax treatment of expatriated entities and their foreign 
                            parents.
Sec. 2003. Excise tax on stock compensation of insiders in expatriated 
                            corporations.
Sec. 2004. Reinsurance of United States risks in foreign jurisdictions.
Sec. 2005. Revision of tax rules on expatriation of individuals.
Sec. 2006. Reporting of taxable mergers and acquisitions.
Sec. 2007. Studies.

             TITLE III--PROVISIONS RELATING TO TAX SHELTERS

                Subtitle A--Taxpayer-Related Provisions

Sec. 3001. Penalty for failing to disclose reportable transactions.
Sec. 3002. Accuracy-related penalty for listed transactions, other 
                            reportable transactions having a 
                            significant tax avoidance purpose, etc.
Sec. 3003. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 3004. Statute of limitations for taxable years for which required 
                            listed transactions not reported.
Sec. 3005. Disclosure of reportable transactions.
Sec. 3006. Failure to furnish information regarding reportable 
                            transactions.
Sec. 3007. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 3008. Penalty on promoters of tax shelters.
Sec. 3009. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
Sec. 3010. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 3011. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 3012. Regulation of individuals practicing before the Department 
                            of the Treasury.

                      Subtitle B--Other Provisions

Sec. 3021. Treatment of stripped interests in bond and preferred stock 
                            funds, etc.
Sec. 3022. Minimum holding period for foreign tax credit on withholding 
                            taxes on income other than dividends.
Sec. 3023. Disallowance of certain partnership loss transfers.
Sec. 3024. No reduction of basis under section 734 in stock held by 
                            partnership in corporate partner.
Sec. 3025. Repeal of special rules for FASITS.
Sec. 3026. Limitation on transfer of built-in losses on REMIC 
                            residuals.
Sec. 3027. Clarification of banking business for purposes of 
                            determining investment of earnings in 
                            United States property.
Sec. 3028. Modifications related to certain small insurance companies.
Sec. 3029. Definition of insurance company for section 831.
Sec. 3030. Denial of deduction for interest on underpayments 
                            attributable to nondisclosed reportable 
                            transactions.
Sec. 3031. Clarification of rules for payment of estimated tax for 
                            certain deemed asset sales.
Sec. 3032. Recognition of gain from the sale of a principal residence 
                            acquired in a like-kind exchange within 5 
                            years of sale.
Sec. 3033. Prevention of mismatching of interest and original issue 
                            discount deductions and income inclusions 
                            in transactions with related foreign 
                            persons.
Sec. 3034. Exclusion from gross income for interest on overpayments of 
                            income tax by individuals.
Sec. 3035. Deposits made to suspend running of interest on potential 
                            underpayments.
Sec. 3036. Partial payment of tax liability in installment agreements.
Sec. 3037. Extension of IRS user fees.

         TITLE IV--TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS

Sec. 4001. Repeal of exclusion for extraterritorial income.
Sec. 4002. COBRA fees.

            TITLE I--CORPORATE REFORM AND GROWTH INCENTIVES

          Subtitle A--Reduction in Corporate Income Tax Rates

SEC. 1001. REDUCED CORPORATE INCOME TAX RATE FOR DOMESTIC PRODUCTION 
              ACTIVITIES INCOME.

    (a) Limitation on Tax on Qualified Production Activities Income.--
Section 11 is amended by redesignating subsections (c) and (d) as 
subsections (d) and (e), respectively, and by inserting after 
subsection (b) the following new subsection:
    ``(c) Limitation on Tax on Qualified Production Activities 
Income.--
            ``(1) In general.--If a corporation has qualified 
        production activities income for any taxable year, the tax 
        imposed by this section shall not exceed the sum of--
                    ``(A) a tax computed at the rates and in the manner 
                as if this subsection had not been enacted on the 
                taxable income reduced by the amount of qualified 
                production activities income, plus
                    ``(B) a tax equal to 32 percent (34 percent in the 
                case of taxable years beginning before January 1, 2007) 
                of the qualified production activities income (or, if 
                less, taxable income).
            ``(2) Qualified production activities income.--
                    ``(A) In general.--The term `qualified production 
                activities income' for any taxable year means an amount 
                equal to the excess (if any) of--
                            ``(i) the taxpayer's domestic production 
                        gross receipts for such taxable year, over
                            ``(ii) the sum of--
                                    ``(I) the cost of goods sold that 
                                are allocable to such receipts,
                                    ``(II) other deductions, expenses, 
                                or losses directly allocable to such 
                                receipts, and
                                    ``(III) a ratable portion of other 
                                deductions, expenses, and losses that 
                                are not directly allocable to such 
                                receipts or another class of income.
                    ``(B) Allocation method.--The Secretary shall 
                prescribe rules for the proper allocation of items of 
                income, deduction, expense, and loss for purposes of 
                determining income attributable to domestic production 
                activities.
            ``(3) Domestic production gross receipts.--For purposes of 
        this subsection, the term `domestic production gross receipts' 
        means the gross receipts of the taxpayer which are derived 
        from--
                    ``(A) any lease, rental, license, sale, exchange, 
                or other disposition of--
                            ``(i) qualifying production property which 
                        was manufactured, produced, grown, or extracted 
                        in whole or in significant part by the taxpayer 
                        within the United States, or
                            ``(ii) any qualified film produced by the 
                        taxpayer, or
                    ``(B) construction, engineering, or architectural 
                services performed in the United States for 
                construction projects in the United States.
            ``(4) Qualifying production property.--For purposes of this 
        subsection, the term `qualifying production property' means--
                    ``(A) tangible personal property,
                    ``(B) any computer software, and
                    ``(C) any property described in section 168(f)(4).
            ``(5) Qualified film.--For purposes of this subsection--
                    ``(A) In general.--The term `qualified film' means 
                any property described in section 168(f)(3) if not less 
                than 50 percent of the total compensation relating to 
                the production of such property is compensation for 
                services performed in the United States by actors, 
                production personnel, directors, and producers.
                    ``(B) Exception.--Such term does not include 
                property with respect to which records are required to 
                be maintained under section 2257 of title 18, United 
                States Code.
            ``(6) Related persons.--For purposes of this subsection--
                    ``(A) In general.--The term `domestic production 
                gross receipts' shall not include any gross receipts of 
                the taxpayer derived from property leased, licensed, or 
                rented by the taxpayer for use by any related person.
                    ``(B) Related person.--For purposes of subparagraph 
                (A), a person shall be treated as related to another 
                person if such persons are treated as a single employer 
                under subsection (a) or (b) of section 52 or subsection 
                (m) or (o) of section 414, except that determinations 
                under subsections (a) and (b) of section 52 shall be 
                made without regard to section 1563(b).''.
    (b) Special Rule Relating to Election To Treat Cutting of Timber as 
a Sale or Exchange.--In the case of a corporation, any election under 
section 631(a) of the Internal Revenue Code of 1986 made for a taxable 
year ending on or before the date of the enactment of this Act may be 
revoked by the taxpayer for any taxable year ending after such date. 
For purposes of determining whether such taxpayer may make a further 
election under such section, such election (and any revocation under 
this section) shall not be taken into account.
    (c) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 1002. REDUCED CORPORATE INCOME TAX RATE FOR SMALL CORPORATIONS.

    (a) In General.--Subsection (b) of section 11 (relating to tax 
imposed on corporations) is amended by redesignating paragraph (2) as 
paragraph (6) and by striking paragraph (1) and inserting the following 
new paragraphs:
            ``(1) For taxable years beginning after 2011.--In the case 
        of taxable years beginning after 2011, the amount of the tax 
        imposed by subsection (a) shall be determined in accordance 
        with the following table:

``If taxable income is:             The tax is:
    Not over $50,000...............
                                        15% of taxable income.
    Over $50,000 but not over 
        $75,000.
                                        $7,500, plus 25% of the excess 
                                                over $50,000.
    Over $75,000 but not over 
        $20,000,000.
                                        $13,750, plus 32% of the excess 
                                                over $75,000.
    Over $20,000,000...............
                                        $6,389,750, plus 35% of the 
                                                excess over 
                                                $20,000,000.
            ``(2) For taxable years beginning in 2009, 2010, or 2011.--
        In the case of taxable years beginning in 2009, 2010, or 2011, 
        the amount of the tax imposed by subsection (a) shall be 
        determined in accordance with the following table:

``If taxable income is:             The tax is:
    Not over $50,000...............
                                        15% of taxable income.
    Over $50,000 but not over 
        $75,000.
                                        $7,500, plus 25% of the excess 
                                                over $50,000.
    Over $75,000 but not over 
        $5,000,000.
                                        $13,750, plus 32% of the excess 
                                                over $75,000.
    Over $5,000,000 but not over 
        $10,000,000.
                                        $1,589,750, plus 34% of the 
                                                excess over $5,000,000.
    Over $10,000,000...............
                                        $3,289,750, plus 35% of the 
                                                excess over 
                                                $10,000,000.
            ``(3) For taxable years beginning in 2007 or 2008.--In the 
        case of taxable years beginning in 2007 or 2008, the amount of 
        the tax imposed by subsection (a) shall be determined in 
        accordance with the following table:

``If taxable income is:             The tax is:
    Not over $50,000...............
                                        15% of taxable income.
    Over $50,000 but not over 
        $75,000.
                                        $7,500, plus 25% of the excess 
                                                over $50,000.
    Over $75,000 but not over 
        $1,000,000.
                                        $13,750, plus 32% of the excess 
                                                over $75,000.
    Over $1,000,000 but not over 
        $10,000,000.
                                        $309,750, plus 34% of the 
                                                excess over $1,000,000.
    Over $10,000,000...............
                                        $3,369,750, plus 35% of the 
                                                excess over 
                                                $10,000,000.
            ``(4) For taxable years beginning in 2004, 2005, or 2006.--
        In the case of taxable years beginning in 2004, 2005, or 2006, 
        the amount of the tax imposed by subsection (a) shall be 
        determined in accordance with the following table:

``If taxable income is:             The tax is:
    Not over $50,000...............
                                        15% of taxable income.
    Over $50,000 but not over 
        $75,000.
                                        $7,500, plus 25% of the excess 
                                                over $50,000.
    Over $75,000 but not over 
        $1,000,000.
                                        $13,750, plus 33% of the excess 
                                                over $75,000.
    Over $1,000,000 but not over 
        $10,000,000.
                                        $319,000, plus 34% of the 
                                                excess over $1,000,000.
    Over $10,000,000...............
                                        $3,379,000, plus 35% of the 
                                                excess over 
                                                $10,000,000.
            ``(5) Phaseout of lower rates for certain taxpayers.--
                    ``(A) General rule for years before 2012.--
                            ``(i) In general.--In the case of taxable 
                        years beginning before 2012 with respect to a 
                        corporation which has taxable income in excess 
                        of the applicable amount for any taxable year, 
                        the amount of tax determined under paragraph 
                        (1), (2), (3) or (4) for such taxable year 
                        shall be increased by the lesser of (I) 5 
                        percent of such excess, or (II) the maximum 
                        increase amount.
                            ``(ii) Maximum increase amount.--For 
                        purposes of clause (i)--
      

------------------------------------------------------------------------
                                                          The maximum
    ``In the case of any taxable      The applicable    increase amount
    year     beginning during:          amount is:            is:
------------------------------------------------------------------------
2004, 2005, or 2006...............      $1,000,000          $21,000
2007 or 2008......................      $1,000,000          $30,250
2009, 2010, or 2011...............      $5,000,000         $110,250.
------------------------------------------------------------------------

                    ``(B) Higher income corporations.--In the case of a 
                corporation which has taxable income in excess of 
                $20,000,000 ($15,000,000 in the case of taxable years 
                beginning before 2012), the amount of the tax 
                determined under the foregoing provisions of this 
                subsection shall be increased by an additional amount 
                equal to the lesser of (i) 3 percent of such excess, or 
                (ii) $610,250 ($100,000 in the case of taxable years 
                beginning before 2012).''.
    (b) Conforming Amendments.--
            (1) Section 904(b)(3)(D)(ii) is amended to read as follows:
                            ``(ii) in the case of a corporation, 
                        section 1201(a) applies to such taxable 
                        year.''.
            (2) Section 1201(a) is amended by striking ``the last 2 
        sentences of section 11(b)(1)'' and inserting ``section 
        11(b)(5)''.
            (3) Section 1561(a) is amended--
                    (A) by striking ``the last 2 sentences of section 
                11(b)(1)'' and inserting ``section 11(b)(5)'', and
                    (B) by striking ``such last 2 sentences'' and 
                inserting ``section 11(b)(5)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

                  Subtitle B--Small Business Expensing

SEC. 1011. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS.

    Subsections (b), (c), and (d) of section 179 (as amended by the 
Jobs and Growth Tax Relief Reconciliation Act of 2003) are each amended 
by striking ``2006'' each place it appears and inserting ``2008''.

                        Subtitle C--Depreciation

SEC. 1021. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN LEASEHOLD 
              IMPROVEMENTS AND RESTAURANT PROPERTY.

    (a) 15-Year Recovery Period.--Subparagraph (E) of section 168(e)(3) 
(relating to classification of certain property) is amended by striking 
``and'' at the end of clause (ii), by striking the period at the end of 
clause (iii) and inserting a comma, and by adding at the end the 
following new clauses:
                            ``(iv) any qualified leasehold improvement 
                        property placed in service before January 1, 
                        2006, and
                            ``(v) any qualified restaurant property 
                        placed in service before January 1, 2006.''
    (b) Qualified Leasehold Improvement Property.--Subsection (e) of 
section 168 is amended by adding at the end the following new 
paragraph:
            ``(6) Qualified leasehold improvement property.--The term 
        `qualified leasehold improvement property' has the meaning 
        given such term in section 168(k)(3) except that the following 
        special rules shall apply:
                    ``(A) Improvements made by lessor.--In the case of 
                an improvement made by the person who was the lessor of 
                such improvement when such improvement was placed in 
                service, such improvement shall be qualified leasehold 
                improvement property (if at all) only so long as such 
                improvement is held by such person.
                    ``(B) Exception for changes in form of business.--
                Property shall not cease to be qualified leasehold 
                improvement property under subparagraph (A) by reason 
                of--
                            ``(i) death,
                            ``(ii) a transaction to which section 
                        381(a) applies,
                            ``(iii) a mere change in the form of 
                        conducting the trade or business so long as the 
                        property is retained in such trade or business 
                        as qualified leasehold improvement property and 
                        the taxpayer retains a substantial interest in 
                        such trade or business,
                            ``(iv) the acquisition of such property in 
                        an exchange described in section 1031, 1033, or 
                        1038 to the extent that the basis of such 
                        property includes an amount representing the 
                        adjusted basis of other property owned by the 
                        taxpayer or a related person, or
                            ``(v) the acquisition of such property by 
                        the taxpayer in a transaction described in 
                        section 332, 351, 361, 721, or 731 (or the 
                        acquisition of such property by the taxpayer 
                        from the transferee or acquiring corporation in 
                        a transaction described in such section), to 
                        the extent that the basis of the property in 
                        the hands of the taxpayer is determined by 
                        reference to its basis in the hands of the 
                        transferor or distributor.''.
    (c) Qualified Restaurant Property.--Subsection (e) of section 168 
(as amended by subsection (b)) is further amended by adding at the end 
the following new paragraph:
            ``(7) Qualified restaurant property.--The term `qualified 
        restaurant property' means any section 1250 property which is 
        an improvement to a building if--
                    ``(A) such improvement is placed in service more 
                than 3 years after the date such building was first 
                placed in service, and
                    ``(B) more than 50 percent of the building's square 
                footage is devoted to preparation of, and seating for 
                on-premises consumption of, prepared meals.''.
    (d) Requirement To Use Straight Line Method.--
            (1) Paragraph (3) of section 168(b) is amended by adding at 
        the end the following new subparagraphs:
                    ``(G) Qualified leasehold improvement property 
                described in subsection (e)(6).
                    ``(H) Qualified restaurant property described in 
                subsection (e)(7).''.
            (2) Subparagraph (A) of section 168(b)(2) is amended by 
        inserting before the comma ``not referred to in paragraph 
        (3)''.
    (e) Alternative System.--The table contained in section 
168(g)(3)(B) is amended by adding at the end the following new items:

          ``(E)(iv)..................................       39         
          ``(E)(v)...................................     39''.        
    (f) Effective Date.--The amendments made by this section shall 
apply to property placed in service after the date of the enactment of 
this Act.

               Subtitle D--Alternative Minimum Tax Relief

SEC. 1031. NET OPERATING LOSSES AND FOREIGN TAX CREDIT UNDER 
              ALTERNATIVE MINIMUM TAX.

    (a) Net Operating Losses.--
            (1) In general.--Subparagraph (A) of section 56(d)(1) is 
        amended to read as follows:
                    ``(A) the amount of such deduction shall not exceed 
                the applicable percentage (determined under paragraph 
                (3)) of the alternative minimum taxable income 
                determined without regard to such deduction, and''.
            (2) Applicable percentage.--Subsection (d) of section 56 is 
        amended by adding at the end the following new paragraph:
            ``(3) Applicable percentage.--For purposes of paragraph 
        (1)(A)--

        ``For taxable years beginning
                                                         The applicable
          in calendar year--
                                                        percentage is--
            2005, 2006, or 2007............................      92    
            2008 or 2009...................................      94    
            2010...........................................      96    
            2011...........................................      98    
            2012 or thereafter.............................  100.''    
    (b) Foreign Tax Credit.--
            (1) Subsection (a) of section 59 is amended by striking 
        paragraph (2) and by redesignating paragraphs (3) and (4) as 
        paragraphs (2) and (3), respectively.
            (2) Section 53(d)(1)(B)(i)(II) is amended by striking ``and 
        if section 59(a)(2) did not apply''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 1032. EXPANSION OF EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR 
              SMALL CORPORATIONS.

    (a) In General.--Subparagraphs (A) and (B) of section 55(e)(1) are 
each amended by striking ``$7,500,000'' each place it appears and 
inserting ``$20,000,000''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 1033. INCOME AVERAGING FOR FARMERS NOT TO INCREASE ALTERNATIVE 
              MINIMUM TAX.

    (a) In General.--Subsection (c) of section 55 (defining regular 
tax) is amended by redesignating paragraph (2) as paragraph (3) and by 
inserting after paragraph (1) the following new paragraph:
            ``(2) Coordination with income averaging for farmers.--
        Solely for purposes of this section, section 1301 (relating to 
        averaging of farm income) shall not apply in computing the 
        regular tax liability.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2002.

          Subtitle E--S Corporation Reform and Simplification

SEC. 1041. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    (a) In General.--Paragraph (1) of section 1361(c) (relating to 
special rules for applying subsection (b)) is amended to read as 
follows:
            ``(1) Members of family treated as 1 shareholder.--
                    ``(A) In general.--For purpose of subsection 
                (b)(1)(A)--
                            ``(i) except as provided in clause (ii), a 
                        husband and wife (and their estates) shall be 
                        treated as 1 shareholder, and
                            ``(ii) in the case of a family with respect 
                        to which an election is in effect under 
                        subparagraph (D), all members of the family 
                        shall be treated as 1 shareholder.
                    ``(B) Members of the family.--For purpose of 
                subparagraph (A)(ii)--
                            ``(i) In general.--The term `members of the 
                        family' means the common ancestor, lineal 
                        descendants of the common ancestor, and the 
                        spouses (or former spouses) of such lineal 
                        descendants or common ancestor.
                            ``(ii) Common Ancestor.--For purposes of 
                        this paragraph, an individual shall not be 
                        considered a common ancestor if, as of the 
                        later of the effective date of this paragraph 
                        or the time the election under section 1362(a) 
                        is made, the individual is more than 3 
                        generations removed from the youngest 
                        generation of shareholders who would (but for 
                        this clause) be members of the family. For 
                        purposes of the preceding sentence, a spouse 
                        (or former spouse) shall be treated as being of 
                        the same generation as the individual to which 
                        such spouse is (or was) married.
                    ``(C) Effect of adoption, etc.--In determining 
                whether any relationship specified in subparagraph (B) 
                exists, the rules of section 152(b)(2) shall apply.
                    ``(D) Election.--An election under subparagraph 
                (A)(ii)--
                            ``(i) may, except as otherwise provided in 
                        regulations prescribed by the Secretary, be 
                        made by any member of the family, and
                            ``(ii) shall remain in effect until 
                        terminated as provided in regulations 
                        prescribed by the Secretary.''.
    (b) Relief From Inadvertent Invalid Election or Termination.--
Section 1362(f) (relating to inadvertent invalid elections or 
terminations), as amended by section 1049, is amended--
            (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
        ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
            (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
        ``section 1361(b)(3)(C),'' in paragraph (1)(B).
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxable years beginning after December 31, 2003.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to elections and terminations made after December 
        31, 2003.

SEC. 1042. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

    (a) In General.--Section 1361(b)(1)(A) (defining small business 
corporation) is amended by striking ``75'' and inserting ``100''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 1043. EXPANSION OF BANK S CORPORATION ELIGIBLE SHAREHOLDERS TO 
              INCLUDE IRAS.

    (a) In General.--Section 1361(c)(2)(A) (relating to certain trusts 
permitted as shareholders) is amended by inserting after clause (v) the 
following new clause:
                            ``(vi) In the case of a corporation which 
                        is a bank (as defined in section 581), a trust 
                        which constitutes an individual retirement 
                        account under section 408(a), including one 
                        designated as a Roth IRA under section 408A, 
                        but only to the extent of the stock held by 
                        such trust in such bank as of the date of the 
                        enactment of this clause.''.
    (b) Treatment as Shareholder.--Section 1361(c)(2)(B) (relating to 
treatment as shareholders) is amended by adding at the end the 
following new clause:
                            ``(vi) In the case of a trust described in 
                        clause (vi) of subparagraph (A), the individual 
                        for whose benefit the trust was created shall 
                        be treated as a shareholder.''.
    (c) Sale of Bank Stock in IRA Relating to S Corporation Election 
Exempt From Prohibited Transaction Rules.--Section 4975(d) (relating to 
exemptions) is amended by striking ``or'' at the end of paragraph (14), 
by striking the period at the end of paragraph (15) and inserting ``; 
or'', and by adding at the end the following new paragraph:
            ``(16) a sale of stock held by a trust which constitutes an 
        individual retirement account under section 408(a) to the 
        individual for whose benefit such account is established if--
                    ``(A) such stock is in a bank (as defined in 
                section 581),
                    ``(B) such stock is held by such trust as of the 
                date of the enactment of this paragraph,
                    ``(C) such sale is pursuant to an election under 
                section 1362(a) by such bank,
                    ``(D) such sale is for fair market value at the 
                time of sale (as established by an independent 
                appraiser) and the terms of the sale are otherwise at 
                least as favorable to such trust as the terms that 
                would apply on a sale to an unrelated party,
                    ``(E) such trust does not pay any commissions, 
                costs, or other expenses in connection with the sale, 
                and
                    ``(F) the stock is sold in a single transaction for 
                cash not later than 120 days after the S corporation 
                election is made.''.
    (d) Conforming Amendment.--Section 512(e)(1) is amended by 
inserting ``1361(c)(2)(A)(vi) or'' before ``1361(c)(6)''.
    (e) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 1044. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN 
              DETERMINING POTENTIAL CURRENT BENEFICIARIES OF ESBT.

    (a) In General.--Section 1361(e)(2) (defining potential current 
beneficiary) is amended--
            (1) by inserting ``(determined without regard to any power 
        of appointment to the extent such power remains unexercised at 
        the end of such period)'' after ``of the trust'' in the first 
        sentence, and
            (2) by striking ``60-day'' in the second sentence and 
        inserting ``1-year''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 1045. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, ETC.

    (a) In General.--Section 1366(d)(2) (relating to indefinite 
carryover of disallowed losses and deductions) is amended to read as 
follows:
            ``(2) Indefinite carryover of disallowed losses and 
        deductions.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), any loss or deduction which is 
                disallowed for any taxable year by reason of paragraph 
                (1) shall be treated as incurred by the corporation in 
                the succeeding taxable year with respect to that 
                shareholder.
                    ``(B) Transfers of stock between spouses or 
                incident to divorce.--In the case of any transfer 
                described in section 1041(a) of stock of an S 
                corporation, any loss or deduction described in 
                subparagraph (A) with respect such stock shall be 
                treated as incurred by the corporation in the 
                succeeding taxable year with respect to the 
                transferee.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 1046. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY 
              QUALIFIED SUBCHAPTER S TRUST INCOME BENEFICIARIES.

    (a) In General.--Section 1361(d)(1) (relating to special rule for 
qualified subchapter S trust) is amended--
            (1) by striking ``and'' at the end of subparagraph (A),
            (2) by striking the period at the end of subparagraph (B) 
        and inserting ``, and'', and
            (3) by adding at the end the following new subparagraph:
                    ``(C) for purposes of applying sections 465 and 469 
                to the beneficiary of the trust, the disposition of the 
                S corporation stock by the trust shall be treated as a 
                disposition by such beneficiary.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transfers made after December 31, 2003.

SEC. 1047. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE 
              INCOME TEST FOR BANK S CORPORATIONS.

    (a) In General.--Section 1362(d)(3) (relating to where passive 
investment income exceeds 25 percent of gross receipts for 3 
consecutive taxable years and corporation has accumulated earnings and 
profits) is amended by adding at the end the following new 
subparagraph:
                    ``(F) Exception for banks; etc.--In the case of a 
                bank (as defined in section 581), a bank holding 
                company (within the meaning of section 2(a) of the Bank 
                Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a 
                financial holding company (within the meaning of 
                section 2(p) of such Act), the term `passive investment 
                income' shall not include--
                            ``(i) interest income earned by such bank 
                        or company, or
                            ``(ii) dividends on assets required to be 
                        held by such bank or company, including stock 
                        in the Federal Reserve Bank, the Federal Home 
                        Loan Bank, or the Federal Agricultural Mortgage 
                        Bank or participation certificates issued by a 
                        Federal Intermediate Credit Bank.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 1048. TREATMENT OF BANK DIRECTOR SHARES.

    (a) In General.--Section 1361 (defining S corporation) is amended 
by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--
            ``(1) In general.--Restricted bank director stock shall not 
        be taken into account as outstanding stock of the S corporation 
        in applying this subchapter (other than section 1368(f)).
            ``(2) Restricted bank director stock.--For purposes of this 
        subsection, the term `restricted bank director stock' means 
        stock in a bank (as defined in section 581), a bank holding 
        company (within the meaning of section 2(a) of the Bank Holding 
        Company Act of 1956 (12 U.S.C. 1841(a))), or a financial 
        holding company (within the meaning of section 2(p) of such 
        Act), registered with the Federal Reserve System if such 
        stock--
                    ``(A) is required to be held by an individual under 
                applicable Federal or State law in order to permit such 
                individual to serve as a director, and
                    ``(B) is subject to an agreement with such bank or 
                company (or a corporation which controls (within the 
                meaning of section 368(c)) such bank or company) 
                pursuant to which the holder is required to sell back 
                such stock (at the same price as the individual 
                acquired such stock) upon ceasing to hold the office of 
                director.
            ``(3) Cross reference.--

                                ``For treatment of certain 
distributions with respect to restricted bank director stock, see 
section 1368(f).''.
    (b) Distributions.--Section 1368 (relating to distributions) is 
amended by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--If a director receives a 
distribution (not in part or full payment in exchange for stock) from 
an S corporation with respect to any restricted bank director stock (as 
defined in section 1361(f)), the amount of such distribution--
            ``(1) shall be includible in gross income of the director, 
        and
            ``(2) shall be deductible by the corporation for the 
        taxable year of such corporation in which or with which ends 
        the taxable year in which such amount in included in the gross 
        income of the director.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 1049. RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S 
              SUBSIDIARY ELECTIONS AND TERMINATIONS.

