American Jobs Creation Act of 2004 (P.L. 108-357) (Title VI--Fair and Equitable Tobacco Reform Act of 2004)
American Jobs Creation Act of 2004 (P.L. 108-357) (Title VI--Fair and Equitable Tobacco Reform Act of 2004)
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H.R. 2896, Introduced in the House
108th CONGRESS
1st Session
H. R. 2896
To amend the Internal Revenue Code of 1986 to remove impediments in such Code and make our manufacturing, service, and high-technology businesses and workers more competitive and productive both at home and abroad.
IN THE HOUSE OF REPRESENTATIVES
July 25, 2003
Mr. THOMAS introduced the following bill;
which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to remove impediments in such Code and make our manufacturing, service, and high-technology businesses and workers more competitive and productive both at home and abroad.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
(a) SHORT TITLE.--This Act may be cited as the "American Jobs Creation Act of 2003".
(b) AMENDMENT OF 1986 CODE.--Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.--
Sec. 1. Short title; etc.
Subtitle A--Reduction in Corporate Income Tax Rates Subtitle B--Extension and Modification of Research Credit Subtitle C--Incentives to Reinvest Foreign Earnings in United States Subtitle D--Small Business Expensing Subtitle E--Depreciation
Sec. 1042. Recovery period for depreciation of certain leasehold improvements and restaurant property.
Sec. 1043. Shorter recovery periods for manufacturing property.
Sec. 1062. Expansion of exemption from alternative minimum tax for small corporations.
Sec. 1063. Reduction in amount of depreciation subject to alternative minimum tax.
Sec. 1072. Increase in number of eligible shareholders to 100.
Sec. 1073. Expansion of bank S corporation eligible shareholders to include IRAs.
Sec. 1075. Transfer of suspended losses incident to divorce, etc.
Sec. 1077. Exclusion of investment securities income from passive income test for bank S corporations.
Sec. 1078. Treatment of qualifying director shares.
Sec. 1079. Relief from inadvertently invalid qualified subchapter S subsidiary elections and terminations.
Sec. 1080. Information returns for qualified subchapter S subsidiaries.
Sec. 1092. Exclusion of incentive stock options and employee stock purchase plan stock options from wages.
Sec. 1093. Extension of transfers of excess pension assets to retiree health accounts.
Sec. 1102. Extension of exception of active financing income from foreign personal holding company income.
Sec. 1104. Look-thru treatment for sales of partnership interests.
Sec. 1105. Repeal of foreign personal holding company rules and foreign investment company rules.
Sec. 1106. Clarification of treatment of pipeline transportation income.
Sec. 1108. Repeal of CFC rules on foreign base company shipping income.
Sec. 1109. Effective date.
Sec. 1112. Recharacterization of overall domestic loss.
Sec. 1113. Reduction to 2 foreign tax credit baskets.
Sec. 1114. 10-year foreign tax credit carryforward.
Sec. 1115. Look-thru rules to apply to dividends from noncontrolled section 902 corporations.
Sec. 1117. Clarification of treatment of certain transfers of intangible property.
Sec. 1118. Application of uniform capitalization rules to foreign persons.
Sec. 1120. Treatment of certain dividends of regulated investment companies.
Sec. 1121. Election not to use average exchange rate for foreign tax paid other than in functional currency.
Sec. 1122. Repeal of withholding tax on dividends from certain foreign corporations.
Sec. 2002. Tax treatment of expatriated entities and their foreign parents.
Sec. 2003. Excise tax on stock compensation of insiders in expatriated corporations.
Sec. 2004. Reinsurance of United States risks in foreign jurisdictions.
Sec. 2005. Revision of tax rules on expatriation of individuals.
Sec. 2006. Reporting of taxable mergers and acquisitions.
Sec. 2007. Studies.
Subtitle A--Taxpayer-Related Provisions
Sec. 3003. Tax shelter exception to confidentiality privileges relating to taxpayer communications.
Sec. 3004. Statute of limitations for taxable years for which required listed transactions not reported.
Sec. 3005. Disclosure of reportable transactions.
Sec. 3006. Failure to furnish information regarding reportable transactions.
Sec. 3007. Modification of penalty for failure to maintain lists of investors.
Sec. 3008. Penalty on promoters of tax shelters.
Sec. 3009. Modifications of substantial understatement penalty for nonreportable transactions.
Sec. 3011. Penalty on failure to report interests in foreign financial accounts.
Sec. 3012. Regulation of individuals practicing before the department of the treasury.
Sec. 3022. Minimum holding period for foreign tax credit on withholding taxes on income other than dividends.
Sec. 3023. Affirmation of consolidated return regulation authority.
Sec. 3024. Disallowance of certain partnership loss transfers.
Sec. 3025. No reduction of basis under section 734 in stock held by partnership in corporate partner.
Sec. 3026. Repeal of special rules for FASITs.
Sec. 3027. Limitation on transfer of built-in losses on REMIC residuals.
Sec. 3029. Clarification of exemption from tax for small property and casualty insurance companies.
Sec. 3030. Definition of insurance company for section 831.
Sec. 3031. Qualified tax collection contracts.
Sec. 4002. COBRA fees.
SEC. 1001. 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 (4) and by striking paragraph (1) and inserting the following new paragraphs:
"(1) IN GENERAL.--The amount of the tax imposed by subsection (a) shall be the sum of--
"(A) 15 percent of so much of the taxable income as does not exceed $50,000,
"(B) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000,
"(C) 33 percent (32 percent for taxable years beginning after December 31, 2009) of so much of the taxable income as exceeds $75,000 but does not exceed the applicable amount,
"(D) in the case of taxable years beginning before January 1, 2012, 34 percent of so much of the taxable income as exceeds the applicable amount but does not exceed $10,000,000, and
"(E) 35 percent of so much of the taxable income as exceeds $10,000,000.
"(2) PHASEOUT OF LOWER RATES FOR CERTAIN TAXPAYERS.--
"(A) IN GENERAL.--In the case of a corporation which has taxable income in excess of the applicable amount for any taxable year, the amount of tax determined under paragraph (1) for such taxable year shall be increased by the lesser of (i) 5 percent of such excess, or (ii) maximum increase amount.
"(B) HIGHER INCOME CORPORATIONS.--In the case of a corporation which has taxable income in excess of $10,000,000, the amount of the tax determined under the foregoing provisions of this paragraph shall be increased by an additional amount equal to the lesser of (i) 3 percent of such excess, or (ii) $100,000.
"(3) DEFINITIONS.--For purposes of this subsection--
"In the case of any taxable The applicable The maximum increase
year beginning during: amount is: amount is:
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2005, 2006, 2007, or 2008 $ 1,000,000 $ 21,000
2009 $ 2,000,000 $ 31,000
2010 and 2011 $ 5,000,000 $110,250
2012 and thereafter $10,000,000 $210,250."
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SEC. 1011. EXTENSION AND MODIFICATION OF RESEARCH CREDIT.
(a) EXTENSION OF RESEARCH CREDIT.--
(1) IN GENERAL.--Subparagraph (B) of section 41(h)(1) (relating to credit for increasing research activities) is amended by striking "June 30, 2004" and inserting "December 31, 2007".
(2) CONFORMING AMENDMENT.--Subparagraph (D) of section 45C(b)(1) is amended by striking "June 30, 2004" and inserting "December 31, 2007".
(3) EFFECTIVE DATE.--The amendments made by this subsection shall apply to amounts paid or incurred after the date of the enactment of this Act.
(b) ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH EXPENSES.--
(1) IN GENERAL.--Subsection (c) of section 41 (relating to base amount) is amended by redesignating paragraphs (5) and (6) as paragraphs (6) and (7), respectively, and by inserting after paragraph (4) the following new paragraph:
"(5) ELECTION OF ALTERNATIVE SIMPLIFIED CREDIT.--
"(A) IN GENERAL.--At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to 12 percent of so much of the qualified research expenses for the taxable year as exceeds 60 percent of the average qualified research expenses for the base period years.
"(B) SPECIAL RULE IN CASE OF NO QUALIFIED RESEARCH EXPENSES IN AT LEAST 1 BASE PERIOD YEAR.--
"(i) TAXPAYERS TO WHICH SUBPARAGRAPH APPLIES.--The credit under this paragraph shall be determined under this subparagraph if the taxpayer has no qualified research expenses in any one of the base period years.
"(ii) CREDIT RATE.--The credit determined under this subparagraph shall be equal to 6 percent of the qualified research expenses for the taxable year.
"(C) BASE PERIOD YEARS.--The base period years with respect to a taxable year for which the credit under this paragraph is being determined are the 3 taxable years--
"(i) which are among the 5 most recent taxable years ending before such taxable year, and
"(ii) which are determined by disregarding--
"(I) 1 taxable year for which the qualified research expenses are the largest, and
"(II) 1 taxable year for which such expenses are the smallest.
"(D) ELECTION.--An election under this paragraph shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. An election under this paragraph may not be made for any taxable year to which an election under paragraph (4) applies.
"(E) APPLICATION OF PARAGRAPH.--An election under this paragraph may be in effect only for taxable years beginning after June 30, 2004, and before January 1, 2007.".
(2) COORDINATION WITH ELECTION OF ALTERNATIVE INCREMENTAL CREDIT.--
(1)[sic] IN GENERAL.--Section 41(c)(4)(B) (relating to election) is amended by adding at the end the following:
"An election under this paragraph may not be made for any taxable year to which an election under paragraph (5) applies.".
(2)[sic] TRANSITION RULE.--In the case of an election under section 41(c)(4) of the Internal Revenue Code of 1986 which applies to the taxable year which includes the date of the enactment of this Act, such election shall be treated as revoked with the consent of the Secretary of the Treasury if the taxpayer makes an election under section 41(c)(5) of such Code (as added by subsection (a)) for such year.
(3)[sic] EFFECTIVE DATE.--The amendments made by this subsection shall apply to taxable years beginning after June 30, 2004.
SEC. 1021. TEMPORARY DEDUCTION BY UNITED STATES SHAREHOLDERS FOR DIVIDENDS RECEIVED FROM CONTROLLED FOREIGN CORPORATIONS.
(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 80 percent of the dividends--
"(A) which are received by such shareholder from controlled foreign corporations during the election period, and
"(B) which are includible in gross income for the taxable year which includes such period.
"(2) DIVIDENDS PAID INDIRECTLY FROM CONTROLLED FOREIGN CORPORATIONS.--If, within the election period, a United States shareholder receives a dividend from a controlled foreign corporation which is excluded from gross income under section 959(a), such dividend shall be treated for purposes of this section as meeting the requirements of paragraph (1)(B) 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 dividend.
