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108th Congress                                            Rept. 108-548
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

======================================================================
                                     


                   AMERICAN JOBS CREATION ACT OF 2004

                               ----------                              

                              R E P O R T

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                              to accompany

                               H.R. 4520

                             together with

                    DISSENTING AND ADDITIONAL VIEWS

      [Including cost estimate of the Congressional Budget Office]




 June 16, 2004.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed



108th Congress                                            Rept. 108-548
                        HOUSE OF REPRESENTATIVES
 2d Session                                                      Part 1

======================================================================



 
                   AMERICAN JOBS CREATION ACT OF 2004

                                _______
                                

 June 16, 2004.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Thomas, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                    DISSENTING AND ADDITIONAL VIEWS

                        [To accompany H.R. 4520]

      [Including cost estimate of the Congressional Budget office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 4520) 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, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
 I. Summary and Background..........................................112
    Title I--End Sanctions and Reduce Corporate Tax Rates for Domestic 
    Manufacturing and Small Corporations............................113
        A. Repeal of Exclusion for Extraterritorial Income (sec. 
            101 of the bill and secs. 114 and 941-943 of the 
            Code)................................................   113
        B. Reduced Corporate Income Tax Rate for Domestic 
            Production Activities Income (sec. 102 of the bill 
            and sec. 11 of the Code).............................   115
        C. Reduced Corporate Income Tax Rate for Small 
            Corporations (sec. 103 of the bill and sec. 11 of the 
            Code)................................................   117
    Title II--Corporate Reform and Growth Incentives for Manufacturers, 
    Small Businesses, and Farmers...................................119
        A. Small Business Expensing..............................   119
            1. Extension of increased section 179 expensing (sec. 
                201 of the bill and sec. 179 of the Code)........   119
        B. Depreciation..........................................   121
            1. Recovery period for depreciation of certain 
                leasehold improvements and restaurant property 
                (sec. 211 of the bill and sec. 168 of the Code)..   121
            2. Modification of depreciation allowance for 
                aircraft (sec. 212 of the bill and sec. 168 of 
                the Code)........................................   123
            3. Modification of placed in service rule for bonus 
                depreciation property (sec. 213 of the bill and 
                sec. 168 of the Code)............................   126
        C. S Corporation Reform and Simplification (secs. 221-231 
            of the bill and secs. 1361-1379 and 4975 of the Code)   127
            1. Members of family treated as one shareholder; 
                increase in number of eligible shareholders to 
                100..............................................   128
            2. Expansion of bank S corporation eligible 
                shareholders to include IRAs.....................   129
            3. Disregard of unexercised powers of appointment in 
                determining potential current beneficiaries of 
                ESBT.............................................   130
            4. Transfers of suspended losses incident to divorce, 
                etc..............................................   130
            5. Use of passive activity loss and at-risk amounts 
                by qualified subchapter S trust income 
                beneficiaries....................................   131
            6. Exclusion of investment securities income from 
                passive investment income test for bank S 
                corporations.....................................   131
            7. Treatment of bank director shares.................   132
            8. Relief from inadvertently invalid qualified 
                subchapter S subsidiary elections and 
                terminations.....................................   133
            9. Information returns for qualified subchapter S 
                subsidiaries.....................................   133
            10. Repayment of loans for qualifying employer 
                securities.......................................   134
        D. Alternative Minimum Tax Relief........................   136
            1. Foreign tax credit under alternative minimum tax; 
                expansion of exemption from alternative minimum 
                tax for small corporations; income averaging for 
                farmers not to increase alternative minimum tax 
                (secs. 241-243 of the bill and secs. 55-59 of the 
                Code)............................................   136
        E. Restructuring of Incentives for Alcohol Fuels, Etc....   137
            1. Reduced rates of tax on alcohol fuel mixtures 
                replaced with an excise tax credit, etc. (secs. 
                251 and 252 of the bill and secs. 4041, 4081, 
                4091, 6427 and 9503 of the Code).................   137
        F. Stock Options and Employee Stock Purchase Plan Stock 
            Options..............................................   144
            1. Exclusion of incentive stock options and employee 
                stock purchase plan stock options from wages 
                (sec. 261 of the bill and secs. 421(b), 423(c), 
                3121(a), 3231, and 3306(b) of the Code)..........   144
        G. Incentives to Reinvest Foreign Earnings in the United 
            States (sec. 271 of the bill and new sec. 965 of the 
            Code)................................................   145
        H. Other Provisions......................................   147
            1. Special rules for livestock sold on account of 
                weather-related conditions (sec. 281 of the bill 
                and secs. 1033 and 451 of the Code)..............   147
            2. Payment of dividends on stock of cooperatives 
                without reducing patronage dividends (sec. 282 of 
                the bill and sec. 1388 of the Code)..............   149
            3. Capital gains treatment to apply to outright sales 
                of timber by landowner (sec. 283 of the bill and 
                sec. 631(b) of the Code).........................   150
            4. Distributions from publicly traded partnerships 
                treated as qualifying income of regulated 
                investment company (sec. 284 of the bill and 
                secs. 851 and 469(k) of the Code)................   151
            5. Improvements related to real estate investment 
                trusts (sec. 285 of the bill and secs. 856, 857 
                and 860 of the Code).............................   153
            6. Treatment of certain dividends of regulated 
                investment companies (sec. 286 of the bill and 
                secs. 871 and 881 of the Code)...................   161
            7. Taxation of certain settlement funds (sec. 287 of 
                the bill and sec. 468B of the Code)..............   167
            8. Expand human clinical trials expenses qualifying 
                for the orphan drug tax credit (sec. 288 of the 
                bill and sec. 45C of the Code)...................   168
            9. Simplification of excise tax imposed on bows and 
                arrows (sec. 289 of the bill and sec. 4161 of the 
                Code)............................................   170
            10. Repeal excise tax on fishing tackle boxes (sec. 
                290 of the bill and sec. 4162 of the Code).......   171
            11. Repeal of excise tax on sonar devices suitable 
                for finding fish (sec. 291 of the bill and secs. 
                4161 and 4162 of the Code).......................   171
            12. Income tax credit for cost of carrying tax-paid 
                distilled spirits in wholesale inventories (sec. 
                292 of the bill and new sec. 5011 of the Code)...   172
            13. Suspension of occupational taxes relating to 
                distilled spirits, wine, and beer (sec. 293 of 
                the bill and new sec. 5148 of the Code)..........   174
            14. Exclusion of certain indebtedness of small 
                business investment companies from acquisition 
                indebtedness (sec. 294 of the bill and sec. 514 
                of the Code).....................................   175
            15. Election to determine taxable income from certain 
                international shipping activities using per ton 
                rate (sec. 295 of the bill and new secs. 1352-
                1359 of the Code)................................   176
            16. Charitable contribution deduction for certain 
                expenses in support of native Alaskan subsistence 
                whaling (sec. 296 of the bill and sec. 170 of the 
                Code)............................................   181
    Title III--Tax Reform and Simplification for United States 
    Businesses......................................................182
        A. Interest Expense Allocation Rules (sec. 301 of the 
            bill and sec. 864 of the Code).......................   182
        B. Recharacterization of Overall Domestic Loss (sec. 302 
            of the bill and sec. 904 of the Code)................   186
        C. Reduction to Two Foreign Tax Credit Baskets (sec. 303 
            of the bill and sec. 904 of the Code)................   188
        D. Look-Through Rules to Apply to Dividends from 
            Noncontrolled Section 902 Corporations (sec. 304 of 
            the bill and sec. 904 of the Code)...................   192
        E. Attribution of Stock Ownership Through Partnerships to 
            Apply in Determining Section 902 and 960 Credits 
            (sec. 305 of the bill and secs. 901, 902, and 960 of 
            the Code)............................................   193
        F. Foreign Tax Credit Treatment of Deemed Payments Under 
            Section 367(d) (sec. 306 of the bill and sec. 367 of 
            the Code)............................................   195
        G. United States Property Not to Include Certain Assets 
            of Controlled Foreign Corporation (sec. 307 of the 
            bill and sec. 956 of the Code).......................   196
        H. Election Not to Use Average Exchange Rate for Foreign 
            Tax Paid Other Than in Functional Currency (sec. 308 
            of the bill and sec. 986 of the Code)................   198
        I. Repeal of Withholding Tax on Dividends from Certain 
            Foreign Corporations (sec. 309 of the bill and sec. 
            871 of the Code).....................................   200
        J. Provide Equal Treatment for Interest Paid by Foreign 
            Partnerships and Foreign Corporations (sec. 310 of 
            the bill and sec. 861 of the Code)...................   201
        K. Look-Through Treatment of Payments Between Related 
            Controlled Foreign Corporations Under Foreign 
            Personal Holding Company Income Rules (sec. 311 of 
            the bill and sec. 954 of the Code)...................   202
        L. Look-Through Treatment Under Subpart F for Sales of 
            Partnership Interests (sec. 312 of the bill and sec. 
            954 of the Code).....................................   203
        M. Repeal of Foreign Personal Holding Company Rules and 
            Foreign Investment Company Rules (sec. 313 of the 
            bill and secs. 542, 551-558, 954, 1246, and 1247 of 
            the Code)............................................   204
        N. Determination of Foreign Personal Holding Company 
            Income with Respect to Transactions in Commodities 
            (sec. 314 of the bill and sec. 954 of the Code)......   205
        O. Modifications to Treatment of Aircraft Leasing and 
            Shipping Income (sec. 315 of the bill and sec. 954 of 
            the Code)............................................   208
        P. Modification of Exceptions Under Subpart F for Active 
            Financing (sec. 316 of the bill and sec. 954 of the 
            Code)................................................   211
    Title IV--Extension of Certain Expiring Provisions..............213
        A. Extend Alternative Minimum Tax Relief for Individuals 
            (sec. 401 of the bill and sec. 26 of the Code).......   213
        B. Extension of the Research Credit (sec. 402 of the bill 
            and sec. 41 of the Code).............................   214
        C. Extension and Modification of the Section 45 
            Electricity Production Credit (sec. 403 of the bill 
            and sec. 45 of the Code).............................   217
        D. Indian Employment Tax Credit (sec. 404 of the bill and 
            sec. 45A of the Code)................................   218
        E. Extend the Work Opportunity Tax Credit (sec. 405 of 
            the bill and sec. 51 of the Code)....................   219
        F. Extend the Welfare-To-Work Tax Credit (sec. 406 of the 
            bill and sec. 51A of the Code).......................   220
        G. Extension of the Above-the-line Deduction for Certain 
            Expenses of Elementary and Secondary School Teachers 
            (sec. 407 of the bill and sec. 62 of the Code).......   221
        H. Extension of Accelerated Depreciation Benefit for 
            Property on Indian Reservations (sec. 408 of the bill 
            and sec. 168(j) of the Code).........................   222
        I. Extend Enhanced Charitable Deduction for Computer 
            Technology and Equipment (sec. 409 of the bill and 
            sec. 170 of the Code)................................   223
        J. Extension of Expensing of Certain Environmental 
            Remediation Costs (sec. 410 of the bill and sec. 198 
            of the Code).........................................   224
        K. Extension of Archer Medical Savings Accounts 
            (``MSAs'') (sec. 411 of the bill and sec. 220 of the 
            Code)................................................   225
        L. Taxable Income Limit on Percentage Depletion for Oil 
            and Natural Gas Produced from Marginal Properties 
            (sec. 412 of the bill and sec. 613A of the Code).....   227
        M. Qualified Zone Academy Bonds (sec. 413 of the bill and 
            sec. 1397E of the Code)..............................   228
        N. Extension of Tax Incentives for Investment in the 
            District of Columbia (sec. 414 of the bill and secs. 
            1400, 1400A, 1400B, and 1400C of the Code)...........   230
        O. Extend the Authority to Issue Liberty Zone Bonds (sec. 
            415 of the bill and sec. 1400L of the Code)..........   231
        P. Disclosure to Law Enforcement Agencies Regarding 
            Terrorist Activities (sec. 416 of the bill and sec. 
            6103 of the Code)....................................   233
        Q. Disclosure of Return Information Relating to Student 
            Loans (sec. 417 of the bill and sec. 6103(l) of the 
            Code)................................................   235
        R. Extension of Cover Over of Excise Tax on Distilled 
            Spirits to Puerto Rico and Virgin Islands (sec. 418 
            of the bill and sec. 7652 of the Code)...............   236
        S. Extension of Joint Review (sec. 419 of the bill and 
            secs. 8021 and 8022 of the Code).....................   237
        T. Parity in the Application of Certain Limits to Mental 
            Health Benefits (sec. 420 of the bill and sec. 9812 
            of the Code).........................................   238
        U. Disclosure of Tax Information to Facilitate Combined 
            Employment Tax Reporting (sec. 421 of the bill)......   239
        V. Extension of Tax Credit for Electric Vehicles and Tax 
            Deduction for Clean-Fuel Vehicles (sec. 422 of the 
            bill and secs. 30 and 179A of the Code)..............   239
    Title V--Deduction of State and Local General Sales Taxes.......240
        A. Deduction of State and Local General Sales Taxes (sec. 
            501 of the bill and sec. 164 of the Code)............   240
    Title VI--Revenue Provisions....................................242
        A. Provisions to Reduce Tax Avoidance Through Individual 
            and Corporate Expatriation...........................   242
            1. Tax treatment of expatriated entities and their 
                foreign parents (sec. 601 of the bill and new 
                sec. 7874 of the Code)...........................   242
            2. Excise tax on stock compensation of insiders in 
                expatriated corporations (sec. 602 of the bill 
                and secs. 162(m), 275(a), and new sec. 4985 of 
                the Code)........................................   246
            3. Reinsurance of U.S. risks in foreign jurisdictions 
                (sec. 603 of the bill and sec. 845(a) of the 
                Code)............................................   250
            4. Revision of tax rules on expatriation of 
                individuals (sec. 604 of the bill and secs. 877, 
                2107, 2501 and 6039G of the Code)................   251
            5. Reporting of taxable mergers and acquisitions 
                (sec. 605 of the bill and new sec. 6043A of the 
                Code)............................................   257
            6. Studies (sec. 606 of the bill)....................   258
        B. Provisions Relating to Tax Shelters...................   260
            1. Penalty for failure to disclose reportable 
                transactions (sec. 611 of the bill and new sec. 
                6707A of the Code)...............................   260
            2. Modifications to the accuracy-related penalties 
                for listed transactions and reportable 
                transactions having a significant tax avoidance 
                purpose (sec. 612 of the bill and new sec. 6662A 
                of the Code).....................................   262
            3. Tax shelter exception to confidentiality 
                privileges relating to taxpayer communications 
                (sec. 613 of the bill and sec. 7525 of the Code).   266
            4. Statute of limitations for unreported listed 
                transactions (sec. 614 of the bill and sec. 6501 
                of the Code).....................................   267
            5. Disclosure of reportable transactions by material 
                advisors (sec. 615 of the bill and secs. 6111 and 
                6707 of the Code)................................   268
            6. Investor lists and modification of penalty for 
                failure to maintain investor lists (secs. 616 and 
                617 of the bill and secs. 6112 and 6708 of the 
                Code)............................................   271
            7. Penalty on promoters of tax shelters (sec. 618 of 
                the bill and sec. 6700 of the Code)..............   273
            8. Modifications of substantial understatement 
                penalty for nonreportable transactions (sec. 619 
                of the bill and sec. 6662 of the Code)...........   274
            9. Modification of actions to enjoin certain conduct 
                related to tax shelters and reportable 
                transactions (sec. 620 of the bill and sec. 7408 
                of the Code).....................................   274
            10. Penalty on failure to report interests in foreign 
                financial accounts (sec. 621 of the bill and sec. 
                5321 of Title 31, United States Code)............   275
            11. Regulation of individuals practicing before the 
                Department of the Treasury (sec. 622 of the bill 
                and sec. 330 of Title 31, United States Code)....   276
            12. Treatment of stripped interests in bond and 
                preferred stock funds, etc. (sec. 631 of the bill 
                and secs. 305 and 1286 of the Code)..............   277
            13. Minimum holding period for foreign tax credit on 
                withholding taxes on income other than dividends 
                (sec. 632 of the bill and sec. 901 of the Code)..   280
            14. Disallowance of certain partnership loss 
                transfers (sec. 633 of the bill and secs. 704, 
                734, and 743 of the Code)........................   281
            15. No reduction of basis under section 734 in stock 
                held by partnership in corporate partner (sec. 
                634 of the bill and sec. 755 of the Code)........   285
            16. Repeal of special rules for FASITs, etc. (sec. 
                635 of the bill and secs. 860H-860L of the Code).   287
            17. Limitation on transfer of built-in losses on 
                REMIC residuals (sec. 636 of the bill and sec. 
                362 of the Code).................................   292
            18. Clarification of banking business for purposes of 
                determining investment of earnings in U.S. 
                property (sec. 637 of the bill and sec. 956 of 
                the Code)........................................   294
            19. Alternative tax for certain small insurance 
                companies (sec. 638 of the bill and sec. 831 of 
                the Code)........................................   296
            20. Denial of deduction for interest on underpayments 
                attributable to nondisclosed reportable 
                transactions (sec. 639 of the bill and sec. 163 
                of the Code).....................................   297
            21. Clarification of rules for payment of estimated 
                tax for certain deemed asset sales (sec. 640 of 
                the bill and sec. 338 of the Code)...............   297
            22. Exclusion of like-kind exchange property from 
                nonrecognition treatment on the sale or exchange 
                of a principal residence (sec. 641 of the bill 
                and sec. 121 of the Code)........................   298
            23. Prevention of mismatching of interest and 
                original issue discount deductions and income 
                inclusions in transactions with related foreign 
                persons (sec. 642 of the bill and secs. 163 and 
                267 of the Code).................................   299
            24. Exclusion from gross income for interest on 
                overpayments of income tax by individuals (sec. 
                643 of the bill and new sec. 139A of the Code)...   302
            25. Deposits made to suspend the running of interest 
                on potential underpayments (sec. 644 of the bill 
                and new sec. 6603 of the Code)...................   304
            26. Authorize IRS to enter into installment 
                agreements that provide for partial payment (sec. 
                645 of the bill and sec. 6159 of the Code).......   307
            27. Affirmation of consolidated return regulation 
                authority (sec. 646 of the bill and sec. 1502 of 
                the Code)........................................   308
            28. Reform of tax treatment of certain leasing 
                arrangements and limitation on deductions 
                allocable to property used by governments or 
                other tax-exempt entities (secs. 647 through 649 
                of the bill, secs. 167 and 168 of the Code, and 
                new sec. 470 of the Code)........................   312
        C. Reduction of Fuel Tax Evasion.........................   319
            1. Exemption from certain excise taxes for mobile 
                machinery vehicles (sec. 651 of the bill, and 
                secs. 4053, 4072, 4082, 4483 and 6421 of the 
                Code)............................................   319
            2. Taxation of aviation-grade kerosene (sec. 652 of 
                the bill and secs. 4041, 4081, 4082, 4083, 4091, 
                4092, 4093, 4101, and 6427 of the Code)..........   321
            3. Mechanical dye injection and related penalties 
                (sec. 653 of the bill and sec. 4082 and new sec. 
                6715A of the Code)...............................   327
            4. Authority to inspect on-site records (sec. 654 of 
                the bill and sec. 4083 of the Code)..............   330
            5.  Registration of pipeline or vessel operators 
                required for exemption of bulk transfers to 
                registered terminals or refineries (sec. 655 of 
                the bill and sec. 4081 of the Code)..............   330
            6.  Display of registration and penalties for failure 
                to display registration and to register (secs. 
                656 and 657 of the bill, secs. 4101, 7232, 7272 
                and new secs. 6717 and 6718 of the Code).........   331
            7.  Penalties for failure to report (sec. 657 of the 
                bill and new sec. 6725 of the Code)..............   332
            8.  Collection from Customs bond where importer not 
                registered (sec. 658 of the bill and new sec. 
                4104 of the Code)................................   333
            9.  Modification of the use tax on heavy highway 
                vehicles (sec. 659 of the bill and secs. 4481, 
                4483 and 6165 of the Code).......................   334
            10.  Modification of ultimate vendor refund claims 
                with respect to farming(sec. 660 of the bill and 
                sec. 6427 of the Code)...........................   336
            11.  Dedication of revenue from certain penalties to 
                the Highway Trust Fund (sec. 661 of the bill and 
                sec. 9503 of the Code)...........................   336
            12.  Taxable fuel refunds for certain ultimate 
                vendors (sec. 662 of the bill and secs. 6416 and 
                6427 of the Code)................................   337
            13.  Two party exchanges (sec. 663 of the bill and 
                new sec. 4105 of the Code).......................   339
            14.  Simplification of tax on tires (sec. 664 of the 
                bill and sec. 4071 of the Code)..................   340
        D. Nonqualified Deferred Compensation Plans..............   341
            1.  Treatment of nonqualified deferred compensation 
                plans (sec. 671 of the bill and new sec. 409A and 
                sec. 6051 of the Code)...........................   341
        E. Other Revenue Provisions..............................   348
            1.  Qualified tax collection contracts (sec. 681 of 
                the bill and new sec. 6306 of the Code)..........   348
            2.  Modify charitable contribution rules for 
                donations of patents and other intellectual 
                property (sec. 682 of the bill and secs. 170 and 
                6050L of the Code)...............................   351
            3.  Require increased reporting for noncash 
                charitable contributions (sec. 683 of the bill 
                and sec. 170 of the Code)........................   355
            4.  Require qualified appraisals for charitable 
                contributions of vehicles (sec. 684 of the bill 
                and sec. 170 of the Code)........................   356
            5.  Extend the present-law intangible amortization 
                provisions to acquisitions of sports franchises 
                (sec. 685 of the bill and sec. 197 of the Code)..   358
            6.  Increase continuous levy for certain Federal 
                payments (sec. 686 of the bill and sec. 6331 of 
                the Code)........................................   360
            7.  Modification of straddle rules (sec. 687 of the 
                bill and sec. 1092 of the Code)..................   361
            8.  Add vaccines against hepatitis A to the list of 
                taxable vaccines (sec. 688 of the bill and sec. 
                4132 of the Code)................................   365
            9.  Add vaccines against influenza to the list of 
                taxable vaccines (sec. 689 of the bill and sec. 
                4132 of the Code)................................   366
            10.  Extension of IRS user fees (sec. 690 of the bill 
                and sec. 7528 of the Code).......................   367
            11.  Extension of customs user fees (sec. 691 of the 
                bill)............................................   367
    Title VII--Market Reform for Tobacco Growers (secs. 701-725 of the 
    bill)...........................................................369
    Title VIII--Trade Provisions....................................371
        A. Suspension of Duties on Ceiling Fans (sec. 801 of the 
            bill)................................................   371
        B. Suspension of Duties on Nuclear Steam Generators (sec. 
            802 of the bill).....................................   371
        C. Suspension of Duties on Nuclear Reactor Vessel Heads 
            (sec. 802 of the bill)...............................   372
II. Votes of the Committee..........................................372
III.Budget Effects of the Bill......................................375

IV. Other Matters To Be Discussed Under the Rules of the House......398
 V. Changes in Existing Law Made by the Bill, as Reported...........399
VI. Dissenting Views................................................400

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; ETC.

  (a) Short Title.--This Act may be cited as the ``American Jobs 
Creation Act of 2004''.
  (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.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; etc.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Reduced corporate income tax rate for domestic production 
activities income.
Sec. 103. Reduced corporate income tax rate for small corporations.

    TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL 
                        BUSINESSES, AND FARMERS

                  Subtitle A--Small Business Expensing

Sec. 201. 2-year extension of increased expensing for small business.

                        Subtitle B--Depreciation

Sec. 211. Recovery period for depreciation of certain leasehold 
improvements and restaurant property.
Sec. 212. Modification of depreciation allowance for aircraft.
Sec. 213. Modification of placed in service rule for bonus depreciation 
property.

          Subtitle C--S Corporation Reform and Simplification

Sec. 221. Members of family treated as 1 shareholder.
Sec. 222. Increase in number of eligible shareholders to 100.
Sec. 223. Expansion of bank S corporation eligible shareholders to 
include IRAs.
Sec. 224. Disregard of unexercised powers of appointment in determining 
potential current beneficiaries of ESBT.
Sec. 225. Transfer of suspended losses incident to divorce, etc.
Sec. 226. Use of passive activity loss and at-risk amounts by qualified 
subchapter S trust income beneficiaries.
Sec. 227. Exclusion of investment securities income from passive income 
test for bank S corporations.
Sec. 228. Treatment of bank director shares.
Sec. 229. Relief from inadvertently invalid qualified subchapter S 
subsidiary elections and terminations.
Sec. 230. Information returns for qualified subchapter S subsidiaries.
Sec. 231. Repayment of loans for qualifying employer securities.

               Subtitle D--Alternative Minimum Tax Relief

Sec. 241. Foreign tax credit under alternative minimum tax.
Sec. 242. Expansion of exemption from alternative minimum tax for small 
corporations.
Sec. 243. Income averaging for farmers not to increase alternative 
minimum tax.

    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

Sec. 251. Reduced rates of tax on gasohol replaced with excise tax 
credit; repeal of other alcohol-based fuel incentives; etc.
Sec. 252. Alcohol fuel subsidies borne by general fund.

   Subtitle F--Stock Options and Employee Stock Purchase Plan Stock 
                                Options

Sec. 261. Exclusion of incentive stock options and employee stock 
purchase plan stock options from wages.

  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

Sec. 271. Incentives to reinvest foreign earnings in United States.

                 Subtitle H--Other Incentive Provisions

Sec. 281. Special rules for livestock sold on account of weather-
related conditions.
Sec. 282. Payment of dividends on stock of cooperatives without 
reducing patronage dividends.
Sec. 283. Capital gain treatment under section 631(b) to apply to 
outright sales by landowners.
Sec. 284. Distributions from publicly traded partnerships treated as 
qualifying income of regulated investment companies.
Sec. 285. Improvements related to real estate investment trusts.
Sec. 286. Treatment of certain dividends of regulated investment 
companies.
Sec. 287. Taxation of certain settlement funds.
Sec. 288. Expansion of human clinical trials qualifying for orphan drug 
credit.
Sec. 289. Simplification of excise tax imposed on bows and arrows.
Sec. 290. Repeal of excise tax on fishing tackle boxes.
Sec. 291. Sonar devices suitable for finding fish.
Sec. 292. Income tax credit to distilled spirits wholesalers for cost 
of carrying Federal excise taxes on bottled distilled spirits.
Sec. 293. Suspension of occupational taxes relating to distilled 
spirits, wine, and beer.
Sec. 294. Modification of unrelated business income limitation on 
investment in certain small business investment companies.
Sec. 295. Election to determine taxable income from certain 
international shipping activities using per ton rate.
Sec. 296. Charitable contribution deduction for certain expenses 
incurred in support of Native Alaskan subsistence whaling.

 TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES

Sec. 301. Interest expense allocation rules.
Sec. 302. Recharacterization of overall domestic loss.
Sec. 303. Reduction to 2 foreign tax credit baskets.
Sec. 304. Look-thru rules to apply to dividends from noncontrolled 
section 902 corporations.
Sec. 305. Attribution of stock ownership through partnerships to apply 
in determining section 902 and 960 credits.
Sec. 306. Clarification of treatment of certain transfers of intangible 
property.
Sec. 307. United States property not to include certain assets of 
controlled foreign corporation.
Sec. 308. Election not to use average exchange rate for foreign tax 
paid other than in functional currency.
Sec. 309. Repeal of withholding tax on dividends from certain foreign 
corporations.
Sec. 310. Provide equal treatment for interest paid by foreign 
partnerships and foreign corporations.
Sec. 311. Look-thru treatment of payments between related controlled 
foreign corporations under foreign personal holding company income 
rules.
Sec. 312. Look-thru treatment for sales of partnership interests.
Sec. 313. Repeal of foreign personal holding company rules and foreign 
investment company rules.
Sec. 314. Determination of foreign personal holding company income with 
respect to transactions in commodities.
Sec. 315. Modifications to treatment of aircraft leasing and shipping 
income.
Sec. 316. Modification of exceptions under subpart F for active 
financing.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

Sec. 401. Allowance of nonrefundable personal credits against regular 
and minimum tax liability.
Sec. 402. Extension of research credit.
Sec. 403. Extension of credit for electricity produced from certain 
renewable resources.
Sec. 404. Indian employment tax credit.
Sec. 405. Work opportunity credit.
Sec. 406. Welfare-to-work credit.
Sec. 407. Certain expenses of elementary and secondary school teachers.
Sec. 408. Extension of accelerated depreciation benefit for property on 
Indian reservations.
Sec. 409. Charitable contributions of computer technology and equipment 
used for educational purposes.
Sec. 410. Expensing of environmental remediation costs.
Sec. 411. Availability of medical savings accounts.
Sec. 412. Taxable income limit on percentage depletion for oil and 
natural gas produced from marginal properties.
Sec. 413. Qualified zone academy bonds.
Sec. 414. District of Columbia.
Sec. 415. Extension of certain New York Liberty Zone bond financing.
Sec. 416. Disclosures relating to terrorist activities.
Sec. 417. Disclosure of return information relating to student loans.
Sec. 418. Cover over of tax on distilled spirits.
Sec. 419. Joint review of strategic plans and budget for the Internal 
Revenue Service.
Sec. 420. Parity in the application of certain limits to mental health 
benefits.
Sec. 421. Combined employment tax reporting project.
Sec. 422. Clean-fuel vehicles.

       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

Sec. 501. Deduction of State and local general sales taxes in lieu of 
State and local income taxes.

                      TITLE VI--REVENUE PROVISIONS

 Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and 
                         Corporate Expatriation

Sec. 601. Tax treatment of expatriated entities and their foreign 
parents.
Sec. 602. Excise tax on stock compensation of insiders in expatriated 
corporations.
Sec. 603. Reinsurance of United States risks in foreign jurisdictions.
Sec. 604. Revision of tax rules on expatriation of individuals.
Sec. 605. Reporting of taxable mergers and acquisitions.
Sec. 606. Studies.

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

Sec. 611. Penalty for failing to disclose reportable transactions.
Sec. 612. Accuracy-related penalty for listed transactions, other 
reportable transactions having a significant tax avoidance purpose, 
etc.
Sec. 613. Tax shelter exception to confidentiality privileges relating 
to taxpayer communications.
Sec. 614. Statute of limitations for taxable years for which required 
listed transactions not reported.
Sec. 615. Disclosure of reportable transactions.
Sec. 616. Failure to furnish information regarding reportable 
transactions.
Sec. 617. Modification of penalty for failure to maintain lists of 
investors.
Sec. 618. Penalty on promoters of tax shelters.
Sec. 619. Modifications of substantial understatement penalty for 
nonreportable transactions.
Sec. 620. Modification of actions to enjoin certain conduct related to 
tax shelters and reportable transactions.
Sec. 621. Penalty on failure to report interests in foreign financial 
accounts.
Sec. 622. Regulation of individuals practicing before the Department of 
the Treasury.

                       Part II--Other Provisions

Sec. 631. Treatment of stripped interests in bond and preferred stock 
funds, etc.
Sec. 632. Minimum holding period for foreign tax credit on withholding 
taxes on income other than dividends.
Sec. 633. Disallowance of certain partnership loss transfers.
Sec. 634. No reduction of basis under section 734 in stock held by 
partnership in corporate partner.
Sec. 635. Repeal of special rules for FASITs.
Sec. 636. Limitation on transfer of built-in losses on REMIC residuals.
Sec. 637. Clarification of banking business for purposes of determining 
investment of earnings in United States property.
Sec. 638. Alternative tax for certain small insurance companies.
Sec. 639. Denial of deduction for interest on underpayments 
attributable to nondisclosed reportable transactions.
Sec. 640. Clarification of rules for payment of estimated tax for 
certain deemed asset sales.
Sec. 641. Recognition of gain from the sale of a principal residence 
acquired in a like-kind exchange within 5 years of sale.
Sec. 642. Prevention of mismatching of interest and original issue 
discount deductions and income inclusions in transactions with related 
foreign persons.
Sec. 643. Exclusion from gross income for interest on overpayments of 
income tax by individuals.
Sec. 644. Deposits made to suspend running of interest on potential 
underpayments.
Sec. 645. Partial payment of tax liability in installment agreements.
Sec. 646. Affirmation of consolidated return regulation authority.

                           Part III--Leasing

Sec. 647. Reform of tax treatment of certain leasing arrangements.
Sec. 648. Limitation on deductions allocable to property used by 
governments or other tax-exempt entities.
Sec. 649. Effective date.

               Subtitle C--Reduction of Fuel Tax Evasion

Sec. 651. Exemption from certain excise taxes for mobile machinery.
Sec. 652. Taxation of aviation-grade kerosene.
Sec. 653. Dye injection equipment.
Sec. 654. Authority to inspect on-site records.
Sec. 655. Registration of pipeline or vessel operators required for 
exemption of bulk transfers to registered terminals or refineries.
Sec. 656. Display of registration.
Sec. 657. Penalties for failure to register and failure to report.
Sec. 658. Collection from customs bond where importer not registered.
Sec. 659. Modifications of tax on use of certain vehicles.
Sec. 660. Modification of ultimate vendor refund claims with respect to 
farming.
Sec. 661. Dedication of revenues from certain penalties to the Highway 
Trust Fund.
Sec. 662. Taxable fuel refunds for certain ultimate vendors.
Sec. 663. Two-party exchanges.
Sec. 664. Simplification of tax on tires.

          Subtitle D--Nonqualified Deferred Compensation Plans

Sec. 671. Treatment of nonqualified deferred compensation plans.

                  Subtitle E--Other Revenue Provisions

Sec. 681. Qualified tax collection contracts.
Sec. 682. Treatment of charitable contributions of patents and similar 
property.
Sec. 683. Increased reporting for noncash charitable contributions.
Sec. 684. Donations of motor vehicles, boats, and aircraft.
Sec. 685. Extension of amortization of intangibles to sports 
franchises.
Sec. 686. Modification of continuing levy on payments to Federal 
venders.
Sec. 687. Modification of straddle rules.
Sec. 688. Addition of vaccines against hepatitis A to list of taxable 
vaccines.
Sec. 689. Addition of vaccines against influenza to list of taxable 
vaccines.
Sec. 690. Extension of IRS user fees.
Sec. 691. COBRA fees.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

Sec. 701. Short title.
Sec. 702. Effective date.

  Subtitle A--Termination of Federal Tobacco Quota and Price Support 
                                Programs

Sec. 711. Termination of tobacco quota program and related provisions.
Sec. 712. Termination of tobacco price support program and related 
provisions.
Sec. 713. Liability.

 Subtitle B--Transitional Payments to Tobacco Quota Holders and Active 
                          Producers of Tobacco

Sec. 721. Definitions of active tobacco producer and quota holder.
Sec. 722. Payments to tobacco quota holders.
Sec. 723. Transition payments for active producers of quota tobacco.
Sec. 724. Resolution of disputes.
Sec. 725. Source of funds for payments.

                      TITLE VIII--TRADE PROVISIONS

Sec. 801. Ceiling fans.
Sec. 802. Certain steam generators, and certain reactor vessel heads, 
used in nuclear facilities.

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS

SEC. 101. 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.
          (4) The second sentence of section 56(g)(4)(B)(i) is amended 
        by striking ``114 or''.
          (5) Section 275(a) is amended--
                  (A) by inserting ``or'' at the end of paragraph 
                (4)(A), by striking ``or'' at the end of paragraph 
                (4)(B) and inserting a period, and by striking 
                subparagraph (C), and
                  (B) by striking the last sentence.
          (6) Paragraph (3) of section 864(e) is amended--
                  (A) by striking:
          ``(3) Tax-exempt assets not taken into account.--
                  ``(A) In general.--For purposes of''; and inserting:
          ``(3) Tax-exempt assets not taken into account.--For purposes 
        of'', and
                  (B) by striking subparagraph (B).
          (7) Section 903 is amended by striking ``114, 164(a),'' and 
        inserting ``164(a)''.
          (8) Section 999(c)(1) is amended by striking ``941(a)(5),''.
  (c) Effective Date.--Except as provided in subsection (d), the 
amendments made by this section shall apply to transactions after 
December 31, 2004.
  (d) Transitional Rule for 2005 and 2006.--
          (1) In general.--In the case of transactions during 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 2005, the applicable percentage shall be 20 
                percent.
                  (B) 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. 102. 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, 2004.

SEC. 103. 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 2012.--In the case of 
        taxable years beginning after 2012, 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 2011 or 2012.--In the 
        case of taxable years beginning in 2011 or 2012, 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 2008, 2009, or 2010.--In 
        the case of taxable years beginning in 2008, 2009, or 2010, 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 2005, 2006, or 2007.--In 
        the case of taxable years beginning in 2005, 2006, or 2007, 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 2013.--
                          ``(i) In general.--In the case of taxable 
                        years beginning before 2013 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)--
      

------------------------------------------------------------------------
    ``In the case of any taxable                          The maximum
     year   beginning during:         The applicable    increase amount
                                        amount is:            is:
------------------------------------------------------------------------
2005, 2006, or 2007...............      $1,000,000          $21,000
2008, 2009, or 2010...............      $1,000,000          $30,250
2011 or 2012......................      $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 2013), 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 2013).''.
  (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, 2004.

    TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL 
                        BUSINESSES, AND FARMERS

                  Subtitle A--Small Business Expensing

SEC. 201. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS.

  Subsections (b), (c), and (d) of section 179 are each amended by 
striking ``2006'' each place it appears and inserting ``2008''.

                        Subtitle B--Depreciation

SEC. 211. 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.

SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT.

  (a) Aircraft Treated as Qualified Property.--
          (1) In general.--Paragraph (2) of section 168(k) is amended 
        by redesignating subparagraphs (C) through (F) as subparagraphs 
        (D) through (G), respectively, and by inserting after 
        subparagraph (B) the following new subparagraph:
                  ``(C) Certain aircraft.--The term `qualified 
                property' includes property--
                          ``(i) which meets the requirements of clauses 
                        (ii) and (iii) of subparagraph (A),
                          ``(ii) which is an aircraft which is not a 
                        transportation property (as defined in 
                        subparagraph (B)(iii)) other than for 
                        agricultural or firefighting purposes,
                          ``(iii) which is purchased and on which such 
                        purchaser, at the time of the contract for 
                        purchase, has made a nonrefundable deposit of 
                        the lesser of--
                                  ``(I) 10 percent of the cost, or
                                  ``(II) $100,000, and
                          ``(iv) which has--
                                  ``(I) an estimated production period 
                                exceeding 4 months, and
                                  ``(II) a cost exceeding $200,000.''.
          (2) Placed in service date.--Clause (iv) of section 
        168(k)(2)(A) is amended by striking ``subparagraph (B)'' and 
        inserting ``subparagraphs (B) and (C)''.
  (b) Conforming Amendments.--
          (1) Section 168(k)(2)(B) is amended by adding at the end the 
        following new clause:
                          ``(iv) Application of subparagraph.--This 
                        subparagraph shall not apply to any property 
                        which is described in subparagraph (C).''.
          (2) Section 168(k)(4)(A)(ii) is amended by striking 
        ``paragraph (2)(C)'' and inserting ``paragraph (2)(D)''.
          (3) Section 168(k)(4)(B)(iii) is amended by inserting ``and 
        paragraph (2)(C)'' after ``of this paragraph)''.
          (4) Section 168(k)(4)(C) is amended by striking 
        ``subparagraphs (B) and (D)'' and inserting ``subparagraphs 
        (B), (C), and (E)''.
          (5) Section 168(k)(4)(D) is amended by striking ``Paragraph 
        (2)(E)'' and inserting ``Paragraph (2)(F)''.
  (c) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 101 of the Job 
Creation and Worker Assistance Act of 2002.

SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS DEPRECIATION 
                    PROPERTY.

  (a) In General.--Section 168(k)(2)(D) (relating to special rules) is 
amended by adding at the end the following new clause:
                          ``(iii) Syndication.--For purposes of 
                        subparagraph (A)(ii), if--
                                  ``(I) property is originally placed 
                                in service after September 10, 2001, by 
                                the lessor of such property,
                                  ``(II) such property is sold by such 
                                lessor or any subsequent purchaser 
                                within 3 months after the date so 
                                placed in service (or, in the case of 
                                multiple units of property subject to 
                                the same lease, within 3 months after 
                                the date the final unit is placed in 
                                service, so long as the period between 
                                the time the first unit is placed in 
                                service and the time the last unit is 
                                placed in service does not exceed 12 
                                months), and
                                  ``(III) the user of such property 
                                after the last sale during such 3-month 
                                period remains the same as when such 
                                property was originally placed in 
                                service,
                        such property shall be treated as originally 
                        placed in service not earlier than the date of 
                        such last sale, so long as no previous owner of 
                        such property elects the application of this 
                        subsection with respect to such property.''.
  (b) Effective Date.--The amendments made by this section shall take 
effect as if included in the amendments made by section 101 of the Job 
Creation and Worker Assistance Act of 2002; except that the 
parenthetical material in section 168(k)(2)(D)(iii)(II) of the Internal 
Revenue Code of 1986, as added by this section, shall apply to property 
sold after June 4, 2004.

          Subtitle C--S Corporation Reform and Simplification

SEC. 221. 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 229, 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, 2004.
          (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to elections and terminations made after December 
        31, 2004.

SEC. 222. 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, 2004.

SEC. 223. 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. 224. 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, 2004.

SEC. 225. 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, 2004.

SEC. 226. 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, 2004.

SEC. 227. 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, 2004.

SEC. 228. 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, 2004.

SEC. 229. 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, 2004.

SEC. 230. 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, 2004.

SEC. 231. 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, 2004.

               Subtitle D--Alternative Minimum Tax Relief

SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.

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

SEC. 242. 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, 2005.

SEC. 243. 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, 2003.

    Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.

SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED WITH EXCISE TAX 
                    CREDIT; REPEAL OF OTHER ALCOHOL-BASED FUEL 
                    INCENTIVES; ETC.

  (a) Excise Tax Credit for Alcohol Fuel Mixtures.--
          (1) In general.--Subsection (f) of section 6427 is amended to 
        read as follows:
  ``(f) Alcohol Fuel Mixtures.--
          ``(1) In general.--The amount of credit which would (but for 
        section 40(c)) be determined under section 40(a)(1) for any 
        period--
                  ``(A) shall, with respect to taxable events occurring 
                during such period, be treated--
                          ``(i) as a payment of the taxpayer's 
                        liability for tax imposed by section 4081, and
                          ``(ii) as received at the time of the taxable 
                        event, and
                  ``(B) to the extent such amount of credit exceeds 
                such liability for such period, shall (except as 
                provided in subsection (k)) be paid subject to 
                subsection (i)(3) by the Secretary without interest.
          ``(2) Special rules.--
                  ``(A) Only certain alcohol taken into account.--For 
                purposes of paragraph (1), section 40 shall be 
                applied--
                          ``(i) by not taking into account alcohol with 
                        a proof of less than 190, and
                          ``(ii) by treating as alcohol the alcohol 
                        gallon equivalent of ethyl tertiary butyl ether 
                        or other ethers produced from such alcohol.
                  ``(B) Treatment of refiners.--For purposes of 
                paragraph (1), in the case of a mixture--
                          ``(i) the alcohol in which is described in 
                        subparagraph (A)(ii), and
                          ``(ii) which is produced by any person at a 
                        refinery prior to any taxable event,
                section 40 shall be applied by treating such person as 
                having sold such mixture at the time of its removal 
                from the refinery (and only at such time) to another 
                person for use as a fuel.
          ``(3) Mixtures not used as fuel.--Rules similar to the rules 
        of subparagraphs (A) and (D) of section 40(d)(3) shall apply 
        for purposes of this subsection.
          ``(4) Termination.--This section shall apply only to periods 
        to which section 40 applies, determined by substituting in 
        section 40(e)--
                  ``(A) `December 31, 2010' for `December 31, 2007', 
                and
                  ``(B) `January 1, 2011' for `January 1, 2008'.''
          (2) Revision of rules for payment of credit.--Paragraph (3) 
        of section 6427(i) is amended to read as follows:
          ``(3) Special rule for alcohol mixture credit.--
                  ``(A) In general.--A claim may be filed under 
                subsection (f)(1)(B) by any person for any period--
                          ``(i) for which $200 or more is payable under 
                        such subsection (f)(1)(B), and
                          ``(ii) which is not less than 1 week.
                In the case of an electronic claim, this subparagraph 
                shall be applied without regard to clause (i).
                  ``(B) Payment of claim.--Notwithstanding subsection 
                (f)(1)(B), if the Secretary has not paid pursuant to a 
                claim filed under this section within 45 days of the 
                date of the filing of such claim (20 days in the case 
                of an electronic claim), the claim shall be paid with 
                interest from such date determined by using the 
                overpayment rate and method under section 6621.
                  ``(C) Time for filing claim.--No claim filed under 
                this paragraph shall be allowed unless filed on or 
                before the last day of the first quarter following the 
                earliest quarter included in the claim.''
  (b) Repeal of Other Incentives for Fuel Mixtures.--
          (1) Subsection (b) of section 4041 is amended to read as 
        follows:
  ``(b) Exemption for Off-Highway Business Use.--
          ``(1) In general.--No tax shall be imposed by subsection (a) 
        or (d)(1) on liquids sold for use or used in an off-highway 
        business use.
          ``(2) Tax where other use.--If a liquid on which no tax was 
        imposed by reason of paragraph (1) is used otherwise than in an 
        off-highway business use, a tax shall be imposed by paragraph 
        (1)(B), (2)(B), or (3)(A)(ii) of subsection (a) (whichever is 
        appropriate) and by the corresponding provision of subsection 
        (d)(1) (if any).
          ``(3) Off-highway business use defined.--For purposes of this 
        subsection, the term `off-highway business use' has the meaning 
        given to such term by section 6421(e)(2); except that such term 
        shall not, for purposes of subsection (a)(1), include use in a 
        diesel-powered train.''
          (2) Section 4041(k) is hereby repealed.
          (3) Section 4081(c) is hereby repealed.
          (4) Section 4091(c) is hereby repealed.
  (c) Transfers to Highway Trust Fund.--Paragraph (4) of section 
9503(b) is amended by adding ``or'' at the end of subparagraph (B), by 
striking the comma at the end of subparagraph (C) and inserting a 
period, and by striking subparagraphs (D), (E), and (F).
  (d) Conforming Amendments.--
          (1) Subsection (c) of section 40 is amended to read as 
        follows:
  ``(c) Coordination With Excise Tax Benefits.--The amount of the 
credit determined under this section with respect to any alcohol shall, 
under regulations prescribed by the Secretary, be properly reduced to 
take into account the benefit provided with respect to such alcohol 
under section 6427(f).''
          (2) Subparagraph (B) of section 40(d)(4) is amended by 
        striking ``under section 4041(k) or 4081(c)'' and inserting 
        ``under section 6427(f)''.
  (e) Effective Dates.--
          (1) In general.--Except as provided by paragraph (2), the 
        amendments made by this section shall apply to fuel sold or 
        used after September 30, 2004.
          (2) Subsection (c).--The amendments made by subsection (c) 
        shall apply to taxes imposed after September 30, 2003.

SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL FUND.

  (a) Transfers to Fund.--Section 9503(b)(1) is amended by adding at 
the end the following new flush sentence:
        ``For purposes of this paragraph, the amount of taxes received 
        under section 4081 shall include any amount treated as a 
        payment under section 6427(f)(1)(A) and shall not be reduced by 
        the amount paid under section 6427(f)(1)(B).''.
  (b) Transfers From Fund.--Subparagraph (A) of section 9503(c)(2) is 
amended by adding at the end the following new sentence: ``Clauses 
(i)(III) and (ii) shall not apply to claims under section 
6427(f)(1)(B).''
  (c) Effective Date.--
          (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxes received after September 30, 2004.
          (2) Subsection (b).--The amendment made by subsection (b) 
        shall apply to amounts paid after September 30, 2004, and (to 
        the extent related to section 34 of the Internal Revenue Code 
        of 1986) to fuel used after such date.

   Subtitle F--Stock Options and Employee Stock Purchase Plan Stock 
                                Options

SEC. 261. 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:
          ``(12) 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 (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)) 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.

  Subtitle G--Incentives to Reinvest Foreign Earnings in United States

SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN UNITED STATES.

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

``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.

  ``(a) Deduction.--
          ``(1) In general.--In the case of a corporation which is a 
        United States shareholder, there shall be allowed as a 
        deduction an amount equal to 85 percent of the dividends which 
        are received by such shareholder from controlled foreign 
        corporations during the election period.
          ``(2) Dividends paid indirectly from controlled foreign 
        corporations.--If, within the election period, a United States 
        shareholder receives a distribution from a controlled foreign 
        corporation which is excluded from gross income under section 
        959(a), such distribution shall be treated for purposes of this 
        section as a dividend to the extent of any amount included in 
        income by such United States shareholder under section 
        951(a)(1)(A) as a result of any dividend paid during the 
        election period to--
                  ``(A) such controlled foreign corporation from 
                another controlled foreign corporation that is in a 
                chain of ownership described in section 958(a), or
                  ``(B) any other controlled foreign corporation in 
                such chain of ownership, but only to the extent of 
                distributions described in section 959(b) which are 
                made during the election period to the controlled 
                foreign corporation from which such United States 
                shareholder received such distribution.
  ``(b) Limitations.--
          ``(1) In general.--The amount of dividends taken into account 
        under subsection (a) shall not exceed the greater of--
                  ``(A) $500,000,000,
                  ``(B) the amount shown on the applicable financial 
                statement as earnings permanently reinvested outside 
                the United States, or
                  ``(C) in the case of an applicable financial 
                statement which fails to show a specific amount of 
                earnings permanently reinvested outside the United 
                States and which shows a specific amount of tax 
                liability attributable to such earnings, the amount of 
                such earnings determined in such manner as the 
                Secretary may prescribe.
        Except as provided in subparagraph (C), if there is no 
        statement or such statement fails to show a specific amount of 
        such earnings or liability, such amount shall be treated as 
        being zero for purposes of this paragraph.
          ``(2) Dividends must be extraordinary.--The amount of 
        dividends taken into account under subsection (a) shall not 
        exceed the excess (if any) of--
                  ``(A) the dividends received during the taxable year 
                by such shareholder from controlled foreign 
                corporations, over
                  ``(B) the annual average for the base period years 
                of--
                          ``(i) the dividends received during each base 
                        period year by such shareholder from such 
                        corporations,
                          ``(ii) the amounts includible in such 
                        shareholder's gross income for each base period 
                        year under section 951(a)(1)(B) with respect to 
                        such corporations, and
                          ``(iii) the amounts that would have been 
                        included for each base period year but for 
                        section 959(a) with respect to such 
                        corporations.
                The amount taken into account under clause (iii) for 
                any base period year shall not include any amount which 
                is not includible in gross income by reason of an 
                amount described in clause (ii) with respect to a prior 
                taxable year.
          ``(3) Requirement to invest in united states.--Subsection (a) 
        shall not apply to any dividend received by a United States 
        shareholder unless the amount of the dividend is invested in 
        the United States pursuant to a plan describing the 
        expenditures to be made with such amount--
                  ``(A) which, before the dividend is received, is 
                approved by the president or chief executive officer of 
                such shareholder, and
                  ``(B) which is approved by the Board of Directors (or 
                management committee) of such shareholder no later than 
                its first meeting on or after the date the dividend is 
                received.
  ``(c) Definitions and Special Rules.--For purposes of this section--
          ``(1) Election period.--The term `election period' means--
                  ``(A) if this section applies to the taxpayer's last 
                taxable year beginning before the date of the enactment 
                of this section, any 6-month or shorter period during 
                such year which is after the date of the enactment of 
                this section and which is selected by the taxpayer, and
                  ``(B) if this section applies to the taxpayer's first 
                taxable year beginning on or after such date, the 1st 6 
                months of such taxable year.
          ``(2) Applicable financial statement.--The term `applicable 
        financial statement' means the most recently audited financial 
        statement (including notes and other documents which accompany 
        such statement)--
                  ``(A) which is certified on or before March 31, 2003, 
                as being prepared in accordance with generally accepted 
                accounting principles, and
                  ``(B) which is used for the purposes of a statement 
                or report--
                          ``(i) to creditors,
                          ``(ii) to shareholders, or
                          ``(iii) for any other substantial nontax 
                        purpose.
        In the case of a corporation required to file a financial 
        statement with the Securities and Exchange Commission, such 
        term means the most recent such statement filed on or before 
        March 31, 2003.
          ``(3) Base period years.--The base period years are the 3 
        taxable years--
                  ``(A) which are among the 5 most recent taxable years 
                ending on or before March 31, 2003, and
                  ``(B) which are determined by disregarding--
                          ``(i) 1 taxable year for which the sum of the 
                        amounts described in clauses (i), (ii), and 
                        (iii) of subsection (b)(2)(B) is the largest, 
                        and
                          ``(ii) 1 taxable year for which such sum is 
                        the smallest.
        Rules similar to the rules of subparagraphs (A) and (B) of 
        section 41(f)(3) shall apply for purposes of this paragraph.
          ``(4) Coordination with dividends received deduction.--No 
        deduction shall be allowed under section 243 or 245 for any 
        dividend for which a deduction is allowed under this section.
  ``(d) 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 deductible portion of any dividend 
        or of any amount described in subsection (a)(2). No deduction 
        shall be allowed under this chapter for any tax for which 
        credit is not allowable by reason of the preceding sentence.
          ``(2) Deductible portion.--For purposes of paragraph (1), 
        unless the taxpayer otherwise specifies, the deductible portion 
        of any dividend is the amount which bears the same ratio to the 
        amount of such dividend as the amount allowed as a deduction 
        under subsection (a) for the taxable year bears to the amount 
        described in subsection (b)(2)(A) for such year.
  ``(e) Increase in Tax on Included Amounts Not Reduced by Credits, 
Etc.--
          ``(1) In general.--Any tax under this chapter by reason of 
        nondeductible CFC dividends shall not be treated as tax imposed 
        by this chapter for purposes of determining--
                  ``(A) the amount of any credit allowable under this 
                chapter, or
                  ``(B) the amount of the tax imposed by section 55.
        Subparagraph (A) shall not apply to the credit under section 53 
        or to the credit under section 27(a) with respect to taxes 
        attributable to such dividends.
          ``(2) Inclusions may not be offset by net operating losses.--
                  ``(A) In general.--The taxable income of any United 
                States shareholder for any taxable year shall in no 
                event be less than the amount of nondeductible CFC 
                dividends received during such year.
                  ``(B) Coordination with section 172.--The 
                nondeductible CFC dividends for any taxable year shall 
                not be taken into account--
                          ``(i) in determining under section 172 the 
                        amount of any net operating loss for such 
                        taxable year, and
                          ``(ii) in determining taxable income for such 
                        taxable year for purposes of the 2nd sentence 
                        of section 172(b)(2).
          ``(3) Nondeductible cfc dividends.--For purposes of this 
        subsection, the term `nondeductible CFC dividends' means the 
        excess of the amount of dividends taken into account under 
        subsection (a) over the deduction allowed under subsection (a) 
        for such dividends.
  ``(f) Election.--This section shall apply for the taxpayer's first 
taxable year beginning on or after the date of the enactment of this 
section if the taxpayer elects its application for such taxable year. 
The taxpayer may elect to apply this section to the taxpayer's last 
taxable year beginning before the date of the enactment of this section 
in lieu of such first taxable year.''
  (b) Alternative Minimum Tax.--Subparagraph (C) of section 56(g)(4) is 
amended by adding at the end the following new clause:
                          ``(v) Special rule for certain distributions 
                        from controlled foreign corporations.--Clause 
                        (i) shall not apply to any deduction allowable 
                        under section 965.''.
  (c) Clerical Amendment.--The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by adding at the end the 
following new item:

                              ``Sec. 965. Temporary dividends received 
                                        deduction.''.

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

                 Subtitle H--Other Incentive Provisions

SEC. 281. 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. 282. 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. 283. 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, 2004.

SEC. 284. 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. 285. 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--
                          ``(i) 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 does not exceed the 
                                greater of \1/4\ of 1 percent or 5 
                                percent of the annual yield to 
                                maturity, 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, or
                          ``(ii) the time or amount of payment is 
                        subject to a contingency upon a default or the 
                        exercise of a prepayment right by the issuer of 
                        the debt, but only if such contingency is 
                        consistent with customary commercial practice.
                  ``(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) Savings Provisions.--
          (1) Rules of application for failure to satisfy section 
        856(c)(4).--Section 856(c) (relating to definition of real 
        estate investment trust) is amended by inserting after 
        paragraph (6) the following new paragraph:
          ``(7) Rules of application for failure to satisfy paragraph 
        (4).--
                  ``(A) De minimis failure.--A corporation, trust, or 
                association that fails to meet the requirements of 
                paragraph (4)(B)(iii) for a particular quarter shall 
                nevertheless be considered to have satisfied the 
                requirements of such paragraph for such quarter if--
                          ``(i) such failure is due to the ownership of 
                        assets the total value of which does not exceed 
                        the lesser of--
                                  ``(I) 1 percent of the total value of 
                                the trust's assets at the end of the 
                                quarter for which such measurement is 
                                done, and
                                  ``(II) $10,000,000, and
                          ``(ii)(I) the corporation, trust, or 
                        association, following the identification of 
                        such failure, disposes of assets in order to 
                        meet the requirements of such paragraph within 
                        6 months after the last day of the quarter in 
                        which the corporation, trust or association's 
                        identification of the failure to satisfy the 
                        requirements of such paragraph occurred or such 
                        other time period prescribed by the Secretary 
                        and in the manner prescribed by the Secretary, 
                        or
                          ``(II) the requirements of such paragraph are 
                        otherwise met within the time period specified 
                        in subclause (I).
                  ``(B) Failures exceeding de minimis amount.--A 
                corporation, trust, or association that fails to meet 
                the requirements of paragraph (4) for a particular 
                quarter shall nevertheless be considered to have 
                satisfied the requirements of such paragraph for such 
                quarter if--
                          ``(i) such failure involves the ownership of 
                        assets the total value of which exceeds the de 
                        minimis standard described in subparagraph 
                        (A)(i) at the end of the quarter for which such 
                        measurement is done,
                          ``(ii) following the corporation, trust, or 
                        association's identification of the failure to 
                        satisfy the requirements of such paragraph for 
                        a particular quarter, a description of each 
                        asset that causes the corporation, trust, or 
                        association to fail to satisfy the requirements 
                        of such paragraph at the close of such quarter 
                        of any taxable year is set forth in a schedule 
                        for such quarter filed in accordance with 
                        regulations prescribed by the Secretary,
                          ``(iii) the failure to meet the requirements 
                        of such paragraph for a particular quarter is 
                        due to reasonable cause and not due to willful 
                        neglect,
                          ``(iv) the corporation, trust, or association 
                        pays a tax computed under subparagraph (C), and
                          ``(v)(I) the corporation, trust, or 
                        association disposes of the assets set forth on 
                        the schedule specified in clause (ii) within 6 
                        months after the last day of the quarter in 
                        which the corporation, trust or association's 
                        identification of the failure to satisfy the 
                        requirements of such paragraph occurred or such 
                        other time period prescribed by the Secretary 
                        and in the manner prescribed by the Secretary, 
                        or
                          ``(II) the requirements of such paragraph are 
                        otherwise met within the time period specified 
                        in subclause (I).
                  ``(C) Tax.--For purposes of subparagraph (B)(iv)--
                          ``(i) Tax imposed.--If a corporation, trust, 
                        or association elects the application of this 
                        subparagraph, there is hereby imposed a tax on 
                        the failure described in subparagraph (B) of 
                        such corporation, trust, or association. Such 
                        tax shall be paid by the corporation, trust, or 
                        association.
                          ``(ii) Tax computed.--The amount of the tax 
                        imposed by clause (i) shall be the greater of--
                                  ``(I) $50,000, or
                                  ``(II) the amount determined 
                                (pursuant to regulations promulgated by 
                                the Secretary) by multiplying the net 
                                income generated by the assets 
                                described in the schedule specified in 
                                subparagraph (B)(ii) for the period 
                                specified in clause (iii) by the 
                                highest rate of tax specified in 
                                section 11.
                          ``(iii) Period.--For purposes of clause 
                        (ii)(II), the period described in this clause 
                        is the period beginning on the first date that 
                        the failure to satisfy the requirements of such 
                        paragraph (4) occurs as a result of the 
                        ownership of such assets and ending on the 
                        earlier of the date on which the trust disposes 
                        of such assets or the end of the first quarter 
                        when there is no longer a failure to satisfy 
                        such paragraph (4).
                          ``(iv) Administrative provisions.--For 
                        purposes of subtitle F, the taxes imposed by 
                        this subparagraph shall be treated as excise 
                        taxes with respect to which the deficiency 
                        procedures of such subtitle apply.''.
          (2) Modification of rules of application for failure to 
        satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of 
        section 856(c) (relating to definition of real estate 
        investment trust) is amended by striking subparagraphs (A) and 
        (B), by redesignating subparagraph (C) as subparagraph (B), and 
        by inserting before subparagraph (B) (as so redesignated) the 
        following new subparagraph:
                  ``(A) following the corporation, trust, or 
                association's identification of the failure to meet the 
                requirements of paragraph (2) or (3), or of both such 
                paragraphs, for any taxable year, a description of each 
                item of its gross income described in such paragraphs 
                is set forth in a schedule for such taxable year filed 
                in accordance with regulations prescribed by the 
                Secretary, and''.
          (3) Reasonable cause exception to loss of reit status if 
        failure to satisfy requirements.--Subsection (g) of section 856 
        (relating to termination of election) is amended--
                  (A) in paragraph (1) by inserting before the period 
                at the end of the first sentence the following: 
                ``unless paragraph (5) applies'', and
                  (B) by adding at the end the following new paragraph:
          ``(5) Entities to which paragraph applies.--This paragraph 
        applies to a corporation, trust, or association--
                  ``(A) which is not a real estate investment trust to 
                which the provisions of this part apply for the taxable 
                year due to one or more failures to comply with one or 
                more of the provisions of this part (other than 
                subsection (c)(6) or (c)(7) of section 856),
                  ``(B) such failures are due to reasonable cause and 
                not due to willful neglect, and
                  ``(C) if such corporation, trust, or association pays 
                (as prescribed by the Secretary in regulations and in 
                the same manner as tax) a penalty of $50,000 for each 
                failure to satisfy a provision of this part due to 
                reasonable cause and not willful neglect.''.
          (4) Deduction of tax paid from amount required to be 
        distributed.--Subparagraph (E) of section 857(b)(2) is amended 
        by striking ``(7)'' and inserting ``(7) of this subsection, 
        section 856(c)(7)(B)(iii), and section 856(g)(1).''.
          (5) Expansion of deficiency dividend procedure.--Subsection 
        (e) of section 860 is amended by striking ``or'' at the end of 
        paragraph (2), by striking the period at the end of paragraph 
        (3) and inserting ``; or'', and by adding at the end the 
        following new paragraph:
          ``(4) a statement by the taxpayer attached to its amendment 
        or supplement to a return of tax for the relevant tax year.''.
  (g) 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) Subsections (c) through  (f).--The amendments made by 
        subsections (c), (d), (e), and (f) shall apply to taxable years 
        beginning after the date of the enactment of this Act.

SEC. 286. 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 December 31, 2004.
          (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after December 
        31, 2004.
          (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect after December 31, 2004.

SEC. 287. 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 to such government entity for use 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, 2004.

SEC. 288. 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. 289. 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 
                        (2),
                a tax equal to 11 percent of the price for which so 
                sold.''.
  (b) Arrows.--Subsection (b) of section 4161 (relating to bows and 
arrows, etc.) is amended by redesignating paragraph (3) as paragraph 
(4) and inserting after paragraph (2) the following:
          ``(3) Arrows.--
                  ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                arrow, a tax equal to 12 percent of the price for which 
                so sold.
                  ``(B) Exception.--In the case of any arrow of which 
                the shaft or any other component has been previously 
                taxed under paragraph (1) or (2)--
                          ``(i) section 6416(b)(3) shall not apply, and
                          ``(ii) the tax imposed by subparagraph (A) 
                        shall be an amount equal to the excess (if any) 
                        of--
                                  ``(I) the amount of tax imposed by 
                                this paragraph (determined without 
                                regard to this subparagraph), over
                                  ``(II) the amount of tax paid with 
                                respect to the tax imposed under 
                                paragraph (1) or (2) on such shaft or 
                                component.
                  ``(C) Arrow.--For purposes of this paragraph, the 
                term `arrow' means any shaft described in paragraph (2) 
                to which additional components are attached.''.
  (c) Conforming Amendments.--Section 4161(b)(2) is amended--
          (1) by inserting ``(other than broadheads)'' after ``point'', 
        and
          (2) by striking ``Arrows.--'' in the heading and inserting 
        ``Arrow components.--''.
  (d) Effective Date.--The amendments made by this section shall apply 
to articles sold by the manufacturer, producer, or importer after 
December 31, 2004.

SEC. 290. 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, 2004.

SEC. 291. 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, 2004.

SEC. 292. 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.--For purposes 
        of paragraph (1), the deemed Federal excise tax per case of 12 
        80-proof 750ml bottles 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 wholesalers 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, 
        2005.--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, 2005.''.
          (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, 2004.

SEC. 293. 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 in 
subsection (b) or 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.

SEC. 294. MODIFICATION OF UNRELATED BUSINESS INCOME LIMITATION ON 
                    INVESTMENT IN CERTAIN SMALL BUSINESS INVESTMENT 
                    COMPANIES.

  (a) In General.--Paragraph (6) of section 514(c) (relating to 
acquisition indebtedness) is amended to read as follows:
          ``(6) Certain federal financing.--
                  ``(A) In general.--For purposes of this section, the 
                term `acquisition indebtedness' does not include--
                          ``(i) an obligation, to the extent that it is 
                        insured by the Federal Housing Administration, 
                        to finance the purchase, rehabilitation, or 
                        construction of housing for low and moderate 
                        income persons, or
                          ``(ii) indebtedness incurred by a small 
                        business investment company licensed under the 
                        Small Business Investment Act of 1958 and 
                        formed after the date of the enactment of the 
                        American Jobs Creation Act of 2004, if such 
                        indebtedness is evidenced by a debenture--
                                  ``(I) issued by such company under 
                                section 303(a) of such Act, and
                                  ``(II) held or guaranteed by the 
                                Small Business Administration.
                  ``(B) Limitation.--Subparagraph (A)(ii) shall not 
                apply with respect to any small business investment 
                company during any period that--
                          ``(i) any organization which is exempt from 
                        tax under this title (other than a governmental 
                        unit) owns more than 25 percent of the capital 
                        or profits interest in such company, or
                          ``(ii) organizations which are exempt from 
                        tax under this title (including governmental 
                        units other than any agency or instrumentality 
                        of the United States) own, in the aggregate, 50 
                        percent or more of the capital or profits 
                        interest in such company.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to indebtedness incurred by small business investment companies formed 
after the date of the enactment of the American Jobs Creation Act of 
2004.

SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME FROM CERTAIN 
                    INTERNATIONAL SHIPPING ACTIVITIES USING PER TON 
                    RATE.

  (a) In General.--Chapter 1 of the Internal Revenue Code of 1986 is 
amended by inserting after subchapter Q the following new subchapter:

   ``Subchapter R--Election To Determine Taxable Income From Certain 
          International Shipping Activities Using per Ton Rate

                              ``Sec. 1352. Alternative tax on 
                                        qualifying shipping activities.
                              ``Sec. 1353. Taxable income from 
                                        qualifying shipping activities.
                              ``Sec. 1354. Qualifying shipping tax 
                                        election; revocation; 
                                        termination.
                              ``Sec. 1355. Definitions and special 
                                        rules.
                              ``Sec. 1356. Qualifying shipping 
                                        activities.
                              ``Sec. 1357. Items not subject to regular 
                                        tax; depreciation; interest.
                              ``Sec. 1358. Allocation of credits, 
                                        income, and deductions.
                              ``Sec. 1359. Disposition of qualifying 
                                        shipping assets.

``SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING ACTIVITIES.

  ``(a) In General.--The taxable income of an electing corporation from 
qualifying shipping activities shall be the amount determined under 
this subchapter, and the corporate percentages of the items of income, 
gain, loss, deduction, or credit of an electing corporation and of 
other members of the electing group of such corporation which would 
otherwise be taken into account by reason of its qualifying shipping 
activities shall be taken into account to the extent provided in 
section 1357.
  ``(b) Alternative Tax.--The taxable income of an electing corporation 
from qualifying shipping activities, if otherwise taxable under section 
11, 55, 882, 887, or 1201(a) shall be subject to tax only under this 
section at the maximum rate specified in section 11(b). The income of a 
foreign corporation shall not be subject to tax under this subchapter 
to the extent its income is excludible from gross income under section 
883(a)(1).

``SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING ACTIVITIES.

  ``(a) In General.--For purposes of this subchapter, the taxable 
income of an electing corporation from qualifying shipping activities 
shall be its corporate income percentage of the sum of the amounts 
determined under subsection (b) for each qualifying vessel operated by 
such electing corporation or other electing entity.
  ``(b) Amounts.--For purposes of subsection (a), the amount of taxable 
income of an electing entity for each qualifying vessel shall equal the 
product of--
          ``(1) the daily notional taxable income from the operation of 
        the qualifying vessel in United States foreign trade, and
          ``(2) the number of days during the taxable year that the 
        electing entity operated such vessel as a qualifying vessel in 
        United States foreign trade.
  ``(c) Daily Notional Taxable Income.--For purposes of subsection (b), 
the daily notional taxable income from the operation of a qualifying 
vessel is 40 cents for each 100 tons of the net tonnage of the vessel, 
up to 25,000 net tons, and 20 cents for each 100 tons of the net 
tonnage of the vessel, in excess of 25,000 net tons.
  ``(d) Multiple Operators of Vessel.--If 2 or more persons have a 
joint interest in a qualifying vessel and are treated as operators of 
that vessel, the taxable income from the operation of such vessel for 
that time (as determined under this section) shall be allocated among 
such persons on the basis of their ownership and charter interests in 
such vessel or on such other basis as the Secretary may prescribe by 
regulations.
  ``(e) Noncorporate Percentage.--Notwithstanding any contrary 
provision of this subchapter, the noncorporate percentage of any item 
of income, gain, loss, deduction, or credit of any member of an 
electing group shall be taken into account for all purposes of this 
subtitle as if this subchapter were not in effect.

``SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REVOCATION; TERMINATION.

  ``(a) In General.--Except as provided in subsections (b) and (f), a 
qualifying shipping tax election may be made in respect of any 
qualifying entity.
  ``(b) Condition of Election.--An election may be made by a member of 
a controlled group under this subsection for any taxable year only if 
all qualifying entities that are members of the controlled group join 
in the election.
  ``(c) When Made.--An election under subsection (a) may be made by a 
qualifying entity in such form as prescribed by the Secretary. Such 
election shall be filed with the qualifying entity's return for the 
first taxable year to which the election shall apply, by the due date 
for such return (including any applicable extensions).
  ``(d) Years for Which Effective.--An election under subsection (a) 
shall be effective for the taxable year of the qualifying entity for 
which it is made and for all succeeding taxable years of the entity, 
until such election is terminated under subsection (e).
  ``(e) Termination.--
          ``(1) By revocation.--
                  ``(A) In general.--An election under subsection (a) 
                may be terminated by revocation.
                  ``(B) When effective.--Except as provided in 
                subparagraph (C)--
                          ``(i) a revocation made during the taxable 
                        year and on or before the 15th day of the 3rd 
                        month thereof shall be effective on the 1st day 
                        of such taxable year, and
                          ``(ii) a revocation made during the taxable 
                        year but after such 15th day shall be effective 
                        on the 1st day of the following taxable year.
                  ``(C) Revocation may specify prospective date.--If 
                the revocation specifies a date for revocation which is 
                on or after the day on which the revocation is made, 
                the revocation shall be effective on and after the date 
                so specified.
          ``(2) By entity ceasing to be qualifying entity.--
                  ``(A) In general.--An election under subsection (a) 
                shall be terminated whenever (at any time on or after 
                the 1st day of the 1st taxable year for which the 
                entity is an electing entity) such entity ceases to be 
                a qualifying entity.
                  ``(B) When effective.--Any termination under this 
                paragraph shall be effective on and after the date of 
                cessation.
  ``(f) Election After Termination.--If a qualifying entity has made an 
election under subsection (a) and if such election has been terminated 
under subsection (e), such entity (and any successor entity) shall not 
be eligible to make an election under subsection (a) for any taxable 
year before its 5th taxable year which begins after the 1st taxable 
year for which such termination is effective, unless the Secretary 
consents to such election.

``SEC. 1355. DEFINITIONS AND SPECIAL RULES.

  ``(a) Definitions.--For purposes of this subchapter:
          ``(1) The term `controlled group' means any group of trusts 
        and business entities whose members would be treated as a 
        single employer under the rules of section 52(a) (without 
        regard to paragraphs (1) and (2) thereof) and section 52(b)(1).
          ``(2) The term `corporate income percentage' means the least 
        aggregate share, expressed as a percentage, of any item of 
        income or gain of an electing corporation or electing group of 
        which such corporation is a member from qualifying shipping 
        activities that would, but for an election in effect under this 
        subchapter, be required to be reported on the Federal income 
        tax return of an electing corporation during any taxable 
        period. In the case of an electing group which includes two or 
        more electing corporations, the corporate income percentage of 
        each such corporation shall be determined on the basis of such 
        corporations' direct and indirect ownership and charter 
        interests in qualifying vessels of the electing group or on 
        such other basis as the Secretary may prescribe by regulations.
          ``(3) The term `corporate loss percentage' means the greatest 
        aggregate share, expressed as a percentage, of any item of 
        loss, deduction or credit of an electing corporation or 
        electing group of which such corporation is a member from 
        qualifying shipping activities that would, but for an election 
        in effect under this subchapter, be required to be reported on 
        the Federal income tax return of an electing corporation during 
        any taxable period.
          ``(4) The term `corporate percentages' means the corporate 
        income percentage and the corporate loss percentage.
          ``(5) The term `electing corporation' means any C corporation 
        that is an electing entity or that would, but for an election 
        in effect under this subchapter, be required to report any item 
        of income, gain, loss, deduction, or credit of an electing 
        entity on its Federal income tax return.
          ``(6) The term `electing entity' means any qualifying entity 
        for which an election is in effect under this subchapter.
          ``(7) The term `electing group' means a controlled group of 
        which one or more members is an electing entity.
          ``(8) The term `noncorporate percentage' means the difference 
        between one hundred percent and the corporate income percentage 
        or corporate loss percentage, as applicable.
          ``(9) The term `qualifying entity' means a trust or business 
        entity that--
                  ``(A) operates one or more qualifying vessels, and
                  ``(B) meets the shipping activity requirement in 
                subsection (c).
          ``(10) The term `qualifying shipping assets' means any 
        qualifying vessel and other assets which are used in core 
        qualifying activities as described in section 1356(b).
          ``(11) The term `qualifying vessel' means a self-propelled 
        (or a combination self-propelled and non-self-propelled) United 
        States flag vessel of not less than 10,000 deadweight tons used 
        in the United States foreign trade.
          ``(12) The term `United States domestic trade' means the 
        transportation of goods or passengers between places in the 
        United States.
          ``(13) The term `United States flag vessel' means any vessel 
        documented under the laws of the United States.
          ``(14) The term `United States foreign trade' means the 
        transportation of goods or passengers between a place in the 
        United States and a foreign place or between foreign places.
  ``(b) Operating a Vessel.--For purposes of this subchapter:
          ``(1) Except as provided in paragraph (2), an entity is 
        treated as operating any vessel owned by, or chartered 
        (including a time charter) to, the entity.
          ``(2) An entity is treated as operating a vessel that it has 
        chartered out on bareboat charter terms only if--
                  ``(A) the vessel is temporarily surplus to the 
                entity's requirements and the term of the charter does 
                not exceed three years; or
                  ``(B) the vessel is bareboat chartered to a member of 
                a controlled group which includes such entity or to an 
                unrelated third party that sub-bareboats or time 
                charters the vessel to a member of such controlled 
                group (including the owner).
  ``(c) Shipping Activity Requirement.--For purposes of this section, 
the shipping activity requirement is met for a taxable year only by an 
entity described in paragraph (1), (2), or (3).
          ``(1) An entity in the first taxable year of its qualifying 
        shipping tax election if, for the preceding taxable year, the 
        test in paragraph (4) is met.
          ``(2) An entity in the second or any subsequent taxable year 
        of its qualifying shipping tax election if, for each of the two 
        preceding taxable years, the test in paragraph (4) is met.
          ``(3) An entity that would be described in paragraph (1) or 
        (2) if the test in paragraph (4) were applied on an aggregate 
        basis to the controlled group of which such entity is a member, 
        and vessel charters between members of the controlled group 
        were disregarded.
          ``(4) The test in this paragraph is met if on average at 
        least 25 percent of the aggregate tonnage of qualifying vessels 
        operated by the entity were owned by the entity or chartered to 
        the entity on bareboat charter terms. For purposes of the 
        preceding sentence, vessels chartered (including time 
        chartered) to an entity by a member of a controlled group which 
        includes the entity, or by a third party that bareboat charters 
        the vessels from the entity or a member of the entity's 
        controlled group, shall be treated as chartered to the entity 
        on bareboat charter terms.
  ``(d) Effect of Temporarily Ceasing To Operate a Qualifying Vessel.--
          ``(1) A temporary cessation by an electing entity in 
        operation of a qualifying vessel shall be disregarded for 
        purposes of subsections (b) and (c) if the electing entity 
        gives timely notice to the Secretary stating--
                  ``(A) that it has temporarily ceased to operate the 
                qualifying vessel, and
                  ``(B) its intention to resume operating the 
                qualifying vessel.
          ``(2) Notice shall be deemed timely if given not later than 
        the due date (including extensions) for the electing entity's 
        tax return (as set forth in section 6072(b)) for the taxable 
        year in which the temporary cessation begins.
          ``(3) The treatment provided by paragraph (1) shall continue 
        until the earlier of--
                  ``(A) the electing entity abandoning its intention to 
                resume operation of the qualifying vessel, or
                  ``(B) the electing entity resuming operation of the 
                qualifying vessel.
  ``(e) Effect of Temporarily Operating a Qualifying Vessel in the 
United States Domestic Trade.--
          ``(1) The temporary operation in the United States domestic 
        trade of any qualifying vessel which had been used in the 
        United States foreign trade shall be disregarded for purposes 
        of this subchapter if the electing entity gives timely notice 
        to the Secretary stating--
                  ``(A) that it temporarily operates or has operated in 
                the United States domestic trade a qualifying vessel 
                which had been used in the United States foreign trade, 
                and
                  ``(B) its intention to resume operation of the vessel 
                in the United States foreign trade.
          ``(2) Notice shall be deemed timely if given not later than 
        the due date (including extensions) for the electing entity's 
        tax return (as set forth in section 6072(b)) for the taxable 
        year in which the temporary cessation begins.
          ``(3) The treatment provided by paragraph (1) shall continue 
        until the earlier of--
                  ``(A) the electing entity abandoning its intention to 
                resume operations of the vessel in the United States 
                foreign trade, or
                  ``(B) the electing entity resuming operation of the 
                vessel in the United States foreign trade.
  ``(f) Effect of Change in Use.--
          ``(1) Except as provided in subsection (e), a vessel that is 
        used other than for operations in the United States foreign 
        trade on other than a temporary basis ceases to be a qualifying 
        vessel when such use begins.
          ``(2) For purposes of this subsection, a change in use of a 
        vessel, other than a commencement of operation in the United 
        States domestic trade, is taken to be permanent unless there 
        are circumstances indicating that it is temporary.
  ``(g) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section.

``SEC. 1356. QUALIFYING SHIPPING ACTIVITIES.

  ``(a) Qualifying Shipping Activities.--For purposes of this 
subchapter the `qualifying shipping activities' of an electing entity 
consist of--
          ``(1) core qualifying activities,
          ``(2) qualifying secondary activities, and
          ``(3) qualifying incidental activities.
  ``(b) Core Qualifying Activities.--
          ``(1) The `core qualifying activities' of an electing entity 
        are--
                  ``(A) its activities in operating qualifying vessels 
                in United States foreign trade, and
                  ``(B) other activities of the electing entity and 
                other members of its electing group that are an 
                integral part of its business of operating qualifying 
                vessels in United States foreign trade, including 
                ownership or operation of barges, containers, chassis, 
                and other equipment that are the complement of, or used 
                in connection with, a qualifying vessel in United 
                States foreign trade, the inland haulage of cargo 
                shipped, or to be shipped, on qualifying vessels in 
                United States foreign trade, and the provision of 
                terminal, maintenance, repair, logistical, or other 
                vessel, container, or cargo-related services that are 
                an integral part of operating qualifying vessels in 
                United States foreign trade.
          ``(2) `Core qualifying activities' do not include the 
        provision by an entity of facilities or services to any person, 
        other than--
                  ``(A) another member of such entity's electing group,
                  ``(B) a consignor, consignee, or other customer of 
                such entity's business of operating qualifying vessels 
                in United States foreign trade, or
                  ``(C) a member of an alliance, joint venture, pool, 
                partnership or similar undertaking involving the 
                operation of qualifying vessels in United States 
                foreign trade of which such entity is a member.
  ``(c) Qualifying Secondary Activities.--For purposes of this 
subsection--
          ``(1) the term `secondary activities' means activities that 
        are not core qualifying activities, and--
                  ``(A) are the active management or operation of 
                vessels in the United States foreign trade,
                  ``(B) the provision of vessel, container, or cargo-
                related facilities or services to any person, or
                  ``(C) such other activities as may be prescribed by 
                the Secretary pursuant to regulations, and
          ``(2) the `qualified secondary activities' of an electing 
        entity are its secondary activities and the secondary 
        activities of other members of its electing group, but only to 
        the extent that, without regard to this subchapter, the 
        aggregate gross income derived by the electing entity and the 
        other members of its electing group from such activities does 
        not exceed 20 percent of the aggregate gross income derived by 
        the electing entity and the other members of its electing group 
        from their core qualifying activities.
  ``(d) Qualifying Incidental Activities.--Shipping-related activities 
carried on by an electing entity or another member of its electing 
group are qualified incidental activities of the electing entity if--
          ``(1) incidental to its core qualifying activities,
          ``(2) not qualifying secondary activities, and
          ``(3) without regard to this subchapter, the aggregate gross 
        income derived by the electing entity and other members of its 
        electing group from such activities does not exceed 0.1 percent 
        of such entities' aggregate gross income from their core 
        qualifying activities.

``SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRECIATION; INTEREST.

  ``(a) Exclusion From Gross Income.--Gross income of an electing 
entity shall not include the corporate income percentage of--
          ``(1) income from qualifying shipping activities in the 
        United States foreign trade,
          ``(2) income from money, bank deposits and other temporary 
        investments which are reasonably necessary to meet the working 
        capital requirements of qualifying shipping activities, and
          ``(3) income from money or other intangible assets 
        accumulated pursuant to a plan to purchase qualifying shipping 
        assets.
  ``(b) Electing Group Member.--Gross income of a member of an electing 
group that is not an electing entity shall not include the corporate 
income percentage of its income from qualifying shipping activities 
that are taken into account under this subchapter as qualifying 
shipping activities of an electing entity.
  ``(c) Denial of Losses, Deductions, and Credits.--
          ``(1) General rule.--Subject to paragraph (2), the corporate 
        loss percentage of each item of loss, deduction (other than for 
        interest expense), or credit of any taxpayer with respect to 
        any activity the income from which is excluded from gross 
        income under this section shall be disallowed.
          ``(2) Depreciation.--Notwithstanding paragraph (1), the 
        deduction for depreciation of a qualifying shipping asset shall 
        be allowed in determining the adjusted basis of such asset for 
        purposes of determining gain from its disposition.
                  ``(A) Except as provided in subparagraph (B), the 
                straight line method of depreciation shall apply to the 
                corporate income percentage of qualifying shipping 
                assets the income from operation of which is excluded 
                from gross income under this section.
                  ``(B) Subparagraph (A) shall not apply to any 
                qualifying shipping asset which is subject to a charter 
                entered into prior to the effective date of this 
                subchapter.
          ``(3) Interest.--The corporate loss percentage of an electing 
        entity's interest expense shall be disallowed in the ratio that 
        the fair market value of its qualifying vessel assets bears to 
        the fair market value of its total assets.
  ``(d) Section Inapplicable to Unrelated Persons.--This section shall 
not apply to a taxpayer that is not a member of an electing group.

``SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DEDUCTIONS.

  ``(a) Qualifying Shipping Activities.--For purposes of this chapter, 
the qualifying shipping activities of an electing entity shall be 
treated as a separate trade or business activity from all other 
activities conducted by the entity.
  ``(b) Exclusion of Credits or Deductions.--
          ``(1) No deduction shall be allowed against the taxable 
        income of an electing corporation from qualifying shipping 
        activities, and no credit shall be allowed against the tax 
        imposed by section 1352(b).
          ``(2) No deduction shall be allowed for any net operating 
        loss attributable to the qualifying shipping activities of a 
        corporation to the extent that such loss is carried forward by 
        the corporation from a taxable year preceding the first taxable 
        year for which such corporation was an electing corporation.
  ``(c) Transactions Not at Arm's Length.--Section 482 shall apply in 
accordance with this subsection to a transaction or series of 
transactions--
          ``(1) as between an electing entity and another person, or
          ``(2) as between an entity's qualifying shipping activities 
        and other activities carried on by it.

``SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING ASSETS.

  ``(a) In General.--If an electing entity sells or disposes of 
qualifying shipping assets (as defined in subsection (c)) in an 
otherwise taxable transaction, at the election of the entity no gain 
shall be recognized if replacement qualifying shipping assets are 
acquired during the period specified in subsection (b), except to the 
extent that the amount realized upon such sale or disposition exceeds 
the cost of the replacement qualifying shipping assets.
  ``(b) Period Within Which Property Must Be Replaced.--The period 
referred to in subsection (a) shall be the period beginning one year 
prior to the disposition of the qualifying shipping assets and ending--
          ``(1) 3 years after the close of the first taxable year in 
        which the gain is realized, or
          ``(2) subject to such terms and conditions as may be 
        specified by the Secretary, on such later date as the Secretary 
        may designate on application by the taxpayer. Such application 
        shall be made at such time and in such manner as the Secretary 
        may by regulations prescribe.
  ``(c) Time for Assessment of Deficiency Attributable to Gain.--If an 
electing entity has made the election provided in subsection (a), 
then--
          ``(1) the statutory period for the assessment of any 
        deficiency, for any taxable year in which any part of the gain 
        is realized, attributable to such gain shall not expire prior 
        to the expiration of 3 years from the date the Secretary is 
        notified by the entity (in such manner as the Secretary may by 
        regulations prescribe) of the replacement tonnage tax property 
        or of an intention not to replace, and
          ``(2) such deficiency may be assessed before the expiration 
        of such 3-year period notwithstanding the provisions of section 
        6212(c) or the provisions of any other law or rule of law which 
        would otherwise prevent such assessment.
  ``(d) Basis of Replacement Qualifying Shipping Assets.--In the case 
of replacement qualifying shipping assets purchased by an electing 
entity which resulted in the nonrecognition of any part of the gain 
realized as the result of a sale or other disposition of qualifying 
shipping assets, the basis shall be the cost of such property decreased 
in the amount of the gain not so recognized; and if the property 
purchased consists of more than one piece of property, the basis 
determined under this sentence shall be allocated to the purchased 
properties in proportion to their respective costs.
  ``(e) Replacement Qualifying Shipping Assets Must Be Acquired From 
Unrelated Person in Certain Cases.--
          ``(1) In general.--Subsection (a) shall not apply if the 
        replacement qualifying shipping assets are acquired from a 
        related person except to the extent that the related person 
        acquired the replacement qualifying shipping assets from an 
        unrelated person during the period applicable under subsection 
        (b).
          ``(2) Related person.--For purposes of this subsection, a 
        person is related to another person if the person bears a 
        relationship to the other person described in section 267(b) or 
        707(b)(1).''
  (b) Technical and Conforming Amendment.--The second sentence of 
section 56(g)(4)(B)(i), as amended by this Act, is further amended by 
inserting ``or 1357'' after ``section 139A''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR CERTAIN EXPENSES 
                    INCURRED IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE 
                    WHALING.

  (a) In General.--Section 170 (relating to charitable, etc., 
contributions and gifts), as amended by this Act, is amended by 
redesignating subsection (n) as subsection (o) and by inserting after 
subsection (m) the following new subsection:
  ``(n) Expenses Paid by Certain Whaling Captains in Support of Native 
Alaskan Subsistence Whaling.--
          ``(1) In general.--In the case of an individual who is 
        recognized by the Alaska Eskimo Whaling Commission as a whaling 
        captain charged with the responsibility of maintaining and 
        carrying out sanctioned whaling activities and who engages in 
        such activities during the taxable year, the amount described 
        in paragraph (2) (to the extent such amount does not exceed 
        $10,000 for the taxable year) shall be treated for purposes of 
        this section as a charitable contribution.
          ``(2) Amount described.--
                  ``(A) In general.--The amount described in this 
                paragraph is the aggregate of the reasonable and 
                necessary whaling expenses paid by the taxpayer during 
                the taxable year in carrying out sanctioned whaling 
                activities.
                  ``(B) Whaling expenses.--For purposes of subparagraph 
                (A), the term `whaling expenses' includes expenses 
                for--
                          ``(i) the acquisition and maintenance of 
                        whaling boats, weapons, and gear used in 
                        sanctioned whaling activities,
                          ``(ii) the supplying of food for the crew and 
                        other provisions for carrying out such 
                        activities, and
                          ``(iii) storage and distribution of the catch 
                        from such activities.
          ``(3) Sanctioned whaling activities.--For purposes of this 
        subsection, the term `sanctioned whaling activities' means 
        subsistence bowhead whale hunting activities conducted pursuant 
        to the management plan of the Alaska Eskimo Whaling 
        Commission.''.
  (b) Effective Date.--The amendments made by subsection (a) shall 
apply to contributions made after December 31, 2004.

 TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES

SEC. 301. INTEREST EXPENSE ALLOCATION RULES.

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

SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

  (a) General Rule.--Section 904 is amended by redesignating 
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j), 
(k), and (l) respectively, and by inserting after subsection (f) the 
following new subsection:
  ``(g) Recharacterization of Overall Domestic Loss.--
          ``(1) General rule.--For purposes of this subpart and section 
        936, in the case of any taxpayer who sustains an overall 
        domestic loss for any taxable year beginning after December 31, 
        2006, that portion of the taxpayer's taxable income from 
        sources within the United States for each succeeding taxable 
        year which is equal to the lesser of--
                  ``(A) the amount of such loss (to the extent not used 
                under this paragraph in prior taxable years), or
                  ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
          ``(2) Overall domestic loss defined.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                  ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer chose the benefits of this subpart for 
                such taxable year.
          ``(3) Characterization of subsequent income.--
                  ``(A) In general.--Any income from sources within the 
                United States that is treated as income from sources 
                without the United States under paragraph (1) shall be 
                allocated among and increase the income categories in 
                proportion to the loss from sources within the United 
                States previously allocated to those income categories.
                  ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given such term by subsection (f)(5)(E)(i).
          ``(4) Coordination with subsection (f).--The Secretary shall 
        prescribe such regulations as may be necessary to coordinate 
        the provisions of this subsection with the provisions of 
        subsection (f).''.
  (b) Conforming Amendments.--
          (1) Section 535(d)(2) is amended by striking ``section 
        904(g)(6)'' and inserting ``section 904(h)(6)''.
          (2) Subparagraph (A) of section 936(a)(2) is amended by 
        striking ``section 904(f)'' and inserting ``subsections (f) and 
        (g) of section 904''.
  (c) Effective Date.--The amendments made by this section shall apply 
to losses for taxable years beginning after December 31, 2006.

SEC. 303. 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 2007 changes.--For 
                purposes of paragraph (1)--
                          ``(i) taxes carried from any taxable year 
                        beginning before January 1, 2007, 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, 2006.

SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED 
                    SECTION 902 CORPORATIONS.

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

SEC. 305. 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. 306. 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. 307. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS OF 
                    CONTROLLED FOREIGN CORPORATION.

  (a) In General.--Section 956(c)(2) (relating to exceptions from 
property treated as United States property) is amended by striking 
``and'' at the end of subparagraph (J), by striking the period at the 
end of subparagraph (K) and inserting a semicolon, and by adding at the 
end the following new subparagraphs:
                  ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if--
                          ``(i) the dealer accounts for the securities 
                        as securities held primarily for sale to 
                        customers in the ordinary course of business, 
                        and
                          ``(ii) the dealer disposes of the securities 
                        (or such securities mature while held by the 
                        dealer) within a period consistent with the 
                        holding of securities for sale to customers in 
                        the ordinary course of business; and
                  ``(M) an obligation of a United States person which--
                          ``(i) is not a domestic corporation, and
                          ``(ii) is not--
                                  ``(I) a United States shareholder (as 
                                defined in section 951(b)) of the 
                                controlled foreign corporation, or
                                  ``(II) a partnership, estate, or 
                                trust in which the controlled foreign 
                                corporation, or any related person (as 
                                defined in section 954(d)(3)), is a 
                                partner, beneficiary, or trustee 
                                immediately after the acquisition of 
                                any obligation of such partnership, 
                                estate, or trust by the controlled 
                                foreign corporation.''.
  (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2004, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX 
                    PAID OTHER THAN IN FUNCTIONAL CURRENCY.

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

SEC. 309. 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. 310. 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, which is 
                predominantly engaged in the active conduct of a trade 
                or business outside the United States, 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. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED 
                    FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING 
                    COMPANY INCOME RULES.

  (a) In General.--Subsection (c) of section 954, as amended by this 
Act, is amended by adding after paragraph (4) the following new 
paragraph:
          ``(5) Look-thru in the case of related controlled foreign 
        corporations.--For purposes of this subsection, dividends, 
        interest, rents, and royalties received or accrued from a 
        controlled foreign corporation which is a related person (as 
        defined in subsection (b)(9)) shall not be treated as foreign 
        personal holding company income to the extent attributable or 
        properly allocable (determined under rules similar to the rules 
        of subparagraphs (C) and (D) of section 904(d)(3)) to income of 
        the related person which is not subpart F income (as defined in 
        section 952). For purposes of this paragraph, interest shall 
        include factoring income which is treated as income equivalent 
        to interest for purposes of paragraph (1)(E). The Secretary 
        shall prescribe such regulations as may be appropriate to 
        prevent the abuse of the purposes of this paragraph.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2004, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

  (a) In General.--Section 954(c) (defining foreign personal holding 
company income), as amended by this Act, is amended by adding after 
paragraph (5) the following new paragraph:
          ``(6) Look-thru rule for certain partnership sales.--
                  ``(A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest in a 
                partnership with respect to which such corporation is a 
                25-percent owner, such corporation shall be treated for 
                purposes of this subsection as selling the 
                proportionate share of the assets of the partnership 
                attributable to such interest. The Secretary shall 
                prescribe such regulations as may be appropriate to 
                prevent abuse of the purposes of this paragraph, 
                including regulations providing for coordination of 
                this paragraph with the provisions of subchapter K.
                  ``(B) 25-percent owner.--For purposes of this 
                paragraph, the term `25-percent owner' means a 
                controlled foreign corporation which owns directly 25 
                percent or more of the capital or profits interest in a 
                partnership. For purposes of the preceding sentence, if 
                a controlled foreign corporation is a shareholder or 
                partner of a corporation or partnership, the controlled 
                foreign corporation shall be treated as owning directly 
                its proportionate share of any such capital or profits 
                interest held directly or indirectly by such 
                corporation or partnership.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2004, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN 
                    INVESTMENT COMPANY RULES.

  (a) General Rule.--The following provisions are hereby repealed:
          (1) Part III of subchapter G of chapter 1 (relating to 
        foreign personal holding companies).
          (2) Section 1246 (relating to gain on foreign investment 
        company stock).
          (3) Section 1247 (relating to election by foreign investment 
        companies to distribute income currently).
  (b) Exemption of Foreign Corporations From Personal Holding Company 
Rules.--
          (1) In general.--Subsection (c) of section 542 (relating to 
        exceptions) is amended--
                  (A) by striking paragraph (5) and inserting the 
                following:
          ``(5) a foreign corporation,'',
                  (B) by striking paragraphs (7) and (10) and by 
                redesignating paragraphs (8) and (9) as paragraphs (7) 
                and (8), respectively,
                  (C) by inserting ``and'' at the end of paragraph (7) 
                (as so redesignated), and
                  (D) by striking ``; and'' at the end of paragraph (8) 
                (as so redesignated) and inserting a period.
          (2) Treatment of income from personal service contracts.--
        Paragraph (1) of section 954(c) is amended by adding at the end 
        the following new subparagraph:
                  ``(I) Personal service contracts.--
                          ``(i) Amounts received under a contract under 
                        which the corporation is to furnish personal 
                        services if--
                                  ``(I) some person other than the 
                                corporation has the right to designate 
                                (by name or by description) the 
                                individual who is to perform the 
                                services, or
                                  ``(II) the individual who is to 
                                perform the services is designated (by 
                                name or by description) in the 
                                contract, and
                          ``(ii) amounts received from the sale or 
                        other disposition of such a contract.
                This subparagraph shall apply with respect to amounts 
                received for services under a particular contract only 
                if at some time during the taxable year 25 percent or 
                more in value of the outstanding stock of the 
                corporation is owned, directly or indirectly, by or for 
                the individual who has performed, is to perform, or may 
                be designated (by name or by description) as the one to 
                perform, such services.''.
  (c) Conforming Amendments.--
          (1) Section 1(h) is amended--
                  (A) in paragraph (10), by inserting ``and'' at the 
                end of subparagraph (F), by striking subparagraph (G), 
                and by redesignating subparagraph (H) as subparagraph 
                (G), and
                  (B) by striking ``a foreign personal holding company 
                (as defined in section 552), a foreign investment 
                company (as defined in section 1246(b)), or'' in 
                paragraph (11)(C)(iii).
          (2) Section 163(e)(3)(B), as amended by section 642(a) of 
        this Act, is amended by striking ``which is a foreign personal 
        holding company (as defined in section 552), a controlled 
        foreign corporation (as defined in section 957), or'' and 
        inserting ``which is a controlled foreign corporation (as 
        defined in section 957) or''.
          (3) Paragraph (2) of section 171(c) is amended--
                  (A) by striking ``, or by a foreign personal holding 
                company, as defined in section 552'', and
                  (B) by striking ``, or foreign personal holding 
                company''.
          (4) Paragraph (2) of section 245(a) is amended by striking 
        ``foreign personal holding company or''.
          (5) Section 267(a)(3)(B), as amended by section 642(b) of 
        this Act, is amended by striking ``to a foreign personal 
        holding company (as defined in section 552), a controlled 
        foreign corporation (as defined in section 957), or'' and 
        inserting ``to a controlled foreign corporation (as defined in 
        section 957) or''.
          (6) Section 312 is amended by striking subsection (j).
          (7) Subsection (m) of section 312 is amended by striking ``, 
        a foreign investment company (within the meaning of section 
        1246(b)), or a foreign personal holding company (within the 
        meaning of section 552)''.
          (8) Subsection (e) of section 443 is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) and (5) as 
        paragraphs (3) and (4), respectively.
          (9) Subparagraph (B) of section 465(c)(7) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
          (10) Paragraph (1) of section 543(b) is amended by inserting 
        ``and'' at the end of subparagraph (A), by striking ``, and'' 
        at the end of subparagraph (B) and inserting a period, and by 
        striking subparagraph (C).
          (11) Paragraph (1) of section 562(b) is amended by striking 
        ``or a foreign personal holding company described in section 
        552''.
          (12) Section 563 is amended--
                  (A) by striking subsection (c),
                  (B) by redesignating subsection (d) as subsection 
                (c), and
                  (C) by striking ``subsection (a), (b), or (c)'' in 
                subsection (c) (as so redesignated) and inserting 
                ``subsection (a) or (b)''.
          (13) Subsection (d) of section 751 is amended by adding 
        ``and'' at the end of paragraph (2), by striking paragraph (3), 
        by redesignating paragraph (4) as paragraph (3), and by 
        striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so 
        redesignated) and inserting ``paragraph (1) or (2)''.
          (14) Paragraph (2) of section 864(d) is amended by striking 
        subparagraph (A) and by redesignating subparagraphs (B) and (C) 
        as subparagraphs (A) and (B), respectively.
          (15)(A) Subparagraph (A) of section 898(b)(1) is amended to 
        read as follows:
                  ``(A) which is treated as a controlled foreign 
                corporation for any purpose under subpart F of part III 
                of this subchapter, and''.
          (B) Subparagraph (B) of section 898(b)(2) is amended by 
        striking ``and sections 551(f) and 554, whichever are 
        applicable,''.
          (C) Paragraph (3) of section 898(b) is amended to read as 
        follows:
          ``(3) United states shareholder.--The term `United States 
        shareholder' has the meaning given to such term by section 
        951(b), except that, in the case of a foreign corporation 
        having related person insurance income (as defined in section 
        953(c)(2)), the Secretary may treat any person as a United 
        States shareholder for purposes of this section if such person 
        is treated as a United States shareholder under section 
        953(c)(1).''.
          (D) Subsection (c) of section 898 is amended to read as 
        follows:
  ``(c) Determination of Required Year.--
          ``(1) In general.--The required year is--
                  ``(A) the majority U.S. shareholder year, or
                  ``(B) if there is no majority U.S. shareholder year, 
                the taxable year prescribed under regulations.
          ``(2) 1-month deferral allowed.--A specified foreign 
        corporation may elect, in lieu of the taxable year under 
        paragraph (1)(A), a taxable year beginning 1 month earlier than 
        the majority U.S. shareholder year.
          ``(3) Majority u.s. shareholder year.--
                  ``(A) In general.--For purposes of this subsection, 
                the term `majority U.S. shareholder year' means the 
                taxable year (if any) which, on each testing day, 
                constituted the taxable year of--
                          ``(i) each United States shareholder 
                        described in subsection (b)(2)(A), and
                          ``(ii) each United States shareholder not 
                        described in clause (i) whose stock was treated 
                        as owned under subsection (b)(2)(B) by any 
                        shareholder described in such clause.
                  ``(B) Testing day.--The testing days shall be--
                          ``(i) the first day of the corporation's 
                        taxable year (determined without regard to this 
                        section), or
                          ``(ii) the days during such representative 
                        period as the Secretary may prescribe.''.
          (16) Clause (ii) of section 904(d)(2)(A) is amended to read 
        as follows:
                          ``(ii) Certain amounts included.--Except as 
                        provided in clause (iii), the term `passive 
                        income' includes, except as provided in 
                        subparagraph (E)(iii) or paragraph (3)(I), any 
                        amount includible in gross income under section 
                        1293 (relating to certain passive foreign 
                        investment companies).''.
          (17)(A) Subparagraph (A) of section 904(h)(1), as 
        redesignated by section 302, 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(h), 
        as so redesignated, is amended by striking ``foreign personal 
        holding or''.
          (18) Section 951 is amended by striking subsections (c) and 
        (d) and by redesignating subsections (e) and (f) as subsections 
        (c) and (d), respectively.
          (19) Paragraph (3) of section 989(b) is amended by striking 
        ``, 551(a),''.
          (20) Paragraph (5) of section 1014(b) is amended by inserting 
        ``and before January 1, 2005,'' after ``August 26, 1937,''.
          (21) Subsection (a) of section 1016 is amended by striking 
        paragraph (13).
          (22)(A) Paragraph (3) of section 1212(a) is amended to read 
        as follows:
          ``(3) Special rules on carrybacks.--A net capital loss of a 
        corporation shall not be carried back under paragraph (1)(A) to 
        a taxable year--
                  ``(A) for which it is a regulated investment company 
                (as defined in section 851), or
                  ``(B) for which it is a real estate investment trust 
                (as defined in section 856).''.
          (B) The amendment made by subparagraph (A) shall apply to 
        taxable years beginning after December 31, 2004.
          (23) Section 1223 is amended by striking paragraph (10) and 
        by redesignating the following paragraphs accordingly.
          (24) Subsection (d) of section 1248 is amended by striking 
        paragraph (5) and by redesignating paragraphs (6) and (7) as 
        paragraphs (5) and (6), respectively.
          (25) Paragraph (2) of section 1260(c) is amended by striking 
        subparagraphs (H) and (I) and by redesignating subparagraph (J) 
        as subparagraph (H).
          (26)(A) Subparagraph (F) of section 1291(b)(3) is amended by 
        striking ``551(d), 959(a),'' and inserting ``959(a)''.
          (B) Subsection (e) of section 1291 is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the American Jobs Creation Act of 2004)'' after ``section 
        1246''.
          (27) Paragraph (2) of section 1294(a) is amended to read as 
        follows:
          ``(2) Election not permitted where amounts otherwise 
        includible under section 951.--The taxpayer may not make an 
        election under paragraph (1) with respect to the undistributed 
        PFIC earnings tax liability attributable to a qualified 
        electing fund for the taxable year if any amount is includible 
        in the gross income of the taxpayer under section 951 with 
        respect to such fund for such taxable year.''.
          (28) Section 6035 is hereby repealed.
          (29) Subparagraph (D) of section 6103(e)(1) is amended by 
        striking clause (iv) and redesignating clauses (v) and (vi) as 
        clauses (iv) and (v), respectively.
          (30) Subparagraph (B) of section 6501(e)(1) is amended to 
        read as follows:
                  ``(B) Constructive dividends.--If the taxpayer omits 
                from gross income an amount properly includible therein 
                under section 951(a), the tax may be assessed, or a 
                proceeding in court for the collection of such tax may 
                be done without assessing, at any time within 6 years 
                after the return was filed.''.
          (31) Subsection (a) of section 6679 is amended--
                  (A) by striking ``6035, 6046, and 6046A'' in 
                paragraph (1) and inserting ``6046 and 6046A'', and
                  (B) by striking paragraph (3).
          (32) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) are 
        each amended by striking ``556(b)(2),'' each place it appears.
          (33) The table of parts for subchapter G of chapter 1 is 
        amended by striking the item relating to part III.
          (34) The table of sections for part IV of subchapter P of 
        chapter 1 is amended by striking the items relating to sections 
        1246 and 1247.
          (35) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6035.
  (d) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years of 
        foreign corporations beginning after December 31, 2004, and to 
        taxable years of United States shareholders with or within 
        which such taxable years of foreign corporations end.
          (2) Subsection (c)(29).--The amendments made by subsection 
        (c)(29) shall apply to disclosures of return or return 
        information with respect to taxable years beginning after 
        December 31, 2004.

SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH 
                    RESPECT TO TRANSACTIONS IN COMMODITIES.

  (a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C) 
(relating to commodity transactions) are amended to read as follows:
                          ``(i) arise out of commodity hedging 
                        transactions (as defined in paragraph (4)(A)),
                          ``(ii) are active business gains or losses 
                        from the sale of commodities, but only if 
                        substantially all of the controlled foreign 
                        corporation's commodities are property 
                        described in paragraph (1), (2), or (8) of 
                        section 1221(a), or''.
  (b) Definition and Special Rules.--Subsection (c) of section 954 is 
amended by adding after paragraph (3) the following new paragraph:
          ``(4) Definition and special rules relating to commodity 
        transactions.--
                  ``(A) Commodity hedging transactions.--For purposes 
                of paragraph (1)(C)(i), the term `commodity hedging 
                transaction' means any transaction with respect to a 
                commodity if such transaction--
                          ``(i) is a hedging transaction as defined in 
                        section 1221(b)(2), determined--
                                  ``(I) without regard to subparagraph 
                                (A)(ii) thereof,
                                  ``(II) by applying subparagraph 
                                (A)(i) thereof by substituting 
                                `ordinary property or property 
                                described in section 1231(b)' for 
                                `ordinary property', and
                                  ``(III) by substituting `controlled 
                                foreign corporation' for `taxpayer' 
                                each place it appears, and
                          ``(ii) is clearly identified as such in 
                        accordance with section 1221(a)(7).
                  ``(B) Treatment of dealer activities under paragraph 
                (1)(C).--Commodities with respect to which gains and 
                losses are not taken into account under paragraph 
                (2)(C) in computing a controlled foreign corporation's 
                foreign personal holding company income shall not be 
                taken into account in applying the substantially all 
                test under paragraph (1)(C)(ii) to such corporation.
                  ``(C) Regulations.--The Secretary shall prescribe 
                such regulations as are appropriate to carry out the 
                purposes of paragraph (1)(C) in the case of 
                transactions involving related parties.''.
  (c) Modification of Exception for Dealers.--Clause (i) of section 
954(c)(2)(C) is amended by inserting ``and transactions involving 
physical settlement'' after ``(including hedging transactions''.
  (d) Effective Date.--The amendments made by this section shall apply 
to transactions entered into after December 31, 2004.

SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND 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. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR ACTIVE 
                    FINANCING.

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

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS

SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST REGULAR 
                    AND MINIMUM TAX LIABILITY.

  (a) In General.--Paragraph (2) of section 26(a) is amended--
          (1) by striking ``rule for 2000, 2001, 2002, and 2003.--'' 
        and inserting ``rule for taxable years 2000 through 2005.--'', 
        and
          (2) by striking ``or 2003,'' and inserting ``2003, 2004, or 
        2005,''.
  (b) Conforming Provisions.--
          (1) Section 904(h) is amended by striking ``or 2003'' and 
        inserting ``2003, 2004, or 2005''.
          (2) The amendments made by sections 201(b), 202(f), and 
        618(b) of the Economic Growth and Tax Relief Reconciliation Act 
        of 2001 shall not apply to taxable years beginning during 2004 
        or 2005.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 402. EXTENSION OF RESEARCH CREDIT.

  (a) Extension.--
          (1) In general.--Section 41(h)(1)(B) (relating to 
        termination) is amended by striking ``June 30, 2004'' and 
        inserting ``December 31, 2005''.
          (2) Conforming amendment.--Section 45C(b)(1)(D) is amended by 
        striking ``June 30, 2004'' and inserting ``December 31, 2005''.
  (b) Effective Date.--The amendments made by subsection (a) shall 
apply to amounts paid or incurred after June 30, 2004.

SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN 
                    RENEWABLE RESOURCES.

  (a) In General.--Subparagraphs (A) and (B) of section 45(c)(3) 
(defining qualified facility) are both amended by striking ``2004'' and 
inserting ``2006''.
  (b) Effective Date.--The amendments made by this section shall apply 
to facilities placed in service after December 31, 2003.

SEC. 404. INDIAN EMPLOYMENT TAX CREDIT.

  Section 45A(f) (relating to termination) is amended by striking 
``December 31, 2004'' and inserting ``December 31, 2005''.

SEC. 405. WORK OPPORTUNITY CREDIT.

  (a) In General.--Subparagraph (B) of section 51(c)(4) is amended by 
striking ``December 31, 2003'' and inserting ``December 31, 2005''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to individuals who begin work for the employer after December 31, 2003.

SEC. 406. WELFARE-TO-WORK CREDIT.

  (a) In General.--Subsection (f) of section 51A is amended by striking 
``December 31, 2003'' and inserting ``December 31, 2005''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to individuals who begin work for the employer after December 31, 2003.

SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS.

  (a) In General.--Subparagraph (D) of section 62(a)(2) (relating to 
certain trade and business deductions of employees) is amended by 
striking ``or 2003'' and inserting ``, 2003, 2004, or 2005''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2003.

SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION BENEFIT FOR PROPERTY ON 
                    INDIAN RESERVATIONS.

  Paragraph (8) of section 168(j) (relating to termination) is amended 
by striking ``December 31, 2004'' and inserting ``December 31, 2005''.

SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT 
                    USED FOR EDUCATIONAL PURPOSES.

  (a) In General.--Subparagraph (G) of section 170(e)(6) (relating to 
special rule for contributions of computer technology and equipment for 
educational purposes) is amended by striking ``December 31, 2003'' and 
inserting ``December 31, 2005''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2003.

SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

  (a) In General.--Subsection (h) of section 198 (relating to 
termination) is amended by striking ``December 31, 2003'' and inserting 
``December 31, 2005''.
  (b) Effective Date.--The amendments made by subsection (a) shall 
apply to expenditures paid or incurred after December 31, 2003.

SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.

  (a) In General.--Paragraphs (2) and (3)(B) of section 220(i) 
(defining cut-off year) are each amended by striking ``2003'' each 
place it appears in the text and headings and inserting ``2005''.
  (b) Conforming Amendments.--
          (1) Paragraph (2) of section 220(j) is amended--
                  (A) in the text by striking ``or 2002'' each place it 
                appears and inserting ``2002, or 2004'', and
                  (B) in the heading by striking ``or 2002'' and 
                inserting ``2002, or 2004''.
          (2) Subparagraph (A) of section 220(j)(4) is amended by 
        striking ``and 2002'' and inserting ``2002, and 2004''.
          (3) Subparagraph (C) of section 220(j)(2) is amended to read 
        as follows:
                  ``(C) No limitation for 2000 or 2003.--The numerical 
                limitation shall not apply for 2000 or 2003.''.
  (c) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2004.
  (d) Time for Filing Reports, Etc.--
          (1) The report required by section 220(j)(4) of the Internal 
        Revenue Code of 1986 to be made on August 1, 2004, shall be 
        treated as timely if made before the close of the 90-day period 
        beginning on the date of the enactment of this Act.
          (2) The determination and publication required by section 
        220(j)(5) of such Code with respect to calendar year 2004 shall 
        be treated as timely if made before the close of the 120-day 
        period beginning on the date of the enactment of this Act. If 
        the determination under the preceding sentence is that 2004 is 
        a cut-off year under section 220(i) of such Code, the cut-off 
        date under such section 220(i) shall be the last day of such 
        120-day period.

SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR OIL AND 
                    NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES.

  (a) In General.--Subparagraph (H) of section 613A(c)(6) is amended by 
striking ``January 1, 2004'' and inserting ``January 1, 2006''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2003.

SEC. 413. QUALIFIED ZONE ACADEMY BONDS.

  (a) In General.--Paragraph (1) of section 1397E(e) is amended by 
striking ``and 2003'' and inserting ``2003, 2004, and 2005''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to obligations issued after the date of the enactment of this Act.

SEC. 414. DISTRICT OF COLUMBIA.

  (a) District of Columbia Enterprise Zone.--Subsection (f) of section 
1400 is amended by striking ``December 31, 2003'' both places it 
appears and inserting ``December 31, 2005''.
  (b)  Tax-Exempt Economic Development Bonds.--Subsection (b) of 
section 1400A is amended by striking ``December 31, 2003'' and 
inserting ``December 31, 2005''.
  (c) Zero Percent Capital Gains Rate.--
          (1) Section 1400B is amended by striking ``January 1, 2004'' 
        each place it appears and inserting ``January 1, 2006''.
          (2) Subsections (e)(2) and (g)(2) of section 1400B are each 
        amended by striking ``2008'' each place it appears in the 
        headings and text and inserting ``2010''.
          (3) Subsection (d) of section 1400F is amended by striking 
        ``December 31, 2008'' and inserting ``December 31, 2010''.
  (d) First-Time Homebuyer Credit.--Subsection (i) of section 1400C is 
amended by striking ``January 1, 2004'' and inserting ``January 1, 
2006''.
  (e) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall take 
        effect on the date of the enactment of this Act.
          (2) Tax-exempt economic development bonds.--The amendment 
        made by subsection (b) shall apply to obligations issued after 
        December 31, 2003.

SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY ZONE BOND FINANCING.

  Subparagraph (D) of section 1400L(d)(2) is amended by striking 
``2005'' and inserting ``2010''.

SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVITIES.

  (a) In General.--Clause (iv) of section 6103(i)(3)(C) and 
subparagraph (E) of section 6103(i)(7) are both amended by striking 
``December 31, 2003'' and inserting ``December 31, 2005''.
  (b) Disclosure of taxpayer identity to law enforcement agencies 
investigating terrorism.--Subparagraph (A) of section 6103(i)(7) is 
amended by adding at the end the following new clause:
                          ``(v) Taxpayer identity.--For purposes of 
                        this subparagraph, a taxpayer's identity shall 
                        not be treated as taxpayer return 
                        information.''.
  (c) Effective Dates.--
          (1) In general.--The amendments made by subsection (a) shall 
        apply to disclosures on or after the date of the enactment of 
        this Act.
          (2) Subsection (b).--The amendment made by subsection (b) 
        shall take effect as if included in section 201 of the Victims 
        of Terrorism Tax Relief Act of 2001.

SEC. 417. DISCLOSURE OF RETURN INFORMATION RELATING TO STUDENT LOANS.

  Section 6103(l)(13)(D) (relating to termination) is amended by 
striking ``December 31, 2004'' and inserting ``December 31, 2005''.

SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS.

  (a) In General.--Paragraph (1) of section 7652(f) is amended by 
striking ``January 1, 2004'' and inserting ``January 1, 2006''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to articles brought into the United States after December 31, 2003.

SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR THE INTERNAL 
                    REVENUE SERVICE.

  (a) In General.--Paragraph (2) of section 8021(f) (relating to joint 
reviews) is amended by striking ``2004'' and inserting ``2005''.
  (b) Report.--Subparagraph (C) of section 8022(3) (regarding reports) 
is amended--
          (1) by striking ``2004'' and inserting ``2005'', and
          (2) by striking ``with respect to--'' and all that follows 
        and inserting ``with respect to the matters addressed in the 
        joint review referred to in section 8021(f)(2).''.
  (c) Time for Joint Review.--The joint review required by section 
8021(f)(2) of the Internal Revenue Code of 1986 to be made before June 
1, 2004, shall be treated as timely if made before June 1, 2005.

SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH 
                    BENEFITS.

  (a) In General.--Subsection (f) of section 9812 is amended by 
striking ``and'' at the end of paragraph (1), by striking paragraph 
(2), and by inserting after paragraph (1) the following new paragraphs:
          ``(2) on or after January 1, 2004, and before the date of the 
        enactment of American Jobs Creation Act of 2004, and
          ``(3) after December 31, 2005.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to benefits for services furnished on or after December 31, 2003.

SEC. 421. COMBINED EMPLOYMENT TAX REPORTING PROJECT.

  (a) In General.--Paragraph (1) of section 976(b) of the Taxpayer 
Relief Act of 1997 (111 Stat. 898) is amended by striking ``for a 
period ending with the date which is 5 years after the date of the 
enactment of this Act'' and inserting ``during the period ending on 
December 31, 2005''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to disclosures on or after the date of the enactment of this Act.

SEC. 422. CLEAN-FUEL VEHICLES.

  (a) Credit for Qualified Electric Vehicles.--Paragraph (2) of section 
30(b) (relating to phaseout) is amended to read as follows:
          ``(2) Phaseout.--In the case of any qualified electric 
        vehicle placed in service after December 31, 2005, the credit 
        otherwise allowable under subsection (a) (determined after the 
        application of paragraph (1)) shall be reduced by 75 
        percent.''.
  (b) Deduction for Qualified Clean-fuel Vehicle Property.--
Subparagraph (B) of section 179A(b)(1) (relating to phaseout) is 
amended to read as follows:
                  ``(B) Phaseout.--In the case of any qualified clean-
                fuel vehicle property placed in service after December 
                31, 2005, the limit otherwise applicable under 
                subparagraph (A) shall be reduced by 75 percent.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to property placed in service after December 31, 2003.

       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES

SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES IN LIEU OF 
                    STATE AND LOCAL INCOME TAXES.

  (a) In General.--Subsection (b) of section 164 (relating to 
definitions and special rules) is amended by adding at the end the 
following:
          ``(5) General sales taxes.--For purposes of subsection (a)--
                  ``(A) Election to deduct state and local sales taxes 
                in lieu of state and local income taxes.--
                          ``(i) In general.--At the election of the 
                        taxpayer for the taxable year, subsection (a) 
                        shall be applied--
                                  ``(I) without regard to the reference 
                                to State and local income taxes, and
                                  ``(II) as if State and local general 
                                sales taxes were referred to in a 
                                paragraph thereof.
                  ``(B) Definition of general sales tax.--The term 
                `general sales tax' means a tax imposed at one rate 
                with respect to the sale at retail of a broad range of 
                classes of items.
                  ``(C) Special rules for food, etc.--In the case of 
                items of food, clothing, medical supplies, and motor 
                vehicles--
                          ``(i) the fact that the tax does not apply 
                        with respect to some or all of such items shall 
                        not be taken into account in determining 
                        whether the tax applies with respect to a broad 
                        range of classes of items, and
                          ``(ii) the fact that the rate of tax 
                        applicable with respect to some or all of such 
                        items is lower than the general rate of tax 
                        shall not be taken into account in determining 
                        whether the tax is imposed at one rate.
                  ``(D) Items taxed at different rates.--Except in the 
                case of a lower rate of tax applicable with respect to 
                an item described in subparagraph (C), no deduction 
                shall be allowed under this paragraph for any general 
                sales tax imposed with respect to an item at a rate 
                other than the general rate of tax.
                  ``(E) Compensating use taxes.--A compensating use tax 
                with respect to an item shall be treated as a general 
                sales tax. For purposes of the preceding sentence, the 
                term `compensating use tax' means, with respect to any 
                item, a tax which--
                          ``(i) is imposed on the use, storage, or 
                        consumption of such item, and
                          ``(ii) is complementary to a general sales 
                        tax, but only if a deduction is allowable under 
                        this paragraph with respect to items sold at 
                        retail in the taxing jurisdiction which are 
                        similar to such item.
                  ``(F) Special rule for motor vehicles.--In the case 
                of motor vehicles, if the rate of tax exceeds the 
                general rate, such excess shall be disregarded and the 
                general rate shall be treated as the rate of tax.
                  ``(G) Separately stated general sales taxes.--If the 
                amount of any general sales tax is separately stated, 
                then, to the extent that the amount so stated is paid 
                by the consumer (other than in connection with the 
                consumer's trade or business) to the seller, such 
                amount shall be treated as a tax imposed on, and paid 
                by, such consumer.
                  ``(H) Amount of deduction to be determined under 
                tables.--
                          ``(i) In general.--The amount of the 
                        deduction allowed under this paragraph shall be 
                        determined under tables prescribed by the 
                        Secretary.
                          ``(ii) Requirements for tables.--The tables 
                        prescribed under clause (i)--
                                  ``(I) shall reflect the provisions of 
                                this paragraph,
                                  ``(II) shall be based on the average 
                                consumption by taxpayers on a State-by-
                                State basis, as determined by the 
                                Secretary, taking into account filing 
                                status, number of dependents, adjusted 
                                gross income, and rates of State and 
                                local general sales taxation, and
                                  ``(III) need only be determined with 
                                respect to adjusted gross incomes up to 
                                the applicable amount (as determined 
                                under section 68(b)).
                  ``(I) Application of paragraph.--This paragraph shall 
                apply to taxable years beginning after December 31, 
                2003, and before January 1, 2006.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2003.

                      TITLE VI--REVENUE PROVISIONS

 Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and 
                         Corporate Expatriation

SEC. 601. 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. 602. 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. 603. 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. 604. 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 $124,000,
                  ``(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 2004, such $124,000 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 `2003' 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 June 3, 2004.

SEC. 605. 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. 606. 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, 2005, 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, 2005, 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 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.

            Subtitle B--Provisions Relating to Tax Shelters

                  Part I--Taxpayer-Related Provisions

SEC. 611. 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. 612. 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. 613. 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. 614. 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. 615. 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. 616. 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. 617. 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. 618. 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. 619. 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. 620. 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. 621. 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. 622. 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.''

                       Part II--Other Provisions

SEC. 631. 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. 632. 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. 633. 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) Special Rules for Transfers of Partnership Interest if There Is 
Substantial Built-In Loss.--
          (1) Adjustment of partnership basis 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 which has 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) Alternative rules for electing investment partnerships.--
                  (A) In general.--Section 743 is amended by adding at 
                the end the following new subsection:
  ``(e) Alternative rules for electing investment partnerships.--
          ``(1) No adjustment of partnership basis.--For purposes of 
        this section, an electing investment partnership shall not be 
        treated as having a substantial built-in loss with respect to 
        any transfer occurring while the election under paragraph 
        (6)(A) is in effect.
          ``(2) Loss deferral for transferee partner.--In the case of a 
        transfer of an interest in an electing investment partnership, 
        the transferee partner's distributive share of losses (without 
        regard to gains) from the sale or exchange of partnership 
        property shall not be allowed except to the extent that it is 
        established that such losses exceed the loss (if any) 
        recognized by the transferor (or any prior transferor to the 
        extent not fully offset by a prior disallowance under this 
        paragraph) on the transfer of the partnership interest.
          ``(3) No reduction in partnership basis.--Losses disallowed 
        under paragraph (2) shall not decrease the transferee partner's 
        basis in the partnership interest.
          ``(4) Effect of termination of partnership.--This subsection 
        shall be applied without regard to any termination of a 
        partnership under section 708(b)(1)(B).
          ``(5) Certain basis reductions treated as losses.--In the 
        case of a transferee partner whose basis in property 
        distributed by the partnership is reduced under section 
        732(a)(2), the amount of the loss recognized by the transferor 
        on the transfer of the partnership interest which is taken into 
        account under paragraph (2) shall be reduced by the amount of 
        such basis reduction.
          ``(6) Electing investment partnership.--For purposes of this 
        subsection, the term `electing investment partnership' means 
        any partnership if--
                  ``(A) the partnership makes an election to have this 
                subsection apply,
                  ``(B) the partnership would be an investment company 
                under section 3(a)(1)(A) of the Investment Company Act 
                of 1940 but for an exemption under paragraph (1) or (7) 
                of section 3(c) of such Act,
                  ``(C) such partnership has never been engaged in a 
                trade or business,
                  ``(D) substantially all of the assets of such 
                partnership are held for investment,
                  ``(E) at least 95 percent of the assets contributed 
                to such partnership consist of money,
                  ``(F) no assets contributed to such partnership had 
                an adjusted basis in excess of fair market value at the 
                time of contribution,
                  ``(G) all partnership interests of such partnership 
                are issued by such partnership pursuant to a private 
                offering and during the 24-month period beginning on 
                the date of the first capital contribution to such 
                partnership,
                  ``(H) the partnership agreement of such partnership 
                has substantive restrictions on each partner's ability 
                to cause a redemption of the partner's interest, and
                  ``(I) the partnership agreement of such partnership 
                provides for a term that is not in excess of 15 years.
        The election described in subparagraph (A), once made, shall be 
        irrevocable except with the consent of the Secretary.
          ``(7) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        this subsection, including regulations for applying this 
        subsection to tiered partnerships.''.
                  (B) Information reporting.--Section 6031 is amended 
                by adding at the end the following new subsection:
  ``(f) Electing Investment Partnerships.--In the case of any electing 
investment partnership (as defined in section 743(e)(6)), the 
information required under subsection (b) to be furnished to any 
partner to whom section 743(e)(2) applies shall include such 
information as is necessary to enable the partner to compute the amount 
of losses disallowed under section 743(e).''.
          (5) Clerical amendments.--
                  (A) The section heading for section 743 is amended to 
                read as follows:

``SEC. 743. SPECIAL RULES 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. Special rules 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).--
                  (A) In general.--Except as provided in subparagraph 
                (B), the amendments made by subsection (b) shall apply 
                to transfers after the date of the enactment of this 
                Act.
                  (B) Transition rule.--In the case of an electing 
                investment partnership which is in existence on June 4, 
                2004, section 743(e)(6)(H) of the Internal Revenue Code 
                of 1986, as added by this section, shall not apply to 
                such partnership and section 743(e)(6)(I) of such Code, 
                as so added, shall be applied by substituting ``20 
                years'' for ``15 years''.
          (3) Subsection (c).--The amendments made by subsection (c) 
        shall apply to distributions after the date of the enactment of 
        this Act.

SEC. 634. 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. 635. REPEAL OF SPECIAL RULES FOR FASITS.

  (a) In General.--Part V of subchapter M of chapter 1 (relating to 
financial asset securitization investment trusts) is hereby repealed.
  (b) Conforming Amendments.--
          (1) Paragraph (6) of section 56(g) is amended by striking 
        ``REMIC, or FASIT'' and inserting ``or REMIC''.
          (2) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``a REMIC to which part IV of subchapter M applies, or 
        a FASIT to which part V of subchapter M applies,'' and 
        inserting ``or a REMIC to which part IV of subchapter M 
        applies,''.
          (3) Paragraph (1) of section 582(c) is amended by striking 
        ``, and any regular interest in a FASIT,''.
          (4) Subparagraph (E) of section 856(c)(5) is amended by 
        striking the last sentence.
          (5)(A) Section 860G(a)(1) is amended by adding at the end the 
        following new sentence: ``An interest shall not fail to qualify 
        as a regular interest solely because the specified principal 
        amount of the regular interest (or the amount of interest 
        accrued on the regular interest) can be reduced as a result of 
        the nonoccurrence of 1 or more contingent payments with respect 
        to any reverse mortgage loan held by the REMIC if, on the 
        startup day for the REMIC, the sponsor reasonably believes that 
        all principal and interest due under the regular interest will 
        be paid at or prior to the liquidation of the REMIC.''.
          (B) The last sentence of section 860G(a)(3) is amended by 
        inserting ``, and any reverse mortgage loan (and each balance 
        increase on such loan meeting the requirements of subparagraph 
        (A)(iii)) shall be treated as an obligation secured by an 
        interest in real property'' before the period at the end.
          (6) Paragraph (3) of section 860G(a) is amended by adding 
        ``and'' at the end of subparagraph (B), by striking ``, and'' 
        at the end of subparagraph (C) and inserting a period, and by 
        striking subparagraph (D).
          (7) Section 860G(a)(3), as amended by paragraph (6), is 
        amended by adding at the end the following new sentence: ``For 
        purposes of subparagraph (A), if more than 50 percent of the 
        obligations transferred to, or purchased by, the REMIC are 
        originated by the United States or any State (or any political 
        subdivision, agency, or instrumentality of the United States or 
        any State) and are principally secured by an interest in real 
        property, then each obligation transferred to, or purchased by, 
        the REMIC shall be treated as secured by an interest in real 
        property.''.
          (8)(A) Section 860G(a)(3)(A) is amended by striking ``or'' at 
        the end of clause (i), by inserting ``or'' at the end of clause 
        (ii), and by inserting after clause (ii) the following new 
        clause:
                          ``(iii) represents an increase in the 
                        principal amount under the original terms of an 
                        obligation described in clause (i) or (ii) if 
                        such increase--
                                  ``(I) is attributable to an advance 
                                made to the obligor pursuant to the 
                                original terms of the obligation,
                                  ``(II) occurs after the startup day, 
                                and
                                  ``(III) is purchased by the REMIC 
                                pursuant to a fixed price contract in 
                                effect on the startup day.''.
          (B) Section 860G(a)(7)(B) is amended to read as follows:
                  ``(B) Qualified reserve fund.--For purposes of 
                subparagraph (A), the term `qualified reserve fund' 
                means any reasonably required reserve to--
                          ``(i) provide for full payment of expenses of 
                        the REMIC or amounts due on regular interests 
                        in the event of defaults on qualified mortgages 
                        or lower than expected returns on cash flow 
                        investments, or
                          ``(ii) provide a source of funds for the 
                        purchase of obligations described in clause 
                        (ii) or (iii) of paragraph (3)(A).
                The aggregate fair market value of the assets held in 
                any such reserve shall not exceed 50 percent of the 
                aggregate fair market value of all of the assets of the 
                REMIC on the startup day, and the amount of any such 
                reserve shall be promptly and appropriately reduced to 
                the extent the amount held in such reserve is no longer 
                reasonably required for purposes specified in clause 
                (i) or (ii) of this subparagraph.''.
          (9) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
          (10) Clause (xi) of section 7701(a)(19)(C) is amended--
                  (A) by striking ``and any regular interest in a 
                FASIT,'', and
                  (B) by striking ``or FASIT'' each place it appears.
          (11) Subparagraph (A) of section 7701(i)(2) is amended by 
        striking ``or a FASIT''.
          (12) The table of parts for subchapter M of chapter 1 is 
        amended by striking the item relating to part V.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall take effect on January 1, 
        2005.
          (2) Exception for existing fasits.--Paragraph (1) shall not 
        apply to any FASIT in existence on the date of the enactment of 
        this Act to the extent that regular interests issued by the 
        FASIT before such date continue to remain outstanding in 
        accordance with the original terms of issuance.

SEC. 636. 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. 637. 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 persons described in paragraph (4);''.
  (b) Eligible Persons.--Section 956(c) (relating to exceptions to 
definition of United States property) is amended by adding at the end 
the following new paragraph:
          ``(4) Financial services providers.--
                  ``(A) In general.--For purposes of paragraph (2)(A), 
                a person is described in this paragraph if at least 80 
                percent of the person's income is from the active 
                conduct of a banking business which is derived from 
                persons who are not related persons.
                  ``(B) Special rules.--For purposes of subparagraph 
                (A) all related persons shall be treated as 1 person in 
                applying the 80-percent test.
                  ``(C) Related person.--For purposes of this 
                paragraph, a person is a related person to another 
                person if--
                          ``(i) the related person bears a relationship 
                        to such person specified in section 267(b) or 
                        707(b)(1), or
                          ``(ii) such persons are members of the same 
                        controlled group of corporations (as defined in 
                        section 1563(a), except that `more than 50 
                        percent' shall be substituted for `at least 80 
                        percent' each place it appears therein).''.
  (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE COMPANIES.

  (a) In General.--Clause (i) of section 831(b)(2)(A) is amended by 
striking ``$1,200,000'' and inserting ``$1,890,000''.
  (b) 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. 639. 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. 640. 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. 641. 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. 642. 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 (reduced by 
                        properly allowable deductions and qualified 
                        deficits under section 952(c)(1)(B)) is 
                        includible 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 item 
                        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 that an 
                        amount attributable to such item (reduced by 
                        properly allowable deductions and qualified 
                        deficits under section 952(c)(1)(B)) is 
                        includible 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. 643. 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. 644. 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. 645. 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. 646. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

  (a) In General.--Section 1502 is amended by adding at the end the 
following new sentence: ``In carrying out the preceding sentence, the 
Secretary may prescribe rules that are different from the provisions of 
chapter 1 that would apply if such corporations filed separate 
returns.''.
  (b) Result Not Overturned.--Notwithstanding the amendment made by 
subsection (a), the Internal Revenue Code of 1986 shall be construed by 
treating Treasury Regulation Sec. 1.1502-20(c)(1)(iii) (as in effect on 
January 1, 2001) as being inapplicable to the factual situation in Rite 
Aid Corporation and Subsidiary Corporations v. United States, 255 F.3d 
1357 (Fed. Cir. 2001).
  (c) Effective Date.--This section, and the amendment made by this 
section, shall apply to taxable years beginning before, on, or after 
the date of the enactment of this Act.

                           Part III--Leasing

SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEASING ARRANGEMENTS.

  (a) Clarification of Recovery Period for Tax-Exempt Use Property 
Subject to Lease.--Subparagraph (A) of section 168(g)(3) (relating to 
special rules for determining class life) is amended by inserting 
``(notwithstanding any other subparagraph of this paragraph)'' after 
``shall''.
  (b) Limitation on Depreciation Period for Software Leased to Tax-
Exempt Entity.--Paragraph (1) of section 167(f) is amended by adding at 
the end the following new subparagraph:
                  ``(C) Tax-exempt use property subject to lease.--In 
                the case of computer software which would be tax-exempt 
                use property as defined in subsection (h) of section 
                168 if such section applied to computer software, the 
                useful life under subparagraph (A) shall not be less 
                than 125 percent of the lease term (within the meaning 
                of section 168(i)(3)).''.
  (c) Lease Term To Include Related Service Contracts.--Subparagraph 
(A) of section 168(i)(3) (relating to lease term) is amended by 
striking ``and'' at the end of clause (i), by redesignating clause (ii) 
as clause (iii), and by inserting after clause (i) the following new 
clause:
                          ``(ii) the term of a lease shall include the 
                        term of any service contract or similar 
                        arrangement (whether or not treated as a lease 
                        under section 7701(e))--
                                  ``(I) which is part of the same 
                                transaction (or series of related 
                                transactions) which includes the lease, 
                                and
                                  ``(II) which is with respect to the 
                                property subject to the lease or 
                                substantially similar property, and''.
  (d) Expansion of Short-Term Lease Exemption for Qualified 
Technological Equipment.--Subparagraph (A) of section 168(h)(3) is 
amended by adding at the end the following new sentence: 
``Notwithstanding subsection (i)(3)(A)(i), in determining a lease term 
for purposes of the preceding sentence, there shall not be taken into 
account any option of the lessee to renew at the fair market value rent 
determined at the time of renewal; except that the aggregate period not 
taken into account by reason of this sentence shall not exceed 24 
months.''

SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED BY 
                    GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.