    (a) In General.--Section 1362(f) (relating to inadvertent invalid 
elections or terminations) is amended--
            (1) by inserting ``, section 1361(b)(3)(B)(ii),'' after 
        ``subsection (a)'' in paragraph (1),
            (2) by inserting ``, section 1361(b)(3)(C),'' after 
        ``subsection (d)'' in paragraph (1)(B),
            (3) by amending paragraph (3)(A) to read as follows:
                    ``(A) so that the corporation for which the 
                election was made is a small business corporation or a 
                qualified subchapter S subsidiary, as the case may be, 
                or'',
            (4) by amending paragraph (4) to read as follows:
            ``(4) the corporation for which the election was made, and 
        each person who was a shareholder in such corporation at any 
        time during the period specified pursuant to this subsection, 
        agrees to make such adjustments (consistent with the treatment 
        of such corporation as an S corporation or a qualified 
        subchapter S subsidiary, as the case may be) as may be required 
        by the Secretary with respect to such period,'', and
            (5) by inserting ``or a qualified subchapter S subsidiary, 
        as the case may be'' after ``S corporation'' in the matter 
        following paragraph (4).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 1050. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.

    (a) In General.--Section 1361(b)(3)(A) (relating to treatment of 
certain wholly owned subsidiaries) is amended by inserting ``and in the 
case of information returns required under part III of subchapter A of 
chapter 61'' after ``Secretary''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 1051. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER SECURITIES.

    (a) In General.--Subsection (f) of section 4975 (relating to other 
definitions and special rules) is amended by adding at the end the 
following new paragraph:
            ``(7) S corporation repayment of loans for qualifying 
        employer securities.--A plan shall not be treated as violating 
        the requirements of section 401 or 409 or subsection (e)(7), or 
        as engaging in a prohibited transaction for purposes of 
        subsection (d)(3), merely by reason of any distribution (as 
        described in section 1368(a)) with respect to S corporation 
        stock that constitutes qualifying employer securities, which in 
        accordance with the plan provisions is used to make payments on 
        a loan described in subsection (d)(3) the proceeds of which 
        were used to acquire such qualifying employer securities 
        (whether or not allocated to participants). The preceding 
        sentence shall not apply in the case of a distribution which is 
        paid with respect to any employer security which is allocated 
        to a participant unless the plan provides that employer 
        securities with a fair market value of not less than the amount 
        of such distribution are allocated to such participant for the 
        year which (but for the preceding sentence) such distribution 
        would have been allocated to such participant.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions with respect to S corporation stock made after 
December 31, 2003.

                Subtitle F--Protecting Employee Benefits

SEC. 1061. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.

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

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

    ``(a) Rules Relating to Constructive Receipt.--
            ``(1) In general.--
                    ``(A) Gross income inclusion.--In the case of a 
                nonqualified deferred compensation plan, all 
                compensation deferred under the plan for all taxable 
                years (to the extent not subject to a substantial risk 
                of forfeiture and not previously included in gross 
                income) shall be includible in gross income for the 
                taxable year unless at all times during the taxable 
                year the plan meets the requirements of paragraphs (2), 
                (3), and (4) and is operated in accordance with such 
requirements.
                    ``(B) Interest on tax liability payable with 
                respect to previously deferred compensation.--
                            ``(i) In general.--If compensation is 
                        required to be included in gross income under 
                        subparagraph (A) for a taxable year, the tax 
                        imposed by this chapter for such taxable year 
                        shall be increased by the amount of interest 
                        determined under clause (ii).
                            ``(ii) Interest.--For purposes of clause 
                        (i), the interest determined under this clause 
                        for any taxable year is the amount of interest 
                        at the underpayment rate plus 1 percentage 
                        point on the underpayments that would have 
                        occurred had the deferred compensation been 
                        includible in gross income for the taxable year 
                        in which first deferred or, if later, the first 
                        taxable year in which such deferred 
                        compensation is not subject to a substantial 
                        risk of forfeiture.
            ``(2) Distributions.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the plan provides that 
                compensation deferred under the plan may not be 
                distributed earlier than--
                            ``(i) separation from service as determined 
                        by the Secretary (except as provided in 
                        subparagraph (B)(i)),
                            ``(ii) disability (as defined by section 
                        223(d) of the Social Security Act),
                            ``(iii) death,
                            ``(iv) a specified time (or pursuant to a 
                        fixed schedule) specified under the plan at the 
                        date of the deferral of such compensation,
                            ``(v) to the extent provided by the 
                        Secretary, a change in the ownership or 
                        effective control of the corporation, or in the 
                        ownership of a substantial portion of the 
                        assets of the corporation, or
                            ``(vi) the occurrence of an unforeseeable 
                        emergency.
                    ``(B) Special rules.--
                            ``(i) Specified employees.--In the case of 
                        specified employees, the requirement of 
                        subparagraph (A)(i) is met only if 
                        distributions may not be made earlier than 6 
                        months after the date of separation from 
                        service. For purposes of the preceding 
                        sentence, a specified employee is a key 
                        employee (as defined in section 416(i)) of a 
                        corporation the stock in which is publicly 
                        traded on an established securities market or 
                        otherwise.
                            ``(ii) Unforeseeable emergency.--For 
                        purposes of subparagraph (A)(vi)--
                                    ``(I) In general.--The term 
                                `unforeseeable emergency' means a 
                                severe financial hardship to the 
                                participant resulting from a sudden and 
                                unexpected illness or accident of the 
                                participant, the participant's spouse, 
                                or a dependent (as defined in section 
                                152(a)) of the participant, loss of the 
                                participant's property due to casualty, 
                                or other similar extraordinary and 
                                unforeseeable circumstances arising as 
                                a result of events beyond the control 
                                of the participant.
                                    ``(II) Limitation on 
                                distributions.--The requirement of 
                                subparagraph (A)(vi) is met only if, as 
                                determined under regulations of the 
                                Secretary, the amounts distributed with 
                                respect to an emergency do not exceed 
                                the amounts necessary to satisfy such 
                                emergency plus amounts necessary to pay 
                                taxes reasonably anticipated as a 
                                result of the distribution, after 
                                taking into account the extent to which 
                                such hardship is or may be relieved 
                                through reimbursement or compensation 
                                by insurance or otherwise or by 
                                liquidation of the participant's assets 
                                (to the extent the liquidation of such 
                                assets would not itself cause severe 
                                financial hardship).
            ``(3) Acceleration of benefits.--The requirements of this 
        paragraph are met if the plan does not permit the acceleration 
        of the time or schedule of any payment under the plan, except 
        as provided in regulations by the Secretary.
            ``(4) Elections.--
                    ``(A) In general.--The requirements of this 
                paragraph are met if the requirements of subparagraphs 
                (B) and (C) are met.
                    ``(B) Initial deferral decision.--The requirements 
                of this subparagraph are met if the plan provides that 
                compensation for services performed during a taxable 
                year may be deferred at the participant's election only 
                if the election to defer such compensation is made 
                during the preceding taxable year or at such other time 
                as provided in regulations. In the case of the first 
                year in which a participant becomes eligible to 
                participate in the plan, such election may be made with 
                respect to services to be performed subsequent to the 
                election within 30 days after the date the participant 
                becomes eligible to participate in such plan.
                    ``(C) Changes in time and form of distribution.--
                The requirements of this subparagraph are met if, in 
                the case of a plan which permits under a subsequent 
                election a delay in a payment or a change in the form 
                of payment--
                            ``(i) the plan requires that such election 
                        may not take effect until at least 12 months 
                        after the date on which the election is made,
                            ``(ii) in the case an election related to a 
                        payment not described in clause (ii), (iii), or 
                        (vi) of paragraph (2)(A), the plan requires 
                        that the first payment with respect to which 
                        such election is made be deferred for a period 
                        of not less than 5 years from the date such 
                        payment would otherwise have been made, and
                            ``(iii) the plan requires that any election 
                        related to a payment described in paragraph 
                        (2)(A)(iv) may not be made less than 12 months 
                        prior to the date of the first scheduled 
                        payment under such paragraph.
    ``(b) Rules Relating to Funding.--
            ``(1) Offshore property in a trust.--In the case of assets 
        held in a trust or set aside (directly or indirectly) in 
        another arrangement, as determined by the Secretary, for 
        purposes of paying deferred compensation under a nonqualified 
        deferred compensation plan, for purposes of section 83 such 
        assets shall be treated as property transferred in connection 
        with the performance of services whether or not such assets are 
        available to satisfy claims of general creditors--
                    ``(A) at the time set aside if such assets are 
                located outside of the United States, or
                    ``(B) at the time transferred if such assets are 
                subsequently transferred outside of the United States.
            ``(2) Employer's financial health.--In the case of a 
        nonqualified deferred compensation plan, there is a transfer of 
        property within the meaning of section 83 as of the earlier 
        of--
                    ``(A) the date on which the plan first provides 
                that assets will become restricted to the provision of 
                benefits under the plan in connection with a change in 
                the employer's financial health, or
                    ``(B) the date on which assets are so restricted.
            ``(3) Income inclusion for offshore trusts and employer's 
        financial health.--For each taxable year that assets treated as 
        transferred under this subsection remain set aside in a trust 
        or other arrangement subject to paragraph (1) or (2), any 
        increase in value in, or earnings with respect to, such assets 
        shall be treated as an additional transfer of property under 
        this subsection (to the extent not previously included in 
        income).
            ``(4) Interest on tax liability payable with respect to 
        transferred property.--
                    ``(A) In general.--If amounts are required to be 
                included in gross income by reason of paragraph (1) or 
                (2) for a taxable year, the tax imposed by this chapter 
                for such taxable year shall be increased by the amount 
                of interest determined under subparagraph (B).
                    ``(B) Interest.--The interest determined under this 
                subparagraph for any taxable year is the amount of 
                interest at the underpayment rate plus 1 percentage 
                point on the underpayments that would have occurred had 
                the amounts so required to be included in gross income 
                by paragraph (1) or (2) been includible in gross income 
                for the taxable year in which such assets were first 
                set aside (directly or indirectly) in a trust (or other 
                arrangement determined by the Secretary) for purposes 
                of the nonqualified deferred compensation plan.
    ``(c) No Inference on Earlier Income Inclusion or Requirement of 
Later Inclusion.--Nothing in this section shall be construed to prevent 
the inclusion of amounts in gross income under any other provision of 
this chapter or any other rule of law earlier than the time provided in 
this section. Any amount included in gross income under this section 
shall not be required to be included in gross income under any other 
provision of this chapter or any other rule of law later than the time 
provided in this section.
    ``(d) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Nonqualified deferred compensation plan.--The term 
        `nonqualified deferred compensation plan' means any plan that 
        provides for the deferral of compensation, other than--
                    ``(A) a qualified employer plan, and
                    ``(B) any bona fide vacation leave, sick leave, 
                compensatory time, disability pay, or death benefit 
                plan.
            ``(2) Qualified employer plan.--The term `qualified 
        employer plan' means--
                    ``(A) any plan, contract, pension, account, or 
                trust described in subparagraph (A) or (B) of section 
                219(g)(5), and
                    ``(B) any eligible deferred compensation plan 
                (within the meaning of section 457(b)) of an employer 
                described in section 457(e)(1)(A).
            ``(3) Plan includes arrangements, etc.--The term `plan' 
        includes any agreement or arrangement, including an agreement 
        or arrangement that includes one person.
            ``(4) Substantial risk of forfeiture.--The rights of a 
        person to compensation are subject to a substantial risk of 
        forfeiture if such person's rights to such compensation are 
        conditioned upon the future performance of substantial services 
        by any individual.
            ``(5) Treatment of earnings.--References to deferred 
        compensation shall be treated as including references to income 
        (whether actual or notional) attributable to such compensation 
        or such income.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations--
            ``(1) providing for the determination of amounts of 
        deferral in the case of a nonqualified deferred compensation 
        plan which is a defined benefit plan,
            ``(2) relating to changes in the ownership and control of a 
        corporation or assets of a corporation for purposes of 
        subsection (a)(2)(A)(v),
            ``(3) exempting arrangements from the application of 
        subsection (b) if such arrangements will not result in an 
        improper deferral of United States tax and will not result in 
        assets being effectively beyond the reach of creditors,
            ``(4) defining financial health for purposes of subsection 
        (b)(2), and
            ``(5) disregarding a substantial risk of forfeiture in 
        cases where necessary to carry out the purposes of this 
        section.''.
    (b) W-2 Forms.--
            (1) In general.--Subsection (a) of section 6051 (relating 
        to receipts for employees) is amended by striking ``and'' at 
        the end of paragraph (10), by striking the period at the end of 
        paragraph (11) and inserting ``, and'', and by inserting after 
        paragraph (11) the following new paragraph:
            ``(12) the total amount of deferrals under a nonqualified 
        deferred compensation plan (within the meaning of section 
        409A(d)).''.
            (2) Threshold.--Subsection (a) of section 6051 is amended 
        by adding at the end the following: ``In the case of the 
        amounts required to be shown by paragraph (12), the Secretary 
        (by regulation) may establish a minimum amount of deferrals 
        below which paragraph (12) does not apply and may provide that 
        paragraph (12) does not apply with respect to amounts of 
        deferrals which are not reasonably ascertainable.''.
    (c) Conforming and Clerical Amendments.--
            (1) Section 414(b) is amended by inserting ``409A,'' after 
        ``408(p),''.
            (2) Section 414(c) is amended by inserting ``409A,'' after 
        ``408(p),''.
            (3) The table of sections for such subpart A of part I of 
        subchapter D of chapter 1 is amended by adding at the end the 
        following new item:

                              ``Sec. 409A. Inclusion in gross income of 
                                        deferred compensation under 
                                        nonqualified deferred 
                                        compensation plans.''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        amounts deferred in taxable years beginning after December 31, 
        2003.
            (2) Amounts deferred in 2004 under certain irrevocable 
        elections and binding arrangements.--The amendments made by 
        this section shall not apply to amounts deferred in taxable 
        years beginning after December 31, 2003, and before January 1, 
        2005, pursuant to an irrevocable election or binding 
        arrangement made before October 24, 2003.
            (3) Earnings attributable to amount previously deferred.--
        The amendments made by this section shall apply to earnings on 
        deferred compensation only to the extent that such amendments 
        apply to such compensation.
    (e) Guidance Relating to Change of Ownership or Control.--Not later 
than 90 days after the date of the enactment of this Act, the Secretary 
of the Treasury shall issue guidance on what constitutes a change in 
ownership or effective control for purposes of section 409A of the 
Internal Revenue Code of 1986, as added by this section.
    (f) Guidance Relating to Termination of Certain Existing 
Arrangements.--Not later than 90 days after the date of the enactment 
of this Act, the Secretary of the Treasury shall issue guidance 
providing a limited period during which an individual participating in 
a nonqualified deferred compensation plan adopted on or before December 
31, 2003, may, without violating the requirements of paragraphs (2), 
(3), and (4) of section 409A(a)(2) of the Internal Revenue Code of 1986 
(as added by this section), terminate participation or cancel an 
outstanding deferral election with regard to amounts earned after 
December 31, 2003, if such amounts are includible in income as earned.

SEC. 1062. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE STOCK 
              PURCHASE PLAN STOCK OPTIONS FROM WAGES.

    (a) Exclusion From Employment Taxes.--
            (1) Social security taxes.--
                    (A) Section 3121(a) (relating to definition of 
                wages) is amended by striking ``or'' at the end of 
                paragraph (20), by striking the period at the end of 
                paragraph (21) and inserting ``; or'', and by inserting 
                after paragraph (21) the following new paragraph:
            ``(22) remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
                    (B) Section 209(a) of the Social Security Act is 
                amended by striking ``or'' at the end of paragraph 
                (17), by striking the period at the end of paragraph 
                (18) and inserting ``; or'', and by inserting after 
                paragraph (18) the following new paragraph:
            ``(19) Remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b) of the 
                Internal Revenue Code of 1986) or under an employee 
                stock purchase plan (as defined in section 423(b) of 
                such Code), or
                    ``(B) any disposition by the individual of such 
                stock.''.
            (2) Railroad retirement taxes.--Subsection (e) of section 
        3231 is amended by adding at the end the following new 
        paragraph:
            ``(11) Qualified stock options.--The term `compensation' 
        shall not include any remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
            (3) Unemployment taxes.--Section 3306(b) (relating to 
        definition of wages) is amended by striking ``or'' at the end 
        of paragraph (16), by striking the period at the end of 
        paragraph (17) and inserting ``; or'', and by inserting after 
        paragraph (17) the following new paragraph:
            ``(18) remuneration on account of--
                    ``(A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an incentive 
                stock option (as defined in section 422(b)) or under an 
                employee stock purchase plan (as defined in section 
                423(b)), or
                    ``(B) any disposition by the individual of such 
                stock.''.
    (b) Wage Withholding Not Required on Disqualifying Dispositions.--
Section 421(b) (relating to effect of disqualifying dispositions) is 
amended by adding at the end the following new sentence: ``No amount 
shall be required to be deducted and withheld under chapter 24 with 
respect to any increase in income attributable to a disposition 
described in the preceding sentence.''.
    (c) Wage Withholding Not Required on Compensation Where Option 
Price Is Between 85 Percent and 100 Percent of Value of Stock.--Section 
423(c) (relating to special rule where option price is between 85 
percent and 100 percent of value of stock) is amended by adding at the 
end the following new sentence: ``No amount shall be required to be 
deducted and withheld under chapter 24 with respect to any amount 
treated as compensation under this subsection.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to stock acquired pursuant to options exercised after the date of 
the enactment of this Act.

SEC. 1063. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE 
              HEALTH ACCOUNTS.

    Paragraph (5) of section 420(b) (relating to expiration) is amended 
by striking ``December 31, 2005'' and inserting ``December 31, 2013''.

                 Subtitle G--Treatment of Active Income

SEC. 1071. MEMBER STATES OF THE EUROPEAN UNION TREATED AS A SINGLE 
              COUNTRY FOR CERTAIN PURPOSES.

    (a) In General.--Subsection (d) of section 954 is amended by adding 
at the end the following new paragraph:
            ``(5) Treatment of member states of the european union.--
        For purposes of this subsection and subsection (e), in the case 
        of a controlled foreign corporation which is created or 
        organized under the laws of a member state of the European 
        Union, all member states of the European Union shall be treated 
        as 1 country.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2008, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 1072. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED 
              FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING 
              COMPANY INCOME RULES.

    (a) In General.--Subsection (c) of section 954 is amended by adding 
after paragraph (3) the following new paragraph:
            ``(4) Look-thru in the case of related controlled foreign 
        corporations.--For purposes of this subsection, dividends, 
        interest, rents, and royalties received or accrued from a 
        controlled foreign corporation which is a related person (as 
        defined in subsection (d)(3)) shall not be treated as foreign 
        personal holding company income to the extent attributable or 
        properly allocable (determined under rules similar to the rules 
        of subparagraphs (C) and (D) of section 904(d)(3)) to income of 
        the related person which is not subpart F income (as defined in 
        section 952). The Secretary shall prescribe such regulations as 
        may be appropriate to prevent the abuse of the purposes of this 
        paragraph.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2006, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 1073. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

    (a) In General.--Section 954(c) (defining foreign personal holding 
company income) is amended by adding after paragraph (4) the following 
new paragraph:
            ``(5) Look-thru rule for certain partnership sales.--
                    ``(A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest in a 
                partnership with respect to which such corporation is a 
                25-percent owner, such corporation shall be treated for 
                purposes of this subsection as selling the 
                proportionate share of the assets of the partnership 
                attributable to such interest.
                    ``(B) 25-percent owner.--For purposes of this 
                paragraph, the term `25-percent owner' means a 
                controlled foreign corporation which owns (within the 
                meaning of section 958(a)) 25 percent or more of the 
                capital or profits interest in the partnership.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2006, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 1074. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN 
              INVESTMENT COMPANY RULES.

    (a) General Rule.--The following provisions are hereby repealed:
            (1) Part III of subchapter G of chapter 1 (relating to 
        foreign personal holding companies).
            (2) Section 1246 (relating to gain on foreign investment 
        company stock).
            (3) Section 1247 (relating to election by foreign 
        investment companies to distribute income currently).
    (b) Exemption of Foreign Corporations From Personal Holding Company 
Rules.--
            (1) In general.--Subsection (c) of section 542 (relating to 
        exceptions) is amended--
                    (A) by striking paragraph (5) and inserting the 
                following:
            ``(5) a foreign corporation,'',
                    (B) by striking paragraphs (7) and (10) and by 
                redesignating paragraphs (8) and (9) as paragraphs (7) 
                and (8), respectively,
                    (C) by inserting ``and'' at the end of paragraph 
                (7) (as so redesignated), and
                    (D) by striking ``; and'' at the end of paragraph 
                (8) (as so redesignated) and inserting a period.
            (2) Treatment of income from personal service contracts.--
        Paragraph (1) of section 954(c) is amended by adding at the end 
        the following new subparagraph:
                    ``(H) Personal service contracts.--
                            ``(i) Amounts received under a contract 
                        under which the corporation is to furnish 
                        personal services if--
                                    ``(I) some person other than the 
                                corporation has the right to designate 
                                (by name or by description) the 
                                individual who is to perform the 
                                services, or
                                    ``(II) the individual who is to 
                                perform the services is designated (by 
                                name or by description) in the 
                                contract, and
                            ``(ii) amounts received from the sale or 
                        other disposition of such a contract.
                This subparagraph shall apply with respect to amounts 
                received for services under a particular contract only 
                if at some time during the taxable year 25 percent or 
                more in value of the outstanding stock of the 
                corporation is owned, directly or indirectly, by or for 
                the individual who has performed, is to perform, or may 
                be designated (by name or by description) as the one to 
                perform, such services.''
    (c) Conforming Amendments.--
            (1) Clause (iii) of section 1(h)(11)(C) is amended by 
        striking ``a foreign personal holding company (as defined in 
        section 552), a foreign investment company (as defined in 
        section 1246(b)), or''.
            (2) Paragraph (2) of section 171(c) is amended--
                    (A) by striking ``, or by a foreign personal 
                holding company, as defined in section 552'', and
                    (B) by striking ``or foreign personal holding 
                company''.
            (3) Paragraph (2) of section 245(a) is amended by striking 
        ``foreign personal holding company or''.
            (4) Section 312 is amended by striking subsection (j).
            (5) Subsection (m) of section 312 is amended by striking 
        ``, a foreign investment company (within the meaning of section 
        1246(b)), or a foreign personal holding company (within the 
        meaning of section 552)''.
            (6) Subsection (e) of section 443 is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) and (5) as 
        paragraphs (3) and (4), respectively.
            (7) Subparagraph (B) of section 465(c)(7) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (8) Paragraph (1) of section 543(b) is amended by inserting 
        ``and'' at the end of subparagraph (A), by striking ``, and'' 
        at the end of subparagraph (B) and inserting a period, and by 
        striking subparagraph (C).
            (9) Paragraph (1) of section 562(b) is amended by striking 
        ``or a foreign personal holding company described in section 
        552''.
            (10) Section 563 is amended--
                    (A) by striking subsection (c),
                    (B) by redesignating subsection (d) as subsection 
                (c), and
                    (C) by striking ``subsection (a), (b), or (c)'' in 
                subsection (c) (as so redesignated) and inserting 
                ``subsection (a) or (b)''.
            (11) Subsection (d) of section 751 is amended by adding 
        ``and'' at the end of paragraph (2), by striking paragraph (3), 
        by redesignating paragraph (4) as paragraph (3), and by 
        striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so 
        redesignated) and inserting ``paragraph (1) or (2)''.
            (12) Paragraph (2) of section 864(d) is amended by striking 
        subparagraph (A) and by redesignating subparagraphs (B) and (C) 
        as subparagraphs (A) and (B), respectively.
            (13)(A) Subparagraph (A) of section 898(b)(1) is amended to 
        read as follows:
                    ``(A) which is treated as a controlled foreign 
                corporation for any purpose under subpart F of part III 
                of this subchapter, and''.
            (B) Subparagraph (B) of section 898(b)(2) is amended by 
        striking ``and sections 551(f) and 554, whichever are 
        applicable,''.
            (C) Paragraph (3) of section 898(b) is amended to read as 
        follows:
            ``(3) United states shareholder.--The term `United States 
        shareholder' has the meaning given to such term by section 
        951(b), except that, in the case of a foreign corporation 
        having related person insurance income (as defined in section 
        953(c)(2)), the Secretary may treat any person as a United 
        States shareholder for purposes of this section if such person 
        is treated as a United States shareholder under section 
        953(c)(1).''
            (D) Subsection (c) of section 898 is amended to read as 
        follows:
    ``(c) Determination of Required Year.--
            ``(1) In general.--The required year is--
                    ``(A) the majority U.S. shareholder year, or
                    ``(B) if there is no majority U.S. shareholder 
                year, the taxable year prescribed under regulations.
            ``(2) 1-month deferral allowed.--A specified foreign 
        corporation may elect, in lieu of the taxable year under 
        paragraph (1)(A), a taxable year beginning 1 month earlier than 
        the majority U.S. shareholder year.
            ``(3) Majority u.s. shareholder year.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `majority U.S. shareholder year' means the 
                taxable year (if any) which, on each testing day, 
                constituted the taxable year of--
                            ``(i) each United States shareholder 
                        described in subsection (b)(2)(A), and
                            ``(ii) each United States shareholder not 
                        described in clause (i) whose stock was treated 
                        as owned under subsection (b)(2)(B) by any 
                        shareholder described in such clause.
                    ``(B) Testing day.--The testing days shall be--
                            ``(i) the first day of the corporation's 
                        taxable year (determined without regard to this 
                        section), or
                            ``(ii) the days during such representative 
                        period as the Secretary may prescribe.''
            (14) Clause (ii) of section 904(d)(2)(A) is amended to read 
        as follows:
                            ``(ii) Certain amounts included.--Except as 
                        provided in clause (iii), the term `passive 
                        income' includes, except as provided in 
                        subparagraph (E)(iii) or paragraph (3)(I), any 
                        amount includible in gross income under section 
                        1293 (relating to certain passive foreign 
                        investment companies).''
            (15)(A) Subparagraph (A) of section 904(g)(1) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (B) The paragraph heading of paragraph (2) of section 
        904(g) is amended by striking ``foreign personal holding or''.
            (16) Section 951 is amended by striking subsections (c) and 
        (d) and by redesignating subsections (e) and (f) as subsections 
        (c) and (d), respectively.
            (17) Paragraph (3) of section 989(b) is amended by striking 
        ``, 551(a),''.
            (18) Paragraph (5) of section 1014(b) is amended by 
        inserting ``and before January 1, 2008,'' after ``August 26, 
        1937,''.
            (19) Subsection (a) of section 1016 is amended by striking 
        paragraph (13).
            (20)(A) Paragraph (3) of section 1212(a) is amended to read 
        as follows:
            ``(3) Special rules on carrybacks.--A net capital loss of a 
        corporation shall not be carried back under paragraph (1)(A) to 
        a taxable year--
                    ``(A) for which it is a regulated investment 
                company (as defined in section 851), or
                    ``(B) for which it is a real estate investment 
                trust (as defined in section 856).''
            (B) The amendment made by subparagraph (A) shall apply to 
        taxable years beginning after December 31, 2006.
            (21) Section 1223 is amended by striking paragraph (10) and 
        by redesignating the following paragraphs accordingly.
            (22) Subsection (d) of section 1248 is amended by striking 
        paragraph (5) and by redesignating paragraphs (6) and (7) as 
        paragraphs (5) and (6), respectively.
            (23) Paragraph (2) of section 1260(c) is amended by 
        striking subparagraphs (H) and (I) and by redesignating 
        subparagraph (J) as subparagraph (H).
            (24)(A) Subparagraph (F) of section 1291(b)(3) is amended 
        by striking ``551(d), 959(a),'' and inserting ``959(a)''.
            (B) Subsection (e) of section 1291 is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the American Jobs Creation Act of 2003)'' after ``section 
        1246''.
            (25) Paragraph (2) of section 1294(a) is amended to read as 
        follows:
            ``(2) Election not permitted where amounts otherwise 
        includible under section 951.--The taxpayer may not make an 
        election under paragraph (1) with respect to the undistributed 
        PFIC earnings tax liability attributable to a qualified 
        electing fund for the taxable year if any amount is includible 
        in the gross income of the taxpayer under section 951 with 
        respect to such fund for such taxable year.''
            (26) Section 6035 is hereby repealed.
            (27) Subparagraph (D) of section 6103(e)(1) is amended by 
        striking clause (iv) and redesignating clauses (v) and (vi) as 
        clauses (iv) and (v), respectively.
            (28) Subparagraph (B) of section 6501(e)(1) is amended to 
        read as follows:
                    ``(B) Constructive dividends.--If the taxpayer 
                omits from gross income an amount properly includible 
                therein under section 951(a), the tax may be assessed, 
                or a proceeding in court for the collection of such tax 
                may be done without assessing, at any time within 6 
                years after the return was filed.''
            (29) Subsection (a) of section 6679 is amended--
                    (A) by striking ``6035, 6046, or 6046A'' in 
                paragraph (1) and inserting ``6046 or 6046A'', and
                    (B) by striking paragraph (3).
            (30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
        are each amended by striking ``556(b)(2),'' each place it 
        appears.
            (31) The table of parts for subchapter G of chapter 1 is 
        amended by striking the item relating to part III.
            (32) The table of sections for part IV of subchapter P of 
        chapter 1 is amended by striking the items relating to sections 
        1246 and 1247.
            (33) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6035.
            (34) Sections 163(e)(3)(B)(i) and 267(a)(3)(B)(i) are each 
        amended by--
                    (A) striking ``a foreign personal holding company 
                (as defined in section 552),'', and
                    (B) striking the comma after ``(as defined in 
                section 957)''.
    (d) Effective Date.--Except as otherwise provided in this section, 
the amendments made by this section shall apply to taxable years of 
foreign corporations beginning after December 31, 2006, and to taxable 
years of United States shareholders with or within which such taxable 
years of foreign corporations end.

