[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5095 Introduced in House (IH)]







107th CONGRESS
  2d Session
                                H. R. 5095

  To amend the Internal Revenue Code of 1986 to improve and simplify 
   compliance with the internal revenue laws, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 11, 2002

Mr. Thomas (for himself, Mr. McCrery, Mrs. Johnson of Connecticut, and 
Mr. Houghton) 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 improve and simplify 
   compliance with the internal revenue laws, and for other purposes.

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

SECTION 1. SHORT TITLE; ETC.

    (a) Short Title.--This Act may be cited as the ``American 
Competitiveness and Corporate Accountability Act of 2002''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--

Sec. 1. Short title; etc.
              TITLE I--PROVISIONS RELATING TO TAX SHELTERS

                Subtitle A--Taxpayer-Related Provisions

Sec. 101. Clarification of economic substance doctrine.
Sec. 102. Penalty for failing to disclose reportable transactions.
Sec. 103. Accuracy-related penalty for listed transactions, other 
                            reportable transactions having a 
                            significant tax avoidance purpose, etc.
Sec. 104. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 105. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 106. Disallowance of certain partnership loss transfers.
Sec. 107. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
                Subtitle B--Promoter-Related Provisions

Sec. 111. Disclosure of reportable transactions.
Sec. 112. Failure to furnish information regarding reportable 
                            transactions.
Sec. 113. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 114. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 115. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 116. Frivolous tax submissions.
Sec. 117. Regulation of individuals practicing before the Department of 
                            the Treasury.
Sec. 118. Penalty on promoters of tax shelters.
                      Subtitle C--Other Provisions

Sec. 121. Treatment of stripped interests in bond and preferred stock 
                            funds, etc.
Sec. 122. Minimum holding period for foreign tax credit on withholding 
                            taxes on income other than dividends.
Sec. 123. Affirmation of consolidated return regulation authority.
TITLE II--PROVISIONS TO REDUCE TAX AVOIDANCE THROUGH CORPORATE EARNINGS 
                       STRIPPING AND EXPATRIATION

Sec. 201. Reduction in potential for earnings stripping by further 
                            limiting deduction for interest on certain 
                            indebtedness.
Sec. 202. Tax treatment of expatriated entities.
Sec. 203. Excise tax on stock compensation of insiders in expatriated 
                            corporations.
Sec. 204. Reporting of taxable mergers and acquisitions.
Sec. 205. Studies.
 TITLE III--SIMPLIFICATION OF RULES RELATING TO THE TAXATION OF UNITED 
                   STATES BUSINESSES OPERATING ABROAD

        Subtitle A--Treatment of Controlled Foreign Corporations

Sec. 301. Repeal of CFC rules on foreign base company sales and service 
                            income.
Sec. 302. Look-thru treatment of payments between related controlled 
                            foreign corporations under foreign personal 
                            holding company income rules.
Sec. 303. Look-thru treatment for sales of partnership interests.
Sec. 304. Repeal of foreign personal holding company rules and foreign 
                            investment company rules.
Sec. 305. Clarification of treatment of pipeline transportation income.
Sec. 306. Determination of foreign personal holding company income with 
                            respect to transactions in commodities.
Sec. 307. Effective date.
         Subtitle B--Provisions Relating to Foreign Tax Credit

Sec. 311. Interest expense allocation rules.
Sec. 312. Recharacterization of overall domestic loss.
Sec. 313. Reduction to 3 foreign tax credit baskets.
Sec. 314. 10-year foreign tax credit carryforward.
Sec. 315. Repeal of limitation of foreign tax credit under alternative 
                            minimum tax.
Sec. 316. Look-thru rules to apply to dividends from noncontrolled 
                            section 902 corporations.
Sec. 317. Attribution of stock ownership through partnerships to apply 
                            in determining section 902 and 960 credits.
                      Subtitle C--Other Provisions

Sec. 321. Application of uniform capitalization rules to foreign 
                            persons.
Sec. 322. United States property not to include certain assets acquired 
                            by dealers in ordinary course of trade or 
                            business.
Sec. 323. Treatment of certain dividends of regulated investment 
                            companies.
Sec. 324. Election not to use average exchange rate for foreign tax 
                            paid other than in functional currency.
Sec. 325. Repeal of withholding tax on dividends from certain foreign 
                            corporations.
Sec. 326. Increase in expensing under section 179.
Sec. 327. Repeal of exclusion for extraterritorial income.
Sec. 328. Repeal of FSC transitional rules.
                       TITLE IV--OTHER PROVISIONS

Sec. 401. Extension of Internal Revenue Service user fees.
Sec. 402. Extension of customs user fees.
Sec. 403. Inclusion in gross income of funded deferred compensation of 
                            corporate insiders.
Sec. 404. Simplification of excise tax imposed on bows and arrows.
Sec. 405. Exclusion from gross income for interest on overpayments of 
                            income tax by individuals.
Sec. 406. Deposits made to suspend running of interest on potential 
                            underpayments.
Sec. 407. Partial payment of tax liability in installment agreements.
Sec. 408. Extension of transfers of excess pension assets to retiree 
                            health accounts.
Sec. 409. Clarification of rules for payment of estimated tax for 
                            certain deemed asset sales.