"(1) LIMITATION TO EARNINGS OTHERWISE PERMANENTLY REINVESTED OUTSIDE THE UNITED STATES.--The amount of dividends taken into account under subsection (a) shall not exceed the amount shown on the applicable financial statement as earnings permanently reinvested outside the United States. If there is no such statement or such statement fails to show a specific amount of such earnings, such amount shall be treated as being zero.
"(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, and
"(ii) the amounts includible in such shareholder's gross income for each base period year under section 951(a)(1)(B) (or which would have been included but for section 959(a)(2)) with respect to such corporations.
The amount taken into account under clause (i) for any base period year shall not include any dividend 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.
"(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.
"(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) and (ii) of subsection (b)(2)(B) is the largest, and
"(ii) 1 taxable year for which such sum is the smallest.
"(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 received during the election period 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).
"(f) FAILURE TO MAINTAIN AVERAGE PAYOUT RATE.--
"(1) IN GENERAL.--If, during any of the 10 taxable years beginning after the taxable year for which a deduction is allowed under this section, the average described in subsection (b)(2)(B) for the base period years exceeds the amount described in subsection (b)(2)(A) for the taxable year, the tax imposed by this chapter for the taxable year of such excess shall be increased by an amount equal to the sum of--
"(A) the increase in tax which would result if such deduction (as reduced by any previous reductions under this subsection) were reduced (but not below zero) by 80 percent of such excess, and
"(B) interest at the underpayment rate, determined as if the amount described in paragraph (1) were an underpayment for the taxable year for which the deduction was allowed.
"(2) CARRYOVER OF EXCESS DIVIDENDS.--If, for any of such 10 taxable years, the amount described in subsection (b)(2)(A) for such taxable year exceeds the average described in subsection (b)(2)(B) for the base period years, such excess shall be treated for purposes of this subsection as a dividend received during the following taxable year.
"(g) 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:
"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.
SEC. 1031. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS.
Subsections (b), (c), and (d) of section 179 (as amended by the Jobs and Growth Tax Relief Reconciliation Act of 2003) are each amended by striking "2006" each place it appears and inserting "2008".
SEC. 1041. 1-YEAR EXTENSION OF BONUS DEPRECIATION.
(a) 50-PERCENT BONUS DEPRECIATION.--Section 168(k)(4) (as amended by the Jobs and Growth Tax Relief Reconciliation Act of 2003) is amended--
(1) by striking "January 1, 2005" each place it appears and inserting "January 1, 2006", and
(2) by striking "January 1, 2006" in subparagraph (B)(iii) (as in effect before the amendment made by paragraph (1)) and inserting "January 1, 2007".
(b) 30-PERCENT BONUS DEPRECIATION.--Section 168(k)(2) (as so amended) is amended--
(1) by striking "January 1, 2005" each place it appears and inserting "January 1, 2006", and
(2) by striking "January 1, 2006" in subparagraph (A)(iv) (as in effect before the amendment made by paragraph (1)) and inserting "January 1, 2007".
(c) CONFORMING AMENDMENT.--The subsection heading for section 168(k) (as so amended) is amended by striking "JANUARY 1, 2005" and inserting "JANUARY 1, 2006".
SEC. 1042. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN LEASEHOLD IMPROVEMENTS AND RESTAURANT PROPERTY.
(a) 20-YEAR RECOVERY PERIOD.--Paragraph (3) of section 168(e) (relating to classification of certain property) is amended by adding after subparagraph (E) the following new subparagraph:
"(i) any qualified leasehold improvement property placed in service, and
"(ii) any qualified restaurant property placed in service.
"(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, 1038, or 1039 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) RELATED PERSON.--For purposes of this paragraph, a person (hereafter in this subparagraph referred to as the 'related person') is related to any person if the related person bears a relationship to such person specified in section 267(b) or 707(b)(1), or the related person and such person are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52).".
"(7) QUALIFIED RESTAURANT PROPERTY.--The term 'qualified restaurant property' means any section 1250 property which is a building (or any addition or improvement to such building) if 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:
"(F)(ii) 39".
SEC. 1043. SHORTER RECOVERY PERIODS FOR MANUFACTURING PROPERTY.
(a) IN GENERAL.--Paragraph (3) of section 168(e), as amended by section 1042, is amended by adding after subparagraph (F) the following new subparagraph:
"(i) IN GENERAL.--
"(I) Manufacturing property which would (but for this subparagraph) be 10-year property shall be treated as 7-year property.
"(II) Manufacturing property which would (but for this subparagraph) be 7-year property shall be treated as 5-year property.
"(III) Manufacturing property which would (but for this subparagraph) be 5-year property shall be treated as 3-year property.
"(ii) MANUFACTURING PROPERTY.--For purposes of this subparagraph, the term 'manufacturing property' means--
"(I) property used in an activity which is manufacturing within the meaning of codes 31-33 of the North American Industry Classification System (2002), and
"(II) property treated as manufacturing property by regulations prescribed by the Secretary."
SEC. 1051. 5-YEAR CARRYBACK OF CERTAIN NET OPERATING LOSSES.
(a) IN GENERAL.--Subparagraph (H) of section 172(b)(1) is amended--
(1) by inserting "5-YEAR CARRYBACK OF CERTAIN LOSSES.--" after "(H)", and
(2) by striking "or 2002" and inserting ", 2002, or 2003".
(b) TEMPORARY SUSPENSION OF LIMITATION ON ALTERNATIVE MINIMUM TAXABLE INCOME FOR CERTAIN NOL CARRYBACKS.--Subclause (I) of section 56(d)(1)(A)(ii) is amended--
(1) by striking "or 2002" and inserting ", 2002, or 2003", and
(2) by striking "and 2002" and inserting ", 2002, or 2003".
(c) TECHNICAL CORRECTIONS.--
(1) Subparagraph (H) of section 172(b)(1) is amended by striking "a taxpayer which has".
(2) Section 102(c)(2) of the Job Creation and Worker Assistance Act of 2002 (Public Law 107-147) is amended by striking "before January 1, 2003" and inserting "after December 31, 1990".
(3)(A) Subclause (I) of section 56(d)(1)(A)(i) is amended by striking "attributable to carryovers".
(B) Subclause (I) of section 56(d)(1)(A)(ii) is amended--
(i) by striking "for taxable years" and inserting "from taxable years", and
(ii) by striking "carryforwards" and inserting "carryovers".
(1) IN GENERAL.--Except as provided in paragraph (2), the amendments made by this section shall apply to net operating losses for taxable years ending after December 31, 2002.
(2) TECHNICAL CORRECTIONS.--The amendments made by subsection (c) shall take effect as if included in the amendments made by section 102 of the Job Creation and Worker Assistance Act of 2002.
(3) ELECTION.--In the case of a net operating loss for a taxable year ending during 2003--
(A) any election made under section 172(b)(3) of such Code may (notwithstanding such section) be revoked before November 1, 2003, and
(B) any election made under section 172(j) of such Code shall (notwithstanding such section) be treated as timely made if made before November 1, 2003.
SEC. 1061. NET OPERATING LOSSES AND FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.
(a) NET OPERATING LOSSES.--Subparagraph (A) of section 56(d)(1) is amended to read as follows:
(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) of such Code is amended by striking "and if section 59(a)(2) did not apply".
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1062. 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 "$15,000,000".
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1063. REDUCTION IN AMOUNT OF DEPRECIATION SUBJECT TO ALTERNATIVE MINIMUM TAX.
(a) IN GENERAL.--Clause (ii) of section 56(a)(1)(A) is amended--
(1) by striking "150-PERCENT" in the heading and inserting "175-PERCENT", and
(2) by striking "150 percent" in the text and inserting "175 percent".
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to property placed in service after December 31, 2005.
SEC. 1071. 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 (E), all members of the family shall be treated as 1 shareholder.
"(B) MEMBERS OF THE FAMILY.--For purpose of subparagraph (A)(ii), 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.
"(C) 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.
"(D) EFFECT OF ADOPTION, ETC.--In determining whether any relationship specified in subparagraph (B) or (C) exists, the rules of section 152(b)(2) shall apply.
"(E) ELECTION.--An election under subparagraph (A)(ii)--
"(i) must be made with the consent of shareholders (including those that are family members) holding in the aggregate more than one-half of the shares of stock in the corporation on the day the election is made,
"(ii) in the case of--
"(I) an electing small business trust, shall be made by the trustee of the trust, and
"(II) a qualified subchapter S trust, shall be made by the beneficiary of the trust,
"(iii) under regulations, shall remain in effect until terminated, and
"(iv) shall apply only with respect to 1 family in any corporation.".
(1) by inserting "or under section 1361(c)(1)(A)(ii)" after "section 1361(b)(3)(B)(ii)" in paragraph (1), and
(2) by inserting "or under section 1361(c)(1)(E)(iii)" after "section 1361(b)(3)(C)" in paragraph (1)(B).
(c) EFFECTIVE DATES.--
(1) SUBSECTION (a).--The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2003.
(2) SUBSECTION (b).--The amendments made by subsection (b) shall apply to elections and terminations made after December 31, 2003.
(a) IN GENERAL.--Section 1361(b)(1)(A) (defining small business corporation) is amended by striking "75" and inserting "100".
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1073. 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:
"(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.".
(e) EFFECTIVE DATE.--The amendments made by this section shall take effect on the date of the enactment of this Act.
SEC. 1074. 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 is not exercised during such period)" after "of the trust" in the first sentence, and
(2) by striking "60-day" in the second sentence and inserting "1-year".
(b) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1075. 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 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."
SEC. 1076. 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.".
SEC. 1077. 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:
"(i) interest income earned by such bank or bank holding company, or
"(ii) dividends on assets required to be held by such bank or bank holding 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.".
SEC. 1078. TREATMENT OF QUALIFYING DIRECTOR SHARES.
(a) IN GENERAL.--Section 1361 (defining S corporation) is amended by adding at the end the following new subsection:
"(f) TREATMENT OF QUALIFYING DIRECTOR SHARES.--
"(1) IN GENERAL.--For purposes of this subchapter--
"(A) qualifying director shares shall not be treated as a second class of stock, and
"(B) no person shall be treated as a shareholder of the corporation by reason of holding qualifying director shares.
"(2) QUALIFYING DIRECTOR SHARES DEFINED.--For purposes of this subsection, the term 'qualifying director shares' means any shares of stock in a bank (as defined in section 581) or in a bank holding company registered as such with the Federal Reserve System--
"(A) which are 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) which are subject to an agreement pursuant to which the holder is required to dispose of the shares of stock upon termination of the holder's status as a director at the same price as the individual acquired such shares of stock.