SEC. 1075. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION 
              INCOME.

    (a) In General.--Section 954(g)(1) (defining foreign base company 
oil related income) is amended by striking ``or'' at the end of 
subparagraph (A), by striking the period at the end of subparagraph (B) 
and inserting ``, or'', and by inserting after subparagraph (B) the 
following new subparagraph:
                    ``(C) the pipeline transportation of oil or gas 
                within such foreign country.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 1076. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME 
              WITH RESPECT TO TRANSACTIONS IN COMMODITIES.

    (a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C) 
(relating to commodity transactions) are amended to read as follows:
                            ``(i) arise out of commodity hedging 
                        transactions (as defined in paragraph (6)(A)),
                            ``(ii) are active business gains or losses 
                        from the sale of commodities, but only if 
                        substantially all of the controlled foreign 
                        corporation's commodities are property 
                        described in paragraph (1), (2), or (8) of 
                        section 1221(a), or''.
    (b) Definition and Special Rules.--Subsection (c) of section 954 is 
amended by adding after paragraph (5) the following new paragraph:
            ``(6) Definition and special rules relating to commodity 
        transactions.--
                    ``(A) Commodity hedging transactions.--For purposes 
                of paragraph (1)(C)(i), the term `commodity hedging 
                transaction' means any transaction with respect to a 
                commodity if such transaction--
                            ``(i) is a hedging transaction as defined 
                        in section 1221(b)(2), determined--
                                    ``(I) without regard to 
                                subparagraph (A)(ii) thereof,
                                    ``(II) by applying subparagraph 
                                (A)(i) thereof by substituting 
                                `ordinary property or property 
                                described in section 1231(b)' for 
                                `ordinary property', and
                                    ``(III) by substituting `controlled 
                                foreign corporation' for `taxpayer' 
                                each place it appears, and
                            ``(ii) is clearly identified as such in 
                        accordance with section 1221(a)(7).
                    ``(B) Regulations.--The Secretary shall prescribe 
                such regulations as are appropriate to carry out the 
                purposes of paragraph (1)(C) in the case of 
                transactions involving related persons.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after December 31, 2004.

SEC. 1077. REPEAL OF CFC RULES ON FOREIGN BASE COMPANY SHIPPING INCOME.

    (a) Elimination of Foreign Base Company Shipping Income.--Section 
954 (relating to foreign base company income) is amended--
            (1) by striking paragraph (4) of subsection (a) (relating 
        to foreign base company shipping income), and
            (2) by striking subsection (f) (relating to foreign base 
        company shipping income).
    (b) Safe Harbor for Certain Leasing Activities.--Subparagraph (A) 
of section 954(c)(2) is amended by adding at the end the following new 
sentence: ``For purposes of the preceding sentence, rents derived from 
leasing an aircraft or vessel in foreign commerce shall not fail to be 
treated as derived in the active conduct of a trade or business if, as 
determined under regulations prescribed by the Secretary, the active 
leasing expenses are not less than 10 percent of the profit on the 
lease.''
    (c) Conforming Amendments.--
            (1) Section 952(c)(1)(B)(iii) is amended by striking 
        subclause (I) and redesignating subclauses (II) through (VI) as 
        subclauses (I) through (V), respectively.
            (2) Subsection (b) of section 954 is amended--
                    (A) by striking ``the foreign base company shipping 
                income,'' in paragraph (5),
                    (B) by striking paragraphs (6) and (7), and
                    (C) by redesignating paragraph (8) as paragraph 
                (6).
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 1078. MODIFICATION OF SUBPART F EXEMPTION FOR ACTIVE FINANCING.

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

SEC. 1079. PARTIAL EXCLUSION FOR INCOME ATTRIBUTABLE TO FILMS USED 
              OUTSIDE THE UNITED STATES.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by inserting 
after section 139 the following new section:

``SEC. 139A. INCOME ATTRIBUTABLE TO FILMS USED OUTSIDE THE UNITED 
              STATES.

    ``(a) Exclusion.--
            ``(1) In general.--There shall be excluded from gross 
        income an amount equal to the applicable percentage of 
        qualified film income.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage shall be determined in 
        accordance with the following table:

                ``For taxable years ending
                                                         The applicable
                  in calendar year--
                                                        percentage is--
                    2007...................................          1 
                    2008...................................          2 
                    2009...................................          3 
                    2010...................................          5 
                    2011...................................          8 
                    2012...................................          9 
                    2013 or thereafter.....................         10.
    ``(b) Qualified Film Income.--For purposes of this section--
            ``(1) In general.--The term `qualified film income' means 
        gross income from a license of a qualified film in the ordinary 
        course of a trade or business for the exploitation or direct 
        use outside the United States less any associated film costs.
            ``(2) Exceptions.--
                    ``(A) Certain uses.--Such term does not include 
                exploitation of characters, soundtracks, designs, 
                scripts, scores, or any other ancillary intangibles 
                associated with the qualified film.
                    ``(B) Related person license.--
                            ``(i) In general.--Such term does not 
                        include any amount from the license of a 
                        qualified film to a related person.
                            ``(ii) Exception.--Clause (i) shall not 
                        apply if such film is held for license by such 
                        related person to an unrelated person for the 
                        direct use or exploitation by such unrelated 
                        person outside the United States.
                            ``(iii) Related person.--For purposes of 
                        this subparagraph, a person shall be related to 
                        another person if such persons are treated as a 
single employer under subsection (a) or (b) of section 52 or subsection 
(m) or (o) of section 414, except that determinations under subsections 
(a) and (b) of section 52 shall be made without regard to section 
1563(b).
    ``(c) Other Definitions.--For purposes of this section--
            ``(1) Qualified Film.--The term `qualified film' means 
        property described in section 168(f)(3) the original use of 
        which commences after December 31, 2006, if not less than 50 
        percent of the total compensation relating to the production of 
        such property is compensation for services performed in the 
        United States by actors, production personnel, directors, and 
        producers. Such term does not include property with respect to 
        which records are required to be maintained under section 2257 
        of title 18, United States Code.
            ``(2) Associated film costs.--The term `associated film 
        costs' means any expense properly apportioned and allocated to 
        income taken into account under subsection (b)(1), determined 
        as provided under regulations prescribed by the Secretary.
    ``(d) Election.--The taxpayer may elect not to apply this section 
to a qualified film. Such election shall be made by the due date 
(including extensions of time) for filing the return for the taxable 
year in which such film is placed in service, and, once made for such 
film, such election shall be irrevocable.
    ``(e) Denial of Foreign Tax Credit.--
            ``(1) In general.--No credit shall be allowed under section 
        901 for any taxes paid or accrued (or treated as paid or 
        accrued) with respect to the excludable portion of any 
        qualified film income. No deduction shall be allowed under this 
        chapter for any tax for which credit is not allowable by reason 
        of the preceding sentence.
            ``(2) Excludable portion.--For purposes of paragraph (1), 
        the taxes paid or accrued (or treated as paid or accrued) with 
        respect to the excludable portion is the amount which bears the 
        same ratio to the amount of taxes paid or accrued (or treated 
        as paid or accrued) with respect to qualified film income as 
        the amount excluded under subsection (a) for the taxable year 
        bears to the qualified film income for such year.''.
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by inserting after the item 
relating to section 139 the following new item:

                              ``Sec. 139A. Income attributable to films 
                                        used outside the United 
                                        States.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 2006.

          Subtitle H--Reduction of Double Taxation of Earnings

SEC. 1081. INTEREST EXPENSE ALLOCATION RULES.

    (a) Election To Allocate on Worldwide Basis.--Section 864 is 
amended by redesignating subsection (f) as subsection (g) and by 
inserting after subsection (e) the following new subsection:
    ``(f) Election To Allocate Interest, etc. on Worldwide Basis.--For 
purposes of this subchapter, at the election of the worldwide 
affiliated group--
            ``(1) Allocation and apportionment of interest expense.--
                    ``(A) In general.--The taxable income of each 
                domestic corporation which is a member of a worldwide 
                affiliated group shall be determined by allocating and 
                apportioning interest expense of each member as if all 
                members of such group were a single corporation.
                    ``(B) Treatment of worldwide affiliated group.--The 
                taxable income of the domestic members of a worldwide 
                affiliated group from sources outside the United States 
                shall be determined by allocating and apportioning the 
                interest expense of such domestic members to such 
                income in an amount equal to the excess (if any) of--
                            ``(i) the total interest expense of the 
                        worldwide affiliated group multiplied by the 
                        ratio which the foreign assets of the worldwide 
                        affiliated group bears to all the assets of the 
                        worldwide affiliated group, over
                            ``(ii) the interest expense of all foreign 
                        corporations which are members of the worldwide 
                        affiliated group to the extent such interest 
                        expense of such foreign corporations would have 
                        been allocated and apportioned to foreign 
                        source income if this subsection were applied 
                        to a group consisting of all the foreign 
                        corporations in such worldwide affiliated 
                        group.
                    ``(C) Worldwide affiliated group.--For purposes of 
                this paragraph, the term `worldwide affiliated group' 
                means a group consisting of--
                            ``(i) the includible members of an 
                        affiliated group (as defined in section 
                        1504(a), determined without regard to 
                        paragraphs (2) and (4) of section 1504(b)), and
                            ``(ii) all controlled foreign corporations 
                        in which such members in the aggregate meet the 
                        ownership requirements of section 1504(a)(2) 
                        either directly or indirectly through applying 
                        paragraph (2) of section 958(a) or through 
                        applying rules similar to the rules of such 
                        paragraph to stock owned directly or indirectly 
                        by domestic partnerships, trusts, or estates.
            ``(2) Allocation and apportionment of other expenses.--
        Expenses other than interest which are not directly allocable 
        or apportioned to any specific income producing activity shall 
        be allocated and apportioned as if all members of the 
        affiliated group were a single corporation. For purposes of the 
        preceding sentence, the term `affiliated group' has the meaning 
given such term by section 1504 (determined without regard to paragraph 
(4) of section 1504(b)).
            ``(3) Treatment of tax-exempt assets; basis of stock in 
        nonaffiliated 10-percent owned corporations.--The rules of 
        paragraphs (3) and (4) of subsection (e) shall apply for 
        purposes of this subsection; except that paragraph (4) shall be 
        applied on worldwide affiliated group basis.
            ``(4) Treatment of certain financial institutions.--
                    ``(A) In general.--For purposes of paragraph (1), 
                any corporation described in subparagraph (B) shall be 
                treated as an includible corporation for purposes of 
                section 1504 only for purposes of applying this 
                subsection separately to corporations so described.
                    ``(B) Description.--A corporation is described in 
                this subparagraph if--
                            ``(i) such corporation is a financial 
                        institution described in section 581 or 591,
                            ``(ii) the business of such financial 
                        institution is predominantly with persons other 
                        than related persons (within the meaning of 
                        subsection (d)(4)) or their customers, and
                            ``(iii) such financial institution is 
                        required by State or Federal law to be operated 
                        separately from any other entity which is not 
                        such an institution.
                    ``(C) Treatment of bank holding companies.--To the 
                extent provided in regulations--
                            ``(i) a bank holding company (within the 
                        meaning of section 2(a) of the Bank Holding 
                        Company Act of 1956 (12 U.S.C. 1841(a))),
                            ``(ii) a financial holding company (within 
                        the meaning of section 2(p) of such Act), and
                            ``(iii) any subsidiary of a financial 
                        institution described in section 581 or 591, or 
                        any such bank or financial holding company, if 
                        such subsidiary is predominantly engaged 
                        (directly or indirectly) in the active conduct 
                        of a banking, financing, or similar business,
                shall be treated as a corporation described in 
                subparagraph (B).
            ``(5) Election to expand financial institution group of 
        worldwide group.--
                    ``(A) In general.--If a worldwide affiliated group 
                elects the application of this subsection, all 
                financial corporations which--
                            ``(i) are members of such worldwide 
                        affiliated group, but
                            ``(ii) are not corporations described in 
                        paragraph (4)(B),
                shall be treated as described in paragraph (4)(B) for 
                purposes of applying paragraph (4)(A). This subsection 
                (other than this paragraph) shall apply to any such 
                group in the same manner as this subsection (other than 
                this paragraph) applies to the pre-election worldwide 
                affiliated group of which such group is a part.
                    ``(B) Financial corporation.--For purposes of this 
                paragraph, the term `financial corporation' means any 
                corporation if at least 80 percent of its gross income 
                is income described in section 904(d)(2)(D)(ii) and the 
                regulations thereunder which is derived from 
                transactions with persons who are not related (within 
                the meaning of section 267(b) or 707(b)(1)) to the 
                corporation. For purposes of the preceding sentence, 
                there shall be disregarded any item of income or gain 
                from a transaction or series of transactions a 
                principal purpose of which is the qualification of any 
                corporation as a financial corporation.
                    ``(C) Antiabuse rules.--In the case of a 
                corporation which is a member of an electing financial 
                institution group, to the extent that such 
                corporation--
                            ``(i) distributes dividends or makes other 
                        distributions with respect to its stock after 
                        the date of the enactment of this paragraph to 
                        any member of the pre-election worldwide 
                        affiliated group (other than to a member of the 
                        electing financial institution group) in excess 
                        of the greater of--
                                    ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5-
                                taxable-year period ending with the 
                                taxable year preceding the taxable 
                                year, or
                                    ``(II) 25 percent of its average 
                                annual earnings and profits for such 5-
                                taxable-year period, or
                            ``(ii) deals with any person in any manner 
                        not clearly reflecting the income of the 
                        corporation (as determined under principles 
                        similar to the principles of section 482),
                an amount of indebtedness of the electing financial 
                institution group equal to the excess distribution or 
                the understatement or overstatement of income, as the 
                case may be, shall be recharacterized (for the taxable 
                year and subsequent taxable years) for purposes of this 
                paragraph as indebtedness of the worldwide affiliated 
                group (excluding the electing financial institution 
                group). If a corporation has not been in existence for 
                5 taxable years, this subparagraph shall be applied 
                with respect to the period it was in existence.
                    ``(D) Election.--An election under this paragraph 
                with respect to any financial institution group may be 
                made only by the common parent of the pre-election 
                worldwide affiliated group and may be made only for the 
                first taxable year beginning after December 31, 2008, 
                in which such affiliated group includes 1 or more 
                financial corporations. Such an election, once made, 
                shall apply to all financial corporations which are 
                members of the electing financial institution group for 
                such taxable year and all subsequent years unless 
revoked with the consent of the Secretary.
                    ``(E) Definitions relating to groups.--For purposes 
                of this paragraph--
                            ``(i) Pre-election worldwide affiliated 
                        group.--The term `pre-election worldwide 
                        affiliated group' means, with respect to a 
                        corporation, the worldwide affiliated group of 
                        which such corporation would (but for an 
                        election under this paragraph) be a member for 
                        purposes of applying paragraph (1).
                            ``(ii) Electing financial institution 
                        group.--The term `electing financial 
                        institution group' means the group of 
                        corporations to which this subsection applies 
                        separately by reason of the application of 
                        paragraph (4)(A) and which includes financial 
                        corporations by reason of an election under 
                        subparagraph (A).
                    ``(F) Regulations.--The Secretary shall prescribe 
                such regulations as may be appropriate to carry out 
                this subsection, including regulations--
                            ``(i) providing for the direct allocation 
                        of interest expense in other circumstances 
                        where such allocation would be appropriate to 
                        carry out the purposes of this subsection,
                            ``(ii) preventing assets or interest 
                        expense from being taken into account more than 
                        once, and
                            ``(iii) dealing with changes in members of 
                        any group (through acquisitions or otherwise) 
                        treated under this paragraph as an affiliated 
                        group for purposes of this subsection.
            ``(6) Election.--An election to have this subsection apply 
        with respect to any worldwide affiliated group may be made only 
        by the common parent of the domestic affiliated group referred 
        to in paragraph (1)(C) and may be made only for the first 
        taxable year beginning after December 31, 2008, in which a 
        worldwide affiliated group exists which includes such 
        affiliated group and at least one foreign corporation. Such an 
        election, once made, shall apply to such common parent and all 
        other corporations which are members of such worldwide 
        affiliated group for such taxable year and all subsequent years 
        unless revoked with the consent of the Secretary.''.
    (b) Expansion of Regulatory Authority.--Paragraph (7) of section 
864(e) is amended--
            (1) by inserting before the comma at the end of 
        subparagraph (B) ``and in other circumstances where such 
        allocation would be appropriate to carry out the purposes of 
        this subsection'', and
            (2) by striking ``and'' at the end of subparagraph (E), by 
        redesignating subparagraph (F) as subparagraph (G), and by 
        inserting after subparagraph (E) the following new 
        subparagraph:
                    ``(F) preventing assets or interest expense from 
                being taken into account more than once, and''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

SEC. 1082. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

    (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), 
(k), and (l) respectively, and by inserting after subsection (f) the 
following new subsection:
    ``(g) Recharacterization of Overall Domestic Loss.--
            ``(1) General rule.--For purposes of this subpart and 
        section 936, in the case of any taxpayer who sustains an 
        overall domestic loss for any taxable year beginning after 
        December 31, 2005, that portion of the taxpayer's taxable 
        income from sources within the United States for each 
        succeeding taxable year which is equal to the lesser of--
                    ``(A) the amount of such loss (to the extent not 
                used under this paragraph in prior taxable years), or
                    ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
            ``(2) Overall domestic loss defined.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                    ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer chose the benefits of this subpart for 
                such taxable year.
            ``(3) Characterization of subsequent income.--
                    ``(A) In general.--Any income from sources within 
                the United States that is treated as income from 
                sources without the United States under paragraph (1) 
                shall be allocated among and increase the income 
                categories in proportion to the loss from sources 
                within the United States previously allocated to those 
                income categories.
                    ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given such term by subsection (f)(5)(E)(i).
            ``(4) Coordination with subsection (f).--The Secretary 
        shall prescribe such regulations as may be necessary to 
        coordinate the provisions of this subsection with the 
        provisions of subsection (f).''
    (b) Conforming Amendments.--
            (1) Section 535(d)(2) is amended by striking ``section 
        904(g)(6)'' and inserting ``section 904(h)(6)''.
            (2) Subparagraph (A) of section 936(a)(2) is amended by 
        striking ``section 904(f)'' and inserting ``subsections (f) and 
        (g) of section 904''.
    (c) Effective Date.--The amendments made by this section shall 
apply to losses sustained for taxable years beginning after December 
31, 2005.

SEC. 1083. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.

    (a) In General.--Paragraph (1) of section 904(d) (relating to 
separate application of section with respect to certain categories of 
income) is amended to read as follows:
            ``(1) In general.--The provisions of subsections (a), (b), 
        and (c) and sections 902, 907, and 960 shall be applied 
        separately with respect to--
                    ``(A) passive category income, and
                    ``(B) general category income.''
    (b) Categories.--Paragraph (2) of section 904(d) is amended by 
striking subparagraph (B), by redesignating subparagraph (A) as 
subparagraph (B), and by inserting before subparagraph (B) (as so 
redesignated) the following new subparagraph:
                    ``(A) Categories.--
                            ``(i) Passive category income.--The term 
                        `passive category income' means passive income 
                        and specified passive category income.
                            ``(ii) General category income.--The term 
                        `general category income' means income other 
                        than passive category income.''
    (c) Specified Passive Category Income.--Subparagraph (B) of section 
904(d)(2), as so redesignated, is amended by adding at the end the 
following new clause:
                            ``(v) Specified passive category income.--
                        The term `specified passive category income' 
                        means--
                                    ``(I) dividends from a DISC or 
                                former DISC (as defined in section 
                                992(a)) to the extent such dividends 
                                are treated as income from sources 
                                without the United States,
                                    ``(II) taxable income attributable 
                                to foreign trade income (within the 
                                meaning of section 923(b)), and
                                    ``(III) distributions from a FSC 
                                (or a former FSC) out of earnings and 
                                profits attributable to foreign trade 
                                income (within the meaning of section 
                                923(b)) or interest or carrying charges 
                                (as defined in section 927(d)(1)) 
                                derived from a transaction which 
                                results in foreign trade income (as 
                                defined in section 923(b)).''
    (d) Treatment of Financial Services.--Paragraph (2) of section 
904(d) is amended by striking subparagraph (D), by redesignating 
subparagraph (C) as subparagraph (D), and by inserting before 
subparagraph (D) (as so redesignated) the following new subparagraph:
                    ``(C) Treatment of financial services income and 
                companies.--
                            ``(i) In general.--Financial services 
                        income shall be treated as general category 
                        income in the case of--
                                    ``(I) a member of a financial 
                                services group, and
                                    ``(II) any other person if such 
                                person is predominantly engaged in the 
                                active conduct of a banking, insurance, 
                                financing, or similar business.
                            ``(ii) Financial services group.--The term 
                        `financial services group' means any affiliated 
                        group (as defined in section 1504(a) without 
                        regard to paragraphs (2) and (3) of section 
                        1504(b)) which is predominantly engaged in the 
                        active conduct of a banking, insurance, 
                        financing, or similar business. In determining 
                        whether such a group is so engaged, there shall 
                        be taken into account only the income of 
                        members of the group that are--
                                    ``(I) United States corporations, 
                                or
                                    ``(II) controlled foreign 
                                corporations in which such United 
                                States corporations own, directly or 
                                indirectly, at least 80 percent of the 
                                total voting power and value of the 
                                stock.
                            ``(iii) Pass-thru entities.--The Secretary 
                        shall by regulation specify for purposes of 
                        this subparagraph the treatment of financial 
                        services income received or accrued by 
                        partnerships and by other pass-thru entities 
                        which are not members of a financial services 
                        group.''
    (e) Conforming Amendments.--
            (1) Clause (iii) of section 904(d)(2)(B) (relating to 
        exceptions from passive income), as so redesignated, is amended 
        by striking subclause (I) and by redesignating subclauses (II) 
        and (III) as subclauses (I) and (II), respectively.
            (2) Clause (i) of section 904(d)(2)(D) (defining financial 
        services income), as so redesignated, is amended by adding 
        ``or'' at the end of subclause (I) and by striking subclauses 
        (II) and (III) and inserting the following new subclause:
                                    ``(II) passive income (determined 
                                without regard to subparagraph 
                                (B)(iii)(II)).''
            (3) Section 904(d)(2)(D) (defining financial services 
        income), as so redesignated, is amended by striking clause 
        (iii).
            (4) Paragraph (3) of section 904(d) is amended to read as 
        follows:
            ``(3) Look-thru in case of controlled foreign 
        corporations.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, dividends, interest, rents, and 
                royalties received or accrued by the taxpayer from a 
                controlled foreign corporation in which the taxpayer is 
                a United States shareholder shall not be treated as 
                passive category income.
                    ``(B) Subpart f inclusions.--Any amount included in 
                gross income under section 951(a)(1)(A) shall be 
                treated as passive category income to the extent the 
                amount so included is attributable to passive category 
                income.
                    ``(C) Interest, rents, and royalties.--Any 
                interest, rent, or royalty which is received or accrued 
                from a controlled foreign corporation in which the 
                taxpayer is a United States shareholder shall be 
                treated as passive category income to the extent it is 
                properly allocable (under regulations prescribed by the 
                Secretary) to passive category income of the controlled 
                foreign corporation.
                    ``(D) Dividends.--Any dividend paid out of the 
                earnings and profits of any controlled foreign 
                corporation in which the taxpayer is a United States 
                shareholder shall be treated as passive category income 
                in proportion to the ratio of--
                            ``(i) the portion of the earnings and 
                        profits attributable to passive category 
                        income, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(E) Look-thru applies only where subpart f 
                applies.--If a controlled foreign corporation meets the 
                requirements of section 954(b)(3)(A) (relating to de 
                minimis rule) for any taxable year, for purposes of 
                this paragraph, none of its foreign base company income 
                (as defined in section 954(a) without regard to section 
                954(b)(5)) and none of its gross insurance income (as 
                defined in section 954(b)(3)(C)) for such taxable year 
                shall be treated as passive category income, except 
                that this sentence shall not apply to any income which 
                (without regard to this sentence) would be treated as 
                financial services income. Solely for purposes of 
                applying subparagraph (D), passive income of a 
                controlled foreign corporation shall not be treated as 
                passive category income if the requirements of section 
                954(b)(4) are met with respect to such income.
                    ``(F) Coordination with high-taxed income 
                provisions.--
                            ``(i) In determining whether any income of 
                        a controlled foreign corporation is passive 
                        category income, subclause (II) of paragraph 
                        (2)(B)(iii) shall not apply.
                            ``(ii) Any income of the taxpayer which is 
                        treated as passive category income under this 
                        paragraph shall be so treated notwithstanding 
                        any provision of paragraph (2); except that the 
                        determination of whether any amount is high-
                        taxed income shall be made after the 
                        application of this paragraph.
                    ``(G) Dividend.--For purposes of this paragraph, 
                the term `dividend' includes any amount included in 
                gross income in section 951(a)(1)(B). Any amount 
                included in gross income under section 78 to the extent 
                attributable to amounts included in gross income in 
                section 951(a)(1)(A) shall not be treated as a dividend 
                but shall be treated as included in gross income under 
                section 951(a)(1)(A).
                    ``(H) Look-thru applies to passive foreign 
                investment company inclusion.--If--
                            ``(i) a passive foreign investment company 
                        is a controlled foreign corporation, and
                            ``(ii) the taxpayer is a United States 
                        shareholder in such controlled foreign 
                        corporation,
                any amount included in gross income under section 1293 
                shall be treated as income in a separate category to 
                the extent such amount is attributable to income in 
                such category.''
            (5) Treatment of income tax base differences.--Paragraph 
        (2) of section 904(d) is amended by redesignating subparagraphs 
        (H) and (I) as subparagraphs (I) and (J), respectively, and by 
        inserting after subparagraph (G) the following new 
        subparagraph:
                    ``(H) Treatment of income tax base differences.--
                Tax imposed under the law of a foreign country or 
                possession of the United States on an amount which does 
                not constitute income under United States tax 
                principles shall be treated as imposed on income 
                described in paragraph (1)(B).''
            (6) Paragraph (2) of section 904(d) is amended by adding at 
        the end the following new subparagraph:
                    ``(K) Transitional rules for 2005 changes.--For 
                purposes of paragraph (1)--
                            ``(i) taxes carried from any taxable year 
                        beginning before January 1, 2005, to any 
                        taxable year beginning on or after such date, 
                        with respect to any item of income, shall be 
                        treated as described in the subparagraph of 
                        paragraph (1) in which such income would be 
                        described were such taxes paid or accrued in a 
                        taxable year beginning on or after such date, 
                        and
                            ``(ii) the Secretary may by regulations 
                        provide for the allocation of any carryback of 
                        taxes with respect to income to such a taxable 
                        year for purposes of allocating such income 
                        among the separate categories in effect for 
                        such taxable year.''.
            (7) Section 904(j)(3)(A)(i) is amended by striking 
        ``subsection (d)(2)(A)'' and inserting ``subsection 
        (d)(2)(B)''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 1084. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED 
              SECTION 902 CORPORATIONS.