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

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

  ``(a) Limitation on Losses.--Except as otherwise provided in this 
section, a tax-exempt use loss for any taxable year shall not be 
allowed.
  ``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt use loss 
with respect to any tax-exempt use property which is disallowed under 
subsection (a) for any taxable year shall be treated as a deduction 
with respect to such property in the next taxable year.
  ``(c) Definitions.--For purposes of this section--
          ``(1) Tax-exempt use loss.--The term `tax-exempt use loss' 
        means, with respect to any taxable year, the amount (if any) by 
        which--
                  ``(A) the sum of--
                          ``(i) the aggregate deductions (other than 
                        interest) directly allocable to a tax-exempt 
                        use property, plus
                          ``(ii) the aggregate deductions for interest 
                        properly allocable to such property, exceed
                  ``(B) the aggregate income from such property.
          ``(2) Tax-exempt use property.--The term `tax-exempt use 
        property' has the meaning given to such term by section 168(h) 
        (without regard to paragraphs (1)(C) and (3) thereof and 
        determined as if property described in section 167(f)(1)(B) 
        were tangible property). Such term shall not include property 
        which would (but for this sentence) be tax-exempt use property 
        solely by reason of section 168(h)(6) if any credit is 
        allowable under section 42 or 47 with respect to such property.
  ``(d) Exception for Certain Leases.--This section shall not apply to 
any lease of property which meets the requirements of all of the 
following paragraphs:
          ``(1) Availability of funds.--
                  ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if (at any time during 
                the lease term) not more than an allowable amount of 
                funds are--
                          ``(i) subject to any arrangement referred to 
                        in subparagraph (B), or
                          ``(ii) set aside or expected to be set aside,
                to or for the benefit of the lessor or any lender, or 
                to or for the benefit of the lessee to satisfy the 
                lessee's obligations or options under the lease. For 
                purposes of clause (ii), funds shall be treated as set 
                aside or expected to be set aside only if a reasonable 
                person would conclude, based on the facts and 
                circumstances, that such funds are set aside or 
                expected to be set aside.
                  ``(B) Arrangements.--The arrangements referred to in 
                this subparagraph include a defeasance arrangement, a 
                loan by the lessee to the lessor or any lender, a 
                deposit arrangement, a letter of credit collateralized 
                with cash or cash equivalents, a payment undertaking 
                agreement, prepaid rent (within the meaning of the 
                regulations under section 467), a sinking fund 
                arrangement, a guaranteed investment contract, 
                financial guaranty insurance, and any similar 
                arrangement (whether or not such arrangement provides 
                credit support).
                  ``(C) Allowable amount.--
                          ``(i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        `allowable amount' means an amount equal to 20 
                        percent of the lessor's adjusted basis in the 
                        property at the time the lease is entered into.
                          ``(ii) Higher amount permitted in certain 
                        cases.--To the extent provided in regulations, 
                        a higher percentage shall be permitted under 
                        clause (i) where necessary because of the 
                        credit-worthiness of the lessee. In no event 
                        may such regulations permit a percentage of 
                        more than 50 percent.
                          ``(iii) Option to purchase other than at fair 
                        market value.--If under the lease the lessee 
                        has the option to purchase the property for a 
                        fixed price or for other than the fair market 
                        value of the property (determined at the time 
                        of exercise), the allowable amount at the time 
                        such option may be exercised may not exceed 50 
                        percent of the price at which such option may 
                        be exercised.
                          ``(iv) No allowable amount for certain 
                        arrangements.--The allowable amount shall be 
                        zero with respect to any arrangement which 
                        involves--
                                  ``(I) a loan from the lessee to the 
                                lessor or a lender,
                                  ``(II) any deposit received, letter 
                                of credit issued, or payment 
                                undertaking agreement entered into by a 
                                lender otherwise involved in the 
                                transaction, or
                                  ``(III) in the case of a transaction 
                                which involves a lender, any credit 
                                support made available to the lessor in 
                                which any such lender does not have a 
                                claim that is senior to the lessor.
                        For purposes of subclause (I), the term `loan' 
                        shall not include any amount treated as a loan 
                        under section 467 with respect to a section 467 
                        rental agreement.
          ``(2) Lessor must make substantial equity investment.--
                  ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if--
                          ``(i) the lessor--
                                  ``(I) has at the time the lease is 
                                entered into an unconditional at-risk 
                                equity investment (as determined by the 
                                Secretary) in the property of at least 
                                20 percent of the lessor's adjusted 
                                basis in the property as of that time, 
                                and
                                  ``(II) maintains such investment 
                                throughout the term of the lease, and
                          ``(ii) the fair market value of the property 
                        at the end of the lease term is reasonably 
                        expected to be equal to at least 20 percent of 
                        such basis.
                  ``(B) Risk of loss.--For purposes of clause (ii), the 
                fair market value at the end of the lease term shall be 
                reduced to the extent that a person other than the 
                lessor bears a risk of loss in the value of the 
                property.
                  ``(C) Paragraph not to apply to short-term leases.--
                This paragraph shall not apply to any lease with a 
                lease term of 5 years or less.
          ``(3) Lessee may not bear more than minimal risk of loss.--
                  ``(A) In general.--A lease of property meets the 
                requirements of this paragraph if there is no 
                arrangement under which the lessee bears--
                          ``(i) any portion of the loss that would 
                        occur if the fair market value of the leased 
                        property were 25 percent less than its 
                        reasonably expected fair market value at the 
                        time the lease is terminated, or
                          ``(ii) more than 50 percent of the loss that 
                        would occur if the fair market value of the 
                        leased property at the time the lease is 
                        terminated were zero.
                  ``(B) Exception.--The Secretary may by regulations 
                provide that the requirements of this paragraph are not 
                met where the lessee bears more than a minimal risk of 
                loss.
                  ``(C) Paragraph not to apply to short-term leases.--
                This paragraph shall not apply to any lease with a 
                lease term of 5 years or less.
  ``(e) Special Rules.--
          ``(1) Treatment of former tax-exempt use property.--
                  ``(A) In general.--In the case of any former tax-
                exempt use property--
                          ``(i) any deduction allowable under 
                        subsection (b) with respect to such property 
                        for any taxable year shall be allowed only to 
                        the extent of any net income (without regard to 
                        such deduction) from such property for such 
                        taxable year, and
                          ``(ii) any portion of such unused deduction 
                        remaining after application of clause (i) shall 
                        be treated as a deduction allowable under 
                        subsection (b) with respect to such property in 
                        the next taxable year.
                  ``(B) Former tax-exempt use property.--For purposes 
                of this subsection, the term `former tax-exempt use 
                property' means any property which--
                          ``(i) is not tax-exempt use property for the 
                        taxable year, but
                          ``(ii) was tax-exempt use property for any 
                        prior taxable year.
          ``(2) Disposition of entire interest in property.--If during 
        the taxable year a taxpayer disposes of the taxpayer's entire 
        interest in tax-exempt use property (or former tax-exempt use 
        property), rules similar to the rules of section 469(g) shall 
        apply for purposes of this section.
          ``(3) Coordination with section 469.--This section shall be 
        applied before the application of section 469.
          ``(4) Coordination with sections 1031 and 1033.--
                  ``(A) In general.--Sections 1031(a) and 1033(a) shall 
                not apply if--
                          ``(i) the exchanged or converted property is 
                        tax-exempt use property subject to a lease 
                        which was entered into before March 13, 2004, 
                        and which would not have met the requirements 
                        of subsection (d) had such requirements been in 
                        effect when the lease was entered into, or
                          ``(ii) the replacement property is tax-exempt 
                        use property subject to a lease which does not 
                        meet the requirements of subsection (d).
                  ``(B) Adjusted basis.--In the case of property 
                acquired by the lessor in a transaction to which 
                section 1031 or 1033 applies, the adjusted basis of 
                such property for purposes of this section shall be 
                equal to the lesser of--
                          ``(i) the fair market value of the property 
                        as of the beginning of the lease term, or
                          ``(ii) the amount which would be the lessor's 
                        adjusted basis if such sections did not apply 
                        to such transaction.
  ``(f) Other Definitions.--For purposes of this section--
          ``(1) Related parties.--The terms `lessor', `lessee', and 
        `lender' each include any related party (within the meaning of 
        section 197(f)(9)(C)(i)).
          ``(2) Lease term.--The term `lease term' has the meaning 
        given to such term by section 168(i)(3).
          ``(3) Lender.--The term `lender' means, with respect to any 
        lease, a person that makes a loan to the lessor which is 
        secured (or economically similar to being secured) by the lease 
        or the leased property.
          ``(4) Loan.--The term `loan' includes any similar 
        arrangement.
  ``(g) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the provisions of this 
section, including regulations which--
          ``(1) allow in appropriate cases the aggregation of property 
        subject to the same lease, and
          ``(2) provide for the determination of the allocation of 
        interest expense for purposes of this section.''.
  (b) Conforming Amendment.--The table of sections for subpart C of 
part II of subchapter E of chapter 1 is amended by adding at the end 
the following new item:

                              ``Sec. 470. Limitation on deductions 
                                        allocable to property used by 
                                        governments or other tax-exempt 
                                        entities.''.

SEC. 649. EFFECTIVE DATE.

  (a) In General.--Except as provided in this section, the amendments 
made by this part shall apply to leases entered into after March 12, 
2004.
  (b) Exception.--
          (1) In general.--The amendments made by this part shall not 
        apply to qualified transportation property.
          (2) Qualified transportation property.--For purposes of 
        paragraph (1), the term ``qualified transportation property'' 
        means domestic property subject to a lease with respect to 
        which a formal application--
                  (A) was submitted for approval to the Federal Transit 
                Administration (an agency of the Department of 
                Transportation) after June 30, 2003, and before March 
                13, 2004,
                  (B) is approved by the Federal Transit Administration 
                before January 1, 2005, and
                  (C) includes a description of such property and the 
                value of such property.
          (3) Exchanges and conversion of tax-exempt use property.--
        Section 470(e)(4) of the Internal Revenue Code of 1986, as 
        added by this section, shall apply to property exchanged or 
        converted after the date of the enactment of this Act.

               Subtitle C--Reduction of Fuel Tax Evasion

SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR MOBILE MACHINERY.

  (a) Exemption From Tax on Heavy Trucks and Trailers Sold at Retail.--
          (1) In general.--Section 4053 (relating to exemptions) is 
        amended by adding at the end the following new paragraph:
          ``(8) Mobile machinery.--Any vehicle which consists of a 
        chassis--
                  ``(A) to which there has been permanently mounted (by 
                welding, bolting, riveting, or other means) machinery 
                or equipment to perform a construction, manufacturing, 
                processing, farming, mining, drilling, timbering, or 
                similar operation if the operation of the machinery or 
                equipment is unrelated to transportation on or off the 
                public highways,
                  ``(B) which has been specially designed to serve only 
                as a mobile carriage and mount (and a power source, 
                where applicable) for the particular machinery or 
                equipment involved, whether or not such machinery or 
                equipment is in operation, and
                  ``(C) which, by reason of such special design, could 
                not, without substantial structural modification, be 
                used as a component of a vehicle designed to perform a 
                function of transporting any load other than that 
                particular machinery or equipment or similar machinery 
                or equipment requiring such a specially designed 
                chassis.''.
          (2) Effective date.--The amendment made by this subsection 
        shall take effect on the day after the date of the enactment of 
        this Act.
  (b) Exemption From Tax on Use of Certain Vehicles.--
          (1) In general.--Section 4483 (relating to exemptions) is 
        amended by redesignating subsection (g) as subsection (h) and 
        by inserting after subsection (f) the following new subsection:
  ``(g) Exemption for Mobile Machinery.--No tax shall be imposed by 
section 4481 on the use of any vehicle described in section 4053(8).''.
          (2) Effective date.--The amendments made by this subsection 
        shall take effect on the day after the date of the enactment of 
        this Act.
  (c) Exemption From Tax on Tires.--
          (1) In General.--Section 4072(b)(2) is amended by adding at 
        the end the following flush sentence: ``Such term shall not 
        include tires of a type used exclusively on vehicles described 
        in section 4053(8).''.
          (2) Effective date.--The amendment made by this subsection 
        shall take effect on the day after the date of the enactment of 
        this Act.
  (d) Refund of Fuel Taxes.--
          (1) In general.--Section 6421(e)(2) (defining off-highway 
        business use) is amended by adding at the end the following new 
        subparagraph:
                  ``(C) Uses in mobile machinery.--
                          ``(i) In general.--The term `off-highway 
                        business use' shall include any use in a 
                        vehicle which meets the requirements described 
                        in clause (ii).
                          ``(ii) Requirements for mobile machinery.--
                        The requirements described in this clause are--
                                  ``(I) the design-based test, and
                                  ``(II) the use-based test.
                          ``(iii) Design-based test.--For purposes of 
                        clause (ii)(I), the design-based test is met if 
                        the vehicle consists of a chassis--
                                  ``(I) to which there has been 
                                permanently mounted (by welding, 
                                bolting, riveting, or other means) 
                                machinery or equipment to perform a 
                                construction, manufacturing, 
                                processing, farming, mining, drilling, 
                                timbering, or similar operation if the 
                                operation of the machinery or equipment 
                                is unrelated to transportation on or 
                                off the public highways,
                                  ``(II) which has been specially 
                                designed to serve only as a mobile 
                                carriage and mount (and a power source, 
                                where applicable) for the particular 
                                machinery or equipment involved, 
                                whether or not such machinery or 
                                equipment is in operation, and
                                  ``(III) which, by reason of such 
                                special design, could not, without 
                                substantial structural modification, be 
                                used as a component of a vehicle 
                                designed to perform a function of 
                                transporting any load other than that 
                                particular machinery or equipment or 
                                similar machinery or equipment 
                                requiring such a specially designed 
                                chassis.
                          ``(iv) Use-based test.--For purposes of 
                        clause (ii)(II), the use-based test is met if 
                        the use of the vehicle on public highways was 
                        less than 7,500 miles during the taxpayer's 
                        taxable year.''.
          (2) No tax-free sales.--Subsection (b) of section 4082, as 
        amended by section 652, is amended by inserting before the 
        period at the end ``and such term shall not include any use 
        described in section 6421(e)(2)(C)''.
          (3) Annual refund of tax paid.--Section 6427(i)(2) (relating 
        to exceptions) is amended by adding at the end the following 
        new subparagraph:
                  ``(C) Nonapplication of paragraph.--This paragraph 
                shall not apply to any fuel used solely in any off-
                highway business use described in section 
                6421(e)(2)(C).''.
          (4) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after the date of the 
        enactment of this Act.

SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE.

  (a) Rate of Tax.--
          (1) In general.--Subparagraph (A) of section 4081(a)(2) is 
        amended by striking ``and'' at the end of clause (ii), by 
        striking the period at the end of clause (iii) and inserting 
        ``, and'', and by adding at the end the following new clause:
                          ``(iv) in the case of aviation-grade 
                        kerosene, 21.8 cents per gallon.''.
          (2) Commercial aviation.--Paragraph (2) of section 4081(a) is 
        amended by adding at the end the following new subparagraph:
                  ``(C) Taxes imposed on fuel used in commercial 
                aviation.--In the case of aviation-grade kerosene which 
                is removed from any refinery or terminal directly into 
                the fuel tank of an aircraft for use in commercial 
                aviation, the rate of tax under subparagraph (A)(iv) 
                shall be 4.3 cents per gallon.''.
          (3) Certain refueler trucks, tankers, and tank wagons treated 
        as terminal.--Subsection (a) of section 4081 is amended by 
        adding at the end the following new paragraph:
          ``(3) Certain refueler trucks, tankers, and tank wagons 
        treated as terminal.--
                  ``(A) In general.--In the case of aviation-grade 
                kerosene which is removed from any terminal directly 
                into the fuel tank of an aircraft (determined without 
                regard to any refueler truck, tanker, or tank wagon 
                which meets the requirements of subparagraph (B)), a 
                refueler truck, tanker, or tank wagon shall be treated 
                as part of such terminal if--
                          ``(i) such truck, tanker, or wagon meets the 
                        requirements of subparagraph (B) with respect 
                        to an airport, and
                          ``(ii) except in the case of exigent 
                        circumstances identified by the Secretary in 
                        regulations, no vehicle registered for highway 
                        use is loaded with aviation-grade kerosene at 
                        such terminal.
                  ``(B) Requirements.--A refueler truck, tanker, or 
                tank wagon meets the requirements of this subparagraph 
                with respect to an airport if such truck, tanker, or 
                wagon--
                          ``(i) is loaded with aviation-grade kerosene 
                        at such terminal located within such airport 
                        and delivers such kerosene only into aircraft 
                        at such airport,
                          ``(ii) has storage tanks, hose, and coupling 
                        equipment designed and used for the purposes of 
                        fueling aircraft,
                          ``(iii) is not registered for highway use, 
                        and
                          ``(iv) is operated by--
                                  ``(I) the terminal operator of such 
                                terminal, or
                                  ``(II) a person that makes a daily 
                                accounting to such terminal operator of 
                                each delivery of fuel from such truck, 
                                tanker, or wagon.
                  ``(C) Reporting.--The Secretary shall require under 
                section 4101(d) reporting by such terminal operator 
                of--
                          ``(i) any information obtained under 
                        subparagraph (B)(iv)(II), and
                          ``(ii) any similar information maintained by 
                        such terminal operator with respect to 
                        deliveries of fuel made by trucks, tankers, or 
                        wagons operated by such terminal operator.''.
          (4) Liability for tax on aviation-grade kerosene used in 
        commercial aviation.--Subsection (a) of section 4081 is amended 
        by adding at the end the following new paragraph:
          ``(4) Liability for tax on aviation-grade kerosene used in 
        commercial aviation.--For purposes of paragraph (2)(C), the 
        person who uses the fuel for commercial aviation shall pay the 
        tax imposed under such paragraph. For purposes of the preceding 
        sentence, fuel shall be treated as used when such fuel is 
        removed into the fuel tank.''.
          (5) Nontaxable uses.--
                  (A) In general.--Section 4082 is amended by 
                redesignating subsections (e) and (f) as subsections 
                (f) and (g), respectively, and by inserting after 
                subsection (d) the following new subsection:
  ``(e) Aviation-Grade Kerosene.--In the case of aviation-grade 
kerosene which is exempt from the tax imposed by section 4041(c) (other 
than by reason of a prior imposition of tax) and which is removed from 
any refinery or terminal directly into the fuel tank of an aircraft, 
the rate of tax under section 4081(a)(2)(A)(iv) shall be zero.''.
                  (B) Conforming amendments.--
                          (i) Subsection (b) of section 4082 is amended 
                        by adding at the end the following new flush 
                        sentence:
``The term `nontaxable use' does not include the use of aviation-grade 
kerosene in an aircraft.''.
                          (ii) Section 4082(d) is amended by striking 
                        paragraph (1) and by redesignating paragraphs 
                        (2) and (3) as paragraphs (1) and (2), 
                        respectively.
          (6) Nonaircraft use of aviation-grade kerosene.--
                  (A) In general.--Subparagraph (B) of section 
                4041(a)(1) is amended by adding at the end the 
                following new sentence: ``This subparagraph shall not 
                apply to aviation-grade kerosene.''.
                  (B) Conforming amendment.--The heading for paragraph 
                (1) of section 4041(a) is amended by inserting ``and 
                kerosene'' after ``diesel fuel''.
  (b) Commercial Aviation.--Section 4083 is amended by redesignating 
subsections (b) and (c) as subsections (c) and (d), respectively, and 
by inserting after subsection (a) the following new subsection:
  ``(b) Commercial Aviation.--For purposes of this subpart, the term 
`commercial aviation' means any use of an aircraft in a business of 
transporting persons or property for compensation or hire by air, 
unless properly allocable to any transportation exempt from the taxes 
imposed by sections 4261 and 4271 by reason of section 4281 or 4282 or 
by reason of section 4261(h).''.
  (c) Refunds.--
          (1) In general.--Paragraph (4) of section 6427(l) is amended 
        to read as follows:
          ``(4) Refunds for aviation-grade kerosene.--
                  ``(A) No refund of certain taxes on fuel used in 
                commercial aviation.--In the case of aviation-grade 
                kerosene used in commercial aviation (as defined in 
                section 4083(b)) (other than supplies for vessels or 
                aircraft within the meaning of section 4221(d)(3)), 
                paragraph (1) shall not apply to so much of the tax 
                imposed by section 4081 as is attributable to--
                          ``(i) the Leaking Underground Storage Tank 
                        Trust Fund financing rate imposed by such 
                        section, and
                          ``(ii) so much of the rate of tax specified 
                        in section 4081(a)(2)(A)(iv) as does not exceed 
                        4.3 cents per gallon.
                  ``(B) Payment to ultimate, registered vendor.--With 
                respect to aviation-grade kerosene, if the ultimate 
                purchaser of such kerosene waives (at such time and in 
                such form and manner as the Secretary shall prescribe) 
                the right to payment under paragraph (1) and assigns 
                such right to the ultimate vendor, then the Secretary 
                shall pay the amount which would be paid under 
                paragraph (1) to such ultimate vendor, but only if such 
                ultimate vendor--
                          ``(i) is registered under section 4101, and
                          ``(ii) meets the requirements of subparagraph 
                        (A), (B), or (D) of section 6416(a)(1).''.
          (2) Time for filing claims.--Subparagraph (A) of section 
        6427(i)(4) is amended--
                  (A) by striking ``subsection (l)(5)'' both places it 
                appears and inserting ``paragraph (4)(B) or (5) of 
                subsection (l)'', and
                  (B) by striking ``the preceding sentence'' and 
                inserting ``subsection (l)(5)''.
          (3) Conforming amendment.--Subparagraph (B) of section 
        6427(l)(2) is amended to read as follows:
                  ``(B) in the case of aviation-grade kerosene--
                          ``(i) any use which is exempt from the tax 
                        imposed by section 4041(c) other than by reason 
                        of a prior imposition of tax, or
                          ``(ii) any use in commercial aviation (within 
                        the meaning of section 4083(b)).''.
  (d) Repeal of Prior Taxation of Aviation Fuel.--
          (1) In general.--Part III of subchapter A of chapter 32 is 
        amended by striking subpart B and by redesignating subpart C as 
        subpart B.
          (2) Conforming amendments.--
                  (A) Section 4041(c) is amended to read as follows:
  ``(c) Aviation-Grade Kerosene.--
          ``(1) In general.--There is hereby imposed a tax upon 
        aviation-grade kerosene--
                  ``(A) sold by any person to an owner, lessee, or 
                other operator of an aircraft for use in such aircraft, 
                or
                  ``(B) used by any person in an aircraft unless there 
                was a taxable sale of such fuel under subparagraph (A).
          ``(2) Exemption for previously taxed fuel.--No tax shall be 
        imposed by this subsection on the sale or use of any aviation-
        grade kerosene if tax was imposed on such liquid under section 
        4081 and the tax thereon was not credited or refunded.
          ``(3) Rate of tax.--The rate of tax imposed by this 
        subsection shall be the rate of tax specified in section 
        4081(a)(2)(A)(iv) which is in effect at the time of such sale 
        or use.''.
                  (B) Section 4041(d)(2) is amended by striking 
                ``section 4091'' and inserting ``section 4081''.
                  (C) Section 4041 is amended by striking subsection 
                (e).
                  (D) Section 4041 is amended by striking subsection 
                (i).
                  (E) Sections 4101(a), 4103, 4221(a), and 6206 are 
                each amended by striking ``, 4081, or 4091'' and 
                inserting ``or 4081''.
                  (F) Section 6416(b)(2) is amended by striking ``4091 
                or''.
                  (G) Section 6416(b)(3) is amended by striking ``or 
                4091'' each place it appears.
                  (H) Section 6416(d) is amended by striking ``or to 
                the tax imposed by section 4091 in the case of refunds 
                described in section 4091(d)''.
                  (I) Section 6427(j)(1) is amended by striking ``, 
                4081, and 4091'' and inserting ``and 4081''.
                  (J)(i) Section 6427(l)(1) is amended to read as 
                follows:
          ``(1) In general.--Except as otherwise provided in this 
        subsection and in subsection (k), if any diesel fuel or 
        kerosene on which tax has been imposed by section 4041 or 4081 
        is used by any person in a nontaxable use, the Secretary shall 
        pay (without interest) to the ultimate purchaser of such fuel 
        an amount equal to the aggregate amount of tax imposed on such 
        fuel under section 4041 or 4081, as the case may be, reduced by 
        any payment made to the ultimate vendor under paragraph 
        (4)(B).''.
                  (ii) Paragraph (5)(B) of section 6427(l) is amended 
                by striking ``Paragraph (1)(A) shall not apply to 
                kerosene'' and inserting ``Paragraph (1) shall not 
                apply to kerosene (other than aviation-grade 
                kerosene)''.
                  (K) Subparagraph (B) of section 6724(d)(1) is amended 
                by striking clause (xv) and by redesignating the 
                succeeding clauses accordingly.
                  (L) Paragraph (2) of section 6724(d) is amended by 
                striking subparagraph (W) and by redesignating the 
                succeeding subparagraphs accordingly.
                  (M) Paragraph (1) of section 9502(b) is amended by 
                adding ``and'' at the end of subparagraph (B) and by 
                striking subparagraphs (C) and (D) and inserting the 
                following new subparagraph:
                  ``(C) section 4081 with respect to aviation gasoline 
                and aviation-grade kerosene, and''.
                  (N) The last sentence of section 9502(b) is amended 
                to read as follows:
``There shall not be taken into account under paragraph (1) so much of 
the taxes imposed by section 4081 as are determined at the rate 
specified in section 4081(a)(2)(B).''.
                  (O) Subsection (b) of section 9508 is amended by 
                striking paragraph (3) and by redesignating paragraphs 
                (4) and (5) as paragraphs (3) and (4), respectively.
                  (P) Section 9508(c)(2)(A) is amended by striking 
                ``sections 4081 and 4091'' and inserting ``section 
                4081''.
                  (Q) The table of subparts for part III of subchapter 
                A of chapter 32 is amended to read as follows:

                              ``Subpart A. Motor and aviation fuels.
                              ``Subpart B. Special provisions 
                                        applicable to fuels tax.''.

                  (R) The heading for subpart A of part III of 
                subchapter A of chapter 32 is amended to read as 
                follows:

                ``Subpart A--Motor and Aviation Fuels''.

                  (S) The heading for subpart B of part III of 
                subchapter A of chapter 32, as redesignated by 
                paragraph (1), is amended to read as follows:

       ``Subpart B--Special Provisions Applicable to Fuels Tax''.

  (e) Effective Date.--The amendments made by this section shall apply 
to aviation-grade kerosene removed, entered, or sold after September 
30, 2004.
  (f) Floor Stocks Tax.--
          (1) In general.--There is hereby imposed on aviation-grade 
        kerosene held on October 1, 2004, by any person a tax equal 
        to--
                  (A) the tax which would have been imposed before such 
                date on such kerosene had the amendments made by this 
                section been in effect at all times before such date, 
                reduced by
                  (B) the tax imposed before such date under section 
                4091 of the Internal Revenue Code of 1986, as in effect 
                on the day before the date of the enactment of this 
                Act.
          (2) Liability for tax and method of payment.--
                  (A) Liability for tax.--The person holding the 
                kerosene on October 1, 2004, to which the tax imposed 
                by paragraph (1) applies shall be liable for such tax.
                  (B) Method and time for payment.--The tax imposed by 
                paragraph (1) shall be paid at such time and in such 
                manner as the Secretary of the Treasury (or the 
                Secretary's delegate) shall prescribe, including the 
                nonapplication of such tax on de minimis amounts of 
                kerosene.
          (3) Transfer of floor stock tax revenues to trust funds.--For 
        purposes of determining the amount transferred to any trust 
        fund, the tax imposed by this subsection shall be treated as 
        imposed by section 4081 of the Internal Revenue Code of 1986--
                  (A) at the Leaking Underground Storage Tank Trust 
                Fund financing rate under such section to the extent of 
                0.1 cents per gallon, and
                  (B) at the rate under section 4081(a)(2)(A)(iv) to 
                the extent of the remainder.
          (4) Held by a person.--For purposes of this section, kerosene 
        shall be considered as held by a person if title thereto has 
        passed to such person (whether or not delivery to the person 
        has been made).
          (5) Other laws applicable.--All provisions of law, including 
        penalties, applicable with respect to the tax imposed by 
        section 4081 of such Code shall, insofar as applicable and not 
        inconsistent with the provisions of this subsection, apply with 
        respect to the floor stock tax imposed by paragraph (1) to the 
        same extent as if such tax were imposed by such section.

SEC. 653. DYE INJECTION EQUIPMENT.

  (a) In General.--Section 4082(a)(2) (relating to exemptions for 
diesel fuel and kerosene) is amended by inserting ``by mechanical 
injection'' after ``indelibly dyed''.
  (b) Dye Injector Security.--Not later than 180 days after the date of 
the enactment of this Act, the Secretary of the Treasury shall issue 
regulations regarding mechanical dye injection systems described in the 
amendment made by subsection (a), and such regulations shall include 
standards for making such systems tamper resistant.
  (c) Penalty for Tampering With or Failing To Maintain Security 
Requirements for Mechanical Dye Injection Systems.--
          (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by adding after 
        section 6715 the following new section:

``SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN SECURITY 
                    REQUIREMENTS FOR MECHANICAL DYE INJECTION SYSTEMS.

  ``(a) Imposition of Penalty--
          ``(1) Tampering.--If any person tampers with a mechanical dye 
        injection system used to indelibly dye fuel for purposes of 
        section 4082, such person shall pay a penalty in addition to 
        the tax (if any).
          ``(2) Failure to maintain security requirements.--If any 
        operator of a mechanical dye injection system used to indelibly 
        dye fuel for purposes of section 4082 fails to maintain the 
        security standards for such system as established by the 
        Secretary, then such operator shall pay a penalty in addition 
        to the tax (if any).
  ``(b) Amount of Penalty.--The amount of the penalty under subsection 
(a) shall be--
          ``(1) for each violation described in paragraph (1), the 
        greater of--
                  ``(A) $25,000, or
                  ``(B) $10 for each gallon of fuel involved, and
          ``(2) for each--
                  ``(A) failure to maintain security standards 
                described in paragraph (2), $1,000, and
                  ``(B) failure to correct a violation described in 
                paragraph (2), $1,000 per day for each day after which 
                such violation was discovered or such person should 
                have reasonably known of such violation.
  ``(c) Joint and Several Liability.--
          ``(1) In general.--If a penalty is imposed under this section 
        on any business entity, each officer, employee, or agent of 
        such entity or other contracting party who willfully 
        participated in any act giving rise to such penalty shall be 
        jointly and severally liable with such entity for such penalty.
          ``(2) Affiliated groups.--If a business entity described in 
        paragraph (1) is part of an affiliated group (as defined in 
        section 1504(a)), the parent corporation of such entity shall 
        be jointly and severally liable with such entity for the 
        penalty imposed under this section.''.
          (2) Clerical amendment.--The table of sections for part I of 
        subchapter B of chapter 68 is amended by adding after the item 
        related to section 6715 the following new item:

                              ``Sec. 6715A. Tampering with or failing 
                                        to maintain security 
                                        requirements for mechanical dye 
                                        injection systems.''.

  (d) Effective Date.--The amendments made by subsections (a) and (c) 
shall take effect on the 180th day after the date on which the 
Secretary issues the regulations described in subsection (b).

SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS.

  (a) In General.--Section 4083(d)(1)(A) (relating to administrative 
authority), as previously amended by this Act, is amended by striking 
``and'' at the end of clause (i) and by inserting after clause (ii) the 
following new clause:
                          ``(iii) inspecting any books and records and 
                        any shipping papers pertaining to such fuel, 
                        and''.
  (b) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERATORS REQUIRED FOR 
                    EXEMPTION OF BULK TRANSFERS TO REGISTERED TERMINALS 
                    OR REFINERIES.

  (a) In General.--Section 4081(a)(1)(B) (relating to exemption for 
bulk transfers to registered terminals or refineries) is amended--
          (1) by inserting ``by pipeline or vessel'' after 
        ``transferred in bulk'', and
          (2) by inserting ``, the operator of such pipeline or 
        vessel,'' after ``the taxable fuel''.
  (b) Effective Date.--The amendments made by this section shall take 
effect on October 1, 2004.
  (c) Publication of Registered Persons.--Beginning on July 1, 2004, 
the Secretary of the Treasury (or the Secretary's delegate) shall 
periodically publish a current list of persons registered under section 
4101 of the Internal Revenue Code of 1986 who are required to register 
under such section.

SEC. 656. DISPLAY OF REGISTRATION.

  (a) In General.--Subsection (a) of section 4101 (relating to 
registration) is amended--
          (1) by striking ``Every'' and inserting the following:
          ``(1) In general.--Every'', and
          (2) by adding at the end the following new paragraph:
          ``(2) Display of registration.--Every operator of a vessel 
        required by the Secretary to register under this section shall 
        display proof of registration through an electronic 
        identification device prescribed by the Secretary on each 
        vessel used by such operator to transport any taxable fuel.''.
  (b) Civil Penalty for Failure To Display Registration.--
          (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by inserting 
        after section 6716 the following new section:

``SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON VESSELS.

  ``(a) Failure To Display Registration.--Every operator of a vessel 
who fails to display proof of registration pursuant to section 
4101(a)(2) shall pay a penalty of $500 for each such failure. With 
respect to any vessel, only one penalty shall be imposed by this 
section during any calendar month.
  ``(b) Multiple Violations.--In determining the penalty under 
subsection (a) on any person, subsection (a) shall be applied by 
increasing the amount in subsection (a) by the product of such amount 
and the aggregate number of penalties (if any) imposed with respect to 
prior months by this section on such person (or a related person or any 
predecessor of such person or related person).
  ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
          (2) Clerical amendment.--The table of sections for part I of 
        subchapter B of chapter 68 is amended by inserting after the 
        item relating to section 6716 the following new item:

                              ``Sec. 6717. Failure to display tax 
                                        registration on vessels.''.

  (c) Effective Dates.--
          (1) Subsection (a).--The amendments made by subsection (a) 
        shall take effect on October 1, 2004.
          (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to penalties imposed after September 30, 2004.

SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO REPORT.

  (a) Increased Penalty.--Subsection (a) of section 7272 (relating to 
penalty for failure to register) is amended by inserting ``($10,000 in 
the case of a failure to register under section 4101)'' after ``$50''.
  (b) Increased Criminal Penalty.--Section 7232 (relating to failure to 
register under section 4101, false representations of registration 
status, etc.) is amended by striking ``$5,000'' and inserting 
``$10,000''.
  (c) Assessable Penalty for Failure To Register.--
          (1) In general.--Part I of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by inserting 
        after section 6717 the following new section:

``SEC. 6718. FAILURE TO REGISTER.

  ``(a) Failure To Register.--Every person who is required to register 
under section 4101 and fails to do so shall pay a penalty in addition 
to the tax (if any).
  ``(b) Amount of Penalty.--The amount of the penalty under subsection 
(a) shall be--
          ``(1) $10,000 for each initial failure to register, and
          ``(2) $1,000 for each day thereafter such person fails to 
        register.
  ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
          (2) Clerical amendment.--The table of sections for part I of 
        subchapter B of chapter 68 is amended by inserting after the 
        item relating to section 6717 the following new item:

                              ``Sec. 6718. Failure to register.''.

  (d) Assessable Penalty for Failure To Report.--
          (1) In general.--Part II of subchapter B of chapter 68 
        (relating to assessable penalties) is amended by adding at the 
        end the following new section:

``SEC. 6725. FAILURE TO REPORT INFORMATION UNDER SECTION 4101.

  ``(a) In General.--In the case of each failure described in 
subsection (b) by any person with respect to a vessel or facility, such 
person shall pay a penalty of $10,000 in addition to the tax (if any).
  ``(b) Failures Subject to Penalty.--For purposes of subsection (a), 
the failures described in this subsection are--
          ``(1) any failure to make a report under section 4101(d) on 
        or before the date prescribed therefor, and
          ``(2) any failure to include all of the information required 
        to be shown on such report or the inclusion of incorrect 
        information.
  ``(c) Reasonable Cause Exception.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.''.
          (2) Clerical amendment.--The table of sections for part II of 
        subchapter B of chapter 68 is amended by adding at the end the 
        following new item:

                              ``Sec. 6725. Failure to report 
                                        information under section 
                                        4101.''.

  (e) Effective Date.--The amendments made by this section shall apply 
to penalties imposed after September 30, 2004.

SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT REGISTERED.

  (a) Tax at Point of Entry Where Importer Not Registered.--Subpart B 
of part III of subchapter A of chapter 32, as redesignated by section 
652(d), is amended by adding after section 4103 the following new 
section:

``SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT 
                    REGISTERED.

  ``(a) In General.--The importer of record shall be jointly and 
severally liable for the tax imposed by section 4081(a)(1)(A)(iii) if, 
under regulations prescribed by the Secretary, any other person that is 
not a person who is registered under section 4101 is liable for such 
tax.
  ``(b) Collection From Customs Bond.--If any tax for which any 
importer of record is liable under subsection (a), or for which any 
importer of record that is not a person registered under section 4101 
is otherwise liable, is not paid on or before the last date prescribed 
for payment, the Secretary may collect such tax from the Customs bond 
posted with respect to the importation of the taxable fuel to which the 
tax relates. For purposes of determining the jurisdiction of any court 
of the United States or any agency of the United States, any action by 
the Secretary described in the preceding sentence shall be treated as 
an action to collect the tax from a bond described in section 
4101(b)(1) and not as an action to collect from a bond relating to the 
importation of merchandise.''.
  (b) Conforming Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 32, as redesignated by section 
652(d), is amended by adding after the item related to section 4103 the 
following new item:

                              ``Sec. 4104. Collection from Customs bond 
                                        where importer not 
                                        registered.''.

  (c) Effective Date.--The amendments made by this section shall apply 
with respect to fuel entered after September 30, 2004.

SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.

  (a) Proration of Tax Where Vehicle Sold.--
          (1) In general.--Subparagraph (A) of section 4481(c)(2) 
        (relating to where vehicle destroyed or stolen) is amended by 
        striking ``destroyed or stolen'' both places it appears and 
        inserting ``sold, destroyed, or stolen''.
          (2) Conforming amendment.--The heading for section 4481(c)(2) 
        is amended by striking ``destroyed or stolen'' and inserting 
        ``sold, destroyed, or stolen''.
  (b) Repeal of Installment Payment.--
          (1) Section 6156 (relating to installment payment of tax on 
        use of highway motor vehicles) is repealed.
          (2) The table of sections for subchapter A of chapter 62 is 
        amended by striking the item relating to section 6156.
  (c) Electronic Filing.--Section 4481 is amended by redesignating 
subsection (e) as subsection (f) and by inserting after subsection (d) 
the following new subsection:
  ``(e) Electronic Filing.--Any taxpayer who files a return under this 
section with respect to 25 or more vehicles for any taxable period 
shall file such return electronically.''.
  (d) Repeal of Reduction in Tax for Certain Trucks.--Section 4483 is 
amended by striking subsection (f).
  (e) Effective Date.--The amendments made by this section shall apply 
to taxable periods beginning after the date of the enactment of this 
Act.

SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND CLAIMS WITH RESPECT TO 
                    FARMING.

  (a) In General.--
          (1) Refunds.--Section 6427(l) is amended by adding at the end 
        the following new paragraph:
          ``(6) Registered vendors permitted to administer certain 
        claims for refund of diesel fuel and kerosene sold to 
        farmers.--
                  ``(A) In general.--In the case of diesel fuel or 
                kerosene used on a farm for farming purposes (within 
                the meaning of section 6420(c)), paragraph (1) shall 
                not apply to the aggregate amount of such diesel fuel 
                or kerosene if such amount does not exceed 250 gallons 
                (as determined under subsection (i)(5)(A)(iii)).
                  ``(B) Payment to ultimate vendor.--The amount which 
                would (but for subparagraph (A)) have been paid under 
                paragraph (1) with respect to any fuel shall be paid to 
                the ultimate vendor of such fuel, if such vendor--
                          ``(i) is registered under section 4101, and
                          ``(ii) meets the requirements of subparagraph 
                        (A), (B), or (D) of section 6416(a)(1).''.
          (2) Filing of claims.--Section 6427(i) is amended by 
        inserting at the end the following new paragraph:
          ``(5) Special rule for vendor refunds with respect to 
        farmers.--
                  ``(A) In general.--A claim may be filed under 
                subsection (l)(6) by any person with respect to fuel 
                sold by such person for any period--
                          ``(i) for which $200 or more ($100 or more in 
                        the case of kerosene) is payable under 
                        subsection (l)(6),
                          ``(ii) which is not less than 1 week, and
                          ``(iii) which is for not more than 250 
                        gallons for each farmer for which there is a 
                        claim.
                Notwithstanding subsection (l)(1), paragraph (3)(B) 
                shall apply to claims filed under the preceding 
                sentence.
                  ``(B) Time for filing claim.--No claim filed under 
                this paragraph shall be allowed unless filed on or 
                before the last day of the first quarter following the 
                earliest quarter included in the claim.''.
          (3) Conforming amendments.--
                  (A) Section 6427(l)(5)(A) is amended to read as 
                follows:
                  ``(A) In general.--Paragraph (1) shall not apply to 
                diesel fuel or kerosene used by a State or local 
                government.''.
                  (B) The heading for section 6427(l)(5) is amended by 
                striking ``farmers and''.
  (b) Effective Date.--The amendment made by this section shall apply 
to fuels sold for nontaxable use after the date of the enactment of 
this Act.

SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO THE HIGHWAY 
                    TRUST FUND.

  (a) In General.--Subsection (b) of section 9503 (relating to transfer 
to Highway Trust Fund of amounts equivalent to certain taxes) is 
amended by redesignating paragraph (5) as paragraph (6) and inserting 
after paragraph (4) the following new paragraph:
          ``(5) Certain penalties.--There are hereby appropriated to 
        the Highway Trust Fund amounts equivalent to the penalties paid 
        under sections 6715, 6715A, 6717, 6718, 6725, 7232, and 7272 
        (but only with regard to penalties under such section related 
        to failure to register under section 4101).''.
  (b) Conforming Amendments.--
          (1) The heading of subsection (b) of section 9503 is amended 
        by inserting ``and Penalties'' after ``Taxes''.
          (2) The heading of paragraph (1) of section 9503(b) is 
        amended by striking ``In general'' and inserting ``Certain 
        taxes''.
  (c) Effective Date.--The amendments made by this section shall apply 
to penalties assessed after October 1, 2004.

SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.

  (a) In General.--Paragraph (4) of section 6416(a) (relating to 
abatements, credits, and refunds) is amended to read as follows:
          ``(4) Registered ultimate vendor to administer credits and 
        refunds of gasoline tax.--
                  ``(A) In general.--For purposes of this subsection, 
                if an ultimate vendor purchases any gasoline on which 
                tax imposed by section 4081 has been paid and sells 
                such gasoline to an ultimate purchaser described in 
                subparagraph (C) or (D) of subsection (b)(2) (and such 
                gasoline is for a use described in such subparagraph), 
                such ultimate vendor shall be treated as the person 
                (and the only person) who paid such tax, but only if 
                such ultimate vendor is registered under section 4101. 
                For purposes of this subparagraph, if the sale of 
                gasoline is made by means of a credit card, the person 
                extending the credit to the ultimate purchaser shall be 
                deemed to be the ultimate vendor.
                  ``(B) Timing of claims.--The procedure and timing of 
                any claim under subparagraph (A) shall be the same as 
                for claims under section 6427(i)(4), except that the 
                rules of section 6427(i)(3)(B) regarding electronic 
                claims shall not apply unless the ultimate vendor has 
                certified to the Secretary for the most recent quarter 
                of the taxable year that all ultimate purchasers of the 
                vendor covered by such claim are certified and entitled 
                to a refund under subparagraph (C) or (D) of subsection 
                (b)(2).''.
  (b) Credit Card Purchases of Diesel Fuel or Kerosene by State and 
Local Governments.--Section 6427(l)(5)(C) (relating to nontaxable uses 
of diesel fuel, kerosene, and aviation fuel) is amended by adding at 
the end the following new flush sentence: ``For purposes of this 
subparagraph, if the sale of diesel fuel or kerosene is made by means 
of a credit card, the person extending the credit to the ultimate 
purchaser shall be deemed to be the ultimate vendor.''.
  (c) Effective Date.--The amendments made by this section shall take 
effect on October 1, 2004.

SEC. 663. TWO-PARTY EXCHANGES.

  (a) In General.--Subpart B of part III of subchapter A of chapter 32, 
as amended by this Act, is amended by adding after section 4104 the 
following new section:

``SEC. 4105. TWO-PARTY EXCHANGES.

  ``(a) In General.--In a two-party exchange, the delivering person 
shall not be liable for the tax imposed under section 
4081(a)(1)(A)(ii).
  ``(b) Two-Party Exchange.--The term `two-party exchange' means a 
transaction, other than a sale, in which taxable fuel is transferred 
from a delivering person registered under section 4101 as a taxable 
fuel registrant fuel to a receiving person who is so registered where 
all of the following occur:
          ``(1) The transaction includes a transfer from the delivering 
        person, who holds the inventory position for taxable fuel in 
        the terminal as reflected in the records of the terminal 
        operator.
          ``(2) The exchange transaction occurs before or 
        contemporaneous with completion of removal across the rack from 
        the terminal by the receiving person.
          ``(3) The terminal operator in its books and records treats 
        the receiving person as the person that removes the taxable 
        fuel across the terminal rack for purposes of reporting the 
        transaction to the Secretary.
          ``(4) The transaction is the subject of a written 
        contract.''.
  (b) Conforming Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 32, as amended by this Act, is 
amended by adding after the item relating to section 4104 the following 
new item:

        ``Sec. 4105. Two-party exchanges.''.

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

SEC. 664. SIMPLIFICATION OF TAX ON TIRES.

  (a) In General.--Subsection (a) of section 4071 is amended to read as 
follows:
  ``(a) Imposition and Rate of Tax.--There is hereby imposed on taxable 
tires sold by the manufacturer, producer, or importer thereof a tax at 
the rate of 9.4 cents (4.7 cents in the case of a biasply tire) for 
each 10 pounds so much of the maximum rated load capacity thereof as 
exceeds 3,500 pounds.''
  (b) Taxable Tire.--Section 4072 is amended by redesignating 
subsections (a) and (b) as subsections (b) and (c), respectively, and 
by inserting before subsection (b) (as so redesignated) the following 
new subsection:
  ``(a) Taxable Tire.--For purposes of this chapter, the term `taxable 
tire' means any tire of the type used on highway vehicles if wholly or 
in part made of rubber and if marked pursuant to Federal regulations 
for highway use.''
  (c) Exemption for Tires Sold to Department of Defense.--Section 4073 
is amended to read as follows:

``SEC. 4073. EXEMPTIONS.

  ``The tax imposed by section 4071 shall not apply to tires sold for 
the exclusive use of the Department of Defense or the Coast Guard.''
  (d) Conforming Amendments.--
          (1) Section 4071 is amended by striking subsection (c) and by 
        moving subsection (e) after subsection (b) and redesignating 
        subsection (e) as subsection (c).
          (2) The item relating to section 4073 in the table of 
        sections for part II of subchapter A of chapter 32 is amended 
        to read as follows:

                              ``Sec. 4073. Exemptions.''

  (e) Effective Date.--The amendments made by this section shall apply 
to sales in calendar years beginning more than 30 days after the date 
of the enactment of this Act.

          Subtitle D--Nonqualified Deferred Compensation Plans

SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.

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

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

  ``(a) Rules Relating to Constructive Receipt.--
          ``(1) In general.--
                  ``(A) Gross income inclusion.--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) the date the participant becomes 
                        disabled (within the meaning of subparagraph 
                        (C)),
                          ``(iii) death,
                          ``(iv) a specified time (or pursuant to a 
                        fixed schedule) specified under the plan 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).
                  ``(C) Disabled.--For purposes of subparagraph 
                (A)(ii), a participant shall be considered disabled if 
                the participant--
                          ``(i) is unable to engage in any substantial 
                        gainful activity by reason of any medically 
                        determinable physical or mental impairment 
                        which can be expected to result in death or can 
                        be expected to last for a continuous period of 
                        not less than 12 months, or
                          ``(ii) is, by reason of any medically 
                        determinable physical or mental impairment 
                        which can be expected to result in death or can 
                        be expected to last for a continuous period of 
                        not less than 12 months, receiving income 
                        replacement benefits for a period of not less 
                        than 3 months under an accident and health plan 
                        covering employees of the participant's 
                        employer.
          ``(3) 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 not 
                later than the close of 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 
        set aside (directly or indirectly) in a trust (or other 
        arrangement determined by the Secretary) for purposes of paying 
        deferred compensation under a nonqualified deferred 
        compensation plan, 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 
        compensation deferred under a nonqualified deferred 
        compensation plan, there is a transfer of property within the 
        meaning of section 83 with respect to such compensation 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 first deferred or, if 
                later, the first taxable year in which such deferred 
                compensation is not subject to a substantial risk of 
                forfeiture.
  ``(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 (11), by striking the period at the end of 
        paragraph (12) and inserting ``, and'', and by inserting after 
        paragraph (12) the following new paragraph:
          ``(13) the total amount of deferrals under a nonqualified 
        deferred compensation plan (within the meaning of section 
        409A(d)).''.
          (2) Threshold.--Subsection (a) of section 6051 is amended by 
        adding at the end the following: ``In the case of the amounts 
        required to be shown by paragraph (13), the Secretary (by 
        regulation) may establish a minimum amount of deferrals below 
        which paragraph (13) does not apply and may provide that 
        paragraph (13) 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.--The amendments made by this section shall 
        apply to amounts deferred after June 3, 2004.
          (2) Certain amounts deferred in 2004 under certain 
        irrevocable elections and binding arrangements.--The amendments 
        made by this section shall not apply to amounts deferred after 
        June 3, 2004, and before January 1, 2005, pursuant to an 
        irrevocable election or binding arrangement made before June 4, 
        2004.
          (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 before June 4, 2004, 
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 June 3, 2004, if 
such amounts are includible in income as earned.

                  Subtitle E--Other Revenue Provisions

SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS.

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

``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

  ``(a) In General.--Nothing in any provision of law shall be construed 
to prevent the Secretary from entering into a qualified tax collection 
contract.
  ``(b) Qualified Tax Collection Contract.--For purposes of this 
section, the term `qualified tax collection contract' means any 
contract which--
          ``(1) is for the services of any person (other than an 
        officer or employee of the Treasury Department)--
                  ``(A) to locate and contact any taxpayer specified by 
                the Secretary,
                  ``(B) to request full payment from such taxpayer of 
                an amount of Federal tax specified by the Secretary 
                and, if such request cannot be met by the taxpayer, to 
                offer the taxpayer an installment agreement providing 
                for full payment of such amount during a period not to 
                exceed 5 years, and
                  ``(C) to obtain financial information specified by 
                the Secretary with respect to such taxpayer,
          ``(2) prohibits each person providing such services under 
        such contract from committing any act or omission which 
        employees of the Internal Revenue Service are prohibited from 
        committing in the performance of similar services,
          ``(3) prohibits subcontractors from--
                  ``(A) having contacts with taxpayers,
                  ``(B) providing quality assurance services, and
                  ``(C) composing debt collection notices, and
          ``(4) permits subcontractors to perform other services only 
        with the approval of the Secretary.
  ``(c) Fees.--The Secretary may retain and use an amount not in excess 
of 25 percent of the amount collected under any qualified tax 
collection contract for the costs of services performed under such 
contract. The Secretary shall keep adequate records regarding amounts 
so retained and used. The amount credited as paid by any taxpayer shall 
be determined without regard to this subsection.
  ``(d) No Federal Liability.--The United States shall not be liable 
for any act or omission of any person performing services under a 
qualified tax collection contract.
  ``(e) Application of Fair Debt Collection Practices Act.--The 
provisions of the Fair Debt Collection Practices Act (15 U.S.C. 1692 et 
seq.) shall apply to any qualified tax collection contract, except to 
the extent superseded by section 6304, section 7602(c), or by any other 
provision of this title.
  ``(f) Cross References.--

                  ``(1) For damages for certain unauthorized collection 
actions by persons performing services under a qualified tax collection 
contract, see section 7433A.
                  ``(2) For application of Taxpayer Assistance Orders 
to persons performing services under a qualified tax collection 
contract, see section 7811(a)(4).''.

          (2) Conforming amendments.--
                  (A) Section 7809(a) is amended by inserting ``6306,'' 
                before ``7651''.
                  (B) The table of sections for subchapter A of chapter 
                64 is amended by adding at the end the following new 
                item:

                              ``Sec. 6306. Qualified Tax Collection 
                                        Contracts.''.

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

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

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

        ``Sec. 7433A. Civil damages for certain unauthorized collection 
                  actions by persons performing services under qualified 
                  tax collection contracts.''.

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

SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS AND SIMILAR 
                    PROPERTY.

  (a) In General.--Subparagraph (B) of section 170(e)(1) is amended by 
striking ``or'' at the end of clause (i), by adding ``or'' at the end 
of clause (ii), and by inserting after clause (ii) the following new 
clause:
                          ``(iii) of any patent, copyright (other than 
                        a copyright described in section 1221(a)(3) or 
                        1231(b)(1)(C)), trademark, trade name, trade 
                        secret, know-how, software (other than software 
                        described in section 197(e)(3)(A)(i)), or 
                        similar property, or applications or 
                        registrations of such property,''.
  (b) Certain Donee Income From Intellectual Property Treated as an 
Additional Charitable Contribution.--Section 170 is amended by 
redesignating subsection (m) as subsection (n) and by inserting after 
subsection (l) the following new subsection:
  ``(m) Certain Donee Income From Intellectual Property Treated as an 
Additional Charitable Contribution.--
          ``(1) Treatment as additional contribution.--In the case of a 
        taxpayer who makes a qualified intellectual property 
        contribution, the deduction allowed under subsection (a) for 
        each taxable year of the taxpayer ending on or after the date 
        of such contribution shall be increased (subject to the 
        limitations under subsection (b)) by the applicable percentage 
        of qualified donee income with respect to such contribution 
        which is properly allocable to such year under this subsection.
          ``(2) Reduction in additional deductions to extent of initial 
        deduction.--With respect to any qualified intellectual property 
        contribution, the deduction allowed under subsection (a) shall 
        be increased under paragraph (1) only to the extent that the 
        aggregate amount of such increases with respect to such 
        contribution exceed the amount allowed as a deduction under 
        subsection (a) with respect to such contribution determined 
        without regard to this subsection.
          ``(3) Qualified donee income.--For purposes of this 
        subsection, the term `qualified donee income' means any net 
        income received by or accrued to the donee which is properly 
        allocable to the qualified intellectual property.
          ``(4) Allocation of qualified donee income to taxable years 
        of donor.--For purposes of this subsection, qualified donee 
        income shall be treated as properly allocable to a taxable year 
        of the donor if such income is received by or accrued to the 
        donee for the taxable year of the donee which ends within or 
        with such taxable year of the donor.
          ``(5) 10-year limitation.--Income shall not be treated as 
        properly allocable to qualified intellectual property for 
        purposes of this subsection if such income is received by or 
        accrued to the donee after the 10-year period beginning on the 
        date of the contribution of such property.
          ``(6) Benefit limited to life of intellectual property.--
        Income shall not be treated as properly allocable to qualified 
        intellectual property for purposes of this subsection if such 
        income is received by or accrued to the donee after the 
        expiration of the legal life of such property.
          ``(7) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means the 
        percentage determined under the following table which 
        corresponds to a taxable year of the donor ending on or after 
        the date of the qualified intellectual property contribution:

``Taxable Year of Donor                                                
  Ending on or After                                         Applicable
  Date of Contribution:                                     Percentage:
        1st....................................................    100 
        2nd....................................................    100 
        3rd....................................................     90 
        4th....................................................     80 
        5th....................................................     70 
        6th....................................................     60 
        7th....................................................     50 
        8th....................................................     40 
        9th....................................................     30 
        10th...................................................     20 
        11th...................................................     10 
        12th...................................................     10.

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

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

  ``(a) Dispositions of Donated Property.--
          ``(1) In general.--If the donee of any charitable deduction 
        property sells, exchanges, or otherwise disposes of such 
        property within 2 years after its receipt, the donee shall make 
        a return (in accordance with forms and regulations prescribed 
        by the Secretary) showing--
                  ``(A) the name, address, and TIN of the donor,
                  ``(B) a description of the property,
                  ``(C) the date of the contribution,
                  ``(D) the amount received on the disposition, and
                  ``(E) the date of such disposition.
          ``(2) Definitions.--For purposes of this subsection--
                  ``(A) Charitable deduction property.--The term 
                `charitable deduction property' means any property 
                (other than publicly traded securities) contributed in 
                a contribution for which a deduction was claimed under 
                section 170 if the claimed value of such property (plus 
                the claimed value of all similar items of property 
                donated by the donor to 1 or more donees) exceeds 
                $5,000.
                  ``(B) Publicly traded securities.--The term `publicly 
                traded securities' means securities for which (as of 
                the date of the contribution) market quotations are 
                readily available on an established securities market.
  ``(b) Qualified Intellectual Property Contributions.--
          ``(1) In general.--Each donee with respect to a qualified 
        intellectual property contribution shall make a return (at such 
        time and in such form and manner as the Secretary may by 
        regulations prescribe) with respect to each specified taxable 
        year of the donee showing--
                  ``(A) the name, address, and TIN of the donor,
                  ``(B) a description of the qualified intellectual 
                property contributed,
                  ``(C) the date of the contribution, and
                  ``(D) the amount of net income of the donee for the 
                taxable year which is properly allocable to the 
                qualified intellectual property (determined without 
                regard to paragraph (10)(B) of section 170(m) and with 
                the modifications described in paragraphs (5) and (6) 
                of such section).
          ``(2) Definitions.--For purposes of this subsection--
                  ``(A) In general.--Terms used in this subsection 
                which are also used in section 170(m) have the 
                respective meanings given such terms in such section.
                  ``(B) Specified taxable year.--The term `specified 
                taxable year' means, with respect to any qualified 
                intellectual property contribution, any taxable year of 
                the donee any portion of which is part of the 10-year 
                period beginning on the date of such contribution.
  ``(c) Statement To Be Furnished to Donors.--Every person making a 
return under subsection (a) or (b) shall furnish a copy of such return 
to the donor at such time and in such manner as the Secretary may by 
regulations prescribe.''.
          (2) Clerical amendment.--The table of sections for subpart A 
        of part II of subchapter A of chapter 61 is amended by striking 
        the item relating to section 6050L and inserting the following 
        new item:

                              ``Sec. 6050L. Returns relating to certain 
                                        donated property.''.

  (d) Coordination With Appraisal Requirements.--Subclause (I) of 
section 170(f)(11)(A)(ii), as added by section 683, is amended by 
inserting ``subsection (e)(1)(B)(iii) or'' before ``section 
1221(a)(1)''.
  (e) Anti-Abuse Rules.--The Secretary of the Treasury may prescribe 
such regulations or other guidance as may be necessary or appropriate 
to prevent the avoidance of the purposes of section 170(e)(1)(B)(iii) 
of the Internal Revenue Code of 1986 (as added by subsection (a)), 
including preventing--
          (1) the circumvention of the reduction of the charitable 
        deduction by embedding or bundling the patent or similar 
        property as part of a charitable contribution of property that 
        includes the patent or similar property,
          (2) the manipulation of the basis of the property to increase 
        the amount of the charitable deduction through the use of 
        related persons, pass-thru entities, or other intermediaries, 
        or through the use of any provision of law or regulation 
        (including the consolidated return regulations), and
          (3) a donor from changing the form of the patent or similar 
        property to property of a form for which different deduction 
        rules would apply.
  (f) Effective Date.--The amendments made by this section shall apply 
to contributions made after June 3, 2004.

SEC. 683. INCREASED REPORTING FOR NONCASH CHARITABLE CONTRIBUTIONS.

  (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) is 
amended by adding after paragraph (10) the following new paragraph:
          ``(11) Qualified appraisal and other documentation for 
        certain contributions.--
                  ``(A) In general.--
                          ``(i) Denial of deduction.--In the case of an 
                        individual, partnership, or corporation, no 
                        deduction shall be allowed under subsection (a) 
                        for any contribution of property for which a 
                        deduction of more than $500 is claimed unless 
                        such person meets the requirements of 
                        subparagraphs (B), (C), and (D), as the case 
                        may be, with respect to such contribution.
                          ``(ii) Exceptions.--
                                  ``(I) Readily valued property.--
                                Subparagraphs (C) and (D) shall not 
                                apply to cash, property described in 
                                section 1221(a)(1), and publicly traded 
                                securities (as defined in section 
                                6050L(a)(2)(B)).
                                  ``(II) Reasonable cause.--Clause (i) 
                                shall not apply if it is shown that the 
                                failure to meet such requirements is 
                                due to reasonable cause and not to 
                                willful neglect.
                  ``(B) Property description for contributions of more 
                than $500.--In the case of contributions of property 
                for which a deduction of more than $500 is claimed, the 
                requirements of this subparagraph are met if the 
                individual, partnership or corporation includes with 
                the return for the taxable year in which the 
                contribution is made a description of such property and 
                such other information as the Secretary may require. 
                The requirements of this subparagraph shall not apply 
                to a C corporation which is not a personal service 
                corporation or a closely held C corporation.
                  ``(C) Qualified appraisal for contributions of more 
                than $5,000.--In the case of contributions of property 
                for which a deduction of more than $5,000 is claimed, 
                the requirements of this subparagraph are met if the 
                individual, partnership, or corporation obtains a 
                qualified appraisal of such property and attaches to 
                the return for the taxable year in which such 
                contribution is made such information regarding such 
                property and such appraisal as the Secretary may 
                require.
                  ``(D) Substantiation for contributions of more than 
                $500,000.--In the case of contributions of property for 
                which a deduction of more than $500,000 is claimed, the 
                requirements of this subparagraph are met if the 
                individual, partnership, or corporation attaches to the 
                return for the taxable year a qualified appraisal of 
                such property.
                  ``(E) Qualified appraisal.--For purposes of this 
                paragraph, the term `qualified appraisal' means, with 
                respect to any property, an appraisal of such property 
                which is treated for purposes of this paragraph as a 
                qualified appraisal under regulations or other guidance 
                prescribed by the Secretary.
                  ``(F) Aggregation of similar items of property.--For 
                purposes of determining thresholds under this 
                paragraph, property and all similar items of property 
                donated to 1 or more donees shall be treated as 1 
                property.
                  ``(G) Special rule for pass-thru entities.--In the 
                case of a partnership or S corporation, this paragraph 
                shall be applied at the entity level, except that the 
                deduction shall be denied at the partner or shareholder 
                level.
                  ``(H) Regulations.--The Secretary may prescribe such 
                regulations as may be necessary or appropriate to carry 
                out the purposes of this paragraph, including 
                regulations that may provide that some or all of the 
                requirements of this paragraph do not apply in 
                appropriate cases.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after June 3, 2004.

SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRCRAFT.

  (a) In General.--Subsection (f) of section 170 (relating to 
disallowance of deduction in certain cases and special rules) is 
amended by adding after paragraph (11) the following new paragraph:
          ``(12) Contributions of motor vehicles, boats, and 
        aircraft.--
                  ``(A) In general.--Except as provided in regulations 
                or other guidance, in the case of a contribution of a 
                specified vehicle to which paragraph (8) applies, no 
                deduction shall be allowed under subsection (a) for 
                such contribution unless the taxpayer obtains a 
                qualified appraisal of the specified vehicle on or 
                before the date of such contribution.
                  ``(B) Exception for inventory property.--Subparagraph 
                (A) shall not apply to property which is described in 
                section 1221(a)(1).
                  ``(C) Specified vehicle.--For purposes of this 
                paragraph, the term `specified vehicle' means any--
                          ``(i) motor vehicle manufactured primarily 
                        for use on public streets, roads, and highways,
                          ``(ii) boat, or
                          ``(iii) aircraft.
                  ``(D) Qualified appraisal.--For purposes of this 
                paragraph, the term `qualified appraisal' means any 
                appraisal which is treated for purposes of this 
                paragraph as a qualified appraisal under regulations or 
                other guidance prescribed by the Secretary.
                  ``(E) Regulations or other guidance.--The Secretary 
                shall prescribe such regulations or other guidance as 
                may be necessary to carry out the purposes of this 
                paragraph.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to contributions made after June 3, 2004.

SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS 
                    FRANCHISES.

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

SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO FEDERAL 
                    VENDERS.

  (a) In General.--Section 6331(h) (relating to continuing levy on 
certain payments) is amended by adding at the end the following new 
paragraph:
          ``(3) Increase in levy for certain payments.--Paragraph (1) 
        shall be applied by substituting `100 percent' for `15 percent' 
        in the case of any specified payment due to a vendor of goods 
        or services sold or leased to the Federal Government.''.
  (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 687. MODIFICATION OF STRADDLE RULES.

  (a) Rules Relating to Identified Straddles.--
          (1) In general.--Subparagraph (A) of section 1092(a)(2) 
        (relating to special rule for identified straddles) is amended 
        to read as follows:
                  ``(A) In general.--In the case of any straddle which 
                is an identified straddle--
                          ``(i) paragraph (1) shall not apply with 
                        respect to identified positions comprising the 
                        identified straddle,
                          ``(ii) if there is any loss with respect to 
                        any identified position of the identified 
                        straddle, the basis of each of the identified 
                        offsetting positions in the identified straddle 
                        shall be increased by an amount which bears the 
                        same ratio to the loss as the unrecognized gain 
                        with respect to such offsetting position bears 
                        to the aggregate unrecognized gain with respect 
                        to all such offsetting positions, and
                          ``(iii) any loss described in clause (ii) 
                        shall not otherwise be taken into account for 
                        purposes of this title.''.
          (2) Identified straddle.--Section 1092(a)(2)(B) (defining 
        identified straddle) is amended--
                  (A) by striking clause (ii) and inserting the 
                following:
                          ``(ii) to the extent provided by regulations, 
                        the value of each position of which (in the 
                        hands of the taxpayer immediately before the 
                        creation of the straddle) is not less than the 
                        basis of such position in the hands of the 
                        taxpayer at the time the straddle is created, 
                        and'', and
                  (B) by adding at the end the following new flush 
                sentence:
                ``The Secretary shall prescribe regulations which 
                specify the proper methods for clearly identifying a 
                straddle as an identified straddle (and the positions 
                comprising such straddle), which specify the rules for 
                the application of this section for a taxpayer which 
                fails to properly identify the positions of an 
                identified straddle, and which specify the ordering 
                rules in cases where a taxpayer disposes of less than 
                an entire position which is part of an identified 
                straddle.''.
          (3) Unrecognized gain.--Section 1092(a)(3) (defining 
        unrecognized gain) is amended by redesignating subparagraph (B) 
        as subparagraph (C) and by inserting after subparagraph (A) the 
        following new subparagraph:
                  ``(B) Special rule for identified straddles.--For 
                purposes of paragraph (2)(A)(ii), the unrecognized gain 
                with respect to any identified offsetting position 
                shall be the excess of the fair market value of the 
                position at the time of the determination over the fair 
                market value of the position at the time the taxpayer 
                identified the position as a position in an identified 
                straddle.''.
          (4) Conforming amendment.--Section 1092(c)(2) is amended by 
        striking subparagraph (B) and by redesignating subparagraph (C) 
        as subparagraph (B).
  (b) Physically Settled Positions.--Section 1092(d) (relating to 
definitions and special rules) is amended by adding at the end the 
following new paragraph:
          ``(8) Special rules for physically settled positions.--For 
        purposes of subsection (a), if a taxpayer settles a position 
        which is part of a straddle by delivering property to which the 
        position relates (and such position, if terminated, would 
        result in a realization of a loss), then such taxpayer shall be 
        treated as if such taxpayer--
                  ``(A) terminated the position for its fair market 
                value immediately before the settlement, and
                  ``(B) sold the property so delivered by the taxpayer 
                at its fair market value.''.
  (c) Repeal of Stock Exception.--
          (1) In general.--Paragraph (3) of section 1092(d) (relating 
        to definitions and special rules) is amended to read as 
        follows:
          ``(3) Special rules for stock.--For purposes of paragraph 
        (1)--
                  ``(A) In general.--The term `personal property' 
                includes--
                          ``(i) any stock which is a part of a straddle 
                        at least 1 of the offsetting positions of which 
                        is a position with respect to such stock or 
                        substantially similar or related property, or
                          ``(ii) any stock of a corporation formed or 
                        availed of to take positions in personal 
                        property which offset positions taken by any 
                        shareholder.
                  ``(B) Rule for application.--For purposes of 
                determining whether subsection (e) applies to any 
                transaction with respect to stock described in 
                subparagraph (A)(ii), all includible corporations of an 
                affiliated group (within the meaning of section 
                1504(a)) shall be treated as 1 taxpayer.''.
          (2) Conforming amendment.--Section 1258(d)(1) is amended by 
        striking ``; except that the term `personal property' shall 
        include stock''.
  (d) Holding period for dividend exclusion.--The last sentence of 
section 246(c) is amended by inserting: ``, other than a qualified 
covered call option to which section 1092(f) applies'' before the 
period at the end.
  (e) Effective Date.--The amendments made by this section shall apply 
to positions established on or after the date of the enactment of this 
Act.

SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF TAXABLE 
                    VACCINES.

  (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. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF TAXABLE 
                    VACCINES.

  (a) In General.--Section 4132(a)(1) (defining taxable vaccine), as 
amended by this Act, is amended by adding at the end the following new 
subparagraph:
                  ``(N) Any trivalent vaccine against influenza.''.
  (b) Effective Date.--
          (1) Sales, etc.--The amendment made by this section shall 
        apply to sales and uses on or after the later of--
                  (A) the first day of the first month which begins 
                more than 4 weeks after the date of the enactment of 
                this Act, or
                  (B) the date on which the Secretary of Health and 
                Human Services lists any vaccine against influenza for 
                purposes of compensation for any vaccine-related injury 
                or death through the Vaccine Injury Compensation Trust 
                Fund.
          (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. 690. 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, 2014''.
  (b) Effective Date.--The amendment made by this section shall apply 
to requests after the date of the enactment of this Act.

SEC. 691. 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, 2014.
  ``(B)(i) Subject to clause (ii), Fees may not be charged under 
paragraphs (1) through (8) of subsection (a) after September 30, 2014.
  ``(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.

              TITLE VII--MARKET REFORM FOR TOBACCO GROWERS

SEC. 701. SHORT TITLE.

  This title may be cited as the ``Fair and Equitable Tobacco Reform 
Act of 2004''.

SEC. 702. EFFECTIVE DATE.

  This title and the amendments made by this title shall apply 
beginning with the 2005 marketing year of each kind of tobacco.

  Subtitle A--Termination of Federal Tobacco Quota and Price Support 
                                Programs

SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM AND RELATED PROVISIONS.