              TITLE I--PROVISIONS RELATING TO TAX SHELTERS

                Subtitle A--Taxpayer-Related Provisions

SEC. 101. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (m) as subsection (n) and by inserting after subsection (l) 
the following new subsection:
    ``(m) Clarification of Economic Substance Doctrine; Etc.--
            ``(1) General rules.--
                    ``(A) In general.--In applying the economic 
                substance doctrine, the determination of whether a 
                transaction has economic substance shall be made as 
                provided in this paragraph.
                    ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A), a transaction has 
                economic substance only if--
                            ``(i) the transaction changes in a 
                        meaningful way (apart from Federal income tax 
                        effects) the taxpayer's economic position, and
                            ``(ii) the taxpayer has a substantial 
                        nontax purpose for entering into such 
                        transaction and the transaction is a reasonable 
                        means of accomplishing such purpose.
            ``(2) Economic substance doctrine.--For purposes of this 
        subsection, the term `economic substance doctrine' means the 
        common law doctrine under which tax benefits under subtitle A 
        with respect to a transaction are not allowable if the 
        transaction does not have economic substance or lacks a 
        business purpose.
            ``(3) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        this subsection, including regulations on the application of 
        this subsection to transactions involving tax-indifferent 
        parties.''
    (b) Effective Date.--The amendment made by this section shall apply 
to transactions after the date of the enactment of this Act.

SEC. 102. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTIONS.

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

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

    ``(a) Imposition of Penalty.--Any person who fails to include on 
any return or statement any information with respect to a reportable 
transaction which is required under section 6011 to be included with 
such return or statement shall pay a penalty in the amount determined 
under subsection (b).
    ``(b) Amount of Penalty.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        amount of the penalty under subsection (a) shall be--
                    ``(A) $10,000 in the case of a natural person, and
                    ``(B) $50,000 in any other case.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be--
                    ``(A) $100,000 in the case of a natural person, and
                    ``(B) $200,000 in any other case.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Reportable transaction.--The term `reportable 
        transaction' means any transaction with respect to which 
        information is required to be included with a return or 
        statement because, as determined under regulations prescribed 
        under section 6011, such transaction is of a type which the 
        Secretary determines as having a potential for tax avoidance or 
        evasion.
            ``(2) Listed transaction.--The term `listed transaction' 
        means a reportable transaction which is the same as, or 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,
                    ``(B) the person on whom the penalty is imposed has 
                a history of complying with the requirements of this 
                title,
                    ``(C) it is shown that the violation is due to an 
                unintentional mistake of fact,
                    ``(D) imposing the penalty would be against equity 
                and good conscience, and
                    ``(E) rescinding the penalty would promote 
                compliance with the requirements of this title and 
                effective tax administration.
            ``(2) Discretion.--The exercise of authority under 
        paragraph (1) shall be at the sole discretion of the 
        Commissioner and may be delegated only to the head of the 
        Office of Tax Shelter Analysis. The Commissioner, in his sole 
        discretion, may establish a procedure to determine if a penalty 
        should be referred to the Commissioner or the head of such 
        Office for a determination under paragraph (1).
            ``(3) No appeal.--Notwithstanding any other provision of 
        law, any determination under this subsection may not be 
        reviewed in any administrative or judicial proceeding.
            ``(4) 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) the reasons for the rescission, and
                    ``(B) the amount of the penalty rescinded.
    ``(e) Coordination With Other Penalties.--The penalty imposed by 
this section shall be in addition to any other penalty imposed by this 
title.''
    (b) Conforming Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by inserting after the item 
relating to section 6707 the following:

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

SEC. 103. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER 
              REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
              AVOIDANCE PURPOSE, ETC.