    (a) In General.--Section 904(d)(4) (relating to look-thru rules 
apply to dividends from noncontrolled section 902 corporations) is 
amended to read as follows:
            ``(4) Look-thru applies to dividends from noncontrolled 
        section 902 corporations.--
                    ``(A) In general.--For purposes of this subsection, 
                any dividend from a noncontrolled section 902 
                corporation with respect to the taxpayer shall be 
                treated as income described in a subparagraph of 
                paragraph (1) in proportion to the ratio of--
                            ``(i) the portion of earnings and profits 
                        attributable to income described in such 
                        subparagraph, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(B) Special rules.--For purposes of this 
                paragraph--
                            ``(i) Earnings and profits.--
                                    ``(I) In general.--The rules of 
                                section 316 shall apply.
                                    ``(II) Regulations.--The Secretary 
                                may prescribe regulations regarding the 
                                treatment of distributions out of 
                                earnings and profits for periods before 
                                the taxpayer's acquisition of the stock 
                                to which the distributions relate.
                            ``(ii) Inadequate substantiation.--If the 
                        Secretary determines that the proper 
                        subparagraph of paragraph (1) in which a 
                        dividend is described has not been 
                        substantiated, such dividend shall be treated 
                        as income described in paragraph (1)(A).
                            ``(iii) Look-thru with respect to 
                        carryforwards of credit.--Rules similar to 
                        subparagraph (A) also shall apply to any 
                        carryforward under subsection (c) from a 
                        taxable year beginning before January 1, 2003, 
                        of tax allocable to a dividend from a 
                        noncontrolled section 902 corporation with 
                        respect to the taxpayer. The Secretary may by 
                        regulations provide for the allocation of any 
                        carryback of tax allocable to a dividend from a 
                        noncontrolled section 902 corporation to such a 
                        taxable year for purposes of allocating such 
                        dividend among the separate categories in 
                        effect for such taxable year.
                            ``(iv) Coordination with high-taxed income 
                        provisions.--Rules similar to the rules of 
                        paragraph (3)(F) shall apply for purposes of 
                        this paragraph.''.
    (b) Conforming Amendments.--
            (1) Section 904(d)(2)(E) is amended--
                    (A) by inserting ``or (4)'' after ``paragraph (3)'' 
                in clause (i), and
                    (B) by striking clauses (ii) and (iv) and by 
                redesignating clause (iii) as clause (ii).
            (2) Clause (i) of section 864(d)(5)(A) is amended to read 
        as follows:
                            ``(i) Subclause (I) of section 
                        904(d)(2)(B)(iii).''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 1085. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS TO APPLY 
              IN DETERMINING SECTION 902 AND 960 CREDITS.

    (a) In General.--Subsection (c) of section 902 is amended by 
redesignating paragraph (7) as paragraph (8) and by inserting after 
paragraph (6) the following new paragraph:
            ``(7) Constructive ownership through partnerships.--Stock 
        owned, directly or indirectly, by or for a partnership shall be 
        considered as being owned proportionately by its partners. 
        Stock considered to be owned by a person by reason of the 
        preceding sentence shall, for purposes of applying such 
        sentence, be treated as actually owned by such person. The 
        Secretary may prescribe such regulations as may be necessary to 
        carry out the purposes of this paragraph, including rules to 
        account for special partnership allocations of dividends, 
        credits, and other incidents of ownership of stock in 
        determining proportionate ownership.''
    (b) Clarification of Comparable Attribution Under Section 
901(b)(5).--Paragraph (5) of section 901(b) is amended by striking 
``any individual'' and inserting ``any person''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxes of foreign corporations for taxable years of such 
corporations beginning after the date of the enactment of this Act.

SEC. 1086. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF 
              INTANGIBLE PROPERTY.

    (a) In General.--Subparagraph (C) of section 367(d)(2) is amended 
by adding at the end the following new sentence: ``For purposes of 
applying section 904(d), any such amount shall be treated in the same 
manner as if such amount were a royalty.''
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts treated as received pursuant to section 367(d)(2) of the 
Internal Revenue Code of 1986 on or after August 5, 1997.

SEC. 1087. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS 
              ACQUIRED BY DEALERS IN ORDINARY COURSE OF TRADE OR 
              BUSINESS.

    (a) In General.--Section 956(c)(2) (relating to exceptions from 
property treated as United States property) is amended by striking 
``and'' at the end of subparagraph (J), by striking the period at the 
end of subparagraph (K) and inserting ``; and'', and by adding at the 
end the following new subparagraph:
                    ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if--
                            ``(i) the dealer accounts for the 
                        securities as securities held primarily for 
                        sale to customers in the ordinary course of 
                        business, and
                            ``(ii) the dealer disposes of the 
                        securities (or such securities mature while 
                        held by the dealer) within a period consistent 
                        with the holding of securities for sale to 
                        customers in the ordinary course of business.''
    (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 1088. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX 
              PAID OTHER THAN IN FUNCTIONAL CURRENCY.

    (a) In General.--Paragraph (1) of section 986(a) (relating to 
determination of foreign taxes and foreign corporation's earnings and 
profits) is amended by redesignating subparagraph (D) as subparagraph 
(E) and by inserting after subparagraph (C) the following new 
subparagraph:
                    ``(D) Elective exception for taxes paid other than 
                in functional currency.--
                            ``(i) In general.--At the election of the 
                        taxpayer, subparagraph (A) shall not apply to 
                        any foreign income taxes the liability for 
                        which is denominated in any currency other than 
                        in the taxpayer's functional currency.
                            ``(ii) Application to qualified business 
                        units.--An election under this subparagraph may 
                        apply to foreign income taxes attributable to a 
                        qualified business unit in accordance with 
                        regulations prescribed by the Secretary.
                            ``(iii) Election.--Any such election shall 
                        apply to the taxable year for which made and 
                        all subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 1089. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN 
              CORPORATIONS.

    (a) In General.--Paragraph (2) of section 871(i) (relating to tax 
not to apply to certain interest and dividends) is amended by adding at 
the end the following new subparagraph:
                    ``(D) Dividends paid by a foreign corporation which 
                are treated under section 861(a)(2)(B) as income from 
sources within the United States.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2004.

SEC. 1090. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY FOREIGN 
              PARTNERSHIPS AND FOREIGN CORPORATIONS.

    (a) In General.--Paragraph (1) of section 861(a) is amended by 
striking ``and'' at the end of subparagraph (A), by striking the period 
at the end of subparagraph (B) and inserting ``, and'', and by adding 
at the end the following new subparagraph:
                    ``(C) in the case of a foreign partnership in which 
                United States persons do not hold directly or 
                indirectly 20 percent or more of either the capital or 
                profits interests, any interest not paid by a trade or 
                business engaged in by the partnership in the United 
                States and not allocable to income which is effectively 
                connected (or treated as effectively connected) with 
                the conduct of a trade or business in the United 
                States.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 1091. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT 
              COMPANIES.

    (a) Treatment of Certain Dividends.--
            (1) Nonresident alien individuals.--Section 871 (relating 
        to tax on nonresident alien individuals) is amended by 
        redesignating subsection (k) as subsection (l) and by inserting 
        after subsection (j) the following new subsection:
    ``(k) Exemption for Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any interest-
                related dividend received from a regulated investment 
                company.
                    ``(B) Exceptions.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any interest-related dividend 
                        received from a regulated investment company by 
                        a person to the extent such dividend is 
                        attributable to interest (other than interest 
                        described in subparagraph (E) (i) or (iii)) 
                        received by such company on indebtedness issued 
                        by such person or by any corporation or 
                        partnership with respect to which such person 
                        is a 10-percent shareholder,
                            ``(ii) to any interest-related dividend 
                        with respect to stock of a regulated investment 
                        company unless the person who would otherwise 
                        be required to deduct and withhold tax from 
                        such dividend under chapter 3 receives a 
                        statement (which meets requirements similar to 
                        the requirements of subsection (h)(5)) that the 
                        beneficial owner of such stock is not a United 
                        States person, and
                            ``(iii) to any interest-related dividend 
                        paid to any person within a foreign country (or 
                        any interest-related dividend payment addressed 
                        to, or for the account of, persons within such 
                        foreign country) during any period described in 
                        subsection (h)(6) with respect to such country.
                Clause (iii) shall not apply to any dividend with 
                respect to any stock which was acquired on or before 
                the date of the publication of the Secretary's 
                determination under subsection (h)(6).
                    ``(C) Interest-related dividend.--For purposes of 
                this paragraph, an interest-related dividend is any 
                dividend (or part thereof) which is designated by the 
                regulated investment company as an interest-related 
                dividend in a written notice mailed to its shareholders 
                not later than 60 days after the close of its taxable 
                year. If the aggregate amount so designated with 
                respect to a taxable year of the company (including 
                amounts so designated with respect to dividends paid 
                after the close of the taxable year described in 
                section 855) is greater than the qualified net interest 
                income of the company for such taxable year, the 
                portion of each distribution which shall be an 
                interest-related dividend shall be only that portion of 
                the amounts so designated which such qualified net 
                interest income bears to the aggregate amount so 
                designated.
                    ``(D) Qualified net interest income.--For purposes 
                of subparagraph (C), the term `qualified net interest 
                income' means the qualified interest income of the 
                regulated investment company reduced by the deductions 
                properly allocable to such income.
                    ``(E) Qualified interest income.--For purposes of 
                subparagraph (D), the term `qualified interest income' 
                means the sum of the following amounts derived by the 
                regulated investment company from sources within the 
                United States:
                            ``(i) Any amount includible in gross income 
                        as original issue discount (within the meaning 
                        of section 1273) on an obligation payable 183 
                        days or less from the date of original issue 
                        (without regard to the period held by the 
                        company).
                            ``(ii) Any interest includible in gross 
                        income (including amounts recognized as 
                        ordinary income in respect of original issue 
                        discount or market discount or acquisition 
                        discount under part V of subchapter P and such 
                        other amounts as regulations may provide) on an 
                        obligation which is in registered form; except 
                        that this clause shall not apply to--
                                    ``(I) any interest on an obligation 
                                issued by a corporation or partnership 
                                if the regulated investment company is 
                                a 10-percent shareholder in such 
                                corporation or partnership, and
                                    ``(II) any interest which is 
                                treated as not being portfolio interest 
                                under the rules of subsection (h)(4).
                            ``(iii) Any interest referred to in 
                        subsection (i)(2)(A) (without regard to the 
                        trade or business of the regulated investment 
                        company).
                            ``(iv) Any interest-related dividend 
                        includable in gross income with respect to 
                        stock of another regulated investment company.
                    ``(F) 10-percent shareholder.--For purposes of this 
                paragraph, the term `10-percent shareholder' has the 
                meaning given such term by subsection (h)(3)(B).
            ``(2) Short-term capital gain dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any short-term 
                capital gain dividend received from a regulated 
                investment company.
                    ``(B) Exception for aliens taxable under subsection 
                (a)(2).--Subparagraph (A) shall not apply in the case 
                of any nonresident alien individual subject to tax 
under subsection (a)(2).
                    ``(C) Short-term capital gain dividend.--For 
                purposes of this paragraph, a short-term capital gain 
                dividend is any dividend (or part thereof) which is 
                designated by the regulated investment company as a 
                short-term capital gain dividend in a written notice 
                mailed to its shareholders not later than 60 days after 
                the close of its taxable year. If the aggregate amount 
                so designated with respect to a taxable year of the 
                company (including amounts so designated with respect 
                to dividends paid after the close of the taxable year 
                described in section 855) is greater than the qualified 
                short-term gain of the company for such taxable year, 
                the portion of each distribution which shall be a 
                short-term capital gain dividend shall be only that 
                portion of the amounts so designated which such 
                qualified short-term gain bears to the aggregate amount 
                so designated.
                    ``(D) Qualified short-term gain.--For purposes of 
                subparagraph (C), the term `qualified short-term gain' 
                means the excess of the net short-term capital gain of 
                the regulated investment company for the taxable year 
                over the net long-term capital loss (if any) of such 
                company for such taxable year. For purposes of this 
                subparagraph--
                            ``(i) the net short-term capital gain of 
                        the regulated investment company shall be 
                        computed by treating any short-term capital 
                        gain dividend includible in gross income with 
                        respect to stock of another regulated 
                        investment company as a short-term capital 
                        gain, and
                            ``(ii) the excess of the net short-term 
                        capital gain for a taxable year over the net 
                        long-term capital loss for a taxable year (to 
                        which an election under section 4982(e)(4) does 
                        not apply) shall be determined without regard 
                        to any net capital loss or net short-term 
                        capital loss attributable to transactions after 
                        October 31 of such year, and any such net 
                        capital loss or net short-term capital loss 
                        shall be treated as arising on the 1st day of 
                        the next taxable year.
                To the extent provided in regulations, clause (ii) 
                shall apply also for purposes of computing the taxable 
                income of the regulated investment company.''
            (2) Foreign corporations.--Section 881 (relating to tax on 
        income of foreign corporations not connected with United States 
        business) is amended by redesignating subsection (e) as 
        subsection (f) and by inserting after subsection (d) the 
        following new subsection:
    ``(e) Tax Not To Apply to Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1) of subsection (a) on any interest-related 
                dividend (as defined in section 871(k)(1)) received 
                from a regulated investment company.
                    ``(B) Exception.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any dividend referred to in 
                        section 871(k)(1)(B), and
                            ``(ii) to any interest-related dividend 
                        received by a controlled foreign corporation 
                        (within the meaning of section 957(a)) to the 
                        extent such dividend is attributable to 
                        interest received by the regulated investment 
                        company from a person who is a related person 
                        (within the meaning of section 864(d)(4)) with 
                        respect to such controlled foreign corporation.
                    ``(C) Treatment of dividends received by controlled 
                foreign corporations.--The rules of subsection 
                (c)(5)(A) shall apply to any interest-related dividend 
                received by a controlled foreign corporation (within 
                the meaning of section 957(a)) to the extent such 
                dividend is attributable to interest received by the 
                regulated investment company which is described in 
                clause (ii) of section 871(k)(1)(E) (and not described 
                in clause (i) or (iii) of such section).
            ``(2) Short-term capital gain dividends.--No tax shall be 
        imposed under paragraph (1) of subsection (a) on any short-term 
        capital gain dividend (as defined in section 871(k)(2)) 
        received from a regulated investment company.''
            (3) Withholding taxes.--
                    (A) Section 1441(c) (relating to exceptions) is 
                amended by adding at the end the following new 
                paragraph:
            ``(12) Certain dividends received from regulated investment 
        companies.--
                    ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
                871(a)(1)(A) by reason of section 871(k).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), clause (i) of section 871(k)(1)(B) shall not apply 
                to any dividend unless the regulated investment company 
                knows that such dividend is a dividend referred to in 
                such clause. A similar rule shall apply with respect to 
                the exception contained in section 871(k)(2)(B).''
                    (B) Section 1442(a) (relating to withholding of tax 
                on foreign corporations) is amended--
                            (i) by striking ``and the reference in 
                        section 1441(c)(10)'' and inserting ``the 
                        reference in section 1441(c)(10)'', and
                            (ii) by inserting before the period at the 
                        end the following: ``, and the references in 
                        section 1441(c)(12) to sections 871(a) and 
                        871(k) shall be treated as referring to 
                        sections 881(a) and 881(e) (except that for 
                        purposes of applying subparagraph (A) of 
                        section 1441(c)(12), as so modified, 
clause (ii) of section 881(e)(1)(B) shall not apply to any dividend 
unless the regulated investment company knows that such dividend is a 
dividend referred to in such clause)''.
    (b) Estate Tax Treatment of Interest in Certain Regulated 
Investment Companies.--Section 2105 (relating to property without the 
United States for estate tax purposes) is amended by adding at the end 
the following new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, stock 
        in a regulated investment company (as defined in section 851) 
        owned by a nonresident not a citizen of the United States shall 
        not be deemed property within the United States in the 
        proportion that, at the end of the quarter of such investment 
        company's taxable year immediately preceding a decedent's date 
        of death (or at such other time as the Secretary may designate 
        in regulations), the assets of the investment company that were 
        qualifying assets with respect to the decedent bore to the 
        total assets of the investment company.
            ``(2) Qualifying assets.--For purposes of this subsection, 
        qualifying assets with respect to a decedent are assets that, 
        if owned directly by the decedent, would have been--
                    ``(A) amounts, deposits, or debt obligations 
                described in subsection (b) of this section,
                    ``(B) debt obligations described in the last 
                sentence of section 2104(c), or
                    ``(C) other property not within the United 
                States.''
    (c) Treatment of Regulated Investment Companies Under Section 
897.--
            (1) Paragraph (1) of section 897(h) is amended by striking 
        ``REIT'' each place it appears and inserting ``qualified 
        investment entity''.
            (2) Paragraphs (2) and (3) of section 897(h) are amended to 
        read as follows:
            ``(2) Sale of stock in domestically controlled entity not 
        taxed.--The term `United States real property interest' does 
        not include any interest in a domestically controlled qualified 
        investment entity.
            ``(3) Distributions by domestically controlled qualified 
        investment entities.--In the case of a domestically controlled 
        qualified investment entity, rules similar to the rules of 
        subsection (d) shall apply to the foreign ownership percentage 
        of any gain.''
            (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
        amended to read as follows:
                    ``(A) Qualified investment entity.--The term 
                `qualified investment entity' means any real estate 
                investment trust and any regulated investment company.
                    ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment entity' 
                means any qualified investment entity in which at all 
                times during the testing period less than 50 percent in 
                value of the stock was held directly or indirectly by 
                foreign persons.''
            (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
        amended by striking ``REIT'' and inserting ``qualified 
        investment entity''.
            (5) The subsection heading for subsection (h) of section 
        897 is amended by striking ``REITS'' and inserting ``Certain 
        Investment Entities''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        dividends with respect to taxable years of regulated investment 
        companies beginning after the date of the enactment of this 
        Act.
            (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after the date of 
        the enactment of this Act.
            (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect on the date of the enactment of this Act.

                      Subtitle I--Other Provisions

SEC. 1101. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
              RELATED CONDITIONS.

    (a) Rules for Replacement of Involuntarily Converted Livestock.--
Subsection (e) of section 1033 (relating to involuntary conversions) is 
amended--
            (1) by striking ``Conditions.--For purposes'' and inserting 
        ``Conditions.--
            ``(1) In general.--For purposes'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Extension of replacement period.--
                    ``(A) In general.--In the case of drought, flood, 
                or other weather-related conditions described in 
                paragraph (1) which result in the area being designated 
                as eligible for assistance by the Federal Government, 
                subsection (a)(2)(B) shall be applied with respect to 
                any converted property by substituting `4 years' for `2 
                years'.
                    ``(B) Further extension by secretary.--The 
                Secretary may extend on a regional basis the period for 
                replacement under this section (after the application 
                of subparagraph (A)) for such additional time as the 
                Secretary determines appropriate if the weather-related 
                conditions which resulted in such application continue 
                for more than 3 years.''.
    (b) Income Inclusion Rules.--Subsection (e) of section 451 
(relating to special rule for proceeds from livestock sold on account 
of drought, flood, or other weather-related conditions) is amended by 
adding at the end the following new paragraph:
            ``(3) Special election rules.--If section 1033(e)(2) 
        applies to a sale or exchange of livestock described in 
        paragraph (1), the election under paragraph (1) shall be deemed 
        valid if made during the replacement period described in such 
        section.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to any taxable year with respect to which the due date (without 
regard to extensions) for the return is after December 31, 2002.

SEC. 1102. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT 
              REDUCING PATRONAGE DIVIDENDS.

    (a) In General.--Subsection (a) of section 1388 (relating to 
patronage dividend defined) is amended by adding at the end the 
following: ``For purposes of paragraph (3), net earnings shall not be 
reduced by amounts paid during the year as dividends on capital stock 
or other proprietary capital interests of the organization to the 
extent that the articles of incorporation or bylaws of such 
organization or other contract with patrons provide that such dividends 
are in addition to amounts otherwise payable to patrons which are 
derived from business done with or for patrons during the taxable 
year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 1103. VACCINE TAX TO APPLY TO HEPATITIS A VACCINE.

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

SEC. 1104. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN 
              DRUG CREDIT.

    (a) In General.--Paragraph (2) of section 45C(b) (relating to 
qualified clinical testing expenses) is amended by adding at the end 
the following new subparagraph:
                    ``(C) Treatment of certain expenses incurred before 
                designation.--For purposes of subparagraph (A)(ii)(I), 
                if a drug is designated under section 526 of the 
                Federal Food, Drug, and Cosmetic Act not later than the 
                due date (including extensions) for filing the return 
                of tax under this subtitle for the taxable year in 
                which the application for such designation of such drug 
                was filed, such drug shall be treated as having been 
                designated on the date that such application was 
                filed.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to expenses incurred after the date of the enactment of this Act.

SEC. 1105. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS TREATED AS 
              QUALIFYING INCOME OF REGULATED INVESTMENT COMPANIES.

    (a) In General.--Paragraph (2) of section 851(b) (defining 
regulated investment company) is amended to read as follows:
            ``(2) at least 90 percent of its gross income is derived 
        from--
                    ``(A) dividends, interest, payments with respect to 
                securities loans (as defined in section 512(a)(5)), and 
                gains from the sale or other disposition of stock or 
                securities (as defined in section 2(a)(36) of the 
                Investment Company Act of 1940, as amended) or foreign 
                currencies, or other income (including but not limited 
                to gains from options, futures or forward contracts) 
                derived with respect to its business of investing in 
                such stock, securities, or currencies, and
                    ``(B) distributions or other income derived from an 
                interest in a qualified publicly traded partnership (as 
                defined in subsection (h)); and''.
    (b) Source Flow-Through Rule Not To Apply.--The last sentence of 
section 851(b) is amended by inserting ``(other than a qualified 
publicly traded partnership as defined in subsection (h))'' after 
``derived from a partnership''.
    (c) Limitation on Ownership.--Subsection (c) of section 851 is 
amended by redesignating paragraph (5) as paragraph (6) and inserting 
after paragraph (4) the following new paragraph:
            ``(5) The term `outstanding voting securities of such 
        issuer' shall include the equity securities of a qualified 
        publicly traded partnership (as defined in subsection (h)).''.
    (d) Definition of Qualified Publicly Traded Partnership.--Section 
851 is amended by adding at the end the following new subsection:
    ``(h) Qualified Publicly Traded Partnership.--For purposes of this 
section, the term `qualified publicly traded partnership' means a 
publicly traded partnership described in section 7704(b) other than a 
partnership which would satisfy the gross income requirements of 
section 7704(c)(2) if qualifying income included only income described 
in subsection (b)(2)(A).''.
    (e) Definition of Qualifying Income.--Section 7704(d)(4) is amended 
by striking ``section 851(b)(2)'' and inserting ``section 
851(b)(2)(A)''.
    (f) Limitation on Composition of Assets.--Subparagraph (B) of 
section 851(b)(3) is amended to read as follows:
                    ``(B) not more than 25 percent of the value of its 
                total assets is invested in--
                            ``(i) the securities (other than Government 
                        securities or the securities of other regulated 
                        investment companies) of any one issuer,
                            ``(ii) the securities (other than the 
                        securities of other regulated investment 
                        companies) of two or more issuers which the 
                        taxpayer controls and which are determined, 
                        under regulations prescribed by the Secretary, 
                        to be engaged in the same or similar trades or 
                        businesses or related trades or businesses, or
                            ``(iii) the securities of one or more 
                        qualified publicly traded partnerships (as 
                        defined in subsection (h)).''.
    (g) Application of Special Passive Activity Rule to Regulated 
Investment Companies.--Subsection (k) of section 469 (relating to 
separate application of section in case of publicly traded 
partnerships) is amended by adding at the end the following new 
paragraph:
            ``(4) Application to regulated investment companies.--For 
        purposes of this section, a regulated investment company (as 
        defined in section 851) holding an interest in a qualified 
        publicly traded partnership (as defined in section 851(h)) 
        shall be treated as a taxpayer described in subsection (a)(2) 
        with respect to items attributable to such interest.''.
    (h) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 1106. IMPROVEMENTS RELATED TO REAL ESTATE INVESTMENT TRUSTS.