  (a) Marketing Quotas.--Part I of subtitle B of title III of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) is 
repealed.
  (b) Processing.--Section 9(b) of the Agricultural Adjustment Act (7 
U.S.C. 609(b)), reenacted with amendments by the Agricultural Marketing 
Agreement Act of 1937, is amended--
          (1) in paragraph (2), by striking ``tobacco,''; and
          (2) in paragraph (6)(B)(i), by striking ``, or, in the case 
        of tobacco, is less than the fair exchange value by not more 
        than 10 per centum,''.
  (c) Declaration of Policy.--Section 2 of the Agricultural Adjustment 
Act of 1938 (7 U.S.C. 1282) is amended by striking ``tobacco,''.
  (d) Definitions.--Section 301(b) of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1301(b)) is amended--
          (1) in paragraph (3)--
                  (A) by striking subparagraph (C); and
                  (B) by redesignating subparagraph (D) as subparagraph 
                (C);
          (2) in paragraph (6)(A), by striking ``tobacco,'';
          (3) in paragraph (10)--
                  (A) by striking subparagraph (B); and
                  (B) by redesignating subparagraph (C) as subparagraph 
                (B);
          (4) in paragraph (11)(B), by striking ``and tobacco'';
          (5) in paragraph (12), by striking ``tobacco,'';
          (6) in paragraph (14)--
                  (A) in subparagraph (A), by striking ``(A)''; and
                  (B) by striking subparagraphs (B), (C), and (D);
          (7) by striking paragraph (15);
          (8) in paragraph (16)--
                  (A) by striking subparagraph (B); and
                  (B) by redesignating subparagraph (C) as subparagraph 
                (B);
          (9) by striking paragraph (17); and
          (10) by redesignating paragraph (16) as paragraph (15).
  (e) Parity Payments.--Section 303 of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1303) is amended in the first sentence by striking 
``rice, or tobacco,'' and inserting ``or rice,''.
  (f) Administrative Provisions.--Section 361 of the Agricultural 
Adjustment Act of 1938 (7 U.S.C. 1361) is amended by striking 
``tobacco,''.
  (g) Adjustment of Quotas.--Section 371 of the Agricultural Adjustment 
Act of 1938 (7 U.S.C. 1371) is amended--
          (1) in the first sentence of subsection (a), by striking 
        ``rice, or tobacco'' and inserting ``or rice''; and
          (2) in the first sentence of subsection (b), by striking 
        ``rice, or tobacco'' and inserting ``or rice''.
  (h) Regulations.--Section 375 of the Agricultural Adjustment Act of 
1938 (7 U.S.C. 1375) is amended--
          (1) in subsection (a), by striking ``peanuts, or tobacco'' 
        and inserting ``or peanuts''; and
          (2) by striking subsection (c).
  (i) Eminent Domain.--Section 378 of the Agricultural Adjustment Act 
of 1938 (7 U.S.C. 1378) is amended--
          (1) in the first sentence of subsection (c), by striking 
        ``cotton, and tobacco'' and inserting ``and cotton''; and
          (2) by striking subsections (d), (e), and (f).
  (j) Burley Tobacco Farm Reconstitution.--Section 379 of the 
Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is amended--
          (1) in subsection (a)--
                  (A) by striking ``(a)''; and
                  (B) in paragraph (6), by striking ``, but this clause 
                (6) shall not be applicable in the case of burley 
                tobacco''; and
          (2) by striking subsections (b) and (c).
  (k) Acreage-Poundage Quotas.--Section 4 of the Act of April 16, 1955 
(Public Law 89-12; 7 U.S.C. 1314c note), is repealed.
  (l) Burley Tobacco Acreage Allotments.--The Act of July 12, 1952 (7 
U.S.C. 1315), is repealed.
  (m) Transfer of Allotments.--Section 703 of the Food and Agriculture 
Act of 1965 (7 U.S.C. 1316) is repealed.
  (n) Advance Recourse Loans.--Section 13(a)(2)(B) of the Food Security 
Improvements Act of 1986 (7 U.S.C. 1433c-1(a)(2)(B)) is amended by 
striking ``tobacco and''.
  (o) Tobacco Field Measurement.--Section 1112 of the Omnibus Budget 
Reconciliation Act of 1987 (Public Law 100-203) is amended by striking 
subsection (c).

SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT PROGRAM AND RELATED 
                    PROVISIONS.

  (a) Termination of Tobacco Price Support and No Net Cost 
Provisions.--Sections 106, 106A, and 106B of the Agricultural Act of 
1949 (7 U.S.C. 1445, 1445-1, 1445-2) are repealed.
  (b) Parity Price Support.--Section 101 of the Agricultural Act of 
1949 (7 U.S.C. 1441) is amended--
          (1) in the first sentence of subsection (a), by striking 
        ``tobacco (except as otherwise provided herein), corn,'' and 
        inserting ``corn'';
          (2) by striking subsections (c), (g), (h), and (i);
          (3) in subsection (d)(3)--
                  (A) by striking ``, except tobacco,''; and
                  (B) by striking ``and no price support shall be made 
                available for any crop of tobacco for which marketing 
                quotas have been disapproved by producers;''; and
          (4) by redesignating subsections (d) and (e) as subsections 
        (c) and (d), respectively.
  (c) Definition of Basic Agricultural Commodity.--Section 408(c) of 
the Agricultural Act of 1949 (7 U.S.C. 1428(c)) is amended by striking 
``tobacco,''.
  (d) Powers of Commodity Credit Corporation.--Section 5 of the 
Commodity Credit Corporation Charter Act (15 U.S.C. 714c) is amended by 
inserting ``(other than tobacco)'' after ``agricultural commodities'' 
each place it appears.

SEC. 713. LIABILITY.

  The amendments made by this subtitle shall not affect the liability 
of any person under any provision of law so amended with respect to any 
crop of tobacco planted before the effective date of this Act.

 Subtitle B--Transitional Payments to Tobacco Quota Holders and Active 
                          Producers of Tobacco

SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER AND QUOTA HOLDER.

  In this subtitle:
          (1) Active tobacco producer.--The term ``active tobacco 
        producer'' means an owner, operator, landlord, tenant, or 
        sharecropper who--
                  (A) shared in the risk of producing tobacco on a farm 
                where tobacco was produced or considered planted 
                pursuant to a tobacco farm marketing quota or farm 
                acreage allotment established under part I of subtitle 
                B of title III of the Agricultural Adjustment Act of 
                1938 (7 U.S.C. 1311 et seq.) for the 2004 marketing 
                year; and
                  (B) was actively engaged on that farm.
          (2) Considered planted.--The term ``considered planted'' 
        means tobacco that was planted, but failed to be produced as a 
        result of a natural disaster, as determined by the Secretary.
          (3) Tobacco quota holder.--The term ``tobacco quota holder'' 
        means a person that was an owner of a farm, as of July 1, 2004, 
        for which a basic tobacco farm marketing quota or farm acreage 
        allotment for quota tobacco was established for the 2004 
        tobacco marketing year.
          (4) Secretary.--The term ``Secretary'' means the Secretary of 
        Agriculture.

SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS.

  (a) Payment Required.--The Secretary shall make payments to each 
eligible tobacco quota holder for the termination of tobacco marketing 
quotas and related price support under subtitle A, which shall 
constitute full and fair compensation for any losses relating to such 
termination.
  (b) Eligibility.--To be eligible to receive a payment under this 
section, a person shall submit to the Secretary an application 
containing such information as the Secretary may require to demonstrate 
to the satisfaction of the Secretary that the person satisfies the 
definition of tobacco quota holder. The application shall be submitted 
within such time, in such form, and in such manner as the Secretary may 
require.
  (c) Individual Base Quota Level.--
          (1) In general.--The Secretary shall establish a base quota 
        level applicable to each eligible tobacco quota holder 
        identified under subsection (b).
          (2) Poundage quotas.--Subject to adjustment under subsection 
        (d), for each kind of tobacco for which the marketing quota is 
        expressed in pounds, the base quota level for each tobacco 
        quota holder shall be equal to the basic tobacco marketing 
        quota under the Agriculture Adjustment Act of 1938 for the 
        marketing year in effect on the date of the enactment of this 
        Act for quota tobacco on the farm owned by the tobacco quota 
        holder.
          (3) Marketing quotas other than poundage quotas.--Subject to 
        adjustment under subsection (d), for each kind of tobacco for 
        which there is marketing quota or allotment on an acreage 
        basis, the base quota level for each tobacco quota holder shall 
        be the amount equal to the product obtained by multiplying--
                  (A) the basic tobacco farm marketing quota or 
                allotment for the marketing year in effect on the date 
                of the enactment of this Act, as established by the 
                Secretary for quota tobacco on the farm owned by the 
                tobacco quota holder; by
                  (B) the average county production yield per acre for 
                the county in which the farm is located for the kind of 
                tobacco for that marketing year.
  (d) Treatment of Certain Contracts and Agreements.--
          (1) Effect of purchase contract.--If there was an agreement 
        for the purchase of all or part of a farm described in 
        subsection (c) as of the date of the enactment of this Act, and 
        the parties to the sale are unable to agree to the disposition 
        of eligibility for payments under this section, the Secretary, 
        taking into account any transfer of quota that has been agreed 
        to, shall provide for the equitable division of the payments 
        among the parties by adjusting the determination of who is the 
        tobacco quota holder with respect to particular pounds of the 
        quota.
          (2) Effect of agreement for permanent quota transfer.--If the 
        Secretary determines that there was in existence, as of the day 
        before the date of the enactment of this Act, an agreement for 
        the permanent transfer of quota, but that the transfer was not 
        completed by that date, the Secretary shall consider the 
        tobacco quota holder to be the party to the agreement that, as 
        of that date, was the owner of the farm to which the quota was 
        to be transferred.
  (e) Total Payment Amounts Based on 2002 Marketing Year.--
          (1) Calculation of annual payment amount.--During fiscal 
        years 2005 through 2009, the Secretary shall make payments to 
        all eligible tobacco quota holders identified under subsection 
        (b) in an annual amount equal to the product obtained by 
        multiplying, for each kind of tobacco--
                  (A) $1.40 per pound; by
                  (B) the total national basic marketing quota 
                established under the Agriculture Adjustment Act of 
                1938 for the 2002 marketing year for that kind of 
                tobacco.
          (2) Marketing quotas other than poundage quotas.--For each 
        kind of tobacco for which there is a marketing quota or 
        allotment on an acreage basis, the Secretary shall convert the 
        tobacco farm marketing quotas or allotments established under 
        the Agriculture Adjustment Act of 1938 for the 2002 marketing 
        year for that kind of tobacco as the Secretary considers 
        appropriate.
  (f) Individual Payment Amounts.--The annual payment amount for each 
eligible tobacco quota holder with respect to a kind of tobacco under 
this section shall bear the same ratio to the amount determined by the 
Secretary under subsection (e) with respect to that kind of tobacco as 
the individual base quota level of that eligible tobacco quota holder 
under subsection (c) with respect to that kind of tobacco bears to the 
total base quota levels of all eligible tobacco quota holders with 
respect to that kind of tobacco.
  (g) Death of Tobacco Quota Holder.--If a tobacco quota holder who is 
entitled to payments under this section dies and is survived by a 
spouse or one or more dependents, the right to receive the payments 
shall transfer to the surviving spouse or, if there is no surviving 
spouse, to the estate of the tobacco quota holder.

SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS OF QUOTA TOBACCO.

  (a) Transition Payments Required.--The Secretary shall make 
transition payments under this section to eligible active producers of 
quota tobacco.
  (b) Eligibility.--To be eligible to receive a transition payment 
under this section, a person shall submit to the Secretary an 
application containing such information as the Secretary may require to 
demonstrate to the satisfaction of the Secretary that the person 
satisfies the definition of active producer of quota tobacco. The 
application shall be submitted within such time, in such form, and in 
such manner as the Secretary may require.
  (c) Current Production Base.--The Secretary shall establish a 
production base applicable to each eligible active producer of quota 
tobacco identified under subsection (b). A producer's production base 
shall be equal to the quantity, in pounds, of quota tobacco subject to 
the basic marketing quota marketed or considered planted by the 
producer under the Agriculture Adjustment Act of 1938 for the marketing 
year in effect on the date of the enactment of this Act.
  (d) Total Payment Amounts Based on 2002 Marketing Year.--
          (1) Calculation of annual payment amount.--During fiscal 
        years 2005 through 2009, the Secretary shall make payments to 
        all eligible active producers of quota tobacco identified under 
        subsection (b) in an annual amount equal to the product 
        obtained by multiplying, for each kind of tobacco--
                  (A) $0.60 per pound; by
                  (B) the total national effective marketing quota 
                established under the Agriculture Adjustment Act of 
                1938 for the 2002 marketing year for that kind of 
                tobacco.
          (2) Marketing quotas other than poundage quotas.--For each 
        kind of tobacco for which there is a marketing quota or 
        allotment on an acreage basis, the Secretary shall convert the 
        tobacco farm marketing quotas or allotments established under 
        the Agriculture Adjustment Act of 1938 for the 2002 marketing 
        year for that kind of tobacco to a poundage basis before 
        executing the mathematical equation specified in paragraph (1).
  (e) Individual Payment Amounts.--The annual payment amount for each 
eligible active producer of quota tobacco identified under subsection 
(b) with respect to a kind of tobacco under this section shall bear the 
same ratio to the amount determined by the Secretary under subsection 
(d) with respect to that kind of tobacco as the individual production 
base of that eligible active producer under subsection (c) with respect 
to that kind of tobacco bears to the total production bases determined 
under that subsection for all eligible active producers of that kind of 
tobacco.
  (f) Death of Tobacco Producer.--If a tobacco producer who is entitled 
to payments under this section dies and is survived by a spouse or one 
or more dependents, the right to receive the payments shall transfer to 
the surviving spouse or, if there is no surviving spouse, to the estate 
of the tobacco producer.

SEC. 724. RESOLUTION OF DISPUTES.

  Any dispute regarding the eligibility of a person to receive a 
payment under this subtitle, or the amount of the payment, shall be 
resolved by the county committee established under section 8 of the 
Soil Conservation and Domestic Allotment Act (16 U.S.C. 590h) for the 
county or other area in which the farming operation of the person is 
located.

SEC. 725. SOURCE OF FUNDS FOR PAYMENTS.

  There is hereby appropriated to the Secretary, from amounts in the 
general fund of the Treasury, such amounts as the Secretary needs in 
order to make the payments required by sections 722 and 723, except 
that such amounts shall not exceed the lesser of--
          (1) amounts received in the Treasury under chapter 52 of the 
        Internal Revenue Code of 1986 (relating to tobacco products and 
        cigarette papers and tubes), or
          (2) $9,600,000,000.

                      TITLE VIII--TRADE PROVISIONS

SEC. 801. CEILING FANS.

  (a) In General.--Subchapter II of chapter 99 of the Harmonized Tariff 
Schedule of the United States is amended by inserting in numerical 
sequence the following new heading:

      

``            9902.84.14      Ceiling fans     Free         No change    No change    On or before
                               for permanent                                           12/31/2006        ''.
                               installation
                               (provided for
                               in subheading
                               8414.51.00)...

  (b) Effective Date.--The amendment made by this section applies to 
goods entered, or withdrawn from warehouse, for consumption on or after 
the 15th day after the date of enactment of this Act.

SEC. 802. CERTAIN STEAM GENERATORS, AND CERTAIN REACTOR VESSEL HEADS, 
                    USED IN NUCLEAR FACILITIES.

  (a) Certain Steam Generators.--Heading 9902.84.02 of the Harmonized 
Tariff Schedule of the United States is amended by striking ``12/31/
2006'' and inserting ``12/31/2008''.
  (b) Certain Reactor Vessel Heads.--Subchapter II of chapter 99 of the 
Harmonized Tariff Schedule of the United States is amended by inserting 
in numerical sequence the following new heading:
      

``               9902.84.03         Reactor vessel       Free                 No change            No change            On or before 12/31/
                                     heads for nuclear                                                                   2008                    ''.
                                     reactors (provided
                                     for in subheading
                                     8401.40.00).......

  (c) Effective Date.--
          (1) Subsection (a).--The amendment made by subsection (a) 
        shall take effect on the date of the enactment of this Act.
          (2) Subsection (b).--The amendment made by subsection (b) 
        shall apply to goods entered, or withdrawn from warehouse, for 
        consumption on or after the 15th day after the date of the 
        enactment of this Act.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill, H.R. 4520, as amended, (the ``American Jobs 
Creation Act of 2004'') repeals the exclusion for 
extraterritorial income (the ``ETI'' regime) and provides a 
reduced corporate income tax rate for domestic production 
activities and other corporate reform and growth incentives.
    The bill provides net tax reductions of over $21.136 
billion over fiscal years 2004-2008.

                 B. Background and Need for Legislation

    The provisions approved by the Committee comply with the 
World Trade Organization holding that the ETI regime 
constitutes a prohibited export subsidy under the relevant 
trade agreements. The provisions approved by the Committee 
provide other corporate reform and growth incentives. The 
estimated revenue effects of the provisions comply with the 
most recent Congressional Budget Office revisions of budget 
projections.

                         C. Legislative History

    The Committee on Ways and Means marked up the American Jobs 
Creation Act of 2004 on June 14, 2004, and ordered the bill, as 
amended, favorably reported by a roll call vote of 27 yeas and 
9 nays (with a quorum being present).

  TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC 
                  MANUFACTURING AND SMALL CORPORATIONS


           A. Repeal of Exclusion for Extraterritorial Income


(Sec. 101 of the bill and secs. 114 and 941-943 of the Code) \1\

                              PRESENT LAW

    The United States has long provided export-related benefits 
under a series of tax regimes, including the domestic 
international sales corporation (``DISC'') regime, the foreign 
sales corporation (``FSC'') regime, and the extraterritorial 
income (``ETI'') regime. Each of these regimes has been found 
to violate U.S. obligations under international trade 
agreements. In 2000, the European Union (``EU'') succeeded in 
having the FSC regime declared a prohibited export subsidy by 
the WTO. In response to this WTO ruling, the United States 
repealed the FSC rules and enacted a new regime under the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000. The 
EU immediately challenged the ETI regime in the WTO, and in 
January of 2002 a WTO Appellate Body held that the ETI regime 
also constituted a prohibited export subsidy under the relevant 
trade agreements.
---------------------------------------------------------------------------
    \1\ Section references are to the Internal Revenue Code of 1986, as 
amended (the ``Code''), unless otherwise indicated.
---------------------------------------------------------------------------
    Under the ETI regime, an exclusion from gross income 
applies with respect to ``extraterritorial income,'' which is a 
taxpayer's gross income attributable to ``foreign trading gross 
receipts.'' This income is eligible for the exclusion to the 
extent that it is ``qualifying foreign trade income.'' 
Qualifying foreign trade income is the amount of gross income 
that, if excluded, would result in a reduction of taxable 
income by the greatest of: (1) 1.2 percent of the foreign 
trading gross receipts derived by the taxpayer from the 
transaction; (2) 15 percent of the ``foreign trade income'' 
derived by the taxpayer from the transaction \2\; or (3) 30 
percent of the ``foreign sale and leasing income'' derived by 
the taxpayer from the transaction.\3\
---------------------------------------------------------------------------
    \2\ ``Foreign trade income'' is the taxable income of the taxpayer 
(determined without regard to the exclusion of qualifying foreign trade 
income) attributable to foreign trading gross receipts.
    \3\ ``Foreign sale and leasing income'' is the amount of the 
taxpayer's foreign trade income (with respect to a transaction) that is 
properly allocable to activities that constitute foreign economic 
processes. Foreign sale and leasing income also includes foreign trade 
income derived by the taxpayer in connection with the lease or rental 
of qualifying foreign trade property for use by the lessee outside the 
United States.
---------------------------------------------------------------------------
    Foreign trading gross receipts are gross receipts derived 
from certain activities in connection with ``qualifying foreign 
trade property'' with respect to which certain economic 
processes take place outside of the United States. 
Specifically, the gross receipts must be: (1) from the sale, 
exchange, or other disposition of qualifying foreign trade 
property; (2) from the lease or rental of qualifying foreign 
trade property for use by the lessee outside the United States; 
(3) for services which are related and subsidiary to the sale, 
exchange, disposition, lease, or rental of qualifying foreign 
trade property (as described above); (4) for engineering or 
architectural services for construction projects located 
outside the United States; or (5) for the performance of 
certain managerial services for unrelated persons. A taxpayer 
may elect to treat gross receipts from a transaction as not 
foreign trading gross receipts. As a result of such an 
election, a taxpayer may use any related foreign tax credits in 
lieu of the exclusion.
    Qualifying foreign trade property generally is property 
manufactured, produced, grown, or extracted within or outside 
the United States that is held primarily for sale, lease, or 
rental in the ordinary course of a trade or business for direct 
use, consumption, or disposition outside the United States. No 
more than 50 percent of the fair market value of such property 
can be attributable to the sum of: (1) the fair market value of 
articles manufactured outside the United States; and (2) the 
direct costs of labor performed outside the United States. With 
respect to property that is manufactured outside the United 
States, certain rules are provided to ensure consistent U.S. 
tax treatment with respect to manufacturers.

                           REASONS FOR CHANGE

    The Committee believes it is important that the United 
States, and all members of the WTO, comply with WTO decisions 
and honor their obligations under WTO agreements. Therefore, 
the Committee believes that the ETI regime should be repealed. 
The Committee believes that it is necessary and appropriate to 
provide transition relief comparable to that which has been 
included in the past in measures taken by WTO members to bring 
their laws into compliance with WTO decisions and obligations.
    The Committee also believes that it is important to use the 
opportunity afforded by the repeal of the ETI regime to reform 
the U.S. tax system in a manner that makes U.S. businesses and 
workers more productive and competitive than they are today. To 
this end, the Committee believes that it is important to 
provide tax cuts to U.S. domestic manufacturers and to update 
the U.S. international tax rules, which are over 40 years old 
and make U.S. companies uncompetitive in the United States and 
abroad.

                        EXPLANATION OF PROVISION

    The provision repeals the ETI exclusion. For transactions 
prior to 2005, taxpayers retain 100 percent of their ETI 
benefits. For transactions after 2004, the provision provides 
taxpayers with 80 percent of their otherwise-applicable ETI 
benefits for transactions during 2005 and 60 percent of their 
otherwise-applicable ETI benefits for transactions during 2006. 
However, the provision provides that the ETI exclusion 
provisions remain in effect for transactions in the ordinary 
course of a trade or business if such transactions are pursuant 
to a binding contract \4\ between the taxpayer and an unrelated 
person and such contract is in effect on January 14, 2002, and 
at all times thereafter.
---------------------------------------------------------------------------
    \4\ This rule also applies to a purchase option, renewal option, or 
replacement option that is included in such contract and that is 
enforceable against the sellor or lessor. For this purpose, a 
replacement option will be considered enforceable against a lessor 
notwithstanding the fact that a lessor retained approval of the 
replacement lessee.
---------------------------------------------------------------------------
    In addition, foreign corporations that elected to be 
treated for all Federal tax purposes as domestic corporations 
in order to facilitate the claiming of ETI benefits are allowed 
to revoke such elections within one year of the date of 
enactment of the provision without recognition of gain or loss, 
subject to anti-abuse rules.

                             EFFECTIVE DATE

    The provision is effective for transactions after December 
31, 2004.

B. Reduced Corporate Income Tax Rate for Domestic Production Activities 
                                 Income


(Sec. 102 of the bill and sec. 11 of the Code)

                              PRESENT LAW

    A corporation's regular income tax liability is determined 
by applying the following tax rate schedule to its taxable 
income.

     TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
                       [Percent of taxable income]
------------------------------------------------------------------------
                                                                 Income
                        Taxable income                          tax rate
------------------------------------------------------------------------
$0-$50,000....................................................        15
$50,001-$75,000...............................................        25
$75,001-$10,000,000...........................................        34
Over $10,000,000..............................................        35
------------------------------------------------------------------------

    The benefit of the first two graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $100,000 and $335,000. 
Also, the benefit of the 34-percent rate is phased out by a 
three-percent surcharge for corporations with taxable income 
between $15 million and $18,333,333; a corporation with taxable 
income of $18,333,333 or more effectively is subject to a flat 
rate of 35 percent.
    Under present law, there is no provision that reduces the 
corporate income tax for taxable income attributable to 
domestic production activities.

                           REASONS FOR CHANGE

    The Committee believes that creating new jobs is an 
essential element of economic recovery and expansion, and that 
tax policies designed to foster economic strength also will 
contribute to the continuation of the recent increases in 
employment levels. To accomplish this objective, the Committee 
believes that Congress should enact tax laws that enhance the 
ability of domestic businesses, and domestic manufacturing 
firms in particular, to compete in the global marketplace.
    The Committee believes that a reduced tax burden on 
domestic manufacturers will improve the cash flow of domestic 
manufacturers and make investments in domestic manufacturing 
facilities more attractive. Such investment will create and 
preserve U.S. manufacturing jobs.

                        EXPLANATION OF PROVISION

In general

    The bill provides that the corporate tax rate applicable to 
qualified production activities income may not exceed 32 
percent (34 percent for taxable years beginning before 2007) of 
the qualified production activities income.
            Qualified production activities income
    ``Qualified production activities income'' is the income 
attributable to domestic production gross receipts, reduced by 
the sum of: (1) the costs of goods sold that are allocable to 
such receipts; (2) other deductions, expenses, or losses that 
are directly allocable to such receipts; and (3) a proper share 
of other deductions, expenses, and losses that are not directly 
allocable to such receipts or another class of income.\5\
---------------------------------------------------------------------------
    \5\ 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. 
Where appropriate, such rules shall be similar to and consistent with 
relevant present-law rules (e.g., secs. 263A and 861).
---------------------------------------------------------------------------
            Domestic production gross receipts
    ``Domestic production gross receipts'' generally are gross 
receipts of a corporation that are derived from: (1) any sale, 
exchange or other disposition, or any lease, rental or license, 
of qualifying production property that was manufactured, 
produced, grown or extracted (in whole or in significant part) 
by the corporation within the United States; \6\ (2) any sale, 
exchange or other disposition, or any lease, rental or license, 
of qualified film produced by the taxpayer; or (3) 
construction, engineering or architectural services performed 
in the United States for construction projects located in the 
United States. However, domestic production gross receipts do 
not include any gross receipts of the taxpayer derived from 
property that is leased, licensed or rented by the taxpayer for 
use by any related person.\7\
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    \6\ Domestic production gross receipts include gross receipts of a 
taxpayer derived from any sale, exchange or other disposition of 
agricultural products with respect to which the taxpayer performs 
storage, handling or other processing activities (other than 
transportation activities) within the United States, provided such 
products are consumed in connection with, or incorporated into, the 
manufacturing, production, growth or extraction of qualifying 
production property (whether or not by the taxpayer). Domestic 
production gross receipts also include gross receipts of a taxpayer 
derived from any sale, exchange or other disposition of food products 
with respect to which the taxpayer performs processing activities (in 
whole or in significant part) within the United States.
    \7\ It is intended that principles similar to those under the 
present-law extraterritorial income regime apply for this purpose. See 
Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For example, this 
exclusion generally does not apply to property leased by the taxpayer 
to a related person if the property is held for sublease, or is 
subleased, by the related person to an unrelated person for the 
ultimate use of such unrelated person. Similarly, the license of 
computer software to a related person for reproduction and sale, 
exchange, lease, rental or sublicense to an unrelated person for the 
ultimate use of such unrelated person is not treated as excluded 
property by reason of the license to the related person.
---------------------------------------------------------------------------
    ``Qualifying production property'' generally is any 
tangible personal property, computer software, or property 
described in section 168(f)(4) of the Code. ``Qualified film'' 
is any property described in section 168(f)(3) of the Code 
(other than certain sexually explicit productions) if 50 
percent or more of the total compensation relating to the 
production of such film (other than compensation in the form of 
residuals and participations) constitutes compensation for 
services performed in the United States by actors, production 
personnel, directors, and producers.
    Under the bill, an election under section 631(a) made by a 
corporate taxpayer for a taxable year ending on or before the 
date of enactment to treat the cutting of timber as a sale or 
exchange, may be revoked by the taxpayer without the consent of 
the IRS for any taxable year ending after that date. The prior 
election (and revocation) is disregarded for purposes of making 
a subsequent election.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

      C. Reduced Corporate Income Tax Rate for Small Corporations


(Sec. 103 of the bill and sec. 11 of the Code)

                              PRESENT LAW

    A corporation's regular income tax liability is determined 
by applying the following tax rate schedule to its taxable 
income.

     Table 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
                       [Percent of taxable income]
------------------------------------------------------------------------
                                                                 Income
                        Taxable income                          tax rate
------------------------------------------------------------------------
$0-$50,000....................................................        15
$50,001-$75,000...............................................        25
$75,001-$10,000,000...........................................        34
Over $10,000,000..............................................        35
------------------------------------------------------------------------

    The benefit of the first two graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $100,000 and $335,000. 
Also, benefit of the 34-percent rate is phased out by a three-
percent surcharge for corporations with taxable income between 
$15 million and $18,333,333; a corporation with taxable income 
of $18,333,333 or more effectively is subject to a flat rate of 
35 percent.

                           REASONS FOR CHANGE

    The Committee believes that reducing the tax burden on 
small and medium sized businesses will enable them to continue 
to create and maintain new jobs in the United States. A reduced 
tax burden on smaller businesses simultaneously makes 
investments by small businesses more attractive and improves 
the cash flow of such businesses, thus facilitating the 
financing of investments. New investment by small business is 
responsible for substantial job creation in the economy and 
provides the foundation for new industries, new technology, and 
the future of the U. S. economy.

                        EXPLANATION OF PROVISION

    Under the provision, a corporation's regular income tax 
liability is determined by applying the following tax rate 
schedules to its taxable income.

   TABLE 2.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2013 AND
                               THEREAFTER
                       [Percent of taxable income]
------------------------------------------------------------------------
                                                                 Income
                        Taxable income                          tax rate
------------------------------------------------------------------------
$0-$50,000....................................................        15
$50,001-$75,000...............................................        25
$75,001-$20,000,000...........................................        32
Over $20,000,000..............................................        35
------------------------------------------------------------------------

    The benefit of the graduated rates described above is 
phased out by a three-percent surcharge for corporations with 
taxable income between $20 million and $40,341,667; a 
corporation with taxable income of $40,341,667 or more 
effectively is subject to a flat rate of 35 percent.

   TABLE 3.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2011-2012
                       [Percent of taxable income]
------------------------------------------------------------------------
                                                                 Income
                        Taxable income                          tax rate
------------------------------------------------------------------------
$0-$50,000....................................................        15
$50,001-$75,000...............................................        25
$75,001-$5,000,000............................................        32
$5,000,001-$10,000,000........................................        34
Over $10,000,000..............................................        35
------------------------------------------------------------------------

    The benefit of the first three graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $5,000,000 and 
$7,205,000. Also, the benefit of the 34-percent rate is phased 
out by a three-percent surcharge for corporations with taxable 
income between $15 million and $18,333,333; a corporation with 
taxable income of $18,333,333 or more effectively is subject to 
a flat rate of 35 percent.

   TABLE 4.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2008-2010
                       [Percent of taxable income]
------------------------------------------------------------------------
                                                                 Income
                        Taxable income                          tax rate
------------------------------------------------------------------------
$0-$50,000....................................................        15
$50,001-$75,000...............................................        25
$75,001-$1,000,000............................................        32
$1,000,001-$10,000,000........................................        34
Over $10,000,000..............................................        35
------------------------------------------------------------------------

    The benefit of the first three graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $1,000,000 and 
$1,605,000. Also, the benefit of the 34-percent rate is phased 
out by a three-percent surcharge for corporations with taxable 
income between $15 million and $18,333,333; a corporation with 
taxable income of $18,333,333 or more effectively is subject to 
a flat rate of 35 percent.

   TABLE 5.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2005-2007
                       [Percent of taxable income]
------------------------------------------------------------------------
                                                                 Income
                        Taxable income                          tax rate
------------------------------------------------------------------------
$0-$50,000....................................................        15
$50,001-$75,000...............................................        25
$75,001-$1,000,000............................................        33
$1,000,001-$10,000,000........................................        34
Over $10,000,000..............................................        35
------------------------------------------------------------------------

    The benefit of the first three graduated rates described 
above is phased out by a five-percent surcharge for 
corporations with taxable income between $1,000,000 and 
$1,420,000. Also, the benefit of the 34-percent rate is phased 
out by a three-percent surcharge for corporations with taxable 
income between $15 million and $18,333,333; a corporation with 
taxable income of $18,333,333 or more effectively is subject to 
a flat rate of 35 percent.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

  TITLE II--CORPORATE REFORM AND GROWTH INCENTIVES FOR MANUFACTURERS, 
                     SMALL BUSINESSES, AND FARMERS


                      A. Small Business Expensing


1. Extension of increased section 179 expensing (sec. 201 of the bill 
        and sec. 179 of the Code)

                              PRESENT LAW

    Present law provides that, in lieu of depreciation, a 
taxpayer with a sufficiently small amount of annual investment 
may elect to deduct such costs. The Jobs and Growth Tax Relief 
Reconciliation Act (JGTRRA) of 2003 \8\ increased the amount a 
taxpayer may deduct, for taxable years beginning in 2003 
through 2005, to $100,000 of the cost of qualifying property 
placed in service for the taxable year.\9\ In general, 
qualifying property is defined as depreciable tangible personal 
property (and certain computer software) that is purchased for 
use in the active conduct of a trade or business. The $100,000 
amount is reduced (but not below zero) by the amount by which 
the cost of qualifying property placed in service during the 
taxable year exceeds $400,000. The $100,000 and $400,000 
amounts are indexed for inflation.
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    \8\ Pub. L. No. 108-27, sec. 202 (2003).
    \9\ Additional section 179 incentives are provided with respect to 
a qualified property used by a business in the New York Liberty Zone 
(sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal 
community (sec. 1400J).
---------------------------------------------------------------------------
    Prior to the enactment of JGTRRA (and for taxable years 
beginning in 2006 and thereafter) a taxpayer with a 
sufficiently small amount of annual investment could elect to 
deduct up to $25,000 of the cost of qualifying property placed 
in service for the taxable year. The $25,000 amount was reduced 
(but not below zero) by the amount by which the cost of 
qualifying property placed in service during the taxable year 
exceeds $200,000. In general, qualifying property is defined as 
depreciable tangible personal property that is purchased for 
use in the active conduct of a trade or business.
    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179.
    Under present law, an expensing election is made under 
rules prescribed by the Secretary.\10\ Applicable Treasury 
regulations provide that an expensing election generally is 
made on the taxpayer's original return for the taxable year to 
which the election relates.\11\
---------------------------------------------------------------------------
    \10\ Sec. 179(c)(1).
    \11\ Treas. Reg. sec. 1.179-5. Under these regulations, a taxpayer 
may make the election on the original return (whether or not the return 
is timely), or on an amended return filed by the due date (including 
extensions) for filing the return for the tax year the property was 
placed in service. If the taxpayer timely filed an original return 
without making the election, the taxpayer may still make the election 
by filing an amended return within six months of the due date of the 
return (excluding extensions).
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    Prior to the enactment of JGTRRA (and for taxable years 
beginning in 2006 and thereafter), an expensing election may be 
revoked only with consent of the Commissioner.\12\ JGTRRA 
permits taxpayers to revoke expensing elections on amended 
returns without the consent of the Commissioner with respect to 
a taxable year beginning after 2002 and before 2006.\13\
---------------------------------------------------------------------------
    \12\ Sec. 179(c)(2).
    \13\ Id.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that section 179 expensing provides 
two important benefits for small businesses. First, it lowers 
the cost of capital for property used in a trade or business. 
With a lower cost of capital, the Committee believes small 
businesses will invest in more equipment and employ more 
workers. Second, it eliminates depreciation recordkeeping 
requirements with respect to expensed property. In JGTRRA, 
Congress acted to increase the value of these benefits and to 
increase the number of taxpayers eligible for taxable years 
through 2005. The Committee believes that these changes to 
section 179 expensing will continue to provide important 
benefits if extended, and the bill therefore extends these 
changes for an additional two years.

                        EXPLANATION OF PROVISION

    The provision extends the increased amount that a taxpayer 
may deduct, and other changes that were made by JGTRRA, for an 
additional two years. Thus, the provision provides that the 
maximum dollar amount that may be deducted under section 179 is 
$100,000 for property placed in service in taxable years 
beginning before 2008 ($25,000 for taxable years beginning in 
2008 and thereafter). In addition, the $400,000 amount applies 
for property placed in service in taxable years beginning 
before 2008 ($200,000 for taxable years beginning in 2008 and 
thereafter). The provision extends, through 2007 (from 2005), 
the indexing for inflation of both the maximum dollar amount 
that may be deducted and the $400,000 amount. The provision 
also includes off-the-shelf computer software placed in service 
in taxable years beginning before 2008 as qualifying property. 
The provision permits taxpayers to revoke expensing elections 
on amended returns without the consent of the Commissioner with 
respect to a taxable year beginning before 2008. The Committee 
expects that the Secretary will prescribe regulations to permit 
a taxpayer to make an expensing election on an amended return 
without the consent of the Commissioner.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                            B. Depreciation


1. Recovery period for depreciation of certain leasehold improvements 
        and restaurant property (sec. 211 of the bill and sec. 168 of 
        the Code)

                              PRESENT LAW

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168). The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.

Depreciation of leasehold improvements

    Depreciation allowances for improvements made on leased 
property are determined under MACRS, even if the MACRS recovery 
period assigned to the property is longer than the term of the 
lease (sec. 168(i)(8)).\14\ This rule applies regardless of 
whether the lessor or the lessee places the leasehold 
improvements in service.\15\ If a leasehold improvement 
constitutes an addition or improvement to nonresidential real 
property already placed in service, the improvement is 
depreciated using the straight-line method over a 39-year 
recovery period, beginning in the month the addition or 
improvement was placed in service (secs. 168(b)(3), (c), 
(d)(2), and (i)(6)).\16\
---------------------------------------------------------------------------
    \14\ The Tax Reform Act of 1986 modified the Accelerated Cost 
Recovery System (``ACRS'') to institute MACRS. Prior to the adoption of 
ACRS by the Economic Recovery Tax Act of 1981, taxpayers were allowed 
to depreciate the various components of a building as separate assets 
with separate useful lives. The use of component depreciation was 
repealed upon the adoption of ACRS. The Tax Reform Act of 1986 also 
denied the use of component depreciation under MACRS.
    \15\ Former sections 168(f)(6) and 178 provided that, in certain 
circumstances, a lessee could recover the cost of leasehold 
improvements made over the remaining term of the lease. The Tax Reform 
Act of 1986 repealed these provisions.
    \16\ If the improvement is characterized as tangible personal 
property, ACRS or MACRS depreciation is calculated using the shorter 
recovery periods, accelerated methods, and conventions applicable to 
such property. The determination of whether improvements are 
characterized as tangible personal property or as nonresidential real 
property often depends on whether or not the improvements constitute a 
``structural component'' of a building (as defined by Treas. Reg. sec. 
1.48-1(e)(1)). See, e.g., Metro National Corp v. Commissioner, 52 TCM 
(CCH) 1440 (1987); King Radio Corp Inc. v. U.S., 486 F.2d 1091 (10th 
Cir. 1973); Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402 (8th Cir. 
1985) (with respect to various leasehold improvements).
---------------------------------------------------------------------------

Qualified leasehold improvement property

    The Job Creation and Worker Assistance Act of 2002 \17\ 
(``JCWAA''), as amended by JGTRRA, generally provides an 
additional first-year depreciation deduction equal to either 30 
percent or 50 percent of the adjusted basis of qualified 
property placed in service before January 1, 2005. Qualified 
property includes qualified leasehold improvement property. For 
this purpose, qualified leasehold improvement property is any 
improvement to an interior portion of a building that is 
nonresidential real property, provided certain requirements are 
met. The improvement must be made under or pursuant to a lease 
either by the lessee (or sublessee), or by the lessor, of that 
portion of the building to be occupied exclusively by the 
lessee (or sublessee). The improvement must be placed in 
service more than three years after the date the building was 
first placed in service. Qualified leasehold improvement 
property does not include any improvement for which the 
expenditure is attributable to the enlargement of the building, 
any elevator or escalator, any structural component benefiting 
a common area, or the internal structural framework of the 
building.
---------------------------------------------------------------------------
    \17\ Pub. L. No. 107-147, sec. 101 (2002), as amended by Pub. L. 
No. 108-27, sec. 201 (2003).
---------------------------------------------------------------------------

Treatment of dispositions of leasehold improvements

    A lessor of leased property that disposes of a leasehold 
improvement that was made by the lessor for the lessee of the 
property may take the adjusted basis of the improvement into 
account for purposes of determining gain or loss if the 
improvement is irrevocably disposed of or abandoned by the 
lessor at the termination of the lease. This rule conforms the 
treatment of lessors and lessees with respect to leasehold 
improvements disposed of at the end of a term of lease.

                           REASONS FOR CHANGE

    The Committee believes that taxpayers should not be 
required to recover the costs of certain leasehold improvements 
beyond the useful life of the investment. The present law 39-
year recovery period for leasehold improvements extends well 
beyond the useful life of such investments. Although lease 
terms differ, the Committee believes that lease terms for 
commercial real estate typically are shorter than the present-
law 39-year recovery period. In the interests of simplicity and 
administrability, a uniform period for recovery of leasehold 
improvements is desirable. The Committee bill therefore 
shortens the recovery period for leasehold improvements to a 
more realistic 15 years.
    The Committee also believes that unlike other commercial 
buildings, restaurant buildings generally are more specialized 
structures. Restaurants also experience considerably more 
traffic, and remain open longer than most retail properties. 
This daily assault causes rapid deterioration of restaurant 
properties and forces restaurateurs to constantly repair and 
upgrade their facilities. As such, restaurant facilities have a 
much shorter life span than other commercial establishments. 
The Committee bill reduces the 39-year recovery period for 
improvements made to restaurant buildings and more accurately 
reflects the true economic life of the properties by reducing 
the recovery period to 15 years.

                        EXPLANATION OF PROVISION

    The provision provides a statutory 15-year recovery period 
for qualified leasehold improvement property placed in service 
before January 1, 2006.\18\ The provision requires that 
qualified leasehold improvement property be recovered using the 
straight-line method.
---------------------------------------------------------------------------
    \18\ Qualified leasehold improvement property continues to be 
eligible for the additional first-year depreciation deduction under 
sec. 168(k).
---------------------------------------------------------------------------
    Qualified leasehold improvement property is defined as 
under present law for purposes of the additional first-year 
depreciation deduction (sec. 168(k)), with the following 
modification. If a lessor makes an improvement that qualifies 
as qualified leasehold improvement property such improvement 
shall not qualify as qualified leasehold improvement property 
to any subsequent owner of such improvement. An exception to 
the rule applies in the case of death and certain transfers of 
property that qualify for non-recognition treatment.
    The provision also provides a statutory 15-year recovery 
period for qualified restaurant property placed in service 
before January 1, 2006.\19\ For purposes of the provision, 
qualified restaurant property means any improvement to a 
building if such improvement is placed in service more than 
three years after the date such building was first placed in 
service and more than 50 percent of the building's square 
footage is devoted to the preparation of, and seating for, on-
premises consumption of prepared meals. The provision requires 
that qualified restaurant property be recovered using the 
straight-line method.
---------------------------------------------------------------------------
    \19\ Qualified restaurant property would become eligible for the 
additional first-year depreciation deduction under sec. 168(k) by 
virtue of the assigned 15-year recovery period.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after the date of enactment.

2. Modification of depreciation allowance for aircraft (sec. 212 of the 
        bill and sec. 168 of the Code)

                              PRESENT LAW

In general

    A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. The amount 
of the depreciation deduction allowed with respect to tangible 
property for a taxable year is determined under the modified 
accelerated cost recovery system (``MACRS''). Under MACRS, 
different types of property generally are assigned applicable 
recovery periods and depreciation methods. The recovery periods 
applicable to most tangible personal property range from 3 to 
25 years. The depreciation methods generally applicable to 
tangible personal property are the 200-percent and 150-percent 
declining balance methods, switching to the straight-line 
method for the taxable year in which the depreciation deduction 
would be maximized.

Thirty-percent additional first year depreciation deduction

    JCWAA allows an additional first-year depreciation 
deduction equal to 30 percent of the adjusted basis of 
qualified property.\20\ The amount of the additional first-year 
depreciation deduction is not affected by a short taxable year. 
The additional first-year depreciation deduction is allowed for 
both regular tax and alternative minimum tax purposes for the 
taxable year in which the property is placed in service.\21\ 
The basis of the property and the depreciation allowances in 
the year of purchase and later years are appropriately adjusted 
to reflect the additional first-year depreciation deduction. In 
addition, there are generally no adjustments to the allowable 
amount of depreciation for purposes of computing a taxpayer's 
alternative minimum taxable income with respect to property to 
which the provision applies. A taxpayer is allowed to elect out 
of the additional first-year depreciation for any class of 
property for any taxable year.\22\
---------------------------------------------------------------------------
    \20\ The additional first-year depreciation deduction is subject to 
the general rules regarding whether an item is deductible under section 
162 or subject to capitalization under section 263 or section 263A.
    \21\ However, the additional first-year depreciation deduction is 
not allowed for purposes of computing earnings and profits.
    \22\ A taxpayer may elect out of the 50-percent additional first-
year depreciation (discussed below) for any class of property and still 
be eligible for the 30-percent additional first-year depreciation.
---------------------------------------------------------------------------
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet all of the following 
requirements. First, the property must be (1) property to which 
MACRS applies with an applicable recovery period of 20 years or 
less, (2) water utility property (as defined in section 
168(e)(5)), (3) computer software other than computer software 
covered by section 197, or (4) qualified leasehold improvement 
property (as defined in section 168(k)(3)).\23\ Second, the 
original use \24\ of the property must commence with the 
taxpayer on or after September 11, 2001. Third, the taxpayer 
must acquire the property within the applicable time period. 
Finally, the property must be placed in service before January 
1, 2005.
---------------------------------------------------------------------------
    \23\ A special rule precludes the additional first-year 
depreciation deduction for any property that is required to be 
depreciated under the alternative depreciation system of MACRS.
    \24\ The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. If, in the normal course of its business, a 
taxpayer sells fractional interests in property to unrelated third 
parties, then the original use of such property begins with the first 
user of each fractional interest (i.e., each fractional owner is 
considered the original user of its proportionate share of the 
property).
---------------------------------------------------------------------------
    An extension of the placed-in-service date of one year 
(i.e., January 1, 2006) is provided for certain property with a 
recovery period of ten years or longer and certain 
transportation property.\25\ Transportation property is defined 
as tangible personal property used in the trade or business of 
transporting persons or property.
---------------------------------------------------------------------------
    \25\ In order for property to qualify for the extended placed-in-
service date, the property must be subject to section 263A by reason of 
having a production period exceeding two years or an estimated 
production period exceeding one year and a cost exceeding $1 million.
---------------------------------------------------------------------------
    The applicable time period for acquired property is (1) 
after September 10, 2001 and before January 1, 2005, but only 
if no binding written contract for the acquisition is in effect 
before September 11, 2001, or (2) pursuant to a binding written 
contract which was entered into after September 10, 2001, and 
before January 1, 2005.\26\ For property eligible for the 
extended placed-in-service date, a special rule limits the 
amount of costs eligible for the additional first year 
depreciation. With respect to such property, only the portion 
of the basis that is properly attributable to the costs 
incurred before January 1, 2005 (``progress expenditures'') is 
eligible for the additional first-year depreciation.\27\
---------------------------------------------------------------------------
    \26\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire 
a component of the property is in effect prior to September 11, 2001.
    \27\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to sec. 46(d)(3) as in 
effect prior to the Tax Reform Act of 1986 shall apply.
---------------------------------------------------------------------------

Fifty-percent additional first year depreciation

    JGTRRA provides an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified property. Qualified property is defined in the same 
manner as for purposes of the 30-percent additional first-year 
depreciation deduction provided by the JCWAA except that the 
applicable time period for acquisition (or self construction) 
of the property is modified. Property eligible for the 50-
percent additional first-year depreciation deduction is not 
eligible for the 30-percent additional first-year depreciation 
deduction.
    In order to qualify, the property must be acquired after 
May 5, 2003, and before January 1, 2005, and no binding written 
contract for the acquisition can be in effect before May 6, 
2003.\28\ With respect to property that is manufactured, 
constructed, or produced by the taxpayer for use by the 
taxpayer, the taxpayer must begin the manufacture, 
construction, or production of the property after May 5, 2003. 
For property eligible for the extended placed-in-service date 
(i.e., certain property with a recovery period of ten years or 
longer and certain transportation property), a special rule 
limits the amount of costs eligible for the additional first-
year depreciation. With respect to such property, only progress 
expenditures properly attributable to the costs incurred before 
January 1, 2005 are eligible for the additional first-year 
depreciation.\29\
---------------------------------------------------------------------------
    \28\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire 
a component of the property is in effect prior to May 6, 2003. However, 
no 50-percent additional first-year depreciation is permitted on any 
such component. No inference is intended as to the proper treatment of 
components placed in service under the 30-percent additional first-year 
depreciation provided by the JCWAA.
    \29\ For purposes of determining the amount of eligible progress 
expenditures, it is intended that rules similar to sec. 46(d)(3) as in 
effect prior to the Tax Reform Act of 1986 shall apply.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that certain non-commercial aircraft 
represent property having characteristics that should qualify 
for the extended placed-in-service date accorded under present 
law for property having long production periods. This treatment 
should be available only if the purchaser makes a substantial 
deposit, the expected cost exceeds certain thresholds, and the 
production period is sufficiently long.

                        EXPLANATION OF PROVISION

    Due to the extended production period, the provision 
provides criteria under which certain non-commercial aircraft 
can qualify for the extended placed-in-service date. Qualifying 
aircraft would be eligible for the additional first-year 
depreciation deduction if placed in service before January 1, 
2006. In order to qualify, the aircraft must:
          (a) Be acquired by the taxpayer during the applicable 
        time period as under present law;
          (b) Meet the appropriate placed-in-service date 
        requirements;
          (c) Not be tangible personal property used in the 
        trade or business of transporting persons or property 
        (except for agricultural or firefighting purposes);
          (d) Be purchased \30\ by a purchaser who, at the time 
        of the contract for purchase, has made a nonrefundable 
        deposit of the lesser of ten percent of the cost or 
        $100,000; and
---------------------------------------------------------------------------
    \30\ For this purpose, the Committee intends that the term 
``purchase'' be interpreted as it is defined in sec. 179(d)(2).
---------------------------------------------------------------------------
          (e) Have an estimated production period exceeding 
        four months and a cost exceeding $200,000.

                             EFFECTIVE DATE

    The provision is effective as if included in the amendments 
made by section 101 of JCWAA, which applies to property placed 
in service after September 10, 2001. However, because the 
property described by the provision qualifies for the 
additional first-year depreciation deduction under present law 
if placed in service prior to January 1, 2005, the provision 
will modify the treatment only of property placed in service 
during calendar year 2005.

3. Modification of placed in service rule for bonus depreciation 
        property (sec. 213 of the bill and sec. 168 of the Code)

                              PRESENT LAW

    Section 101 of JCWAA provides generally for 30-percent 
additional first-year depreciation, and provides a binding 
contract rule in determining property that qualifies for it. 
The requirements that must be satisfied in order for property 
to qualify include that (1) the original use of the property 
must commence with the taxpayer on or after September 11, 2001, 
(2) the taxpayer must acquire the property after September 10, 
2001 and before September 11, 2004, and (3) no binding written 
contract for the acquisition of the property is in effect 
before September 11, 2001 (or, in the case of self-constructed 
property, manufacture, construction, or production of the 
property does not begin before September 11, 2001). In 
addition, JCWAA provides a special rule in the case of certain 
leased property. In the case of any property that is originally 
placed in service by a person and that is sold to the taxpayer 
and leased back to such person by the taxpayer within three 
months after the date that the property was placed in service, 
the property is treated as originally placed in service by the 
taxpayer not earlier than the date that the property is used 
under the leaseback. JCWAA did not specifically address the 
syndication of a lease by the lessor.
    JGTRRA provides an additional first-year depreciation 
deduction equal to 50 percent of the adjusted basis of 
qualified property. Qualified property is defined in the same 
manner as for purposes of the 30-percent additional first-year 
depreciation deduction provided by the JCWAA except that the 
applicable time period for acquisition (or self construction) 
of the property is modified. Property with respect to which the 
50-percent additional first-year depreciation deduction is 
claimed is not also eligible for the 30-percent additional 
first-year depreciation deduction. In order to qualify, the 
property must be acquired after May 5, 2003 and before January 
1, 2005, and no binding written contract for the acquisition 
can be in effect before May 6, 2003. With respect to property 
that is manufactured, constructed, or produced by the taxpayer 
for use by the taxpayer, the taxpayer must begin the 
manufacture, construction, or production of the property after 
May 5, 2003.

                           REASONS FOR CHANGE

    The Committee believes that the rules relating to 30-
percent additional first-year depreciation should be clarified 
to reflect the legislative intent that syndicated property, if 
sold within three months of the date it was originally placed 
in service, be eligible for the additional first-year 
depreciation deduction. Further, the Committee is aware that 
certain syndication arrangements are entered into with respect 
to multiple units of property (such as rail cars) that, for 
logistical reasons, must be placed in service over a period of 
time that exceeds three months. In such cases, it would be 
impractical for the sale of the earlier produced units to occur 
within three months of its placed-in-service date. Thus, the 
Committee deems it appropriate to provide a special rule with 
respect to the syndication of multiple units of property that 
will be placed in service over a period of up to twelve months.

                        EXPLANATION OF PROVISION

    The provision provides that if property is originally 
placed in service by a lessor (including by operation of the 
special rule for self-constructed property), such property is 
sold within three months after the date that the property was 
placed in service, and the user of such property does not 
change, then the property is treated as originally placed in 
service by the taxpayer not earlier than the date of such sale. 
The provision also provides a special rule in the case of 
multiple units of property subject to the same lease. In such 
cases, property will qualify as placed in service on the date 
of sale if it is sold within three months after the final unit 
is placed in service, so long as the period between the time 
the first and last units are placed in service does not exceed 
12 months.

                             EFFECTIVE DATE

    The provision is generally effective as if included in the 
amendments made by section 101 of JCWAA (i.e., generally for 
property placed in service after September 10, 2001, in taxable 
years ending after that date). However, the special rule in the 
case of multiple units of property subject to the same lease 
applies to property sold after June 4, 2004.

               C. S Corporation Reform and Simplification


(Secs. 221-231 of the bill and secs. 1361-1379 and 4975 of the Code)

                                OVERVIEW

    In general, an S corporation is not subject to corporate-
level income tax on its items of income and loss. Instead, an S 
corporation passes through its items of income and loss to its 
shareholders. The shareholders take into account separately 
their shares of these items on their individual income tax 
returns. To prevent double taxation of these items when the 
stock is later disposed of, each shareholder's basis in the 
stock of the S corporation is increased by the amount included 
in income (including tax-exempt income) and is decreased by the 
amount of any losses (including nondeductible losses) taken 
into account. A shareholder's loss may be deducted only to the 
extent of his or her basis in the stock or debt of the S 
corporation. To the extent a loss is not allowed due to this 
limitation, the loss generally is carried forward with respect 
to the shareholder.

                           REASONS FOR CHANGE

    The bill contains a number of general provisions relating 
to S corporations. The Committee adopted these provisions that 
modernize the S corporation rules and eliminate undue 
restrictions on S corporations in order to expand the 
application of the S corporation provisions so that more 
corporations and their shareholders will be able to enjoy the 
benefits of subchapter S status.
    The Committee is aware of obstacles that have prevented 
banks from electing subchapter S status.\31\ The bill contains 
provisions that apply specifically to banks in order to remove 
these obstacles and make S corporation status more readily 
available to banks.
---------------------------------------------------------------------------
    \31\ See, for example, GAO/GGD-00-159, Banking Taxation, 
Implications of Proposed Revisions Governing S-Corporations on 
Community Banks (June 23, 2000).
---------------------------------------------------------------------------
    The bill also revises the prohibited transaction rules 
applicable to employee stock ownership plans (``ESOPs'') 
maintained by S corporations in order to expand the ability to 
use distributions made with respect to S corporation stock held 
by an ESOP to repay a loan used to purchase the stock, subject 
to the same conditions that apply to C corporation dividends 
used to repay such a loan.

1. Members of family treated as one shareholder; increase in number of 
        eligible shareholders to 100

                              PRESENT LAW

    A small business corporation may elect to be an S 
corporation with the consent of all its shareholders, and may 
terminate its election with the consent of shareholders holding 
more than 50 percent of the stock. A ``small business 
corporation'' is defined as a domestic corporation which is not 
an ineligible corporation and which has (1) no more than 75 
shareholders, all of whom are individuals (and certain trusts, 
estates, charities, and qualified retirement plans)\32\ who are 
citizens or residents of the United States, and (2) only one 
class of stock. For purposes of the 75-shareholder limitation, 
a husband and wife are treated as one shareholder. An 
``ineligible corporation'' means a corporation that is a 
financial institution using the reserve method of accounting 
for bad debts, an insurance company, a corporation electing the 
benefits of the Puerto Rico and possessions tax credit, or a 
Domestic International Sales Corporation (``DISC'') or former 
DISC.
---------------------------------------------------------------------------
    \32\ If a qualified retirement plan (other than an employee stock 
ownership plan) or a charity holds stock in an S corporation, the 
interest held is treated as an interest in an unrelated trade or 
business, and the plan or charity's share of the S corporation's items 
of income, loss, or deduction, and gain or loss on the disposition of 
the S corporation stock, are taken into account in computing unrelated 
business taxable income.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The bill provides that all family members can elect to be 
treated as one shareholder for purposes of determining the 
number of shareholders in the corporation. A family is defined 
as the lineal descendants (and their spouses) of a common 
ancestor. The common ancestor cannot be more than three 
generations removed from the youngest generation of shareholder 
at the time the S election is made (or the effective date of 
this provision, if later). Except as provided by Treasury 
regulations, the election may be made by any family member and 
the election remains in effect until terminated.
    The bill increases the maximum number of eligible 
shareholders from 75 to 100.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

2. Expansion of bank S corporation eligible shareholders to include 
        IRAs

                              PRESENT LAW

    An individual retirement account (``IRA'') is a trust or 
account established for the exclusive benefit of an individual 
and his or her beneficiaries. There are two general types of 
IRAs: traditional IRAs, to which both deductible and 
nondeductible contributions may be made, and Roth IRAs, 
contributions to which are not deductible. Amounts held in a 
traditional IRA are includible in income when withdrawn (except 
to the extent the withdrawal is a return of nondeductible 
contributions). Amounts held in a Roth IRA that are withdrawn 
as a qualified distribution are not includible in income; 
distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings. A qualified distribution is a 
distribution that (1) is made after the five-taxable year 
period beginning with the first taxable year for which the 
individual made a contribution to a Roth IRA, and (2) is made 
after attainment of age 59\1/2\, on account of death or 
disability, or is made for first-time homebuyer expenses of up 
to $10,000.
    Under present law, an IRA cannot be a shareholder of an S 
corporation.
    Certain transactions are prohibited between an IRA and the 
individual for whose benefit the IRA is established, including 
a sale of property by the IRA to the individual. If a 
prohibited transaction occurs between an IRA and the IRA 
beneficiary, the account ceases to be an IRA, and an amount 
equal to the fair market value of the assets held in the IRA is 
deemed distributed to the beneficiary.

                        EXPLANATION OF PROVISION

    The bill allows an IRA (including a Roth IRA) to be a 
shareholder of a bank that is an S corporation, but only to the 
extent of bank stock held by the IRA on the date of enactment 
of the provision.\33\
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    \33\ Under the bill, the present-law rules treating S corporation 
stock held by a qualified retirement plan (other than an employee stock 
ownership plan) or a charity as an interest in an unrelated trade or 
business apply to an IRA holding S corporation stock of a bank.
---------------------------------------------------------------------------
    The bill also provides an exemption from prohibited 
transaction treatment for the sale by an IRA to the IRA 
beneficiary of bank stock held by the IRA on the date of 
enactment of the provision. Under the bill, a sale is not a 
prohibited transaction if: (1) the sale is pursuant to an S 
corporation election by the bank; (2) the sale is for fair 
market value (as established by an independent appraiser) and 
is on terms at least as favorable to the IRA as the terms would 
be on a sale to an unrelated party; (3) the IRA incurs no 
commissions, costs, or other expenses in connection with the 
sale; and (4) the stock is sold in a single transaction for 
cash not later than 120 days after the S corporation election 
is made.

                             EFFECTIVE DATE

    The provision takes effect on the date of enactment of the 
bill.

3. Disregard of unexercised powers of appointment in determining 
        potential current beneficiaries of ESBT

                              PRESENT LAW

    An electing small business trust (``ESBT'') holding stock 
in an S corporation is taxed at the maximum individual tax rate 
on its ratable share of items of income, deduction, gain, or 
loss passing through from the S corporation. An ESBT generally 
is an electing trust all of whose beneficiaries are eligible S 
corporation shareholders. For purposes of determining the 
maximum number of shareholders, each person who is entitled to 
receive a distribution from the trust (``potential current 
beneficiary'') is treated as a shareholder during the period 
the person may receive a distribution from the trust.
    An ESBT has 60 days to dispose of the S corporation stock 
after an ineligible shareholder becomes a potential current 
beneficiary to avoid disqualification.

                        EXPLANATION OF PROVISION

    Under the bill, powers of appointment to the extent not 
exercised are disregarded in determining the potential current 
beneficiaries of an electing small business trust.
    The bill increases the period during which an ESBT can 
dispose of S corporation stock, after an ineligible shareholder 
becomes a potential current beneficiary, from 60 days to one 
year.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

4. Transfers of suspended losses incident to divorce, etc.

                              PRESENT LAW

    Under present law, any loss or deduction that is not 
allowed to a shareholder of an S corporation, because the loss 
exceeds the shareholder's basis in stock and debt of the 
corporation, is treated as incurred by the S corporation with 
respect to that shareholder in the subsequent taxable year.

                        EXPLANATION OF PROVISION

    Under the bill, if a shareholder's stock in an S 
corporation is transferred to a spouse, or to a former spouse 
incident to a divorce, any suspended loss or deduction with 
respect to that stock is treated as incurred by the corporation 
with respect to the transferee in the subsequent taxable year.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

5. Use of passive activity loss and at-risk amounts by qualified 
        subchapter S trust income beneficiaries

                              PRESENT LAW

    Under present law, the share of income of an S corporation 
whose stock is held by a qualified subchapter S trust 
(``QSST''), with respect to which the beneficiary makes an 
election, is taxed to the beneficiary. However, the trust, and 
not the beneficiary, is treated as the owner of the S 
corporation stock for purposes of determining the tax 
consequences of the disposition of the S corporation stock by 
the trust. A QSST generally is a trust with one individual 
income beneficiary for the life of the beneficiary.

                        EXPLANATION OF PROVISION

    Under the bill, the beneficiary of a qualified subchapter S 
trust is generally allowed to deduct suspended losses under the 
at-risk rules and the passive loss rules when the trust 
disposes of the S corporation stock.

                             EFFECTIVE DATE

    The provision applies to transfers made after December 31, 
2004.

6. Exclusion of investment securities income from passive investment 
        income test for bank S corporations

                              PRESENT LAW

    An S corporation is subject to corporate-level tax, at the 
highest corporate tax rate, on its excess net passive income if 
the corporation has (1) accumulated earnings and profits at the 
close of the taxable year and (2) gross receipts more than 25 
percent of which are passive investment income.
    Excess net passive income is the net passive income for a 
taxable year multiplied by a fraction, the numerator of which 
is the amount of passive investment income in excess of 25 
percent of gross receipts and the denominator of which is the 
passive investment income for the year. Net passive income is 
defined as passive investment income reduced by the allowable 
deductions that are directly connected with the production of 
that income. Passive investment income generally means gross 
receipts derived from royalties, rents, dividends, interest, 
annuities, and sales or exchanges of stock or securities (to 
the extent of gains). Passive investment income generally does 
not include interest on accounts receivable, gross receipts 
that are derived directly from the active and regular conduct 
of a lending or finance business, gross receipts from certain 
liquidations, or gain or loss from any section 1256 contract 
(or related property) of an options or commodities dealer.\34\
---------------------------------------------------------------------------
    \34\ Notice 97-5, 1997-1 C.B. 352, sets forth guidance relating to 
passive investment income on banking assets.
---------------------------------------------------------------------------
    In addition, an S corporation election is terminated 
whenever the S corporation has accumulated earnings and profits 
at the close of each of three consecutive taxable years and has 
gross receipts for each of those years more than 25 percent of 
which are passive investment income.

                        EXPLANATION OF PROVISION

    The bill provides that, in the case of a bank (as defined 
in section 581), a bank holding company (as defined in section 
2(a) of the Bank Holding Company Act of 1956), or a financial 
holding company (as defined in section 2(p) of that Act), 
interest income and dividends on assets required to be held by 
the bank or holding company are not treated as passive 
investment income for purposes of the S corporation passive 
investment income rules.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

7. Treatment of bank director shares

                              PRESENT LAW

    An S corporation may have no more than 75 shareholders and 
may have only one outstanding class of stock.\35\
---------------------------------------------------------------------------
    \35\ Another provision of the bill increases the maximum number of 
shareholders to 100.
---------------------------------------------------------------------------
    An S corporation has one class of stock if all outstanding 
shares of stock confer identical rights to distribution and 
liquidation proceeds. Differences in voting rights are 
disregarded.\36\
---------------------------------------------------------------------------
    \36\ Sec. 1361(c)(4). Treasury regulations provide that buy-sell 
and redemption agreements are disregarded in determining whether a 
corporation's outstanding shares confer identical distribution and 
liquidation rights unless (1) a principal purpose of the agreement is 
to circumvent the one class of stock requirement and (2) the agreement 
establishes a purchase price that, at the time the agreement is entered 
into, is significantly in excess of, or below, the fair market value of 
the stock. Treas. Reg. sec. 1.1361-1(l).
---------------------------------------------------------------------------
    National banking law requires that a director of a national 
bank own stock in the bank and that a bank have at least five 
directors.\37\ A number of States have similar requirements for 
State-chartered banks. Apparently, it is common practice for a 
bank director to enter into an agreement under which the bank 
(or a holding company) will reacquire the stock upon the 
director's ceasing to hold the office of director, at the price 
paid by the director for the stock.\38\
---------------------------------------------------------------------------
    \37\ 12 U.S.C. secs. 71-72.
    \38\ See Private Letter Ruling 200217048 (January 24, 2002) 
describing such an agreement and holding that it creates a second class 
of stock. Nonetheless, the ruling concluded that the election to be an 
S corporation was inadvertently invalid and that an amended agreement 
did not create a second class of stock so that the corporation's 
election was validated.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    Under the bill, restricted bank director stock is not taken 
into account as outstanding stock in applying the provisions of 
subchapter S.\39\ Thus, the stock is not treated as a second 
class of stock; a director is not treated as a shareholder of 
the S corporation by reason of the stock; the stock is 
disregarded in allocating items of income, loss, etc. among the 
shareholders; and the stock is not treated as outstanding for 
purposes of determining whether an S corporation holds 100 
percent of the stock of a qualified subchapter S subsidiary.
---------------------------------------------------------------------------
    \39\ No inference is intended as to the proper tax treatment under 
present law.
---------------------------------------------------------------------------
    Restricted bank director stock is 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), or a financial holding company (as defined in section 
2(p) of that Act), registered with the Federal Reserve System, 
if the stock is required to be held by an individual under 
applicable Federal or State law in order to permit the 
individual to serve as a director of the bank or holding 
company and which is subject to an agreement with the bank or 
holding company (or corporation in control of the bank or 
company) pursuant to which the holder is required to sell the 
stock back upon ceasing to be a director at the same price the 
individual acquired the stock.
    A distribution (other than a payment in exchange for the 
stock) with respect to the restricted stock is includible in 
the gross income of the director and is deductible by the S 
corporation for the taxable year that includes the last day of 
the director's taxable year in which the distribution is 
included in income.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

8. Relief from inadvertently invalid qualified subchapter S subsidiary 
        elections and terminations

                              PRESENT LAW

    Under present law, inadvertent invalid subchapter S 
elections and terminations may be waived.

                        EXPLANATION OF PROVISION

    The bill allows inadvertent invalid qualified subchapter S 
subsidiary elections and terminations to be waived by the IRS.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

9. Information returns for qualified subchapter S subsidiaries

                              PRESENT LAW

    Under present law, a corporation all of whose stock is held 
by an S corporation is treated as a qualified subchapter S 
subsidiary if the S corporation so elects. The assets, 
liabilities, and items of income, deduction, and credit of the 
subsidiary are treated as assets, liabilities, and items of the 
parent S corporation.

                        EXPLANATION OF PROVISION

    The bill provides authority to the Secretary to provide 
guidance regarding information returns of qualified subchapter 
S subsidiaries.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2004.

10. Repayment of loans for qualifying employer securities

                              PRESENT LAW

    An employee stock ownership plan (an ``ESOP'') is a defined 
contribution plan that is designated as an ESOP and is designed 
to invest primarily in qualifying employer securities. For 
purposes of ESOP investments, a ``qualifying employer 
security'' is defined as: (1) publicly traded common stock of 
the employer or a member of the same controlled group; (2) if 
there is no such publicly traded common stock, common stock of 
the employer (or member of the same controlled group) that has 
both voting power and dividend rights at least as great as any 
other class of common stock; or (3) noncallable preferred stock 
that is convertible into common stock described in (1) or (2) 
and that meets certain requirements. In some cases, an employer 
may design a class of preferred stock that meets these 
requirements and that is held only by the ESOP. Special rules 
apply to ESOPs that do not apply to other types of qualified 
retirement plans, including a special exemption from the 
prohibited transaction rules.
    Certain transactions between an employee benefit plan and a 
disqualified person, including the employer maintaining the 
plan, are prohibited transactions that result in the imposition 
of an excise tax.\40\ Prohibited transactions include, among 
other transactions, (1) the sale, exchange or leasing of 
property between a plan and a disqualified person, (2) the 
lending of money or other extension of credit between a plan 
and a disqualified person, and (3) the transfer to, or use by 
or for the benefit of, a disqualified person of the income or 
assets of the plan. However, certain transactions are exempt 
from prohibited transaction treatment, including certain loans 
to enable an ESOP to purchase qualifying employer 
securities.\41\ In such a case, the employer securities 
purchased with the loan proceeds are generally pledged as 
security for the loan. Contributions to the ESOP and dividends 
paid on employer securities held by the ESOP are used to repay 
the loan. The employer securities are held in a suspense 
account and released for allocation to participants' accounts 
as the loan is repaid.
---------------------------------------------------------------------------
    \40\ Sec. 4975.
    \41\ Sec. 4975(d)(3). An ESOP that borrows money to purchase 
employer stock is referred to as a ``leveraged'' ESOP.
---------------------------------------------------------------------------
    A loan to an ESOP is exempt from prohibited transaction 
treatment if the loan is primarily for the benefit of the 
participants and their beneficiaries, the loan is at a 
reasonable rate of interest, and the collateral given to a 
disqualified person consists of only qualifying employer 
securities. No person entitled to payments under the loan can 
have the right to any assets of the ESOP other than (1) 
collateral given for the loan, (2) contributions made to the 
ESOP to meet its obligations on the loan, and (3) earnings 
attributable to the collateral and the investment of 
contributions described in (2).\42\ In addition, the payments 
made on the loan by the ESOP during a plan year cannot exceed 
the sum of those contributions and earnings during the current 
and prior years, less loan payments made in prior years.
---------------------------------------------------------------------------
    \42\ Treas. Reg. sec. 54.4975-7(b)(5).
---------------------------------------------------------------------------
    An ESOP of a C corporation is not treated as violating the 
qualification requirements of the Code or as engaging in a 
prohibited transaction merely because, in accordance with plan 
provisions, a dividend paid with respect to qualifying employer 
securities held by the ESOP is used to make payments on a loan 
(including payments of interest as well as principal) that was 
used to acquire the employer securities (whether or not 
allocated to participants).\43\ In the case of a dividend paid 
with respect to any employer security that is allocated to a 
participant, this relief does not apply unless the plan 
provides that employer securities with a fair market value of 
not less than the amount of the dividend is allocated to the 
participant for the year which the dividend would have been 
allocated to the participant.\44\
---------------------------------------------------------------------------
    \43\ Sec. 404(k)(5)(B).
    \44\ Sec. 404(k)(2)(B).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    Under the provision, an ESOP maintained by an S corporation 
is not treated as violating the qualification requirements of 
the Code or as engaging in a prohibited transaction merely 
because, in accordance with plan provisions, a distribution 
made with respect to S corporation stock that constitutes 
qualifying employer securities held by the ESOP is used to 
repay a loan that was used to acquire the securities (whether 
or not allocated to participants). This relief does not apply 
in the case of a distribution with respect to S corporation 
stock that is allocated to a participant unless the plan 
provides that stock with a fair market value of not less than 
the amount of such distribution is allocated to the participant 
for the year which the distribution would have been allocated 
to the participant.