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

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

    ``(a) Imposition of Penalty.--If a taxpayer has a reportable 
transaction understatement for any taxable year, there shall be added 
to the tax an amount equal to 20 percent of the amount of such 
understatement.
    ``(b) Reportable Transaction Understatement.--For purposes of this 
section--
            ``(1) In general.--The term `reportable transaction 
        understatement' means the sum of--
                    ``(A) the product of--
                            ``(i) the amount of the increase (if any) 
                        in taxable income which results from a 
                        difference between the proper tax treatment of 
                        an item to which this section applies and the 
                        taxpayer's treatment of such item (as shown on 
                        the taxpayer's return of tax), and
                            ``(ii) the highest rate of tax imposed by 
                        section 1 (section 11 in the case of a taxpayer 
                        which is a corporation), and
                    ``(B) the amount of the decrease (if any) in the 
                aggregate amount of credits determined under subtitle A 
                which results from a difference between the taxpayer's 
                treatment of an item to which this section applies (as 
                shown on the taxpayer's return of tax) and the proper 
                tax treatment of such item.
        For purposes of subparagraph (A), any reduction of the excess 
        of deductions allowed for the taxable year over gross income 
        for such year, and any reduction in the amount of capital 
        losses which would (without regard to section 1211) be allowed 
        for such year, shall be treated as an increase in taxable 
        income.
            ``(2) Items to which section applies.--This section shall 
        apply to any item which is attributable to--
                    ``(A) any listed transaction, and
                    ``(B) any reportable transaction (other than a 
                listed transaction) if a significant purpose of such 
                transaction is the avoidance or evasion of Federal 
                income tax.
    ``(c) Higher Penalty for Nondisclosed Transactions.--Subsection (a) 
shall be applied by substituting `30 percent' for `20 percent' with 
respect to the portion of any reportable transaction understatement 
with respect to which the requirement of section 6664(d)(2)(A) is not 
met.
    ``(d) Definitions of Reportable and Listed Transactions.--For 
purposes of this section, the terms `reportable transaction' and 
`listed transaction' have the respective meanings given to such terms 
by section 6707A(c).
    ``(e) Special Rules.--
            ``(1) Coordination with penalties, etc., on other 
        understatements.--In the case of an understatement (as defined 
        in section 6662(d)(2))--
                    ``(A) the amount of such understatement (determined 
                without regard to this paragraph) shall be increased by 
                the aggregate amount of reportable transaction 
                understatements and noneconomic substance 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 and 
                noneconomic substance 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 and noneconomic substance transaction 
                understatements.
                    ``(B) No double penalty.--This section shall not 
                apply to any portion of an understatement on which a 
                penalty is imposed under section 6662B or 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 or noneconomic substance 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.
            ``(4) Noneconomic substance transaction understatement.--
        For purposes of this subsection, the term `noneconomic 
        substance transaction understatement' has the meaning given to 
        such term by section 6662B(c).''
    (b) Determination of Other Understatements.--Subparagraph (A) of 
section 6662(d)(2) is amended by adding at the end the following flush 
sentence:
                ``The excess under the preceding sentence shall be 
                determined without regard to items to which section 
                6662A applies and without regard to items with respect 
                to which a penalty is imposed by section 6662B.''
    (c) Reasonable Cause Exception.--
            (1) In general.--Section 6664 is amended by adding at the 
        end the following new subsection:
    ``(d) Reasonable Cause Exception for Reportable Transaction 
Understatements.--
            ``(1) In general.--No penalty shall be imposed under 
        section 6662A with respect to any portion of a reportable 
        transaction understatement if it is shown that there was a 
        reasonable cause for such portion and that the taxpayer acted 
        in good faith with respect to such portion.
            ``(2) Special rules.--Paragraph (1) shall not apply to any 
        reportable transaction understatement unless--
                    ``(A) the relevant facts affecting the tax 
                treatment of the item are adequately disclosed in 
                accordance with the regulations prescribed under 
                section 6011,
                    ``(B) there is or was substantial authority for 
                such treatment, and
                    ``(C) the taxpayer reasonably believed that such 
                treatment was more likely than not the proper 
                treatment.
            ``(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 continuing financial 
                                interest with respect to the 
                                transaction.
                            ``(iii) Disqualified opinions.--For 
                        purposes of clause (i), an opinion is 
                        disqualified if the opinion--
                                    ``(I) is based on unreasonable 
                                factual or legal assumptions (including 
                                assumptions as to future events),
                                    ``(II) unreasonably relies on 
                                representations, statements, findings, 
                                or agreements of the taxpayer or any 
                                other person,
                                    ``(III) does not identify and 
                                consider all relevant facts, or
                                    ``(IV) fails to meet any other 
                                requirement as the Secretary may 
                                prescribe.''
            (2) Conforming amendments.--
                    (A) Paragraph (1) of section 6664(c) is amended by 
                striking ``this part'' and inserting ``section 6662 or 
                6663''.
                    (B) The heading for subsection (c) of section 6664 
                is amended by inserting ``for Underpayments'' after 
                ``Exception''.
    (d) Reduction in Penalty for Substantial Understatement of Income 
Tax Not To Apply to Tax Shelters.--Subparagraph (C) of section 
6662(d)(2) (relating to substantial understatement of income tax) is 
amended to read as follows:
                    ``(C) Reduction not to apply to tax shelters.--
                            ``(i) In general.--Subparagraph (B) shall 
                        not apply to any item attributable to a tax 
                        shelter.
                            ``(ii) Tax shelter.--For purposes of clause 
                        (i), the term `tax shelter' means--
                                    ``(I) a partnership or other 
                                entity,
                                    ``(II) any investment plan or 
                                arrangement, or
                                    ``(III) any other plan or 
                                arrangement,
                        if a significant purpose of such partnership, 
                        entity, plan, or arrangement is the avoidance 
                        or evasion of Federal income tax.''
    (e) Conforming Amendments.--
            (1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each 
        amended by striking ``section 6662(d)(2)(C)(iii)'' and 
        inserting ``section 6662(d)(2)(C)(ii)''.
            (2) The heading for section 6662 is amended to read as 
        follows:

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

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

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

SEC. 104. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

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

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    ``(a) Imposition of Penalty.--If a taxpayer has an noneconomic 
substance transaction understatement for any taxable year, there shall 
be added to the tax an amount equal to 40 percent of the amount of such 
understatement.
    ``(b) Reduction of Penalty for Disclosed Transactions.--Subsection 
(a) shall be applied by substituting `20 percent' for `40 percent' with 
respect to the portion of any noneconomic substance transaction 
understatement with respect to which the relevant facts affecting the 
tax treatment of the item are adequately disclosed in accordance with 
the regulations prescribed under section 6011.
    ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
            ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which would be an 
        understatement under section 6662A(b)(1) if such section only 
        applied to items attributable to noneconomic substance 
        transactions.
            ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any transaction if--
                    ``(A) the transaction lacks economic substance 
                (within the meaning of section 7701(m)), or
                    ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
            ``(3) Exception for personal transactions of individuals.--
        In the case of an individual, such term shall not include any 
        transaction other than a transaction entered into in connection 
        with a trade or business or an activity engaged in for the 
        production of income.
    ``(d) Coordination With Other Penalties.--
            ``(1) In general.--Except as otherwise provided in this 
        part, the penalty imposed by this section shall be in addition 
        to any other penalty imposed by this title.
            ``(2) Cross reference.--

                                ``For coordination of penalty with 
understatements under section 6662 and other special rules, see section 
6662A(e).''
    (b) Clerical Amendment.--The table of sections for part II of 
subchapter A of chapter 68 is amended by inserting after the item 
relating to section 6662A the following new item:

                              ``Sec. 6662B. Penalty for understatements 
                                        attributable to transactions 
                                        lacking economic substance, 
                                        etc.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act.