"(3) DISTRIBUTIONS.--A distribution (not in part or full payment in exchange for stock) made by the corporation with respect to qualifying director shares shall be includible as ordinary income of the holder and deductible to the corporation as an expense in computing taxable income under section 1363(b) in the year such distribution is received.".
(b) CONFORMING AMENDMENT.--Section 1366(a) is amended by adding at the end the following new paragraph:
"(3) ALLOCATION WITH RESPECT TO QUALIFYING DIRECTOR SHARES.--The holders of qualifying director shares (as defined in section 1361(f)) shall not, with respect to such shares of stock, be allocated any of the items described in paragraph (1).".
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1079. 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 "or under section 1361(b)(3)(B)(ii)" after "subsection (a)" in paragraph (1),
(2) by inserting "or under section 1361(b)(3)(C)" after "subsection (d)" in paragraph (1)(B),
(3) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "small business corporation" in paragraph (3)(A),
(4) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "S corporation" in paragraph (4), and
(5) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "S corporation" in the matter following paragraph (4).
(b) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1080. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.
(a) IN GENERAL.--Section 1361(b)(3)(A) (relating to treatment of certain wholly owned subsidiaries) is amended by inserting "and in the case of information returns required under part III of subchapter A of chapter 61" after "Secretary".
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 1091. 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 in which such deferred compensation is not subject to a substantial risk of forfeiture.
"(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 (except as provided in subparagraph (B)(i)),
"(ii) disability (as defined by section 223(d) of the Social Security Act),
"(iii) death,
"(iv) a specified time (or pursuant to a fixed schedule) specified under the plan as of the date of the deferral of such compensation,
"(v) to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or
"(vi) the occurrence of an unforeseeable emergency.
"(B) SPECIAL RULES.--
"(i) 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 or of 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).
"(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 earned during a taxable year may be deferred at the employee's election only if the election to defer such compensation is made during the preceding taxable year or at such other time as provided in regulations. In the case of the first year in which an employee 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 employee 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 distributable under paragraph (2)(A)(iv) or a change in the form of payment--
"(i) such election may not be made less than 12 months prior to the date of the first scheduled payment under paragraph (2)(A)(iv), and
"(ii) the plan requires that payments with respect to which such election is made be deferred for a period of not less than 5 years from the date of such election.
"(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 a nonqualified deferred compensation plan, there is a transfer of property within the meaning of section 83 as of the earlier of--
"(A) the date on which the plan first provides that assets will become restricted to the provision of benefits under the plan in connection with a change in the employer's financial health, or
"(B) the date on which assets are so restricted.
"(3) INCOME INCLUSION FOR OFFSHORE TRUSTS AND EMPLOYER'S FINANCIAL HEALTH.-- For each taxable year that assets treated as transferred under this subsection remain set aside in a trust or other arrangement subject to paragraph (1) or (2), any increase in value in, or earnings with respect to, such assets shall be treated as an additional transfer of property under this subsection (to the extent not previously included in income).
"(4) INTEREST ON TAX LIABILITY PAYABLE WITH RESPECT TO TRANSFERRED PROPERTY.--
"(A) IN GENERAL.--If amounts are required to be included in gross income by reason of paragraph (1) or (2) for a taxable year, the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined under subparagraph (B).
"(B) INTEREST.--The interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the amounts so required to be included in gross income by paragraph (1) or (2) been includible in gross income for the taxable year in which such assets were first set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary) for purposes of the nonqualified deferred compensation plan.
"(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", by striking the period at the end of paragraph (11) and inserting ", and", and by inserting after paragraph (11) the following new paragraph:
"(12) the total amount of deferrals under a nonqualified deferred compensation plan (within the meaning of section 409A(d)).".
(2) THRESHOLD.--Subsection (a) of section 6051 is amended by adding at the end the following:
"In the case of the amounts required to be shown by paragraph (12), the Secretary may (by regulation) establish a minimum amount of deferrals below which paragraph (12) does not apply.".
(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 is amended by adding at the end the following new item:
(d) EFFECTIVE DATE.--The amendments made by this section shall apply to amounts deferred in taxable years beginning after December 31, 2003.
SEC. 1092. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN STOCK OPTIONS FROM WAGES.
(a) EXCLUSION FROM EMPLOYMENT TAXES.--
(1) SOCIAL SECURITY TAXES.--
(A) Section 3121(a) (relating to definition of wages) is amended by striking "or" at the end of paragraph (20), by striking the period at the end of paragraph (21) and inserting "; or", and by inserting after paragraph (21) the following new paragraph:
"(22) remuneration on account of--
"(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or
"(B) any disposition by the individual of such stock.".
(B) Section 209(a) of the Social Security Act is amended by striking "or" at the end of paragraph (17), by striking the period at the end of paragraph (18) and inserting "; or", and by inserting after paragraph (18) the following new paragraph:
"(19) Remuneration on account of--
"(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b) of the Internal Revenue Code of 1986) or under an employee stock purchase plan (as defined in section 423(b) of such Code), or
"(B) any disposition by the individual of such stock.".
(2) RAILROAD RETIREMENT TAXES.--Subsection (e) of section 3231 is amended by adding at the end the following new paragraph:
"(11) QUALIFIED STOCK OPTIONS.--The term 'compensation' shall not include any remuneration on account of--
"(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or
"(B) any disposition by the individual of such stock.".
(3) UNEMPLOYMENT TAXES.--Section 3306(b) (relating to definition of wages) is amended by striking "or" at the end of paragraph (16), by striking the period at the end of paragraph (17) and inserting "; or", and by inserting after paragraph (17) the following new paragraph:
"(18) remuneration on account of--
"(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an employee stock purchase plan (as defined in section 423(b)), or
"(B) any disposition by the individual of such stock.".
"No amount shall be required to be deducted and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.".
(c) WAGE WITHHOLDING NOT REQUIRED ON COMPENSATION WHERE OPTION PRICE IS BETWEEN 85 PERCENT AND 100 PERCENT OF VALUE OF STOCK.--Section 423(c) (relating to special rule where option price is between 85 percent and 100 percent of value of stock) is amended by adding at the end the following new sentence:
"No amount shall be required to be deducted and withheld under chapter 24 with respect to any amount treated as compensation under this subsection.".
(d) EFFECTIVE DATE.--The amendments made by this section shall apply to stock acquired pursuant to options exercised after the date of the enactment of this Act.
SEC. 1093. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH ACCOUNTS.
Paragraph (5) of section 420(b) (relating to expiration) is amended by striking "December 31, 2005" and inserting "December 31, 2013".
SEC. 1101. REPEAL OF CFC RULES ON FOREIGN BASE COMPANY SALES AND SERVICES INCOME.
(a) IN GENERAL.--Subsection (a) of section 954 (relating to foreign base company income) is amended by striking paragraphs (2) and (3) and by redesignating paragraphs (4) and (5) as paragraphs (2) and (3), respectively.
(b) CERTAIN SALES.--Paragraph (1) of section 954(c) is amended by adding at the end the following new subparagraph:
"(i) the property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted in the United States, and
"(ii) the property is sold for use, consumption, or disposition in the United States, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition in the United States."
(1) Clause (iii) of section 952(c)(1)(B) is amended by striking subclauses (III) and (IV) and by redesignating subclauses (V) and (VI) as subclauses (III) and (IV), respectively.
(2) Section 953(c)(6)(A) is amended by striking "section 954(d)(3)" and inserting "section 954(b)(9)".
(3) Subsection (b) of section 954 is amended by adding at the end the following new paragraph:
"(9) RELATED PERSON DEFINED.--For purposes of this subsection, a person is a related person with respect to a controlled foreign corporation if--
"(A) such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or
"(B) such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.
For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply."
(4) Paragraph (5) of section 954(b) is amended by striking "the foreign base company sales income, the foreign base company services income,".
(5) Section 954 is amended by striking subsections (d) and (e).
(6) Sections 552(c)(2), 861(c)(2)(B), 904(d)(2)(H), 953(e), 955(b), 958(b), 971(f), 988(e)(3)(C), 1297(b)(2), 1298(d)(3), and 1298(e)(2)(B) are each amended by striking "954(d)(3)" each place it appears and inserting "954(b)(9)".
(d) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years of foreign corporations beginning after December 31, 2005, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.
SEC. 1102. EXTENSION OF EXCEPTION OF ACTIVE FINANCING INCOME FROM FOREIGN PERSONAL HOLDING COMPANY INCOME.
(a) INSURANCE INCOME.--Section 953(e)(10) is amended--
(1) by striking "January 1, 2007" and inserting "January 1, 2008", and
(2) by striking "December 31, 2006" and inserting "December 31, 2007".
(b) ACTIVE CONDUCT OF BANKING, FINANCING, OR SIMILAR BUSINESSES.--Paragraph (9) of section 954(h) (relating to special rule for income derived in the active conduct of banking, financing, or similar business) is amended by striking "January 1, 2007" and inserting "January 1, 2008".
SEC. 1103. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING COMPANY INCOME RULES.
Subsection (c) of section 954 is amended by adding after paragraph (3) the following new paragraph:
Section 954(c) (defining foreign personal holding company income) is amended by adding after paragraph (4) the following new paragraph:
"(A) IN GENERAL.--In the case of any sale by a controlled foreign corporation of an interest in a partnership with respect to which such corporation is a 25-percent owner, such corporation shall be treated for purposes of this subsection as selling the proportionate share of the assets of the partnership attributable to such interest.
"(B) 25-PERCENT OWNER.--For purposes of this paragraph, the term '25-percent owner' means a controlled foreign corporation which owns (within the meaning of section 958(a)) 25 percent or more of the capital or profits interest in the partnership."
(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."
(1) Clause (iii) of section 1(h)(11)(C) is amended by striking "a foreign personal holding company (as defined in section 552), a foreign investment company (as defined in section 1246(b)), or".
(2) Paragraph (2) of section 171(c) is amended--
(A) by striking ", or by a foreign personal holding company, as defined in section 552", and
(B) by striking ", or foreign personal holding company".
(3) Paragraph (2) of section 245(a) is amended by striking "foreign personal holding company or".
(4) Section 312 is amended by striking subsection (j).
(5) Subsection (m) of section 312 is amended by striking ", a foreign investment company (within the meaning of section 1246(b)), or a foreign personal holding company (within the meaning of section 552)".
(6) Subsection (e) of section 443 is amended by striking paragraph (3) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively.
(7) Subparagraph (B) of section 465(c)(7) is amended by adding "or" at the end of clause (i), by striking clause (ii), and by redesignating clause (iii) as clause (ii).