                             EFFECTIVE DATE

    The provision is effective for distributions made with 
respect to S corporation stock after December 31, 2004.

                   D. Alternative Minimum Tax Relief


1. Foreign tax credit under alternative minimum tax; expansion of 
        exemption from alternative minimum tax for small corporations; 
        income averaging for farmers not to increase alternative 
        minimum tax (secs. 241-243 of the bill and secs. 55-59 of the 
        Code)

                              PRESENT LAW

In general

    Under present law, taxpayers are subject to an alternative 
minimum tax (``AMT''), which is payable, in addition to all 
other tax liabilities, to the extent that it exceeds the 
taxpayer's regular income tax liability. The tax is imposed at 
a flat rate of 20 percent, in the case of corporate taxpayers, 
on alternative minimum taxable income (``AMTI'') in excess of a 
phased-out exemption amount. AMTI is the taxpayer's taxable 
income increased for certain tax preferences and adjusted by 
determining the tax treatment of certain items in a manner that 
limits the tax benefits resulting from the regular tax 
treatment of such items.

Foreign tax credit

    Taxpayers are permitted to reduce their AMT liability by an 
AMT foreign tax credit. The AMT foreign tax credit for a 
taxable year is determined under principles similar to those 
used in computing the regular tax foreign tax credit, except 
that (1) the numerator of the AMT foreign tax credit limitation 
fraction is foreign source AMTI and (2) the denominator of that 
fraction is total AMTI. Taxpayers may elect to use as their AMT 
foreign tax credit limitation fraction the ratio of foreign 
source regular taxable income to total AMTI.
    The AMT foreign tax credit for any taxable year generally 
may not offset a taxpayer's entire pre-credit AMT. Rather, the 
AMT foreign tax credit is limited to 90 percent of AMT computed 
without any AMT net operating loss deduction and the AMT 
foreign tax credit. For example, assume that a corporation has 
$10 million of AMTI, has no AMT net operating loss deduction, 
and has no regular tax liability. In the absence of the AMT 
foreign tax credit, the corporation's tax liability would be $2 
million. Accordingly, the AMT foreign tax credit cannot be 
applied to reduce the taxpayer's tax liability below $200,000. 
Any unused AMT foreign tax credit may be carried back two years 
and carried forward five years for use against AMT in those 
years under the principles of the foreign tax credit carryback 
and carryover rules set forth in section 904(c).

Small corporation exemption

    Corporations with average gross receipts of less than $7.5 
million for the prior three taxable years are exempt from the 
corporate AMT. The $7.5 million threshold is reduced to $5 
million for the corporation's first 3-taxable year period.

Farmer income averaging

    An individual taxpayer engaged in a farming business (as 
defined by section 263A(e)(4)) may elect to compute his or her 
current year regular tax liability by averaging, over the prior 
three-year period, all or portion of his or her taxable income 
from the trade or business of farming. Because farmer income 
averaging reduces the regular tax liability, the AMT may be 
increased. Thus, the benefits of farmer income averaging may be 
reduced or eliminated for farmers subject to the AMT.

                           REASONS FOR CHANGE

    The Committee believes that the AMT is merely a prepayment 
of tax. The corporate AMT requires businesses to prepay their 
taxes when they can least afford it, during a business 
downturn. The Committee believes that increasing the gross 
receipts cap for companies exempt from corporate AMT from $7.5 
million of gross receipts to $20 million of gross receipts will 
relieve many taxpayers of the financial burden of having to 
prepay their tax when they can least afford it. The provision 
also will relieve many taxpayers of the administrative cost and 
compliance burden of having to calculate their taxes under two 
separate income tax systems. The Committee also believes that 
taxpayers should be permitted full use of foreign tax credits 
in computing the AMT. The Committee believes that farmers 
should be allowed the full benefits of income averaging without 
incurring liability under the AMT.

                        EXPLANATION OF PROVISION

    The provision repeals the 90-percent limitation on the 
utilization of the AMT foreign tax credit.
    The provision increases the amount of average gross 
receipts that an exempt corporation may receive from $7.5 
million to $20 million.
    The provision provides that, in computing AMT, a farmer's 
regular tax liability is determined without regard to farmer 
income averaging. Thus, a farmer receives the full benefit of 
income averaging because averaging reduces the regular tax 
while the AMT (if any) remains unchanged.

                             EFFECTIVE DATE

    The provision relating to the foreign tax credit applies to 
taxable years beginning after December 31, 2004.
    The provision relating to the small corporation exemption 
applies to taxable years beginning after December 31, 2005.
    The provision relating to farmers' income averaging applies 
to taxable years beginning after December 31, 2003.

         E. Restructuring of Incentives for Alcohol Fuels, Etc.


1. Reduced rates of tax on alcohol fuel mixtures replaced with an 
        excise tax credit, etc. (secs. 251 and 252 of the bill and 
        secs. 4041, 4081, 4091, 6427 and 9503 of the Code)

                              PRESENT LAW

Alcohol fuels income tax credit

    The alcohol fuels credit is the sum of three credits: the 
alcohol mixture credit, the alcohol credit, and the small 
ethanol producer credit. Generally, the alcohol fuels credit 
expires after December 31, 2007.\45\
---------------------------------------------------------------------------
    \45\ The alcohol fuels credit is unavailable when, for any period 
before January 1, 2008, the tax rates for gasoline and diesel fuels 
drop to 4.3 cents per gallon.
---------------------------------------------------------------------------
    A taxpayer (generally a petroleum refiner, distributor, or 
marketer) who mixes ethanol with gasoline (or a special fuel 
\46\ ) is an ``ethanol blender.'' Ethanol blenders are eligible 
for an income tax credit of 52 cents per gallon of ethanol used 
in the production of a qualified mixture (the ``alcohol mixture 
credit''). A qualified mixture means a mixture of alcohol and 
gasoline, (or of alcohol and a special fuel) sold by the 
blender as fuel, or used as fuel by the blender in producing 
the mixture. The term alcohol includes methanol and ethanol but 
does not include (1) alcohol produced from petroleum, natural 
gas, or coal (including peat), or (2) alcohol with a proof of 
less than 150. Businesses also may reduce their income taxes by 
52 cents for each gallon of ethanol (not mixed with gasoline or 
other special fuel) that they sell at the retail level as 
vehicle fuel or use themselves as a fuel in their trade or 
business (``the alcohol credit''). The 52-cents-per-gallon 
income tax credit rate is scheduled to decline to 51 cents per 
gallon during the period 2005 through 2007. For blenders using 
an alcohol other than ethanol, the rate is 60 cents per 
gallon.\47\
---------------------------------------------------------------------------
    \46\ A special fuel includes any liquid (other than gasoline) that 
is suitable for use in an internal combustion engine.
    \47\ In the case of any alcohol (other than ethanol) with a proof 
that is at least 150 but less than 190, the credit is 45 cents per 
gallon (the ``low-proof blender amount''). For ethanol with a proof 
that is at least 150 but less than 190, the low-proof blender amount is 
38.52 cents for sales or uses during calendar year 2004, and 37.78 
cents for calendar years 2005, 2006, and 2007.
---------------------------------------------------------------------------
    A separate income tax credit is available for small ethanol 
producers (the ``small ethanol producer credit''). A small 
ethanol producer is defined as a person whose ethanol 
production capacity does not exceed 30 million gallons per 
year. The small ethanol producer credit is 10 cents per gallon 
of ethanol produced during the taxable year for up to a maximum 
of 15 million gallons.
    The credits that comprise the alcohol fuels tax credit are 
includible in income. The credit may not be used to offset 
alternative minimum tax liability. The credit is treated as a 
general business credit, subject to the ordering rules and 
carryforward/carryback rules that apply to business credits 
generally.

Excise tax reductions for alcohol mixture fuels

    Generally, motor fuels tax rates are as follows: \48\
---------------------------------------------------------------------------
    \48\ These fuels are also subject to an additional 0.1 cent-per-
gallon excise tax to fund the Leaking Underground Storage Tank Trust 
Fund. See secs. 4041(d) and 4081(a)(2)(B). In addition, the basic fuel 
tax rate will drop to 4.3 cents per gallon beginning on October 1, 
2005.

Gasoline....................................  18.3 cents per gallon.
Diesel fuel and kerosene....................  24.3 cents per gallon.
Special motor fuels.........................  18.3 cents per gallon generally.


    Alcohol-blended fuels are subject to a reduced rate of tax. 
The benefits provided by the alcohol fuels income tax credit 
and the excise tax reduction are integrated such that the 
alcohol fuels credit is reduced to take into account the 
benefit of any excise tax reduction.
            Gasohol
    Registered ethanol blenders may forgo the full income tax 
credit and instead pay reduced rates of excise tax on gasoline 
that they purchase for blending with ethanol. Most of the 
benefit of the alcohol fuels credit is claimed through the 
excise tax system.
    The reduced excise tax rates apply to gasohol upon its 
removal or entry. Gasohol is defined as a gasoline/ethanol 
blend that contains 5.7 percent ethanol, 7.7 percent ethanol, 
or 10 percent ethanol. For the calendar year 2004, the 
following reduced rates apply to gasohol: \49\
---------------------------------------------------------------------------
    \49\ These rates include the additional 0.1 cent-per-gallon excise 
tax to fund the Leaking Underground Storage Tank Trust Fund. These 
special rates will terminate after September 30, 2007 (sec. 
4081(c)(8)).

5.7 percent ethanol.........................  15.436 cents per gallon.
7.7 percent ethanol.........................  14.396 cents per gallon.
10.0 percent ethanol........................  13.200 cents per gallon.


    Reduced excise tax rates also apply when gasoline is 
purchased for the production of ``gasohol.'' When gasoline is 
purchased for blending into gasohol, the rates above are 
multiplied by a fraction (e.g., 10/9 for 10-percent gasohol) so 
that the increased volume of motor fuel will be subject to tax. 
The reduced tax rates apply if the person liable for the tax is 
registered with the IRS and (1) produces gasohol with gasoline 
within 24 hours of removing or entering the gasoline or (2) 
gasoline is sold upon its removal or entry and such person has 
an unexpired certificate from the buyer and has no reason to 
believe the certificate is false.\50\
---------------------------------------------------------------------------
    \50\ Treas. Reg. sec. 48.4081-6(c). A certificate from the buyer 
assures that the gasoline will be used to produce gasohol within 24 
hours after purchase. A copy of the registrant's letter of registration 
cannot be used as a gasohol blender's certificate.
---------------------------------------------------------------------------
            Qualified methanol and ethanol fuels
    Qualified methanol or ethanol fuel is any liquid that 
contains at least 85 percent methanol or ethanol or other 
alcohol produced from a substance other than petroleum or 
natural gas. These fuels are taxed at reduced rates.\51\ The 
rate of tax on qualified methanol is 12.35 cents per gallon. 
The rate on qualified ethanol in 2004 is 13.15 cents. From 
January 1, 2005 through September 30, 2007, the rate of tax on 
qualified ethanol is 13.25 cents.
---------------------------------------------------------------------------
    \51\ These reduced rates terminate after September 30, 2007. 
Included in these rates is the 0.05-cent-per-gallon Leaking Underground 
Storage Tank Trust Fund tax imposed on such fuel. (sec. 4041(b)(2)).
---------------------------------------------------------------------------
            Alcohol produced from natural gas
    A mixture of methanol, ethanol, or other alcohol produced 
from natural gas that consists of at least 85 percent alcohol 
is also taxed at reduced rates.\52\ For mixtures not containing 
ethanol, the applicable rate of tax is 9.25 cents per gallon 
before October 1, 2005. In all other cases, the rate is 11.4 
cents per gallon. After September 30, 2005, the rate is reduced 
to 2.15 cents per gallon when the mixture does not contain 
ethanol and 4.3 cents per gallon in all other cases.
---------------------------------------------------------------------------
    \52\ These rates include the additional 0.1 cent-per-gallon excise 
tax to fund the Leaking Underground Storage Tank Trust Fund (sec. 
4041(d)(1)).
---------------------------------------------------------------------------
            Blends of alcohol and diesel fuel or special motor fuels
    A reduced rate of tax applies to diesel fuel or kerosene 
that is combined with alcohol as long as at least 10 percent of 
the finished mixture is alcohol. If none of the alcohol in the 
mixture is ethanol, the rate of tax is 18.4 cents per gallon. 
For alcohol mixtures containing ethanol, the rate of tax in 
2004 is 19.2 cents per gallon and 19.3 cents per gallon for 
2005 through September 30, 2007. Fuel removed or entered for 
use in producing a 10 percent diesel-alcohol fuel mixture 
(without ethanol), is subject to a tax of 20.44 cents per 
gallon. The rate of tax for fuel removed or entered for use to 
produce a 10 percent diesel-ethanol fuel mixture is 21.333 
cents per gallon for 2004 and 21.444 cents per gallon for the 
period January 1, 2005 through September 30, 2007.\53\
---------------------------------------------------------------------------
    \53\ These rates include the additional 0.1 cent-per-gallon excise 
tax to fund the Leaking Underground Storage Tank Trust Fund.
---------------------------------------------------------------------------
    Special motor fuel (nongasoline) mixtures with alcohol also 
are taxed at reduced rates.
            Aviation fuel
    Noncommercial aviation fuel is subject to a tax of 21.9 
cents per gallon.\54\ Fuel mixtures containing at least 10 
percent alcohol are taxed at lower rates.\55\ In the case of 10 
percent ethanol mixtures, for any sale or use during 2004, the 
21.9 cents is reduced by 13.2 cents (for a tax of 8.7 cents per 
gallon), for 2005, 2006, and 2007 the reduction is 13.1 cents 
(for a tax of 8.8 cents per gallon) and is reduced by 13.4 
cents in the case of any sale during 2008 or thereafter. For 
mixtures not containing ethanol, the 21.9 cents is reduced by 
14 cents for a tax of 7.9 cents. These reduced rates expire 
after September 30, 2007.\56\
---------------------------------------------------------------------------
    \54\ This rate includes the additional 0.1 cent-per-gallon tax for 
the Leaking Underground Storage Tank Trust fund.
    \55\ Secs. 4041(k)(1) and 4091(c).
    \56\ Sec. 4091(c)(1).
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    When aviation fuel is purchased for blending with alcohol, 
the rates above are multiplied by a fraction (10/9) so that the 
increased volume of aviation fuel will be subject to tax.

Refunds and payments

    If fully taxed gasoline (or other taxable fuel) is used to 
produce a qualified alcohol mixture, the Code permits the 
blender to file a claim for a quick excise tax refund. The 
refund is equal to the difference between the gasoline (or 
other taxable fuel) excise tax that was paid and the tax that 
would have been paid by a registered blender on the alcohol 
fuel mixture being produced. Generally, the IRS pays these 
quick refunds within 20 days. Interest accrues if the refund is 
paid more than 20 days after filing. A claim may be filed by 
any person with respect to gasoline, diesel fuel, or kerosene 
used to produce a qualified alcohol fuel mixture for any period 
for which $200 or more is payable and which is not less than 
one week.

Ethyl tertiary butyl ether (ETBE)

    Ethyl tertiary butyl ether (``ETBE'') is an ether that is 
manufactured using ethanol. Unlike ethanol, ETBE can be blended 
with gasoline before the gasoline enters a pipeline because 
ETBE does not result in contamination of fuel with water while 
in transport. Treasury regulations provide that gasohol 
blenders may claim the income tax credit and excise tax rate 
reductions for ethanol used in the production of ETBE. The 
regulations also provide a special election allowing refiners 
to claim the benefit of the excise tax rate reduction even 
though the fuel being removed from terminals does not contain 
the requisite percentages of ethanol for claiming the excise 
tax rate reduction.

Highway Trust Fund

    With certain exceptions, the taxes imposed by section 4041 
(relating to retail taxes on diesel fuels and special motor 
fuels) and section 4081 (relating to tax on gasoline, diesel 
fuel and kerosene) are credited to the Highway Trust Fund. In 
the case of alcohol fuels, 2.5 cents per gallon of the tax 
imposed is retained in the General Fund.\57\ In the case of a 
taxable fuel taxed at a reduced rate upon removal or entry 
prior to mixing with alcohol, 2.8 cents of the reduced rate is 
retained in the General Fund.\58\
---------------------------------------------------------------------------
    \57\ Sec. 9503(b)(4)(E).
    \58\ Sec. 9503(b)(4)(F).
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Taxes from gasoline and special motor fuels used in motorboats and 
        gasoline used in the nonbusiness use of small-engine outdoor 
        power equipment

    The Aquatic Resources Trust Fund is funded by a portion of 
the receipts from the excise tax imposed on motorboat gasoline 
and special motor fuels, as well as small-engine fuel taxes, 
that are first deposited into the Highway Trust Fund. As a 
result, transfers to the Aquatic Resources Trust Fund are 
governed in part by Highway Trust Fund provisions.\59\
---------------------------------------------------------------------------
    \59\ Sec. 9503(c)(4) and 9503(c)(5).
---------------------------------------------------------------------------
    A total tax rate of 18.4 cents per gallon is imposed on 
gasoline and special motor fuels used in motorboats. Of this 
rate, 0.1 cent per gallon is dedicated to the Leaking 
Underground Storage Tank Trust Fund. Of the remaining 18.3 
cents per gallon, the Code currently transfers 13.5 cents per 
gallon from the Highway Trust Fund to the Aquatics Resources 
Trust Fund and Land and Water Conservation Fund. The remainder, 
4.8 cents per gallon, is retained in the General Fund. In 
addition, the Sport Fish Restoration Account of the Aquatics 
Resources Trust Fund receives 13.5 cents per gallon of the 
revenues from the tax imposed on gasoline used as a fuel in the 
nonbusiness use of small-engine outdoor power equipment. The 
balance of 4.8 cents per gallon is retained in the General 
Fund.\60\
---------------------------------------------------------------------------
    \60\ The Sport Fish Restoration Account also is funded with 
receipts from an ad valorem manufacturer's excise tax on sport fishing 
equipment.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Highway vehicles using alcohol-blended fuels contribute to 
the wear and tear of the same highway system used by gasoline 
or diesel vehicles. Therefore, the Committee believes that 
alcohol-blended fuels should be taxed at rates equal to 
gasoline or diesel. The Committee believes that present law 
provides opportunities for fraud because individuals can buy 
gasoline at reduced tax rates for blending with alcohol, but 
never actually use the gasoline to make an alcohol fuel blend. 
The Committee believes that eliminating the reduced tax rate on 
gasoline prior to blending with alcohol will reduce such 
opportunities for fraud. The Committee also believes that 
providing a tax credit based on the gallons of alcohol used to 
make an alcohol fuel and eliminating the various blend tiers 
associated with reduced tax rates for alcohol-blended fuels 
will simplify present law.

                        EXPLANATION OF PROVISION

Overview

    The provision eliminates reduced rates of excise tax for 
alcohol-blended fuels and imposes the full rate of excise tax 
on alcohol-blended fuels (18.4 cents per gallon on gasoline 
blends and 24.4 cents per gallon of diesel blended fuel). In 
place of reduced rates, the provision permits the section 40 
alcohol mixture credit, with certain modifications, to be 
applied against excise tax liability. The credit may be taken 
against the tax imposed on taxable fuels (by section 4081). To 
the extent a person does not have section 4081 liability, the 
provision allows taxpayers to file a claim for payment equal to 
the amount of the credit for the alcohol used to produce an 
eligible mixture. Under certain circumstances, a tax is imposed 
if an alcohol fuel mixture credit is claimed with respect to 
alcohol used in the production of any alcohol mixture, which is 
subsequently used for a purpose for which the credit is not 
allowed or changed into a substance that does not qualify for 
the credit. The provision eliminates the General Fund retention 
of certain taxes on alcohol fuels, and credits these taxes to 
the Highway Trust Fund.
             Alcohol fuel mixture excise tax credit and payment 
                    provisions

                 ALCOHOL FUEL MIXTURE EXCISE TAX CREDIT

    The provision eliminates the reduced rates of excise tax 
for alcohol-blended fuels and taxable fuels used to produce an 
alcohol fuel mixture. Under the provision, the full rate of tax 
for taxable fuels is imposed on both alcohol fuel mixtures and 
the taxable fuel used to produce an alcohol fuel mixture.
    In lieu of the reduced excise tax rates, the provision 
provides that the alcohol mixture credit provided under section 
40 may be applied against section 4081 excise tax liability 
(hereinafter referred to as ``the alcohol fuel mixture 
credit''). The credit is treated as a payment of the taxpayer's 
tax liability received at the time of the taxable event. The 
alcohol fuel mixture credit is 52 cents for each gallon of 
alcohol used by a person in producing an alcohol fuel mixture 
for sale or use in a trade or business of the taxpayer. The 
credit declines to 51 cents per gallon after calendar year 
2004. For mixtures not containing ethanol (renewable source 
methanol), the credit is 60 cents per gallon. As discussed 
further below, the excise tax credit is refundable in order to 
provide a benefit equivalent to the reduced tax rates, which 
are being repealed under the provision.
    For purposes of the alcohol fuel mixture credit, an 
``alcohol fuel mixture'' is a mixture of alcohol and gasoline 
or alcohol and a special fuel which is sold for use or used as 
a fuel by the taxpayer producing the mixture. Alcohol for this 
purpose includes methanol, ethanol, and alcohol gallon 
equivalents of ETBE or other ethers produced from such alcohol. 
It does not include alcohol produced from petroleum, natural 
gas, or coal (including peat), or alcohol with a proof of less 
than 190 (determined without regard to any added denaturants). 
Special fuel is any liquid fuel (other than gasoline) which is 
suitable for use in an internal combustion engine. The benefit 
obtained from the excise tax credit is coordinated with the 
alcohol fuels income tax credit. For refiners making an alcohol 
fuel mixture with ETBE, the mixture is treated as sold to 
another person for use as a fuel only upon removal from the 
refinery. The excise tax credit is available through December 
31, 2010.
            Payments with respect to qualified alcohol fuel mixtures
    To the extent the alcohol fuel mixture credit exceeds any 
section 4081 liability of a person, the Secretary is to pay 
such person an amount equal to the alcohol fuel mixture credit 
with respect to such mixture. These payments are intended to 
provide an equivalent benefit to replace the partial exemption 
for fuels to be blended with alcohol and alcohol fuels being 
repealed by the provision. If claims for payment are not paid 
within 45 days, the claim is to be paid with interest. The 
provision also provides that in the case of an electronic 
claim, if such claim is not paid within 20 days, the claim is 
to be paid with interest. If claims are filed electronically, 
the claimant may make a claim for less than $200.
    The provision does not apply with respect to alcohol fuel 
mixtures sold after December 31, 2010.

Alcohol fuel subsidies borne by General Fund

    The provision eliminates the requirement that 2.5 and 2.8 
cents per gallon of excise taxes be retained in the General 
Fund with the result that the full amount of tax on alcohol 
fuels is credited to the Highway Trust Fund. The provision also 
authorizes the full amount of fuel taxes to be appropriated to 
the Highway Trust Fund without reduction for amounts equivalent 
to the excise tax credits allowed for alcohol fuel mixtures, 
and the Trust Fund is not required to reimburse any payments 
with respect to qualified alcohol fuel mixtures.

Motorboat and small engine fuel taxes

    The provision eliminates the General Fund retention of the 
4.8 cents per gallon of the taxes imposed on gasoline and 
special motor fuels used in motorboats and gasoline used as a 
fuel in the nonbusiness use of small-engine outdoor power 
equipment.

                            EFFECTIVE DATES

    The provisions generally are effective for fuel sold or 
used after September 30, 2004. The repeal of the General Fund 
retention of the 2.5/2.8 cents per gallon of tax regarding 
alcohol fuels and the repeal of the 4.8 cents per gallon 
General Fund retention of the taxes imposed on fuels used in 
motorboats and small engine equipment is effective for taxes 
imposed after September 30, 2003. The provision regarding the 
crediting of the full amount of tax to the Highway Trust Fund 
without regard to credits and payments is effective for taxes 
received after September 30, 2004, and payments made after 
September 30, 2004.

    F. Stock Options and Employee Stock Purchase Plan Stock Options


1. Exclusion of incentive stock options and employee stock purchase 
        plan stock options from wages (sec. 261 of the bill and secs. 
        421(b), 423(c), 3121(a), 3231, and 3306(b) of the Code)

                              PRESENT LAW

    Generally, when an employee exercises a compensatory option 
on employer stock, the difference between the option price and 
the fair market value of the stock (i.e., the ``spread'') is 
includible in income as compensation. In the case of an 
incentive stock option or an option to purchase stock under an 
employee stock purchase plan (collectively referred to as 
``statutory stock options''), the spread is not included in 
income at the time of exercise.\61\
---------------------------------------------------------------------------
    \61\ Sec. 421. For purposes of the individual alternative minimum 
tax, the transfer of stock pursuant to an incentive stock option is 
generally treated as the transfer of stock pursuant to a nonstatutory 
option. Sec. 56(b)(3).
---------------------------------------------------------------------------
    If the statutory holding period requirements are satisfied 
with respect to stock acquired through the exercise of a 
statutory stock option, the spread, and any additional 
appreciation, will be taxed as capital gain upon disposition of 
such stock. Compensation income is recognized, however, if 
there is a disqualifying disposition (i.e., if the statutory 
holding period is not satisfied) of stock acquired pursuant to 
the exercise of a statutory stock option.
    Federal Insurance Contribution Act (``FICA'') and Federal 
Unemployment Tax Act (``FUTA'') taxes (collectively referred to 
as ``employment taxes'') are generally imposed in an amount 
equal to a percentage of wages paid by the employer with 
respect to employment.\62\ The applicable Code provisions \63\ 
do not provide an exception from FICA and FUTA taxes for wages 
paid to an employee arising from the exercise of a statutory 
stock option.
---------------------------------------------------------------------------
    \62\ Secs. 3101, 3111 and 3301.
    \63\ Secs. 3121 and 3306.
---------------------------------------------------------------------------
    There has been uncertainty in the past as to employer 
withholding obligations upon the exercise of statutory stock 
options. On June 25, 2002, the IRS announced that until further 
guidance is issued, it would not assess FICA or FUTA taxes, or 
impose Federal income tax withholding obligations, upon either 
the exercise of a statutory stock option or the disposition of 
stock acquired pursuant to the exercise of a statutory stock 
option.\64\
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    \64\ Notice 2002-47, 2002-28 I.R.B. 97.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    To provide taxpayers certainty, the Committee believes that 
it is appropriate to clarify the treatment of statutory stock 
options for employment tax and income tax withholding purposes. 
The Committee believes that in the past, the IRS has been 
inconsistent in its treatment of taxpayers with respect to this 
issue and did not uniformly challenge taxpayers who did not 
collect employment taxes and withhold income taxes on statutory 
stock options.
    Until January 2001, the IRS had not published guidance with 
respect to the imposition of employment taxes and income tax 
withholding on statutory stock options. Many taxpayers relied 
on guidance published with respect to qualified stock options 
(the predecessor to incentive stock options) to take the 
position that no employment taxes or income tax withholding 
were required with respect to statutory stock options. It is 
the Committee's belief that a majority of taxpayers did not 
withhold employment and income taxes with respect to statutory 
stock options. Thus, proposed IRS regulations, if implemented, 
would have altered the treatment of statutory stock options for 
most employers.
    Because there is a specific income tax exclusion with 
respect to statutory stock options, the Committee believes it 
is appropriate to clarify that there is a conforming exclusion 
for employment taxes and income tax withholding. Statutory 
stock options are required to meet certain Code requirements 
that do not apply to nonqualified stock options. The Committee 
believes that such requirements are intended to make statutory 
stock options a tool of employee ownership rather than a form 
of compensation subject to employment taxes. Furthermore, this 
clarification will ensure that, if further IRS guidance is 
issued, employees will not be faced with a tax increase that 
will reduce their net paychecks even though their total 
compensation has not changed.
    The clarification will also eliminate the administrative 
burden and cost to employers who, in the absence of the 
Committee bill, could be required to modify their payroll 
systems to provide for the withholding of income and employment 
taxes on statutory stock options that they are not currently 
required to withhold.

                        EXPLANATION OF PROVISION

    The provision provides specific exclusions from FICA and 
FUTA wages for remuneration on account of the transfer of stock 
pursuant to the exercise of an incentive stock option or under 
an employee stock purchase plan, or any disposition of such 
stock. Thus, under the provision, FICA and FUTA taxes do not 
apply upon the exercise of a statutory stock option.\65\ The 
provision also provides that such remuneration is not taken 
into account for purposes of determining Social Security 
benefits.
---------------------------------------------------------------------------
    \65\ The provision also provides a similar exclusion under the 
Railroad Retirement Tax Act.
---------------------------------------------------------------------------
    Additionally, the provision provides that Federal income 
tax withholding is not required on a disqualifying disposition, 
nor when compensation is recognized in connection with an 
employee stock purchase plan discount. Present law reporting 
requirements continue to apply.

                             EFFECTIVE DATE

    The provision is effective for stock acquired pursuant to 
options exercised after the date of enactment.

    G. Incentives to Reinvest Foreign Earnings in the United States


(Sec. 271 of the bill and new sec. 965 of the Code)

                              PRESENT LAW

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
whether derived in the United States or abroad. Income earned 
by a domestic parent corporation from foreign operations 
conducted by foreign corporate subsidiaries generally is 
subject to U.S. tax when the income is distributed as a 
dividend to the domestic corporation. Until such repatriation, 
the U.S. tax on such income generally is deferred, and U.S. tax 
is imposed on such income when repatriated. However, under 
anti-deferral rules, the domestic parent corporation may be 
taxed on a current basis in the United States with respect to 
certain categories of passive or highly mobile income earned by 
its foreign subsidiaries, regardless of whether the income has 
been distributed as a dividend to the domestic parent 
corporation. The main anti-deferral provisions in this context 
are the controlled foreign corporation rules of subpart F \66\ 
and the passive foreign investment company rules.\67\ A foreign 
tax credit generally is available to offset, in whole or in 
part, the U.S. tax owed on foreign-source income, whether 
earned directly by the domestic corporation, repatriated as a 
dividend from a foreign subsidiary, or included in income under 
the anti-deferral rules.\68\
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    \66\ Secs. 951-964.
    \67\ Secs. 1291-1298.
    \68\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee observes that the residual U.S. tax imposed 
on the repatriation of foreign earnings can serve as a 
disincentive to repatriate these earnings. The Committee 
believes that a temporary reduction in the U.S. tax on 
repatriated dividends will stimulate the U.S. domestic economy 
by triggering the repatriation of foreign earnings that 
otherwise would have remained abroad. The Committee emphasizes 
that this is a temporary economic stimulus measure.

                        EXPLANATION OF PROVISION

    Under the provision, certain dividends received by a U.S. 
corporation from a controlled foreign corporation are eligible 
for an 85-percent dividends-received deduction. At the 
taxpayer's election, this deduction is available for dividends 
received either: (1) during the first six months of the 
taxpayer's first taxable year beginning on or after the date of 
enactment of the bill; or (2) during any six-month or shorter 
period after the date of enactment of the bill, during the 
taxpayer's last taxable year beginning before such date. 
Dividends received after the election period will be taxed in 
the normal manner under present law.
    The deduction applies only to dividends and other amounts 
included in gross income as dividends (e.g., amounts described 
in section 1248(a)). The deduction does not apply to items that 
are not included in gross income as dividends, such as subpart 
F inclusions or deemed repatriations under section 956. 
Similarly, the deduction does not apply to distributions of 
earnings previously taxed under subpart F, except to the extent 
that the subpart F inclusions result from the payment of a 
dividend by one controlled foreign corporation to another 
controlled foreign corporation within a certain chain of 
ownership during the election period. This exception enables 
multinational corporate groups to qualify for the deduction in 
connection with the repatriation of earnings from lower-tier 
controlled foreign corporations.
    The deduction is subject to a number of limitations. First, 
it applies only to repatriations in excess of the taxpayer's 
average repatriation level over three of the five most recent 
taxable years ending on or before March 31, 2003, determined by 
disregarding the highest-repatriation year and the lowest-
repatriation year among such five years (the ``base-period 
average''). In addition to actual dividends, deemed 
repatriations under section 956 and distributions of earnings 
previously taxed under subpart F are included in the base-
period average.
    Second, the amount of dividends eligible for the deduction 
is limited to the greatest of: (1) $500 million; (2) the amount 
of earnings shown as permanently invested outside the United 
States on the taxpayer's most recent audited financial 
statement which is certified on or before March 31, 2003; or 
(3) in the case of an applicable financial statement that fails 
to show a specific amount of such earnings, but that does show 
a specific amount of tax liability attributable to such 
earnings, the amount of such earnings determined in such manner 
as the Treasury Secretary may prescribe.
    Third, dividends qualifying for the deduction must be 
invested in the United States pursuant to a plan approved by 
the senior management and board of directors of the corporation 
claiming the deduction.
    No foreign tax credit (or deduction) is allowed for foreign 
taxes attributable to the deductible portion of any dividend 
received during the taxable year for which an election under 
the provision is in effect. For this purpose, the taxpayer may 
specifically identify which dividends are treated as carrying 
the deduction and which are not; in the absence of such 
identification, a pro rata amount of foreign tax credits will 
be disallowed with respect to every dividend received during 
the taxable year.
    In addition, the income attributable to the nondeductible 
portion of a qualifying dividend may not be offset by net 
operating losses, and the tax attributable to such income 
generally may not be offset by credits (other than foreign tax 
credits and AMT credits) and may not reduce the alternative 
minimum tax otherwise owed by the taxpayer. No deduction under 
sections 243 or 245 is allowed for any dividend for which a 
deduction is allowed under the provision.

                             EFFECTIVE DATE

    The provision is effective for a taxpayer's first taxable 
year beginning on or after the date of enactment of the bill, 
or the taxpayer's last taxable year beginning before such date, 
at the taxpayer's election.

                          H. Other Provisions


1. Special rules for livestock sold on account of weather-related 
        conditions (sec. 281 of the bill and secs. 1033 and 451 of the 
        Code)

                              PRESENT LAW

    Generally, a taxpayer realizes gain to the extent the sales 
price (and any other consideration received) exceeds the 
taxpayer's basis in the property. The realized gain is subject 
to current income tax unless the gain is deferred or not 
recognized under a special tax provision.
    Under section 1033, gain realized by a taxpayer from an 
involuntary conversion of property is deferred to the extent 
the taxpayer purchases property similar or related in service 
or use to the converted property within the applicable period. 
The taxpayer's basis in the replacement property generally is 
the same as the taxpayer's basis in the converted property, 
decreased by the amount of any money or loss recognized on the 
conversion, and increased by the amount of any gain recognized 
on the conversion.
    The applicable period for the taxpayer to replace the 
converted property begins with the date of the disposition of 
the converted property (or if earlier, the earliest date of the 
threat or imminence of requisition or condemnation of the 
converted property) and ends two years after the close of the 
first taxable year in which any part of the gain upon 
conversion is realized (the ``replacement period''). Special 
rules extend the replacement period for certain real property 
and principle residences damaged by a Presidentially declared 
disaster to three years and four years, respectively, after the 
close of the first taxable year in which gain is realized.
    Section 1033(e) provides that the sale of livestock (other 
than poultry) that is held for draft, breeding, or dairy 
purposes in excess of the number of livestock that would have 
been sold but for drought, flood, or other weather-related 
conditions is treated as an involuntary conversion. 
Consequently, gain from the sale of such livestock could be 
deferred by reinvesting the proceeds of the sale in similar 
property within a two-year period.
    In general, cash-method taxpayers report income in the year 
it is actually or constructively received. However, section 
451(e) provides that a cash-method taxpayer whose principal 
trade or business is farming who is forced to sell livestock 
due to drought, flood, or other weather-related conditions may 
elect to include income from the sale of the livestock in the 
taxable year following the taxable year of the sale. This 
elective deferral of income is available only if the taxpayer 
establishes that, under the taxpayer's usual business 
practices, the sale would not have occurred but for drought, 
flood, or weather-related conditions that resulted in the area 
being designated as eligible for Federal assistance. This 
exception is generally intended to put taxpayers who receive an 
unusually high amount of income in one year in the position 
they would have been in absent the weather-related condition.

                           REASONS FOR CHANGE

    The Committee is aware of situations in which cattlemen 
sold livestock in excess of their usual business practice as a 
result of weather-related conditions, but have been unable to 
purchase replacement property because the weather-related 
conditions have continued. The Committee believes it is 
appropriate to extend the time period for cattlemen to purchase 
replacement property in such situations.

                        EXPLANATION OF PROVISION

    The provision extends the applicable period for a taxpayer 
to replace livestock sold on account of drought, flood, or 
other weather-related conditions from two years to four years 
after the close of the first taxable year in which any part of 
the gain on conversion is realized. The extension is only 
available if the taxpayer establishes that, under the 
taxpayer's usual business practices, the sale would not have 
occurred but for drought, flood, or weather-related conditions 
that resulted in the area being designated as eligible for 
Federal assistance. In addition, the Secretary of the Treasury 
is granted authority to further extend the replacement period 
on a regional basis should the weather-related conditions 
continue longer than three years. Also, for property eligible 
for the provision's extended replacement period, the provision 
provides that the taxpayer can make an election under section 
451(e) until the period for reinvestment of such property under 
section 1033 expires.

                             EFFECTIVE DATE

    The provision is effective for any taxable year with 
respect to which the due date (without regard to extensions) 
for the return is after December 31, 2002.

2. Payment of dividends on stock of cooperatives without reducing 
        patronage dividends (sec. 282 of the bill and sec. 1388 of the 
        Code)

                              PRESENT LAW

    Under present law, cooperatives generally are entitled to 
deduct or exclude amounts distributed as patronage dividends in 
accordance with Subchapter T of the Code. In general, patronage 
dividends are comprised of amounts that are paid to patrons (1) 
on the basis of the quantity or value of business done with or 
for patrons, (2) under a valid and enforceable obligation to 
pay such amounts that was in existence before the cooperative 
received the amounts paid, and (3) which are determined by 
reference to the net earnings of the cooperative from business 
done with or for patrons.
    Treasury Regulations provide that net earnings are reduced 
by dividends paid on capital stock or other proprietary capital 
interests (referred to as the ``dividend allocation 
rule'').\69\ The dividend allocation rule has been interpreted 
to require that such dividends be allocated between a 
cooperative's patronage and nonpatronage operations, with the 
amount allocated to the patronage operations reducing the net 
earnings available for the payment of patronage dividends.
---------------------------------------------------------------------------
    \69\ Treas. Reg. sec. 1.1388-1(a)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the dividend allocation rule 
should not apply to the extent that the organizational 
documents of a cooperative provide that capital stock dividends 
do not reduce the amounts owed to patrons as patronage 
dividends. To the extent that capital stock dividends are in 
addition to amounts paid under the cooperative's organizational 
documents to patrons as patronage dividends, the Committee 
believes that those capital stock dividends are not being paid 
from earnings from patronage business.
    In addition, the Committee believes cooperatives should be 
able to raise needed equity capital by issuing capital stock 
without dividends paid on such stock causing the cooperative to 
be taxed on a portion of its patronage income, and without 
preventing the cooperative from being treated as operating on a 
cooperative basis.

                        EXPLANATION OF PROVISION

    The provision provides a special rule for dividends on 
capital stock of a cooperative. To the extent provided in 
organizational documents of the cooperative, dividends on 
capital stock do not reduce patronage income and do not prevent 
the cooperative from being treated as operating on a 
cooperative basis.

                             EFFECTIVE DATE

    The provision is effective for distributions made in 
taxable years ending after the date of enactment.

3. Capital gains treatment to apply to outright sales of timber by 
        landowner (sec. 283 of the bill and sec. 631(b) of the Code)

                              PRESENT LAW

    Under present law, a taxpayer disposing of timber held for 
more than one year is eligible for capital gains treatment in 
three situations. First, if the taxpayer sells or exchanges 
timber that is a capital asset (sec. 1221) or property used in 
the trade or business (sec. 1231), the gain generally is long-
term capital gain; however, if the timber is held for sale to 
customers in the taxpayer's business, the gain will be ordinary 
income. Second, if the taxpayer disposes of the timber with a 
retained economic interest, the gain is eligible for capital 
gain treatment (sec. 631(b)). Third, if the taxpayer cuts 
standing timber, the taxpayer may elect to treat the cutting as 
a sale or exchange eligible for capital gains treatment (sec. 
631(a)).

                           REASONS FOR CHANGE

    The Committee believes that the requirement that the owner 
of timber retain an economic interest in the timber in order to 
obtain capital gain treatment under section 631(b) results in 
poor timber management. Under present law, the buyer, when 
cutting and removing timber, has no incentive to protect young 
or other uncut trees because the buyer only pays for the timber 
that is cut and removed. Therefore, the Committee bill 
eliminates this requirement and provides for capital gain 
treatment under section 631(b) in the case of outright sales of 
timber.

                        EXPLANATION OF PROVISION

    Under the provision, in the case of a sale of timber by the 
owner of the land from which the timber is cut, the requirement 
that a taxpayer retain an economic interest in the timber in 
order to treat gains as capital gain under section 631(b) does 
not apply. Outright sales of timber by the landowner will 
qualify for capital gains treatment in the same manner as sales 
with a retained economic interest qualify under present law, 
except that the usual tax rules relating to the timing of the 
income from the sale of the timber will apply (rather than the 
special rule of section 631(b) treating the disposal as 
occurring on the date the timber is cut).

                             EFFECTIVE DATE

    The provision is effective for sales of timber after 
December 31, 2004.

4. Distributions from publicly traded partnerships treated as 
        qualifying income of regulated investment company (sec. 284 of 
        the bill and secs. 851 and 469(k) of the Code)

                              PRESENT LAW

Treatment of RICs

    A regulated investment company (``RIC'') generally is 
treated as a conduit for Federal income tax purposes. In 
computing its taxable income, a RIC deducts dividends paid to 
its shareholders to achieve conduit treatment (sec. 852(b)). In 
order to qualify for conduit treatment, a RIC must be a 
domestic corporation that, at all times during the taxable 
year, is registered under the Investment Company Act of 1940 as 
a management company or as a unit investment trust, or has 
elected to be treated as a business development company under 
that Act (sec. 851(a)). In addition, the corporation must elect 
RIC status, and must satisfy certain other requirements (sec. 
851(b)).
    One of the RIC qualification requirements is that at least 
90 percent of the RIC's gross income is derived from dividends, 
interest, payments with respect to securities loans, and gains 
from the sale or other disposition of stock or securities 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 (sec. 851(b)(2)). Income derived from 
a partnership is treated as meeting this requirement only to 
the extent such income is attributable to items of income of 
the partnership that would meet the requirement if realized by 
the RIC in the same manner as realized by the partnership (the 
``look-through'' rule for partnership income) (sec. 851(b)). 
Under present law, no distinction is made under this rule 
between a publicly traded partnership and any other 
partnership.
    The RIC qualification rules include limitations on the 
ownership of assets and on the composition of the RIC's assets 
(sec. 851(b)(3)). Under the ownership limitation, at least 50 
percent of the value of the RIC's total assets must be 
represented by cash, government securities and securities of 
other RICs, and other securities; however, in the case of such 
other securities, the RIC may invest no more than five percent 
of the value of the total assets of the RIC in the securities 
of any one issuer, and may hold no more than 10 percent of the 
outstanding voting securities of any one issuer. Under the 
limitation on the composition of the RIC's assets, no more than 
25 percent of the value of the RIC's total assets may be 
invested in the securities of any one issuer (other than 
Government securities), or in securities of two or more 
controlled issuers in the same or similar trades or businesses. 
These limitations generally are applied at the end of each 
quarter (sec. 851(d)).

Treatment of publicly traded partnerships

    Present law provides that a publicly traded partnership 
means a partnership, interests in which are traded on an 
established securities market, or are readily tradable on a 
secondary market (or the substantial equivalent thereof). In 
general, a publicly traded partnership is treated as a 
corporation (sec. 7704(a)), but an exception to corporate 
treatment is provided if 90 percent or more of its gross income 
is interest, dividends, real property rents, or certain other 
types of qualifying income (sec. 7704(c) and (d)).
    A special rule for publicly traded partnerships applies 
under the passive loss rules. The passive loss rules limit 
deductions and credits from passive trade or business 
activities (sec. 469). Deductions attributable to passive 
activities, to the extent they exceed income from passive 
activities, generally may not be deducted against other income. 
Deductions and credits that are suspended under these rules are 
carried forward and treated as deductions and credits from 
passive activities in the next year. The suspended losses from 
a passive activity are allowed in full when a taxpayer disposes 
of his entire interest in the passive activity to an unrelated 
person. The special rule for publicly traded partnerships 
provides that the passive loss rules are applied separately 
with respect to items attributable to each publicly traded 
partnership (sec. 469(k)). Thus, income or loss from the 
publicly traded partnership is treated as separate from income 
or loss from other passive activities.

                           REASONS FOR CHANGE

    The Committee understands that publicly traded partnerships 
generally are treated as corporations under rules enacted to 
address Congress' view that publicly traded partnerships 
resemble corporations in important respects.\70\ Publicly 
traded partnerships with specified types of income are not 
treated as corporations, however, for the reason that if the 
income is from sources that are commonly considered to be 
passive investments, then there is less reason to treat the 
publicly traded partnership as a corporation.\71\ The Committee 
understands that these types of publicly traded partnerships 
may have improved access to capital markets if their interests 
were permitted investments of mutual funds. Therefore, the bill 
treats publicly traded partnership interests as permitted 
investments for mutual funds (``RICs'').
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    \70\ H.R. Rep. No. 100-391, pt. 2 of 2, at 1066 (1987).
    \71\ Id.
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    Nevertheless, the Committee believes that permitting mutual 
funds to hold interests in a publicly traded partnership should 
not give rise to avoidance of unrelated business income tax or 
withholding of income tax that would apply if tax-exempt 
organizations or foreign persons held publicly traded 
partnership interests directly rather than through a mutual 
fund. Therefore, the Committee bill requires that present-law 
limitations on ownership and composition of assets of mutual 
funds apply to any investment in a publicly traded partnership 
by a mutual fund. The Committee believes that these limitations 
will serve to limit the use of mutual funds as conduits for 
avoidance of unrelated business income tax or withholding rules 
that would otherwise apply with respect to publicly traded 
partnership income.

                        EXPLANATION OF PROVISION

    The provision modifies the 90-percent test with respect to 
income of a RIC to include income derived from an interest in a 
publicly traded partnership. The provision also modifies the 
lookthrough rule for partnership income of a RIC so that it 
applies only to income from a partnership other than a publicly 
traded partnership.
    The provision provides that the limitation on ownership and 
the limitation on composition of assets that apply to other 
investments of a RIC also apply to RIC investments in publicly 
traded partnership interests.
    The provision provides that the special rule for publicly 
traded partnerships under the passive loss rules (requiring 
separate treatment) applies to a RIC holding an interest in a 
publicly traded partnership, with respect to items attributable 
to the interest in the publicly traded partnership.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after the date of enactment.

5. Improvements related to real estate investment trusts (sec. 285 of 
        the bill and secs. 856, 857 and 860 of the Code)

                              PRESENT LAW

In general

    Real estate investment trusts (``REITs'') are treated, in 
substance, as pass-through entities under present law. Pass-
through status is achieved by allowing the REIT a deduction for 
dividends paid to its shareholders. REITs are generally 
restricted to investing in passive investments primarily in 
real estate and securities.
    A REIT must satisfy four tests on a year-by-year basis: 
organizational structure, source of income, nature of assets, 
and distribution of income. Whether the REIT meets the asset 
tests is generally measured each quarter.

Organizational structure requirements

    To qualify as a REIT, an entity must be for its entire 
taxable year a corporation or an unincorporated trust or 
association that would be taxable as a domestic corporation but 
for the REIT provisions, and must be managed by one or more 
trustees. The beneficial ownership of the entity must be 
evidenced by transferable shares or certificates of ownership. 
Except for the first taxable year for which an entity elects to 
be a REIT, the beneficial ownership of the entity must be held 
by 100 or more persons, and the entity may not be so closely 
held by individuals that it would be treated as a personal 
holding company if all its adjusted gross income constituted 
personal holding company income. A REIT is required to comply 
with regulations to ascertain the actual ownership of the 
REIT's outstanding shares.

Income requirements

    In order for an entity to qualify as a REIT, at least 95 
percent of its gross income generally must be derived from 
certain passive sources (the ``95-percent income test''). In 
addition, at least 75 percent of its income generally must be 
from certain real estate sources (the ``75-percent income 
test''), including rents from real property (as defined) and 
gain from the sale or other disposition of real property.
            Qualified rental income
    Amounts received as impermissible ``tenant services 
income'' are not treated as rents from real property.\72\ In 
general, such amounts are for services rendered to tenants that 
are not ``customarily furnished'' in connection with the rental 
of real property.\73\ Special rules also permit amounts to be 
received from certain ``foreclosure property'' treated as such 
for three years after the property is acquired by the REIT in 
foreclosure after a default (or imminent default) on a lease of 
such property or an indebtedness which such property secured.
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    \72\ A REIT is not treated as providing services that produce 
impermissible tenant services income if such services are provided by 
an independent contractor from whom the REIT does not derive or receive 
any income. An independent contractor is defined as a person who does 
not own, directly or indirectly, more than 35 percent of the shares of 
the REIT. Also, no more than 35 percent of the total shares of stock of 
an independent contractor (or of the interests in net assets or net 
profits, if not a corporation) can be owned directly or indirectly by 
persons owning 35 percent or more of the interests in the REIT.
    \73\ Rents for certain personal property leased in connection with 
the rental of real property are treated as rents from real property if 
the fair market value of the personal property does not exceed 15 
percent of the aggregate fair market values of the real and personal 
property.
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    Rents from real property, for purposes of the 95-percent 
and 75-percent income tests, generally do not include any 
amount received or accrued from any person in which the REIT 
owns, directly or indirectly, 10 percent or more of the vote or 
value.\74\ An exception applies to rents received from a 
taxable REIT subsidiary (``TRS'') (described further below) if 
at least 90 percent of the leased space of the property is 
rented to persons other than a TRS or certain related persons, 
and if the rents from the TRS are substantially comparable to 
unrelated party rents.\75\
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    \74\ Sec. 856(d)(2)(B).
    \75\ Sec. 856(d)(8).
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            Certain hedging instruments
    Except as provided in regulations, a payment to a REIT 
under an interest rate swap or cap agreement, option, futures 
contract, forward rate agreement, or any similar financial 
instrument, entered into by the trust in a transaction to 
reduce the interest rate risks with respect to any indebtedness 
incurred or to be incurred by the REIT to acquire or carry real 
estate assets, and any gain from the sale or disposition of any 
such investment, is treated as income qualifying for the 95-
percent income test.
            Tax if qualified income tests not met
    If a REIT fails to meet the 95-percent or 75-percent income 
tests but has set out the income it did receive in a schedule 
and any error in the schedule is due to reasonable cause and 
not willful neglect, then the REIT does not lose its REIT 
status but instead pays a tax measured by the greater of the 
amount by which 90 percent \76\ of the REIT's gross income 
exceeds the amount of items subject to the 95-percent test, or 
the amount by which 75 percent of the REIT's gross income 
exceeds the amount of items subject to the 75-percent test.\77\
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    \76\ Prior to 1999, the rule had applied to the amount by which 95 
percent of the income exceeded the items subject to the 95 percent 
test.
    \77\ The ratio of the REIT's net to gross income is applied to the 
excess amount, to determine the amount of tax (disregarding certain 
items otherwise subject to a 100-percent tax). In effect, the formula 
seeks to require that all of the REIT net income attributable to the 
failure of the income tests will be paid as tax. Sec. 857(b)(5).
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Asset requirements

            75-percent asset test
    To satisfy the asset requirements to qualify for treatment 
as a REIT, at the close of each quarter of its taxable year, an 
entity must have at least 75 percent of the value of its assets 
invested in real estate assets, cash and cash items, and 
government securities (the ``75-percent asset test''). The term 
real estate asset is defined to mean real property (including 
interests in real property and mortgages on real property) and 
interests in REITs.
            Limitation on investment in other entities
    A REIT is limited in the amount that it can own in other 
corporations. Specifically, a REIT cannot own securities (other 
than Government securities and certain real estate assets) in 
an amount greater than 25 percent of the value of REIT assets. 
In addition, it cannot own such securities of any one issuer 
representing more than 5 percent of the total value of REIT 
assets or more than 10 percent of the voting securities or 10 
percent of the value of the outstanding securities of any one 
issuer. Securities for purposes of these rules are defined by 
reference to the Investment Company Act of 1940.
            ``Straight debt'' exception
    Securities of an issuer that are within a safe-harbor 
definition of ``straight debt'' (as defined for purposes of 
subchapter S) \78\ are not taken into account in applying the 
limitation that a REIT may not hold more than 10 percent of the 
value of outstanding securities of a single issuer, if: (1) the 
issuer is an individual, (2) the only securities of such issuer 
held by the REIT or a taxable REIT subsidiary of the REIT are 
straight debt, or (3) the issuer is a partnership and the trust 
holds at least a 20 percent profits interest in the 
partnership.
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    \78\ Sec. 1361(c)(5), without regard to paragraph (B)(iii) thereof.
---------------------------------------------------------------------------
    Straight debt for purposes of the REIT provision \79\ is 
defined as a written or unconditional promise to pay on demand 
or on a specified date a sum certain in money if (i) the 
interest rate (and interest payment dates) are not contingent 
on profits, the borrower's discretion, or similar factors, and 
(ii) there is no convertibility (directly or indirectly) into 
stock.
---------------------------------------------------------------------------
    \79\ Sec. 856(c)(7).
---------------------------------------------------------------------------
            Certain subsidiary ownership permitted with income treated 
                    as income of the REIT
    Under one exception to the rule limiting a REIT's 
securities holdings to no more than 10 percent of the vote or 
value of a single issuer, a REIT can own 100 percent of the 
stock of a corporation, but in that case the income and assets 
of such corporation are treated as income and assets of the 
REIT.
            Special rules for Taxable REIT subsidiaries
    Under another exception to the general rule limiting REIT 
securities ownership of other entities, a REIT can own stock of 
a taxable REIT subsidiary (``TRS''), generally, a corporation 
other than a real estate investment trust \80\ with which the 
REIT makes a joint election to be subject to special rules. A 
TRS can engage in active business operations that would produce 
income that would not be qualified income for purposes of the 
95-percent or 75-percent income tests for a REIT, and that 
income is not attributed to the REIT. For example a TRS could 
provide noncustomary services to REIT tenants, or it could 
engage directly in the active operation and management of real 
estate (without use of an independent contractor); and the 
income the TRS derived from these nonqualified activities would 
not be treated as disqualified REIT income. Transactions 
between a TRS and a REIT are subject to a number of specified 
rules that are intended to prevent the TRS (taxable as a 
separate corporate entity) from shifting taxable income from 
its activities to the pass-through entity REIT or from 
absorbing more than its share of expenses. Under one rule, a 
100-percent excise tax is imposed on rents, deductions, or 
interest paid by the TRS to the REIT to the extent such items 
would exceed an arm's length amount as determined under section 
482.\81\
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    \80\ Certain corporations are not eligible to be a TRS, such as a 
corporation which directly or indirectly operates or manages a lodging 
facility or a health care facility, or directly or indirectly provides 
to any other person rights to a brand name under which any lodging 
facility or health care facility is operated. Sec. 856(l)(3).
    \81\ If the excise tax applies, then the item is not reallocated 
back to the TRS under section 482.
---------------------------------------------------------------------------
    Rents subject to the 100 percent excise tax do not include 
rents for services of a TRS that are for services customarily 
furnished or rendered in connection with the rental of real 
property.
    They also do not include rents from a TRS that are for real 
property or from incidental personal property provided with 
such real property.

Income distribution requirements

    A REIT is generally required to distribute 90 percent of 
its income before the end of its taxable year, as deductible 
dividends paid to shareholders. This rule is similar to a rule 
for regulated investment companies (``RICs'') that requires 
distribution of 90 percent of income. If a REIT declares 
certain dividends after the end of its taxable year but before 
the time prescribed for filing its return for that year and 
distributes those amounts to shareholders within the 12 months 
following the close of that taxable year, such distributions 
are treated as made during such taxable year for this purpose. 
As described further below, a REIT can also make certain 
``deficiency dividends'' after the close of the taxable year 
after a determination that it has not distributed the correct 
amount for qualification as a REIT.

Consequences of failure to meet requirements

    A REIT loses its status as a REIT, and becomes subject to 
tax as a C corporation, if it fails to meet specified tests 
regarding the sources of its income, the nature and amount of 
its assets, its structure, and the amount of its income 
distributed to shareholders.
    In the case of a failure to meet the source of income 
requirements, if the failure is due to reasonable cause and not 
to willful neglect, the REIT may continue its REIT status if it 
pays the disallowed income as a tax to the Treasury.\82\
---------------------------------------------------------------------------
    \82\ Secs. 856(c)(6) and 857(b)(5).
---------------------------------------------------------------------------
    There is no similar provision that allows a REIT to pay a 
penalty and avoid disqualification in the case of other 
qualification failures.
    A REIT may make a deficiency dividend after a determination 
is made that it has not distributed the correct amount of its 
income, and avoid disqualification. The Code provides only for 
determinations involving a controversy with the IRS and does 
not provide for a REIT to make such a distribution on its own 
initiative. Deficiency dividends may be declared on or after 
the date of ``determination''. A determination is defined to 
include only (i) a final decision by the Tax Court or other 
court of competent jurisdiction, (ii) a closing agreement under 
section 7121, or (iii) under Treasury regulations, an agreement 
signed by the Secretary and the REIT.

                           REASONS FOR CHANGE

    The Committee believes that a number of simplifying and 
conforming changes should be made to the ``straight debt'' 
provisions that exempt certain securities from the rule that a 
REIT may not hold more than 10 percent of the value of 
securities of a single issuer, as well as to the TRS rules, the 
rules relating to certain hedging arrangements, and the 
computation of tax liability when the 95-percent gross income 
test is not met.
    The Committee also believes it is desirable to provide 
rules under which a REIT that inadvertently fails to meet 
certain REIT qualification requirements can correct such 
failure without losing REIT status.

                        EXPLANATION OF PROVISION

    The provision makes a number of modifications to the REIT 
rules.

Straight debt modification

    The provision modifies the definition of ``straight debt'' 
for purposes of the limitation that a REIT may not hold more 
than 10 percent of the value of the outstanding securities of a 
single issuer, to provide more flexibility than the present law 
rule. In addition, except as provided in regulations, neither 
such straight debt nor certain other types of securities are 
considered ``securities'' for purposes of this rule.
            Straight debt securities
    As under present law, ``straight-debt'' is still defined by 
reference to section 1361(c)(5), without regard to subparagraph 
(B)(iii) thereof (limiting the nature of the creditor).
    Special rules are provided permitting certain contingencies 
for purposes of the REIT provision. 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 one of several factors applies. The 
first type of contingency that is permitted is one that 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, but only if (i) any such 
contingency does not exceed the greater of \1/4\ of one percent 
or five percent of the annual yield to maturity, or (ii) 
neither the aggregate issue price nor the aggregate face amount 
of the debt instruments held by the REIT exceeds $1,000,000 and 
not more than 12 months of unaccrued interest can be required 
to be prepaid thereunder.
    Also, the time or amount of any payment is permitted to be 
subject to a contingency upon a default or the exercise of a 
prepayment right by the issuer of the debt, provided that such 
contingency is consistent with customary commercial 
practice.\83\
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    \83\ The present law rules that limit qualified interest income to 
amounts the determination of which do not depend, in whole or in part, 
on the income or profits of any person, continue to apply to such 
contingent interest. See, e.g., secs. 856(c)(2)(G), 856(c)(3)(G) and 
856(f).
---------------------------------------------------------------------------
    The provision eliminates the present law rule requiring a 
REIT to own a 20 percent equity interest in a partnership in 
order for debt to qualify as ``straight debt''. The bill 
instead provides new ``look-through'' rules determining a REIT 
partner's share of partnership securities, generally treating 
debt to the REIT as part of the REIT's partnership interest for 
this purpose, except in the case of otherwise qualifying debt 
of the partnership.
    Certain corporate or partnership issues that otherwise 
would be permitted to be held without limitation under the 
special straight debt rules described above will not be so 
permitted if the REIT holding such securities, and any of its 
taxable REIT subsidiaries, holds any securities of the issuer 
which are not permitted securities (prior to the application of 
this rule) and have an aggregate value greater than one percent 
of the issuer's outstanding securities.
            Other securities
    Except as provided in regulations, the following also are 
not considered ``securities'' for purposes of the rule that a 
REIT cannot own more than 10 percent of the value of the 
outstanding securities of a single issuer: (i) any loan to an 
individual or an estate, (ii) any section 467 rental agreement, 
(as defined in section 467(d)), other than with a person 
described in section 856(d)(2)(B), (iii) any obligation to pay 
rents from real property, (iv) 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 category, or payments on any obligation 
issued by such an entity, (v) any security issued by a real 
estate investment trust; and (vi) any other arrangement that, 
as determined by the Secretary, is excepted from the definition 
of a security.

Safe harbor testing date for certain rents

    The provision provides specific safe-harbor rules regarding 
the dates for testing whether 90 percent of a REIT property is 
rented to unrelated persons and whether the rents paid by 
related persons are substantially comparable to unrelated party 
rents. These testing rules are provided solely for purposes of 
the special provision permitting rents received from a TRS to 
be treated as qualified rental income for purposes of the 
income tests.\84\
---------------------------------------------------------------------------
    \84\ The provision does not modify any of the standards of section 
482 as they apply to REITs and to TRSs.
---------------------------------------------------------------------------

Customary services exception

    The provision prospectively eliminates the safe harbor 
allowing rents received by a REIT to be exempt from the 100 
percent excise tax if the rents are for customary services 
performed by the TRS \85\ or are from a TRS and are for the 
provision of certain incidental personal property. Instead, 
such payments are free of the excise tax if they satisfy the 
present law safe-harbor that applies if the REIT pays the TRS 
at least 150 percent of the cost to the TRS of providing any 
services.
---------------------------------------------------------------------------
    \85\ Although a REIT could itself provide such service and receive 
the income without receiving any disqualified income, in that case the 
REIT itself would be bearing the cost of providing the service. Under 
the present law exception for a TRS providing such service, there is no 
explicit requirement that the TRS be reimbursed for the full cost of 
the service.
---------------------------------------------------------------------------

Hedging rules

    The rules governing the tax treatment of arrangements 
engaged in by a REIT to reduce certain interest rate risks are 
prospectively generally conformed to the rules included in 
section 1221. Also, the defined income of a REIT from such a 
hedging transaction is excluded from gross income for purposes 
of the 95-percent of gross income requirement.

95-percent of gross income requirement

    The provision prospectively amends the tax liability owed 
by the REIT when it fails to meet the 95-percent of gross 
income test by applying a taxable fraction based on 95 percent, 
rather than 90 percent, of the REIT's gross income.

Consequences of failure to meet REIT requirements

    Under the provision, a REIT may avoid disqualification in 
the event of certain failures of the requirements for REIT 
status, provided that (1) the failure was due to reasonable 
cause and not willful neglect, (2) the failure is corrected, 
and (3) except for certain failures not exceeding a specified 
de minimis amount, a penalty amount is paid.
            Certain de minimis asset failures of 5-percent or 10-
                    percent tests
    One requirement of present law is that, with certain 
exceptions, (i) not more than 5 percent of the value of total 
REIT assets may be represented by securities of one issuer, and 
(ii) a REIT may not hold securities possessing more than 10 
percent of the total voting power or 10 percent of the total 
value of the outstanding securities of any one issuer.\86\ The 
requirements must be satisfied each quarter.
---------------------------------------------------------------------------
    \86\ Sec. 856(c)(4)(B)(iii). These rules do not apply to securities 
of a TRS, or to securities that qualify for the 75 percent asset test 
of section 856(c)(4)(A), such as real estate assets, cash items 
(including receivables), or Government securities.
---------------------------------------------------------------------------
    The provision provides that a REIT will not lose its REIT 
status for failing to satisfy these requirements in a quarter 
if the failure is due to the ownership of assets the total 
value of which does not exceed the lesser of (i) one percent of 
the total value of the REIT's assets at the end of the quarter 
for which such measurement is done or (ii) 10 million dollars; 
provided in either case that the REIT either disposes of the 
assets within six months after the last day of the quarter in 
which the REIT identifies the failure (or such other time 
period prescribed by the Treasury), or otherwise meets the 
requirements of those rules by the end of such time period.\87\
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    \87\ A REIT might satisfy the requirements without a disposition, 
for example, by increasing its other assets in the case of the 5 
percent rule; or by the issuer modifying the amount or value of its 
total securities outstanding in the case of the 10 percent rule.
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            Larger asset test failures (whether of 5-percent or 10-
                    percent tests, or of 75-percent or other asset 
                    tests)
    Under the provision, if a REIT fails to meet any of the 
asset test requirements for a particular quarter and the 
failure exceeds the de minimis threshold described above, then 
the REIT still will be deemed to have satisfied the 
requirements if: (i) following the REIT's identification of the 
failure, the REIT files a schedule with a description of each 
asset that caused the failure, in accordance with regulations 
prescribed by the Treasury; (ii) the failure was due to 
reasonable cause and not to willful neglect, (iii) the REIT 
disposes of the assets within 6 months after the last day of 
the quarter in which the identification occurred or such other 
time period as is prescribed by the Treasury (or the 
requirements of the rules are otherwise met within such 
period), and (iv) the REIT pays a tax on the failure.
    The tax that the REIT must pay on the failure is the 
greater of (i) $50,000, or (ii) an amount determined (pursuant 
to regulations) by multiplying the highest rate of tax for 
corporations under section 11, times the net income generated 
by the assets for the period beginning on the first date of the 
failure and ending on the date the REIT has disposed of the 
assets (or otherwise satisfies the requirements).
    Such taxes are treated as excise taxes, for which the 
deficiency provisions of the excise tax subtitle of the Code 
(subtitle F) apply.
            Conforming reasonable cause and reporting standard for 
                    failures of income tests
    The provision conforms the reporting and reasonable cause 
standards for failure to meet the income tests to the new asset 
test standards. However, the provision does not change the rule 
under section 857(b)(5) that for income test failures, all of 
the net income attributed to the disqualified gross income is 
paid as tax.
            Other failures
    The bill adds a provision under which, if a REIT fails to 
satisfy one or more requirements for REIT qualification, other 
than the 95-percent and 75-percent gross income tests and other 
than the new rules provided for failures of the asset tests, 
the REIT may retain its REIT qualification if the failures are 
due to reasonable cause and not willful neglect, and if the 
REIT pays a penalty of $50,000 for each such failure.
            Taxes and penalties paid deducted from amount required to 
                    be distributed
    Any taxes or penalties paid under the provision are 
deducted from the net income of the REIT in determining the 
amount the REIT must distribute under the 90-percent 
distribution requirement.
            Expansion of deficiency dividend procedure
    The provision expands the circumstances in which a REIT may 
declare a deficiency dividend, by allowing such a declaration 
to occur after the REIT unilaterally has identified a failure 
to pay the relevant amount. Thus, the declaration need not 
await a decision of the Tax Court, a closing agreement, or an 
agreement signed by the Secretary of the Treasury.

                             EFFECTIVE DATE

    The provision is generally effective for taxable years 
beginning after December 31, 2000.
    However, some of the provisions are effective for taxable 
years beginning after the date of enactment. These are: the new 
``look through'' rules determining a REIT partner's share of 
partnership securities for purposes of the ``straight debt'' 
rules; the provision changing the 90-percent of gross income 
reference to 95 percent, for purposes of the tax liability if a 
REIT fails to meet the 95-percent of gross income test; the new 
hedging definition; the rule modifying the treatment of rents 
with respect to customary services; and the new rules for 
correction of certain failures to satisfy the REIT 
requirements.