SEC. 105. 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. 106. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.

    (a) Treatment of Contributed Property With Built-In Loss.--
Paragraph (1) of section 704(c) is amended by striking ``and'' at the 
end of subparagraph (A), by striking the period at the end of 
subparagraph (B) and inserting ``, and'', and by adding at the end the 
following:
                    ``(C) if any property so contributed has a built-in 
                loss--
                            ``(i) such built-in loss shall be taken 
                        into account only in determining the amount of 
                        items allocated to the contributing partner, 
                        and
                            ``(ii) except as provided in regulations, 
                        in determining the amount of items allocated to 
                        other partners, the basis of the contributed 
                        property in the hands of the partnership shall 
                        be treated as being equal to its fair market 
                        value immediately after the contribution.
        For purposes of subparagraph (C), the term `built-in loss' 
        means the excess of the adjusted basis of the property over its 
        fair market value immediately after the 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--
                    ``(A) the transferee partner's proportionate share 
                of the adjusted basis of the partnership property 
                exceeds the basis of such partner's interest in the 
                partnership, and
                    ``(B) such excess exceeds the greater of--
                            ``(i) $250,000, or
                            ``(ii) 10 percent of the basis of such 
                        partner's interest in the partnership.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the purposes of 
        paragraph (1) and section 734(d), including regulations 
        aggregating related partnerships and disregarding property 
        acquired by the partnership in an attempt to avoid such 
        purposes.''
            (4) Clerical amendments.--
                    (A) The section heading for section 743 is amended 
                to read as follows:

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

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

                              ``Sec. 743. Adjustment to basis of 
                                        partnership property where 
                                        section 754 election or 
                                        substantial built-in loss.''
    (c) Adjustment to Basis of Undistributed Partnership Property if 
There Is Substantial Basis Reduction.--
            (1) Adjustment required.--Subsection (a) of section 734 
        (relating to optional adjustment to basis of undistributed 
        partnership property) is amended by inserting before the period 
        ``or unless there is a substantial basis reduction''.
            (2) Adjustment.--Subsection (b) of section 734 is amended 
        by inserting ``or unless there is a substantial basis 
        reduction'' after ``section 754 is in effect''.
            (3) Substantial basis reduction.--Section 734 is amended by 
        adding at the end the following new subsection:
    ``(d) Substantial Basis Reduction.--
            ``(1) In general.--For purposes of this section, there is a 
        substantial basis reduction with respect to a distribution if 
        the sum of the amounts described in subparagraphs (A) and (B) 
        of subsection (b)(2) exceeds the greater of $250,000 or 10 
        percent of the aggregate adjusted basis of partnership property 
        immediately after the distribution.
            ``(2) Regulations.--

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

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

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

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

SEC. 107. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR 
              NONREPORTABLE TRANSACTIONS.

    (a) Substantial Understatement of Corporations.--Section 
6662(d)(1)(B) (relating to special rule for corporations) is amended to 
read as follows:
                    ``(B) Special rule for corporations.--In the case 
                of a corporation other than an S corporation or a 
                personal holding company (as defined in section 542), 
                there is a substantial understatement of income tax for 
                any taxable year if the amount of the understatement 
                for the taxable year exceeds the lesser of--
                            ``(i) 10 percent of the tax required to be 
                        shown on the return for the taxable year (or, 
                        if greater, $10,000), or
                            ``(ii) $10,000,000.''
    (b) Reduction for Understatement of Taxpayer Due to Position of 
Taxpayer or Disclosed Item.--Section 6662(d)(2)(B)(i) (relating to 
substantial authority) is amended to read as follows:
                            ``(i) the tax treatment of any item by the 
                        taxpayer if the taxpayer had reasonable belief 
                        that the tax treatment was more likely than not 
                        the proper treatment, or''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

                Subtitle B--Promoter-Related Provisions

SEC. 111. 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, promoting, selling, implementing, 
                        or carrying out any reportable transaction, and
                            ``(ii) who directly or indirectly derives 
                        gross income in excess of the threshold amount 
                        (or such other amount as may be prescribed by 
                        the Secretary) for such advice or assistance.
                    ``(B) Threshold amount.--For purposes of 
                subparagraph (A), the threshold amount is--
                            ``(i) $50,000 in the case of a reportable 
                        transaction substantially all of the tax 
                        benefits from which are provided to natural 
                        persons, and
                            ``(ii) $250,000 in any other case.
            ``(2) Reportable transaction.--The term `reportable 
        transaction' has the meaning given to such term by section 
        6707A(c).
    ``(c) Regulations.--The Secretary may prescribe regulations which 
provide--
            ``(1) that only 1 person shall be required to meet the 
        requirements of subsection (a) in cases in which 2 or more 
        persons would otherwise be required to meet such requirements,
            ``(2) exemptions from the requirements of this section, and
            ``(3) such rules as may be necessary or appropriate to 
        carry out the purposes of this section.''
    (b) Conforming Amendments.--
            (1) The item relating to section 6111 in the table of 
        sections for subchapter B of chapter 61 is amended to read as 
        follows:

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

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

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

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

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

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

                              ``Sec. 6708. Failure to maintain lists of 
                                        advisees with respect to 
                                        reportable transactions.''
    (c) Effective Date.--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.