(8) Paragraph (1) of section 543(b) is amended by inserting "and" at the end of subparagraph (A), by striking ", and" at the end of subparagraph (B) and inserting a period, and by striking subparagraph (C).
(9) Paragraph (1) of section 562(b) is amended by striking "or a foreign personal holding company described in section 552".
(10) Section 563 is amended--
(A) by striking subsection (c),
(B) by redesignating subsection (d) as subsection (c), and
(C) by striking "subsection (a), (b), or (c)" in subsection (c) (as so redesignated) and inserting "subsection (a) or (b)".
(11) Subsection (d) of section 751 is amended by adding "and" at the end of paragraph (2), by striking paragraph (3), by redesignating paragraph (4) as paragraph (3), and by striking "paragraph (1), (2), or (3)" in paragraph (3) (as so redesignated) and inserting "paragraph (1) or (2)".
(12) Paragraph (2) of section 864(d) is amended by striking subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively.
(13)(A) Subparagraph (A) of section 898(b)(1) is amended to read as follows:
"(A) which is treated as a controlled foreign corporation for any purpose under subpart F of part III of this subchapter, and".
(B) Subparagraph (B) of section 898(b)(2) is amended by striking "and sections 551(f) and 554, whichever are applicable,".
(C) Paragraph (3) of section 898(b) is amended to read as follows:
"(3) UNITED STATES SHAREHOLDER.--The term 'United States shareholder' has the meaning given to such term by section 951(b), except that, in the case of a foreign corporation having related person insurance income (as defined in section 953(c)(2)), the Secretary may treat any person as a United States shareholder for purposes of this section if such person is treated as a United States shareholder under section 953(c)(1)."
(D) Subsection (c) of section 898 is amended to read as follows:
"(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."
(B) The paragraph heading of paragraph (2) of section 904(g) is amended by striking "FOREIGN PERSONAL HOLDING OR".
(16) Section 951 is amended by striking subsections (c) and (d) and by redesignating subsections (e) and (f) as subsections (c) and (d), respectively.
(17) Paragraph (3) of section 989(b) is amended by striking ", 551(a),".
(18) Paragraph (5) of section 1014(b) is amended by inserting "and before January 1, 2004," after "August 26, 1937,".
(19) Subsection (a) of section 1016 is amended by striking paragraph (13).
(20)(A) Paragraph (3) of section 1212(a) is amended to read as follows:
"(3) SPECIAL RULES ON CARRYBACKS.--A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year--
"(A) for which it is a regulated investment company (as defined in section 851), or
"(B) for which it is a real estate investment trust (as defined in section 856)."
(B) The amendment made by subparagraph (A) shall apply to taxable years beginning after December 31, 2005.
(21) Section 1223 is amended by striking paragraph (10) and by redesignating the following paragraphs accordingly.
(22) Subsection (d) of section 1248 is amended by striking paragraph (5) and by redesignating paragraphs (6) and (7) as paragraphs (5) and (6), respectively.
(23) Paragraph (2) of section 1260(c) is amended by striking subparagraphs (H) and (I) and by redesignating subparagraph (J) as subparagraph (H).
(24)(A) Subparagraph (F) of section 1291(b)(3) is amended by striking "551(d), 959(a)," and inserting "959(a)".
(B) Subsection (e) of section 1291 is amended by inserting "(as in effect on the day before the date of the enactment of the American Jobs Creation Act of 2003)" after "section 1246".
(25) Paragraph (2) of section 1294(a) is amended to read as follows:
"(2) ELECTION NOT PERMITTED WHERE AMOUNTS OTHERWISE INCLUDIBLE UNDER SECTION 951.--The taxpayer may not make an election under paragraph (1) with respect to the undistributed PFIC earnings tax liability attributable to a qualified electing fund for the taxable year if any amount is includible in the gross income of the taxpayer under section 951 with respect to such fund for such taxable year."
(26) Section 6035 is hereby repealed.
(27) Subparagraph (D) of section 6103(e)(1) is amended by striking clause (iv) and redesignating clauses (v) and (vi) as clauses (iv) and (v), respectively.
(28) Subparagraph (B) of section 6501(e)(1) is amended to read as follows:
"(B) CONSTRUCTIVE DIVIDENDS.--If the taxpayer omits from gross income an amount properly includible therein under section 951(a), the tax may be assessed, or a proceeding in court for the collection of such tax may be done without assessing, at any time within 6 years after the return was filed."
(29) Subsection (a) of section 6679 is amended--
(A) by striking "6035, 6046, and 6046A" in paragraph (1) and inserting "6046 and 6046A", and
(B) by striking paragraph (3).
(30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) are each amended by striking "556(b)(2)," each place it appears.
(31) The table of parts for subchapter G of chapter 1 is amended by striking the item relating to part III.
(32) The table of sections for part IV of subchapter P of chapter 1 is amended by striking the items relating to sections 1246 and 1247.
(33) The table of sections for subpart A of part III of subchapter A of chapter 61 is amended by striking the item relating to section 6035.
Section 954(g)(1) (defining foreign base company oil related income) is amended by striking "or" at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting ", or", and by inserting after subparagraph (B) the following new subparagraph:
(a) IN GENERAL.--Clauses (i) and (ii) of section 954(c)(1)(C) (relating to commodity transactions) are amended to read as follows:
"(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".
"(6) DEFINITION AND SPECIAL RULES RELATING TO COMMODITY TRANSACTIONS.--
"(A) COMMODITY HEDGING TRANSACTIONS.--For purposes of paragraph (1)(C)(i), the term 'commodity hedging transaction' means any transaction with respect to a commodity if such transaction--
"(i) is a hedging transaction as defined in section 1221(b)(2), determined--
"(I) without regard to subparagraph (A)(ii) thereof,
"(II) by applying subparagraph (A)(i) thereof by substituting 'ordinary property or property described in section 1231(b)' for 'ordinary property', and
"(III) by substituting 'controlled foreign corporation' for 'taxpayer' each place it appears, and
"(ii) is clearly identified as such in accordance with section 1221(a)(7).
"(B) REGULATIONS.--The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (1)(C) in the case of transactions involving related parties."
SEC. 1108. REPEAL OF CFC RULES ON FOREIGN BASE COMPANY SHIPPING INCOME.
(a) ELIMINATION OF FOREIGN BASE COMPANY SHIPPING INCOME.--Section 954 (relating to foreign base company income), as amended by section 1101, is amended--
(1) by striking paragraph (2) 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:
(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 shipping income," in paragraph (5),
(B) by striking paragraphs (6) and (7), and
(C) by redesignating paragraph (8) as paragraph (6).
Except as otherwise provided in this subtitle, the amendments made by this subtitle 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. 1111. 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.
"(3) TREATMENT OF TAX-EXEMPT ASSETS; BASIS OF STOCK IN NONAFFILIATED 10-PERCENT OWNED CORPORATIONS.--The rules of paragraphs (3) and (4) of subsection (e) shall apply for purposes of this subsection; except that paragraph (4) shall be applied on worldwide affiliated group basis.
"(4) TREATMENT OF CERTAIN FINANCIAL INSTITUTIONS.--
"(A) IN GENERAL.--For purposes of paragraph (1), any corporation described in subparagraph (B) shall be treated as an includible corporation for purposes of section 1504 only for purposes of applying this subsection separately to corporations so described.
"(B) DESCRIPTION.--A corporation is described in this subparagraph if--
"(i) such corporation is a financial institution described in section 581 or 591,
"(ii) the business of such financial institution is predominantly with persons other than related persons (within the meaning of subsection (d)(4)) or their customers, and
"(iii) such financial institution is required by State or Federal law to be operated separately from any other entity which is not such an institution.
"(C) TREATMENT OF BANK HOLDING COMPANIES.--To the extent provided in regulations--
"(i) a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956), and
"(ii) any subsidiary of a financial institution described in section 581 or 591 or of any bank holding company if such subsidiary is predominantly engaged (directly or indirectly) in the active conduct of a banking, financing, or similar business,
shall be treated as a corporation described in subparagraph (B).
"(5) ELECTION TO EXPAND FINANCIAL INSTITUTION GROUP OF WORLDWIDE GROUP.--
"(A) IN GENERAL.--If a worldwide affiliated group elects the application of this subsection, all financial corporations which--
"(i) are members of such worldwide affiliated group, but
"(ii) are not corporations described in paragraph (4)(B),
shall be treated as described in paragraph (4)(B) for purposes of applying paragraph (4)(A). This subsection (other than this paragraph) shall apply to any such group in the same manner as this subsection (other than this paragraph) applies to the pre-election worldwide affiliated group of which such group is a part.
"(B) FINANCIAL CORPORATION.--For purposes of this paragraph, the term 'financial corporation' means any corporation if at least 80 percent of its gross income is income described in section 904(d)(2)(D)(ii) and the regulations thereunder which is derived from transactions with persons who are not related (within the meaning of section 267(b) or 707(b)(1)) to the corporation. For purposes of the preceding sentence, there shall be disregarded any item of income or gain from a transaction or series of transactions a principal purpose of which is the qualification of any corporation as a financial corporation.
"(C) ANTIABUSE RULES.--In the case of a corporation which is a member of an electing financial institution group, to the extent that such corporation--
"(i) distributes dividends or makes other distributions with respect to its stock after the date of the enactment of this paragraph to any member of the pre-election worldwide affiliated group (other than to a member of the electing financial institution group) in excess of the greater of--
"(I) its average annual dividend (expressed as a percentage of current earnings and profits) during the 5-taxable-year period ending with the taxable year preceding the taxable year, or
"(II) 25 percent of its average annual earnings and profits for such 5-taxable-year period, or
"(ii) deals with any person in any manner not clearly reflecting the income of the corporation (as determined under principles similar to the principles of section 482),
an amount of indebtedness of the electing financial institution group equal to the excess distribution or the understatement or overstatement of income, as the case may be, shall be recharacterized (for the taxable year and subsequent taxable years) for purposes of this paragraph as indebtedness of the worldwide affiliated group (excluding the electing financial institution group). If a corporation has not been in existence for 5 taxable years, this subparagraph shall be applied with respect to the period it was in existence.
"(D) ELECTION.--An election under this paragraph with respect to any financial institution group may be made only by the common parent of the pre-election worldwide affiliated group and may be made only for the first taxable year beginning after December 31, 2005, 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.
(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".
SEC. 1112. 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, 2004, 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, 2004.
SEC. 1113. 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."
"(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."
"(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))."
"(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."
(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:
(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."
"(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 (3) of section 904(d) is amended by striking subparagraph (H) and by redesignating subparagraph (I) as subparagraph (H).