    (a) Expansion of Straight Debt Safe Harbor.--Section 856 (defining 
real estate investment trust) is amended--
            (1) in subsection (c) by striking paragraph (7), and
            (2) by adding at the end the following new subsection:
    ``(m) Safe Harbor in Applying Subsection (c)(4).--
            ``(1) In general.--In applying subclause (III) of 
        subsection (c)(4)(B)(iii), except as otherwise determined by 
        the Secretary in regulations, the following shall not be 
        considered securities held by the trust:
                    ``(A) Straight debt securities of an issuer which 
                meet the requirements of paragraph (2).
                    ``(B) Any loan to an individual or an estate.
                    ``(C) Any section 467 rental agreement (as defined 
                in section 467(d)), other than with a person described 
                in subsection (d)(2)(B).
                    ``(D) Any obligation to pay rents from real 
                property (as defined in subsection (d)(1)).
                    ``(E) Any security issued by a State or any 
                political subdivision thereof, the District of 
                Columbia, a foreign government or any political 
                subdivision thereof, or the Commonwealth of Puerto 
                Rico, but only if the determination of any payment 
                received or accrued under such security does not depend 
                in whole or in part on the profits of any entity not 
                described in this subparagraph or payments on any 
                obligation issued by such an entity,
                    ``(F) Any security issued by a real estate 
                investment trust.
                    ``(G) Any other arrangement as determined by the 
                Secretary.
            ``(2) Special rules relating to straight debt securities.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(A), securities meet the requirements of this 
                paragraph if such securities are straight debt, as 
                defined in section 1361(c)(5) (without regard to 
                subparagraph (B)(iii) thereof).
                    ``(B) Special rules relating to certain 
                contingencies.--For purposes of subparagraph (A), any 
                interest or principal shall not be treated as failing 
                to satisfy section 1361(c)(5)(B)(i) solely by reason of 
                the fact that the time of payment of such interest or 
                principal is subject to a contingency, but only if--
                            ``(i) any such contingency does not have 
                        the effect of changing the effective yield to 
                        maturity, as determined under section 1272, 
                        other than a change in the annual yield to 
                        maturity which either--
                                    ``(I) does not exceed the greater 
                                of \1/4\ of 1 percent or 5 percent of 
                                the annual yield to maturity, or
                                    ``(II) results solely from a 
                                default or the exercise of a prepayment 
                                right by the issuer of the debt, or
                            ``(ii) neither the aggregate issue price 
                        nor the aggregate face amount of the issuer's 
                        debt instruments held by the trust exceeds 
                        $1,000,000 and not more than 12 months of 
                        unaccrued interest can be required to be 
                        prepaid thereunder.
                    ``(C) Special rules relating to corporate or 
                partnership issuers.--In the case of an issuer which is 
                a corporation or a partnership, securities that 
                otherwise would be described in paragraph (1)(A) shall 
                be considered not to be so described if the trust 
                holding such securities and any of its controlled 
                taxable REIT subsidiaries (as defined in subsection 
                (d)(8)(A)(iv)) hold any securities of the issuer 
                which--
                            ``(i) are not described in paragraph (1) 
                        (prior to the application of this 
                        subparagraph), and
                            ``(ii) have an aggregate value greater than 
                        1 percent of the issuer's outstanding 
                        securities determined without regard to 
                        paragraph (3)(A)(i).
            ``(3) Look-through rule for partnership securities.--
                    ``(A) In general.--For purposes of applying 
                subclause (III) of subsection (c)(4)(B)(iii)--
                            ``(i) a trust's interest as a partner in a 
                        partnership (as defined in section 7701(a)(2)) 
                        shall not be considered a security, and
                            ``(ii) the trust shall be deemed to own its 
                        proportionate share of each of the assets of 
                        the partnership.
                    ``(B) Determination of trust's interest in 
                partnership assets.--For purposes of subparagraph (A), 
                with respect to any taxable year beginning after the 
                date of the enactment of this subparagraph--
                            ``(i) the trust's interest in the 
                        partnership assets shall be the trust's 
                        proportionate interest in any securities issued 
                        by the partnership (determined without regard 
                        to subparagraph (A)(i) and paragraph (4), 
but not including securities described in paragraph (1)), and
                            ``(ii) the value of any debt instrument 
                        shall be the adjusted issue price thereof, as 
                        defined in section 1272(a)(4).
            ``(4) Certain partnership debt instruments not treated as a 
        security.--For purposes of applying subclause (III) of 
        subsection (c)(4)(B)(iii)--
                    ``(A) any debt instrument issued by a partnership 
                and not described in paragraph (1) shall not be 
                considered a security to the extent of the trust's 
                interest as a partner in the partnership, and
                    ``(B) any debt instrument issued by a partnership 
                and not described in paragraph (1) shall not be 
                considered a security if at least 75 percent of the 
                partnership's gross income (excluding gross income from 
                prohibited transactions) is derived from sources 
                referred to in subsection (c)(3).
            ``(5) Secretarial guidance.--The Secretary is authorized to 
        provide guidance (including through the issuance of a written 
        determination, as defined in section 6110(b)) that an 
        arrangement shall not be considered a security held by the 
        trust for purposes of applying subclause (III) of subsection 
        (c)(4)(B)(iii) notwithstanding that such arrangement otherwise 
        could be considered a security under subparagraph (F) of 
        subsection (c)(5).''.
    (b) Clarification of Application of Limited Rental Exception.--
Subparagraph (A) of section 856(d)(8) (relating to special rules for 
taxable REIT subsidiaries) is amended to read as follows:
                    ``(A) Limited rental exception.--
                            ``(i) In general.--The requirements of this 
                        subparagraph are met with respect to any 
                        property if at least 90 percent of the leased 
                        space of the property is rented to persons 
                        other than taxable REIT subsidiaries of such 
                        trust and other than persons described in 
                        paragraph (2)(B).
                            ``(ii) Rents must be substantially 
                        comparable.--Clause (i) shall apply only to the 
                        extent that the amounts paid to the trust as 
                        rents from real property (as defined in 
                        paragraph (1) without regard to paragraph 
                        (2)(B)) from such property are substantially 
                        comparable to such rents paid by the other 
                        tenants of the trust's property for comparable 
                        space.
                            ``(iii) Times for testing rent 
                        comparability.--The substantial comparability 
                        requirement of clause (ii) shall be treated as 
                        met with respect to a lease to a taxable REIT 
                        subsidiary of the trust if such requirement is 
                        met under the terms of the lease--
                                    ``(I) at the time such lease is 
                                entered into,
                                    ``(II) at the time of each 
                                extension of the lease, including a 
                                failure to exercise a right to 
                                terminate, and
                                    ``(III) at the time of any 
                                modification of the lease between the 
                                trust and the taxable REIT subsidiary 
                                if the rent under such lease is 
                                effectively increased pursuant to such 
                                modification.
                        With respect to subclause (III), if the taxable 
                        REIT subsidiary of the trust is a controlled 
                        taxable REIT subsidiary of the trust, the term 
                        `rents from real property' shall not in any 
                        event include rent under such lease to the 
                        extent of the increase in such rent on account 
                        of such modification.
                            ``(iv) Controlled taxable reit 
                        subsidiary.--For purposes of clause (iii), the 
                        term `controlled taxable REIT subsidiary' 
                        means, with respect to any real estate 
                        investment trust, any taxable REIT subsidiary 
                        of such trust if such trust owns directly or 
                        indirectly--
                                    ``(I) stock possessing more than 50 
                                percent of the total voting power of 
                                the outstanding stock of such 
                                subsidiary, or
                                    ``(II) stock having a value of more 
                                than 50 percent of the total value of 
                                the outstanding stock of such 
                                subsidiary.
                            ``(v) Continuing qualification based on 
                        third party actions.--If the requirements of 
                        clause (i) are met at a time referred to in 
                        clause (iii), such requirements shall continue 
                        to be treated as met so long as there is no 
                        increase in the space leased to any taxable 
                        REIT subsidiary of such trust or to any person 
                        described in paragraph (2)(B).
                            ``(vi) Correction period.--If there is an 
                        increase referred to in clause (v) during any 
                        calendar quarter with respect to any property, 
                        the requirements of clause (iii) shall be 
                        treated as met during the quarter and the 
                        succeeding quarter if such requirements are met 
                        at the close of such succeeding quarter.''.
    (c) Deletion of Customary Services Exception.--Subparagraph (B) of 
section 857(b)(7) (relating to redetermined rents) is amended by 
striking clause (ii) and by redesignating clauses (iii), (iv), (v), 
(vi), and (vii) as clauses (ii), (iii), (iv), (v), and (vi), 
respectively.
    (d) Conformity With General Hedging Definition.--Subparagraph (G) 
of section 856(c)(5) (relating to treatment of certain hedging 
instruments) is amended to read as follows:
                    ``(G) Treatment of certain hedging instruments.--
                Except to the extent provided by regulations, any 
                income of a real estate investment trust from a hedging 
                transaction (as defined in clause (ii) or (iii) of 
                section 1221(b)(2)(A)) which is clearly identified 
                pursuant to section 1221(a)(7), including gain from the 
                sale or disposition of such a transaction, shall not 
                constitute gross income under paragraph (2) to the 
                extent that the transaction hedges any indebtedness 
                incurred or to be incurred by the trust to acquire or 
                carry real estate assets.''.
    (e) Conformity With Regulated Investment Company Rules.--Clause (i) 
of section 857(b)(5)(A) (relating to imposition of tax in case of 
failure to meet certain requirements) is amended by striking ``90 
percent'' and inserting ``95 percent''.
    (f) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2000.
            (2) Subparagraphs (c) through  (e).--The amendments made by 
        subsections (c), (d), and (e) shall apply to taxable years 
        beginning after the date of the enactment of this Act.

SEC. 1107. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS.

    (a) Bows.--Paragraph (1) of section 4161(b) (relating to bows) is 
amended to read as follows:
            ``(1) Bows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                bow which has a peak draw weight of 30 pounds or more, 
a tax equal to 11 percent of the price for which so sold.
                    ``(B) Archery equipment.--There is hereby imposed 
                on the sale by the manufacturer, producer, or 
                importer--
                            ``(i) of any part or accessory suitable for 
                        inclusion in or attachment to a bow described 
                        in subparagraph (A), and
                            ``(ii) of any quiver or broadhead suitable 
                        for use with an arrow described in paragraph 
                        (3),
                a tax equal to 11 percent of the price for which so 
                sold.''.
    (b) Arrows.--Subsection (b) of section 4161 (relating to bows and 
arrows, etc.) is amended by redesignating paragraph (3) as paragraph 
(4) and inserting after paragraph (2) the following:
            ``(3) Arrows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                arrow, a tax equal to 12 percent of the price for which 
                so sold.
                    ``(B) Exception.--The tax imposed by subparagraph 
                (A) on an arrow shall not apply if the arrow contains 
                an arrow shaft with respect to which tax was paid under 
                paragraph (2).
                    ``(C) Arrow.--For purposes of this paragraph, the 
                term `arrow' means any shaft described in paragraph (2) 
                to which additional components are attached.''.
    (c) Conforming Amendments.--(1) Section 4161(b)(2) is amended by 
inserting ``(other than a broadhead)'' after ``point''.
    (2) The heading of section 4161(b)(2) is amended by striking 
``Arrows.--'' and inserting ``Arrow components.--''.
    (d) Effective Date.--The amendments made by this section shall 
apply to articles sold by the manufacturer, producer, or importer after 
December 31, 2003.

SEC. 1108. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

    (a) Repeal.--Paragraph (6) of section 4162(a) (defining sport 
fishing equipment) is amended by striking subparagraph (C) and by 
redesignating subparagraphs (D) through (J) as subparagraphs (C) 
through (I), respectively.
    (b) Effective Date.--The amendments made this section shall apply 
to articles sold by the manufacturer, producer, or importer after 
December 31, 2003.

SEC. 1109. INCOME TAX CREDIT TO DISTILLED SPIRITS WHOLESALERS FOR COST 
              OF CARRYING FEDERAL EXCISE TAXES ON BOTTLED DISTILLED 
              SPIRITS.

    (a) In General.--Subpart A of part I of subchapter A of chapter 51 
(relating to gallonage and occupational taxes) is amended by adding at 
the end the following new section:

``SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER'S AVERAGE COST OF 
              CARRYING EXCISE TAX.

    ``(a) In General.--For purposes of section 38, in the case of an 
eligible wholesaler, the amount of the distilled spirits wholesalers 
credit for any taxable year is the amount equal to the product of--
            ``(1) the number of cases of bottled distilled spirits--
                    ``(A) which were bottled in the United States, and
                    ``(B) which are purchased by such wholesaler during 
                the taxable year directly from the bottler of such 
                spirits, and
            ``(2) the average tax-financing cost per case for the most 
        recent calendar year ending before the beginning of such 
        taxable year.
    ``(b) Eligible Wholesaler.--For purposes of this section, the term 
`eligible wholesaler' means any person who holds a permit under the 
Federal Alcohol Administration Act as a wholesaler of distilled 
spirits.
    ``(c) Average Tax-Financing Cost.--
            ``(1) In general.--For purposes of this section, the 
        average tax-financing cost per case for any calendar year is 
        the amount of interest which would accrue at the deemed 
        financing rate during a 60-day period on an amount equal to the 
        deemed Federal excise per case.
            ``(2) Deemed financing rate.--For purposes of paragraph 
        (1), the deemed financing rate for any calendar year is the 
        average of the corporate overpayment rates under paragraph (1) 
        of section 6621(a) (determined without regard to the last 
        sentence of such paragraph) for calendar quarters of such year.
            ``(3) Deemed federal excise tax based on case of 12 80-
        proof 750ml bottles.--For purposes of paragraph (1), the deemed 
        Federal excise tax per case is $22.83.
            ``(4) Number of cases in lot.--For purposes of this 
        section, the number of cases in any lot of distilled spirits 
        shall be determined by dividing the number of liters in such 
        lot by 9.''
    (b) Conforming Amendments.--
            (1) Subsection (b) of section 38 is amended by striking 
        ``plus'' at the end of paragraph (14), by striking the period 
        at the end of paragraph (15) and inserting ``, plus'', and by 
        adding at the end the following new paragraph:
            ``(16) in the case of an eligible wholesaler (as defined in 
        section 5011(b)), the distilled spirits wholesaler credit 
        determined under section 5011(a).''
            (2) Subsection (d) of section 39 (relating to carryback and 
        carryforward of unused credits) is amended by adding at the end 
        the following new paragraph:
            ``(11) No carryback of section 5011 credit before january 
        1, 2004.--No portion of the unused business credit for any 
        taxable year which is attributable to the credit determined 
        under section 5011(a) may be carried back to a taxable year 
        beginning before January 1, 2004.''.
            (3) The table of sections for subpart A of part I of 
        subchapter A of chapter 51 is amended by adding at the end the 
        following new item:

                              ``Sec. 5011. Income tax credit for 
                                        wholesaler's average cost of 
                                        carrying excise tax.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 1110. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO 
              OUTRIGHT SALES BY LANDOWNERS.

    (a) In General.--The first sentence of section 631(b) (relating to 
disposal of timber with a retained economic interest) is amended by 
striking ``retains an economic interest in such timber'' and inserting 
``either retains an economic interest in such timber or makes an 
outright sale of such timber''.
    (b) Conforming Amendments.--
            (1) The third sentence of section 631(b) is amended by 
        striking ``The date of disposal'' and inserting ``In the case 
        of disposal of timber with a retained economic interest, the 
        date of disposal''.
            (2) The heading for section 631(b) is amended by striking 
        ``With a Retained Economic Interest''.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales after December 31, 2003.

SEC. 1111. SONAR DEVICES SUITABLE FOR FINDING FISH.

    (a) Not Treated as Sport Fishing Equipment.--Subsection (a) of 
section 4162 (relating to sport fishing equipment defined) is amended 
by inserting ``and'' at the end of paragraph (8), by striking ``, and'' 
at the end of paragraph (9) and inserting a period, and by striking 
paragraph (10).
    (b) Conforming Amendment.--Section 4162 is amended by striking 
subsection (b) and by redesignating subsection (c) as subsection (b).
    (c) Effective Date.--The amendments made this section shall apply 
to articles sold by the manufacturer, producer, or importer after 
December 31, 2003.

SEC. 1112. TAXATION OF CERTAIN SETTLEMENT FUNDS.

    (a) In General.--Subsection (g) of section 468B (relating to 
clarification of taxation of certain funds) is amended to read as 
follows:
    ``(g) Clarification of Taxation of Certain Funds.--
            ``(1) In general.--Except as provided in paragraph (2), 
        nothing in any provision of law shall be construed as providing 
        that an escrow account, settlement fund, or similar fund is not 
        subject to current income tax. The Secretary shall prescribe 
        regulations providing for the taxation of any such account or 
        fund whether as a grantor trust or otherwise.
            ``(2) Exemption from tax for certain settlement funds.--An 
        escrow account, settlement fund, or similar fund shall be 
        treated as beneficially owned by the United States and shall be 
        exempt from taxation under this subtitle if--
                    ``(A) it is established pursuant to a consent 
                decree entered by a judge of a United States District 
                Court,
                    ``(B) it is created for the receipt of settlement 
                payments as directed by a government entity for the 
                sole purpose of resolving or satisfying one or more 
                claims asserting liability under the Comprehensive 
                Environmental Response, Compensation, and Liability Act 
                of 1980,
                    ``(C) the authority and control over the 
                expenditure of funds therein (including the expenditure 
                of contributions thereto and any net earnings thereon) 
                is with such government entity, and
                    ``(D) upon termination, any remaining funds will be 
                disbursed upon instructions by such government entity 
                in accordance with applicable law.
        For purposes of this paragraph, the term `government entity' 
        means the United States, any State or political subdivision 
        thereof, the District of Columbia, any possession of the United 
        States, and any agency or instrumentality of any of the 
        foregoing.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 1113. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO DISTILLED 
              SPIRITS, WINE, AND BEER.

    (a) In General.--Subpart G of part II of subchapter A of chapter 51 
is amended by redesignating section 5148 as section 5149 and by 
inserting after section 5147 the following new section:

``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.

    ``(a) In General.--Notwithstanding sections 5081, 5091, 5111, 5121, 
and 5131, the rate of tax imposed under such sections for the 
suspension period shall be zero. During such period, persons engaged in 
or carrying on a trade or business covered by such sections shall 
register under section 5141 and shall comply with the recordkeeping 
requirements under this part.
    ``(b) Suspension Period.--For purposes of subsection (a), the 
suspension period is the period beginning on July 1, 2004, and ending 
on June 30, 2007.''.
    (b) Conforming Amendment.--Section 5117 is amended by adding at the 
end the following new subsection:
    ``(d) Special Rule During Suspension Period.--Except as provided by 
the Secretary, during the suspension period (as defined in section 
5148) it shall be unlawful for any dealer to purchase distilled spirits 
for resale from any person other than a wholesale dealer in liquors who 
is required to keep records under section 5114.''.
    (c) Clerical Amendment.--The table of sections for subpart G of 
part II of subchapter A of chapter 51 is amended by striking the last 
item and inserting the following new items:

                              ``Sec. 5148. Suspension of occupational 
                                        tax.
                              ``Sec. 5149. Cross references.''.
    (d) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

TITLE II--PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH CORPORATE EARNINGS 
                       STRIPPING AND EXPATRIATION

SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS STRIPPING BY FURTHER 
              LIMITING DEDUCTION FOR INTEREST ON CERTAIN INDEBTEDNESS.

    (a) Reduction in Potential for Earnings Stripping.--
            (1) In general.--Section 163(j) is amended by striking 
        paragraphs (1) and (2), by redesignating paragraphs (3) through 
        (8) as paragraphs (4) through (9), respectively, and by 
inserting before paragraph (4), as so redesignated, the following new 
paragraphs:
            ``(1) Limitation.--
                    ``(A) In general.--In the case of a corporation, no 
                deduction shall be allowed under this chapter for 
                disqualified interest paid or accrued during the 
                taxable year.
                    ``(B) Maximum disallowance.--The amount disallowed 
                under subparagraph (A) shall not exceed the sum of--
                            ``(i) the corporation's excess interest 
                        expense for the taxable year, and
                            ``(ii) the corporation's excess related 
                        party interest expense for such year.
                In no event shall the disallowance under subparagraph 
                (A) reduce the deduction for interest below the sum of 
                the amount of interest includible in the gross income 
                of the taxpayer for such taxable year and an amount 
                equal to 25 percent of adjusted taxable income (35 
                percent in the case of the first taxable year beginning 
                after December 31, 2003).
                    ``(C) Disallowed amount carried to succeeding 
                taxable year.--
                            ``(i) In general.--Any amount disallowed 
                        under subparagraph (A) for any taxable year 
                        shall be treated as paid or accrued in the 
                        succeeding taxable year and in the 2nd through 
                        10th succeeding taxable years to the extent not 
                        previously taken into account under this 
                        subparagraph.
                            ``(ii) Limitation on amount carried to 
                        year.--A carryforward amount may not be taken 
                        into account for any such succeeding taxable 
                        year to the extent that such amount, when added 
                        to amounts carried to such succeeding taxable 
                        year from taxable years preceding the taxable 
                        year from which the amount is being carried 
                        forward, would result in (or increase) a 
                        disallowance under subparagraph (A).
                            ``(iii) Carryover applied separately to 
                        categories of disqualified interest.--Clauses 
                        (i) and (ii) shall be applied separately to 
                        disqualified interest described in paragraph 
                        (3)(A) and to disqualified interest described 
                        in paragraph (3)(B). For purposes of this 
                        subparagraph, any amount disallowed under 
                        subparagraph (A) for any taxable year shall be 
                        treated as disqualified interest described in 
                        paragraph (3)(A) to the extent thereof and then 
                        as disqualified interest described in paragraph 
                        (3)(B).
            ``(2) Excess interest expense; excess related party 
        interest expense.--For purposes of this subsection--
                    ``(A) Excess interest expense.--The term `excess 
                interest expense' means the excess (if any) of--
                            ``(i) the corporation's net interest 
                        expense, over
                            ``(ii) 50 percent of the adjusted taxable 
                        income of the corporation.
                    ``(B) Excess related party interest expense.--The 
                term `excess related party interest expense' means the 
                excess (if any) of--
                            ``(i) the lesser of--
                                    ``(I) the amount of disqualified 
                                interest described in paragraph (3)(A), 
                                or
                                    ``(II) the corporation's net 
                                interest expense, over
                            ``(ii) 25 percent (35 percent in the case 
                        of the first taxable year beginning after 
                        December 31, 2003) of the adjusted taxable 
                        income of the corporation.
            ``(3) Alternative maximum disallowance.--
                    ``(A) In general.--In the case of a corporation 
                with respect to which an election is in effect under 
                subparagraph (B), the amount disallowed under paragraph 
                (1)(A) shall not exceed the excess (if any) of--
                            ``(i) the corporation's net interest 
                        expense, over
                            ``(ii) 30 percent of the adjusted taxable 
                        income of the corporation.
                    ``(B) Election.--A corporation may make a one-time 
                irrevocable election to have the alternative maximum 
                disallowance described in subparagraph (A) apply for 
                purposes of this subsection in lieu of paragraph 
                (1)(B). An election under this subparagraph shall not 
                apply with respect to any taxable year beginning before 
                January 1, 2005.
                    ``(C) Limitation.--Subparagraph (B) shall not apply 
                with respect to any corporation which is--
                            ``(i) a surrogate foreign corporation (as 
                        defined in section 7874(a)(2)(B)),
                            ``(ii) a corporation which would be a 
                        surrogate foreign corporation (as so defined) 
                        if ``December 31, 1996'' were substituted for 
                        ``March 4, 2003'' in section 7874(a), or
                            ``(iii) a corporation which is an 
                        expatriated entity (as defined in section 
                        7874(a)) with respect to a corporation 
                        described in clause (i) or (ii).''.
            (2) Conforming amendment.--Paragraph (5)(B)(ii) of section 
        163(j), as redesignated by paragraph (1), is amended by 
        striking ``paragraph (5)(B)'' and inserting ``paragraph 
        (6)(B)''.
    (b) Maintenance of Current Law for Interest Paid by Taxable REIT 
Subsidiaries to REIT.--
            (1) Exception from 163(j).--Paragraph (4) of section 
        163(j), as redesignated by subsection (a), is amended by 
        inserting ``and'' at the end of subparagraph (A), by striking 
        ``, and'' at the end of subparagraph (B) and inserting a 
        period, and by striking subparagraph (C).
            (2) Disallowance.--Section 856 is amended by adding at the 
        end the following new subsection:
    ``(n) Limitation on Deduction for Interest on Certain Indebtedness 
of Taxable REIT Subsidiary.--
            ``(1) Limitation.--
                    ``(A) In general.--If this subsection applies to 
                any taxable REIT subsidiary for any taxable year, no 
                deduction shall be allowed under this chapter for 
                disqualified interest paid or accrued by such 
                subsidiary during such taxable year. The amount 
                disallowed under the preceding sentence shall not 
                exceed the subsidiary's excess interest expense for the 
                taxable year.
                    ``(B) Disallowed amount carried to succeeding 
                taxable year.--Any amount disallowed under subparagraph 
                (A) for any taxable year shall be treated as 
                disqualified interest paid or accrued in the succeeding 
                taxable year (and clause (ii) of paragraph (2)(A) shall 
                not apply for purposes of applying this subsection to 
                the amount so treated).
            ``(2) Subsidiaries to which subsection applies.--
                    ``(A) In general.--This subsection shall apply to 
                any taxable REIT subsidiary for any taxable year if--
                            ``(i) such subsidiary has excess interest 
                        expense for such taxable year, and
                            ``(ii) the ratio of debt to equity of such 
                        subsidiary as of the close of such taxable year 
                        (or on any other day during the taxable year as 
                        the Secretary may by regulations prescribe) 
                        exceeds 1.5 to 1.
                    ``(B) Excess interest expense.--
                            ``(i) In general.--For purposes of this 
                        subsection, the term `excess interest expense' 
                        means the excess (if any) of--
                                    ``(I) the taxable REIT subsidiary's 
                                net interest expense, over
                                    ``(II) the sum of 50 percent of the 
                                adjusted taxable income of the 
                                subsidiary plus any excess limitation 
                                carryforward under clause (ii).
                            ``(ii) Excess limitation carryforward.--If 
                        a taxable REIT subsidiary has an excess 
                        limitation for any taxable year, the amount of 
                        such excess limitation shall be an excess 
                        limitation carryforward to the 1st succeeding 
                        taxable year and to the 2nd and 3rd succeeding 
                        taxable years to the extent not previously 
                        taken into account under this clause. The 
                        amount of such a carryforward taken into 
                        account for any such succeeding taxable year 
                        shall not exceed the excess interest expense 
                        for such succeeding taxable year (determined 
                        without regard to the carryforward from the 
                        taxable year of such excess limitation).
                            ``(iii) Excess limitation.--For purposes of 
                        clause (ii), the term `excess limitation' means 
                        the excess (if any) of--
                                    ``(I) 50 percent of the adjusted 
                                taxable income of the subsidiary, over
                                    ``(II) the subsidiary's net 
                                interest expense.
                    ``(C) Ratio of debt to equity.--For purposes of 
                this paragraph, the term `ratio of debt to equity' 
                means the ratio which the total indebtedness of the 
                subsidiary bears to the sum of its money and all other 
                assets reduced (but not below zero) by such total 
                indebtedness. The rules of section 163(j)(6)(E) shall 
                apply for purposes of the preceding sentence.
            ``(3) Disqualified interest.--For purposes of this 
        subsection, the term `disqualified interest' means any interest 
        paid or accrued (directly or indirectly) by a taxable REIT 
        subsidiary of a real estate investment trust to such trust.
            ``(4) Other rules to apply.--Rules similar to the rules of 
        paragraphs (7), (8), and (9) of section 163(j) shall apply for 
        purposes of this subsection.''
    (c) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2003.
            (2) Earlier effective date with respect to expatriated 
        corporations, etc.--The amendments made by this section shall 
        apply to taxable years ending after March 4, 2003, in the case 
        of a taxpayer which is--
                    (A) a surrogate foreign corporation, as defined in 
                section 7874(a)(2)(B) of the Internal Revenue Code of 
                1986, as added by section 2002,
                    (B) a corporation which would be a surrogate 
                foreign corporation (as so defined) if ``December 31, 
                1996'' were substituted for ``March 4, 2003'' in such 
                section 7874(a), or
                    (C) a corporation which is an expatriated entity 
                (as defined in such section 7874(a)) with respect to a 
                corporation described in subparagraph (A) or (B).
        In applying such amendments to a taxpayer described in the 
        preceding sentence, subparagraph (B) of section 163(j)(2) of 
        such Code, as amended by this section, shall be applied by 
        substituting ``25 percent'' for ``35 percent''.
            (3) Limitation on carryover of disallowed interest.--
                    (A) In general.--Except in the case of a taxpayer 
                described in paragraph (2), for purposes of applying 
                section 163(j)(1)(C) of the Internal Revenue Code of 
                1986 (as added by this section), amounts carried from a 
                taxable year beginning before January 1, 2004, to any 
                taxable year beginning after December 31, 2003, shall 
                be treated as disqualified interest described in 
                section 163(j)(3)(B) of such Code which is disallowed 
                for the most recent taxable year beginning before 
                January 1, 2004.
                    (B) Expatriated corporations.--In the case of a 
                taxpayer described in paragraph (2), a rule similar to 
                the rule of subparagraph (A) shall apply to amounts 
                carried from a taxable year ending on or before March 
                5, 2003.