SEC. 112. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE 
              TRANSACTIONS.

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

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

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

SEC. 113. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF 
              INVESTORS.

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

SEC. 114. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO 
              TAX SHELTERS AND REPORTABLE TRANSACTIONS.

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

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

            (2) The table of sections for subchapter A of chapter 67 is 
        amended by striking the item relating to section 7408 and 
        inserting the following new item:

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

SEC. 115. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
              ACCOUNTS.

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

SEC. 116. FRIVOLOUS TAX SUBMISSIONS.

    (a) Civil Penalties.--Section 6702 is amended to read as follows:

``SEC. 6702. FRIVOLOUS TAX SUBMISSIONS.

    ``(a) Civil Penalty for Frivolous Tax Returns.--A person shall pay 
a penalty of $5,000 if--
            ``(1) such person files what purports to be a return of a 
        tax imposed by this title but which--
                    ``(A) does not contain information on which the 
                substantial correctness of the self-assessment may be 
                judged, or
                    ``(B) contains information that on its face 
                indicates that the self-assessment is substantially 
                incorrect; and
            ``(2) the conduct referred to in paragraph (1)--
                    ``(A) is due to a position which is frivolous, or
                    ``(B) reflects a desire to delay or impede the 
                administration of Federal tax laws.
    ``(b) Civil Penalty for Specified Frivolous Submissions.--
            ``(1) Imposition of Penalty.--Except as provided in 
        paragraph (3), any person who submits a specified frivolous 
        submission shall pay a penalty of $5,000.
            ``(2) Specified frivolous submission.--For purposes of this 
        section--
                    ``(A) Specified frivolous submission.--The term 
                `specified frivolous submission' means a specified 
                submission if any portion of such submission--
                            ``(i) is based on a position which is 
                        frivolous, or
                            ``(ii) reflects a desire to delay or impede 
                        the administration of Federal tax laws.
                    ``(B) Specified submission.--The term `specified 
                submission' means--
                            ``(i) a request for a hearing under--
                                    ``(I) section 6320 (relating to 
                                notice and opportunity for hearing upon 
                                filing of notice of lien), or
                                    ``(II) section 6330 (relating to 
                                notice and opportunity for hearing 
                                before levy), and
                            ``(ii) an application under--
                                    ``(I) section 6159 (relating to 
                                agreements for payment of tax liability 
                                in installments),
                                    ``(II) section 7122 (relating to 
                                compromises), or
                                    ``(III) section 7811 (relating to 
                                taxpayer assistance orders).
            ``(3) Opportunity to withdraw submission.--If the Secretary 
        provides a person with notice that a submission is a specified 
        frivolous submission and such person withdraws such submission 
        within 30 days after such notice, the penalty imposed under 
        paragraph (1) shall not apply with respect to such submission.
    ``(c) Reduction of Penalty.--The Secretary may reduce the amount of 
any penalty imposed under this section if the Secretary determines that 
such reduction would promote compliance with and administration of the 
Federal tax laws.
    ``(d) Penalties in Addition to Other Penalties.--The penalties 
imposed by this section shall be in addition to any other penalty 
provided by law.''
    (b) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by striking the item relating to 
section 6702 and inserting the following new item:

                              ``Sec. 6702. Frivolous tax submissions.''
    (c) Effective Date.--The amendments made by this section shall 
apply to submissions made and issues raised after the date of the 
enactment of this Act.

SEC. 117. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 
              THE TREASURY.

    (a) Censure; Imposition of Penalty.--
            (1) In general.--Section 330(b) of title 31, United States 
        Code, is amended--
                    (A) by inserting ``, or censure,'' after 
                ``Department'', and
                    (B) by adding at the end the following new flush 
                sentence:
``The Secretary may impose a monetary penalty on any representative 
described in the preceding sentence. If the representative was acting 
on behalf of an employer or any firm or other entity in connection with 
the conduct giving rise to such penalty, the Secretary may impose a 
monetary penalty on such employer, firm, or entity if it knew, or 
reasonably should have known, of such conduct. Such penalty shall not 
exceed the gross income derived (or to be derived) from the conduct 
giving rise to the penalty and may be in addition to, or in lieu of, 
any suspension, disbarment, or censure.''
            (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. 118. 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.

                      Subtitle C--Other Provisions

SEC. 121. 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. 122. 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. 123. 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.

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

SEC. 201. REDUCTION IN POTENTIAL FOR EARNINGS STRIPPING BY FURTHER 
              LIMITING DEDUCTION FOR INTEREST ON CERTAIN INDEBTEDNESS.