(7) Paragraph (2) of section 904(d) is amended by adding at the end the following new subparagraph:
"(K) TRANSITIONAL RULES FOR 2005 CHANGES.--For purposes of paragraph (1)--
"(i) taxes carried from any taxable year beginning before January 1, 2005, to any taxable year beginning on or after such date, with respect to any item of income, shall be treated as described in the subparagraph of paragraph (1) in which such income would be described were such taxes paid or accrued in a taxable year beginning on or after such date, and
"(ii) the Secretary may by regulations provide for the allocation of any carryback of taxes with respect to income to such a taxable year for purposes of allocating such income among the separate categories in effect for such taxable year.".
(f) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2004.
SEC. 1114. 10-YEAR FOREIGN TAX CREDIT CARRYFORWARD.
(a) GENERAL RULE.--Section 904(c) (relating to carryback and carryover of excess tax paid) is amended by striking "in the first, second, third, fourth, or fifth" and inserting "in any of the first 10".
(b) EXCESS EXTRACTION TAXES.--Paragraph (1) of section 907(f) is amended by striking "in the first, second, third, fourth, or fifth" and inserting "in any of the first 10".
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to excess foreign taxes which (without regard to the amendments made by this section) may be carried to any taxable year beginning after December 31, 2004.
SEC. 1115. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS.
(a) IN GENERAL.--Section 904(d)(4) (relating to look-thru rules apply to dividends from noncontrolled section 902 corporations) is amended to read as follows:
"(4) LOOK-THRU APPLIES TO DIVIDENDS FROM NONCONTROLLED SECTION 902 CORPORATIONS.--
"(A) IN GENERAL.--For purposes of this subsection, any dividend from a noncontrolled section 902 corporation with respect to the taxpayer shall be treated as income described in a subparagraph of paragraph (1) in proportion to the ratio of--
"(i) the portion of earnings and profits attributable to income described in such subparagraph, to
"(ii) the total amount of earnings and profits.
"(B) SPECIAL RULES.--For purposes of this paragraph--
"(i) EARNINGS AND PROFITS.--
"(I) IN GENERAL.--The rules of section 316 shall apply.
"(II) REGULATIONS.--The Secretary may prescribe regulations regarding the treatment of distributions out of earnings and profits for periods before the taxpayer's acquisition of the stock to which the distributions relate.
"(ii) INADEQUATE SUBSTANTIATION.--If the Secretary determines that the proper subparagraph of paragraph (1) in which a dividend is described has not been substantiated, such dividend shall be treated as income described in paragraph (1)(A).
"(iii) LOOK-THRU WITH RESPECT TO CARRYFORWARDS OF CREDIT.--Rules similar to subparagraph (A) also shall apply to any carryforward under subsection (c) from a taxable year beginning before January 1, 2003, of tax allocable to a dividend from a noncontrolled section 902 corporation with respect to the taxpayer. The Secretary may by regulations provide for the allocation of any carryback of tax allocable to a dividend from a noncontrolled section 902 corporation to such a taxable year for purposes of allocating such dividend among the separate categories in effect for such taxable year.
"(iv) COORDINATION WITH HIGH-TAXED INCOME PROVISIONS.--Rules similar to the rules of paragraph (3)(F) shall apply for purposes of this paragraph.".
(1) Section 904(d)(2)(E) is amended--
(A) by inserting "or (4)" after "paragraph (3)" in clause (i), and
(B) by striking clauses (ii) and (iv) and by redesignating clause (iii) as clause (ii).
(2) Clause (i) of section 864(d)(5)(A) is amended to read as follows:
SEC. 1116. 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. 1117. 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:
SEC. 1118. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN PERSONS.
(a) IN GENERAL.--Section 263A(c) (relating to exceptions) is amended by adding at the end the following new paragraph:
"(7) FOREIGN PERSONS.--Except for purposes of applying sections 871(b)(1) and 882(a)(1), this section shall not apply to any taxpayer who is not a United States person if such taxpayer capitalizes costs of produced property or property acquired for resale by applying the method used to ascertain the income, profit, or loss for purposes of reports or statements to shareholders, partners, other proprietors, or beneficiaries, or for credit purposes."
(b) EFFECTIVE DATE-
(1) IN GENERAL.--The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2004.
(2) CHANGE IN METHOD OF ACCOUNTING.--In the case of any taxpayer required by the amendment made by this section to change its method of accounting for its first taxable year beginning after December 31, 2004--
(A) such change shall be treated as initiated by the taxpayer,
(B) such change shall be treated as made with the consent of the Secretary of the Treasury, and
(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of the Internal Revenue Code of 1986 shall be taken into account in such first year.
(a) IN GENERAL.--Section 956(c)(2) (relating to exceptions from property treated as United States property) is amended by striking "and" at the end of subparagraph (J), by striking the period at the end of subparagraph (K) and inserting "; and", and by adding at the end the following new subparagraph:
"(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."
(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. 1120. 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:
(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."
(1) Paragraph (1) of section 897(h) is amended by striking "REIT" each place it appears and inserting "qualified investment entity".
(2) Paragraphs (2) and (3) of section 897(h) are amended to read as follows:
"(2) SALE OF STOCK IN DOMESTICALLY CONTROLLED ENTITY NOT TAXED.--The term 'United States real property interest' does not include any interest in a domestically controlled qualified investment entity.
"(3) DISTRIBUTIONS BY DOMESTICALLY CONTROLLED QUALIFIED INVESTMENT ENTITIES.--In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain."
(3) Subparagraphs (A) and (B) of section 897(h)(4) are amended to read as follows:
"(A) QUALIFIED INVESTMENT ENTITY.--The term 'qualified investment entity' means any real estate investment trust and any regulated investment company.
"(B) DOMESTICALLY CONTROLLED.--The term 'domestically controlled qualified investment entity' means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons."
(4) Subparagraphs (C) and (D) of section 897(h)(4) are each amended by striking "REIT" and inserting "qualified investment entity".
(5) The subsection heading for subsection (h) of section 897 is amended by striking "REITS" and inserting "CERTAIN INVESTMENT ENTITIES".
(d) EFFECTIVE DATE.--
(1) IN GENERAL.--Except as otherwise provided in this subsection, the amendments made by this section shall apply to dividends with respect to taxable years of regulated investment companies beginning after the date of the enactment of this Act.
(2) ESTATE TAX TREATMENT.--The amendment made by subsection (b) shall apply to estates of decedents dying after the date of the enactment of this Act.
(3) CERTAIN OTHER PROVISIONS.--The amendments made by subsection (c) (other than paragraph (1) thereof) shall take effect on the date of the enactment of this Act.
(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:
"(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."
SEC. 1122. 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:
SEC. 2001. REDUCTION IN POTENTIAL FOR EARNINGS STRIPPING BY FURTHER LIMITING DEDUCTION FOR INTEREST ON CERTAIN INDEBTEDNESS.
(a) REDUCTION IN POTENTIAL FOR EARNINGS STRIPPING.--Paragraphs (1) and (2) of section 163(j) are amended to read as follows:
"(1) LIMITATION.--
"(A) IN GENERAL.--In the case of a corporation, no deduction shall be allowed under this chapter for disqualified interest paid or accrued during the taxable year.
"(B) MAXIMUM DISALLOWANCE.--The amount disallowed under subparagraph (A) shall not exceed the sum of--
"(i) the corporation's excess interest expense for the taxable year, and
"(ii) the corporation's excess related party interest expense for such year.
In no event shall the disallowance under subparagraph (A) reduce the deduction for disqualified interest below an amount equal to 25 percent of adjusted taxable income (35 percent in the case of the first taxable year beginning after December 31, 2003).
"(C) DISALLOWED AMOUNT CARRIED TO SUCCEEDING TAXABLE YEAR.--
"(i) IN GENERAL.--Any amount disallowed under subparagraph (A) for any taxable year shall be treated as paid or accrued in the succeeding taxable year and in the 2nd through 10th succeeding taxable years to the extent not previously taken into account under this subparagraph.
"(ii) LIMITATION ON AMOUNT CARRIED TO YEAR.--A carryforward amount may not be taken into account for any such succeeding taxable year to the extent that such amount, when added to amounts carried to such succeeding taxable year from taxable years preceding the taxable year from which the amount is being carried forward, would result in (or increase) a disallowance under subparagraph (A).
"(iii) CARRYOVER APPLIED SEPARATELY TO CATEGORIES OF DISQUALIFIED INTEREST.--Clauses (i) and (ii) shall be applied separately to disqualified interest described in paragraph (3)(A) and to disqualified interest described in paragraph (3)(B). For purposes of this subparagraph, any amount disallowed under subparagraph (A) for any taxable year shall be treated as disqualified interest described in paragraph (3)(A) to the extent thereof and then as disqualified interest described in paragraph (3)(B).
"(A) EXCESS INTEREST EXPENSE.--The term 'excess interest expense' means the excess (if any) of--
"(i) the corporation's net interest expense, over
"(ii) 50 percent of the adjusted taxable income of the corporation.
"(B) EXCESS RELATED PARTY INTEREST EXPENSE.--The term 'excess related party interest expense' means the excess (if any) of--
"(i) the lesser of--
"(I) the amount of disqualified interest described in paragraph (3)(A), or
"(II) the corporation's net interest expense, over
"(ii) 25 percent (35 percent in the case of the first taxable year beginning after December 31, 2003) of the adjusted taxable income of the corporation."
(1) EXCEPTION FROM 163(J).--Paragraph (3) of section 163(j) is amended by inserting "and" at the end of subparagraph (A), by striking ", and" at the end of subparagraph (B) and inserting a period, and by striking subparagraph (C).
(2) DISALLOWANCE.--Section 856 is amended by adding at the end the following new subsection:
"(m) LIMITATION ON DEDUCTION FOR INTEREST ON CERTAIN INDEBTEDNESS OF TAXABLE REIT SUBSIDIARY-
"(1) LIMITATION.--
"(A) IN GENERAL.--If this subsection applies to any taxable REIT subsidiary for any taxable year, no deduction shall be allowed under this chapter for disqualified interest paid or accrued by such subsidiary during such taxable year. The amount disallowed under the preceding sentence shall not exceed the subsidiary's excess interest expense for the taxable year.
"(B) DISALLOWED AMOUNT CARRIED TO SUCCEEDING TAXABLE YEAR.--Any amount disallowed under subparagraph (A) for any taxable year shall be treated as disqualified interest paid or accrued in the succeeding taxable year (and clause (ii) of paragraph (2)(A) shall not apply for purposes of applying this subsection to the amount so treated).