6. Treatment of certain dividends of regulated investment companies 
        (sec. 286 of the bill and secs. 871 and 881 of the Code)

                              PRESENT LAW

Regulated investment companies

    A regulated investment company (``RIC'') is a domestic 
corporation that, at all times during the taxable year, is 
registered under the Investment Company Act of 1940 as a 
management company or as a unit investment trust, or has 
elected to be treated as a business development company under 
that Act (sec. 851(a)).
    In addition, to qualify as a RIC, a corporation must elect 
such status and must satisfy certain tests (sec. 851(b)). These 
tests include a requirement that the corporation derive at 
least 90 percent of its gross income from dividends, interest, 
payments with respect to certain securities loans, and gains on 
the sale or other disposition of stock or securities or foreign 
currencies, or other income derived with respect to its 
business of investment in such stock, securities, or 
currencies.
    Generally, a RIC pays no income tax because it is permitted 
to deduct dividends paid to its shareholders in computing its 
taxable income. The amount of any distribution generally is not 
considered as a dividend for purposes of computing the 
dividends paid deduction unless the distribution is pro rata, 
with no preference to any share of stock as compared with other 
shares of the same class (sec. 562(c)). For distributions by 
RICs to shareholders who made initial investments of at least 
$10,000,000, however, the distribution is not treated as non-
pro rata or preferential solely by reason of an increase in the 
distribution due to reductions in administrative expenses of 
the company.
    A RIC generally may pass through to its shareholders the 
character of its long-term capital gains. It does this by 
designating a dividend it pays as a capital gain dividend to 
the extent that the RIC has net capital gain (i.e., net long-
term capital gain over net short-term capital loss). These 
capital gain dividends are treated as long-term capital gain by 
the shareholders. A RIC generally also can pass through to its 
shareholders the character of tax-exempt interest from State 
and local bonds, but only if, at the close of each quarter of 
its taxable year, at least 50 percent of the value of the total 
assets of the RIC consists of these obligations. In this case, 
the RIC generally may designate a dividend it pays as an 
exempt-interest dividend to the extent that the RIC has tax-
exempt interest income. These exempt-interest dividends are 
treated as interest excludable from gross income by the 
shareholders.

U.S. source investment income of foreign persons

            In general
    The United States generally imposes a flat 30-percent tax, 
collected by withholding, on the gross amount of U.S.-source 
investment income payments, such as interest, dividends, rents, 
royalties or similar types of income, to nonresident alien 
individuals and foreign corporations (``foreign persons'') 
(secs. 871(a), 881, 1441, and 1442). Under treaties, the United 
States may reduce or eliminate such taxes. Even taking into 
account U.S. treaties, however, the tax on a dividend generally 
is not entirely eliminated. Instead, U.S.-source portfolio 
investment dividends received by foreign persons generally are 
subject to U.S. withholding tax at a rate of at least 15 
percent.
            Interest
    Although payments of U.S.-source interest that is not 
effectively connected with a U.S. trade or business generally 
are subject to the 30-percent withholding tax, there are 
exceptions to that rule. For example, interest from certain 
deposits with banks and other financial institutions is exempt 
from tax (secs. 871(i)(2)(A) and 881(d)). Original issue 
discount on obligations maturing in 183 days or less from the 
date of original issue (without regard to the period held by 
the taxpayer) is also exempt from tax (sec. 871(g)). An 
additional exception is provided for certain interest paid on 
portfolio obligations (secs. 871(h) and 881(c)). ``Portfolio 
interest'' generally is defined as any U.S.-source interest 
(including original issue discount), not effectively connected 
with the conduct of a U.S. trade or business, (i) on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto (i.e., the obligation is ``foreign 
targeted''), and (ii) that is not received by a 10-percent 
shareholder (secs. 871(h)(3) and 881(c)(3)). With respect to a 
registered obligation, a statement that the beneficial owner is 
not a U.S. person is required (secs. 871(h)(2), (5) and 
881(c)(2)). This exception is not available for any interest 
received either by a bank on a loan extended in the ordinary 
course of its business (except in the case of interest paid on 
an obligation of the United States), or by a controlled foreign 
corporation from a related person (sec. 881(c)(3)). Moreover, 
this exception is not available for certain contingent interest 
payments (secs. 871(h)(4) and 881(c)(4)).
            Capital gains
    Foreign persons generally are not subject to U.S. tax on 
gain realized on the disposition of stock or securities issued 
by a U.S. person (other than a ``U.S. real property holding 
corporation,'' as described below), unless the gain is 
effectively connected with the conduct of a trade or business 
in the United States. This exemption does not apply, however, 
if the foreign person is a nonresident alien individual present 
in the United States for a period or periods aggregating 183 
days or more during the taxable year (sec. 871(a)(2)). A RIC 
may elect not to withhold on a distribution to a foreign person 
representing a capital gain dividend. (Treas. Reg. sec. 1.1441-
3(c)(2)(D)).
    Gain or loss of a foreign person from the disposition of a 
U.S. real property interest is subject to net basis tax as if 
the taxpayer were engaged in a trade or business within the 
United States and the gain or loss were effectively connected 
with such trade or business (sec. 897). In addition to an 
interest in real property located in the United States or the 
Virgin Islands, U.S. real property interests include (among 
other things) any interest in a domestic corporation unless the 
taxpayer establishes that the corporation was not, during a 5-
year period ending on the date of the disposition of the 
interest, a U.S. real property holding corporation (which is 
defined generally to mean a corporation the fair market value 
of whose U.S. real property interests equals or exceeds 50 
percent of the sum of the fair market values of its real 
property interests and any other of its assets used or held for 
use in a trade or business).
            Estate taxation
    Decedents who were citizens or residents of the United 
States are generally subject to Federal estate tax on all 
property, wherever situated.\88\ Nonresidents who are not U.S. 
citizens, however, are subject to estate tax only on their 
property which is within the United States. Property within the 
United States generally includes debt obligations of U.S. 
persons, including the Federal government and State and local 
governments (sec. 2104(c)), but does not include either bank 
deposits or portfolio obligations, the interest on which would 
be exempt from U.S. income tax under section 871 (sec. 
2105(b)). Stock owned and held by a nonresident who is not a 
U.S. citizen is treated as property within the United States 
only if the stock was issued by a domestic corporation (sec. 
2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
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    \88\ The Economic Growth and Tax Relief Reconciliation Act of 2001 
(``EGTRRA'') repealed the estate tax for estates of decedents dying 
after December 31, 2009. However, EGTRRA included a ``sunset'' 
provision, pursuant to which EGTRRA's provisions (including estate tax 
repeal) do not apply to estates of decedents dying after December 31, 
2010.
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    Treaties may reduce U.S. taxation on transfers by estates 
of nonresident decedents who are not U.S. citizens. Under 
recent treaties, for example, U.S. tax may generally be 
eliminated except insofar as the property transferred includes 
U.S. real property or business property of a U.S. permanent 
establishment.

                           REASONS FOR CHANGE

    Under present law, a disparity exists between foreign 
persons who invest directly in certain interest-bearing and 
other securities and a foreign person who invests in such 
securities indirectly through U.S. mutual funds. In general, 
certain amounts received by the direct foreign investor (or a 
foreign investor through a foreign fund) may be exempt from the 
U.S. gross-basis withholding tax. In contrast, distributions 
from a RIC generally are treated as dividends subject to the 
withholding tax, notwithstanding that the distributions may be 
attributable to amounts that otherwise could qualify for an 
exemption from withholding tax. U.S. financial institutions 
often respond to this disparate treatment by forming ``mirror 
funds'' outside the United States. The Committee believes that 
such disparate treatment should be eliminated so that U.S. 
financial institutions will be encouraged to form and operate 
their mutual funds within the United States rather than outside 
the United States.
    Therefore, the Committee believes that, to the extent a RIC 
distributes to a foreign person a dividend attributable to 
amounts that would have been exempt from U.S. withholding tax 
had the foreign person received it directly (such as portfolio 
interest and capital gains, including short-term capital 
gains), such dividend similarly should be exempt from the U.S. 
gross-basis withholding tax. The Committee also believes that 
comparable treatment should be afforded for estate tax purposes 
to foreign persons who invest in certain assets through a RIC 
to the extent that such assets would not be subject to the 
estate tax if held directly.

                        EXPLANATION OF PROVISION

In general

    Under the bill, a RIC that earns certain interest income 
that would not be subject to U.S. tax if earned by a foreign 
person directly may, to the extent of such income, designate a 
dividend it pays as derived from such interest income. A 
foreign person who is a shareholder in the RIC generally would 
treat such a dividend as exempt from gross-basis U.S. tax, as 
if the foreign person had earned the interest directly. 
Similarly, a RIC that earns an excess of net short-term capital 
gains over net long-term capital losses, which excess would not 
be subject to U.S. tax if earned by a foreign person, generally 
may, to the extent of such excess, designate a dividend it pays 
as derived from such excess. A foreign person who is a 
shareholder in the RIC generally would treat such a dividend as 
exempt from gross-basis U.S. tax, as if the foreign person had 
realized the excess directly. The bill also provides that the 
estate of a foreign decedent is exempt from U.S. estate tax on 
a transfer of stock in the RIC in the proportion that the 
assets held by the RIC are debt obligations, deposits, or other 
property that would generally be treated as situated outside 
the United States if held directly by the estate.

Interest-related dividends

    Under the bill, a RIC may, under certain circumstances, 
designate all or a portion of a dividend as an ``interest-
related dividend,'' by written notice mailed to its 
shareholders not later than 60 days after the close of its 
taxable year. In addition, an interest-related dividend 
received by a foreign person generally is exempt from U.S. 
gross-basis tax under sections 871(a), 881, 1441 and 1442.
    However, this exemption does not apply to a dividend on 
shares of RIC stock if the withholding agent does not receive a 
statement, similar to that required under the portfolio 
interest rules, that the beneficial owner of the shares is not 
a U.S. person. The exemption does not apply to a dividend paid 
to any person within a foreign country (or dividends addressed 
to, or for the account of, persons within such foreign country) 
with respect to which the Treasury Secretary has determined, 
under the portfolio interest rules, that exchange of 
information is inadequate to prevent evasion of U.S. income tax 
by U.S. persons.
    In addition, the exemption generally does not apply to 
dividends paid to a controlled foreign corporation to the 
extent such dividends are attributable to income received by 
the RIC on a debt obligation of a person with respect to which 
the recipient of the dividend (i.e., the controlled foreign 
corporation) is a related person. Nor does the exemption 
generally apply to dividends to the extent such dividends are 
attributable to income (other than short-term original issue 
discount or bank deposit interest) received by the RIC on 
indebtedness issued by the RIC-dividend recipient or by any 
corporation or partnership with respect to which the recipient 
of the RIC dividend is a 10-percent shareholder. However, in 
these two circumstances the RIC remains exempt from its 
withholding obligation unless the RIC knows that the dividend 
recipient is such a controlled foreign corporation or 10-
percent shareholder. To the extent that an interest-related 
dividend received by a controlled foreign corporation is 
attributable to interest income of the RIC that would be 
portfolio interest if received by a foreign corporation, the 
dividend is treated as portfolio interest for purposes of the 
de minimis rules, the high-tax exception, and the same country 
exceptions of subpart F (see sec. 881(c)(5)(A)).
    The aggregate amount designated as interest-related 
dividends for the RIC's taxable year (including dividends so 
designated that are paid after the close of the taxable year 
but treated as paid during that year as described in section 
855) generally is limited to the qualified net interest income 
of the RIC for the taxable year. The qualified net interest 
income of the RIC equals the excess of: (1) the amount of 
qualified interest income of the RIC; over (2) the amount of 
expenses of the RIC properly allocable to such interest income.
    Qualified interest income of the RIC is equal to the sum of 
its U.S.-source income with respect to: (1) bank deposit 
interest; (2) short term original issue discount that is 
currently exempt from the gross-basis tax under section 871; 
(3) any interest (including amounts recognized as ordinary 
income in respect of original issue discount, market discount, 
or acquisition discount under the provisions of sections 1271-
1288, and such other amounts as regulations may provide) on an 
obligation which is in registered form, unless it is earned on 
an obligation issued by a corporation or partnership in which 
the RIC is a 10-percent shareholder or is contingent interest 
not treated as portfolio interest under section 871(h)(4); and 
(4) any interest-related dividend from another RIC.
    If the amount designated as an interest-related dividend is 
greater than the qualified net interest income described above, 
the portion of the distribution so designated which constitutes 
an interest-related dividend will be only that proportion of 
the amount so designated as the amount of the qualified net 
interest income bears to the amount so designated.

Short-term capital gain dividends

    Under the bill, a RIC also may, under certain 
circumstances, designate all or a portion of a dividend as a 
``short-term capital gain dividend,'' by written notice mailed 
to its shareholders not later than 60 days after the close of 
its taxable year. For purposes of the U.S. gross-basis tax, a 
short-term capital gain dividend received by a foreign person 
generally is exempt from U.S. gross-basis tax under sections 
871(a), 881, 1441 and 1442. This exemption does not apply to 
the extent that the foreign person is a nonresident alien 
individual present in the United States for a period or periods 
aggregating 183 days or more during the taxable year. However, 
in this circumstance the RIC remains exempt from its 
withholding obligation unless the RIC knows that the dividend 
recipient has been present in the United States for such 
period.
    The aggregate amount qualified to be designated as short-
term capital gain dividends for the RIC's taxable year 
(including dividends so designated that are paid after the 
close of the taxable year but treated as paid during that year 
as described in sec. 855) is equal to the excess of the RIC's 
net short-term capital gains over net long-term capital losses. 
The short-term capital gain includes short-term capital gain 
dividends from another RIC. As provided under present law for 
purposes of computing the amount of a capital gain dividend, 
the amount is determined (except in the case where an election 
under sec. 4982(e)(4) applies) without regard to any net 
capital loss or net short-term capital loss attributable to 
transactions after October 31 of the year. Instead, that loss 
is treated as arising on the first day of the next taxable 
year. To the extent provided in regulations, this rule also 
applies for purposes of computing the taxable income of the 
RIC.
    In computing the amount of short-term capital gain 
dividends for the year, no reduction is made for the amount of 
expenses of the RIC allocable to such net gains. In addition, 
if the amount designated as short-term capital gain dividends 
is greater than the amount of qualified short-term capital 
gain, the portion of the distribution so designated which 
constitutes a short-term capital gain dividend is only that 
proportion of the amount so designated as the amount of the 
excess bears to the amount so designated.
    As under present law for distributions from REITs, the bill 
provides that any distribution by a RIC to a foreign person 
shall, to the extent attributable to gains from sales or 
exchanges by the RIC of an asset that is considered a U.S. real 
property interest, be treated as gain recognized by the foreign 
person from the sale or exchange of a U.S. real property 
interest. The bill also extends the special rules for 
domestically-controlled REITs to domestically-controlled RICs.

Estate tax treatment

    Under the bill, a portion of the stock in a RIC held by the 
estate of a nonresident decedent who is not a U.S. citizen is 
treated as property without the United States. The portion so 
treated is based upon the proportion of the assets held by the 
RIC at the end of the quarter immediately preceding the 
decedent's death (or such other time as the Secretary may 
designate in regulations) that are ``qualifying assets''. 
Qualifying assets for this purpose are bank deposits of the 
type that are exempt from gross-basis income tax, portfolio 
debt obligations, certain original issue discount obligations, 
debt obligations of a domestic corporation that are treated as 
giving rise to foreign source income, and other property not 
within the United States.

                             EFFECTIVE DATE

    The provision generally applies to dividends with respect 
to taxable years of RICs beginning after December 31, 2004. 
With respect to the treatment of a RIC for estate tax purposes, 
the provision applies to estates of decedents dying after 
December 31, 2004. With respect to the treatment of RICs under 
section 897 (relating to U.S. real property interests), the 
provision is effective after December 31, 2004.

7. Taxation of certain settlement funds (sec. 287 of the bill and sec. 
        468B of the Code)

                              PRESENT LAW

    In general, section 468B provides that a payment to a 
designated settlement fund that extinguishes a tort liability 
of the taxpayer will result in a deduction to the taxpayer. A 
designated settlement fund means a fund which is established 
pursuant to a court order, extinguishes the taxpayer's tort 
liability, is managed and controlled by persons unrelated to 
the taxpayer, and in which the taxpayer does not have a 
beneficial interest in the trust.
    Generally, a designated or qualified settlement fund is 
taxed as a separate entity at the maximum trust rate on its 
modified income. Modified income is generally gross income less 
deductions for administrative costs and other incidental 
expenses incurred in connection with the operation of the 
settlement fund.
    The cleanup of hazardous waste sites is sometimes funded by 
environmental ``settlement funds'' or escrow accounts. These 
escrow accounts are established in consent decrees between the 
Environmental Protection Agency (``EPA'') and the settling 
parties under the jurisdiction of a Federal district court. The 
EPA uses these accounts to resolve claims against private 
parties under Comprehensive Environmental Response, 
Compensation and Liability Act of 1980 (``CERCLA'').
    Present law provides that nothing in any provision of law 
is to be construed as providing that an escrow account, 
settlement fund, or similar fund is not subject to current 
income tax.

                           REASONS FOR CHANGE

    The Committee believes that these environmental escrow 
accounts, established under court consent decrees, are 
essential for the EPA to resolve or satisfy claims under the 
Comprehensive Environmental Response, Compensation and 
Liability Act of 1980. The tax treatment of these settlement 
funds may prevent taxpayers from entering into prompt 
settlements with the EPA for the cleanup of Superfund hazardous 
waste sites and reduce the ultimate amount of funds available 
for the sites' cleanup. As these settlement funds are 
controlled by the government, the Committee believes it is 
appropriate to establish that these funds are to be treated as 
beneficially owned by the United States.

                        EXPLANATION OF PROVISION

    The provision provides that certain settlement funds 
established in consent decrees for the sole purpose of 
resolving claims under CERCLA are to be treated as beneficially 
owned by the United States government and therefore, not 
subject to Federal income tax.
    To qualify the settlement fund must be: (1) established 
pursuant to a consent decree entered by a judge of a United 
States District Court; (2) created for the receipt of 
settlement payments for the sole purpose of resolving claims 
under CERCLA; (3) controlled (in terms of expenditures of 
contributions and earnings thereon) by the government or an 
agency or instrumentality thereof; and (4) upon termination, 
any remaining funds will be disbursed to such government entity 
and used in accordance with applicable law. For purposes of the 
provision, a government entity means the United States, any 
State of political subdivision thereof, the District of 
Columbia, any possession of the United States, and any agency 
or instrumentality of the foregoing.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

8. Expand human clinical trials expenses qualifying for the orphan drug 
        tax credit (sec. 288 of the bill and sec. 45C of the Code)

                              PRESENT LAW

    Taxpayers may claim a 50-percent credit for expenses 
related to human clinical testing of drugs for the treatment of 
certain rare diseases and conditions, generally those that 
afflict less than 200,000 persons in the United States. 
Qualifying expenses are those paid or incurred by the taxpayer 
after the date on which the drug is designated as a potential 
treatment for a rare disease or disorder by the Food and Drug 
Administration (``FDA'') in accordance with section 526 of the 
Federal Food, Drug, and Cosmetic Act.

                           REASONS FOR CHANGE

    The Committee observes that approval for human clinical 
testing, and designation as a potential treatment for a rare 
disease or disorder, require separate reviews within the FDA. 
As a result, in some cases, a taxpayer may be permitted to 
begin human clinical testing prior to a drug being designated 
as a potential treatment for a rare disease or disorder. If the 
taxpayer delays human clinical testing in order to obtain the 
benefits of the orphan drug tax credit, which currently may be 
claimed only for expenses incurred after the drug is designated 
as a potential treatment for a rare disease or disorder, 
valuable testing and research time will have been lost and 
Congress's original intent in enacting the orphan drug tax 
credit will have been partially thwarted.
    By submitting an application with the FDA for designation 
as a treatment of certain rare diseases and conditions, the 
taxpayer is indicating that he or she intends to examine the 
drug as a potential treatment for a qualifying disease or 
condition in approved clinical trials. The FDA is required to 
approve drugs for human clinical testing before testing can 
commence. The Committee believes the application for 
designation as a potential treatment for a rare disease or 
disorder can create a starting point from which human clinical 
testing expenses can be measured for purposes of the credit. 
For those cases where the process of filing an application and 
receiving designation as a potential treatment for a rare 
disease or disorder occurs sufficiently expeditiously to fall 
entirely within the taxpayer's taxable year plus permitted 
return filing extension period, the Committee finds it 
appropriate to eliminate the potential financial incentive to 
delaying clinical testing by permitting testing expenses paid 
or incurred prior to designation to qualify for the credit. The 
Committee recognizes that while such an outcome may well 
describe most applications, in some cases, particularly for 
applications filed near the close of a taxpayer's taxable year, 
in other cases the application and designation of the drug will 
not be made within the requisite period. The Committee chooses 
not to expand qualifying expenses to include those expenses 
paid or incurred after the date on which the taxpayer files an 
application with FDA for designation of the drug as a potential 
treatment for a rare disease or disorder, in the case when the 
designation is approved with respect to a taxable year 
subsequent to the year in which the application is filed, 
because to do so may create the additional taxpayer burden of 
requiring the taxpayer to file an amended return to claim 
credit for qualifying costs related to expenses incurred in a 
taxable year prior to designation.

                        EXPLANATION OF PROVISION

    The provision expands qualifying expenses to include those 
expenses related to human clinical testing paid or incurred 
after the date on which the taxpayer files an application with 
the FDA for designation of the drug under section 526 of the 
Federal Food, Drug, and Cosmetic Act as a potential treatment 
for a rare disease or disorder, if certain conditions are met. 
Under the provision, qualifying expenses include those expenses 
paid or incurred after the date on which the taxpayer files an 
application with the FDA for designation as a potential 
treatment for a rare disease or disorder if the drug receives 
FDA designation before the due date (including extensions) for 
filing the tax return for the taxable year in which the 
application was filed with the FDA. As under present law, the 
credit may only be claimed for such expenses related to drugs 
designated as a potential treatment for a rare disease or 
disorder by the FDA in accordance with section 526 of such Act.

                             EFFECTIVE DATE

    The provision is effective for expenditures paid or 
incurred after the date of enactment.

9. Simplification of excise tax imposed on bows and arrows (sec. 289 of 
        the bill and sec. 4161 of the Code)

                              PRESENT LAW

    The Code imposes an excise tax of 11 percent on the sale by 
a manufacturer, producer or importer of any bow with a draw 
weight of 10 pounds or more.\89\ An excise tax of 12.4 percent 
is imposed on the sale by a manufacturer or importer of any 
shaft, point, nock, or vane designed for use as part of an 
arrow which after its assembly (1) is over 18 inches long, or 
(2) is designed for use with a taxable bow (if shorter than 18 
inches).\90\ No tax is imposed on finished arrows. An 11-
percent excise tax also is imposed on any part of an accessory 
for taxable bows and on quivers for use with arrows (1) over 18 
inches long or (2) designed for use with a taxable bow (if 
shorter than 18 inches).\91\
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    \89\ Sec. 4161(b)(1)(A).
    \90\ Sec. 4161(b)(2).
    \91\ Sec. 4161(b)(1)(B).
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                           REASONS FOR CHANGE

    Under present law, foreign manufacturers and importers of 
arrows avoid the 12.4 percent excise tax paid by domestic 
manufacturers because the tax is placed on arrow components 
rather than finished arrows. As a result, arrows assembled 
outside of the United States have a price advantage over 
domestically manufactured arrows. The Committee believes it is 
appropriate to close this loophole. The Committee also believes 
that adjusting the minimum draw weight for taxable bows from 10 
pounds to 30 pounds will better target the excise tax to actual 
hunting use by eliminating the excise tax on instructional 
(``youth'') bows.

                        EXPLANATION OF PROVISION

    The provision increases the draw weight for a taxable bow 
from 10 pounds or more to a peak draw weight of 30 pounds or 
more.\92\ The provision also imposes an excise tax of 12 
percent on arrows generally. An arrow for this purpose is 
defined as a taxable arrow shaft to which additional components 
are attached. The present law 12.4-percent excise tax on 
certain arrow components is unchanged by the bill. In the case 
of any arrow comprised of a shaft or any other component upon 
which tax has been imposed, the amount of the arrow tax is 
equal to the excess of (1) the arrow tax that would have been 
imposed but for this exception, over (2) the amount of tax paid 
with respect to such components.\93\ Finally, the provision 
subjects certain broadheads (a type of arrow point) to an 
excise tax equal to 11 percent of the sales price instead of 
12.4 percent.
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    \92\ Draw weight is the maximum force required to bring the 
bowstring to a full-draw position not less than 26\1/4\-inches, 
measured from the pressure point of the hand grip to the nocking 
position on the bowstring.
    \93\ A credit or refund may be obtained when an item was taxed and 
it is used in the manufacture or production of another taxable item. 
Sec. 6416(b)(3). As arrow components and finished arrows are both 
taxable, in lieu of a refund of the tax paid on components, the 
provision suspends the application of sec. 6416(b)(3) and permits the 
taxpayer to reduce the tax due on the finished arrow by the amount of 
the previous tax paid on the components used in the manufacture of such 
arrow.
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                             EFFECTIVE DATE

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after December 31, 2004.

10. Repeal excise tax on fishing tackle boxes (sec. 290 of the bill and 
        sec. 4162 of the Code)

                              PRESENT LAW

    Under present law, a 10-percent manufacturer's excise tax 
is imposed on specified sport fishing equipment. Examples of 
taxable equipment include fishing rods and poles, fishing 
reels, artificial bait, fishing lures, line and hooks, and 
fishing tackle boxes. Revenues from the excise tax on sport 
fishing equipment are deposited in the Sport Fishing Account of 
the Aquatic Resources Trust Fund. Monies in the fund are spent, 
subject to an existing permanent appropriation, to support 
Federal-State sport fish enhancement and safety programs.

                           REASONS FOR CHANGE

    The Committee observes that fishing ``tackle boxes'' are 
little different in design and appearance from ``tool boxes,'' 
yet the former are subject to a Federal excise tax at a rate of 
10-percent, while the latter are not subject to Federal excise 
tax. This excise tax can create a sufficiently large price 
difference that some fishermen will choose to use a ``tool 
box'' to hold their hooks and lures rather than a traditional 
``tackle box.'' The Committee finds that such a distortion of 
consumer choice places an inappropriate burden on the 
manufacturers and purchasers of traditional tackle boxes, 
particularly in comparison to the modest amount of revenue 
raised by the present-law provision, and that this burden 
warrants repeal of the tax. The excise tax also adds 
unwarranted complexity to the Code, by requiring taxpayers and 
the IRS to make highly factual determinations as to which 
similar-use items are subject to tax and which are not.\94\
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    \94\ The Joint Committee on Taxation has cited the tackle box issue 
as an example of the complexity of the sport fishing excise tax, and 
has recommended the elimination of the sport fishing equipment excise 
tax. See Joint Committee on Taxation, Study of the Overall State of the 
Federal Tax System and Recommendations for Simplification, Pursuant to 
Section 8022(3)(B) of the Internal Revenue Code of 1986, (JCS-3-01), 
Vol. II, Recommendations of the Staff of the Joint Committee on 
Taxation to Simplify the Federal Tax System, at 499-500, April 2001.
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                        EXPLANATION OF PROVISION

    The provision repeals the excise tax on fishing tackle 
boxes.

                             EFFECTIVE DATE

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after December 31, 2004.

11. Repeal of excise tax on sonar devices suitable for finding fish 
        (sec. 291 of the bill and secs. 4161 and 4162 of the Code)

                              PRESENT LAW

    In general, the Code imposes a 10 percent tax on the sale 
by the manufacturer, producer, or importer of specified sport 
fishing equipment.\95\ A three percent rate, however, applies 
to the sale of electric outboard motors and sonar devices 
suitable for finding fish.\96\ Further, the tax imposed on the 
sale of sonar devices suitable for finding fish is limited to 
$30. A sonar device suitable for finding fish does not include 
any device that is a graph recorder, a digital type, a meter 
readout, a combination graph recorder or combination meter 
readout.\97\
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    \95\ Sec. 4161(a)(1).
    \96\ Sec. 4161(a)(2).
    \97\ Sec. 4162(b).
---------------------------------------------------------------------------
    Revenues from the excise tax on sport fishing equipment are 
deposited in the Sport Fishing Account of the Aquatic Resources 
Trust Fund. Monies in the fund are spent, subject to an 
existing permanent appropriation, to support Federal-State 
sport fish enhancement and safety programs.

                           REASONS FOR CHANGE

    The Committee observes that the current exemption for 
certain forms of sonar devices has the effect of exempting 
almost all of the devices currently on the market. The 
Committee understands that only one form of sonar device is not 
exempt from the tax, those units utilizing light-emitting diode 
(``LED'') display technology. The Committee understands that 
LED devices are currently not exempt from the tax because the 
technology was developed after the exemption for the other 
technologies was enacted. In the Committee's view, the 
application of the tax to LED display devices, and not to 
devices performing the same function with a different 
technology, creates an unfair advantage for the exempt devices. 
Because most of the devices on the market already are exempt, 
the Committee believes it is appropriate to level the playing 
field by repealing the tax imposed on all sonar devices 
suitable for finding fish. The Committee believes this is a 
more suitable solution than exempting a device from the tax 
based on the type of technology used.

                        EXPLANATION OF PROVISION

    The provision repeals the excise tax on all sonar devices 
suitable for finding fish.

                             EFFECTIVE DATE

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after December 31, 2004.

12. Income tax credit for cost of carrying tax-paid distilled spirits 
        in wholesale inventories (sec. 292 of the bill and new sec. 
        5011 of the Code)

                              PRESENT LAW

    As is true of most major Federal excise taxes, the excise 
tax on distilled spirits is imposed at a point in the chain of 
distribution before the product reaches the retail (consumer) 
level. Tax on domestically produced and/or bottled distilled 
spirits arises upon production (receipt) in a bonded distillery 
and is collected based on removals from the distillery during 
each semi-monthly period. Distilled spirits that are bottled 
before importation into the United States are taxed on removal 
from the first U.S. warehouse where they are landed (including 
a warehouse located in a foreign trade zone).
    No tax credits are allowed under present law for business 
costs associated with having tax-paid products in inventory. 
Rather, excise tax that is included in the purchase price of a 
product is treated the same as the other components of the 
product cost, i.e., deductible as a cost of goods sold.

                           REASONS FOR CHANGE

    Under current law, wholesale importers of distilled spirits 
are not required to pay the Federal excise tax on imported 
spirits until after the product is removed from a bonded 
warehouse for sale to a retailer. In contrast, the tax on 
domestically produced spirits is included as part of the 
purchase price and passed on from the supplier to wholesaler. 
It is the Committee's understanding that in some instances, 
wholesalers can carry this tax-paid inventory for an average of 
60 days before selling it to a retailer. To provide equivalent 
tax treatment of domestic and imported product, the Committee 
believes it is appropriate to provide an income tax credit to 
approximate the interest charge--more commonly referred to as 
float--that results from carrying tax-paid distilled spirits in 
inventory.

                        EXPLANATION OF PROVISION

    The provision creates a new income tax credit for eligible 
wholesale distributors of distilled spirits. An eligible 
wholesaler is any person who holds a permit under the Federal 
Alcohol Administration Act as a wholesaler of distilled 
spirits.
    The credit is calculated by multiplying the number of cases 
of bottled distilled spirits by the average tax-financing cost 
per case for the most recent calendar year ending before the 
beginning of such taxable year. A case is 12 80-proof 750-
milliliter bottles. The average tax-financing cost per case is 
the amount of interest that would accrue at corporate 
overpayment rates during an assumed 60-day holding period on an 
assumed tax rate of $22.83 per case of 12 750-milliliter 
bottles.
    The credit only applies to domestically bottled distilled 
spirits \98\ purchased directly from the bottler of such 
spirits. The credit is in addition to present-law rules 
allowing tax included in inventory costs to be deducted as a 
cost of goods sold.
---------------------------------------------------------------------------
    \98\ Distilled spirits that are imported in bulk and then bottled 
domestically qualify as domestically bottled distilled spirits.
---------------------------------------------------------------------------
    The credit cannot be carried back to a taxable year 
beginning before January 1, 2005.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2004.

13. Suspension of occupational taxes relating to distilled spirits, 
        wine, and beer (sec. 293 of the bill and new sec. 5148 of the 
        Code)

                              PRESENT LAW

    Under present law, special occupational taxes are imposed 
on producers and others engaged in the marketing of distilled 
spirits, wine, and beer. These excise taxes are imposed as part 
of a broader Federal tax and regulatory engine governing the 
production and marketing of alcoholic beverages. The special 
occupational taxes are payable annually, on July 1 of each 
year. The present tax rates are as follows:

Producers: \99\
    Distilled spirits and      $1,000 per year, per premise.
     wines (sec. 5081).
    Brewers (sec. 5091)......  $1,000 per year, per premise.
Wholesale dealers (sec.
 5111):
    Liquors, wines, or beer..  $500 per year.
Retail dealers (sec. 5121):
    Liquors, wines, or beer..  $250 per year.
Nonbeverage use of distilled   $500 per year.
 spirits (sec. 5131).
Industrial use of distilled    $250 per year.
 spirits (sec. 5276).


    The Code requires every wholesale or retail dealer in 
liquors, wine or beer to keep records of their 
transactions.\100\ A delegate of the Secretary of the Treasury 
is authorized to inspect the records of any dealer during 
business hours.\101\ There are penalties for failing to comply 
with the recordkeeping requirements.\102\
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    \99\ A reduced rate of tax in the amount of $500 is imposed on 
small proprietors. Secs. 5081(b), 5091(b).
    \100\ Secs. 5114, 5124.
    \101\ Sec. 5146.
    \102\ Sec. 5603.
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    The Code limits the persons from whom dealers may purchase 
their liquor stock intended for resale. Under the Code, a 
dealer may only purchase from:
          (1) a wholesale dealer in liquors who has paid the 
        special occupational tax as such dealer to cover the 
        place where such purchase is made; or
          (2) a wholesale dealer in liquors who is exempt, at 
        the place where such purchase is made, from payment of 
        such tax under any provision chapter 51 of the Code; or
          (3) a person who is not required to pay special 
        occupational tax as a wholesale dealer in liquors.\103\
---------------------------------------------------------------------------
    \103\ Sec. 5117. For example, purchases from a proprietor of a 
distilled spirits plant at his principal business office would be 
covered under item (2) since such a proprietor is not subject to the 
special occupational tax on account of sales at his principal business 
office. Sec. 5113(a). Purchases from a State-operated liquor store 
would be covered under item (3). Sec. 5113(b).
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    In addition, a limited retail dealer (such as a charitable 
organization selling liquor at a picnic) may lawfully purchase 
distilled spirits for resale from a retail dealer in 
liquors.\104\
---------------------------------------------------------------------------
    \104\ Sec. 5117(b).
---------------------------------------------------------------------------
    Violation of this restriction is punishable by $1,000 fine, 
imprisonment of one year, or both.\105\ A violation also makes 
the alcohol subject to seizure and forfeiture.\106\
---------------------------------------------------------------------------
    \105\ Sec. 5687.
    \106\ Sec. 7302.
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                           REASONS FOR CHANGE

    The special occupational tax is not a tax on alcoholic 
products but rather operates as a license fee on businesses. 
The Committee believes that this tax places an unfair burden on 
business owners. However, the Committee recognizes that the 
recordkeeping and registration authorities applicable to 
wholesalers and retailers engaged in such businesses are 
necessary enforcement tools to ensure the protection of the 
revenue arising from the excise taxes on these products. Thus, 
the Committee believes it appropriate to suspend the tax for a 
three-year period, while retaining present-law recordkeeping 
and registration requirements.

                        EXPLANATION OF PROVISION

    Under the provision, the special occupational taxes on 
producers and marketers of alcoholic beverages are suspended 
for a three-year period, July 1, 2004 through June 30, 2007. 
Present law recordkeeping and registration requirements will 
continue to apply, notwithstanding the suspension of the 
special occupation taxes. In addition, during the suspension 
period, 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 subject to the recordkeeping 
requirements, except that a limited retail dealer may purchase 
distilled spirits for resale from a retail dealer in liquors, 
as permitted under present law.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

14. Exclusion of certain indebtedness of small business investment 
        companies from acquisition indebtedness (sec. 294 of the bill 
        and sec. 514 of the Code)

                              PRESENT LAW

    In general, an organization that is otherwise exempt from 
Federal income tax is taxed on income from a trade or business 
that is unrelated to the organization's exempt purposes. 
Certain types of income, such as rents, royalties, dividends, 
and interest, generally are excluded from unrelated business 
taxable income except when such income is derived from ``debt-
financed property.'' Debt-financed property generally means any 
property that is held to produce income and with respect to 
which there is acquisition indebtedness at any time during the 
taxable year.
    In general, income of a tax-exempt organization that is 
produced by debt-financed property is treated as unrelated 
business income in proportion to the acquisition indebtedness 
on the income-producing property. Acquisition indebtedness 
generally means the amount of unpaid indebtedness incurred by 
an organization to acquire or improve the property and 
indebtedness that would not have been incurred but for the 
acquisition or improvement of the property. Acquisition 
indebtedness does not include, however, (1) certain 
indebtedness incurred in the performance or exercise of a 
purpose or function constituting the basis of the 
organization's exemption, (2) obligations to pay certain types 
of annuities, (3) an obligation, to the extent it is insured by 
the Federal Housing Administration, to finance the purchase, 
rehabilitation, or construction of housing for low and moderate 
income persons, or (4) indebtedness incurred by certain 
qualified organizations to acquire or improve real property. An 
extension, renewal, or refinancing of an obligation evidencing 
a pre-existing indebtedness is not treated as the creation of a 
new indebtedness.
    Special rules apply in the case of an exempt organization 
that owns a partnership interest in a partnership that holds 
debt-financed income-producing property. An exempt 
organization's share of partnership income that is derived from 
such debt-financed property generally is taxed as debt-financed 
income unless an exception provides otherwise.

                           REASONS FOR CHANGE

    Small business investment companies obtain financial 
assistance from the Small Business Administration in the form 
of equity or by incurring indebtedness that is held or 
guaranteed by the Small Business Administration pursuant to the 
Small Business Investment Act of 1958. Tax-exempt organizations 
that invest in small business investment companies who are 
treated as partnerships and who incur indebtedness that is held 
or guaranteed by the Small Business Administration may be 
subject to unrelated business income tax on their distributive 
shares of income from the small business investment company. 
The Committee believes that the imposition of unrelated 
business income tax in such cases creates a disincentive for 
tax-exempt organizations to invest in small business investment 
companies, thereby reducing the amount of investment capital 
that may be provided by small business investment companies to 
the nation's small businesses. The Committee believes, however, 
that ownership limitations on the percentage interests that may 
be held by exempt organizations are appropriate to prevent all 
or most of a small business investment company's income from 
escaping Federal income tax.

                        EXPLANATION OF PROVISION

    The provision modifies the debt-financed property 
provisions by excluding from the definition of acquisition 
indebtedness any indebtedness incurred by a small business 
investment company licensed under the Small Business Investment 
Act of 1958 that is evidenced by a debenture (1) issued by such 
company under section 303(a) of said Act, and (2) held or 
guaranteed by the Small Business Administration. The exclusion 
shall not apply during any period that any exempt organization 
(other than a governmental unit) owns more than 25 percent of 
the capital or profits interest in the small business 
investment company, or exempt organizations (including 
governmental units other than any agency or instrumentality of 
the United States) own, in the aggregate, 50 percent or more of 
the capital or profits interest in such company.

                             EFFECTIVE DATE

    The provision is effective for small business investment 
companies formed after the date of enactment.

15. Election to determine taxable income from certain international 
        shipping activities using per ton rate (sec. 295 of the bill 
        and new secs. 1352-1359 of the Code)

                              PRESENT LAW

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
including income from shipping operations, whether derived in 
the United States or abroad. In order to mitigate double 
taxation, a foreign tax credit for income taxes paid to foreign 
countries is provided to reduce or eliminate the U.S. tax owed 
on such income, subject to certain limitations.
    Generally, the United States taxes foreign corporations 
only on income that has a sufficient nexus to the United 
States. Thus, a foreign corporation is generally subject to 
U.S. tax only on income, including income from shipping 
operations, which is ``effectively connected'' with the conduct 
of a trade or business in the United States (sec. 882). Such 
``effectively connected income'' generally is taxed in the same 
manner and at the same rates as the income of a U.S. 
corporation.
    The United States imposes a four percent tax on the amount 
of a foreign corporation's U.S. gross transportation income 
(sec. 887). Transportation income includes income from the use 
(or hiring or leasing for use) of a vessel and income from 
services directly related to the use of a vessel. Fifty percent 
of the transportation income attributable to transportation 
that either begins or ends (but not both) in the United States 
is treated as U.S. source gross transportation income. The tax 
does not apply, however, to U.S. gross transportation income 
that is treated as income effectively connected with the 
conduct of a U.S. trade or business. U.S. gross transportation 
income is not treated as effectively connected income unless 
(1) the taxpayer has a fixed place of business in the United 
States involved in earning the income, and (2) substantially 
all the income is attributable to regularly scheduled 
transportation.
    The taxes imposed by sections 882 and 887 on income from 
shipping operations may be limited by an applicable U.S. income 
tax treaty or by an exemption of a foreign corporation's 
international shipping operations income in instances where a 
foreign country grants an equivalent exemption (sec. 883).
    Under present law, there is no provision that provides an 
alternative to the corporate income tax for taxable income 
attributable to international shipping activities.

                           REASONS FOR CHANGE

    In general, operators of U.S.-flag vessels in international 
trade are subject to higher taxes than their foreign-based 
competition. The uncompetitive U.S. taxation of shipping income 
has caused a steady and substantial decline of the U.S. 
shipping industry. The Committee believes that this provision 
will provide operators of U.S.-flag vessels in international 
trade the opportunity to be competitive with their tax-
advantaged foreign competitors.

                        EXPLANATION OF PROVISION

In general

    The provision generally allows corporations to elect a 
``tonnage tax'' on their taxable income from certain shipping 
activities in lieu of the U.S. corporate income tax. 
Accordingly, a corporation's income from qualifying shipping 
activities is no longer taxable under sections 11, 55, 882, 887 
or 1201(a) under the regime, and electing entities are only 
subject to tax at the maximum corporate income tax rate on a 
notional amount based on the net tonnage of a corporation's 
qualifying vessels. However, a foreign corporation is not 
subject to tax under the tonnage tax regime to the extent its 
income from qualifying shipping activities is subject to an 
exclusion for certain shipping operations by foreign 
corporations pursuant to section 883(a)(1) or pursuant to a 
treaty obligation of the United States.

Taxable income from qualifying shipping activities

    Generally, the taxable income of an electing corporation 
from qualifying shipping activities is the corporate income 
percentage \107\ of the sum of the taxable income from each of 
its qualifying vessels. The taxable income from each qualifying 
vessel is the product of (1) the daily notional taxable income 
\108\ from the operation of the qualifying vessel in United 
States foreign trade,\109\ and (2) the number of days during 
the taxable year that the electing entity operated such vessel 
as a qualifying vessel in U.S. foreign trade.\110\ A 
``qualifying vessel'' is described as a self-propelled U.S.-
flag vessel of not less than 10,000 deadweight tons used in 
U.S. foreign trade.
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    \107\ The ``corporate income percentage'' is the least aggregate 
share, expressed as a percentage, of any item of income or gain of an 
electing corporation, or an electing group (i.e., a controlled group of 
which one or more members is an electing entity) of which such 
corporation is a member from qualifying shipping activities that would 
otherwise be required to be reported on the U.S. Federal income tax 
return of an electing corporation during any taxable period. A 
``controlled group'' is any group of trusts and business entities whose 
members would be treated as a single employer under the rules of 
section 52(a) (without regard to paragraphs (1) and (2) and section 
52(b)(1)).
    \108\ The ``daily notional taxable income'' from the operation of a 
qualifying vessel is 40 cents for each 100 tons of the net tonnage of 
the vessel (up to 25,000 net tons), and 20 cents for each 100 tons of 
the net tonnage of the vessel, in excess of 25,000 net tons.
    \109\ ``U.S. foreign trade'' means the transportation of goods or 
passengers between a place in the United States and a foreign place or 
between foreign places. As a general rule, the temporary operation in 
the U.S. domestic trade (i.e., the transportation of goods or 
passengers between places in the United States) of any qualifying 
vessel is disregarded. However, a vessel that is no longer used for 
operations in U.S. foreign trade (unless such non-use is on a temporary 
basis) ceases to be a qualifying vessel when such non-use begins.
    \110\ If there are multiple operators of a vessel, the taxable 
income of such vessel must be allocated among such persons on the basis 
of their ownership and charter interests or another basis that Treasury 
may prescribe in regulations.
---------------------------------------------------------------------------
    An entity's qualifying shipping activities consist of its 
(1) core qualifying activities, (2) qualifying secondary 
activities, and (3) qualifying incidental activities. 
Generally, core qualifying activities are activities from 
operating vessels in U.S. foreign trade and other activities of 
an electing entity and an electing group that are an integral 
part of the business of operating qualifying vessels in U.S. 
foreign trade. Qualifying secondary activities generally 
consist of the active management or operation of vessels in 
U.S. foreign trade and provisions for vessel, container and 
cargo-related facilities or such other activities as may be 
prescribed by the Secretary (which are not core activities), 
and may not exceed 20 percent of the aggregate gross income 
derived from electing entities and other members of its 
electing group from their core qualifying activities. 
Qualifying incidental activities are activities that are 
incidental to core qualifying activities and are not qualifying 
secondary activities. The aggregate gross income from 
qualifying incidental activities cannot exceed one-tenth of one 
percent of the aggregate gross income from the core qualifying 
activities of the electing entities and other members of its 
electing group.

Items not subject to corporate income tax

    Generally, gross income from an electing entity does not 
include the corporate income percentage of an entity's (1) 
income from qualifying shipping activities in U.S. foreign 
trade, (2) income from money, bank deposits and other temporary 
investments which are reasonably necessary to meet the working 
capital requirements of its qualifying shipping activities, and 
(3) income from money or other intangible assets accumulated 
pursuant to a plan to purchase qualifying shipping assets.\111\ 
Generally, the corporate loss percentage \112\ of each item of 
loss, deduction, or credit is disallowed with respect to any 
activity the income from which is excluded from gross income 
under the provision. The corporate loss percentage of an 
electing entity's interest expense is disallowed in the ratio 
that the fair market value of its qualifying shipping assets 
bears to the fair market value of its total assets.
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    \111\ ``Qualifying shipping assets'' means any qualifying vessel 
and other assets which are used in core qualifying activities.
    \112\ ``Corporate loss percentage'' means the greatest aggregate 
share, expressed as a percentage, of any item of loss, deduction or 
credit of an electing corporation or electing group of which such 
corporation is a member from qualifying shipping activities that would 
otherwise be required to be reported on the U.S. Federal income tax 
return of an electing corporation during any taxable period.
---------------------------------------------------------------------------

Allocation of credits, income and deductions

    No deductions are allowed against the taxable income of an 
electing corporation from qualifying shipping activities, and 
no credit is allowed against the tax imposed under the tonnage 
tax regime. No deduction is allowed for any net operating loss 
attributable to the qualifying shipping activities of a 
corporation to the extent that such loss is carried forward by 
the corporation from a taxable year preceding the first taxable 
year for which such corporation was an electing corporation. 
For purposes of the provision, section 482 applies to a 
transaction or series of transactions between an electing 
entity and another person or between an entity's qualifying 
shipping activities and other activities carried on by it. The 
qualifying shipping activities of an electing entity shall be 
treated as a separate trade or business activity from all other 
activities conducted by the entity.

Qualifying shipping assets

    If an electing entity sells or disposes of qualifying 
shipping assets in an otherwise taxable transaction, at the 
election of the entity no gain is recognized if replacement 
qualifying shipping assets are acquired during a limited 
replacement period except to the extent that the amount 
realized upon such sale or disposition exceeds the cost of the 
replacement qualifying shipping assets. In the case of 
replacement qualifying shipping assets purchased by an electing 
entity which results in the nonrecognition of any part of the 
gain realized as the result of a sale or other disposition of 
qualifying shipping assets, the basis is the cost of such 
replacement property decreased in the amount of gain not 
recognized. If the property purchased consists of more than one 
piece of property, the basis is allocated to the purchased 
properties in proportion to their respective costs.
    The election not to recognize gain on the disposition and 
replacement of qualifying shipping assets is not available if 
the replacement qualifying shipping assets are acquired from a 
related person except to the extent that the related person (as 
defined under section 267(b) or 707(b)(1)) acquired the 
replacement qualifying shipping assets from an unrelated person 
during a limited replacement period.

Election

    Generally, any qualifying entity may elect into the tonnage 
tax regime by filing an election with the qualifying entity's 
income tax return for the first taxable year to which the 
election applies. However, a qualifying entity, which is a 
member of a controlled group, may only make an election into 
the tonnage tax regime if all qualifying entities that are 
members of the controlled group make such an election. Once 
made, an election is effective for the taxable year in which it 
was made and for all succeeding taxable years of the entity 
until the election is terminated. An election may be terminated 
if the entity ceases to be a qualifying entity or if the 
election is revoked. In the event that a qualifying entity 
elects into the tonnage tax regime and subsequently revokes the 
election, such entity is barred from electing back into the 
regime until the fifth taxable year after the termination is 
effective, unless the Secretary of the Treasury consents to the 
election.
    A qualifying entity means a trust or business entity that 
(1) operates one or more qualifying vessels and (2) meets the 
``shipping activity requirement.'' \113\ The shipping activity 
requirement is met for a taxable year only by an entity that 
meets one of the following requirements: (1) in the first 
taxable year of its election into the tonnage tax regime, for 
the preceding taxable year on average at least 25 percent of 
the aggregate tonnage of the qualifying vessels which were 
operated by the entity were owned by the entity or bareboat 
chartered to the entity; (2) in the second or any subsequent 
taxable year of its election into the tonnage tax regime, in 
each of the two preceding taxable years on average at least 25 
percent of the aggregate tonnage of the qualifying vessels 
which were operated by the entity were owned by the entity or 
bareboat chartered to the entity; or (3) requirements (1) or 
(2) above would be met if the 25 percent average tonnage 
requirement was applied on an aggregate basis to the controlled 
group of which such entity is a member, and vessel charters 
between members of the controlled group were disregarded.
---------------------------------------------------------------------------
    \113\ An entity is generally treated as operating any vessel owned 
by or chartered to the entity. However, an entity is treated as 
operating a vessel that it has chartered out on bareboat basis only if: 
(1) the vessel is temporarily surplus to the entity's requirements and 
the term of the charter does not exceed three years or (2) the vessel 
is bareboat chartered to a member of a controlled group which includes 
such entity or to an unrelated third party that sub-bareboats or time 
charters the vessel to a member of such controlled group (including the 
owner). Special rules apply in an instance in which an electing entity 
temporarily ceases to operate a qualifying vessel.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after the date of enactment.

16. Charitable contribution deduction for certain expenses in support 
        of native Alaskan subsistence whaling (sec. 296 of the bill and 
        sec. 170 of the Code)

                              PRESENT LAW

    In computing taxable income, individuals who do not elect 
the standard deduction may claim itemized deductions, including 
a deduction (subject to certain limitations) for charitable 
contributions or gifts made during the taxable year to a 
qualified charitable organization or governmental entity. 
Individuals who elect the standard deduction may not claim a 
deduction for charitable contributions made during the taxable 
year.
    No charitable contribution deduction is allowed for a 
contribution of services. However, unreimbursed expenditures 
made incident to the rendition of services to an organization, 
contributions to which are deductible, may constitute a 
deductible contribution.\114\ Specifically, section 170(j) 
provides that no charitable contribution deduction is allowed 
for traveling expenses (including amounts expended for meals 
and lodging) while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel.
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    \114\ Treas. Reg. sec. 1.170A-1(g).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that subsistence bowhead whale 
hunting activities are important to certain native peoples of 
Alaska and further charitable purposes. The Committee believes 
that certain expenses paid by individuals recognized as whaling 
captains by the Alaska Eskimo Whaling Commission in the conduct 
of sanctioned whaling activities conducted pursuant to the 
management plan of that Commission should be deductible 
expenses.

                        EXPLANATION OF PROVISION

    The provision allows individuals to claim a deduction under 
section 170 not exceeding $10,000 per taxable year for certain 
expenses incurred in carrying out sanctioned whaling 
activities. The deduction is available only to an individual 
who is recognized by the Alaska Eskimo Whaling Commission as a 
whaling captain charged with the responsibility of maintaining 
and carrying out sanctioned whaling activities. The deduction 
is available for reasonable and necessary expenses paid by the 
taxpayer during the taxable year for: (1) the acquisition and 
maintenance of whaling boats, weapons, and gear used in 
sanctioned whaling activities; (2) the supplying of food for 
the crew and other provisions for carrying out such activities; 
and (3) the storage and distribution of the catch from such 
activities. The Committee intends that the Secretary shall 
require that the taxpayer substantiate deductible expenses by 
maintaining appropriate written records that show, for example, 
the time, place, date, amount, and nature of the expense, as 
well as the taxpayer's eligibility for the deduction, and that 
such substantiation be provided as part of the taxpayer's 
income tax return, to the extent provided by the Secretary.
    For purposes of the provision, the term ``sanctioned 
whaling activities'' means subsistence bowhead whale hunting 
activities conducted pursuant to the management plan of the 
Alaska Eskimo Whaling Commission.

                             EFFECTIVE DATE

    The provision is effective for contributions made after 
December 31, 2004.

 TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES


                  A. Interest Expense Allocation Rules


(Sec. 301 of the bill and sec. 864 of the Code)

                              PRESENT LAW

In general

    In order to compute the foreign tax credit limitation, a 
taxpayer must determine the amount of its taxable income from 
foreign sources. Thus, the taxpayer must allocate and apportion 
deductions between items of U.S.-source gross income, on the 
one hand, and items of foreign-source gross income, on the 
other.
    In the case of interest expense, the rules generally are 
based on the approach that money is fungible and that interest 
expense is properly attributable to all business activities and 
property of a taxpayer, regardless of any specific purpose for 
incurring an obligation on which interest is paid.\115\ For 
interest allocation purposes, the Code provides that all 
members of an affiliated group of corporations generally are 
treated as a single corporation (the so-called ``one-taxpayer 
rule'') and allocation must be made on the basis of assets 
rather than gross income.
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    \115\ However, exceptions to the fungibility principle are provided 
in particular cases, some of which are described below.
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Affiliated group

            In general
    The term ``affiliated group'' in this context generally is 
defined by reference to the rules for determining whether 
corporations are eligible to file consolidated returns. 
However, some groups of corporations are eligible to file 
consolidated returns yet are not treated as affiliated for 
interest allocation purposes, and other groups of corporations 
are treated as affiliated for interest allocation purposes even 
though they are not eligible to file consolidated returns. 
Thus, under the one-taxpayer rule, the factors affecting the 
allocation of interest expense of one corporation may affect 
the sourcing of taxable income of another, related corporation 
even if the two corporations do not elect to file, or are 
ineligible to file, consolidated returns.
            Definition of affiliated group--consolidated return rules
    For consolidation purposes, the term ``affiliated group'' 
means one or more chains of includible corporations connected 
through stock ownership with a common parent corporation which 
is an includible corporation, but only if: (1) the common 
parent owns directly stock possessing at least 80 percent of 
the total voting power and at least 80 percent of the total 
value of at least one other includible corporation; and (2) 
stock meeting the same voting power and value standards with 
respect to each includible corporation (excluding the common 
parent) is directly owned by one or more other includible 
corporations.
    Generally, the term ``includible corporation'' means any 
domestic corporation except certain corporations exempt from 
tax under section 501 (for example, corporations organized and 
operated exclusively for charitable or educational purposes), 
certain life insurance companies, corporations electing 
application of the possession tax credit, regulated investment 
companies, real estate investment trusts, and domestic 
international sales corporations. A foreign corporation 
generally is not an includible corporation.
            Definition of affiliated group--special interest allocation 
                    rules
    Subject to exceptions, the consolidated return and interest 
allocation definitions of affiliation generally are consistent 
with each other.\116\ For example, both definitions generally 
exclude all foreign corporations from the affiliated group. 
Thus, while debt generally is considered fungible among the 
assets of a group of domestic affiliated corporations, the same 
rules do not apply as between the domestic and foreign members 
of a group with the same degree of common control as the 
domestic affiliated group.
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    \116\ One such exception is that the affiliated group for interest 
allocation purposes includes section 936 corporations that are excluded 
from the consolidated group.
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            Banks, savings institutions, and other financial affiliates
    The affiliated group for interest allocation purposes 
generally excludes what are referred to in the Treasury 
regulations as ``financial corporations'' (Treas. Reg. sec. 
1.861-11T(d)(4)). These include any corporation, otherwise a 
member of the affiliated group for consolidation purposes, that 
is a financial institution (described in section 581 or section 
591), the business of which is predominantly with persons other 
than related persons or their customers, and which is required 
by State or Federal law to be operated separately from any 
other entity which is not a financial institution (sec. 
864(e)(5)(C)). The category of financial corporations also 
includes, to the extent provided in regulations, bank holding 
companies (including financial holding companies), subsidiaries 
of banks and bank holding companies (including financial 
holding companies), and savings institutions predominantly 
engaged in the active conduct of a banking, financing, or 
similar business (sec. 864(e)(5)(D)).
    A financial corporation is not treated as a member of the 
regular affiliated group for purposes of applying the one-
taxpayer rule to other non-financial members of that group. 
Instead, all such financial corporations that would be so 
affiliated are treated as a separate single corporation for 
interest allocation purposes.

                           REASONS FOR CHANGE

    The Committee observes that the United States is the only 
country that currently imposes harsh and anti-competitive 
interest expense allocation rules on its businesses and 
workers. The present-law interest expense allocation rules 
result in U.S. companies allocating a portion of their U.S. 
interest expense against foreign-source income, even when the 
foreign operation has its own debt. The tax effect of this rule 
is that U.S. companies end up paying double tax. The practical 
effect is that the cost for U.S. companies to borrow in the 
United States is increased and it becomes more expensive to 
invest in the United States. The Committee believes that these 
rules should be modified so that U.S. companies are not 
discouraged from investing in the United States. To this end, 
U.S. companies should not be required to allocate U.S. interest 
expense against foreign-source income (and thereby incur double 
taxation) unless their debt-to-asset ratio is higher in the 
United States than in foreign countries.

                        EXPLANATION OF PROVISION

In general

    The provision modifies the present-law interest expense 
allocation rules (which generally apply for purposes of 
computing the foreign tax credit limitation) by providing a 
one-time election under which the taxable income of the 
domestic members of an affiliated group from sources outside 
the United States generally is determined by allocating and 
apportioning interest expense of the domestic members of a 
worldwide affiliated group on a worldwide-group basis (i.e., as 
if all members of the worldwide group were a single 
corporation). If a group makes this election, the taxable 
income of the domestic members of a worldwide affiliated group 
from sources outside the United States is determined by 
allocating and apportioning the third-party interest expense of 
those domestic members to foreign-source income in an amount 
equal to the excess (if any) of (1) the worldwide affiliated 
group's worldwide third-party interest expense multiplied by 
the ratio which the foreign assets of the worldwide affiliated 
group bears to the total assets of the worldwide affiliated 
group,\117\ over (2) the third-party interest expense incurred 
by foreign members of the group to the extent such interest 
would be allocated to foreign sources if the provision's 
principles were applied separately to the foreign members of 
the group.\118\
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    \117\ For purposes of determining the assets of the worldwide 
affiliated group, neither stock in corporations within the group nor 
indebtedness (including receivables) between members of the group is 
taken into account. It is anticipated that the Treasury Secretary will 
adopt regulations addressing the allocation and apportionment of 
interest expense on such indebtedness that follow principles analogous 
to those of existing regulations. Income from holding stock or 
indebtedness of another group member is taken into account for all 
purposes under the present-law rules of the Code, including the foreign 
tax credit provisions.
    \118\ Although the interest expense of a foreign subsidiary is 
taken into account for purposes of allocating the interest expense of 
the domestic members of the electing worldwide affiliated group for 
foreign tax credit limitation purposes, the interest expense incurred 
by a foreign subsidiary is not deductible on a U.S. return.
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    For purposes of the new elective rules based on worldwide 
fungibility, the worldwide affiliated group means all 
corporations in an affiliated group (as that term is defined 
under present law for interest allocation purposes) \119\ as 
well as all controlled foreign corporations that, in the 
aggregate, either directly or indirectly,\120\ would be members 
of such an affiliated group if section 1504(b)(3) did not apply 
(i.e., in which at least 80 percent of the vote and value of 
the stock of such corporations is owned by one or more other 
corporations included in the affiliated group). Thus, if an 
affiliated group makes this election, the taxable income from 
sources outside the United States of domestic group members 
generally is determined by allocating and apportioning interest 
expense of the domestic members of the worldwide affiliated 
group as if all of the interest expense and assets of 80-
percent or greater owned domestic corporations (i.e., 
corporations that are part of the affiliated group under 
present-law section 864(e)(5)(A) as modified to include 
insurance companies) and certain controlled foreign 
corporations were attributable to a single corporation.
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    \119\ The provision expands the definition of an affiliated group 
for interest expense allocation purposes to include certain insurance 
companies that are generally excluded from an affiliated group under 
section 1504(b)(2) (without regard to whether such companies are 
covered by an election under section 1504(c)(2)).
    \120\ Indirect ownership is determined under the rules of section 
958(a)(2) or through applying rules similar to those of section 
958(a)(2) to stock owned directly or indirectly by domestic 
partnerships, trusts, or estates.
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    In addition, if an affiliated group elects to apply the new 
elective rules based on worldwide fungibility, the present-law 
rules regarding the treatment of tax-exempt assets and the 
basis of stock in nonaffiliated ten-percent owned corporations 
apply on a worldwide affiliated group basis.
    The common parent of the domestic affiliated group must 
make the worldwide affiliated group election. It must be made 
for the first taxable year beginning after December 31, 2008, 
in which a worldwide affiliated group exists that includes at 
least one foreign corporation that meets the requirements for 
inclusion in a worldwide affiliated group. Once made, the 
election applies to the common parent and all other members of 
the worldwide affiliated group for the taxable year for which 
the election was made and all subsequent taxable years, unless 
revoked with the consent of the Secretary of the Treasury.

Financial institution group election

    The provision allows taxpayers to apply the present-law 
bank group rules to exclude certain financial institutions from 
the affiliated group for interest allocation purposes under the 
worldwide fungibility approach. The provision also provides a 
one-time ``financial institution group'' election that expands 
the present-law bank group. Under the provision, at the 
election of the common parent of the pre-election worldwide 
affiliated group, the interest expense allocation rules are 
applied separately to a subgroup of the worldwide affiliated 
group that consists of (1) all corporations that are part of 
the present-law bank group, and (2) all ``financial 
corporations.'' For this purpose, a corporation is a financial 
corporation if at least 80 percent of its gross income is 
financial services income (as described in section 
904(d)(2)(C)(i) and the regulations thereunder) that is derived 
from transactions with unrelated persons.\121\ For these 
purposes, items of income or gain from a transaction or series 
of transactions are disregarded if a principal purpose for the 
transaction or transactions is to qualify any corporation as a 
financial corporation.
---------------------------------------------------------------------------
    \121\ See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
    The common parent of the pre-election worldwide affiliated 
group must make the election for the first taxable year 
beginning after December 31, 2008, in which a worldwide 
affiliated group includes a financial corporation. Once made, 
the election applies to the financial institution group for the 
taxable year and all subsequent taxable years. In addition, the 
provision provides anti-abuse rules under which certain 
transfers from one member of a financial institution group to a 
member of the worldwide affiliated group outside of the 
financial institution group are treated as reducing the amount 
of indebtedness of the separate financial institution group. 
The provision provides regulatory authority with respect to the 
election to provide for the direct allocation of interest 
expense in circumstances in which such allocation is 
appropriate to carry out the purposes of the provision, prevent 
assets or interest expense from being taken into account more 
than once, or address changes in members of any group (through 
acquisitions or otherwise) treated as affiliated under this 
provision.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2008.

             B. Recharacterization of Overall Domestic Loss


(Sec. 302 of the bill and sec. 904 of the Code)

                              PRESENT LAW

    The United States provides a credit for foreign income 
taxes paid or accrued. The foreign tax credit generally is 
limited to the U.S. tax liability on a taxpayer's foreign-
source income, in order to ensure that the credit serves the 
purpose of mitigating double taxation of foreign-source income 
without offsetting the U.S. tax on U.S.-source income. This 
overall limitation is calculated by prorating a taxpayer's pre-
credit U.S. tax on its worldwide income between its U.S.-source 
and foreign-source taxable income. The ratio (not exceeding 100 
percent) of the taxpayer's foreign-source taxable income to 
worldwide taxable income is multiplied by its pre-credit U.S. 
tax to establish the amount of U.S. tax allocable to the 
taxpayer's foreign-source income and, thus, the upper limit on 
the foreign tax credit for the year.
    In addition, this limitation is calculated separately for 
various categories of income, generally referred to as 
``separate limitation categories.'' The total amount of the 
foreign tax credit used to offset the U.S. tax on income in 
each separate limitation category may not exceed the proportion 
of the taxpayer's U.S. tax which the taxpayer's foreign-source 
taxable income in that category bears to its worldwide taxable 
income.
    If a taxpayer's losses from foreign sources exceed its 
foreign-source income, the excess (``overall foreign loss,'' or 
``OFL'') may offset U.S.-source income. Such an offset reduces 
the effective rate of U.S. tax on U.S.-source income.
    In order to eliminate a double benefit (that is, the 
reduction of U.S. tax previously noted and, later, full 
allowance of a foreign tax credit with respect to foreign-
source income), present law includes an OFL recapture rule. 
Under this rule, a portion of foreign-source taxable income 
earned after an OFL year is recharacterized as U.S.-source 
taxable income for foreign tax credit purposes (and for 
purposes of the possessions tax credit). Unless a taxpayer 
elects a higher percentage, however, generally no more than 50 
percent of the foreign-source taxable income earned in any 
particular taxable year is recharacterized as U.S.-source 
taxable income. The effect of the recapture is to reduce the 
foreign tax credit limitation in one or more years following an 
OFL year and, therefore, the amount of U.S. tax that can be 
offset by foreign tax credits in the later year or years.
    Losses for any taxable year in separate foreign limitation 
categories (to the extent that they do not exceed foreign 
income for the year) are apportioned on a proportionate basis 
among (and operate to reduce) the foreign income categories in 
which the entity earns income in the loss year. A separate 
limitation loss recharacterization rule applies to foreign 
losses apportioned to foreign income pursuant to the above 
rule. If a separate limitation loss was apportioned to income 
subject to another separate limitation category and the loss 
category has income for a subsequent taxable year, then that 
income (to the extent that it does not exceed the aggregate 
separate limitation losses in the loss category not previously 
recharacterized) must be recharacterized as income in the 
separate limitation category that was previously offset by the 
loss. Such recharacterization must be made in proportion to the 
prior loss apportionment not previously taken into account.
    A U.S.-source loss reduces pre-credit U.S. tax on worldwide 
income to an amount less than the hypothetical tax that would 
apply to the taxpayer's foreign-source income if viewed in 
isolation. The existence of foreign-source taxable income in 
the year of the U.S.-source loss reduces or eliminates any net 
operating loss carryover that the U.S.-source loss would 
otherwise have generated absent the foreign income. In 
addition, as the pre-credit U.S. tax on worldwide income is 
reduced, so is the foreign tax credit limitation. Moreover, any 
U.S.-source loss for any taxable year is apportioned among (and 
operates to reduce) foreign income in the separate limitation 
categories on a proportionate basis. As a result, some foreign 
tax credits in the year of the U.S.-source loss must be 
credited, if at all, in a carryover year. Tax on U.S.-source 
taxable income in a subsequent year may be offset by a net 
operating loss carryforward, but not by a foreign tax credit 
carryforward. There is currently no mechanism for 
recharacterizing such subsequent U.S.-source income as foreign-
source income.
    For example, suppose a taxpayer generates a $100 U.S.-
source loss and earns $100 of foreign-source income in Year 1, 
and pays $30 of foreign tax on the $100 of foreign-source 
income. Because the taxpayer has no net taxable income in Year 
1, no foreign tax credit can be claimed in Year 1 with respect 
to the $30 of foreign taxes. If the taxpayer then earns $100 of 
U.S.-source income and $100 of foreign-source income in Year 2, 
present law does not recharacterize any portion of the $100 of 
U.S.-source income as foreign-source income to reflect the fact 
that the previous year's $100 U.S.-source loss reduced the 
taxpayer's ability to claim foreign tax credits.

                           REASONS FOR CHANGE

    The Committee believes that it is important to create 
parity in the treatment of overall foreign losses and overall 
domestic losses in order to prevent the double taxation of 
income. The Committee believes that preventing double taxation 
will make U.S. businesses more competitive and will lead to 
increased export sales. The Committee believes that this 
increase in export sales will increase production in the United 
States and increase jobs in the United States to support the 
increased exports.