    (a) Reduction in Potential for Earnings Stripping.--
            (1) In general.--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.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the amount disallowed under 
                        subparagraph (A) shall not exceed the 
                        corporation's excess overall interest expense 
                        for the taxable year.
                            ``(ii) Corporations which are members of 
                        worldwide affiliated group.--In the case of a 
                        corporation which is a member of a worldwide 
                        affiliated group, the amount disallowed under 
                        subparagraph (A) shall not exceed the greater 
                        of--
                                    ``(I) the corporation's excess 
                                overall interest expense for the 
                                taxable year, or
                                    ``(II) the corporation's excess 
                                domestic disqualified interest for such 
                                year.
                    ``(C) 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 in the 2nd through 5th succeeding 
                taxable years to the extent not previously taken into 
                account under this subparagraph. The amount of such a 
                carryforward taken into account for any such succeeding 
                taxable year shall not exceed--
                            ``(i) the excess (if any) of--
                                    ``(I) 35 percent of the adjusted 
                                taxable income of the corporation for 
                                such succeeding taxable year, over
                                    ``(II) the corporation's net 
                                interest expense for such succeeding 
                                taxable year, reduced by
                            ``(ii) amounts carried to such succeeding 
                        taxable year from taxable years preceding the 
                        taxable year from which the amount is being 
                        carried forward.
                    ``(D) Special rules for carryover.--
                            ``(i) No carryover of excess domestic 
                        disqualified interest.--In the case of a 
                        corporation which is a member of a worldwide 
                        affiliated group, the amount disallowed under 
                        subparagraph (A) for any taxable year which may 
                        be treated as provided in subparagraph (C) 
                        shall not exceed the excess (if any) of the 
                        amount disallowed over the amount described in 
                        subparagraph (B)(ii)(II) for such year.
                            ``(ii) No carryover to year for which 
                        amount disallowed.--No amount may be carried 
                        under this subparagraph to any taxable year for 
                        which any amount is disallowed under 
                        subparagraph (A).
            ``(2) Excess interest expense.--For purposes of this 
        subsection--
                    ``(A) Excess overall interest expense.--The term 
                `excess overall interest expense' means the excess (if 
                any) of--
                            ``(i) the corporation's net interest 
                        expense, over
                            ``(ii) 35 percent of the adjusted taxable 
                        income of the corporation.
                    ``(B) Excess domestic disqualified interest.--The 
                term `excess domestic disqualified interest' means the 
                product of--
                            ``(i) the disqualified interest paid or 
                        accrued by the corporation during the taxable 
                        year, and
                            ``(ii) the corporation's disproportionate 
                        domestic related-party indebtedness 
                        percentage.''
            (2) Disproportionate domestic related-party indebtedness 
        percentage.--Subsection (j) of section 163 is amended by 
        redesignating paragraphs (6), (7), and (8) as paragraphs (7), 
        (8), and (9), respectively, and by inserting after paragraph 
        (5) the following new paragraph:
            ``(6) Disproportionate domestic related-party indebtedness 
        percentage.--For purposes of this subsection--
                    ``(A) In general.--The term `disproportionate 
                domestic related-party indebtedness percentage' means, 
                for any taxable year, the percentage (but not greater 
                than 100 percent) which, as of the close of such 
                taxable year (or on any other day during the taxable 
                year as the Secretary may by regulations prescribe)--
                            ``(i) the disproportionate indebtedness of 
                        the corporation, bears to
                            ``(ii) the related-party indebtedness of 
                        the corporation.
                    ``(B) Disproportionate indebtedness.--The term 
                `disproportionate indebtedness' means the amount by 
                which the total indebtedness of the corporation exceeds 
                the amount which bears the same ratio to the total 
                indebtedness of the worldwide affiliated group as--
                            ``(i) the money and all other assets of the 
                        corporation, bears to
                            ``(ii) the money and all other assets of 
                        the worldwide affiliated group of which such 
                        corporation is a member.
                For purposes of determining the money and other assets, 
                and indebtedness, of a worldwide affiliated group, all 
                members of the same worldwide affiliated group shall be 
                treated as 1 corporation.
                    ``(C) Related-party indebtedness.--The term 
                `related-party indebtedness' means any indebtedness of 
                the corporation if the interest on such indebtedness is 
                disqualified interest.
                    ``(D) Worldwide affiliated group.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the term `worldwide affiliated 
                        group' means an affiliated group as defined in 
                        section 1504(a), determined without regard to 
                        paragraphs (2), (3), and (4) of section 
                        1504(b).
                            ``(ii) Treatment of certain financial 
                        institutions.--
                                    ``(I) In general.--All financial 
                                corporations (as defined in section 
                                864(e)(6)(B)) which are members of a 
                                worldwide affiliated group shall be 
                                treated as a separate worldwide 
                                affiliated group (and not as part of 
                                any other worldwide affiliated group) 
                                for purposes of applying this 
                                subsection.
                                    ``(II) Determination of domestic 
                                debt and assets.--For purposes of this 
                                paragraph, all such financial 
                                corporations which are members of the 
                                same affiliated group (as defined in 
                                section 1504(a), determined without 
                                regard to paragraph (2) of section 
                                1504(b)) shall be treated as 1 
                                corporation.
                    ``(E) Determination of debt and assets.--For 
                purposes of this paragraph--
                            ``(i) the amount taken into account with 
                        respect to any asset shall be the adjusted 
                        basis thereof for purposes of determining gain,
                            ``(ii) the amount taken into account with 
                        respect to any indebtedness with original issue 
                        discount shall be its issue price plus the 
                        portion of the original issue discount 
                        previously accrued as determined under the 
                        rules of section 1272 (determined without 
                        regard to subsection (a)(7) or (b)(4) thereof), 
                        and
                            ``(iii) there shall be such other 
                        adjustments as the Secretary may by regulations 
                        prescribe.''
            (3) Conforming amendment.--Paragraph (9) of section 163(j), 
        as redesignated by paragraph (2), is amended by inserting ``or 
        worldwide affiliated group'' after ``an affiliated group''.
    (b) Maintenance of Current Law for Interest Paid By Taxable REIT 
Subsidiaries to REIT.--
            (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.
                    ``(C) Ratio of debt to equity.--For purposes of 
                this paragraph, the term `ratio of debt to equity' 
                means the ratio which the total indebtedness of the 
                subsidiary bears to the sum of its money and all other 
                assets reduced (but not below zero) by such total 
                indebtedness. The rules of section 163(j)(6)(E) shall 
                apply for purposes of the preceding sentence.
            ``(3) Disqualified interest.--For purposes of this 
        subsection, the term `disqualified interest' means any interest 
        paid or accrued (directly or indirectly) by a taxable REIT 
        subsidiary of a real estate investment trust to such trust.
            ``(4) Other rules to apply.--Rules similar to the rules of 
        paragraphs (7), (8), and (9) of section 163(j) shall apply for 
        purposes of this subsection.''
    (c) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2003.
            (2) Earlier effective date with respect to expatriated 
        corporations, etc.--The amendments made by this section shall 
        apply to taxable years ending after March 20, 2002, in the case 
        of a taxpayer which is--
                    (A) a surrogate foreign corporation, as defined in 
                section 7874(b) of the Internal Revenue Code of 1986 
                (as added by section 202),
                    (B) a corporation which would be a surrogate 
                foreign corporation (as so defined) if ``December 31, 
                1996'' were substituted for ``March 20, 2002'' in such 
                section 7874(b), and
                    (C) any corporation which is an expatriated entity 
                (as defined in such section 7874(b)) with respect to a 
                corporation described in subparagraph (A) or (B).
            (3) Earlier effective date for recent debt.--
                    (A) In general.--Subject to subparagraph (B), the 
                amendments made by this section shall also apply to 
                taxable years ending after July 10, 2002, and beginning 
                before the first taxable year to which such amendments 
                would (without regard to this paragraph) apply.
                    (B) Application only to recent debt.--In the case 
                of a taxable year to which the amendments made by this 
                section apply solely by reason of this paragraph, the 
                increase in the amount disallowed under section 163(j) 
                of the Internal Revenue Code of 1986 by reason of such 
                amendments shall not exceed the amount of disqualified 
                interest for such year on indebtedness incurred after 
                July 10, 2002.
            (4) Limitation on carryover of disallowed interest.--For 
        purposes of applying section 163(j)(1)(C) of the Internal 
        Revenue Code of 1986 (as added by this section), amounts 
        carried to any taxable year beginning after December 31, 2003, 
        shall be treated as disallowed for the most recent taxable year 
        beginning on or before such date.