"(2) SUBSIDIARIES TO WHICH SUBSECTION APPLIES.--
"(A) IN GENERAL.--This subsection shall apply to any taxable REIT subsidiary for any taxable year if--
"(i) such subsidiary has excess interest expense for such taxable year, and
"(ii) the ratio of debt to equity of such subsidiary as of the close of such taxable year (or on any other day during the taxable year as the Secretary may by regulations prescribe) exceeds 1.5 to 1.
"(B) EXCESS INTEREST EXPENSE.--
"(i) IN GENERAL.--For purposes of this subsection, the term 'excess interest expense' means the excess (if any) of--
"(I) the taxable REIT subsidiary's net interest expense, over
"(II) the sum of 50 percent of the adjusted taxable income of the subsidiary plus any excess limitation carryforward under clause (ii).
"(ii) EXCESS LIMITATION CARRYFORWARD.--If a taxable REIT subsidiary has an excess limitation for any taxable year, the amount of such excess limitation shall be an excess limitation carryforward to the 1st succeeding taxable year and to the 2nd and 3rd succeeding taxable years to the extent not previously taken into account under this clause. The amount of such a carryforward taken into account for any such succeeding taxable year shall not exceed the excess interest expense for such succeeding taxable year (determined without regard to the carryforward from the taxable year of such excess limitation).
"(iii) EXCESS LIMITATION.--For purposes of clause (ii), the term 'excess limitation' means the excess (if any) of--
"(I) 50 percent of the adjusted taxable income of the subsidiary, over
"(II) the subsidiary's net interest expense.
"(3) DISQUALIFIED INTEREST.--For purposes of this subsection, the term 'disqualified interest' means any interest paid or accrued (directly or indirectly) by a taxable REIT subsidiary of a real estate investment trust to such trust.
"(4) OTHER RULES TO APPLY.--Rules similar to the rules of paragraphs (7), (8), and (9) of section 163(j) shall apply for purposes of this subsection."
(c) EFFECTIVE DATE.--
(1) IN GENERAL.--Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2003.
(2) EARLIER EFFECTIVE DATE WITH RESPECT TO EXPATRIATED CORPORATIONS, ETC.-- The amendments made by this section shall apply to taxable years ending after March 4, 2003, in the case of a taxpayer which is--
(A) a surrogate foreign corporation, as defined in section 7874(a)(2)(B) of the Internal Revenue Code of 1986, as added by section 2002,
(B) a corporation which would be a surrogate foreign corporation (as so defined) if "December 31, 1996" were substituted for "March 4, 2003" in such section 7874(a), and
(C) any corporation which is an expatriated entity (as defined in such section 7874(a)) with respect to a corporation described in subparagraph (A) or (B).
In applying such amendments to a taxpayer described in the preceding sentence, subparagraph (B) of section 163(j)(2) of such Code, as amended by this section, shall be applied by substituting "25 percent" for "35 percent".
(3) LIMITATION ON CARRYOVER OF DISALLOWED INTEREST.--
(A) IN GENERAL.--Except in the case of a taxpayer described in paragraph (2), for purposes of applying section 163(j)(1)(C) of the Internal Revenue Code of 1986 (as added by this section), amounts carried from a taxable year beginning before January 1, 2004, to any taxable year beginning after December 31, 2003, shall be treated as disqualified interest described in section 163(j)(3)(B) of such Code which is disallowed for the most recent taxable year beginning before January 1, 2004.
(B) EXPATRIATED CORPORATIONS.--In the case of a taxpayer described in paragraph (2), a rule similar to the rule of subparagraph (A) shall apply to amounts carried from a taxable year beginning before March 5, 2003.
(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, and
"(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.
"(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).
"(4) 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.
"(5) 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.
"(6) 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.
"(7) 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.
"(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.
"(4)[sic] 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.
"(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.
"(g) REGULATIONS.--The Secretary shall provide such regulations as are necessary to carry out this section, including regulations providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including the avoidance of such purposes through--
"(1) the use of related persons, pass-through or other noncorporate entities, or other intermediaries, or
"(2) transactions designed to have persons cease to be (or not become) members of expanded affiliated groups or related persons.".
(b) CONFORMING AMENDMENT.--The table of sections for subchapter C of chapter 80 is amended by adding at the end the following new item:
"Sec. 7874. Rules relating to expatriated entities and their foreign parents."
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years ending after March 4, 2003.
SEC. 2003. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN EXPATRIATED CORPORATIONS.
(a) IN GENERAL.--Subtitle D is amended by inserting after chapter 44 end the following new chapter:
"CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES
"Sec. 4985. Stock compensation of insiders in expatriated corporations.
"SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED CORPORATIONS.
"(a) IMPOSITION OF TAX.--In the case of an individual who is a disqualified individual with respect to any expatriated corporation, there is hereby imposed on such person a tax equal to 15 percent of the value (determined under subsection (b)) of the specified stock compensation held (directly or indirectly) by or for the benefit of such individual or a member of such individual's family (as defined in section 267) at any time during the 12-month period beginning on the date which is 6 months before the expatriation date.
"(b) VALUE.--For purposes of subsection (a)--
"(1) IN GENERAL.--The value of specified stock compensation shall be--
"(A) in the case of a stock option (or other similar right) or a stock appreciation right, the fair value of such option or right, and
"(B) in any other case, the fair market value of such compensation.
"(2) DATE FOR DETERMINING VALUE.--The determination of value shall be made--
"(A) in the case of specified stock compensation held on the expatriation date, on such date,
"(B) in the case of such compensation which is canceled during the 6 months before the expatriation date, on the day before such cancellation, and
"(C) in the case of such compensation which is granted after the expatriation date, on the date such compensation is granted.
"(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, and
"(2) any specified stock compensation which is sold, exchanged, distributed or cashed-out during such period in a transaction in which gain or loss is recognized in full.
"(e) DEFINITIONS.--For purposes of this section--
"(1) DISQUALIFIED INDIVIDUAL.--The term 'disqualified individual' means, with respect to a corporation, any individual who, at any time during the 12-month period beginning on the date which is 6 months before the 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).
"(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."
(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:
(d) EFFECTIVE DATE.--The amendments made by this section shall take effect on March 4, 2003; except that periods before such date shall not be taken into account in applying the periods in subsections (a) and (e)(1) of section 4985 of the Internal Revenue Code of 1986, as added by this section.
SEC. 2004. REINSURANCE OF UNITED STATES RISKS IN FOREIGN JURISDICTIONS.
(a) IN GENERAL.--Section 845(a) (relating to allocation in case of reinsurance agreement involving tax avoidance or evasion) is amended by striking "source and character" and inserting "amount, source, or character".
(b) EFFECTIVE DATE.--The amendments made by this section shall apply to any risk reinsured after the date of the enactment of this Act.
SEC. 2005. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.
(a) EXPATRIATION TO AVOID TAX.--
(1) IN GENERAL.--Subsection (a) of section 877 (relating to treatment of expatriates) is amended to read as follows:
"(a) TREATMENT OF EXPATRIATES.--
"(1) IN GENERAL.--Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871.
"(2) INDIVIDUALS SUBJECT TO THIS SECTION.--This section shall apply to any individual if--
"(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $122,000,
"(B) the net worth of the individual as of such date is $2,000,000 or more, or
"(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
In the case of the loss of United States citizenship in any calendar year after 2003, such $122,000 amount shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year by substituting '2002' for '1992' in subparagraph (B) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $1,000.".
(2) REVISION OF EXCEPTIONS FROM ALTERNATIVE TAX.--Subsection (c) of section 877 (relating to tax avoidance not presumed in certain cases) is amended to read as follows:
"(c) EXCEPTIONS.--
"(1) IN GENERAL.--Subparagraphs (A) and (B) of subsection (a)(2) shall not apply to an individual described in paragraph (2) or (3).
"(2) DUAL CITIZENS.--
"(A) IN GENERAL.--An individual is described in this paragraph if--
"(i) the individual became at birth a citizen of the United States and a citizen of another country and continues to be a citizen of such other country, and
"(ii) the individual has had no substantial contacts with the United States.
"(B) SUBSTANTIAL CONTACTS.--An individual shall be treated as having no substantial contacts with the United States only if the individual--
"(i) was never a resident of the United States (as defined in section 7701(b)),
"(ii) has never held a United States passport, and
"(iii) was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the individual's loss of United States citizenship.
"(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.".
(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.
"(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."
(1) IN GENERAL.--Subsection (a) of section 6039G is amended to read as follows:
"(a) IN GENERAL.--Notwithstanding any other provision of law, any individual to whom section 877(b) applies for any taxable year shall provide a statement for such taxable year which includes the information described in subsection (b).".
(2) INFORMATION TO BE PROVIDED.--Subsection (b) of section 6039G is amended to read as follows:
"(b) INFORMATION TO BE PROVIDED.--Information required under subsection (a) shall include--
"(1) the taxpayer's TIN,
"(2) the mailing address of such individual's principal foreign residence,
"(3) the foreign country in which such individual is residing,
"(4) the foreign country of which such individual is a citizen,
"(5) information detailing the income, assets, and liabilities of such individual,
"(6) the number of days during any portion of which that the individual was physically present in the United States during the taxable year, and
"(7) such other information as the Secretary may prescribe.".
(3) INCREASE IN PENALTY.--Subsection (d) of section 6039G is amended to read as follows:
"(d) PENALTY.--If--
"(1) an individual is required to file a statement under subsection (a) for any taxable year, and
"(2) fails to file such a statement with the Secretary on or before the date such statement is required to be filed or fails to include all the information required to be shown on the statement or includes incorrect information,
such individual shall pay a penalty of $10,000 unless it is shown that such failure is due to reasonable cause and not to willful neglect.".
(4) CONFORMING AMENDMENT.--Section 6039G is amended by striking subsections (c), (f), and (g) and by redesignating subsections (d) and (e) as subsection (c) and (d), respectively.
(f) EFFECTIVE DATE.--The amendments made by this section shall apply to individuals who expatriate after February 27, 2003.
SEC. 2006. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.
(a) IN GENERAL.--Subpart B of part III of subchapter A of chapter 61 is amended by inserting after section 6043 the following new section:
"SEC. 6043A. 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 (xvii) as clauses (iii) through (xviii), respectively, and by inserting after clause (i) the following new clause:
"(F) subsections (b) and (d) of section 6043A (relating to returns relating to taxable mergers and acquisitions).".
"Sec. 6043A. Returns relating to taxable mergers and acquisitions.".
(d) EFFECTIVE DATE.--The amendments made by this section shall apply to acquisitions after the date of the enactment of this Act.
SEC. 2007. STUDIES.