SEC. 2002. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR FOREIGN 
              PARENTS.

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

``SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES AND THEIR FOREIGN 
              PARENTS.

    ``(a) Tax on Inversion Gain of Expatriated Entities.--
            ``(1) In general.--The taxable income of an expatriated 
        entity for any taxable year which includes any portion of the 
        applicable period shall in no event be less than the inversion 
        gain of the entity for the taxable year.
            ``(2) Expatriated entity.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `expatriated entity' 
                means--
                            ``(i) the domestic corporation or 
                        partnership referred to in subparagraph (B)(i) 
                        with respect to which a foreign corporation is 
                        a surrogate foreign corporation, and
                            ``(ii) any United States person who is 
                        related (within the meaning of section 267(b) 
                        or 707(b)(1)) to a domestic corporation or 
                        partnership described in clause (i).
                    ``(B) Surrogate foreign corporation.--A foreign 
                corporation shall be treated as a surrogate foreign 
                corporation if, pursuant to a plan (or a series of 
                related transactions)--
                            ``(i) the entity completes after March 4, 
                        2003, the direct or indirect acquisition of 
                        substantially all of the properties held 
                        directly or indirectly by a domestic 
                        corporation or substantially all of the 
                        properties constituting a trade or business of 
                        a domestic partnership,
                            ``(ii) after the acquisition at least 60 
                        percent of the stock (by vote or value) of the 
                        entity is held--
                                    ``(I) in the case of an acquisition 
                                with respect to a domestic corporation, 
                                by former shareholders of the domestic 
                                corporation by reason of holding stock 
                                in the domestic corporation, or
                                    ``(II) in the case of an 
                                acquisition with respect to a domestic 
                                partnership, by former partners of the 
                                domestic partnership by reason of 
                                holding a capital or profits interest 
                                in the domestic partnership, and
                            ``(iii) after the acquisition the expanded 
                        affiliated group which includes the entity does 
                        not have substantial business activities in the 
                        foreign country in which, or under the law of 
                        which, the entity is created or organized, when 
                        compared to the total business activities of 
                        such expanded affiliated group.
                An entity otherwise described in clause (i) with 
                respect to any domestic corporation or partnership 
                trade or business shall be treated as not so described 
                if, on or before March 4, 2003, such entity acquired 
                directly or indirectly more than half of the properties 
                held directly or indirectly by such corporation or more 
                than half of the properties constituting such 
                partnership trade or business, as the case may be.
    ``(b) Definitions and Special Rules.--
            ``(1) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group as defined in 
        section 1504(a) but without regard to section 1504(b)(3), 
        except that section 1504(a) shall be applied by substituting 
        `more than 50 percent' for `at least 80 percent' each place it 
        appears.
            ``(2) Certain stock disregarded.--There shall not be taken 
        into account in determining ownership under subsection 
        (a)(2)(B)(ii)--
                    ``(A) stock held by members of the expanded 
                affiliated group which includes the foreign 
                corporation, or
                    ``(B) stock of such foreign corporation which is 
                sold in a public offering related to the acquisition 
                described in subsection (a)(2)(B)(i).
            ``(3) Plan deemed in certain cases.--If a foreign 
        corporation acquires directly or indirectly substantially all 
        of the properties of a domestic corporation or partnership 
        during the 4-year period beginning on the date which is 2 years 
        before the ownership requirements of subsection (a)(2)(B)(ii) 
        are met, such actions shall be treated as pursuant to a plan.
            ``(4) Certain transfers disregarded.--The transfer of 
        properties or liabilities (including by contribution or 
        distribution) shall be disregarded if such transfers are part 
        of a plan a principal purpose of which is to avoid the purposes 
        of this section.
            ``(5) Special rule for related partnerships.--For purposes 
        of applying subsection (a)(2)(B)(ii) to the acquisition of a 
        trade or business of a domestic partnership, except as provided 
        in regulations, all partnerships which are under common control 
        (within the meaning of section 482) shall be treated as 1 
        partnership.
            ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to determine whether a 
        corporation is a surrogate foreign corporation, including 
        regulations--
                    ``(A) to treat warrants, options, contracts to 
                acquire stock, convertible debt interests, and other 
                similar interests as stock, and
                    ``(B) to treat stock as not stock.
    ``(c) Other Definitions.--For purposes of this section--
            ``(1) Applicable period.--The term `applicable period' 
        means the period--
                    ``(A) beginning on the first date properties are 
                acquired as part of the acquisition described in 
                subsection (a)(2)(B)(i), and
                    ``(B) ending on the date which is 10 years after 
                the last date properties are acquired as part of such 
                acquisition.
            ``(2) Inversion gain.--The term `inversion gain' means the 
        income or gain recognized by reason of the transfer during the 
        applicable period of stock or other properties by an 
        expatriated entity, and any income received or accrued during 
        the applicable period by reason of a license of any property by 
        an expatriated entity--
                    ``(A) as part of the acquisition described in 
                subsection (a)(2)(B)(i), or
                    ``(B) after such acquisition if the transfer or 
                license is to a foreign related person.
        Subparagraph (B) shall not apply to property described in 
        section 1221(a)(1) in the hands of the expatriated entity.
            ``(3) Foreign related person.--The term `foreign related 
        person' means, with respect to any expatriated entity, a 
        foreign person which--
                    ``(A) is related (within the meaning of section 
                267(b) or 707(b)(1)) to such entity, or
                    ``(B) is under the same common control (within the 
                meaning of section 482) as such entity.
    ``(d) Special Rules.--
            ``(1) Credits not allowed against tax on inversion gain.--
        Credits (other than the credit allowed by section 901) shall be 
        allowed against the tax imposed by this chapter on an 
        expatriated entity for any taxable year described in subsection 
        (a) only to the extent such tax exceeds the product of--
                    ``(A) the amount of the inversion gain for the 
                taxable year, and
                    ``(B) the highest rate of tax specified in section 
                11(b)(1).
        For purposes of determining the credit allowed by section 901, 
        inversion gain shall be treated as from sources within the 
        United States.
            ``(2) Special rules for partnerships.--In the case of an 
        expatriated entity which is a partnership--
                    ``(A) subsection (a)(1) shall apply at the partner 
                rather than the partnership level,
                    ``(B) the inversion gain of any partner for any 
                taxable year shall be equal to the sum of--
                            ``(i) the partner's distributive share of 
                        inversion gain of the partnership for such 
                        taxable year, plus
                            ``(ii) gain recognized for the taxable year 
                        by the partner by reason of the transfer during 
                        the applicable period of any partnership 
                        interest of the partner in such partnership to 
                        the surrogate foreign corporation, and
                    ``(C) the highest rate of tax specified in the rate 
                schedule applicable to the partner under this chapter 
                shall be substituted for the rate of tax referred to in 
                paragraph (1).
            ``(3) Coordination with section 172 and minimum tax.--Rules 
        similar to the rules of paragraphs (3) and (4) of section 
        860E(a) shall apply for purposes of subsection (a).
            ``(4) Statute of limitations.--
                    ``(A) In general.--The statutory period for the 
                assessment of any deficiency attributable to the 
                inversion gain of any taxpayer for any pre-inversion 
                year shall not expire before the expiration of 3 years 
                from the date the Secretary is notified by the taxpayer 
                (in such manner as the Secretary may prescribe) of the 
                acquisition described in subsection (a)(2)(B)(i) to 
                which such gain relates and such deficiency may be 
                assessed before the expiration of such 3-year period 
                notwithstanding the provisions of any other law or rule 
                of law which would otherwise prevent such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' means 
                any taxable year if--
                            ``(i) any portion of the applicable period 
                        is included in such taxable year, and
                            ``(ii) such year ends before the taxable 
                        year in which the acquisition described in 
                        subsection (a)(2)(B)(i) is completed.
    ``(e) Special Rule for Treaties.--Nothing in section 894 or 7852(d) 
or in any other provision of law shall be construed as permitting an 
exemption, by reason of any treaty obligation of the United States 
heretofore or hereafter entered into, from the provisions of this 
section.
    ``(f) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including regulations 
providing for such adjustments to the application of this section as 
are necessary to prevent the avoidance of the purposes of this section, 
including the avoidance of such purposes through--
            ``(1) the use of related persons, pass-through or other 
        noncorporate entities, or other intermediaries, or
            ``(2) transactions designed to have persons cease to be (or 
        not become) members of expanded affiliated groups or related 
        persons.''.
    (b) Conforming Amendment.--The table of sections for subchapter C 
of chapter 80 is amended by adding at the end the following new item:

                              ``Sec. 7874. Rules relating to 
                                        expatriated entities and their 
                                        foreign parents.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after March 4, 2003.

SEC. 2003. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
              CORPORATIONS.

    (a) In General.--Subtitle D is amended by inserting after chapter 
44 end the following new chapter:

       ``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES

                              ``Sec. 4985. Stock compensation of 
                                        insiders in expatriated 
                                        corporations.

``SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
              CORPORATIONS.

    ``(a) Imposition of Tax.--In the case of an individual who is a 
disqualified individual with respect to any expatriated corporation, 
there is hereby imposed on such person a tax equal to 15 percent of the 
value (determined under subsection (b)) of the specified stock 
compensation held (directly or indirectly) by or for the benefit of 
such individual or a member of such individual's family (as defined in 
section 267) at any time during the 12-month period beginning on the 
date which is 6 months before the expatriation date.
    ``(b) Value.--For purposes of subsection (a)--
            ``(1) In general.--The value of specified stock 
        compensation shall be--
                    ``(A) in the case of a stock option (or other 
                similar right) or a stock appreciation right, the fair 
                value of such option or right, and
                    ``(B) in any other case, the fair market value of 
                such compensation.
            ``(2) Date for determining value.--The determination of 
        value shall be made--
                    ``(A) in the case of specified stock compensation 
                held on the expatriation date, on such date,
                    ``(B) in the case of such compensation which is 
                canceled during the 6 months before the expatriation 
                date, on the day before such cancellation, and
                    ``(C) in the case of such compensation which is 
                granted after the expatriation date, on the date such 
                compensation is granted.
    ``(c) Tax To Apply Only if Shareholder Gain Recognized.--Subsection 
(a) shall apply to any disqualified individual with respect to an 
expatriated corporation only if gain (if any) on any stock in such 
corporation is recognized in whole or part by any shareholder by reason 
of the acquisition referred to in section 7874(a)(2)(B)(i) with respect 
to such corporation.
    ``(d) Exception Where Gain Recognized on Compensation.--Subsection 
(a) shall not apply to--
            ``(1) any stock option which is exercised on the 
        expatriation date or during the 6-month period before such date 
        and to the stock acquired in such exercise, if income is 
        recognized under section 83 on or before the expatriation date 
        with respect to the stock acquired pursuant to such exercise, 
        and
            ``(2) any other specified stock compensation which is 
        exercised, sold, exchanged, distributed, cashed-out, or 
        otherwise paid during such period in a transaction in which 
        income, gain, or loss is recognized in full.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Disqualified individual.--The term `disqualified 
        individual' means, with respect to a corporation, any 
        individual who, at any time during the 12-month period 
        beginning on the date which is 6 months before the expatriation 
        date--
                    ``(A) is subject to the requirements of section 
                16(a) of the Securities Exchange Act of 1934 with 
                respect to such corporation or any member of the 
                expanded affiliated group which includes such 
                corporation, or
                    ``(B) would be subject to such requirements if such 
                corporation or member were an issuer of equity 
                securities referred to in such section.
            ``(2) Expatriated corporation; expatriation date.--
                    ``(A) Expatriated corporation.--The term 
                `expatriated corporation' means any corporation which 
                is an expatriated entity (as defined in section 
                7874(a)(2)). Such term includes any predecessor or 
                successor of such a corporation.
                    ``(B) Expatriation date.--The term `expatriation 
                date' means, with respect to a corporation, the date on 
                which the corporation first becomes an expatriated 
                corporation.
            ``(3) Specified stock compensation.--
                    ``(A) In general.--The term `specified stock 
                compensation' means payment (or right to payment) 
                granted by the expatriated corporation (or by any 
                member of the expanded affiliated group which includes 
                such corporation) to any person in connection with the 
                performance of services by a disqualified individual 
                for such corporation or member if the value of such 
                payment or right is based on (or determined by 
                reference to) the value (or change in value) of stock 
                in such corporation (or any such member).
                    ``(B) Exceptions.--Such term shall not include--
                            ``(i) any option to which part II of 
                        subchapter D of chapter 1 applies, or
                            ``(ii) any payment or right to payment from 
                        a plan referred to in section 280G(b)(6).
            ``(4) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group (as defined in 
        section 1504(a) without regard to section 1504(b)(3)); except 
        that section 1504(a) shall be applied by substituting `more 
        than 50 percent' for `at least 80 percent' each place it 
        appears.
    ``(f) Special Rules.--For purposes of this section--
            ``(1) Cancellation of restriction.--The cancellation of a 
        restriction which by its terms will never lapse shall be 
        treated as a grant.
            ``(2) Payment or reimbursement of tax by corporation 
        treated as specified stock compensation.--Any payment of the 
        tax imposed by this section directly or indirectly by the 
        expatriated corporation or by any member of the expanded 
        affiliated group which includes such corporation--
                    ``(A) shall be treated as specified stock 
                compensation, and
                    ``(B) shall not be allowed as a deduction under any 
                provision of chapter 1.
            ``(3) Certain restrictions ignored.--Whether there is 
        specified stock compensation, and the value thereof, shall be 
        determined without regard to any restriction other than a 
        restriction which by its terms will never lapse.
            ``(4) Property transfers.--Any transfer of property shall 
        be treated as a payment and any right to a transfer of property 
        shall be treated as a right to a payment.
            ``(5) Other administrative provisions.--For purposes of 
        subtitle F, any tax imposed by this section shall be treated as 
        a tax imposed by subtitle A.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Denial of Deduction.--
            (1) In general.--Paragraph (6) of section 275(a) is amended 
        by inserting ``45,'' before ``46,''.
            (2) $1,000,000 limit on deductible compensation reduced by 
        payment of excise tax on specified stock compensation.--
        Paragraph (4) of section 162(m) is amended by adding at the end 
        the following new subparagraph:
                    ``(G) Coordination with excise tax on specified 
                stock compensation.--The dollar limitation contained in 
                paragraph (1) with respect to any covered employee 
                shall be reduced (but not below zero) by the amount of 
                any payment (with respect to such employee) of the tax 
                imposed by section 4985 directly or indirectly by the 
                expatriated corporation (as defined in such section) or 
                by any member of the expanded affiliated group (as 
                defined in such section) which includes such 
                corporation.''
    (c) Conforming Amendments.--
            (1) The last sentence of section 3121(v)(2)(A) is amended 
        by inserting before the period ``or to any specified stock 
        compensation (as defined in section 4985) on which tax is 
        imposed by section 4985''.
            (2) The table of chapters for subtitle D is amended by 
        inserting after the item relating to chapter 44 the following 
        new item:

                              ``Chapter 45. Provisions relating to 
                                        expatriated entities.''
    (d) Effective Date.--The amendments made by this section shall take 
effect on March 4, 2003; except that periods before such date shall not 
be taken into account in applying the periods in subsections (a) and 
(e)(1) of section 4985 of the Internal Revenue Code of 1986, as added 
by this section.

SEC. 2004. REINSURANCE OF UNITED STATES RISKS IN FOREIGN JURISDICTIONS.

    (a) In General.--Section 845(a) (relating to allocation in case of 
reinsurance agreement involving tax avoidance or evasion) is amended by 
striking ``source and character'' and inserting ``amount, source, or 
character''.
    (b) Effective Date.--The amendments made by this section shall 
apply to any risk reinsured after the date of the enactment of this 
Act.

SEC. 2005. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.

    (a) Expatriation To Avoid Tax.--
            (1) In general.--Subsection (a) of section 877 (relating to 
        treatment of expatriates) is amended to read as follows:
    ``(a) Treatment of Expatriates.--
            ``(1) In general.--Every nonresident alien individual to 
        whom this section applies and who, within the 10-year period 
        immediately preceding the close of the taxable year, lost 
        United States citizenship shall be taxable for such taxable 
        year in the manner provided in subsection (b) if the tax 
        imposed pursuant to such subsection (after any reduction in 
        such tax under the last sentence of such subsection) exceeds 
        the tax which, without regard to this section, is imposed 
        pursuant to section 871.
            ``(2) Individuals subject to this section.--This section 
        shall apply to any individual if--
                    ``(A) the average annual net income tax (as defined 
                in section 38(c)(1)) of such individual for the period 
                of 5 taxable years ending before the date of the loss 
                of United States citizenship is greater than $122,000,
                    ``(B) the net worth of the individual as of such 
                date is $2,000,000 or more, or
                    ``(C) such individual fails to certify under 
                penalty of perjury that he has met the requirements of 
                this title for the 5 preceding taxable years or fails 
                to submit such evidence of such compliance as the 
                Secretary may require.
        In the case of the loss of United States citizenship in any 
        calendar year after 2003, such $122,000 amount shall be 
        increased by an amount equal to such dollar amount multiplied 
        by the cost-of-living adjustment determined under section 
        1(f)(3) for such calendar year by substituting `2002' for 
        `1992' in subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest multiple of 
        $1,000.''.
            (2) Revision of exceptions from alternative tax.--
        Subsection (c) of section 877 (relating to tax avoidance not 
        presumed in certain cases) is amended to read as follows:
    ``(c) Exceptions.--
            ``(1) In general.--Subparagraphs (A) and (B) of subsection 
        (a)(2) shall not apply to an individual described in paragraph 
        (2) or (3).
            ``(2) Dual citizens.--
                    ``(A) In general.--An individual is described in 
                this paragraph if--
                            ``(i) the individual became at birth a 
                        citizen of the United States and a citizen of 
                        another country and continues to be a citizen 
                        of such other country, and
                            ``(ii) the individual has had no 
                        substantial contacts with the United States.
                    ``(B) Substantial contacts.--An individual shall be 
                treated as having no substantial contacts with the 
                United States only if the individual--
                            ``(i) was never a resident of the United 
                        States (as defined in section 7701(b)),
                            ``(ii) has never held a United States 
                        passport, and
                            ``(iii) was not present in the United 
                        States for more than 30 days during any 
                        calendar year which is 1 of the 10 calendar 
                        years preceding the individual's loss of United 
                        States citizenship.
            ``(3) Certain minors.--An individual is described in this 
        paragraph if--
                    ``(A) the individual became at birth a citizen of 
                the United States,
                    ``(B) neither parent of such individual was a 
                citizen of the United States at the time of such birth,
                    ``(C) the individual's loss of United States 
                citizenship occurs before such individual attains age 
                18\1/2\, and
                    ``(D) the individual was not present in the United 
                States for more than 30 days during any calendar year 
                which is 1 of the 10 calendar years preceding the 
                individual's loss of United States citizenship.''.
            (3) Conforming amendment.--Section 2107(a) is amended to 
        read as follows:
    ``(a) Treatment of Expatriates.--A tax computed in accordance with 
the table contained in section 2001 is hereby imposed on the transfer 
of the taxable estate, determined as provided in section 2106, of every 
decedent nonresident not a citizen of the United States if the date 
of death occurs during a taxable year with respect to which the 
decedent is subject to tax under section 877(b).''.
    (b) Special Rules for Determining When an Individual Is No Longer a 
United States Citizen or Long-Term Resident.--Section 7701 (relating to 
definitions) is amended by redesignating subsection (n) as subsection 
(o) and by inserting after subsection (m) the following new subsection:
    ``(n) Special Rules for Determining When an Individual Is No Longer 
a United States Citizen or Long-Term Resident.--An individual who would 
(but for this subsection) cease to be treated as a citizen or resident 
of the United States shall continue to be treated as a citizen or 
resident of the United States, as the case may be, until such 
individual--
            ``(1) gives notice of an expatriating act or termination of 
        residency (with the requisite intent to relinquish citizenship 
        or terminate residency) to the Secretary of State or the 
        Secretary of Homeland Security, and
            ``(2) provides a statement in accordance with section 
        6039G.''.
    (c) Physical Presence in the United States for More Than 30 Days.--
Section 877 (relating to expatriation to avoid tax) is amended by 
adding at the end the following new subsection:
    ``(g) Physical Presence.--
            ``(1) In general.--This section shall not apply to any 
        individual to whom this section would otherwise apply for any 
        taxable year during the 10-year period referred to in 
        subsection (a) in which such individual is physically present 
        in the United States at any time on more than 30 days in the 
        calendar year ending in such taxable year, and such individual 
        shall be treated for purposes of this title as a citizen or 
        resident of the United States, as the case may be, for such 
        taxable year.
            ``(2) Exception.--
                    ``(A) In general.--In the case of an individual 
                described in any of the following subparagraphs of this 
                paragraph, a day of physical presence in the United 
                States shall be disregarded if the individual is 
                performing services in the United States on such day 
                for an employer. The preceding sentence shall not apply 
                if--
                            ``(i) such employer is related (within the 
                        meaning of section 267 and 707) to such 
                        individual, or
                            ``(ii) such employer fails to meet such 
                        requirements as the Secretary may prescribe by 
                        regulations to prevent the avoidance of the 
                        purposes of this paragraph.
                Not more than 30 days during any calendar year may be 
                disregarded under this subparagraph.
                    ``(B) Individuals with ties to other countries.--An 
                individual is described in this subparagraph if--
                            ``(i) the individual becomes (not later 
                        than the close of a reasonable period after 
                        loss of United States citizenship or 
                        termination of residency) a citizen or resident 
                        of the country in which--
                                    ``(I) such individual was born,
                                    ``(II) if such individual is 
                                married, such individual's spouse was 
                                born, or
                                    ``(III) either of such individual's 
                                parents were born, and
                            ``(ii) the individual becomes fully liable 
                        for income tax in such country.
                    ``(C) Minimal prior physical presence in the united 
                states.--An individual is described in this 
                subparagraph if, for each year in the 10-year period 
                ending on the date of loss of United States citizenship 
                or termination of residency, the individual was 
                physically present in the United States for 30 days or 
                less. The rule of section 7701(b)(3)(D)(ii) shall apply 
                for purposes of this subparagraph.''.
    (d) Transfers Subject to Gift Tax.--
            (1) In general.--Subsection (a) of section 2501 (relating 
        to taxable transfers) is amended by striking paragraph (4), by 
        redesignating paragraph (5) as paragraph (4), and by striking 
        paragraph (3) and inserting the following new paragraph:
            ``(3) Exception.--
                    ``(A) Certain individuals.--Paragraph (2) shall not 
                apply in the case of a donor to whom section 877(b) 
                applies for the taxable year which includes the date of 
                the transfer.
                    ``(B) Credit for foreign gift taxes.--The tax 
                imposed by this section solely by reason of this 
                paragraph shall be credited with the amount of any gift 
                tax actually paid to any foreign country in respect of 
                any gift which is taxable under this section solely by 
                reason of this paragraph.''
            (2) Transfers of certain stock.--Subsection (a) of section 
        2501 is amended by adding at the end the following new 
        paragraph:
            ``(5) Transfers of certain stock.--
                    ``(A) In general.--In the case of a transfer of 
                stock in a foreign corporation described in 
                subparagraph (B) by a donor to whom section 877(b) 
                applies for the taxable year which includes the date of 
                the transfer--
                            ``(i) section 2511(a) shall be applied 
                        without regard to whether such stock is 
                        situated within the United States, and
                            ``(ii) the value of such stock for purposes 
                        of this chapter shall be its U.S.-asset value 
                        determined under subparagraph (C).
                    ``(B) Foreign corporation described.--A foreign 
                corporation is described in this subparagraph with 
                respect to a donor if--
                            ``(i) the donor owned (within the meaning 
                        of section 958(a)) at the time of such transfer 
                        10 percent or more of the total combined voting 
                        power of all classes of stock entitled to vote 
                        of the foreign corporation, and
                            ``(ii) such donor owned (within the meaning 
                        of section 958(a)), or is considered to have 
                        owned (by applying the ownership rules of 
                        section 958(b)), at the time of such transfer, 
                        more than 50 percent of--
                                    ``(I) the total combined voting 
                                power of all classes of stock entitled 
                                to vote of such corporation, or
                                    ``(II) the total value of the stock 
                                of such corporation.
                    ``(C) U.S.-asset value.--For purposes of 
                subparagraph (A), the U.S.-asset value of stock shall 
                be the amount which bears the same ratio to the fair 
                market value of such stock at the time of transfer as--
                            ``(i) the fair market value (at such time) 
                        of the assets owned by such foreign corporation 
                        and situated in the United States, bears to
                            ``(ii) the total fair market value (at such 
                        time) of all assets owned by such foreign 
                        corporation.''
    (e) Enhanced Information Reporting From Individuals Losing United 
States Citizenship.--
            (1) In general.--Subsection (a) of section 6039G is amended 
        to read as follows:
    ``(a) In General.--Notwithstanding any other provision of law, any 
individual to whom section 877(b) applies for any taxable year shall 
provide a statement for such taxable year which includes the 
information described in subsection (b).''.
            (2) Information to be provided.--Subsection (b) of section 
        6039G is amended to read as follows:
    ``(b) Information To Be Provided.--Information required under 
subsection (a) shall include--
            ``(1) the taxpayer's TIN,
            ``(2) the mailing address of such individual's principal 
        foreign residence,
            ``(3) the foreign country in which such individual is 
        residing,
            ``(4) the foreign country of which such individual is a 
        citizen,
            ``(5) information detailing the income, assets, and 
        liabilities of such individual,
            ``(6) the number of days during any portion of which that 
        the individual was physically present in the United States 
        during the taxable year, and
            ``(7) such other information as the Secretary may 
        prescribe.''.
            (3) Increase in penalty.--Subsection (d) of section 6039G 
        is amended to read as follows:
    ``(d) Penalty.--If--
            ``(1) an individual is required to file a statement under 
        subsection (a) for any taxable year, and
            ``(2) fails to file such a statement with the Secretary on 
        or before the date such statement is required to be filed or 
        fails to include all the information required to be shown on 
        the statement or includes incorrect information,
such individual shall pay a penalty of $10,000 unless it is shown that 
such failure is due to reasonable cause and not to willful neglect.''.
            (4) Conforming amendment.--Section 6039G is amended by 
        striking subsections (c), (f), and (g) and by redesignating 
        subsections (d) and (e) as subsection (c) and (d), 
        respectively.
    (f) Effective Date.--The amendments made by this section shall 
apply to individuals who expatriate after February 27, 2003.