SEC. 202. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR FOREIGN 
              PARENTS.

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

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

    ``(a) Inverted Corporations Treated as Domestic Corporations.--
            ``(1) In general.--If a foreign incorporated entity is 
        treated as an inverted domestic corporation, then, 
        notwithstanding section 7701(a)(4), such entity shall be 
        treated for purposes of this title as a domestic corporation.
            ``(2) Exception.--Paragraph (1) shall not apply for 
        purposes of determining under section 367 whether any 
        shareholder recognizes gain in connection with the acquisition.
            ``(3) Inverted domestic corporation.--For purposes of this 
        section, a foreign incorporated entity shall be treated as an 
        inverted domestic corporation if, pursuant to a plan (or a 
        series of related transactions)--
                    ``(A) the entity completes after March 20, 2002, 
                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,
                    ``(B) after the acquisition at least 80 percent of 
                the stock (by vote or value) of the entity is held--
                            ``(i) in the case of an acquisition with 
                        respect to a domestic corporation, by former 
                        shareholders of the domestic corporation by 
                        reason of holding stock in the domestic 
                        corporation, or
                            ``(ii) in the case of an acquisition with 
                        respect to a domestic partnership, by former 
                        partners of the domestic partnership by reason 
                        of holding a capital or profits interest in the 
                        domestic partnership, and
                    ``(C) the expanded affiliated group which after the 
                acquisition includes the entity does not have 
                substantial business activities in the foreign country 
                in which or under the law of which the entity is 
                created or organized when compared to the total 
                business activities of such expanded affiliated group.
            ``(4) Termination.--This subsection shall not apply to any 
        acquisition completed after March 20, 2005.
    ``(b) 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 incorporated 
                        entity 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 
                incorporated entity 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 20, 
                        2002, 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.
                The term `surrogate foreign corporation' shall not 
                include an inverted domestic corporation.
    ``(c) General Definitions and Special Rules.--
            ``(1) Foreign incorporated entity.--For purposes of this 
        section, the term `foreign incorporated entity' means any 
        entity which is, or but for subsection (a) would be, treated as 
        a foreign corporation for purposes of this title.
            ``(2) 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), except 
        that section 1504(a) shall be applied by substituting `more 
        than 50 percent' for `at least 80 percent' each place it 
        appears.
            ``(3) Certain stock disregarded.--There shall not be taken 
        into account in determining ownership under subsections 
        (a)(3)(B) and (b)(2)(B)(ii)--
                            ``(i) stock held by members of the expanded 
                        affiliated group which includes the foreign 
                        incorporated entity, or
                            ``(ii) stock of such foreign incorporated 
                        entity which is sold in a public offering 
                        related to the acquisition described in 
                        subsection (a)(3)(A) or (b)(2)(B)(i), 
                        respectively.
            ``(4) Plan deemed in certain cases.--If a foreign 
        incorporated entity 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 
        subsections (a)(3)(B) and (b)(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 subsections (a)(3)(B) and (b)(2)(B)(ii) to the 
        acquisition 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 an inverted domestic corporation or 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.
    ``(d) Definitions Relating to Tax on Inversion Gain.--For purposes 
of subsection (b)--
            ``(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 (b)(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 (b)(2)(B)(i), or
                    ``(B) after such acquisition if the transfer 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) 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.
    ``(e) Special Rules Relating to Tax on Inversion Gain.--
            ``(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 
        (b) 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 (b) 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 (b).
            ``(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 (b)(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 (b)(2)(B)(i) is completed.
    ``(f) Special Rule for Treaties.--Nothing in section 894 or 7852(d) 
or in any other provision of law shall be construed as permitting an 
exemption, by reason of any treaty obligation of the United States 
heretofore or hereafter entered into, from the provisions of this 
section.
    ``(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 20, 2002.