(a) TRANSFER PRICING RULES.--The Secretary of the Treasury or the Secretary's delegate shall conduct a study regarding the effectiveness of current transfer pricing rules and compliance efforts in ensuring that cross-border transfers and other related-party transactions, particularly transactions involving intangible assets, service contracts, or leases cannot be used improperly to shift income out of the United States. The study shall include a review of the contemporaneous documentation and penalty rules under section 6662 of the Internal Revenue Code of 1986, a review of the regulatory and administrative guidance implementing the principles of section 482 of such Code to transactions involving intangible property and services and to cost-sharing arrangements, and an examination of whether increased disclosure of cross-border transactions should be required. The study shall set forth specific recommendations to address all abuses identified in the study. Not later than June 30, 2004, such Secretary or delegate shall submit to the Congress a report of such study.
(b) INCOME TAX TREATIES.--The Secretary of the Treasury or the Secretary's delegate shall conduct a study of United States income tax treaties to identify any inappropriate reductions in United States withholding tax that provide opportunities for shifting income out of the United States, and to evaluate whether existing anti-abuse mechanisms are operating properly. The study shall include specific recommendations to address all inappropriate uses of tax treaties. Not later than December 31, 2003, such Secretary or delegate shall submit to the Congress a report of such study.
(c) IMPACT OF CORPORATE EXPATRIATION PROVISIONS.--The Secretary of the Treasury or the Secretary's delegate shall conduct a study of the impact of the provisions of this title on earnings stripping and corporate expatriation. The study shall include such recommendations as such Secretary or delegate may have to improve the impact of such provisions in carrying out the purposes of this title. Not later than December 31, 2005, such Secretary or delegate shall submit to the Congress a report of such study.
SEC. 3001. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTIONS.
(a) IN GENERAL.--Part I of subchapter B of chapter 68 (relating to assessable penalties) is amended by inserting after section 6707 the following new section:
"SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION INFORMATION WITH RETURN.
"(a) IMPOSITION OF PENALTY.--Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).
"(b) AMOUNT OF PENALTY.--
"(1) IN GENERAL.--Except as provided in paragraph (2), the amount of the penalty under subsection (a) shall be--
"(A) $10,000 in the case of a natural person, and
"(B) $50,000 in any other case.
"(2) LISTED TRANSACTION.--The amount of the penalty under subsection (a) with respect to a listed transaction shall be--
"(A) $100,000 in the case of a natural person, and
"(B) $200,000 in any other case.
"(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.
(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.
(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.
"(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:
(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."
(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".
"(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."
(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. 6662A. Imposition of accuracy-related penalty on understatements with respect to reportable transactions."
(f) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.
SEC. 3003. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING TO TAXPAYER COMMUNICATIONS.
(a) IN GENERAL.--Section 7525(b) (relating to section not to apply to communications regarding corporate tax shelters) is amended to read as follows:
"(b) SECTION NOT TO APPLY TO COMMUNICATIONS REGARDING TAX SHELTERS.--The privilege under subsection (a) shall not apply to any written communication which is--
"(1) between a federally authorized tax practitioner and--
"(A) any person,
"(B) any director, officer, employee, agent, or representative of the person, or
"(C) any other person holding a capital or profits interest in the person, and
"(2) in connection with the promotion of the direct or indirect participation of the person in any tax shelter (as defined in section 6662(d)(2)(C)(ii))."
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to communications made on or after the date of the enactment of this Act.
SEC. 3004. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH REQUIRED LISTED TRANSACTIONS NOT REPORTED.
(a) IN GENERAL.--Section 6501(c) (relating to exceptions) is amended by adding at the end the following new paragraph:
"(10) LISTED TRANSACTIONS.--If a taxpayer fails to include on any return or statement for any taxable year any information with respect to a listed transaction (as defined in section 6707A(c)(2)) which is required under section 6011 to be included with such return or statement, the time for assessment of any tax imposed by this title with respect to such transaction shall not expire before the date which is 1 year after the earlier of--
"(A) the date on which the Secretary is furnished the information so required, or
"(B) the date that a material advisor (as defined in section 6111) meets the requirements of section 6112 with respect to a request by the Secretary under section 6112(b) relating to such transaction with respect to such taxpayer."
SEC. 3005. DISCLOSURE OF REPORTABLE TRANSACTIONS.
(a) IN GENERAL.--Section 6111 (relating to registration of tax shelters) is amended to read as follows:
"SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.
"(a) IN GENERAL.--Each material advisor with respect to any reportable transaction shall make a return (in such form as the Secretary may prescribe) setting forth--
"(1) information identifying and describing the transaction,
"(2) information describing any potential tax benefits expected to result from the transaction, and
"(3) such other information as the Secretary may prescribe.
Such return shall be filed not later than the date specified by the Secretary.
"(b) DEFINITIONS.--For purposes of this section--
"(1) MATERIAL ADVISOR.--
"(A) IN GENERAL.--The term 'material advisor' means any person--
"(i) who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, or carrying out any reportable transaction, and
"(ii) who directly or indirectly derives gross income in excess of the threshold amount (or such other amount as may be prescribed by the Secretary) for such advice or assistance.
"(B) THRESHOLD AMOUNT.--For purposes of subparagraph (A), the threshold amount is--
"(i) $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons, and
"(ii) $250,000 in any other case.
"(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:
"(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:
(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.
(a) IN GENERAL.--Section 6707 (relating to failure to furnish information regarding tax shelters) is amended to read as follows:
"SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE TRANSACTIONS.
"(a) IN GENERAL.--If a person who is required to file a return under section 6111(a) with respect to any reportable transaction--
"(1) fails to file such return on or before the date prescribed therefor, or
"(2) files false or incomplete information with the Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in the amount determined under subsection (b).
"(b) AMOUNT OF PENALTY.--
"(1) IN GENERAL.--Except as provided in paragraph (2), the penalty imposed under subsection (a) with respect to any failure shall be $50,000.
"(2) LISTED TRANSACTIONS.--The penalty imposed under subsection (a) with respect to any listed transaction shall be an amount equal to the greater of--
"(A) $200,000, or
"(B) 50 percent of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return is filed under section 6111.
Subparagraph (B) shall be applied by substituting '75 percent' for '50 percent' in the case of an intentional failure or act described in subsection (a).
"(c) RESCISSION AUTHORITY.--The provisions of section 6707A(d) (relating to authority of Commissioner to rescind penalty) shall apply to any penalty imposed under this section.
"(d) REPORTABLE AND LISTED TRANSACTIONS.--For purposes of this section, the terms 'reportable transaction' and 'listed transaction' have the respective meanings given to such terms by section 6707A(c)."
(b) CLERICAL AMENDMENT.--The item relating to section 6707 in the table of sections for part I of subchapter B of chapter 68 is amended by striking "tax shelters" and inserting "reportable transactions".
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to returns the due date for which is after the date of the enactment of this Act.
SEC. 3007. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF INVESTORS.
(a) IN GENERAL.--Subsection (a) of section 6708 is amended to read as follows:
"(a) IMPOSITION OF PENALTY.--
"(1) IN GENERAL.--If any person who is required to maintain a list under section 6112(a) fails to make such list available upon written request to the Secretary in accordance with section 6112(b) within 20 business days after the date of such request, such person shall pay a penalty of $10,000 for each day of such failure after such 20th day.
"(2) REASONABLE CAUSE EXCEPTION.--No penalty shall be imposed by paragraph (1) with respect to the failure on any day if such failure is due to reasonable cause.
"(3) LIMITATION ON AUTHORITY TO COMPROMISE PENALTY.--If the 1st letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals has been sent with respect to a penalty imposed by this section, only the Commissioner of Internal Revenue may compromise all or any portion of such penalty."
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to requests made after the date of the enactment of this Act.
SEC. 3008. PENALTY ON PROMOTERS OF TAX SHELTERS.
(a) PENALTY ON PROMOTING ABUSIVE TAX SHELTERS.--Section 6700(a) is amended by adding at the end the following new sentence:
"Notwithstanding the first sentence, if an activity with respect to which a penalty imposed under this subsection involves a statement described in paragraph (2)(A), the amount of the penalty shall be equal to 50 percent of the gross income derived (or to be derived) from such activity by the person on which the penalty is imposed."
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to activities after the date of the enactment of this Act.
SEC. 3009. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR NONREPORTABLE TRANSACTIONS.
(a) SUBSTANTIAL UNDERSTATEMENT OF CORPORATIONS.--Section 6662(d)(1)(B) (relating to special rule for corporations) is amended to read as follows:
"(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."
SEC. 3010. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO TAX SHELTERS AND REPORTABLE TRANSACTIONS.
(a) IN GENERAL.--Section 7408 (relating to action to enjoin promoters of abusive tax shelters, etc.) is amended by redesignating subsection (c) as subsection (d) and by striking subsections (a) and (b) and inserting the following new subsections:
"(a) AUTHORITY TO SEEK INJUNCTION.--A civil action in the name of the United States to enjoin any person from further engaging in specified conduct may be commenced at the request of the Secretary. Any action under this section shall be brought in the district court of the United States for the district in which such person resides, has his principal place of business, or has engaged in specified conduct. The court may exercise its jurisdiction over such action (as provided in section 7402(a)) separate and apart from any other action brought by the United States against such person.
"(b) ADJUDICATION AND DECREE.--In any action under subsection (a), if the court finds--
"(1) that the person has engaged in any specified conduct, and
"(2) that injunctive relief is appropriate to prevent recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in any other activity subject to penalty under this title.
"(c) SPECIFIED CONDUCT.--For purposes of this section, the term 'specified conduct' means any action, or failure to take action, subject to penalty under section 6700, 6701, 6707, or 6708."
(b) CONFORMING AMENDMENTS.--
(1) The heading for section 7408 is amended to read as follows:
(c) EFFECTIVE DATE.--The amendment made by this section shall take effect on the day after the date of the enactment of this Act.
SEC. 3011. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL ACCOUNTS.
(a) IN GENERAL.--Section 5321(a)(5) of title 31, United States Code, is amended to read as follows:
"(5) FOREIGN FINANCIAL AGENCY TRANSACTION VIOLATION.--
"(A) PENALTY AUTHORIZED.--The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.
"(B) AMOUNT OF PENALTY.--
"(i) IN GENERAL.--Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $5,000.
"(ii) REASONABLE CAUSE EXCEPTION.--No penalty shall be imposed under subparagraph (A) with respect to any violation if--
"(I) such violation was due to reasonable cause, and
"(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.
"(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."
SEC. 3012. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF THE TREASURY.
(a) CENSURE; IMPOSITION OF PENALTY.--
(1) IN GENERAL.--Section 330(b) of title 31, United States Code, is amended--
(A) by inserting ", or censure," after "Department", and
(B) by adding at the end the following new flush sentence:
(2) EFFECTIVE DATE.--The amendments made by this subsection shall apply to actions taken after the date of the enactment of this Act.