SEC. 2006. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

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

``SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS AND ACQUISITIONS.

    ``(a) In General.--According to the forms or regulations prescribed 
by the Secretary, the acquiring corporation in any taxable acquisition 
shall make a return setting forth--
            ``(1) a description of the acquisition,
            ``(2) the name and address of each shareholder of the 
        acquired corporation who is required to recognize gain (if any) 
        as a result of the acquisition,
            ``(3) the amount of money and the fair market value of 
        other property transferred to each such shareholder as part of 
        such acquisition, and
            ``(4) such other information as the Secretary may 
        prescribe.
To the extent provided by the Secretary, the requirements of this 
section applicable to the acquiring corporation shall be applicable to 
the acquired corporation and not to the acquiring corporation.
    ``(b) Nominees.--According to the forms or regulations prescribed 
by the Secretary--
            ``(1) Reporting.--Any person who holds stock as a nominee 
        for another person shall furnish in the manner prescribed by 
        the Secretary to such other person the information provided by 
        the corporation under subsection (d).
            ``(2) Reporting to nominees.--In the case of stock held by 
        any person as a nominee, references in this section (other than 
        in subsection (c)) to a shareholder shall be treated as a 
        reference to the nominee.
    ``(c) Taxable Acquisition.--For purposes of this section, the term 
`taxable acquisition' means any acquisition by a corporation of stock 
in or property of another corporation if any shareholder of the 
acquired corporation is required to recognize gain (if any) as a result 
of such acquisition.
    ``(d) Statements To Be Furnished to Shareholders.--According to the 
forms or regulations prescribed by the Secretary, every person required 
to make a return under subsection (a) shall furnish to each shareholder 
whose name is required to be set forth in such return a written 
statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return,
            ``(2) the information required to be shown on such return 
        with respect to such shareholder, and
            ``(3) such other information as the Secretary may 
        prescribe.
The written statement required under the preceding sentence shall be 
furnished to the shareholder on or before January 31 of the year 
following the calendar year during which the taxable acquisition 
occurred.''
    (b) Assessable Penalties.--
            (1) Subparagraph (B) of section 6724(d)(1) (relating to 
        definitions) is amended by redesignating clauses (ii) through 
        (xviii) as clauses (iii) through (xix), respectively, and by 
        inserting after clause (i) the following new clause:
                            ``(ii) section 6043A(a) (relating to 
                        returns relating to taxable mergers and 
                        acquisitions),''.
            (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (F) through (BB) as subparagraphs 
        (G) through (CC), respectively, and by inserting after 
        subparagraph (E) the following new subparagraph:
                    ``(F) subsections (b) and (d) of section 6043A 
                (relating to returns relating to taxable mergers and 
                acquisitions).''.
    (c) Clerical Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 61 is amended by inserting after 
the item relating to section 6043 the following new item:

                              ``Sec. 6043A. Returns relating to taxable 
                                        mergers and acquisitions.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to acquisitions after the date of the enactment of this Act.

SEC. 2007. STUDIES.

    (a) Transfer Pricing Rules.--The Secretary of the Treasury or the 
Secretary's delegate shall conduct a study regarding the effectiveness 
of current transfer pricing rules and compliance efforts in ensuring 
that cross-border transfers and other related-party transactions, 
particularly transactions involving intangible assets, service 
contracts, or leases cannot be used improperly to shift income out of 
the United States. The study shall include a review of the 
contemporaneous documentation and penalty rules under section 6662 of 
the Internal Revenue Code of 1986, a review of the regulatory and 
administrative guidance implementing the principles of section 482 of 
such Code to transactions involving intangible property and services 
and to cost-sharing arrangements, and an examination of whether 
increased disclosure of cross-border transactions should be required. 
The study shall set forth specific recommendations to address all 
abuses identified in the study. Not later than June 30, 2004, such 
Secretary or delegate shall submit to the Congress a report of such 
study.
    (b) Income Tax Treaties.--The Secretary of the Treasury or the 
Secretary's delegate shall conduct a study of United States income tax 
treaties to identify any inappropriate reductions in United States 
withholding tax that provide opportunities for shifting income out of 
the United States, and to evaluate whether existing anti-abuse 
mechanisms are operating properly. The study shall include specific 
recommendations to address all inappropriate uses of tax treaties. Not 
later than June 30, 2004, such Secretary or delegate shall submit to 
the Congress a report of such study.
    (c) Impact of Corporate Expatriation Provisions.--The Secretary of 
the Treasury or the Secretary's delegate shall conduct a study of the 
impact of the provisions of this title on earnings stripping and 
corporate expatriation. The study shall include such recommendations as 
such Secretary or delegate may have to improve the impact of such 
provisions in carrying out the purposes of this title. Not later than 
December 31, 2005, such Secretary or delegate shall submit to the 
Congress a report of such study.

             TITLE III--PROVISIONS RELATING TO TAX SHELTERS

                Subtitle A--Taxpayer-Related Provisions

SEC. 3001. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTIONS.

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

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

    ``(a) Imposition of Penalty.--Any person who fails to include on 
any return or statement any information with respect to a reportable 
transaction which is required under section 6011 to be included with 
such return or statement shall pay a penalty in the amount determined 
under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        amount of the penalty under subsection (a) shall be--
                    ``(A) $10,000 in the case of a natural person, and
                    ``(B) $50,000 in any other case.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be--
                    ``(A) $100,000 in the case of a natural person, and
                    ``(B) $200,000 in any other case.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to which 
        information is required to be included with a return or 
        statement because, as determined under regulations prescribed 
        under section 6011, such transaction is of a type which the 
        Secretary determines as having a potential for tax avoidance or 
        evasion.
            ``(2) Listed transaction.--The term `listed transaction' 
        means a reportable transaction which is the same as, or 
        substantially similar to, a transaction specifically identified 
        by the Secretary as a tax avoidance transaction for purposes of 
        section 6011.
    ``(d) Authority To Rescind Penalty.--
            ``(1) In general.--The Commissioner of Internal Revenue may 
        rescind all or any portion of any penalty imposed by this 
        section with respect to any violation if--
                    ``(A) the violation is with respect to a reportable 
                transaction other than a listed transaction, and
                    ``(B) rescinding the penalty would promote 
                compliance with the requirements of this title and 
                effective tax administration.
            ``(2) No judicial appeal.--Notwithstanding any other 
        provision of law, any determination under this subsection may 
        not be reviewed in any judicial proceeding.
            ``(3) Records.--If a penalty is rescinded under paragraph 
        (1), the Commissioner shall place in the file in the Office of 
        the Commissioner the opinion of the Commissioner or the head of 
        the Office of Tax Shelter Analysis with respect to the 
        determination, including--
                    ``(A) a statement of the facts and circumstances 
                relating to the violation,
                    ``(B) the reasons for the rescission, and
                    ``(C) the amount of the penalty rescinded.
    ``(e) Coordination With Other Penalties.--The penalty imposed by 
this section shall be in addition to any other penalty imposed by this 
title.''
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by inserting after the item 
relating to section 6707 the following:

                              ``Sec. 6707A. Penalty for failure to 
                                        include reportable transaction 
                                        information with return.''
    (c) Effective Date.--The amendments made by this section shall 
apply to returns and statements the due date for which is after the 
date of the enactment of this Act.
    (d) Report.--The Commissioner of Internal Revenue shall annually 
report to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate--
            (1) a summary of the total number and aggregate amount of 
        penalties imposed, and rescinded, under section 6707A of the 
        Internal Revenue Code of 1986, and
            (2) a description of each penalty rescinded under section 
        6707(c) of such Code and the reasons therefor.

SEC. 3002. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER 
              REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
              AVOIDANCE PURPOSE, ETC.

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

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

    ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be added 
to the tax an amount equal to 20 percent of the amount of such 
understatement.
    ``(b) Reportable Transaction Understatement.--For purposes of this 
section--
            ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                    ``(A) the product of--
                            ``(i) the amount of the increase (if any) 
                        in taxable income which results from a 
                        difference between the proper tax treatment of 
                        an item to which this section applies and the 
                        taxpayer's treatment of such item (as shown on 
                        the taxpayer's return of tax), and
                            ``(ii) the highest rate of tax imposed by 
                        section 1 (section 11 in the case of a taxpayer 
                        which is a corporation), and
                    ``(B) the amount of the decrease (if any) in the 
                aggregate amount of credits determined under subtitle A 
                which results from a difference between the taxpayer's 
                treatment of an item to which this section applies (as 
                shown on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the excess 
        of deductions allowed for the taxable year over gross income 
        for such year, and any reduction in the amount of capital 
        losses which would (without regard to section 1211) be allowed 
        for such year, shall be treated as an increase in taxable 
        income.
            ``(2) Items to which section applies.--This section shall 
        apply to any item which is attributable to--
                    ``(A) any listed transaction, and
                    ``(B) any reportable transaction (other than a 
                listed transaction) if a significant purpose of such 
                transaction is the avoidance or evasion of Federal 
                income tax.
    ``(c) Higher Penalty for Nondisclosed Transactions.--Subsection (a) 
shall be applied by substituting `30 percent' for `20 percent' with 
respect to the portion of any reportable transaction understatement 
with respect to which the requirement of section 6664(d)(2)(A) is not 
met.
    ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' and 
`listed transaction' have the respective meanings given to such terms 
by section 6707A(c).
    ``(e) Special Rules.--
            ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as defined 
        in section 6662(d)(2))--
                    ``(A) the amount of such understatement (determined 
                without regard to this paragraph) shall be increased by 
                the aggregate amount of reportable transaction 
                understatements for purposes of determining whether 
                such understatement is a substantial understatement 
                under section 6662(d)(1), and
                    ``(B) the addition to tax under section 6662(a) 
                shall apply only to the excess of the amount of the 
                substantial understatement (if any) after the 
                application of subparagraph (A) over the aggregate 
                amount of reportable transaction understatements.
            ``(2) Coordination with other penalties.--
                    ``(A) Application of fraud penalty.--References to 
                an underpayment in section 6663 shall be treated as 
                including references to a reportable transaction 
                understatement.
                    ``(B) No double penalty.--This section shall not 
                apply to any portion of an understatement on which a 
                penalty is imposed under section 6663.
            ``(3) Special rule for amended returns.--Except as provided 
        in regulations, in no event shall any tax treatment included 
        with an amendment or supplement to a return of tax be taken 
        into account in determining the amount of any reportable 
        transaction understatement if the amendment or supplement is 
        filed after the earlier of the date the taxpayer is first 
        contacted by the Secretary regarding the examination of the 
        return or such other date as is specified by the Secretary.''
    (b) Determination of Other Understatements.--Subparagraph (A) of 
section 6662(d)(2) is amended by adding at the end the following flush 
sentence:
                ``The excess under the preceding sentence shall be 
                determined without regard to items to which section 
                6662A applies.''
    (c) Reasonable Cause Exception.--
            (1) In general.--Section 6664 is amended by adding at the 
        end the following new subsection:
    ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
            ``(1) In general.--No penalty shall be imposed under 
        section 6662A with respect to any portion of a reportable 
        transaction understatement if it is shown that there was a 
        reasonable cause for such portion and that the taxpayer acted 
        in good faith with respect to such portion.
            ``(2) Special rules.--Paragraph (1) shall not apply to any 
        reportable transaction understatement unless--
                    ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed in 
                accordance with the regulations prescribed under 
                section 6011,
                    ``(B) there is or was substantial authority for 
                such treatment, and
                    ``(C) the taxpayer reasonably believed that such 
                treatment was more likely than not the proper 
                treatment.
        A taxpayer failing to adequately disclose in accordance with 
        section 6011 shall be treated as meeting the requirements of 
        subparagraph (A) if the penalty for such failure was rescinded 
        under section 6707A(d).
            ``(3) Rules relating to reasonable belief.--For purposes of 
        paragraph (2)(C)--
                    ``(A) In general.--A taxpayer shall be treated as 
                having a reasonable belief with respect to the tax 
                treatment of an item only if such belief--
                            ``(i) is based on the facts and law that 
                        exist at the time the return of tax which 
                        includes such tax treatment is filed, and
                            ``(ii) relates solely to the taxpayer's 
                        chances of success on the merits of such 
                        treatment and does not take into account the 
                        possibility that a return will not be audited, 
                        such treatment will not be raised on audit, or 
                        such treatment will be resolved through 
                        settlement if it is raised.
                    ``(B) Certain opinions may not be relied upon.--
                            ``(i) In general.--An opinion of a tax 
                        advisor may not be relied upon to establish the 
                        reasonable belief of a taxpayer if--
                                    ``(I) the tax advisor is described 
                                in clause (ii), or
                                    ``(II) the opinion is described in 
                                clause (iii).
                            ``(ii) Disqualified tax advisors.--A tax 
                        advisor is described in this clause if the tax 
                        advisor--
                                    ``(I) is a material advisor (within 
                                the meaning of section 6111(b)(1)) and 
                                participates in the organization, 
                                management, promotion, or sale of the 
                                transaction or is related (within the 
                                meaning of section 267(b) or 707(b)(1)) 
                                to any person who so participates,
                                    ``(II) is compensated directly or 
                                indirectly by a material advisor with 
                                respect to the transaction,
                                    ``(III) has a fee arrangement with 
                                respect to the transaction which is 
                                contingent on all or part of the 
                                intended tax benefits from the 
                                transaction being sustained, or
                                    ``(IV) as determined under 
                                regulations prescribed by the 
                                Secretary, has a disqualifying 
                                financial interest with respect to the 
                                transaction.
                            ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                    ``(I) is based on unreasonable 
                                factual or legal assumptions (including 
                                assumptions as to future events),
                                    ``(II) unreasonably relies on 
                                representations, statements, findings, 
                                or agreements of the taxpayer or any 
                                other person,
                                    ``(III) does not identify and 
                                consider all relevant facts, or
                                    ``(IV) fails to meet any other 
                                requirement as the Secretary may 
                                prescribe.''
            (2) Conforming amendments.--
                    (A) Paragraph (1) of section 6664(c) is amended by 
                striking ``this part'' and inserting ``section 6662 or 
                6663''.
                    (B) The heading for subsection (c) of section 6664 
                is amended by inserting ``for Underpayments'' after 
                ``Exception''.
    (d) Reduction in Penalty for Substantial Understatement of Income 
Tax Not To Apply to Tax Shelters.--Subparagraph (C) of section 
6662(d)(2) (relating to substantial understatement of income tax) is 
amended to read as follows:
                    ``(C) Reduction not to apply to tax shelters.--
                            ``(i) In general.--Subparagraph (B) shall 
                        not apply to any item attributable to a tax 
                        shelter.
                            ``(ii) Tax shelter.--For purposes of clause 
                        (i), the term `tax shelter' means--
                                    ``(I) a partnership or other 
                                entity,
                                    ``(II) any investment plan or 
                                arrangement, or
                                    ``(III) any other plan or 
                                arrangement,
                        if a significant purpose of such partnership, 
                        entity, plan, or arrangement is the avoidance 
                        or evasion of Federal income tax.''
    (e) Conforming Amendments.--
            (1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each 
        amended by striking ``section 6662(d)(2)(C)(iii)'' and 
        inserting ``section 6662(d)(2)(C)(ii)''.
            (2) The heading for section 6662 is amended to read as 
        follows:

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

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

                              ``Sec. 6662. Imposition of accuracy-
                                        related penalty on 
                                        underpayments.
                              ``Sec. 6662A. Imposition of accuracy-
                                        related penalty on 
                                        understatements with respect to 
                                        reportable transactions.''
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

SEC. 3003. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING 
              TO TAXPAYER COMMUNICATIONS.

    (a) In General.--Section 7525(b) (relating to section not to apply 
to communications regarding corporate tax shelters) is amended to read 
as follows:
    ``(b) Section Not To Apply to Communications Regarding Tax 
Shelters.--The privilege under subsection (a) shall not apply to any 
written communication which is--
            ``(1) between a federally authorized tax practitioner and--
                    ``(A) any person,
                    ``(B) any director, officer, employee, agent, or 
                representative of the person, or
                    ``(C) any other person holding a capital or profits 
                interest in the person, and
            ``(2) in connection with the promotion of the direct or 
        indirect participation of the person in any tax shelter (as 
        defined in section 6662(d)(2)(C)(ii)).''
    (b) Effective Date.--The amendment made by this section shall apply 
to communications made on or after the date of the enactment of this 
Act.

SEC. 3004. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH REQUIRED 
              LISTED TRANSACTIONS NOT REPORTED.

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

SEC. 3005. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.

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

                              ``Sec. 6111. Disclosure of reportable 
                                        transactions.''
            (2) So much of section 6112 as precedes subsection (c) 
        thereof is amended to read as follows:

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

    ``(a) In General.--Each material advisor (as defined in section 
6111) with respect to any reportable transaction (as defined in section 
6707A(c)) shall (whether or not required to file a return under section 
6111 with respect to such transaction) maintain (in such manner as the 
Secretary may by regulations prescribe) a list--
            ``(1) identifying each person with respect to whom such 
        advisor acted as a material advisor with respect to such 
        transaction, and
            ``(2) containing such other information as the Secretary 
        may by regulations require.''
            (3) Section 6112 is amended--
                    (A) by redesignating subsection (c) as subsection 
                (b),
                    (B) by inserting ``written'' before ``request'' in 
                subsection (b)(1) (as so redesignated), and
                    (C) by striking ``shall prescribe'' in subsection 
                (b)(2) (as so redesignated) and inserting ``may 
                prescribe''.
            (4) The item relating to section 6112 in the table of 
        sections for subchapter B of chapter 61 is amended to read as 
        follows:

                              ``Sec. 6112. Material advisors of 
                                        reportable transactions must 
                                        keep lists of advisees, etc.''
            (5)(A) The heading for section 6708 is amended to read as 
        follows:

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

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

                              ``Sec. 6708. Failure to maintain lists of 
                                        advisees with respect to 
                                        reportable transactions.''
    (c) Required Disclosure Not Subject to Claim of Confidentiality.--
Paragraph (1) of section 6112(b), as redesignated by subsection (b), is 
amended by adding at the end the following new flush sentence:
        ``For purposes of this section, the identity of any person on 
        such list shall not be privileged.''.
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to transactions 
        with respect to which material aid, assistance, or advice 
        referred to in section 6111(b)(1)(A)(i) of the Internal Revenue 
        Code of 1986 (as added by this section) is provided after the 
        date of the enactment of this Act.
            (2) No claim of confidentiality against disclosure.--The 
        amendment made by subsection (c) shall take effect as if 
        included in the amendments made by section 142 of the Deficit 
        Reduction Act of 1984.

SEC. 3006. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
              TRANSACTIONS.

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

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

    ``(a) In General.--If a person who is required to file a return 
under section 6111(a) with respect to any reportable transaction--
            ``(1) fails to file such return on or before the date 
        prescribed therefor, or
            ``(2) files false or incomplete information with the 
        Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in the 
amount determined under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        penalty imposed under subsection (a) with respect to any 
        failure shall be $50,000.
            ``(2) Listed transactions.--The penalty imposed under 
        subsection (a) with respect to any listed transaction shall be 
        an amount equal to the greater of--
                    ``(A) $200,000, or
                    ``(B) 50 percent of the gross income derived by 
                such person with respect to aid, assistance, or advice 
                which is provided with respect to the listed 
                transaction before the date the return is filed under 
                section 6111.
        Subparagraph (B) shall be applied by substituting `75 percent' 
        for `50 percent' in the case of an intentional failure or act 
        described in subsection (a).
    ``(c) Rescission Authority.--The provisions of section 6707A(d) 
(relating to authority of Commissioner to rescind penalty) shall apply 
to any penalty imposed under this section.
    ``(d) Reportable and Listed Transactions.--For purposes of this 
section, the terms `reportable transaction' and `listed transaction' 
have the respective meanings given to such terms by section 6707A(c).''
    (b) Clerical Amendment.--The item relating to section 6707 in the 
table of sections for part I of subchapter B of chapter 68 is amended 
by striking ``tax shelters'' and inserting ``reportable transactions''.
    (c) Effective Date.--The amendments made by this section shall 
apply to returns the due date for which is after the date of the 
enactment of this Act.

SEC. 3007. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
              INVESTORS.

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

SEC. 3008. PENALTY ON PROMOTERS OF TAX SHELTERS.

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

SEC. 3009. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR 
              NONREPORTABLE TRANSACTIONS.

    (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is amended to 
read as follows:
                    ``(B) Special rule for corporations.--In the case 
                of a corporation other than an S corporation or a 
                personal holding company (as defined in section 542), 
                there is a substantial understatement of income tax for 
                any taxable year if the amount of the understatement 
                for the taxable year exceeds the lesser of--
                            ``(i) 10 percent of the tax required to be 
                        shown on the return for the taxable year (or, 
                        if greater, $10,000), or
                            ``(ii) $10,000,000.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 3010. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO 
              TAX SHELTERS AND REPORTABLE TRANSACTIONS.

    (a) In General.--Section 7408 (relating to action to enjoin 
promoters of abusive tax shelters, etc.) is amended by redesignating 
subsection (c) as subsection (d) and by striking subsections (a) and 
(b) and inserting the following new subsections:
    ``(a) Authority To Seek Injunction.--A civil action in the name of 
the United States to enjoin any person from further engaging in 
specified conduct may be commenced at the request of the Secretary. Any 
action under this section shall be brought in the district court of the 
United States for the district in which such person resides, has his 
principal place of business, or has engaged in specified conduct. The 
court may exercise its jurisdiction over such action (as provided in 
section 7402(a)) separate and apart from any other action brought by 
the United States against such person.
    ``(b) Adjudication and Decree.--In any action under subsection (a), 
if the court finds--
            ``(1) that the person has engaged in any specified conduct, 
        and
            ``(2) that injunctive relief is appropriate to prevent 
        recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in 
any other activity subject to penalty under this title.
    ``(c) Specified Conduct.--For purposes of this section, the term 
`specified conduct' means any action, or failure to take action, 
subject to penalty under section 6700, 6701, 6707, or 6708.''
    (b) Conforming Amendments.--
            (1) The heading for section 7408 is amended to read as 
        follows:

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

            (2) The table of sections for subchapter A of chapter 76 is 
        amended by striking the item relating to section 7408 and 
        inserting the following new item:

        ``Sec. 7408. Actions to enjoin specified conduct related to tax 
                            shelters and reportable transactions.''
    (c) Effective Date.--The amendment made by this section shall take 
effect on the day after the date of the enactment of this Act.

SEC. 3011. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
              ACCOUNTS.

    (a) In General.--Section 5321(a)(5) of title 31, United States 
Code, is amended to read as follows:
            ``(5) Foreign financial agency transaction violation.--
                    ``(A) Penalty authorized.--The Secretary of the 
                Treasury may impose a civil money penalty on any person 
                who violates, or causes any violation of, any provision 
                of section 5314.
                    ``(B) Amount of penalty.--
                            ``(i) In general.--Except as provided in 
                        subparagraph (C), the amount of any civil 
                        penalty imposed under subparagraph (A) shall 
                        not exceed $5,000.
                            ``(ii) Reasonable cause exception.--No 
                        penalty shall be imposed under subparagraph (A) 
                        with respect to any violation if--
                                    ``(I) such violation was due to 
                                reasonable cause, and
                                    ``(II) the amount of the 
                                transaction or the balance in the 
                                account at the time of the transaction 
                                was properly reported.
                    ``(C) Willful violations.--In the case of any 
                person willfully violating, or willfully causing any 
                violation of, any provision of section 5314--
                            ``(i) the maximum penalty under 
                        subparagraph (B)(i) shall be increased to the 
                        greater of--
                                    ``(I) $25,000, or
                                    ``(II) the amount (not exceeding 
                                $100,000) determined under subparagraph 
                                (D), and
                            ``(ii) subparagraph (B)(ii) shall not 
                        apply.
                    ``(D) Amount.--The amount determined under this 
                subparagraph is--
                            ``(i) in the case of a violation involving 
                        a transaction, the amount of the transaction, 
                        or
                            ``(ii) in the case of a violation involving 
                        a failure to report the existence of an account 
                        or any identifying information required to be 
                        provided with respect to an account, the 
                        balance in the account at the time of the 
                        violation.''
    (b) Effective Date.--The amendment made by this section shall apply 
to violations occurring after the date of the enactment of this Act.