                        EXPLANATION OF PROVISION

    The provision applies a re-sourcing rule to U.S.-source 
income in cases in which a taxpayer's foreign tax credit 
limitation has been reduced as a result of an overall domestic 
loss. Under the provision, a portion of the taxpayer's U.S.-
source income for each succeeding taxable year is 
recharacterized as foreign-source income in an amount equal to 
the lesser of: (1) the amount of the unrecharacterized overall 
domestic losses for years prior to such succeeding taxable 
year, and (2) 50 percent of the taxpayer's U.S.-source income 
for such succeeding taxable year.
    The provision defines an overall domestic loss for this 
purpose as any domestic loss to the extent it offsets foreign-
source taxable income for the current taxable year or for any 
preceding taxable year by reason of a loss carryback. For this 
purpose, a domestic loss means the amount by which the U.S.-
source gross income for the taxable year is exceeded by the sum 
of the deductions properly apportioned or allocated thereto, 
determined without regard to any loss carried back from a 
subsequent taxable year. Under the provision, an overall 
domestic loss does not include any loss for any taxable year 
unless the taxpayer elected the use of the foreign tax credit 
for such taxable year.
    Any U.S.-source income recharacterized under the provision 
is allocated among and increases the various foreign tax credit 
separate limitation categories in the same proportion that 
those categories were reduced by the prior overall domestic 
losses, in a manner similar to the recharacterization rules for 
separate limitation losses.
    It is anticipated that situations may arise in which a 
taxpayer generates an overall domestic loss in a year following 
a year in which it had an overall foreign loss, or vice versa. 
In such a case, it would be necessary for ordering and other 
coordination rules to be developed for purposes of computing 
the foreign tax credit limitation in subsequent taxable years. 
The provision grants the Secretary of the Treasury authority to 
prescribe such regulations as may be necessary to coordinate 
the operation of the OFL recapture rules with the operation of 
the overall domestic loss recapture rules added by the 
provision.

                             EFFECTIVE DATE

    The provision applies to losses incurred in taxable years 
beginning after December 31, 2006.

             C. Reduction to Two Foreign Tax Credit Baskets


(Sec. 303 of the bill and sec. 904 of the Code)

                              PRESENT LAW

In general

    The United States taxes its citizens and residents on their 
worldwide income. Because the countries in which income is 
earned also may assert their jurisdiction to tax the same 
income on the basis of source, foreign-source income earned by 
U.S. persons may be subject to double taxation. In order to 
mitigate this possibility, the United States provides a credit 
against U.S. tax liability for foreign income taxes paid, 
subject to a number of limitations. The foreign tax credit 
generally is limited to the U.S. tax liability on a taxpayer's 
foreign-source income, in order to ensure that the credit 
serves its purpose of mitigating double taxation of cross-
border income without offsetting the U.S. tax on U.S.-source 
income.
    The foreign tax credit limitation is applied separately to 
the following categories of income: (1) passive income, (2) 
high withholding tax interest, (3) financial services income, 
(4) shipping income, (5) certain dividends received from 
noncontrolled section 902 foreign corporations (``10/50 
companies''),\122\ (6) certain dividends from a domestic 
international sales corporation or former domestic 
international sales corporation, (7) taxable income 
attributable to certain foreign trade income, (8) certain 
distributions from a foreign sales corporation or former 
foreign sales corporation, and (9) any other income not 
described in items (1) through (8) (so-called ``general 
basket'' income). In addition, a number of other provisions of 
the Code and U.S. tax treaties effectively create additional 
separate limitations in certain circumstances.\123\
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    \122\ Subject to certain exceptions, dividends paid by a 10/50 
company in taxable years beginning after December 31, 2002 are subject 
to either a look-through approach in which the dividend is attributed 
to a particular limitation category based on the underlying earnings 
which gave rise to the dividend (for post-2002 earnings and profits), 
or a single-basket limitation approach for dividends from all 10/50 
companies that are not passive foreign investment companies (for pre-
2003 earnings and profits). Under section 304 of the bill, these 
dividends are subject to a look-through approach, irrespective of when 
the underlying earnings and profits arose.
    \123\ See, e.g., sec. 56(g)(4)(C)(iii)(IV) (relating to certain 
dividends from corporations eligible for the sec. 936 credit); sec. 
245(a)(10) (relating to certain dividends treated as foreign source 
under treaties); sec. 865(h)(1)(B) (relating to certain gains from 
stock and intangibles treated as foreign source under treaties); sec. 
901(j)(1)(B) (relating to income from certain specified countries); and 
sec. 904(g)(10)(A) (relating to interest, dividends, and certain other 
amounts derived from U.S.-owned foreign corporations and treated as 
foreign source under treaties).
---------------------------------------------------------------------------

Financial services income

    In general, the term ``financial services income'' includes 
income received or accrued by a person predominantly engaged in 
the active conduct of a banking, insurance, financing, or 
similar business, if the income is derived in the active 
conduct of a banking, financing or similar business, or is 
derived from the investment by an insurance company of its 
unearned premiums or reserves ordinary and necessary for the 
proper conduct of its insurance business (sec. 904(d)(2)(C)). 
The Code also provides that financial services income includes 
income, received or accrued by a person predominantly engaged 
in the active conduct of a banking, insurance, financing, or 
similar business, of a kind which would generally be insurance 
income (as defined in section 953(a)), among other items.
    Treasury regulations provide that a person is predominantly 
engaged in the active conduct of a banking, insurance, 
financing, or similar business for any year if for that year at 
least 80 percent of its gross income is ``active financing 
income.'' \124\ The regulations further provide that a 
corporation that is not predominantly engaged in the active 
conduct of a banking, insurance, financing, or similar business 
under the preceding definition can derive financial services 
income if the corporation is a member of an affiliated group 
(as defined in section 1504(a), but expanded to include foreign 
corporations) that, as a whole, meets the regulatory test of 
being ``predominantly engaged.'' \125\ In determining whether 
an affiliated group is ``predominantly engaged,'' only the 
income of members of the group that are U.S. corporations, or 
controlled foreign corporations in which such U.S. corporations 
own (directly or indirectly) at least 80 percent of the total 
voting power and value of the stock, are counted.
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    \124\ Treas. Reg. sec. 1.904-4(e)(3)(i) and (2)(i).
    \125\ Treas. Reg. sec. 1.904-4(e)(3)(ii).
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``Base difference'' items

    Under Treasury regulations, foreign taxes are allocated and 
apportioned to the same limitation categories as the income to 
which they relate.\126\ In cases in which foreign law imposes 
tax on an item of income that does not constitute income under 
U.S. tax principles (a ``base difference'' item), the tax is 
treated as imposed on income in the general limitation 
category.\127\
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    \126\ Treas. Reg. sec. 1.904-6.
    \127\ Treas. Reg. sec. 1.904-6(a)(1)(iv).
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                           REASONS FOR CHANGE

    The Committee believes that requiring taxpayers to separate 
income and tax credits into nine separate tax baskets creates 
some of the most complex tax reporting and compliance issues in 
the Code. Reducing the number of foreign tax credit baskets to 
two will greatly simplify the Code and undo much of the 
complexity created by the Tax Reform Act of 1986. The Committee 
believes that simplifying these rules will reduce double 
taxation, make U.S. businesses more competitive, and create 
jobs in the United States.

                        EXPLANATION OF PROVISION

In general

    The provision generally reduces the number of foreign tax 
credit limitation categories to two: passive category income 
and general category income. Other income is included in one of 
the two categories, as appropriate. For example, shipping 
income generally falls into the general limitation category, 
whereas high withholding tax interest generally could fall into 
the passive income or the general limitation category, 
depending on the circumstances. Dividends from a domestic 
international sales corporation or former domestic 
international sales corporation, income attributable to certain 
foreign trade income, and certain distributions from a foreign 
sales corporation or former foreign sales corporation all are 
assigned to the passive income limitation category. The 
provision does not affect the separate computation of foreign 
tax credit limitations under special provisions of the Code 
relating to, for example, treaty-based sourcing rules or 
specified countries under section 901(j).

Financial services income

    In the case of a member of a financial services group or 
any other person predominantly engaged in the active conduct of 
a banking, insurance, financing or similar business, the 
provision treats income meeting the definition of financial 
services income as general category income. Under the 
provision, a financial services group is an affiliated group 
that is predominantly engaged in the active conduct of a 
banking, insurance, financing or similar business. For this 
purpose, the definition of an affiliated group under section 
1504(a) is applied, but expanded to include certain insurance 
companies (without regard to whether such companies are covered 
by an election under section 1504(c)(2)) and foreign 
corporations. In determining whether such a group is 
predominantly engaged in the active conduct of a banking, 
insurance, financing, or similar business, only the income of 
members of the group that are U.S. corporations or controlled 
foreign corporations in which such U.S. corporations own 
(directly or indirectly) at least 80 percent of total voting 
power and value of the stock are taken into account.
    The provision does not alter the present law interpretation 
of what it means to be a ``person predominantly engaged in the 
active conduct of a banking, insurance, financing, or similar 
business.'' \128\ Thus, other provisions of the Code that rely 
on this same concept of a ``person predominantly engaged in the 
active conduct of a banking, insurance, financing, or similar 
business'' are not affected by the provision. For example, 
under the ``accumulated deficit rule'' of section 952(c)(1)(B), 
subpart F income inclusions of a U.S. shareholder attributable 
to a ``qualified activity'' of a controlled foreign corporation 
may be reduced by the amount of the U.S. shareholder's pro rata 
share of certain prior year deficits attributable to the same 
qualified activity. In the case of a qualified financial 
institution, qualified activity consists of any activity giving 
rise to foreign personal holding company income, but only if 
the controlled foreign corporation was predominantly engaged in 
the active conduct of a banking, financing, or similar business 
in both the year in which the corporation earned the income and 
the year in which the corporation incurred the deficit. 
Similarly, in the case of a qualified insurance company, 
qualified activity consists of activity giving rise to 
insurance income or foreign personal holding company income, 
but only if the controlled foreign corporation was 
predominantly engaged in the active conduct of an insurance 
business in both the year in which the corporation earned the 
income and the year in which the corporation incurred the 
deficit. For this purpose, ``predominantly engaged in the 
active conduct of a banking, insurance, financing, or similar 
business'' is defined under present law by reference to the use 
of the term for purposes of the separate foreign tax credit 
limitations.\129\ The present-law meaning of ``predominantly 
engaged'' for purposes of section 952(c)(1)(B) remains 
unchanged under the provision.
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    \128\ See Treas. Reg. sec. 1.904-4(e).
    \129\ See H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-621 (1986); 
Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess., 
General Explanation of the Tax Reform Act of 1986, at 984 (1987).
---------------------------------------------------------------------------
    The provision requires the Treasury Secretary to specify 
the treatment of financial services income received or accrued 
by pass-through entities that are not members of a financial 
services group. The Committee expects these regulations to be 
generally consistent with regulations currently in effect.

``Base difference'' items

    Creditable foreign taxes that are imposed on amounts that 
do not constitute income under U.S. tax principles are treated 
as imposed on general limitation income.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2006.
    Taxes paid or accrued in a taxable year beginning before 
January 1, 2007, and carried to any subsequent taxable year are 
treated as if this provision were in effect on the date such 
taxes were paid or accrued. Thus, such taxes are assigned to 
one of the two foreign tax credit limitation categories, as 
appropriate.
    The Treasury Secretary is given authority to provide by 
regulations for the allocation of income with respect to taxes 
carried back to pre-effective-date years (in which more than 
two limitation categories are in effect).

D. Look-Through Rules To Apply to Dividends From Noncontrolled Section 
                            902 Corporations


(Sec. 304 of the bill and sec. 904 of the Code)

                              PRESENT LAW

    U.S. persons may credit foreign taxes against U.S. tax on 
foreign-source income. In general, the amount of foreign tax 
credits that may be claimed in a year is subject to a 
limitation that prevents taxpayers from using foreign tax 
credits to offset U.S. tax on U.S.-source income. Separate 
limitations are also applied to specific categories of income.
    Special foreign tax credit limitations apply in the case of 
dividends received from a foreign corporation in which the 
taxpayer owns at least 10 percent of the stock by vote and 
which is not a controlled foreign corporation (a so-called 
``10/50 company''). Dividends paid by a 10/50 company that is 
not a passive foreign investment company out of earnings and 
profits accumulated in taxable years beginning before January 
1, 2003 are subject to a single foreign tax credit limitation 
for all 10/50 companies (other than passive foreign investment 
companies).\130\ Dividends paid by a 10/50 company that is a 
passive foreign investment company out of earnings and profits 
accumulated in taxable years beginning before January 1, 2003, 
continue to be subject to a separate foreign tax credit 
limitation for each such 10/50 company. Dividends paid by a 10/
50 company out of earnings and profits accumulated in taxable 
years after December 31, 2002 are treated as income in a 
foreign tax credit limitation category in proportion to the 
ratio of the 10/50 company's earnings and profits attributable 
to income in such foreign tax credit limitation category to its 
total earnings and profits (a ``look-through'' approach).
---------------------------------------------------------------------------
    \130\ Dividends paid by a 10/50 company in taxable years beginning 
before January 1, 2003 are subject to a separate foreign tax credit 
limitation for each 10/50 company.
---------------------------------------------------------------------------
    For these purposes, distributions are treated as made from 
the most recently accumulated earnings and profits. Regulatory 
authority is granted to provide rules regarding the treatment 
of distributions out of earnings and profits for periods prior 
to the taxpayer's acquisition of such stock.

                           REASONS FOR CHANGE

    The Committee believes that significant simplification can 
be achieved by eliminating the requirement that taxpayers 
segregate the earnings and profits of 10/50 companies on the 
basis of when such earnings and profits arose.

                        EXPLANATION OF PROVISION

    The provision generally applies the look-through approach 
to dividends paid by a 10/50 company regardless of the year in 
which the earnings and profits out of which the dividend is 
paid were accumulated.\131\ If the Treasury Secretary 
determines that a taxpayer has inadequately substantiated that 
it assigned a dividend from a 10/50 company to the proper 
foreign tax credit limitation category, the dividend is treated 
as passive category income for foreign tax credit basketing 
purposes.\132\
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    \131\ This look-through treatment also applies to dividends that a 
controlled foreign corporation receives from a 10/50 company and then 
distributes to a U.S. shareholder.
    \132\ It is anticipated that the Treasury Secretary will reconsider 
the operation of the foreign tax credit regulations to ensure that the 
high-tax income rules apply appropriately to dividends treated as 
passive category income because of inadequate substantiation.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2002.
    The provision also provides transition rules regarding the 
use of pre-effective-date foreign tax credits associated with a 
10/50 company separate limitation category in post-effective-
date years. Look-through principles similar to those applicable 
to post-effective-date dividends from a 10/50 company apply to 
determine the appropriate foreign tax credit limitation 
category or categories with respect to carrying forward foreign 
tax credits into future years. The provision allows the 
Treasury Secretary to issue regulations addressing the 
carryback of foreign tax credits associated with a dividend 
from a 10/50 company to pre-effective-date years.

  E. Attribution of Stock Ownership Through Partnerships To Apply in 
                Determining Section 902 and 960 Credits


(Sec. 305 of the bill and secs. 901, 902, and 960 of the Code)

                              PRESENT LAW

    Under section 902, a domestic corporation that receives a 
dividend from a foreign corporation in which it owns ten 
percent or more of the voting stock is deemed to have paid a 
portion of the foreign taxes paid by such foreign corporation. 
Thus, such a domestic corporation is eligible to claim a 
foreign tax credit with respect to such deemed-paid taxes. The 
domestic corporation that receives a dividend is deemed to have 
paid a portion of the foreign corporation's post-1986 foreign 
income taxes based on the ratio of the amount of the dividend 
to the foreign corporation's post-1986 undistributed earnings 
and profits.
    Foreign income taxes paid or accrued by lower-tier foreign 
corporations also are eligible for the deemed-paid credit if 
the foreign corporation falls within a qualified group (sec. 
902(b)). A ``qualified group'' includes certain foreign 
corporations within the first six tiers of a chain of foreign 
corporations if, among other things, the product of the 
percentage ownership of voting stock at each level of the chain 
(beginning from the domestic corporation) equals at least five 
percent. In addition, in order to claim indirect credits for 
foreign taxes paid by certain fourth-, fifth-, and sixth-tier 
corporations, such corporations must be controlled foreign 
corporations (within the meaning of sec. 957) and the 
shareholder claiming the indirect credit must be a U.S. 
shareholder (as defined in sec. 951(b)) with respect to the 
controlled foreign corporations. The application of the 
indirect foreign tax credit below the third tier is limited to 
taxes paid in taxable years during which the payor is a 
controlled foreign corporation. Foreign taxes paid below the 
sixth tier of foreign corporations are ineligible for the 
indirect foreign tax credit.
    Section 960 similarly permits a domestic corporation with 
subpart F inclusions from a controlled foreign corporation to 
claim deemed-paid foreign tax credits with respect to foreign 
taxes paid or accrued by the controlled foreign corporation on 
its subpart F income.
    The foreign tax credit provisions in the Code do not 
specifically address whether a domestic corporation owning ten 
percent or more of the voting stock of a foreign corporation 
through a partnership is entitled to a deemed-paid foreign tax 
credit.\133\ In Rev. Rul. 71-141,\134\ the IRS held that a 
foreign corporation's stock held indirectly by two domestic 
corporations through their interests in a domestic general 
partnership is attributed to such domestic corporations for 
purposes of determining the domestic corporations' eligibility 
to claim a deemed-paid foreign tax credit with respect to the 
foreign taxes paid by such foreign corporation. Accordingly, a 
general partner of a domestic general partnership is permitted 
to claim deemed-paid foreign tax credits with respect to a 
dividend distribution from the foreign corporation to the 
partnership.
---------------------------------------------------------------------------
    \133\ Under section 901(b)(5), an individual member of a 
partnership or a beneficiary of an estate or trust generally may claim 
a direct foreign tax credit with respect to the amount of his or her 
proportionate share of the foreign taxes paid or accrued by the 
partnership, estate, or trust. This rule does not specifically apply to 
corporations that are either members of a partnership or beneficiaries 
of an estate or trust. However, section 702(a)(6) provides that each 
partner (including individuals or corporations) of a partnership must 
take into account separately its distributive share of the 
partnership's foreign taxes paid or accrued. In addition, under section 
703(b)(3), the election under section 901 (whether to credit the 
foreign taxes) is made by each partner separately.
    \134\ 1971-1 C.B. 211.
---------------------------------------------------------------------------
    However, in 1997, the Treasury Department issued final 
regulations under section 902, and the preamble to the 
regulations states that ``[t]he final regulations do not 
resolve under what circumstances a domestic corporate partner 
may compute an amount of foreign taxes deemed paid with respect 
to dividends received from a foreign corporation by a 
partnership or other pass-through entity.'' \135\ In 
recognition of the holding in Rev. Rul. 71-141, the preamble to 
the final regulations under section 902 states that a 
``domestic shareholder'' for purposes of section 902 is a 
domestic corporation that ``owns'' the requisite voting stock 
in a foreign corporation rather than one that ``owns directly'' 
the voting stock. At the same time, the preamble states that 
the IRS is still considering under what other circumstances 
Rev. Rul. 71-141 should apply. Consequently, uncertainty 
remains regarding whether a domestic corporation owning ten 
percent or more of the voting stock of a foreign corporation 
through a partnership is entitled to a deemed-paid foreign tax 
credit (other than through a domestic general partnership).
---------------------------------------------------------------------------
    \135\ T.D. 8708, 1997-1 C.B. 137.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that a clarification is appropriate 
regarding the ability of a domestic corporation owning ten 
percent or more of the voting stock of a foreign corporation 
through a partnership to claim a deemed-paid foreign tax 
credit.

                        EXPLANATION OF PROVISION

    The provision clarifies that a domestic corporation is 
entitled to claim deemed-paid foreign tax credits with respect 
to a foreign corporation that is held indirectly through a 
foreign or domestic partnership, provided that the domestic 
corporation owns (indirectly through the partnership) ten 
percent or more of the foreign corporation's voting stock. No 
inference is intended as to the treatment of such deemed-paid 
foreign tax credits under present law. The provision also 
clarifies that both individual and corporate partners (or 
estate or trust beneficiaries) may claim direct foreign tax 
credits with respect to their proportionate shares of taxes 
paid or accrued by a partnership (or estate or trust).

                             EFFECTIVE DATE

    The provision applies to taxes of foreign corporations for 
taxable years of such corporations beginning after the date of 
enactment.

F. Foreign Tax Credit Treatment of Deemed Payments Under Section 367(d)


(Sec. 306 of the bill and sec. 367 of the Code)

                              PRESENT LAW

    In the case of transfers of intangible property to foreign 
corporations by means of contributions and certain other 
nonrecognition transactions, special rules apply that are 
designed to mitigate the tax avoidance that may arise from 
shifting the income attributable to intangible property 
offshore. Under section 367(d), the outbound transfer of 
intangible property is treated as a sale of the intangible for 
a stream of contingent payments. The amounts of these deemed 
payments must be commensurate with the income attributable to 
the intangible. The deemed payments are included in gross 
income of the U.S. transferor as ordinary income, and the 
earnings and profits of the foreign corporation to which the 
intangible was transferred are reduced by such amounts.
    The Taxpayer Relief Act of 1997 (the ``1997 Act'') repealed 
a rule that treated all such deemed payments as giving rise to 
U.S.-source income. Because the foreign tax credit is generally 
limited to the U.S. tax imposed on foreign-source income, the 
prior-law rule reduced the taxpayer's ability to claim foreign 
tax credits. As a result of the repeal of the rule, the source 
of payments deemed received under section 367(d) is determined 
under general sourcing rules. These rules treat income from 
sales of intangible property for contingent payments the same 
as royalties, with the result that the deemed payments may give 
rise to foreign-source income.\136\
---------------------------------------------------------------------------
    \136\ Secs. 865(d), 862(a).
---------------------------------------------------------------------------
    The 1997 Act did not address the characterization of the 
deemed payments for purposes of applying the foreign tax credit 
separate limitation categories.\137\ If the deemed payments are 
treated like proceeds of a sale, then they could fall into the 
passive category; if the deemed payments are treated like 
royalties, then in many cases they could fall into the general 
category (under look-through rules applicable to payments of 
dividends, interest, rents, and royalties received from 
controlled foreign corporations).\138\
---------------------------------------------------------------------------
    \137\ Sec. 904(d).
    \138\ Sec. 904(d)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to 
characterize deemed payments under section 367(d) as royalties 
for purposes of applying the separate limitation categories of 
the foreign tax credit, and that this treatment should be 
effective for all transactions subject to the underlying 
provision of the 1997 Act.

                        EXPLANATION OF PROVISION

    The provision specifies that deemed payments under section 
367(d) are treated as royalties for purposes of applying the 
separate limitation categories of the foreign tax credit.

                             EFFECTIVE DATE

    The provision is effective for amounts treated as received 
on or after August 5, 1997 (the effective date of the relevant 
provision of the 1997 Act).

 G. United States Property Not To Include Certain Assets of Controlled 
                          Foreign Corporation


(Sec. 307 of the bill and sec. 956 of the Code)

                              PRESENT LAW

    In general, the subpart F rules \139\ require U.S. 
shareholders with a 10-percent or greater interest in a 
controlled foreign corporation (``U.S. 10-percent 
shareholders'') to include in taxable income their pro rata 
shares of certain income of the controlled foreign corporation 
(referred to as ``subpart F income'') when such income is 
earned, whether or not the earnings are distributed currently 
to the shareholders. In addition, the U.S. 10-percent 
shareholders of a controlled foreign corporation are subject to 
U.S. tax on their pro rata shares of the controlled foreign 
corporation's earnings to the extent invested by the controlled 
foreign corporation in certain U.S. property in a taxable 
year.\140\
---------------------------------------------------------------------------
    \139\ Secs. 951-964.
    \140\ Sec. 951(a)(1)(B).
---------------------------------------------------------------------------
    A shareholder's income inclusion with respect to a 
controlled foreign corporation's investment in U.S. property 
for a taxable year is based on the controlled foreign 
corporation's average investment in U.S. property for such 
year. For this purpose, the U.S. property held (directly or 
indirectly) by the controlled foreign corporation must be 
measured as of the close of each quarter in the taxable 
year.\141\ The amount taken into account with respect to any 
property is the property's adjusted basis as determined for 
purposes of reporting the controlled foreign corporation's 
earnings and profits, reduced by any liability to which the 
property is subject. The amount determined for inclusion in 
each taxable year is the shareholder's pro rata share of an 
amount equal to the lesser of: (1) the controlled foreign 
corporation's average investment in U.S. property as of the end 
of each quarter of such taxable year, to the extent that such 
investment exceeds the foreign corporation's earnings and 
profits that were previously taxed on that basis; or (2) the 
controlled foreign corporation's current or accumulated 
earnings and profits (but not including a deficit), reduced by 
distributions during the year and by earnings that have been 
taxed previously as earnings invested in U.S. property.\142\ An 
income inclusion is required only to the extent that the amount 
so calculated exceeds the amount of the controlled foreign 
corporation's earnings that have been previously taxed as 
subpart F income.\143\
---------------------------------------------------------------------------
    \141\ Sec. 956(a).
    \142\ Secs. 956 and 959.
    \143\ Secs. 951(a)(1)(B) and 959.
---------------------------------------------------------------------------
    For purposes of section 956, U.S. property generally is 
defined to include tangible property located in the United 
States, stock of a U.S. corporation, an obligation of a U.S. 
person, and certain intangible assets including a patent or 
copyright, an invention, model or design, a secret formula or 
process or similar property right which is acquired or 
developed by the controlled foreign corporation for use in the 
United States.\144\
---------------------------------------------------------------------------
    \144\ Sec. 956(c)(1).
---------------------------------------------------------------------------
    Specified exceptions from the definition of U.S. property 
are provided for: (1) obligations of the United States, money, 
or deposits with persons carrying on the banking business; (2) 
certain export property; (3) certain trade or business 
obligations; (4) aircraft, railroad rolling stock, vessels, 
motor vehicles or containers used in transportation in foreign 
commerce and used predominantly outside of the United States; 
(5) certain insurance company reserves and unearned premiums 
related to insurance of foreign risks; (6) stock or debt of 
certain unrelated U.S. corporations; (7) moveable property 
(other than a vessel or aircraft) used for the purpose of 
exploring, developing, or certain other activities in 
connection with the ocean waters of the U.S. Continental Shelf; 
(8) an amount of assets equal to the controlled foreign 
corporation's accumulated earnings and profits attributable to 
income effectively connected with a U.S. trade or business; (9) 
property (to the extent provided in regulations) held by a 
foreign sales corporation and related to its export activities; 
(10) certain deposits or receipts of collateral or margin by a 
securities or commodities dealer, if such deposit is made or 
received on commercial terms in the ordinary course of the 
dealer's business as a securities or commodities dealer; and 
(11) certain repurchase and reverse repurchase agreement 
transactions entered into by or with a dealer in securities or 
commodities in the ordinary course of its business as a 
securities or commodities dealer.\145\
---------------------------------------------------------------------------
    \145\ Sec. 956(c)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the acquisition of securities 
by a controlled foreign corporation in the ordinary course of 
its business as a securities dealer generally should not give 
rise to an income inclusion as an investment in U.S. property 
under the provisions of subpart F. Similarly, the Committee 
believes that the acquisition by a controlled foreign 
corporation of obligations issued by unrelated U.S. 
noncorporate persons generally should not give rise to an 
income inclusion as an investment in U.S. property.

                        EXPLANATION OF PROVISION

    The provision adds two new exceptions from the definition 
of U.S. property for determining current income inclusion by a 
U.S. 10-percent shareholder with respect to an investment in 
U.S. property by a controlled foreign corporation.
    The first exception generally applies to securities 
acquired and held by a controlled foreign corporation in the 
ordinary course of its trade or business as a dealer in 
securities. The exception applies only if the controlled 
foreign corporation dealer: (1) accounts for the securities as 
securities held primarily for sale to customers in the ordinary 
course of business; and (2) disposes of such securities (or 
such securities mature while being held by the dealer) within a 
period consistent with the holding of securities for sale to 
customers in the ordinary course of business.
    The second exception generally applies to the acquisition 
by a controlled foreign corporation of obligations issued by a 
U.S. person that is not a domestic corporation and that is not 
(1) a U.S. 10-percent shareholder of the controlled foreign 
corporation, or (2) a partnership, estate or trust in which the 
controlled foreign corporation or any related person is a 
partner, beneficiary or trustee immediately after the 
acquisition by the controlled foreign corporation of such 
obligation.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and for taxable 
years of United States shareholders with or within which such 
taxable years of such foreign corporations end.

H. Election Not To Use Average Exchange Rate for Foreign Tax Paid Other 
                      Than in Functional Currency


(Sec. 308 of the bill and sec. 986 of the Code)

                              PRESENT LAW

    For taxpayers that take foreign income taxes into account 
when accrued, present law provides that the amount of the 
foreign tax credit generally is determined by translating the 
amount of foreign taxes paid in foreign currencies into a U.S. 
dollar amount at the average exchange rate for the taxable year 
to which such taxes relate.\146\ This rule applies to foreign 
taxes paid directly by U.S. taxpayers, which taxes are 
creditable in the year paid or accrued, and to foreign taxes 
paid by foreign corporations that are deemed paid by a U.S. 
corporation that is a shareholder of the foreign corporation, 
and hence creditable in the year that the U.S. corporation 
receives a dividend or has an income inclusion from the foreign 
corporation. This rule does not apply to any foreign income 
tax: (1) that is paid after the date that is two years after 
the close of the taxable year to which such taxes relate; (2) 
of an accrual-basis taxpayer that is actually paid in a taxable 
year prior to the year to which the tax relates; or (3) that is 
denominated in an inflationary currency (as defined by 
regulations).
---------------------------------------------------------------------------
    \146\ Sec. 986(a)(1).
---------------------------------------------------------------------------
    Foreign taxes that are not eligible for translation at the 
average exchange rate generally are translated into U.S. dollar 
amounts using the exchange rates as of the time such taxes are 
paid. However, the Secretary is authorized to issue regulations 
that would allow foreign tax payments to be translated into 
U.S. dollar amounts using an average exchange rate for a 
specified period.\147\
---------------------------------------------------------------------------
    \147\ Sec. 986(a)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that taxpayers generally should be 
permitted to elect whether to translate foreign income tax 
payments using an average exchange rate for the taxable year or 
the exchange rate when the taxes are paid, provided the elected 
method continues to be applied consistently unless revoked with 
the consent of the Treasury Secretary.

                        EXPLANATION OF PROVISION

    For taxpayers that are required under present law to 
translate foreign income tax payments at the average exchange 
rate, the provision provides an election to translate such 
taxes into U.S. dollar amounts using the exchange rates as of 
the time such taxes are paid, provided the foreign income taxes 
are denominated in a currency other than the taxpayer's 
functional currency.\148\ Any election under the provision 
applies to the taxable year for which the election is made and 
to all subsequent taxable years unless revoked with the consent 
of the Secretary. The provision authorizes the Secretary to 
issue regulations that apply the election to foreign income 
taxes attributable to a qualified business unit.
---------------------------------------------------------------------------
    \148\ Electing taxpayers translate foreign income tax payments 
pursuant to the same present-law rules that apply to taxpayers that are 
required to translate foreign income taxes using the exchange rates as 
of the time such taxes are paid.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective with respect to taxable years 
beginning after December 31, 2004.

    I. Repeal of Withholding Tax on Dividends From Certain Foreign 
                              Corporations


(Sec. 309 of the bill and sec. 871 of the Code)

                              PRESENT LAW

    Nonresident individuals who are not U.S. citizens and 
foreign corporations (collectively, foreign persons) are 
subject to U.S. tax on income that is effectively connected 
with the conduct of a U.S. trade or business; the U.S. tax on 
such income is calculated in the same manner and at the same 
graduated rates as the tax on U.S. persons (secs. 871(b) and 
882). Foreign persons also are subject to a 30-percent gross 
basis tax, collected by withholding, on certain U.S.-source 
passive income (e.g., interest and dividends) that is not 
effectively connected with a U.S. trade or business. This 30-
percent withholding tax may be reduced or eliminated pursuant 
to an applicable tax treaty. Foreign persons generally are not 
subject to U.S. tax on foreign-source income that is not 
effectively connected with a U.S. trade or business.
    In general, dividends paid by a domestic corporation are 
treated as being from U.S. sources and dividends paid by a 
foreign corporation are treated as being from foreign sources. 
Thus, dividends paid by foreign corporations to foreign persons 
generally are not subject to withholding tax because such 
income generally is treated as foreign-source income.
    An exception from this general rule applies in the case of 
dividends paid by certain foreign corporations. If a foreign 
corporation derives 25 percent or more of its gross income as 
income effectively connected with a U.S. trade or business for 
the three-year period ending with the close of the taxable year 
preceding the declaration of a dividend, then a portion of any 
dividend paid by the foreign corporation to its shareholders 
will be treated as U.S.-source income and, in the case of 
dividends paid to foreign shareholders, will be subject to the 
30-percent withholding tax (sec. 861(a)(2)(B)). This rule is 
sometimes referred to as the ``secondary withholding tax.'' The 
portion of the dividend treated as U.S.-source income is equal 
to the ratio of the gross income of the foreign corporation 
that was effectively connected with its U.S. trade or business 
over the total gross income of the foreign corporation during 
the three-year period ending with the close of the preceding 
taxable year. The U.S.-source portion of the dividend paid by 
the foreign corporation to its foreign shareholders is subject 
to the 30-percent withholding tax.
    Under the branch profits tax provisions, the United States 
taxes foreign corporations engaged in a U.S. trade or business 
on amounts of U.S. earnings and profits that are shifted out of 
the U.S. branch of the foreign corporation. The branch profits 
tax is comparable to the second-level taxes imposed on 
dividends paid by a domestic corporation to its foreign 
shareholders. The branch profits tax is 30 percent of the 
foreign corporation's ``dividend equivalent amount,'' which 
generally is the earnings and profits of a U.S. branch of a 
foreign corporation attributable to its income effectively 
connected with a U.S. trade or business (secs. 884(a) and (b)).
    If a foreign corporation is subject to the branch profits 
tax, then no secondary withholding tax is imposed on dividends 
paid by the foreign corporation to its shareholders (sec. 
884(e)(3)(A)). If a foreign corporation is a qualified resident 
of a tax treaty country and claims an exemption from the branch 
profits tax pursuant to the treaty, the secondary withholding 
tax could apply with respect to dividends it pays to its 
shareholders. Several tax treaties (including treaties that 
prevent imposition of the branch profits tax), however, exempt 
dividends paid by the foreign corporation from the secondary 
withholding tax.

                           REASONS FOR CHANGE

    The Committee observes that the secondary withholding tax 
with respect to dividends paid by certain foreign corporations 
has been largely superseded by the branch profits tax and 
applicable income tax treaties. Accordingly, the Committee 
believes that the tax should be repealed in the interest of 
simplification.

                        EXPLANATION OF PROVISION

    The provision eliminates the secondary withholding tax with 
respect to dividends paid by certain foreign corporations.

                             EFFECTIVE DATE

    The provision is effective for payments made after December 
31, 2004.

 J. Provide Equal Treatment for Interest Paid by Foreign Partnerships 
                        and Foreign Corporations


(Sec. 310 of the bill and sec. 861 of the Code)

                              PRESENT LAW

    In general, interest income from bonds, notes or other 
interest-bearing obligations of noncorporate U.S. residents or 
domestic corporations is treated as U.S.-source income.\149\ 
Other interest (e.g., interest on obligations of foreign 
corporations and foreign partnerships) generally is treated as 
foreign-source income. However, Treasury regulations provide 
that a foreign partnership is a U.S. resident for purposes of 
this rule if at any time during its taxable year it is engaged 
in a trade or business in the United States.\150\ Therefore, 
any interest received from such a foreign partnership is U.S.-
source income.
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    \149\ Sec. 861(a)(1).
    \150\ Treas. Reg. sec. 1.861-2(a)(2).
---------------------------------------------------------------------------
    Notwithstanding the general rule described above, in the 
case of a foreign corporation engaged in a U.S. trade or 
business (or having gross income that is treated as effectively 
connected with the conduct of a U.S. trade or business), 
interest paid by such U.S. trade or business is treated as if 
it were paid by a domestic corporation (i.e., such interest is 
treated as U.S.-source income).\151\
---------------------------------------------------------------------------
    \151\ Sec. 884(f)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the source of interest income 
received from a foreign partnership or foreign corporation 
should be consistent. The Committee believes that interest 
payments from a foreign partnership engaged in a trade or 
business in the United States should be sourced in the same 
manner as interest payments from a foreign corporation engaged 
in a trade or business in the United States.

                        EXPLANATION OF PROVISION

    The provision treats interest paid by foreign partnerships 
in a manner similar to the treatment of interest paid by 
foreign corporations. Thus, interest paid by a foreign 
partnership is treated as U.S.-source income only if the 
interest is paid by a U.S. trade or business conducted by the 
partnership or is allocable to income that is treated as 
effectively connected with the conduct of a U.S. trade or 
business. The provision applies only to foreign partnerships 
that are predominantly engaged in the active conduct of a trade 
or business outside the United States.

                             EFFECTIVE DATE

    This provision is effective for taxable years beginning 
after December 31, 2003.

   K. Look-Through Treatment of Payments Between Related Controlled 
  Foreign Corporations Under Foreign Personal Holding Company Income 
                                 Rules


(Sec. 311 of the bill and sec. 954 of the Code)

                              PRESENT LAW

    In general, the rules of subpart F (secs. 951-964) require 
U.S. shareholders with a 10-percent or greater interest in a 
controlled foreign corporation to include certain income of the 
controlled foreign corporation (referred to as ``subpart F 
income'') on a current basis for U.S. tax purposes, regardless 
of whether the income is distributed to the shareholders.
    Subpart F income includes foreign base company income. One 
category of foreign base company income is foreign personal 
holding company income. For subpart F purposes, foreign 
personal holding company income generally includes dividends, 
interest, rents and royalties, among other types of income. 
However, foreign personal holding company income does not 
include dividends and interest received by a controlled foreign 
corporation from a related corporation organized and operating 
in the same foreign country in which the controlled foreign 
corporation is organized, or rents and royalties received by a 
controlled foreign corporation from a related corporation for 
the use of property within the country in which the controlled 
foreign corporation is organized. Interest, rent, and royalty 
payments do not qualify for this exclusion to the extent that 
such payments reduce the subpart F income of the payor.

                           REASONS FOR CHANGE

    Most countries allow their companies to redeploy active 
foreign earnings with no additional tax burden. The Committee 
believes that this provision will make U.S. companies and U.S. 
workers more competitive with respect to such countries. By 
allowing U.S. companies to reinvest their active foreign 
earnings where they are most needed without incurring the 
immediate additional tax that companies based in many other 
countries never incur, the Committee believes that the 
provision will enable U.S. companies to make more sales 
overseas, and thus produce more goods in the United States.

                        EXPLANATION OF PROVISION

    Under the provision, dividends, interest, rents, and 
royalties received by one controlled foreign corporation from a 
related controlled foreign corporation are not treated as 
foreign personal holding company income to the extent 
attributable or properly allocable to non-subpart-F income of 
the payor. For these purposes, a related controlled foreign 
corporation is a controlled foreign corporation that controls 
or is controlled by the other controlled foreign corporation, 
or a controlled foreign corporation that is controlled by the 
same person or persons that control the other controlled 
foreign corporation. Ownership of more than 50 percent of the 
controlled foreign corporation's stock (by vote or value) 
constitutes control for these purposes.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

  L. Look-Through Treatment Under Subpart F for Sales of Partnership 
                               Interests


(Sec. 312 of the bill and sec. 954 of the Code)

                              PRESENT LAW

    In general, the subpart F rules (secs. 951-964) require 
U.S. shareholders with a 10-percent or greater interest in a 
controlled foreign corporation to include in income currently 
for U.S. tax purposes certain types of income of the controlled 
foreign corporation, whether or not such income is actually 
distributed currently to the shareholders (referred to as 
``subpart F income''). Subpart F income includes foreign 
personal holding company income. Foreign personal holding 
company income generally consists of the following: (1) 
dividends, interest, royalties, rents, and annuities; (2) net 
gains from the sale or exchange of (a) property that gives rise 
to the preceding types of income, (b) property that does not 
give rise to income, and (c) interests in trusts, partnerships, 
and REMICs; (3) net gains from commodities transactions; (4) 
net gains from foreign currency transactions; (5) income that 
is equivalent to interest; (6) income from notional principal 
contracts; and (7) payments in lieu of dividends. Thus, if a 
controlled foreign corporation sells a partnership interest at 
a gain, the gain generally constitutes foreign personal holding 
company income and is included in the income of 10-percent U.S. 
shareholders of the controlled foreign corporation as subpart F 
income.

                           REASONS FOR CHANGE

    The Committee believes that the sale of a partnership 
interest by a controlled foreign corporation that owns a 
significant interest in the partnership should constitute 
subpart F income only to the extent that a proportionate sale 
of the underlying partnership assets attributable to the 
partnership interest would constitute subpart F income.

                        EXPLANATION OF PROVISION

    The provision treats the sale by a controlled foreign 
corporation of a partnership interest as a sale of the 
proportionate share of partnership assets attributable to such 
interest for purposes of determining subpart F foreign personal 
holding company income. This rule applies only to partners 
owning directly, indirectly, or constructively at least 25 
percent of a capital or profits interest in the partnership. 
Thus, the sale of a partnership interest by a controlled 
foreign corporation that meets this ownership threshold 
constitutes subpart F income under the provision only to the 
extent that a proportionate sale of the underlying partnership 
assets attributable to the partnership interest would 
constitute subpart F income. The Treasury Secretary is directed 
to prescribe such regulations as may be appropriate to prevent 
the abuse of this provision.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

    M. Repeal of Foreign Personal Holding Company Rules and Foreign 
                        Investment Company Rules


(Sec. 313 of the bill and secs. 542, 551-558, 954, 1246, and 1247 of 
        the Code)

                              PRESENT LAW

    Income earned by a foreign corporation from its foreign 
operations generally is subject to U.S. tax only when such 
income is distributed to any U.S. persons that hold stock in 
such corporation. Accordingly, a U.S. person that conducts 
foreign operations through a foreign corporation generally is 
subject to U.S. tax on the income from those operations when 
the income is repatriated to the United States through a 
dividend distribution to the U.S. person. The income is 
reported on the U.S. person's tax return for the year the 
distribution is received, and the United States imposes tax on 
such income at that time. The foreign tax credit may reduce the 
U.S. tax imposed on such income.
    Several sets of anti-deferral rules impose current U.S. tax 
on certain income earned by a U.S. person through a foreign 
corporation. Detailed rules for coordination among the anti-
deferral rules are provided to prevent the U.S. person from 
being subject to U.S. tax on the same item of income under 
multiple rules.
    The Code sets forth the following anti-deferral rules: the 
controlled foreign corporation rules of subpart F (secs. 951-
964); the passive foreign investment company rules (secs. 1291-
1298); the foreign personal holding company rules (secs. 551-
558); the personal holding company rules (secs. 541-547); the 
accumulated earnings tax rules (secs. 531-537); and the foreign 
investment company rules (secs. 1246-1247).

                           REASONS FOR CHANGE

    The Committee believes that the overlap among the various 
anti-deferral regimes results in significant complexity usually 
with little or no ultimate tax consequences. These overlaps 
require the application of specific rules of priority for 
income inclusions among the regimes, as well as additional 
coordination provisions pertaining to other operational 
differences among the various regimes. The Committee believes 
that significant simplification will be achieved by 
streamlining these rules.

                        EXPLANATION OF PROVISION

    The provision: (1) eliminates the rules applicable to 
foreign personal holding companies and foreign investment 
companies; (2) excludes foreign corporations from the 
application of the personal holding company rules; and (3) 
includes as subpart F foreign personal holding company income 
personal services contract income that is subject to the 
present-law foreign personal holding company rules.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.

   N. Determination of Foreign Personal Holding Company Income With 
                 Respect to Transactions in Commodities


(Sec. 314 of the bill and sec. 954 of the Code)

                              PRESENT LAW

Subpart F foreign personal holding company income

    Under the subpart F rules, U.S. shareholders with a 10-
percent or greater interest in a controlled foreign corporation 
(``U.S. 10-percent shareholders'') are subject to U.S. tax 
currently on certain income earned by the controlled foreign 
corporation, whether or not such income is distributed to the 
shareholders. The income subject to current inclusion under the 
subpart F rules includes, among other things, ``foreign 
personal holding company income.''
    Foreign personal holding company income generally consists 
of the following: dividends, interest, royalties, rents and 
annuities; net gains from sales or exchanges of (1) property 
that gives rise to the foregoing types of income, (2) property 
that does not give rise to income, and (3) interests in trusts, 
partnerships, and real estate mortgage investment conduits 
(``REMICs''); net gains from commodities transactions; net 
gains from foreign currency transactions; income that is 
equivalent to interest; income from notional principal 
contracts; and payments in lieu of dividends.
    With respect to transactions in commodities, foreign 
personal holding company income does not consist of gains or 
losses which arise out of bona fide hedging transactions that 
are reasonably necessary to the conduct of any business by a 
producer, processor, merchant, or handler of a commodity in the 
manner in which such business is customarily and usually 
conducted by others.\152\ In addition, foreign personal holding 
company income does not consist of gains or losses which are 
comprised of active business gains or losses from the sale of 
commodities, but only if substantially all of the controlled 
foreign corporation's business is as an active producer, 
processor, merchant, or handler of commodities.\153\
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    \152\ For hedging transactions entered into on or after January 31, 
2003, Treasury regulations provide that gains or losses from a 
commodities hedging transaction generally are excluded from the 
definition of foreign personal holding company income if the 
transaction is with respect to the controlled foreign corporation's 
business as a producer, processor, merchant or handler of commodities, 
regardless of whether the transaction is a hedge with respect to a sale 
of commodities in the active conduct of a commodities business by the 
controlled foreign corporation. The regulations also provide that, for 
purposes of satisfying the requirements for exclusion from the 
definition of foreign personal holding company income, a producer, 
processor, merchant or handler of commodities includes a controlled 
foreign corporation that regularly uses commodities in a manufacturing, 
construction, utilities, or transportation business (Treas. Reg. sec. 
1.954-2(f)(2)(v)). However, the regulations provide that a controlled 
foreign corporation is not a producer, processor, merchant or handler 
of commodities (and therefore would not satisfy the requirements for 
exclusion) if its business is primarily financial (Treas. Reg. sec. 
1.954-2(f)(2)(v)).
    \153\ Treasury regulations provide that substantially all of a 
controlled foreign corporation's business is as an active producer, 
processor, merchant or handler of commodities if: (1) the sum of its 
gross receipts from all of its active sales of commodities in such 
capacity and its gross receipts from all of its commodities hedging 
transactions that qualify for exclusion from the definition of foreign 
personal holding company income, equals or exceeds (2) 85 percent of 
its total receipts for the taxable year (computed as though the 
controlled foreign corporation was a domestic corporation) (Treas. Reg. 
sec. 1.954-2(f)(2)(iii)(C)).
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Hedging transactions

    Under present law, the term ``capital asset'' does not 
include any hedging transaction which is clearly identified as 
such before the close of the day on which it was acquired, 
originated, or entered into (or such other time as the 
Secretary may by regulations prescribe).\154\ The term 
``hedging transaction'' means any transaction entered into by 
the taxpayer in the normal course of the taxpayer's trade or 
business primarily: (1) to manage risk of price changes or 
currency fluctuations with respect to ordinary property which 
is held or to be held by the taxpayer; (2) to manage risk of 
interest rate or price changes or currency fluctuations with 
respect to borrowings made or to be made, or ordinary 
obligations incurred or to be incurred, by the taxpayer; or (3) 
to manage such other risks as the Secretary may prescribe in 
regulations.\155\
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    \154\ Sec. 1221(a)(7).
    \155\ Sec. 1221(b)(2)(A).
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                           REASONS FOR CHANGE

    The Committee believes that exceptions from subpart F 
foreign personal holding company income for commodities hedging 
transactions and active business sales of commodities should be 
modified to better reflect current active business practices 
and, in the case of hedging transactions, to conform to recent 
tax law changes concerning hedging transactions generally.

                        EXPLANATION OF PROVISION

    The provision modifies the requirements that must be 
satisfied for gains or losses from a commodities hedging 
transaction to qualify for exclusion from the definition of 
subpart F foreign personal holding company income. Under the 
provision, gains or losses from a transaction with respect to a 
commodity are not treated as foreign personal holding company 
income if the transaction satisfies the general definition of a 
hedging transaction under section 1221(b)(2). For purposes of 
this provision, the general definition of a hedging transaction 
under section 1221(b)(2) is modified to include any transaction 
with respect to a commodity entered into by a controlled 
foreign corporation in the normal course of the controlled 
foreign corporation's trade or business primarily: (1) to 
manage risk of price changes or currency fluctuations with 
respect to ordinary property or property described in section 
1231(b) which is held or to be held by the controlled foreign 
corporation; or (2) to manage such other risks as the Secretary 
may prescribe in regulations. Gains or losses from a 
transaction that satisfies the modified definition of a hedging 
transaction are excluded from the definition of foreign 
personal holding company income only if the transaction is 
clearly identified as a hedging transaction in accordance with 
the hedge identification requirements that apply generally to 
hedging transactions under section 1221(b)(2).\156\
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    \156\ Sec. 1221(a)(7) and (b)(2)(B).
---------------------------------------------------------------------------
    The provision also changes the requirements that must be 
satisfied for active business gains or losses from the sale of 
commodities to qualify for exclusion from the definition of 
foreign personal holding company income. Under the provision, 
such gains or losses are not treated as foreign personal 
holding company income if substantially all of the controlled 
foreign corporation's commodities are comprised of: (1) stock 
in trade of the controlled foreign corporation or other 
property of a kind which would properly be included in the 
inventory of the controlled foreign corporation if on hand at 
the close of the taxable year, or property held by the 
controlled foreign corporation primarily for sale to customers 
in the ordinary course of the controlled foreign corporation's 
trade or business; (2) property that is used in the trade or 
business of the controlled foreign corporation and is of a 
character which is subject to the allowance for depreciation 
under section 167; or (3) supplies of a type regularly used or 
consumed by the controlled foreign corporation in the ordinary 
course of a trade or business of the controlled foreign 
corporation.\157\
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    \157\ For purposes of determining whether substantially all of the 
controlled foreign corporation's commodities are comprised of such 
property, it is intended that the 85-percent requirement provided in 
the current Treasury regulations (as modified to reflect the changes 
made by the provision) continue to apply.
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    For purposes of applying the requirements for active 
business gains or losses from commodities sales to qualify for 
exclusion from the definition of foreign personal holding 
company income, the provision also provides that commodities 
with respect to which gains or losses are not taken into 
account as foreign personal holding company income by a regular 
dealer in commodities (or financial instruments referenced to 
commodities) are not taken into account in determining whether 
substantially all of the dealer's commodities are comprised of 
the property described above.

                             EFFECTIVE DATE

    The provision is effective with respect to transactions 
entered into after December 31, 2004.

 O. Modifications to Treatment of Aircraft Leasing and Shipping Income


(Sec. 315 of the bill and sec. 954 of the Code)

                              PRESENT LAW

    In general, the subpart F rules (secs. 951-964) require 
U.S. shareholders with a 10-percent or greater interest in a 
controlled foreign corporation (``CFC'') to include currently 
in income for U.S. tax purposes certain income of the CFC 
(referred to as ``subpart F income''), without regard to 
whether the income is distributed to the shareholders (sec. 
951(a)(1)(A)). In effect, the Code treats the U.S. 10-percent 
shareholders of a CFC as having received a current distribution 
of their pro rata shares of the CFC's subpart F income. The 
amounts included in income by the CFC's U.S. 10-percent 
shareholders under these rules are subject to U.S. tax 
currently. The U.S. tax on such amounts may be reduced through 
foreign tax credits.
    Subpart F income includes foreign base company shipping 
income (sec. 954(f)). Foreign base company shipping income 
generally includes income derived from the use of an aircraft 
or vessel in foreign commerce, the performance of services 
directly related to the use of any such aircraft or vessel, the 
sale or other disposition of any such aircraft or vessel, and 
certain space or ocean activities (e.g., leasing of satellites 
for use in space). Foreign commerce generally involves the 
transportation of property or passengers between a port (or 
airport) in the U.S. and a port (or airport) in a foreign 
country, two ports (or airports) within the same foreign 
country, or two ports (or airports) in different foreign 
countries. In addition, foreign base company shipping income 
includes dividends and interest that a CFC receives from 
certain foreign corporations and any gains from the disposition 
of stock in certain foreign corporations, to the extent the 
dividends, interest, or gains are attributable to foreign base 
company shipping income. Foreign base company shipping income 
also includes incidental income derived in the course of active 
foreign base company shipping operations (e.g., income from 
temporary investments in or sales of related shipping assets), 
foreign exchange gain or loss attributable to foreign base 
company shipping operations, and a CFC's distributive share of 
gross income of any partnership and gross income received from 
certain trusts to the extent that the income would have been 
foreign base company shipping income had it been realized 
directly by the corporation.
    Subpart F income also includes foreign personal holding 
company income (sec. 954(c)). For subpart F purposes, foreign 
personal holding company income generally consists of the 
following: (1) dividends, interest, royalties, rents and 
annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and REMICS; (3) net gains from 
commodities transactions; (4) net gains from foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; and (7) payments in 
lieu of dividends.
    Subpart F foreign personal holding company income does not 
include rents and royalties received by a CFC in the active 
conduct of a trade or business from unrelated persons (sec. 
954(c)(2)(A)). The determination of whether rents or royalties 
are derived in the active conduct of a trade or business is 
based on all the facts and circumstances. However, the Treasury 
regulations provide certain types of rents are treated as 
derived in the active conduct of a trade or business. These 
include rents derived from property that is leased as a result 
of the performance of marketing functions by the lessor if the 
lessor (through its own officers or employees located in a 
foreign country) maintains and operates an organization in such 
country that regularly engages in the business of marketing, or 
marketing and servicing, the leased property and that is 
substantial in relation to the amount of rents derived from the 
leasing of such property. An organization in a foreign country 
is substantial in relation to rents if the active leasing 
expenses \158\ equal at least 25 percent of the adjusted 
leasing profit.\159\
    Also generally excluded from subpart F foreign personal 
holding company income are rents and royalties received by the 
CFC from a related corporation for the use of property within 
the country in which the CFC was organized (sec. 954(c)(3)). 
However, rent, and royalty payments do not qualify for this 
exclusion to the extent that such payments reduce subpart F 
income of the payor.
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    \158\ ``Active-leasing expenses'' are section 162 expenses properly 
allocable to rental income other than (1) deductions for compensation 
for personal services rendered by the lessor's shareholders or a 
related person, (2) deductions for rents, (3) section 167 and 168 
expenses, and (4) deductions for payments to independent contractors 
with respect to leased property. Treas. Reg. sec. 1.954-2(c)(2)(iii).
    \159\ Generally, ``adjusted leasing profit'' is rental income less 
the sum of (1) rents paid or incurred by the CFC with respect to such 
rental income; (2) section 167 and 168 expenses with respect to such 
rental income; and (3) payments to independent contractors with respect 
to such rental income. Treas. Reg. sec. 1.954-2(c)(2)(iv).
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                           REASONS FOR CHANGE

    In general, other countries do not tax foreign shipping 
income, whereas the United States imposes immediate U.S. tax on 
such income. The uncompetitive U.S. taxation of shipping income 
has directly caused a steady and substantial decline of the 
U.S. shipping industry. The Committee believes that this 
provision will provide U.S. shippers the opportunity to be 
competitive with their tax-advantaged foreign competitors.
    In addition, the Committee believes that the current-law 
exception from foreign base company income for rents and 
royalties received by a CFC in the active conduct of a trade or 
business from unrelated persons is too narrow in the context of 
the leasing of an aircraft or vessel in foreign commerce. The 
Committee believes the provision of the safe harbor under the 
bill will improve the competitiveness of U.S.-based 
multinationals engaging in these activities.

                        EXPLANATION OF PROVISION

    The provision repeals the subpart F rules relating to 
foreign base company shipping income. The bill also amends the 
exception from foreign personal holding company income 
applicable to rents or royalties derived from unrelated persons 
in an active trade or business, by providing a safe harbor for 
rents derived from leasing an aircraft or vessel in foreign 
commerce. Such rents are excluded from foreign personal holding 
company income if the active leasing expenses comprise at least 
10 percent of the profit on the lease. This provision is to be 
applied in accordance with existing regulations under sec. 
954(c)(2)(A) by comparing the lessor's ``active leasing 
expenses'' for its pool of leased assets to its ``adjusted 
leasing profit.''
    The safe harbor will not prevent a lessor from otherwise 
showing that it actively carries on a trade or business. In 
this regard, the requirements of section 954(c)(2)(A) will be 
met if a lessor regularly and directly performs active and 
substantial marketing, remarketing, management and operational 
functions with respect to the leasing of an aircraft or vessel 
(or component engines). This will be the case regardless of 
whether the lessor engages in marketing of the lease as a form 
of financing (versus marketing the property as such) or whether 
the lease is classified as a finance lease or operating lease 
for financial accounting purposes. If a lessor acquires, from 
an unrelated or related party, a ship or aircraft subject to an 
existing FSC or ETI lease, the requirements of section 
954(c)(2)(A) will be satisfied if, following the acquisition, 
the lessor performs active and substantial management, 
operational, and remarketing functions with respect to the 
leased property. If such a lease is transferred to a CFC 
lessor, it will no longer be eligible for FSC or ETI benefits.
    An aircraft or vessel will be considered to be leased in 
foreign commerce if it is used for the transportation of 
property or passengers between a port (or airport) in the 
United States and one in a foreign country or between foreign 
ports (or airports), provided the aircraft or vessel is used 
predominantly outside the United States. An aircraft or vessel 
will be considered used predominantly outside the United States 
if more than 50 percent of the miles during the taxable year 
are traversed outside the United States or the aircraft or 
vessel is located outside the United States more than 50 
percent of the time during such taxable year.
    The Committee expects that the Secretary of the Treasury 
will issue timely guidance to make conforming changes to 
existing regulations, including guidance that aircraft or 
vessel leasing activity that satisfies the requirements of 
section 954(c)(2)(A) shall also satisfy the requirements for 
avoiding income inclusion under section 956 and section 367(a).
    The Committee anticipates that taxpayers now eligible for 
the benefits of the ETI exclusion (or the FSC provisions 
pursuant to the FSC Repeal and Extraterritorial Income 
Exclusion Act of 2000), will find it appropriate, as a matter 
of sound business judgment, to restructure their business 
operations to take into account the tax law changes brought 
about by the bill. The Committee notes that courts have 
recognized the validity of structuring operations for the 
purpose of obtaining the benefit of tax regimes expressly 
intended by Congress. The Committee intends that structuring or 
restructuring of operations for the purposes of adapting to the 
repeal of the ETI exclusion (or the FSC regime) will be 
considered to serve a valid business purpose and will not 
constitute tax avoidance, where the restructured operations 
conform to the requirements expressly mandated by Congress for 
obtaining tax benefits that remain available. For example, the 
Committee intends that a restructuring undertaken to transfer 
aircraft subject to existing FSC or ETI leases to a CFC lessor, 
to take advantange of the amendments made by this bill, would 
serve as a valid business purpose and would not constitute tax 
avoidance, for purposes of determining whether a particular tax 
treatment (such as nonrecognition of gain) applies to such 
restructuring. The Committee intends, for example, that if such 
a restructuring meets the other requirements necessary to 
qualify as a ``reorganization'' under section 368, the 
transaction will also be deemed to meet the ``business 
purpose'' requirements under section 368, and thus, qualify as 
a reorganization under that section.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.

   P. Modification of Exceptions Under Subpart F for Active Financing


(Sec. 316 of the bill and sec. 954 of the Code)

                              PRESENT LAW

    Under the subpart F rules, U.S. shareholders with a 10-
percent or greater interest in a controlled foreign corporation 
(``CFC'') are subject to U.S. tax currently on certain income 
earned by the CFC, whether or not such income is distributed to 
the shareholders. The income subject to current inclusion under 
the subpart F rules includes, among other things, foreign 
personal holding company income and insurance income. In 
addition, 10-percent U.S. shareholders of a CFC are subject to 
current inclusion with respect to their shares of the CFC's 
foreign base company services income (i.e., income derived from 
services performed for a related person outside the country in 
which the CFC is organized).
    Foreign personal holding company income generally consists 
of the following: (1) dividends, interest, royalties, rents, 
and annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and REMICs; (3) net gains from 
commodities transactions; (4) net gains from foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; and (7) payments in 
lieu of dividends.
    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization, as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Investment 
income of a CFC that is allocable to any insurance or annuity 
contract related to risks located outside the CFC's country of 
organization is taxable as subpart F insurance income (Treas. 
Reg. sec. 1.953-1(a)).
    Temporary exceptions from foreign personal holding company 
income, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, or in the conduct of an insurance business 
(so-called ``active financing income'').\160\
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    \160\ Temporary exceptions from the subpart F provisions for 
certain active financing income applied only for taxable years 
beginning in 1998. Those exceptions were modified and extended for one 
year, applicable only for taxable years beginning in 1999. The Tax 
Relief Extension Act of 1999 (Pub.L. No. 106-170) clarified and 
extended the temporary exceptions for two years, applicable only for 
taxable years beginning after 1999 and before 2002. The Job Creation 
and Worker Assistance Act of 2002 (Pub.L. No. 107-147) extended the 
temporary exceptions for five years, applicable only for taxable years 
beginning after 2001 and before 2007, with a modification relating to 
insurance reserves.
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    With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the exceptions. In addition, certain nexus 
requirements apply, which provide that income derived by a CFC 
or a qualified business unit (``QBU'') of a CFC from 
transactions with customers is eligible for the exceptions if, 
among other things, substantially all of the activities in 
connection with such transactions are conducted directly by the 
CFC or QBU in its home country, and such income is treated as 
earned by the CFC or QBU in its home country for purposes of 
such country's tax laws. Moreover, the exceptions apply to 
income derived from certain cross border transactions, provided 
that certain requirements are met. Additional exceptions from 
foreign personal holding company income apply for certain 
income derived by a securities dealer within the meaning of 
section 475 and for gain from the sale of active financing 
assets.
    In the case of insurance, in addition to temporary 
exceptions from insurance income and from foreign personal 
holding company income for certain income of a qualifying 
insurance company with respect to risks located within the 
CFC's country of creation or organization, temporary exceptions 
from insurance income and from foreign personal holding company 
income apply for certain income of a qualifying branch of a 
qualifying insurance company with respect to risks located 
within the home country of the branch, provided certain 
requirements are met under each of the exceptions. Further, 
additional temporary exceptions from insurance income and from 
foreign personal holding company income apply for certain 
income of certain CFCs or branches with respect to risks 
located in a country other than the United States, provided 
that the requirements for these exceptions are met.

                           REASONS FOR CHANGE

    The Committee believes that the rules for determining 
whether income earned by an eligible CFC or QBU is active 
financing income should be more consistent with the rules for 
determining whether a CFC or QBU is eligible to earn active 
financing income.

                        EXPLANATION OF PROVISION

    The provision modifies the present-law temporary exceptions 
from subpart F foreign personal holding company income and 
foreign base company services income for income derived in the 
active conduct of a banking, financing, or similar business. 
For purposes of determining whether a CFC or QBU has conducted 
directly in its home country substantially all of the 
activities in connection with transactions with customers, the 
provision provides that an activity is treated as conducted 
directly by the CFC or QBU in its home country if the activity 
is performed by employees of a related person and: (1) the 
related person is itself an eligible CFC the home country of 
which is the same as that of the CFC or QBU; (2) the activity 
is performed in the home country of the related person; and (3) 
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 tax laws of such country. For 
purposes of determining whether a CFC or QBU is eligible to 
earn active financing income, such activity may not be taken 
into account by any CFC or QBU (including the employer of the 
employees performing the activity) other than the CFC or QBU 
for which the activities are performed.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2004, and taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.

           TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS


        A. Extend Alternative Minimum Tax Relief for Individuals


(Sec. 401 of the bill and sec. 26 of the Code)

                              PRESENT LAW

    Present law provides for certain nonrefundable personal tax 
credits (i.e., the dependent care credit, the credit for the 
elderly and disabled, the adoption credit, the child tax 
credit,\161\ the credit for interest on certain home mortgages, 
the HOPE Scholarship and Lifetime Learning credits, the IRA 
credit, and the D.C. homebuyer's credit).
---------------------------------------------------------------------------
    \161\ A portion of the child credit may be refundable.
---------------------------------------------------------------------------
    For taxable years beginning in 2003, all the nonrefundable 
personal credits are allowed to the extent of the full amount 
of the individual's regular tax and alternative minimum tax.
    For taxable years beginning after 2003, the credits (other 
than the adoption credit, child credit and IRA credit) are 
allowed only to the extent that the individual's regular income 
tax liability exceeds the individual's tentative minimum tax, 
determined without regard to the minimum tax foreign tax 
credit. The adoption credit, child credit, and IRA credit are 
allowed to the full extent of the individual's regular tax and 
alternative minimum tax.
    The alternative minimum tax is the amount by which the 
tentative minimum tax exceeds the regular income tax. An 
individual's tentative minimum tax is an amount equal to (1) 26 
percent of the first $175,000 ($87,500 in the case of a married 
individual filing a separate return) of alternative minimum 
taxable income (``AMTI'') in excess of an exemption amount that 
phases out and (2) 28 percent of the remaining AMTI. The 
maximum tax rates on net capital gain used in computing the 
tentative minimum tax are the same as under the regular tax. 
AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments. The exemption 
amounts are: (1) $58,000 ($45,000 in taxable years beginning 
after 2004) in the case of married individuals filing a joint 
return and surviving spouses; (2) $40,250 ($33,750 in taxable 
years beginning after 2004) in the case of other unmarried 
individuals; (3) $29,000 ($22,500 in taxable years beginning 
after 2004) in the case of married individuals filing a 
separate return; and (4) $22,500 in the case of an estate or 
trust. The exemption amounts are phased out by an amount equal 
to 25 percent of the amount by which the individual's AMTI 
exceeds (1) $150,000 in the case of married individuals filing 
a joint return and surviving spouses, (2) $112,500 in the case 
of other unmarried individuals, and (3) $75,000 in the case of 
married individuals filing separate returns or an estate or a 
trust. These amounts are not indexed for inflation.

                           REASONS FOR CHANGE

    The Committee believes that the nonrefundable personal 
credits should be useable without limitation by reason of the 
alternative minimum tax. This will result in significant 
simplification and will enable individuals to fully benefit 
from the credits.

                        EXPLANATION OF PROVISION

    The bill extends the provision allowing an individual to 
offset the entire regular tax liability and alternative minimum 
tax liability by the personal nonrefundable credits for taxable 
years beginning in 2004 and 2005.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003.

                  B. Extension of the Research Credit


(Sec. 402 of the bill and sec. 41 of the Code)

                              PRESENT LAW

General rule

    Section 41 provides for a research tax credit equal to 20 
percent of the amount by which a taxpayer's qualified research 
expenses for a taxable year exceed its base amount for that 
year. The research tax credit is scheduled to expire and 
generally will not apply to amounts paid or incurred after June 
30, 2004.
    A 20-percent research tax credit also applies to the excess 
of (1) 100 percent of corporate cash expenses (including grants 
or contributions) paid for basic research conducted by 
universities (and certain nonprofit scientific research 
organizations) over (2) the sum of (a) the greater of two 
minimum basic research floors plus (b) an amount reflecting any 
decrease in nonresearch giving to universities by the 
corporation as compared to such giving during a fixed-base 
period, as adjusted for inflation. This separate credit 
computation is commonly referred to as the university basic 
research credit (see sec. 41(e)).

Computation of allowable credit

    Except for certain university basic research payments made 
by corporations, the research tax credit applies only to the 
extent that the taxpayer's qualified research expenses for the 
current taxable year exceed its base amount. The base amount 
for the current year generally is computed by multiplying the 
taxpayer's fixed-base percentage by the average amount of the 
taxpayer's gross receipts for the four preceding years. If a 
taxpayer both incurred qualified research expenses and had 
gross receipts during each of at least three years from 1984 
through 1988, then its fixed-base percentage is the ratio that 
its total qualified research expenses for the 1984-1988 period 
bears to its total gross receipts for that period (subject to a 
maximum fixed-base percentage of 16 percent). All other 
taxpayers (so-called start-up firms) are assigned a fixed-base 
percentage of three percent. In computing the credit, a 
taxpayer's base amount may not be less than 50 percent of its 
current-year qualified research expenses.

Alternative incremental research credit regime

    Taxpayers are allowed to elect an alternative incremental 
research credit regime.\162\ If a taxpayer elects to be subject 
to this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base 
percentage otherwise applicable under present law) and the 
credit rate likewise is reduced. Under the alternative credit 
regime, a credit rate of 2.65 percent applies to the extent 
that a taxpayer's current-year research expenses exceed a base 
amount computed by using a fixed-base percentage of one percent 
(i.e., the base amount equals one percent of the taxpayer's 
average gross receipts for the four preceding years) but do not 
exceed a base amount computed by using a fixed-base percentage 
of 1.5 percent. A credit rate of 3.2 percent applies to the 
extent that a taxpayer's current-year research expenses exceed 
a base amount computed by using a fixed-base percentage of 1.5 
percent but do not exceed a base amount computed by using a 
fixed-base percentage of two percent. A credit rate of 3.75 
percent applies to the extent that a taxpayer's current-year 
research expenses exceed a base amount computed by using a 
fixed-base percentage of two percent. An election to be subject 
to this alternative incremental credit regime may be made for 
any taxable year beginning after June 30, 1996, and such an 
election applies to that taxable year and all subsequent years 
unless revoked with the consent of the Secretary of the 
Treasury.
---------------------------------------------------------------------------
    \162\ Sec. 41(c)(4).
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Eligible expenses

    Qualified research expenses eligible for the research tax 
credit consist of: (1) in-house expenses of the taxpayer for 
wages and supplies attributable to qualified research; (2) 
certain time-sharing costs for computer use in qualified 
research; and (3) 65 percent of amounts paid or incurred by the 
taxpayer to certain other persons for qualified research 
conducted on the taxpayer's behalf (so-called contract research 
expenses).\163\
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    \163\ Under a special rule enacted as part of the Small Business 
Job Protection Act of 1996, 75 percent of amounts paid to a research 
consortium for qualified research is treated as qualified research 
expenses eligible for the research credit (rather than 65 percent under 
the general rule under section 41(b)(3) governing contract research 
expenses) if (1) such research consortium is a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and is organized and operated 
primarily to conduct scientific research, and (2) such qualified 
research is conducted by the consortium on behalf of the taxpayer and 
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
---------------------------------------------------------------------------
    To be eligible for the credit, the research must not only 
satisfy the requirements of present-law section 174 (described 
below) but must be undertaken for the purpose of discovering 
information that is technological in nature, the application of 
which is intended to be useful in the development of a new or 
improved business component of the taxpayer, and substantially 
all of the activities of which must constitute elements of a 
process of experimentation for functional aspects, performance, 
reliability, or quality of a business component. Research does 
not qualify for the credit if substantially all of the 
activities relate to style, taste, cosmetic, or seasonal design 
factors (sec. 41(d)(3)). In addition, research does not qualify 
for the credit: (1) if conducted after the beginning of 
commercial production of the business component; (2) if related 
to the adaptation of an existing business component to a 
particular customer's requirements; (3) if related to the 
duplication of an existing business component from a physical 
examination of the component itself or certain other 
information; or (4) if related to certain efficiency surveys, 
management function or technique, market research, market 
testing, or market development, routine data collection or 
routine quality control (sec. 41(d)(4)). Research does not 
qualify for the credit if it is conducted outside the United 
States, Puerto Rico, or any U.S. possession.