(b) TAX SHELTER OPINIONS, ETC.--Section 330 of such title 31 is amended by adding at the end the following new subsection:
"(d) Nothing in this section or in any other provision of law shall be construed to limit the authority of the Secretary of the Treasury to impose standards applicable to the rendering of written advice with respect to any entity, transaction plan or arrangement, or other plan or arrangement, which is of a type which the Secretary determines as having a potential for tax avoidance or evasion."
SEC. 3021. TREATMENT OF STRIPPED INTERESTS IN BOND AND PREFERRED STOCK FUNDS, ETC.
(a) IN GENERAL.--Section 1286 (relating to tax treatment of stripped bonds) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:
"(f) TREATMENT OF STRIPPED INTERESTS IN BOND AND PREFERRED STOCK FUNDS, ETC.--In the case of an account or entity substantially all of the assets of which consist of bonds, preferred stock, or a combination thereof, the Secretary may by regulations provide that rules similar to the rules of this section and 305(e), as appropriate, shall apply to interests in such account or entity to which (but for this subsection) this section or section 305(e), as the case may be, would not apply."
(b) CROSS REFERENCE.--Subsection (e) of section 305 is amended by adding at the end the following new paragraph:
"(7) CROSS REFERENCE.--
"For treatment of stripped interests in certain accounts or entities holding preferred stock, see section 1286(f)."
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to purchases and dispositions after the date of the enactment of this Act.
SEC. 3022. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON WITHHOLDING TAXES ON INCOME OTHER THAN DIVIDENDS.
(a) IN GENERAL.--Section 901 is amended by redesignating subsection (l) as subsection (m) and by inserting after subsection (k) the following new subsection:
"(l) MINIMUM HOLDING PERIOD FOR WITHHOLDING TAXES ON GAIN AND INCOME OTHER THAN DIVIDENDS ETC.--
"(1) IN GENERAL.--In no event shall a credit be allowed under subsection (a) for any withholding tax (as defined in subsection (k)) on any item of income or gain with respect to any property if--
"(A) such property is held by the recipient of the item for 15 days or less during the 30-day period beginning on the date which is 15 days before the date on which the right to receive payment of such item arises, or
"(B) to the extent that the recipient of the item is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
This paragraph shall not apply to any dividend to which subsection (k) applies.
"(2) EXCEPTION FOR TAXES PAID BY DEALERS.--
"(A) IN GENERAL.--Paragraph (1) shall not apply to any qualified tax with respect to any property held in the active conduct in a foreign country of a business as a dealer in such property.
"(B) QUALIFIED TAX.--For purposes of subparagraph (A), the term 'qualified tax' means a tax paid to a foreign country (other than the foreign country referred to in subparagraph (A)) if--
"(i) the item to which such tax is attributable is subject to taxation on a net basis by the country referred to in subparagraph (A), and
"(ii) such country allows a credit against its net basis tax for the full amount of the tax paid to such other foreign country.
"(C) DEALER.--For purposes of subparagraph (A), the term 'dealer' means--
"(i) with respect to a security, any person to whom paragraphs (1) and (2) of subsection (k) would not apply by reason of paragraph (4) thereof if such security were stock, and
"(ii) with respect to any other property, any person with respect to whom such property is described in section 1221(a)(1).
"(D) REGULATIONS.--The Secretary may prescribe such regulations as may be appropriate to carry out this paragraph, including regulations to prevent the abuse of the exception provided by this paragraph and to treat other taxes as qualified taxes.
"(3) EXCEPTIONS.--The Secretary may by regulation provide that paragraph (1) shall not apply to property where the Secretary determines that the application of paragraph (1) to such property is not necessary to carry out the purposes of this subsection.
"(4) CERTAIN RULES TO APPLY.--Rules similar to the rules of paragraphs (5), (6), and (7) of subsection (k) shall apply for purposes of this subsection.
"(5) DETERMINATION OF HOLDING PERIOD.--Holding periods shall be determined for purposes of this subsection without regard to section 1235 or any similar rule."
(b) CONFORMING AMENDMENT.--The heading of subsection (k) of section 901 is amended by inserting "ON DIVIDENDS" after "TAXES".
(c) EFFECTIVE DATE.--The amendments made by this section shall apply to amounts paid or accrued more than 30 days after the date of the enactment of this Act.
SEC. 3023. 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.
SEC. 3024. 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:
"(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.
(b) ADJUSTMENT TO BASIS OF PARTNERSHIP PROPERTY ON TRANSFER OF PARTNERSHIP INTEREST IF THERE IS SUBSTANTIAL BUILT-IN LOSS.--
(1) ADJUSTMENT REQUIRED.--Subsection (a) of section 743 (relating to optional adjustment to basis of partnership property) is amended by inserting before the period "or unless the partnership has a substantial built-in loss immediately after such transfer".
(2) ADJUSTMENT.--Subsection (b) of section 743 is amended by inserting "or with respect to which there is a substantial built-in loss immediately after such transfer" after "section 754 is in effect".
(3) SUBSTANTIAL BUILT-IN LOSS.--Section 743 is amended by adding at the end the following new subsection:
"(d) SUBSTANTIAL BUILT-IN LOSS.--
"(1) IN GENERAL.--For purposes of this section, a partnership has a substantial built-in loss with respect to a transfer of an interest in a partnership if the partnership's adjusted basis in the partnership property exceeds by more than $250,000 the fair market value of such property.
"(2) REGULATIONS.--The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of paragraph (1) and section 734(d), including regulations aggregating related partnerships and disregarding property acquired by the partnership in an attempt to avoid such purposes."
(4) CLERICAL AMENDMENTS-
(A) The section heading for section 743 is amended to read as follows:
(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:
(d) EFFECTIVE DATES.--
(1) SUBSECTION (a).--The amendment made by subsection (a) shall apply to contributions made after the date of the enactment of this Act.
(2) SUBSECTION (b).--The amendments made by subsection (b) shall apply to transfers after the date of the enactment of this Act.
(3) SUBSECTION (c).--The amendments made by subsection (c) shall apply to distributions after the date of the enactment of this Act.
(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. 3026. 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) Paragraph (5) 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).
(6) Subparagraph (C) of section 1202(e)(4) is amended by striking "REMIC, or FASIT" and inserting "or REMIC".
(7) Subparagraph (C) of section 7701(a)(19) is amended by adding "and" at the end of clause (ix), by striking ", and" at the end of clause (x) and inserting a period, and by striking clause (xi).
(8) The table of parts for subchapter M of chapter 1 is amended by striking the item relating to part V.
(c) EFFECTIVE DATE.--
(1) IN GENERAL.--Except as provided in paragraph (2), the amendments made by this section shall apply to taxable years beginning after December 31, 2003.
(2) EXCEPTION FOR EXISTING FASITs.--The amendments made by this section shall not apply to any FASIT in existence on the date of the enactment of this Act to the extent that any regular interest issued by the FASIT before such date continues to remain outstanding in accordance with the original terms of issuance of such interest.
(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. 3028. 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:
SEC. 3029. CLARIFICATION OF EXEMPTION FROM TAX FOR SMALL PROPERTY AND CASUALTY INSURANCE COMPANIES.
(a) IN GENERAL.--Section 501(c)(15)(A) is amended to read as follows:
"(i) the gross receipts for the taxable year do not exceed $600,000, and
"(ii) more than 50 percent of such gross receipts consist of premiums.".
(c) CONFORMING AMENDMENT.--Clause (i) of section 831(b)(2)(A) is amended by striking "exceed $350,000 but".
(d) EFFECTIVE DATE.--The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 3030. DEFINITION OF INSURANCE COMPANY FOR SECTION 831.
(a) IN GENERAL.--Section 831 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:
"(c) INSURANCE COMPANY DEFINED.--For purposes of this section, the term 'insurance company' has the meaning given to such term by section 816(a))."
(b) EFFECTIVE DATE.--The amendment made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 3031. 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:
"(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) to locate and contact any taxpayer specified by the Secretary, to request payment from such taxpayer of an amount of Federal tax specified by the Secretary, and 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 subcontracts 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:
(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:
"(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:
(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. 4001. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.
(a) IN GENERAL.--Section 114 is hereby repealed.
(b) CONFORMING AMENDMENTS.--
(1) Subpart E of part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is hereby repealed.
(2) The table of subparts for such part III is amended by striking the item relating to subpart E.
(3) The table of sections for part III of subchapter B of chapter 1 is amended by striking the item relating to section 114.
(c) EFFECTIVE DATE.--Except as provided in subsection (d), the amendments made by this section shall apply to transactions after December 31, 2003.
(d) TRANSITIONAL RULE FOR 2004 AND 2005.--
(1) IN GENERAL.--In the case of transactions during 2004 and 2005, the amount includible in gross income by reason of the amendments made by this section shall not exceed the applicable percentage of the amount which would have been so included but for this subsection.
(2) APPLICABLE PERCENTAGE.--For purposes of paragraph (1), the applicable percentage shall be as follows:
(A) For 2004, the applicable percentage shall be 35 percent.
(B) For 2005, the applicable percentage shall be 65 percent.
(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.
SEC. 4002. COBRA FEES.
(a) USE OF MERCHANDISE PROCESSING FEE.--Section 13031(f) of the Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C. 58c(f)) is amended--
(1) in paragraph (1), by aligning subparagraph (B) with subparagraph (A); and
(2) in paragraph (2), by striking "commercial operations" and all that follows through "processing" and inserting "customs revenue functions as defined in section 415 of the Homeland Security Act of 2002 (other than functions performde 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:
(1) SENSE OF CONGRESS.--The Congress finds that--
(A) the fees set forth in paragraphs (1) through (8) of subsection (a) of section 13031 of the Consolidated Omnibus Budget Reconciliation Act of 1985 have been reasonably related to the costs of providing customs services in connection with the activities or items for which the fees have been charged under such paragraphs; and
(B) the fees collected under such paragraphs have not exceeded, in the aggregate, the amounts paid for the costs described in subsection (f)(3)(A) incurred in providing customs services in connection with the activities or items for which the fees were charged under such paragraphs.
(2) EFFECTIVE PERIOD; STANDARD FOR SETTING FEES.--Section 13031(j)(3) of the Consolidated Omnibus Budget Reconciliation Act of 1985 is amended to read as follows:
"(3)(A) Fees may not be charged under paragraphs (9) and (10) of subsection (a) after September 30, 2013.
"(B)(i) Subject to clause (ii), Fees may not be charged under paragraphs (1) through (8) of subsection (a) after September 30, 2006.
"(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;
"(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.".
(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.
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