SEC. 3012. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT 
              OF THE TREASURY.

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

                      Subtitle B--Other Provisions

SEC. 3021. TREATMENT OF STRIPPED INTERESTS IN BOND AND PREFERRED STOCK 
              FUNDS, ETC.

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

                                ``For treatment of stripped interests 
in certain accounts or entities holding preferred stock, see section 
1286(f).''
    (c) Effective Date.--The amendments made by this section shall 
apply to purchases and dispositions after the date of the enactment of 
this Act.

SEC. 3022. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON WITHHOLDING 
              TAXES ON INCOME OTHER THAN DIVIDENDS.

    (a) In General.--Section 901 is amended by redesignating subsection 
(l) as subsection (m) and by inserting after subsection (k) the 
following new subsection:
    ``(l) Minimum Holding Period for Withholding Taxes on Gain and 
Income Other Than Dividends etc.--
            ``(1) In general.--In no event shall a credit be allowed 
        under subsection (a) for any withholding tax (as defined in 
subsection (k)) on any item of income or gain with respect to any 
property if--
                    ``(A) such property is held by the recipient of the 
                item for 15 days or less during the 30-day period 
                beginning on the date which is 15 days before the date 
                on which the right to receive payment of such item 
                arises, or
                    ``(B) to the extent that the recipient of the item 
                is under an obligation (whether pursuant to a short 
                sale or otherwise) to make related payments with 
                respect to positions in substantially similar or 
                related property.
        This paragraph shall not apply to any dividend to which 
        subsection (k) applies.
            ``(2) Exception for taxes paid by dealers.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any qualified tax with respect to any property held in 
                the active conduct in a foreign country of a business 
                as a dealer in such property.
                    ``(B) Qualified tax.--For purposes of subparagraph 
                (A), the term `qualified tax' means a tax paid to a 
                foreign country (other than the foreign country 
                referred to in subparagraph (A)) if--
                            ``(i) the item to which such tax is 
                        attributable is subject to taxation on a net 
                        basis by the country referred to in 
                        subparagraph (A), and
                            ``(ii) such country allows a credit against 
                        its net basis tax for the full amount of the 
                        tax paid to such other foreign country.
                    ``(C) Dealer.--For purposes of subparagraph (A), 
                the term `dealer' means--
                            ``(i) with respect to a security, any 
                        person to whom paragraphs (1) and (2) of 
                        subsection (k) would not apply by reason of 
                        paragraph (4) thereof if such security were 
                        stock, and
                            ``(ii) with respect to any other property, 
                        any person with respect to whom such property 
                        is described in section 1221(a)(1).
                    ``(D) Regulations.--The Secretary may prescribe 
                such regulations as may be appropriate to carry out 
                this paragraph, including regulations to prevent the 
                abuse of the exception provided by this paragraph and 
                to treat other taxes as qualified taxes.
            ``(3) Exceptions.--The Secretary may by regulation provide 
        that paragraph (1) shall not apply to property where the 
        Secretary determines that the application of paragraph (1) to 
        such property is not necessary to carry out the purposes of 
        this subsection.
            ``(4) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (5), (6), and (7) of subsection (k) shall apply 
        for purposes of this subsection.
            ``(5) Determination of holding period.--Holding periods 
        shall be determined for purposes of this subsection without 
        regard to section 1235 or any similar rule.''
    (b) Conforming Amendment.--The heading of subsection (k) of section 
901 is amended by inserting ``on Dividends'' after ``Taxes''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or accrued more than 30 days after the date of 
the enactment of this Act.

SEC. 3023. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) 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) if any property so contributed has a built-in 
                loss--
                            ``(i) such built-in loss shall be taken 
                        into account only in determining the amount of 
                        items allocated to the contributing partner, 
                        and
                            ``(ii) except as provided in regulations, 
                        in determining the amount of items allocated to 
                        other partners, the basis of the contributed 
                        property in the hands of the partnership shall 
                        be treated as being equal to its fair market 
                        value at the time of contribution.
        For purposes of subparagraph (C), the term `built-in loss' 
        means the excess of the adjusted basis of the property 
        (determined without regard to subparagraph (C)(ii)) over its 
        fair market value at the time of contribution.''
    (b) Adjustment to Basis of Partnership Property on Transfer of 
Partnership Interest if There Is Substantial Built-In Loss.--
            (1) Adjustment required.--Subsection (a) of section 743 
        (relating to optional adjustment to basis of partnership 
        property) is amended by inserting before the period ``or unless 
        the partnership has a substantial built-in loss immediately 
        after such transfer''.
            (2) Adjustment.--Subsection (b) of section 743 is amended 
        by inserting ``or with respect to which there is a substantial 
        built-in loss immediately after such transfer'' after ``section 
        754 is in effect''.
            (3) Substantial built-in loss.--Section 743 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Built-In Loss.--
            ``(1) In general.--For purposes of this section, a 
        partnership has a substantial built-in loss with respect to a 
        transfer of an interest in a partnership if the partnership's 
        adjusted basis in the partnership property exceeds by more than 
        $250,000 the fair market value of such property.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        paragraph (1) and section 734(d), including regulations 
        aggregating related partnerships and disregarding property 
        acquired by the partnership in an attempt to avoid such 
        purposes.''
            (4) Clerical amendments.--
                    (A) The section heading for section 743 is amended 
                to read as follows:

``SEC. 743. ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY WHERE SECTION 
              754 ELECTION OR SUBSTANTIAL BUILT-IN LOSS.''

                    (B) The table of sections for subpart C of part II 
                of subchapter K of chapter 1 is amended by striking the 
                item relating to section 743 and inserting the 
                following new item:

                              ``Sec. 743. Adjustment to basis of 
                                        partnership property where 
                                        section 754 election or 
                                        substantial built-in loss.''
    (c) Adjustment to Basis of Undistributed Partnership Property if 
There Is Substantial Basis Reduction.--
            (1) Adjustment required.--Subsection (a) of section 734 
        (relating to optional adjustment to basis of undistributed 
        partnership property) is amended by inserting before the period 
        ``or unless there is a substantial basis reduction''.
            (2) Adjustment.--Subsection (b) of section 734 is amended 
        by inserting ``or unless there is a substantial basis 
        reduction'' after ``section 754 is in effect''.
            (3) Substantial basis reduction.--Section 734 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Basis Reduction.--
            ``(1) In general.--For purposes of this section, there is a 
        substantial basis reduction with respect to a distribution if 
        the sum of the amounts described in subparagraphs (A) and (B) 
        of subsection (b)(2) exceeds $250,000.
            ``(2) Regulations.--

                                ``For regulations to carry out this 
subsection, see section 743(d)(2).''
            (4) Clerical amendments.--
                    (A) The section heading for section 734 is amended 
                to read as follows:

``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY 
              WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS 
              REDUCTION.''

                    (B) The table of sections for subpart B of part II 
                of subchapter K of chapter 1 is amended by striking the 
                item relating to section 734 and inserting the 
                following new item:

                              ``Sec. 734. Adjustment to basis of 
                                        undistributed partnership 
                                        property where section 754 
                                        election or substantial basis 
                                        reduction.''
    (d) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to contributions made after the date of the 
        enactment of this Act.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to transfers after the date of the enactment of 
        this Act.
            (3) Subsection (c).--The amendments made by subsection (c) 
        shall apply to distributions after the date of the enactment of 
        this Act.

SEC. 3024. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY 
              PARTNERSHIP IN CORPORATE PARTNER.

    (a) In General.--Section 755 is amended by adding at the end the 
following new subsection:
    ``(c) No Allocation of Basis Decrease to Stock of Corporate 
Partner.--In making an allocation under subsection (a) of any decrease 
in the adjusted basis of partnership property under section 734(b)--
            ``(1) no allocation may be made to stock in a corporation 
        (or any person related (within the meaning of sections 267(b) 
        and 707(b)(1)) to such corporation) which is a partner in the 
        partnership, and
            ``(2) any amount not allocable to stock by reason of 
        paragraph (1) shall be allocated under subsection (a) to other 
        partnership property.
Gain shall be recognized to the partnership to the extent that the 
amount required to be allocated under paragraph (2) to other 
partnership property exceeds the aggregate adjusted basis of such other 
property immediately before the allocation required by paragraph (2).''
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions after the date of the enactment of this Act.

SEC. 3025. REPEAL OF SPECIAL RULES FOR FASITS.

    (a) In General.--Part V of subchapter M of chapter 1 (relating to 
financial asset securitization investment trusts) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 56(g) is amended by striking 
        ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (2) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``a REMIC to which part IV of subchapter M applies, or 
        a FASIT to which part V of subchapter M applies,'' and 
        inserting ``or a REMIC to which part IV of subchapter M 
        applies,''.
            (3) Paragraph (1) of section 582(c) is amended by striking 
        ``, and any regular interest in a FASIT,''.
            (4) Subparagraph (E) of section 856(c)(5) is amended by 
        striking the last sentence.
            (5)(A) Section 860G(a)(1) is amended by adding at the end 
        the following new sentence: ``An interest shall not fail to 
        qualify as a regular interest solely because the specified 
        principal amount of the regular interest (or the amount of 
        interest accrued on the regular interest) can be reduced as a 
        result of the nonoccurrence of 1 or more contingent payments 
        with respect to any reverse mortgage loan held by the REMIC if, 
        on the startup day for the REMIC, the sponsor reasonably 
        believes that all principal and interest due under the regular 
        interest will be paid at or prior to the liquidation of the 
        REMIC.''.
            (B) The last sentence of section 860G(a)(3) is amended by 
        inserting ``, and any reverse mortgage loan (and each balance 
        increase on such loan meeting the requirements of subparagraph 
        (A)(iii)) shall be treated as an obligation secured by an 
        interest in real property'' before the period at the end.
            (6) Paragraph (3) of section 860G(a) is amended by adding 
        ``and'' at the end of subparagraph (B), by striking ``, and'' 
        at the end of subparagraph (C) and inserting a period, and by 
        striking subparagraph (D).
            (7) Section 860G(a)(3) is amended by adding at the end the 
        following new sentence: ``For purposes of subparagraph (A), if 
        more than 50 percent of the obligations transferred to, or 
        purchased by, the REMIC are originated by the United States or 
        any State (or any political subdivision, agency, or 
        instrumentality of the United States or any State) and are 
principally secured by an interest in real property, then each 
obligation transferred to, or purchased by, the REMIC shall be treated 
as secured by an interest in real property.''.
            (8)(A) Section 860G(a)(3)(A) is amended by striking ``or'' 
        at the end of clause (i), by inserting ``or'' at the end of 
        clause (ii), and by inserting after clause (ii) the following 
        new clause:
                            ``(iii) represents an increase in the 
                        principal amount under the original terms of an 
                        obligation described in clause (i) or (ii) if--
                                    ``(I) such increase in the balance 
                                is attributable to an advance made to 
                                the obligor pursuant to the original 
                                terms of the obligation,
                                    ``(II) such increase in the balance 
                                occurs after the startup day, and
                                    ``(III) such increase in the 
                                balance is purchased by the REMIC 
                                pursuant to a fixed price contract in 
                                effect on the startup day.''.
            (B) Section 860G(a)(7)(B) is amended to read as follows:
                    ``(B) Qualified reserve fund.--For purposes of 
                subparagraph (A), the term `qualified reserve fund' 
                means any reasonably required reserve to--
                            ``(i) provide for full payment of expenses 
                        of the REMIC or amounts due on regular 
                        interests in the event of defaults on qualified 
                        mortgages or lower than expected returns on 
                        cash flow investments, or
                            ``(ii) provide a source of funds for the 
                        purchase of obligations described in clause 
                        (ii) or (iii) of paragraph (3)(A).
                The aggregate fair market value of the assets held in 
                any such reserve shall not exceed 50 percent of the 
                aggregate fair market value of all of the assets of the 
                REMIC on the startup day, and the amount of any such 
                reserve shall be promptly and appropriately reduced to 
                the extent the amount held in such reserve is no longer 
                reasonably required for purposes specified in clause 
                (i) or (ii) of paragraph (3)(A).''.
            (9) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (10) Section 1272(a)(6)(B) is amended by adding at the end 
        the following new flush sentence:
                ``For purposes of clause (iii), the Secretary shall 
                prescribe regulations permitting the use of a current 
                prepayment assumption, determined as of the close of 
                the accrual period (or such other time as the Secretary 
                may prescribe during the taxable year in which the 
                accrual period ends).''.
            (11) Subparagraph (C) of section 7701(a)(19) is amended by 
        adding ``and'' at the end of clause (ix), by striking ``, and'' 
        at the end of clause (x) and inserting a period, and by 
        striking clause (xi).
            (12) The table of parts for subchapter M of chapter 1 is 
        amended by striking the item relating to part V.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2003.
            (2) Exception for existing fasits.--
                    (A) In general.--Paragraph (1) shall not apply to 
                any FASIT in existence on the date of the enactment of 
                this Act to the extent that regular interests issued by 
                the FASIT before such date continue to remain 
                outstanding in accordance with the original terms of 
                issuance.
                    (B) Transfer of additional assets not permitted.--
                Except as provided in regulations prescribed by the 
                Secretary of the Treasury or the Secretary's delegate, 
                subparagraph (A) shall cease to apply as of the 
                earliest date after the date of the enactment of this 
                Act that any property is transferred to the FASIT.

SEC. 3026. LIMITATION ON TRANSFER OF BUILT-IN LOSSES ON REMIC 
              RESIDUALS.

    (a) In General.--Section 362 (relating to basis to corporations) is 
amended by adding at the end the following new subsection:
    ``(e) Limitation on Transfer of Built-in Losses on REMIC Residuals 
in Section 351 Transactions.--If--
            ``(1) a residual interest (as defined in section 
        860G(a)(2)) in a REMIC is transferred in any transaction which 
        is described in subsection (a), and
            ``(2) the transferee's adjusted basis in such residual 
        interest would (but for this paragraph) exceed its fair market 
        value immediately after such transaction,
then, notwithstanding subsection (a), the transferee's adjusted basis 
in such residual interest shall not exceed its fair market value 
(whether or not greater than zero) immediately after such 
transaction.''
    (b) Effective Date.--The amendment made by this section shall apply 
to transactions after the date of the enactment of this Act.

SEC. 3027. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF 
              DETERMINING INVESTMENT OF EARNINGS IN UNITED STATES 
              PROPERTY.

    (a) In General.--Subparagraph (A) of section 956(c)(2) is amended 
to read as follows:
                    ``(A) obligations of the United States, money, or 
                deposits with any corporation with respect to which a 
                bank holding company (within the meaning of section 
                2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 
                1841(a))) or financial holding company (within the 
                meaning of section 2(p) of such Act) owns directly or 
                indirectly more than 80 percent by vote or value of the 
                stock of such corporation;''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 3028. MODIFICATIONS RELATED TO CERTAIN SMALL INSURANCE COMPANIES.

    (a) Exemption for Small Property and Casualty Insurance 
Companies.--
            (1) In general.--Section 501(c)(15)(A) is amended to read 
        as follows:
                    ``(A) Insurance companies (as defined in section 
                816(a)) other than life (including interinsurers and 
                reciprocal underwriters) if--
                            ``(i) the gross receipts for the taxable 
                        year do not exceed $600,000, and
                            ``(ii) more than 50 percent of such gross 
                        receipts consist of premiums.''.
            (2) Controlled group rule.--Section 501(c)(15)(C) is 
        amended by inserting ``, except that in applying section 1563 
        for purposes of section 831(b)(2)(B)(ii), subparagraphs (B) and 
        (C) of section 1563(b)(2) shall be disregarded'' before the 
        period at the end.
            (3) Conforming amendment.--Clause (i) of section 
        831(b)(2)(A) is amended by striking ``exceed $350,000 but''.
    (b) Alternative Tax for Certain Small Insurance Companies.--
            (1) Increased limitation.--Clause (i) of section 
        831(b)(2)(A) is amended by striking ``$1,200,000'' and 
        inserting ``$1,890,000''.
            (2) Inflation adjustment.--Paragraph (2) of section 831(b) 
        is amended by adding at the end the following new subparagraph:
                    ``(C) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 2004, 
                the $1,890,000 amount in subparagraph (A) shall be 
                increased by an amount equal to--
                            ``(i) $1,890,000, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for such 
                        calendar year by substituting `calendar year 
                        2003' for `calendar year 1992' in subparagraph 
                        (B) thereof.
                If the amount as adjusted under the preceding sentence 
                is not a multiple of $1,000, such amount shall be 
                rounded to the next lowest multiple of $1,000.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 3029. DEFINITION OF INSURANCE COMPANY FOR SECTION 831.

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

SEC. 3030. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONDISCLOSED REPORTABLE TRANSACTIONS.

    (a) In General.--Section 163 (relating to deduction for interest) 
is amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new subsection:
    ``(m) Interest on Unpaid Taxes Attributable to Nondisclosed 
Reportable Transactions.--No deduction shall be allowed under this 
chapter for any interest paid or accrued under section 6601 on any 
underpayment of tax which is attributable to 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.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 3031. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX FOR 
              CERTAIN DEEMED ASSET SALES.

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

SEC. 3032. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL RESIDENCE 
              ACQUIRED IN A LIKE-KIND EXCHANGE WITHIN 5 YEARS OF SALE.

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

SEC. 3033. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL ISSUE 
              DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS IN TRANSACTIONS 
              WITH RELATED FOREIGN PERSONS.

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

SEC. 3034. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF 
              INCOME TAX BY INDIVIDUALS.

    (a) In General.--Part III of subchapter B of chapter 1 (relating to 
items specifically excluded from gross income) is amended by inserting 
after section 139A the following new section:

``SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS 
              OF INCOME TAX BY INDIVIDUALS.

    ``(a) In General.--In the case of an individual, gross income shall 
not include interest paid under section 6611 on any overpayment of tax 
imposed by this subtitle.
    ``(b) Exception.--Subsection (a) shall not apply in the case of a 
failure to claim items resulting in the overpayment on the original 
return if the Secretary determines that the principal purpose of such 
failure is to take advantage of subsection (a).
    ``(c) Special Rule for Determining Modified Adjusted Gross 
Income.--For purposes of this title, interest not included in gross 
income under subsection (a) shall not be treated as interest which is 
exempt from tax for purposes of sections 32(i)(2)(B) and 6012(d) or any 
computation in which interest exempt from tax under this title is added 
to adjusted gross income.''.
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 is amended by inserting after the item 
relating to section 139A the following new item:

                              ``Sec. 139B. Exclusion from gross income 
                                        for interest on overpayments of 
                                        income tax by individuals.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to interest received in calendar years beginning after the date 
of the enactment of this Act.

SEC. 3035. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS.

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

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

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

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

SEC. 3036. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.

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

SEC. 3037. EXTENSION OF IRS USER FEES.

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

         TITLE IV--TRADE ENHANCEMENT AND COMPLIANCE PROVISIONS

SEC. 4001. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

    (a) In General.--Section 114 is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subpart E of part III of subchapter N of chapter 1 
        (relating to qualifying foreign trade income) is hereby 
        repealed.
            (2) The table of subparts for such part III is amended by 
        striking the item relating to subpart E.
            (3) The table of sections for part III of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        114.
    (c) Effective Date.--Except as provided in subsection (d), the 
amendments made by this section shall apply to transactions after 
December 31, 2003.
    (d) Transitional Rule for 2004, 2005, and 2006.--
            (1) In general.--In the case of transactions during 2004, 
        2005, or 2006, the amount includible in gross income by reason 
        of the amendments made by this section shall not exceed the 
        applicable percentage of the amount which would have been so 
        included but for this subsection.
            (2) Applicable percentage.--For purposes of paragraph (1), 
        the applicable percentage shall be as follows:
                    (A) For 2004, the applicable percentage shall be 20 
                percent.
                    (B) For 2005, the applicable percentage shall be 20 
                percent.
                    (C) For 2006, the applicable percentage shall be 40 
                percent.
    (e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of 
this Act, a corporation for which an election is in effect under 
section 943(e) of the Internal Revenue Code of 1986 revokes such 
election, no gain or loss shall be recognized with respect to property 
treated as transferred under clause (ii) of section 943(e)(4)(B) of 
such Code to the extent such property--
            (1) was treated as transferred under clause (i) thereof, or
            (2) was acquired during a taxable year to which such 
        election applies and before May 1, 2003, in the ordinary course 
        of its trade or business.
The Secretary of the Treasury (or such Secretary's delegate) may 
prescribe such regulations as may be necessary to prevent the abuse of 
the purposes of this subsection.
    (f) Binding Contracts.--The amendments made by this section shall 
not apply to any transaction in the ordinary course of a trade or 
business which occurs pursuant to a binding contract--
            (1) which is between the taxpayer and a person who is not a 
        related person (as defined in section 943(b)(3) of such Code, 
        as in effect on the day before the date of the enactment of 
        this Act), and
            (2) which is in effect on January 14, 2002, and at all 
        times thereafter.
For purposes of this subsection, a binding contract shall include a 
purchase option, renewal option, or replacement option which is 
included in such contract and which is enforceable against the seller 
or lessor.

SEC. 4002. COBRA FEES.

    (a) Use of Merchandise Processing Fee.--Section 13031(f) of the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 
58c(f)) is amended--
            (1) in paragraph (1), by aligning subparagraph (B) with 
        subparagraph (A); and
            (2) in paragraph (2), by striking ``commercial operations'' 
        and all that follows through ``processing.'' and inserting 
        ``customs revenue functions as defined in section 415 of the 
        Homeland Security Act of 2002 (other than functions performed 
        by the Office of International Affairs referred to in section 
        415(8) of that Act), and for automation (including the 
        Automation Commercial Environment computer system), and for no 
        other purpose. To the extent that funds in the Customs User Fee 
        Account are insufficient to pay the costs of such customs 
        revenue functions, customs duties in an amount equal to the 
        amount of such insufficiency shall be available, to the extent 
        provided for in appropriations Acts, to pay the costs of such 
        customs revenue functions in the amount of such insufficiency, 
        and shall be available for no other purpose. The provisions of 
        the first and second sentences of this paragraph specifying the 
        purposes for which amounts in the Customs User Fee Account may 
        be made available shall not be superseded except by a provision 
        of law which specifically modifies or supersedes such 
        provisions.''.
    (b) Reimbursement of Appropriations From COBRA Fees.--Section 
13031(f)(3) of the Consolidated Omnibus Budget Reconciliation Act of 
1985 (19 U.S.C. 58c(f)(3)) is amended by adding at the end the 
following:
    ``(E) Nothing in this paragraph shall be construed to preclude the 
use of appropriated funds, from sources other than the fees collected 
under subsection (a), to pay the costs set forth in clauses (i), (ii), 
and (iii) of subparagraph (A).''.
    (c) Sense of Congress; Effective Period for Collecting Fees; 
Standard for Setting Fees.--
            (1) Sense of congress.--The Congress finds that--
                    (A) the fees set forth in paragraphs (1) through 
                (8) of subsection (a) of section 13031 of the 
                Consolidated Omnibus Budget Reconciliation Act of 1985 
                have been reasonably related to the costs of providing 
                customs services in connection with the activities or 
                items for which the fees have been charged under such 
                paragraphs; and
                    (B) the fees collected under such paragraphs have 
                not exceeded, in the aggregate, the amounts paid for 
                the costs described in subsection (f)(3)(A) incurred in 
                providing customs services in connection with the 
                activities or items for which the fees were charged 
                under such paragraphs.
            (2) Effective period; standard for setting fees.--Section 
        13031(j)(3) of the Consolidated Omnibus Budget Reconciliation 
        Act of 1985 is amended to read as follows:
    ``(3)(A) Fees may not be charged under paragraphs (9) and (10) of 
subsection (a) after September 30, 2013.
    ``(B)(i) Subject to clause (ii), Fees may not be charged under 
paragraphs (1) through (8) of subsection (a) after September 30, 2013.
    ``(ii) In fiscal year 2006 and in each succeeding fiscal year for 
which fees under paragraphs (1) through (8) of subsection (a) are 
authorized--
            ``(I) the Secretary of the Treasury shall charge fees under 
        each such paragraph in amounts that are reasonably related to 
        the costs of providing customs services in connection with the 
        activity or item for which the fee is charged under such 
        paragraph, except that in no case may the fee charged under any 
        such paragraph exceed by more than 10 percent the amount 
        otherwise prescribed by such paragraph;
            ``(II) the amount of fees collected under such paragraphs 
        may not exceed, in the aggregate, the amounts paid in that 
        fiscal year for the costs described in subsection (f)(3)(A) 
        incurred in providing customs services in connection with the 
        activity or item for which the fees are charged under such 
        paragraphs;
            ``(III) a fee may not be collected under any such paragraph 
        except to the extent such fee will be expended to pay the costs 
        described in subsection (f)(3)(A) incurred in providing customs 
        services in connection with the activity or item for which the 
        fee is charged under such paragraph; and
            ``(IV) any fee collected under any such paragraph shall be 
        available for expenditure only to pay the costs described in 
        subsection (f)(3)(A) incurred in providing customs services in 
        connection with the activity or item for which the fee is 
        charged under such paragraph.''.
    (d) Clerical Amendments.--Section 13031 of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 is amended--
            (1) in subsection (a)(5)(B), by striking ``$1.75'' and 
        inserting ``$1.75.'';
            (2) in subsection (b)--
                    (A) in paragraph (1)(A), by aligning clause (iii) 
                with clause (ii);
                    (B) in paragraph (7), by striking ``paragraphs'' 
                and inserting ``paragraph''; and
                    (C) in paragraph (9), by aligning subparagraph (B) 
                with subparagraph (A); and
            (3) in subsection (e)(2), by aligning subparagraph (B) with 
        subparagraph (A).
    (e) Study of All Fees Collected by Department of Homeland 
Security.--The Secretary of the Treasury shall conduct a study of all 
the fees collected by the Department of Homeland Security, and shall 
submit to the Congress, not later than September 30, 2005, a report 
containing the recommendations of the Secretary on--
            (1) what fees should be eliminated;
            (2) what the rate of fees retained should be; and
            (3) any other recommendations with respect to the fees that 
        the Secretary considers appropriate.




                                                 Union Calendar No. 226

108th CONGRESS

  1st Session

                               H. R. 2896

                          [Report No. 108-393]

_______________________________________________________________________

                                 A BILL

  To amend the Internal Revenue Code of 1986 to remove impediments in 
  such Code and make our manufacturing, service, and high-technology 
businesses and workers more competitive and productive both at home and 
                                abroad.

_______________________________________________________________________

                           November 21, 2003

  Reported with an amendment, committed to the Committee of the Whole 
       House on the State of the Union, and ordered to be printed