Relation to deduction

    Under section 174, taxpayers may elect to deduct currently 
the amount of certain research or experimental expenditures 
paid or incurred in connection with a trade or business, 
notwithstanding the general rule that business expenses to 
develop or create an asset that has a useful life extending 
beyond the current year must be capitalized.\164\ However, 
deductions allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year (Sec. 280C(c)). Taxpayers may alternatively elect to claim 
a reduced research tax credit amount under section 41 in lieu 
of reducing deductions otherwise allowed (sec. 280C(c)(3)).
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    \164\ Taxpayers may elect 10-year amortization of certain research 
expenditures allowable as a deduction under section 174(a). Secs. 
174(f)(2) and 59(e).
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                           REASONS FOR CHANGE

    The Committee acknowledges that research is important to 
the economy. Research is the basis of new products, new 
services, new industries, and new jobs for the domestic 
economy. Therefore the Committee believes it is appropriate to 
extend the present-law research credit.

                        EXPLANATION OF PROVISION

    The provision extends the present-law research credit to 
qualified amounts paid or incurred before January 1, 2006.

                             EFFECTIVE DATE

    The provision is effective for amounts paid or incurred 
after June 30, 2004.

C. Extension and Modification of the Section 45 Electricity Production 
                                 Credit


(Sec. 403 of the bill and sec. 45 of the Code)

                              PRESENT LAW

    An income tax credit is allowed for the production of 
electricity from either qualified wind energy, qualified 
``closed-loop'' biomass, or qualified poultry waste facilities 
(sec. 45). The amount of the credit is 1.5 cents per kilowatt 
hour (indexed for inflation) of electricity produced. The 
amount of the credit is 1.8 cents per kilowatt hour for 2004. 
The credit is reduced for grants, tax-exempt bonds, subsidized 
energy financing, and other credits.
    The credit applies to electricity produced by a wind energy 
facility placed in service after December 31, 1993, and before 
January 1, 2004, to electricity produced by a closed-loop 
biomass facility placed in service after December 31, 1992, and 
before January 1, 2004, and to a poultry waste facility placed 
in service after December 31, 1999, and before January 1, 2004. 
The credit is allowable for production during the 10-year 
period after a facility is originally placed in service. In 
order to claim the credit, a taxpayer must own the facility and 
sell the electricity produced by the facility to an unrelated 
party. In the case of a poultry waste facility, the taxpayer 
may claim the credit as a lessee/operator of a facility owned 
by a governmental unit.
    Closed-loop biomass is plant matter, where the plants are 
grown for the sole purpose of being used to generate 
electricity. It does not include waste materials (including, 
but not limited to, scrap wood, manure, and municipal or 
agricultural waste). The credit also is not available to 
taxpayers who use standing timber to produce electricity. 
Poultry waste means poultry manure and litter, including wood 
shavings, straw, rice hulls, and other bedding material for the 
disposition of manure.
    The credit for electricity produced from wind, closed-loop 
biomass, or poultry waste is a component of the general 
business credit (sec. 38(b)(8)). The credit, when combined with 
all other components of the general business credit, generally 
may not exceed for any taxable year the excess of the 
taxpayer's net income tax over the greater of (1) 25 percent of 
net regular tax liability above $25,000, or (2) the tentative 
minimum tax. For credits arising in taxable years beginning 
after December 31, 1997, an unused general business credit 
generally may be carried back one year and carried forward 20 
years (sec. 39). To coordinate the carryback with the period of 
application for this credit, the credit for electricity 
produced from closed-loop biomass facilities may not be carried 
back to a tax year ending before 1993 and the credit for 
electricity produced from wind energy may not be carried back 
to a tax year ending before 1994 (sec. 39).

                           REASONS FOR CHANGE

    The Committee recognizes that the section 45 production 
credit has fostered additional electricity generation capacity 
in the form of non-polluting wind power. The Committee believes 
it is important to continue this tax credit by extending the 
placed in service date for such facilities to bring more wind 
energy to the U. S. electric grid. The Committee further 
believes that, to encourage entrepreneurial exploration of 
alternative sources for electricity generation, it is 
appropriate to extend the present-law provision relating to 
facilities that use closed-loop biomass as an energy source.

                        EXPLANATION OF PROVISION

    The provision extends the placed in service date for wind 
facilities and closed-loop biomass facilities to facilities 
placed in service after December 31, 1993 (December 31, 1992 in 
the case of closed-loop biomass facilities) and before January 
1, 2006. The provision does not extend the placed in service 
date for poultry waste facilities.

                             EFFECTIVE DATE

    The provision is effective for facilities placed in service 
after December 31, 2003.

                    D. Indian Employment Tax Credit


(Sec. 404 of the bill and sec. 45A of the Code)

                              PRESENT LAW

    In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by the employer with respect to certain employees (sec. 45A). 
The credit is equal to 20 percent of the excess of eligible 
employee qualified wages and health insurance costs during the 
current year over the amount of such wages and costs incurred 
by the employer during 1993. The credit is an incremental 
credit, such that an employer's current-year qualified wages 
and qualified employee health insurance costs (up to $20,000 
per employee) are eligible for the credit only to the extent 
that the sum of such costs exceeds the sum of comparable costs 
paid during 1993. No deduction is allowed for the portion of 
the wages equal to the amount of the credit.
    Qualified wages means wages paid or incurred by an employer 
for services performed by a qualified employee. A qualified 
employee means any employee who is an enrolled member of an 
Indian tribe or the spouse of an enrolled member of an Indian 
tribe, who performs substantially all of the services within an 
Indian reservation, and whose principal place of abode while 
performing such services is on or near the reservation in which 
the services are performed. An employee will not be treated as 
a qualified employee for any taxable year of the employer if 
the total amount of wages paid or incurred by the employer with 
respect to such employee during the taxable year exceeds an 
amount determined at an annual rate of $30,000 (adjusted for 
inflation after 1993).
    The wage credit is available for wages paid or incurred on 
or after January 1, 1994, in taxable years that begin before 
January 1, 2005.

                           REASONS FOR CHANGE

    The Committee believes that extending the wage credit tax 
incentive will expand employment opportunities for members of 
Indian tribes.

                        EXPLANATION OF PROVISION

    The provision extends the Indian employment credit 
incentive for one year (to taxable years beginning before 
January 1, 2006).

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

               E. Extend the Work Opportunity Tax Credit


(Sec. 405 of the bill and sec. 51 of the Code)

                              PRESENT LAW

In general

    The work opportunity tax credit (``WOTC'') is available on 
an elective basis for employers hiring individuals from one or 
more of eight targeted groups. The credit equals 40 percent (25 
percent for employment of 400 hours or less) of qualified 
wages. Generally, qualified wages are wages attributable to 
service rendered by a member of a targeted group during the 
one-year period beginning with the day the individual began 
work for the employer.
    The maximum credit per employee is $2,400 (40 percent of 
the first $6,000 of qualified first-year wages). With respect 
to qualified summer youth employees, the maximum credit is 
$1,200 (40 percent of the first $3,000 of qualified first-year 
wages).
    For purposes of the credit, wages are generally defined as 
under the Federal Unemployment Tax Act, without regard to the 
dollar cap.

Targeted groups eligible for the credit

    The eight targeted groups are: (1) families eligible to 
receive benefits under the Temporary Assistance for Needy 
Families (``TANF'') Program; (2) high-risk youth; (3) qualified 
ex-felons; (4) vocational rehabilitation referrals; (5) 
qualified summer youth employees; (6) qualified veterans; (7) 
families receiving food stamps; and (8) persons receiving 
certain Supplemental Security Income (``SSI'') benefits.
    The employer's deduction for wages is reduced by the amount 
of the credit.

Expiration date

    The credit is effective for wages paid or incurred to a 
qualified individual who begins work for an employer before 
January 1, 2004.

                           REASONS FOR CHANGE

    The Committee believes that a temporary extension of this 
credit will allow the Congress and the Treasury and Labor 
Departments to continue to examine the effectiveness of the 
credit in expanding employment opportunities among the eight 
targeted groups.

                        EXPLANATION OF PROVISION

    The bill extends the work opportunity tax credit for two 
years (through December 31, 2005).

                             EFFECTIVE DATE

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after January 1, 2004, and before January 1, 2006.

                F. Extend the Welfare-To-Work Tax Credit


(Sec. 406 of the bill and sec. 51A of the Code)

                              PRESENT LAW

In general

    The welfare-to-work tax credit is available on an elective 
basis for employers for the first $20,000 of eligible wages 
paid to qualified long-term family assistance recipients during 
the first two years of employment. The credit is 35 percent of 
the first $10,000 of eligible wages in the first year of 
employment and 50 percent of the first $10,000 of eligible 
wages in the second year of employment. The maximum credit is 
$8,500 per qualified employee.
    Qualified long-term family assistance recipients are: (1) 
members of a family that has received family assistance for at 
least 18 consecutive months ending on the hiring date; (2) 
members of a family that has received family assistance for a 
total of at least 18 months (whether or not consecutive) after 
the date of enactment of this credit if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for family 
assistance because of either Federal or State time limits, if 
they are hired within two years after the Federal or State time 
limits made the family ineligible for family assistance. Family 
assistance means benefits under the Temporary Assistance to 
Needy Families (``TANF'') program.
    For purposes of the credit, wages are generally defined 
under the Federal Unemployment Tax Act, without regard to the 
dollar amount. In addition, wages include the following: (1) 
educational assistance excludable under a section 127 program; 
(2) the value of excludable health plan coverage but not more 
than the applicable premium defined under section 4980B(f)(4); 
and (3) dependent care assistance excludable under section 129.
    The employer's deduction for wages is reduced by the amount 
of the credit.

Expiration date

    The welfare to work credit is effective for wages paid or 
incurred to a qualified individual who begins work for an 
employer before January 1, 2004.

                           REASONS FOR CHANGE

    The Committee believes that the welfare-to-work credit 
should be temporarily extended to provide the Congress and 
Treasury and Labor Departments a better opportunity to continue 
to assess the operation and effectiveness of the credit in 
meeting its goals. These goals are: (1) to provide an incentive 
to hire long-term welfare recipients; (2) to promote the 
transition from welfare to work by increasing access to 
employment for these individuals; and (3) to encourage 
employers to provide these individuals with training, health 
coverage, dependent care and ultimately better job attachment.

                        EXPLANATION OF PROVISION

    The bill extends the welfare to work credit for two years 
(through December 31, 2005).

                             EFFECTIVE DATE

    The provision is effective for wages paid or incurred to a 
qualified individual who begins work for an employer on or 
after January 1, 2004, and before January 1, 2006.

 G. Extension of the Above-the-line Deduction for Certain Expenses of 
                Elementary and Secondary School Teachers


(Sec. 407 of the bill and sec. 62 of the Code)

                              PRESENT LAW

    In general, ordinary and necessary business expenses are 
deductible (sec. 162). However, in general, unreimbursed 
employee business expenses are deductible only as an itemized 
deduction and only to the extent that the individual's total 
miscellaneous deductions (including employee business expenses) 
exceed two percent of adjusted gross income. An individual's 
otherwise allowable itemized deductions may be further limited 
by the overall limitation on itemized deductions, which reduces 
itemized deductions for taxpayers with adjusted gross income in 
excess of $142,700 (for 2004). In addition, miscellaneous 
itemized deductions are not allowable under the alternative 
minimum tax.
    Certain expenses of eligible educators are allowed as an 
above-the-line deduction. Specifically, for taxable years 
beginning in 2002 and 2003, an above-the-line deduction is 
allowed for up to $250 annually of expenses paid or incurred by 
an eligible educator for books, supplies (other than 
nonathletic supplies for courses of instruction in health or 
physical education), computer equipment (including related 
software and services) and other equipment, and supplementary 
materials used by the eligible educator in the classroom. To be 
eligible for this deduction, the expenses must be otherwise 
deductible under section 162 as a trade or business expense. A 
deduction is allowed only to the extent the amount of expenses 
exceeds the amount excludable from income under section 135 
(relating to education savings bonds), 529(c)(1) (relating to 
qualified tuition programs), and section 530(d)(2) (relating to 
Coverdell education savings accounts).
    An eligible educator is a kindergarten through grade 12 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school that provides elementary education or secondary 
education, as determined under State law.
    The above-the-line deduction for eligible educators is not 
allowed for taxable years beginning after December 31, 2003.

                           REASONS FOR CHANGE

    The Committee recognizes that elementary and secondary 
educators often incur substantial unreimbursed expenses in the 
course of their teaching duties, and believes that an extension 
of the deduction of such expenses is warranted to continue to 
provide tax relief to educators who incur such expenses on 
behalf of their students.

                        EXPLANATION OF PROVISION

    The provision extends the availability of the above-the-
line deduction for two years, i.e., for taxable years beginning 
during 2004 and 2005.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003.

H. Extension of Accelerated Depreciation Benefit for Property on Indian 
                              Reservations


(Sec. 408 of the bill and sec. 168(j) of the Code)

                              PRESENT LAW

    With respect to certain property used in connection with 
the conduct of a trade or business within an Indian 
reservation, depreciation deductions under section 168(j) will 
be determined using the following recovery periods:

                                                                   Years
3-year property...................................................     2
5-year property...................................................     3
7-year property...................................................     4
10-year property..................................................     6
15-year property..................................................     9
20-year property..................................................    12
Nonresidential real property......................................    22

    ``Qualified Indian reservation property'' eligible for 
accelerated depreciation includes property which is (1) used by 
the taxpayer predominantly in the active conduct of a trade or 
business within an Indian reservation, (2) not used or located 
outside the reservation on a regular basis, (3) not acquired 
(directly or indirectly) by the taxpayer from a person who is 
related to the taxpayer (within the meaning of section 
465(b)(3)(C)), and (4) described in the recovery-period table 
above. In addition, property is not ``qualified Indian 
reservation property'' if it is placed in service for purposes 
of conducting gaming activities. Certain ``qualified 
infrastructure property'' may be eligible for the accelerated 
depreciation even if located outside an Indian reservation, 
provided that the purpose of such property is to connect with 
qualified infrastructure property located within the 
reservation (e.g., roads, power lines, water systems, railroad 
spurs, and communications facilities).
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum tax. 
The accelerated depreciation for Indian reservations is 
available with respect to property placed in service on or 
after January 1, 1994, and before January 1, 2005.

                           REASONS FOR CHANGE

    The Committee believes that extending the depreciation 
incentive will encourage economic development within Indian 
reservations and expand employment opportunities on such 
reservations.

                        EXPLANATION OF PROVISION

    The provision extends the accelerated depreciation 
incentive for one year (to property placed in service before 
January 1, 2006).

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

  I. Extend Enhanced Charitable Deduction for Computer Technology and 
                               Equipment


(Sec. 409 of the bill and sec. 170 of the Code)

                              PRESENT LAW

    Under present law, a taxpayer's deduction for charitable 
contributions of computer technology and equipment generally is 
limited to the taxpayer's basis (typically, cost) in the 
property. However, certain corporations may claim a deduction 
in excess of basis for a qualified computer contribution.\165\ 
This enhanced deduction is equal to the lesser of (1) basis 
plus one-half of the item's appreciated value (i.e., basis plus 
one half of fair market value minus basis) or (2) two times 
basis. The enhanced deduction for qualified computer 
contributions expires for any contribution made during any 
taxable year beginning after December 31, 2003.
---------------------------------------------------------------------------
    \165\ Sec. 170(e)(6).
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    A qualified computer contribution means a charitable 
contribution of any computer technology or equipment that meets 
standards of functionality and suitability as established by 
the Secretary of the Treasury. The contribution must be to 
certain educational organizations or public libraries and made 
not later than three years after the taxpayer acquired the 
property or, if the taxpayer constructed the property, not 
later than the date construction of the property is 
substantially completed.\166\ The original use of the property 
must be by the donor or the donee,\167\ and in the case of the 
donee, must be used substantially for educational purposes 
related to the function or purpose of the donee. The property 
must fit productively into the donee's education plan. The 
donee may not transfer the property in exchange for money, 
other property, or services, except for shipping, installation, 
and transfer costs. Property is considered constructed by the 
taxpayer only if the cost of the parts used in the construction 
of the property (other than parts manufactured by the taxpayer 
or a related person) does not exceed 50 percent of the 
taxpayer's basis in the property. Contributions may be made to 
private foundations under certain conditions.
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    \166\ If the taxpayer constructed the property and reacquired such 
property, the contribution must be within three years of the date the 
original construction was substantially completed. Sec. 
170(e)(6)(D)(i).
    \167\ This requirement does not apply if the property was 
reacquired by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
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                           REASONS FOR CHANGE

    The Committee believes that educational organizations and 
public libraries continue to have a need for computer equipment 
and that it is appropriate to extend the enhanced deduction for 
contributions of such equipment to such institutions.

                        EXPLANATION OF PROVISION

    The provision extends the enhanced deduction for qualified 
computer contributions to contributions made during any taxable 
year beginning before January 1, 2005.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003.

  J. Extension of Expensing of Certain Environmental Remediation Costs


(Sec. 410 of the bill and sec. 198 of the Code)

                              PRESENT LAW

    Taxpayers can elect to treat certain environmental 
remediation expenditures that would otherwise be chargeable to 
capital account as deductible in the year paid or incurred 
(sec. 198). The deduction applies for both regular and 
alternative minimum tax purposes. The expenditure must be 
incurred in connection with the abatement or control of 
hazardous substances at a qualified contaminated site.
    A ``qualified contaminated site'' generally is any property 
that (1) is held for use in a trade or business, for the 
production of income, or as inventory and (2) is at a site on 
which there has been a release (or threat of release) or 
disposal of certain hazardous substances as certified by the 
appropriate State environmental agency (so called 
``brownfields''). However, sites that are identified on the 
national priorities list under the Comprehensive Environmental 
Response, Compensation, and Liability Act of 1980 cannot 
qualify as targeted areas.
    Eligible expenditures are those paid or incurred before 
January 1, 2004.

                           REASONS FOR CHANGE

    The Committee observes that by lowering the net capital 
cost of a development project the expensing of brownfields 
remediation costs promotes the goal of environmental 
remediation and promotes new investment and employment 
opportunities. In addition, the Committee believes that the 
increased investment in the qualifying areas has spillover 
effects that are beneficial to the neighboring communities. 
Therefore, the Committee believes it is appropriate to extend 
the present-law provision permitting the expensing of 
environmental remediation costs.

                        EXPLANATION OF PROVISION

    The provision extends the present law expensing provision 
for two years (through December 31, 2005).

                             EFFECTIVE DATE

    The provision is effective for expenses paid or incurred 
after December 31, 2003, and before January 1, 2006.

       K. Extension of Archer Medical Savings Accounts (``MSAs'')


(Sec. 411 of the bill and sec. 220 of the Code)

                              PRESENT LAW

In general

    Within limits, contributions to an Archer MSA are 
deductible in determining adjusted gross income if made by an 
eligible individual and are excludable from gross income and 
wages for employment tax purposes if made by the employer of an 
eligible individual. Earnings on amounts in an Archer MSA are 
not currently taxable. Distributions from an Archer MSA for 
medical expenses are not includible in gross income. 
Distributions not used for medical expenses are includible in 
gross income. In addition, distributions not used for medical 
expenses are subject to an additional 15-percent tax unless the 
distribution is made after age 65, death, or disability.

Eligible individuals

    Archer MSAs are available to employees covered under an 
employer-sponsored high deductible plan of a small employer and 
self-employed individuals covered under a high deductible 
health plan.\168\ An employer is a small employer if it 
employed, on average, no more than 50 employees on business 
days during either the preceding or the second preceding year. 
An individual is not eligible for an Archer MSA if he or she is 
covered under any other health plan in addition to the high 
deductible plan.
---------------------------------------------------------------------------
    \168\ Self-employed individuals include more than two-perent 
shareholders of S corporations who are treated as partners for purposes 
of fringe benefit rules pursuant to section 1372.
---------------------------------------------------------------------------

Tax treatment of and limits on contributions

    Individual contributions to an Archer MSA are deductible 
(within limits) in determining adjusted gross income (i.e., 
``above-the-line''). In addition, employer contributions are 
excludable from gross income and wages for employment tax 
purposes (within the same limits), except that this exclusion 
does not apply to contributions made through a cafeteria plan. 
In the case of an employee, contributions can be made to an 
Archer MSA either by the individual or by the individual's 
employer.
    The maximum annual contribution that can be made to an 
Archer MSA for a year is 65 percent of the deductible under the 
high deductible plan in the case of individual coverage and 75 
percent of the deductible in the case of family coverage.

Definition of high deductible plan

    A high deductible plan is a health plan with an annual 
deductible of at least $1,700 and no more than $2,600 in the 
case of individual coverage and at least $3,450 and no more 
than $5,150 in the case of family coverage. In addition, the 
maximum out-of-pocket expenses with respect to allowed costs 
(including the deductible) must be no more than $3,450 in the 
case of individual coverage and no more than $6,300 in the case 
of family coverage.\169\ A plan does not fail to qualify as a 
high deductible plan merely because it does not have a 
deductible for preventive care as required by State law. A plan 
does not qualify as a high deductible health plan if 
substantially all of the coverage under the plan is for 
permitted coverage (as described above). In the case of a self-
insured plan, the plan must in fact be insurance (e.g., there 
must be appropriate risk shifting) and not merely a 
reimbursement arrangement.
---------------------------------------------------------------------------
    \169\ These dollar amounts are for 2004. These amounts are indexed 
for inflation, rounded to the nearest $50.
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Cap on taxpayers utilizing Archer MSAs and expiration of pilot program

    The number of taxpayers benefiting annually from an Archer 
MSA contribution is limited to a threshold level (generally 
750,000 taxpayers). The number of Archer MSAs established has 
not exceeded the threshold level.
    After 2003, no new contributions may be made to Archer MSAs 
except by or on behalf of individuals who previously had Archer 
MSA contributions and employees who are employed by a 
participating employer.
    Trustees of Archer MSAs are generally required to make 
reports to the Treasury by August 1 regarding Archer MSAs 
established by July 1 of that year. If any year is a cut-off 
year, the Secretary is required to make and publish such 
determination by October 1 of such year.

                           REASONS FOR CHANGE

    The Committee believes that individuals should be 
encouraged to save for future medical care expenses and that 
individuals should be allowed to save for such expenses on a 
tax-favored basis. The Committee believes that consumers who 
spend their own savings on health care will make cost-conscious 
decisions, thus reducing the rising cost of health care. The 
Committee believes that Archer MSAs have been an important tool 
in allowing certain individuals to save for future medical 
expenses on a tax-favored basis.
    The Committee is aware that recently enacted health savings 
accounts offer more advantageous tax treatment than Archer MSAs 
and that amounts can be rolled over into a health savings 
account from an Archer MSA on a tax-free basis. Still, the 
Committee believes that individuals should be allowed the 
choice to continue the use of Archer MSAs. Thus, the Committee 
believes that it is appropriate to extend Archer MSAs.

                        EXPLANATION OF PROVISION

    The provision extends Archer MSAs through December 31, 
2005. The provision also provides that the reports required by 
MSA trustees for 2004 are treated as timely if made within 90 
days after the date of enactment. In addition, the 
determination of whether 2004 is a cut-off year and the 
publication of such determination is to be made within 120 days 
of the date of enactment. If 2004 is a cut-off year, the cut-
off date will be the last day of such 120-day period.

                             EFFECTIVE DATE

    The provision is generally effective on January 1, 2004. 
The provisions relating to reports and the determination by the 
Secretary are effective on the date of enactment.

L. Taxable Income Limit on Percentage Depletion for Oil and Natural Gas 
                   Produced From Marginal Properties


(Sec. 412 of the bill and sec. 613A of the Code)

                              PRESENT LAW

Overview of depletion

    Depletion, like depreciation, is a form of capital cost 
recovery. In both cases, the taxpayer is allowed a deduction in 
recognition of the fact that an asset--in the case of depletion 
for oil or gas interests, the mineral reserve itself--is being 
expended in order to produce income. Certain costs incurred 
prior to drilling an oil or gas property are recovered through 
the depletion deduction. These include costs of acquiring the 
lease or other interest in the property and geological and 
geophysical costs (in advance of actual drilling).
    Depletion is available to any person having an economic 
interest in a producing property. An economic interest is 
possessed in every case in which the taxpayer has acquired by 
investment any interest in minerals in place, and secures, by 
any form of legal relationship, income derived from the 
extraction of the mineral, to which it must look for a return 
of its capital.\170\ Thus, for example, both working interests 
and royalty interests in an oil- or gas-producing property 
constitute economic interests, thereby qualifying the interest 
holders for depletion deductions with respect to the property. 
A taxpayer who has no capital investment in the mineral deposit 
does not possess an economic interest merely because it 
possesses an economic or pecuniary advantage derived from 
production through a contractual relation.
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    \170\ Treas. Reg. sec. 1.611-1(b)(1).
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Cost depletion

    Two methods of depletion are currently allowable under the 
Code: (1) the cost depletion method, and (2) the percentage 
depletion method.\171\ Under the cost depletion method, the 
taxpayer deducts that portion of the adjusted basis of the 
depletable property which is equal to the ratio of units sold 
from that property during the taxable year to the number of 
units remaining as of the end of taxable year plus the number 
of units sold during the taxable year. Thus, the amount 
recovered under cost depletion may never exceed the taxpayer's 
basis in the property.
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    \171\ Secs. 611-613.
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Percentage depletion and related income limitations

    The Code generally limits the percentage depletion method 
for oil and gas properties to independent producers and royalty 
owners.\172\ Generally, under the percentage depletion method, 
15 percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year.\173\ The amount deducted generally may not exceed 100 
percent of the net income from that property in any year (the 
``net-income limitation'').\174\ The 100-percent net-income 
limitation for marginal wells has been suspended for taxable 
years beginning after December 31, 1997, and before January 1, 
2004.
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    \172\ Sec. 613A.
    \173\ Sec. 613A(c).
    \174\ Sec. 613(a).
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                           REASONS FOR CHANGE

    Domestic production from marginal wells is an appropriate 
part of establishing national energy security and reducing 
dependence on foreign oil. The Committee believes the 
suspension of the 100-percent net-income limitation for 
marginal wells should be extended to encourage continued 
operation of such wells.

                        EXPLANATION OF PROVISION

    The suspension of the 100-percent net-income limitation for 
marginal wells is extended an additional two years, through 
taxable years beginning before January 1, 2006.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003.

                    M. Qualified Zone Academy Bonds


(Sec. 413 of the bill and sec. 1397E of the Code)

                              PRESENT LAW

Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of the governmental units. Activities that can be 
financed with these tax-exempt bonds include the financing of 
public schools (sec. 103).

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, States 
and local governments are given the authority to issue 
``qualified zone academy bonds'' (``QZABs'') (sec. 1397E). A 
total of $400 million of qualified zone academy bonds may be 
issued annually in calendar years 1998 through 2003. The $400 
million aggregate bond cap is allocated each year to the States 
according to their respective populations of individuals below 
the poverty line. Each State, in turn, allocates the credit 
authority to qualified zone academies within such State.
    Financial institutions that hold qualified zone academy 
bonds are entitled to a nonrefundable tax credit in an amount 
equal to a credit rate multiplied by the face amount of the 
bond. A taxpayer holding a qualified zone academy bond on the 
credit allowance date is entitled to a credit. The credit is 
includable in gross income (as if it were a taxable interest 
payment on the bond), and may be claimed against regular income 
tax and AMT liability.
    The Treasury Department sets the credit rate at a rate 
estimated to allow issuance of qualified zone academy bonds 
without discount and without interest cost to the issuer. The 
maximum term of the bond is determined by the Treasury 
Department, so that the present value of the obligation to 
repay the bond is 50 percent of the face value of the bond.
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that: (1) at 
least 95 percent of the proceeds are used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy'', and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
    A school is a ``qualified zone academy'' if: (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zone or 
enterprise community designated under the Code, or (b) it is 
reasonably expected that at least 35 percent of the students at 
the school will be eligible for free or reduced-cost lunches 
under the school lunch program established under the National 
School Lunch Act.

                           REASONS FOR CHANGE

    The Committee believes that the extension of authority to 
issue qualified zone academy bonds is appropriate in light of 
the educational needs that exist today.

                        EXPLANATION OF PROVISION

    The bill authorizes issuance of up to $400 million of 
qualified zone academy bonds annually for calendar years 2004 
and 2005.

                             EFFECTIVE DATE

    The provision is effective for obligations issued after the 
date of enactment.

   N. Extension of Tax Incentives for Investment in the District of 
                                Columbia


(Sec. 414 of the bill and secs. 1400, 1400A, 1400B, and 1400C of the 
        Code)

                              PRESENT LAW

DC Zone incentives

    The Taxpayer Relief Act of 1997 designated certain 
economically depressed census tracts within the District of 
Columbia as the District of Columbia Enterprise Zone (the 
``D.C. Zone''), within which businesses and individual 
residents are eligible for special tax incentives. The D.C. 
Zone designation is in effect for the period from January 1, 
1998, through December 31, 2003. In addition to the tax 
incentives generally available with respect to empowerment 
zones, the D.C. Zone also has a zero-percent capital gains rate 
that applies to gain from the sale of certain qualified D.C. 
Zone assets acquired after December 31, 1997, and held for more 
than five years.
    With respect to the tax-exempt financing incentives, the 
D.C. Zone generally is treated like a Round I empowerment zone; 
therefore, the issuance of such tax-exempt bonds is subject to 
the District of Columbia's annual private activity bond volume 
limitation. However, the aggregate face amount of all 
outstanding qualified D.C. zone facility bonds per qualified 
D.C. Zone business may not exceed $15 million (rather than $3 
million, as is the case for Round I empowerment zones).

Homebuyers tax credit

    First-time homebuyers of a principal residence in the 
District of Columbia are eligible for a nonrefundable tax 
credit of up to $5,000 of the amount of the purchase price. The 
$5,000 maximum credit applies both to individuals and married 
couples. Married individuals filing separately can claim a 
maximum credit of $2,500 each. The credit phases out for 
individual taxpayers with adjusted gross income between $70,000 
and $90,000 ($110,000-$130,000 for joint filers). For purposes 
of eligibility, ``first-time homebuyer'' means any individual 
if such individual did not have a present ownership interest in 
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence 
to which the credit applies. The credit is scheduled to expire 
for property purchased after December 31, 2003.

                           REASONS FOR CHANGE

    The Committee believes that the incentives should 
temporarily be extended to provide the Congress and the 
Treasury Department a better opportunity to continue to assess 
the overall operation and effectiveness of the tax incentives 
to revitalize the DC Zone and to promote homeownership therein.

                        EXPLANATION OF PROVISION

DC Zone incentives

    The bill extends the D.C. Zone designation and tax-exempt 
financing incentives for two years (through December 31, 2005). 
The bill extends the date before which a DC Zone asset must be 
acquired for purposes of utilizing the zero-percent capital 
gains rate for two years (to January 1, 2006), and extends the 
period within which gain is treated as qualified capital gain 
for two years (through December 31, 2010).

Homebuyers tax credit

    The bill extends the first-time homebuyer credit for two 
years (through December 31, 2005).

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment, 
except that the provision relating to tax-exempt financing 
incentives applies to obligations issued after December 31, 
2003.

          O. Extend the Authority to Issue Liberty Zone Bonds


(Sec. 415 of the bill and sec. 1400L of the Code)

                              PRESENT LAW

In general

    Interest on debt incurred by States or local governments is 
excluded from income if the proceeds of the borrowing are used 
to carry out governmental functions of those entities or the 
debt is repaid with governmental funds (sec. 103). Interest on 
bonds that nominally are issued by States or local governments, 
but the proceeds of which are used (directly or indirectly) by 
a private person and payment of which is derived from funds of 
such a private person is taxable unless the purpose of the 
borrowing is approved specifically in the Code or in a non-Code 
provision of a revenue Act. These bonds are called ``private 
activity bonds.'' The term ``private person'' includes the 
Federal Government and all other individuals and entities other 
than States or local governments.
    In most cases, the aggregate volume of tax-exempt private 
activity bonds that may be issued in a State is restricted by 
annual volume limits. For calendar year 2004, these annual 
volume limits are equal to the greater of $80 per resident of 
the State or $234 million.

Tax-exempt private activity bonds

    Interest on private activity bonds is tax-exempt only for 
qualified bonds. Qualified bonds include: (1) exempt facility 
bonds; (2) qualified mortgage bonds; (3) qualified veteran 
mortgage bonds; (4) qualified small-issue bonds; (5) qualified 
student loan bonds; (6) qualified redevelopment bonds; and (7) 
qualified 501(c)(3) bonds. A further provision allows tax-
exempt financing for ``environmental enhancements of hydro-
electric generating facilities.'' Tax-exempt financing also is 
authorized for capital expenditures for small manufacturing 
facilities and land and equipment for first-time farmers 
(``qualified small-issue bonds''), local redevelopment 
activities (``qualified redevelopment bonds''), and eligible 
empowerment zone and enterprise community businesses.
    Tax-exempt financing is also allowed for qualified New York 
Liberty Bonds issued during calendar years 2002, 2003, and 
2004. An aggregate limit of $8 billion of tax-exempt private 
activity bonds to finance the construction and rehabilitation 
of nonresidential real property \175\ and residential rental 
real property \176\ in a newly designated ``Liberty Zone'' (the 
``Zone'') of New York City is allowed.\177\ Property eligible 
for financing with these bonds includes buildings and their 
structural components, fixed tenant improvements,\178\ and 
public utility property (e.g., gas, water, electric and 
telecommunication lines). All business addresses located on or 
south of Canal Street, East Broadway (east of its intersection 
with Canal Street), or Grand Street (east of its intersection 
with East Broadway) in the Borough of Manhattan are considered 
to be located within the Zone. Issuance of these bonds is 
limited to projects approved by the Mayor of New York City or 
the Governor of New York State, each of whom may designate up 
to $4 billion of the bonds authorized under the bill.
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    \175\ No more than $800 million of the authorized bond amount may 
be used to finance property used for retail sales of tangible property 
(e.g., department stores, restaurants, etc.) and functionally related 
and subordinate property. The term nonresidential real property 
includes structural components of such property if the taxpayer treats 
such components as part of the real property structure for all Federal 
income tax purposes (e.g., cost recovery). The $800 million limit is 
divided equally between the Mayor and the Governor.
    \176\ No more than $1.6 billion of the authorized bond amount may 
be used to finance residential rental property. The $1.6 billion limit 
is divided equally between the Mayor and the Governor.
    \177\ Current refundings of outstanding New York Liberty Bonds 
bonds do not count against the $8 billion volume limit to the extent 
that the amount of the refunding bonds does not exceed the outstanding 
amount of the bonds being refunded. In addition, qualified New York 
Liberty Bonds may be issued after December 31, 2004 to refund (other 
than advance refund) qualified New York Liberty Bonds originally issued 
before January 1, 2005, to the extent the amount of the refunding bonds 
does not exceed the outstanding amount of the refunded bonds. The bonds 
may not be advance refunded.
    \178\ Fixtures and equipment that could be removed from the 
designated zone for use elsewhere are not eligible for financing with 
these bonds.
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    If the Mayor or the Governor determines that it is not 
feasible to use all of the authorized bonds that he is 
authorized to designate for property located in the Zone, up to 
$1 billion of bonds may be designated by each to be used for 
the acquisition, construction, and rehabilitation of 
nonresidential real property (including fixed tenant 
improvements) located outside the Zone and within New York 
City.\179\ Bond-financed property located outside the Zone must 
meet the additional requirement that the project have at least 
100,000 square feet of usable office or other commercial space 
in a single building or multiple adjacent buildings.
---------------------------------------------------------------------------
    \179\ Public utility property and residential property located 
outside the Zone cannot be financed with the bonds.
---------------------------------------------------------------------------
    Subject to the following exceptions and modifications, 
issuance of these tax-exempt bonds is subject to the general 
rules applicable to issuance of exempt-facility private 
activity bonds:
          (1) Issuance of the bonds is not subject to the 
        aggregate annual State private activity bond volume 
        limits (sec. 146);
          (2) The restriction on acquisition of existing 
        property is applied using a minimum requirement of 50 
        percent of the cost of acquiring the building being 
        devoted to rehabilitation (sec. 147(d));
    (3) The special arbitrage expenditure rules for certain 
construction bond proceeds apply to available construction 
proceeds of the bonds (sec. 148(f)(4)(C));
    (4) The tenant targeting rules applicable to exempt-
facility bonds for residential rental property (and the 
corresponding change in use penalties for violations of those 
rules) do not apply to such property financed with the bonds 
(secs. 142(d) and 150(b)(2));
    (5) Repayments of bond-financed loans may not be used to 
make additional loans, but rather must be used to retire 
outstanding bonds (with the first such retirement occurring 10 
years after issuance of the bonds); \180\ and
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    \180\ It is intended that redemptions will occur at least semi-
annually beginning at the end of 10 years after the bonds are issued; 
however, amounts less than $250,000 are not required to be used to 
redeem bonds at such intervals.
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    (6) Interest on the bonds is not a preference item for 
purposes of the alternative minimum tax preference for private 
activity bond interest (sec. 57(a)(5)).

                           REASONS FOR CHANGE

    The Committee is committed to aiding the City of New York's 
economic recovery from the terrorist attacks of September 11, 
2001. Therefore, the Committee believes that an extension of 
the authority to issue New York Liberty Bonds is appropriate.

                        EXPLANATION OF PROVISION

    The bill extends authority to issue New York Liberty Bonds 
through December 31, 2009.

                             EFFECTIVE DATE

    The provision is effective for bonds issued after the date 
of enactment and before January 1, 2010.

     P. Disclosure to Law Enforcement Agencies Regarding Terrorist 
                               Activities


(Sec. 416 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Return information includes a taxpayer's identity.\181\ The 
IRS may disclose return information, other than taxpayer return 
information, to officers and employees of Federal law 
enforcement upon a written request. The request must be made by 
the head of the Federal law enforcement agency (or his 
delegate) involved in the response to or investigation of 
terrorist incidents, threats, or activities, and set forth the 
specific reason or reasons why such disclosure may be relevant 
to a terrorist incident, threat, or activity. The information 
is to be disclosed to officers and employees of the Federal law 
enforcement agency who would be personally and directly 
involved in the response to or investigation of terrorist 
incidents, threats, or activities. The information is to be 
used by such officers and employees solely for such response or 
investigation.\182\
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    \181\ Sec. 6103(b)(2)(A).
    \182\ Sec. 6103(i)(7)(A).
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    The Federal law enforcement agency may redisclose the 
information to officers and employees of State and local law 
enforcement personally and directly engaged in the response to 
or investigation of the terrorist incident, threat, or 
activity. The State or local law enforcement agency must be 
part of an investigative or response team with the Federal law 
enforcement agency for these disclosures to be made.\183\
---------------------------------------------------------------------------
    \183\ Sec. 6103(i)(7)(A)(ii).
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    If a taxpayer's identity is taken from a return or other 
information filed with or furnished to the IRS by or on behalf 
of the taxpayer, it is taxpayer return information. Since 
taxpayer return information is not covered by this disclosure 
authorization, taxpayer identity so obtained cannot be 
disclosed and thus associated with the other information being 
provided.
    The Code also allows the IRS to disclose return information 
(other than taxpayer return information) upon the written 
request of an officer or employee of the Department of Justice 
or Treasury who is appointed by the President with the advice 
and consent of the Senate, or who is the Director of the U.S. 
Secret Service, if such individual is responsible for the 
collection and analysis of intelligence and counterintelligence 
concerning any terrorist incident, threat, or activity.\184\ 
Taxpayer identity information for this purpose is not 
considered taxpayer return information. Such written request 
must set forth the specific reason or reasons why such 
disclosure may be relevant to a terrorist incident, threat, or 
activity. Disclosures under this authority may be made to those 
officers and employees of the Department of Justice, Treasury, 
and Federal intelligence agencies who are personally and 
directly engaged in the collection or analysis of intelligence 
and counterintelligence information or investigation concerning 
any terrorist incident, threat, or activity. Such disclosures 
may be made solely for the use of such officers and employees 
in such investigation, collection, or analysis.
---------------------------------------------------------------------------
    \184\ Sec. 6103(i)(7)(B).
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    The IRS, on its own initiative, may disclose in writing 
return information (other than taxpayer return information) 
that may be related to a terrorist incident, threat, or 
activity to the extent necessary to apprise the head of the 
appropriate investigating Federal law enforcement agency.\185\ 
Taxpayer identity information for this purpose is not 
considered taxpayer return information. The head of the agency 
may redisclose such information to officers and employees of 
such agency to the extent necessary to investigate or respond 
to the terrorist incident, threat, or activity.
---------------------------------------------------------------------------
    \185\ Sec. 6103(i)(3)(C).
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    If taxpayer return information is sought, the disclosure 
must be made pursuant to the ex parte order of a Federal 
district court judge or magistrate.
    No disclosures may be made under these provisions after 
December 31, 2003.

                           REASONS FOR CHANGE

    The Committee believes that a renewal of this disclosure 
authority will provide additional time to evaluate the 
effectiveness of the provision and whether any modifications 
need to be implemented to enhance the provision.

                        EXPLANATION OF PROVISION

    The provision extends the disclosure authority relating to 
terrorist activities. Under the provision, no disclosures can 
be made after December 31, 2005.
    The provision also makes a technical change to clarify that 
a taxpayer's identity is not treated as taxpayer return 
information for purposes of disclosures to law enforcement 
agencies regarding terrorist activities.

                             EFFECTIVE DATE

    The provision extending authority is effective for 
disclosures made on or after the date of enactment. The 
technical change is effective as if included in section 201 of 
the Victims of Terrorism Tax Relief Act of 2001.

     Q. Disclosure of Return Information Relating to Student Loans


(Sec. 417 of the bill and sec. 6103(l) of the Code)

                              Present Law

    Present law prohibits the disclosure of returns and return 
information, except to the extent specifically authorized by 
the Code.\186\ An exception is provided for disclosure to the 
Department of Education (but not to contractors thereof) of a 
taxpayer's filing status, adjusted gross income and identity 
information (i.e., name, mailing address, taxpayer identifying 
number) to establish an appropriate repayment amount for an 
applicable student loan.\187\ The Department of Education 
disclosure authority is scheduled to expire after December 31, 
2004.\188\
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    \186\ Sec. 6103.
    \187\ Sec. 6103(l)(13).
    \188\ Pub. L. No. 108-89, sec. 201 (2003).
---------------------------------------------------------------------------
    An exception to the general rule prohibiting disclosure is 
also provided for the disclosure of returns and return 
information to a designee of the taxpayer.\189\ Unlike the 
specific Department of Education exception, section 6103(c) 
disclosures are not subject to use restrictions nor are they 
subject to statutory safeguards. Because the Department of 
Education utilizes contractors for the income-contingent loan 
verification program, the Department of Education obtains 
taxpayer information by consent under section 6103(c), rather 
than under the specific exception.\190\ The Department of 
Treasury has reported that the Internal Revenue Service 
processes approximately 100,000 consents per year for this 
purpose.\191\
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    \189\ Sec. 6103(c).
    \190\ Department of Treasury, Report to the Congress on Scope and 
Use of Taxpayer Confidentiality and Disclosure Provisions, Volume I: 
Study of General Provisions (October 2000) at 91.
    \191\ Department of Treasury, General Explanations of the 
Administration's Fiscal Year 2004 Revenue Proposals (February 2003) at 
133.
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                           REASONS FOR CHANGE

    The Committee believes that the Department of Education 
should be provided with access to tax return information to 
assist it in carrying out the income-contingent repayment 
program. Thus, the Committee believes that it is appropriate to 
provide a further extension of this disclosure authority.

                        EXPLANATION OF PROVISION

    The bill extends the disclosure authority relating to the 
disclosure of return information to carry out income-contingent 
repayment of student loans. Under the bill, no disclosures can 
be made after December 31, 2005.

                             EFFECTIVE DATE

    The provision is effective with respect to disclosures made 
after the date of enactment.

R. Extension of Cover Over of Excise Tax on Distilled Spirits to Puerto 
                        Rico and Virgin Islands


(Sec. 418 of the bill and sec. 7652 of the Code)

                              PRESENT LAW

    A $13.50 per proof gallon \192\ excise tax is imposed on 
distilled spirits produced in or imported (or brought) into the 
United States.\193\ The excise tax does not apply to distilled 
spirits that are exported from the United States, including 
exports to U.S. possessions (e.g., Puerto Rico and the Virgin 
Islands).\194\
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    \192\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10), (11).
    \193\ Sec. 5001(a)(1).
    \194\ Secs. 5062(b), 7653(b) and (c).
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    The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.\195\ The amount of the cover over is 
limited under section 7652(f) to $10.50 per proof gallon 
($13.25 per proof gallon during the period July 1, 1999 through 
December 31, 2003).
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    \195\ Sec. 7652(a)(3), (b)(3), and (e)(1). One percent of the 
amount of excise tax collected from imports into the United States of 
articles produced in the Virgin Islands is retained by the United 
States under section 7652(b)(3).
---------------------------------------------------------------------------
    Thus, tax amounts attributable to shipments to the United 
States of rum produced in Puerto Rico are covered over to 
Puerto Rico. Tax amounts attributable to shipments to the 
United States of rum produced in the Virgin Islands are covered 
over to the Virgin Islands. Tax amounts attributable to 
shipments to the United States of rum produced in neither 
Puerto Rico nor the Virgin Islands are divided and covered over 
to the two possessions under a formula.\196\ Amounts covered 
over to Puerto Rico and the Virgin Islands are deposited into 
the treasuries of the two possessions for use as those 
possessions determine.\197\ All of the amounts covered over are 
subject to the limitation.
---------------------------------------------------------------------------
    \196\ Sec. 7652(e)(2).
    \197\ Sec. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the needs of Puerto Rico and 
the Virgin Islands justify the extension of the cover over 
amount of $13.25 per proof gallon through December 31, 2005.

                        EXPLANATION OF PROVISION

    The provision temporarily suspends the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the Virgin Islands. Under the 
provision, the cover over amount of $13.25 per proof gallon is 
extended for rum brought into the United States after December 
31, 2003 and before January 1, 2006. After December 31, 2005, 
the cover over amount reverts to $10.50 per proof gallon.

                             EFFECTIVE DATE

    The provision is effective for articles brought into the 
United States after December 31, 2003.

                      S. Extension of Joint Review


(Sec. 419 of the bill and secs. 8021 and 8022 of the Code)

                              PRESENT LAW

    The Code required the Joint Committee on Taxation to 
conduct a joint review \198\ of the strategic plans and budget 
of the IRS from 1999 through 2003.\199\ The Code also required 
the Joint Committee to provide an annual report \200\ from 1999 
through 2003 with respect to:
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    \198\ The joint review was required to include two members of the 
majority and one member of the minority of the Senate Committees on 
Finance, Appropriations, and Governmental Affairs, and of the House 
Committees on Ways and Means, Appropriations, and Government Reform and 
Oversight.
    \199\ Sec. 8021(f).
    \200\ Sec. 8022(3)(C).
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           Strategic and business plans for the IRS;
           Progress of the IRS in meeting its 
        objectives;
           The budget for the IRS and whether it 
        supports its objectives;
           Progress of the IRS in improving taxpayer 
        service and compliance;
           Progress of the IRS on technology 
        modernization; and
           The annual filing season.

                           REASONS FOR CHANGE

    The Committee believes that a joint review of the IRS 
should be held for one additional year and that the report 
provided by the Joint Committee on Taxation should be tailored 
to the specific issues addressed in the joint review.

                        EXPLANATION OF PROVISION

    The provision requires that the Joint Committee conduct a 
joint review before June 1, 2005. The provision requires the 
Joint Committee to provide an annual report before June 1, 
2005, but specifies that the content of the annual report is 
the matters addressed in the joint review.\201\
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    \201\ Accordingly, the provision deletes the specific list of 
matters required to be covered in the annual report.
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                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

    T. Parity in the Application of Certain Limits to Mental Health 
                                Benefits


(Sec. 420 of the bill and sec. 9812 of the Code)

                              PRESENT LAW

    The Mental Health Parity Act of 1996 amended the Employee 
Retirement Income Security Act of 1974 (``ERISA'') and the 
Public Health Service Act (``PHSA'') to provide that group 
health plans that provide both medical and surgical benefits 
and mental health benefits cannot impose aggregate lifetime or 
annual dollar limits on mental health benefits that are not 
imposed on substantially all medical and surgical benefits. The 
provisions of the Mental Health Parity Act were initially 
effective with respect to plan years beginning on or after 
January 1, 1998, for a temporary period. Since enactment, the 
mental health parity requirements in ERISA and the PHSA have 
been extended on more than one occasion and currently are 
scheduled to expire with respect to benefits for services 
furnished on or after December 31, 2004.
    The Taxpayer Relief Act of 1997 added to the Code the 
requirements imposed under the Mental Health Parity Act, and 
imposed an excise tax on group health plans that fail to meet 
the requirements. The excise tax is equal to $100 per day 
during the period of noncompliance and is generally imposed on 
the employer sponsoring the plan if the plan fails to meet the 
requirements. The maximum tax that can be imposed during a 
taxable year cannot exceed the lesser of 10 percent of the 
employer's group health plan expenses for the prior year or 
$500,000. No tax is imposed if the Secretary determines that 
the employer did not know, and exercising reasonable diligence 
would not have known, that the failure existed.
    The Code provisions were initially effective with respect 
to plan years beginning on or after January 1, 1998, for a 
temporary period.\202\ The Code provisions have been extended 
on a number of occasions, and expired with respect to benefits 
for services furnished after December 31, 2003.
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    \202\ The excise tax does not apply to benefits for services 
furnished on or after September 30, 2001, and before January 10, 2002.
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                           REASONS FOR CHANGE

    The provisions of the Mental Health Parity Act in ERISA and 
the PHSA have been extended to December 31, 2004, while the 
Code provisions have expired. The Committee recognizes that the 
Code provisions relating to mental health parity are important 
to carrying out the purposes of the Mental Health Parity Act. 
Thus, the Committee believes that extending the Code provisions 
relating to mental health parity is warranted.

                        EXPLANATION OF PROVISION

    The provision extends the Code provisions relating to 
mental health parity to benefits for services furnished after 
the date of enactment and before January 1, 2006. Thus, the 
excise tax on failures to meet the requirements imposed by the 
Code provisions does not apply after December 31, 2003, and 
before the date of enactment.

                             EFFECTIVE DATE

    The provision is effective for benefits for services 
furnished after the date of enactment.

U. Disclosure of Tax Information To Facilitate Combined Employment Tax 
                               Reporting


(Sec. 421 of the bill)

                              PRESENT LAW

    Traditionally, Federal tax forms are filed with the Federal 
government and State tax forms are filed with individual 
States. This necessitates duplication of items common to both 
returns.
    The Taxpayer Relief Act of 1997 \203\ permitted 
implementation of a demonstration project to assess the 
feasibility and desirability of expanding combined Federal and 
State reporting. There were several limitations on the 
demonstration project. First, it was limited to the sharing of 
information between the State of Montana and the IRS. Second, 
it was limited to employment tax reporting. Third, it was 
limited to disclosure of the name, address, TIN, and signature 
of the taxpayer, which is information common to both the 
Montana and Federal portions of the combined form. Fourth, it 
was limited to a period of five years.
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    \203\ Pub. L. No. 105-34, sec. 976.
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    The authority for the demonstration project expired on the 
date five years after the date of enactment (August 5, 2002).

                           REASONS FOR CHANGE

    The Committee believes that authorizing this pilot project 
for an additional year will provide the Congress with 
information to assess the usefulness of the program and whether 
further expansions are warranted.

                        EXPLANATION OF PROVISION

    The provision renews authority for the demonstration 
project through December 31, 2005.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

V. Extension of Tax Credit for Electric Vehicles and Tax Deduction for 
                          Clean-Fuel Vehicles


(Sec. 422 of the bill and secs. 30 and 179A of the Code)

                              PRESENT LAW

Electric vehicles

    A 10-percent tax credit is provided for the cost of a 
qualified electric vehicle, up to a maximum credit of $4,000 
(sec. 30). A qualified electric vehicle is a motor vehicle that 
is powered primarily by an electric motor drawing current from 
rechargeable batteries, fuel cells, or other portable sources 
of electrical current, the original use of which commences with 
the taxpayer, and that is acquired for the use by the taxpayer 
and not for resale. The full amount of the credit is available 
for purchases prior to 2002. The credit phases down in the 
years 2004 through 2006, and is unavailable for purchases after 
December 31, 2006.

Clean-fuel vehicles

    Certain costs of qualified clean-fuel vehicle may be 
expensed and deducted when such property is placed in service 
(sec. 179A). Qualified clean-fuel vehicle property includes 
motor vehicles that use certain clean-burning fuels (natural 
gas, liquefied natural gas, liquefied petroleum gas, hydrogen, 
electricity and any other fuel at least 85 percent of which is 
methanol, ethanol, any other alcohol or ether). The maximum 
amount of the deduction is $50,000 for a truck or van with a 
gross vehicle weight over 26,000 pounds or a bus with seating 
capacities of at least 20 adults; $5,000 in the case of a truck 
or van with a gross vehicle weight between 10,000 and 26,000 
pounds; and $2,000 in the case of any other motor vehicle. 
Qualified electric vehicles do not qualify for the clean-fuel 
vehicle deduction. The deduction phases down in the years 2004 
through 2006, and is unavailable for purchases after December 
31, 2006.

                           REASONS FOR CHANGE

    The Committee believes it is necessary to continue to 
provide the full benefit of the tax subsidy to the purchase of 
these innovative vehicles to enable such vehicles to 
demonstrate their road-worthiness to the consumer.

                        EXPLANATION OF PROVISION

    The provision suspends the phase down of allowable tax 
credit for electric vehicles and the deduction for clean-fuel 
vehicles in 2004 and 2005. Thus, a taxpayer who purchases a 
qualifying vehicle may claim 100 percent of the otherwise 
allowable credit or deduction for vehicles purchased in 2004 
and 2005. For vehicles purchased in 2006 the credit or 
deduction remains at 25 percent of the otherwise allowable 
amount as under present law.

                             EFFECTIVE DATE

    The provision is effective for vehicles placed in service 
after December 31, 2003.

       TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES


          A. Deduction of State and Local General Sales Taxes


(Sec. 501 of the bill and sec. 164 of the Code)

                              PRESENT LAW

    An itemized deduction is permitted for certain taxes paid, 
including individual income taxes, real property taxes, and 
personal property taxes. No itemized deduction is permitted for 
State or local general sales taxes.

                           REASONS FOR CHANGE

    The Committee recognizes that not all States rely on income 
taxes as a primary source of revenue, and that allowing a 
deduction for State and local income taxes, but not sales 
taxes, may create inequities across States and may also create 
bias in the types of taxes that States and localities choose to 
impose. The Committee believes that the provision of an 
itemized deduction for State and local general sales taxes in 
lieu of the deduction for State and local income taxes provides 
more equitable Federal tax treatment across States, and will 
cause the Federal tax laws to have a more neutral effect on the 
types of taxes that State and local governments utilize.

                        EXPLANATION OF PROVISION

    The provision provides that, at the election of the 
taxpayer, an itemized deduction may be taken for State and 
local general sales taxes in lieu of the itemized deduction 
provided under present law for State and local income taxes.
    The term ``general sales tax'' means a tax imposed at one 
rate with respect to the sale at retail of a broad range of 
classes of items. However, in the case of items of food, 
clothing, medical supplies, and motor vehicles, the fact that 
the tax does not apply with respect to some or all of such 
items is not taken into account in determining whether the tax 
applies with respect to a broad range of classes of items, and 
the fact that the rate of tax applicable with respect to some 
or all of such items is lower than the general rate of tax is 
not taken into account in determining whether the tax is 
imposed at one rate. Except in the case of a lower rate of tax 
applicable with respect to food, clothing, medical supplies, or 
motor vehicles, no deduction is allowed for any general sales 
tax imposed with respect to an item at a rate other than the 
general rate of tax. However, in the case of motor vehicles, if 
the rate of tax exceeds the general rate, such excess shall be 
disregarded and the general rate is treated as the rate of tax.
    A compensating use tax with respect to an item is treated 
as a general sales tax, provided such tax is complimentary to a 
general sales tax and a deduction for sales taxes is allowable 
with respect to items sold at retail in the taxing jurisdiction 
that are similar to such item.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2003, and prior to January 1, 2006.

                      TITLE VI--REVENUE PROVISIONS


A. Provisions To Reduce Tax Avoidance Through Individual and Corporate 
                              Expatriation


1. Tax treatment of expatriated entities and their foreign parents 
        (sec. 601 of the bill and new sec. 7874 of the Code)

                              PRESENT LAW

Determination of corporate residence

    The U.S. tax treatment of a multinational corporate group 
depends significantly on whether the parent corporation of the 
group is domestic or foreign. For purposes of U.S. tax law, a 
corporation is treated as domestic if it is incorporated under 
the law of the United States or of any State. All other 
corporations (i.e., those incorporated under the laws of 
foreign countries) are treated as foreign.

U.S. taxation of domestic corporations

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
whether derived in the United States or abroad. In order to 
mitigate the double taxation that may arise from taxing the 
foreign-source income of a domestic corporation, a foreign tax 
credit for income taxes paid to foreign countries is provided 
to reduce or eliminate the U.S. tax owed on such income, 
subject to certain limitations.
    Income earned by a domestic parent corporation from foreign 
operations conducted by foreign corporate subsidiaries 
generally is subject to U.S. tax when the income is distributed 
as a dividend to the domestic corporation. Until such 
repatriation, the U.S. tax on such income generally is 
deferred, and U.S. tax is imposed on such income when 
repatriated. However, certain anti-deferral regimes may cause 
the domestic parent corporation to be taxed on a current basis 
in the United States with respect to certain categories of 
passive or highly mobile income earned by its foreign 
subsidiaries, regardless of whether the income has been 
distributed as a dividend to the domestic parent corporation. 
The main anti-deferral regimes in this context are the 
controlled foreign corporation rules of subpart F (secs. 951-
964) and the passive foreign investment company rules (secs. 
1291-1298). A foreign tax credit is generally available to 
offset, in whole or in part, the U.S. tax owed on this foreign-
source income, whether repatriated as an actual dividend or 
included under one of the anti-deferral regimes.

U.S. taxation of foreign corporations

    The United States taxes foreign corporations only on income 
that has a sufficient nexus to the United States. Thus, a 
foreign corporation is generally subject to U.S. tax only on 
income that is ``effectively connected'' with the conduct of a 
trade or business in the United States. Such ``effectively 
connected income'' generally is taxed in the same manner and at 
the same rates as the income of a U.S. corporation. An 
applicable tax treaty may limit the imposition of U.S. tax on 
business operations of a foreign corporation to cases in which 
the business is conducted through a ``permanent establishment'' 
in the United States.
    In addition, foreign corporations generally are subject to 
a gross-basis U.S. tax at a flat 30-percent rate on the receipt 
of interest, dividends, rents, royalties, and certain similar 
types of income derived from U.S. sources, subject to certain 
exceptions. The tax generally is collected by means of 
withholding by the person making the payment. This tax may be 
reduced or eliminated under an applicable tax treaty.

U.S. tax treatment of inversion transactions

    Under present law, a U.S. corporation may reincorporate in 
a foreign jurisdiction and thereby replace the U.S. parent 
corporation of a multinational corporate group with a foreign 
parent corporation. These transactions are commonly referred to 
as inversion transactions. Inversion transactions may take many 
different forms, including stock inversions, asset inversions, 
and various combinations of and variations on the two. Most of 
the known transactions to date have been stock inversions. In 
one example of a stock inversion, a U.S. corporation forms a 
foreign corporation, which in turn forms a domestic merger 
subsidiary. The domestic merger subsidiary then merges into the 
U.S. corporation, with the U.S. corporation surviving, now as a 
subsidiary of the new foreign corporation. The U.S. 
corporation's shareholders receive shares of the foreign 
corporation and are treated as having exchanged their U.S. 
corporation shares for the foreign corporation shares. An asset 
inversion reaches a similar result, but through a direct merger 
of the top-tier U.S. corporation into a new foreign 
corporation, among other possible forms. An inversion 
transaction may be accompanied or followed by further 
restructuring of the corporate group. For example, in the case 
of a stock inversion, in order to remove income from foreign 
operations from the U.S. taxing jurisdiction, the U.S. 
corporation may transfer some or all of its foreign 
subsidiaries directly to the new foreign parent corporation or 
other related foreign corporations.
    In addition to removing foreign operations from the U.S. 
taxing jurisdiction, the corporate group may derive further 
advantage from the inverted structure by reducing U.S. tax on 
U.S.-source income through various earnings stripping or other 
transactions. This may include earnings stripping through 
payment by a U.S. corporation of deductible amounts such as 
interest, royalties, rents, or management service fees to the 
new foreign parent or other foreign affiliates. In this 
respect, the post-inversion structure enables the group to 
employ the same tax-reduction strategies that are available to 
other multinational corporate groups with foreign parents and 
U.S. subsidiaries, subject to the same limitations (e.g., secs. 
163(j) and 482).
    Inversion transactions may give rise to immediate U.S. tax 
consequences at the shareholder and/or the corporate level, 
depending on the type of inversion. In stock inversions, the 
U.S. shareholders generally recognize gain (but not loss) under 
section 367(a), based on the difference between the fair market 
value of the foreign corporation shares received and the 
adjusted basis of the domestic corporation stock exchanged. To 
the extent that a corporation's share value has declined, and/
or it has many foreign or tax-exempt shareholders, the impact 
of this section 367(a) ``toll charge'' is reduced. The transfer 
of foreign subsidiaries or other assets to the foreign parent 
corporation also may give rise to U.S. tax consequences at the 
corporate level (e.g., gain recognition and earnings and 
profits inclusions under secs. 1001, 311(b), 304, 367, 1248 or 
other provisions). The tax on any income recognized as a result 
of these restructurings may be reduced or eliminated through 
the use of net operating losses, foreign tax credits, and other 
tax attributes.
    In asset inversions, the U.S. corporation generally 
recognizes gain (but not loss) under section 367(a) as though 
it had sold all of its assets, but the shareholders generally 
do not recognize gain or loss, assuming the transaction meets 
the requirements of a reorganization under section 368.

                           REASONS FOR CHANGE

    The Committee believes that corporate inversion 
transactions are a symptom of larger problems with our current 
uncompetitive system for taxing U.S.-based global businesses 
and are also indicative of the unfair advantages that our tax 
laws convey to foreign ownership. The bill addresses the 
underlying problems with the U.S. system of taxing U.S.-based 
global businesses and contains provisions to remove the 
incentives for entering into inversion transactions. Imposing 
full U.S. tax on gains of companies undertaking an inversion 
transaction is one such provision that helps to remove the 
incentive to enter into an inversion transaction.

                        EXPLANATION OF PROVISION

    The bill applies special tax rules to corporations that 
undertake certain defined inversion transactions. For this 
purpose, an inversion is a transaction in which, pursuant to a 
plan or a series of related transactions: (1) a U.S. 
corporation becomes a subsidiary of a foreign-incorporated 
entity or otherwise transfers substantially all of its 
properties to such an entity after March 4, 2003; (2) the 
former shareholders of the U.S. corporation hold (by reason of 
holding stock in the U.S. corporation) 60 percent or more (by 
vote or value) of the stock of the foreign-incorporated entity 
after the transaction; and (3) the foreign-incorporated entity, 
considered together with all companies connected to it by a 
chain of greater than 50-percent ownership (i.e., the 
``expanded affiliated group'') does not conduct substantial 
business activities in the entity's country of incorporation 
compared to the total worldwide business activities of the 
expanded affiliated group.
    In such a case, any applicable corporate-level ``toll 
charges'' for establishing the inverted structure are not 
offset by tax attributes such as net operating losses or 
foreign tax credits. Specifically, any applicable corporate-
level income or gain required to be recognized under sections 
304, 311(b), 367, 1001, 1248, or any other provision with 
respect to the transfer of controlled foreign corporation stock 
or the transfer or license of other assets by a U.S. 
corporation as part of the inversion transaction or after such 
transaction to a related foreign person is taxable, without 
offset by any tax attributes (e.g., net operating losses or 
foreign tax credits). This rule does not apply to certain 
transfers of inventory and similar property. These measures 
generally apply for a 10-year period following the inversion 
transaction.
    In determining whether a transaction meets the definition 
of an inversion under the provision, stock held by members of 
the expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Similarly, if a U.S. parent corporation 
converts an existing wholly owned U.S. subsidiary into a new 
wholly owned controlled foreign corporation, the stock of the 
new foreign corporation would be disregarded. Stock sold in a 
public offering related to the transaction also is disregarded 
for these purposes.
    Transfers of properties or liabilities as part of a plan a 
principal purpose of which is to avoid the purposes of the 
provision are disregarded. In addition, the Treasury Secretary 
is granted authority to prevent the avoidance of the purposes 
of the provision, including avoidance through the use of 
related persons, pass-through or other noncorporate entities, 
or other intermediaries, and through transactions designed to 
qualify or disqualify a person as a related person or a member 
of an expanded affiliated group. Similarly, the Treasury 
Secretary is granted authority to treat certain non-stock 
instruments as stock, and certain stock as not stock, where 
necessary, to carry out the purposes of the provision.
    Under the provision, inversion transactions include certain 
partnership transactions. Specifically, the provision applies 
to transactions in which a foreign-incorporated entity acquires 
substantially all of the properties constituting a trade or 
business of a domestic partnership, if after the acquisition at 
least 60 percent of the stock of the entity is held by former 
partners of the partnership (by reason of holding their 
partnership interests), provided that the other terms of the 
basic definition are met. For purposes of applying this test, 
all partnerships that are under common control within the 
meaning of section 482 are treated as one partnership, except 
as provided otherwise in regulations. In addition, the modified 
``toll charge'' provisions apply at the partner level.
    A transaction otherwise meeting the definition of an 
inversion transaction is not treated as an inversion 
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more 
than half of the properties held directly or indirectly by the 
domestic corporation, or more than half of the properties 
constituting the partnership trade or business, as the case may 
be.

                             EFFECTIVE DATE

    The provision applies to taxable years ending after March 
4, 2003.

2. Excise tax on stock compensation of insiders in expatriated 
        corporations (sec. 602 of the bill and secs. 162(m), 275(a), 
        and new sec. 4985 of the Code)

                              PRESENT LAW

    The income taxation of a nonstatutory \204\ compensatory 
stock option is determined under the rules that apply to 
property transferred in connection with the performance of 
services (sec. 83). If a nonstatutory stock option does not 
have a readily ascertainable fair market value at the time of 
grant, which is generally the case unless the option is 
actively traded on an established market, no amount is included 
in the gross income of the recipient with respect to the option 
until the recipient exercises the option.\205\ Upon exercise of 
such an option, the excess of the fair market value of the 
stock purchased over the option price is generally included in 
the recipient's gross income as ordinary income in such taxable 
year.\206\
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    \204\ Nonstatutory stock options refer to stock options other than 
incentive stock options and employee stock purchase plans, the taxation 
of which is determined under sections 421-424.
    \205\ If an individual receives a grant of a nonstatutory option 
that has a readily ascertainable fair market value at the time the 
option is granted, the excess of the fair market value of the option 
over the amount paid for the option is included in the recipient's 
gross income as ordinary income in the first taxable year in which the 
option is either transferable or not subject to a substantial risk of 
forfeiture.
    \206\ Under section 83, such amount is includable in gross income 
in the first taxable year in which the rights to the stock are 
transferable or are not subject to substantial risk of forfeiture.
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    The tax treatment of other forms of stock-based 
compensation (e.g., restricted stock and stock appreciation 
rights) is also determined under section 83. The excess of the 
fair market value over the amount paid (if any) for such 
property is generally includable in gross income in the first 
taxable year in which the rights to the property are 
transferable or are not subject to substantial risk of 
forfeiture.
    Shareholders are generally required to recognize gain upon 
stock inversion transactions. An inversion transaction is 
generally not a taxable event for holders of stock options and 
other stock-based compensation.

                           REASONS FOR CHANGE

    The Committee believes that certain inversion transactions 
are a means of avoiding U.S. tax and should be curtailed. The 
Committee is concerned that, while shareholders are generally 
required to recognize gain upon stock inversion transactions, 
executives holding stock options and certain stock-based 
compensation are not taxed upon such transactions. Since such 
executives are often instrumental in deciding whether to engage 
in inversion transactions, the Committee believes that, upon 
certain inversion transactions, it is appropriate to impose an 
excise tax on certain executives holding stock options and 
stock-based compensation. Because shareholders are taxed at the 
capital gains rate upon inversion transactions