SEC. 203. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
              CORPORATIONS.

    (a) In General.--Subtitle D is amended by adding at the end the 
following new chapter:

      ``CHAPTER 48--STOCK COMPENSATION OF INSIDERS IN EXPATRIATED 
                              CORPORATIONS

                              ``Sec. 5000A. Stock compensation of 
                                        insiders in expatriated 
                                        corporations.

``SEC. 5000A. 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 20 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, the fair value 
                of such option, and
                    ``(B) in any other case, the fair market value of 
                such compensation.
            ``(2) Date for determining value.--The determination of 
        value shall be made--
                    ``(A) in the case of specified stock compensation 
                held on the expatriation date, on such date,
                    ``(B) in the case of such compensation which is 
                canceled during the 6 months before the expatriation 
                date, on the day before such cancellation, and
                    ``(C) in the case of such compensation which is 
                granted after the expatriation date, on the date such 
                compensation is granted.
    ``(c) Tax To Apply Only If Shareholder Gain Recognized.--Subsection 
(a) shall apply to any disqualified individual with respect to an 
expatriated corporation only if gain (if any) on any stock in such 
corporation is recognized in whole or part by any shareholder by reason 
of the acquisition referred to in section 7874(b)(2)(B)(i) (determined 
by substituting `July 10, 2002' for `March 20, 2002') with respect to 
such corporation.
    ``(d) Exception Where Gain Recognized on Compensation.--Subsection 
(a) shall not apply to--
            ``(1) any stock option which is exercised on the 
        expatriation date or during the 6-month period before such date 
        and to the stock acquired in such exercise, and
            ``(2) any stock option or stock which is sold or exchanged 
        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 
                would be an expatriated entity (as defined in section 
                7874(b)(2)) if--
                            ``(i) section 7874(b)(2)(B) were applied by 
                        substituting `July 10, 2002' for `March 20, 
                        2002', and
                            ``(ii) the last sentence of section 
                        7874(b)(2)(B) did not apply.
                Such term includes any predecessor or successor of such 
                a corporation.
                    ``(B) Expatriation date.--The term `expatriation 
                date' means, with respect to a corporation, the date on 
                which the corporation first becomes an expatriated 
                corporation.
            ``(3) Specified stock compensation.--
                    ``(A) In general.--The term `specified stock 
                compensation' means payment (or right to payment) 
                granted by the expatriated corporation (or by any 
                member of the expanded affiliated group which includes 
                such corporation) to any person in connection with the 
                performance of services by a disqualified individual 
                for such corporation or member if the value of such 
                payment or right is based on (or determined by 
                reference to) the value (or change in value) of stock 
                in such corporation (or any such member).
                    ``(B) Exceptions.--Such term shall not include--
                            ``(i) any option to which part II of 
                        subchapter D of chapter 1 applies, or
                            ``(ii) any payment or right to payment from 
                        a plan referred to in section 280G(b)(6).
            ``(4) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group (as defined in 
        section 1504(a) without regard to section 1504(b)); except that 
        section 1504(a) shall be applied by substituting `more than 50 
        percent' for `at least 80 percent' each place it appears.
    ``(f) Special Rules.--For purposes of this section--
            ``(1) Cancellation of restriction.--The cancellation of a 
        restriction which by its terms will never lapse shall be 
        treated as a grant.
            ``(2) Payment or reimbursement of tax by corporation 
        treated as specified stock compensation.--Any payment of the 
        tax imposed by this section directly or indirectly by the 
        expatriated corporation or by any member of the expanded 
        affiliated group which includes such corporation--
                    ``(A) shall be treated as specified stock 
                compensation, and
                    ``(B) shall not be allowed as a deduction under any 
                provision of chapter 1.
            ``(3) Certain restrictions ignored.--Whether there is 
        specified stock compensation, and the value thereof, shall be 
        determined without regard to any restriction other than a 
        restriction which by its terms will never lapse.
            ``(4) Property transfers.--Any transfer of property shall 
        be treated as a payment and any right to a transfer of property 
        shall be treated as a right to a payment.
            ``(5) Other administrative provisions.--For purposes of 
        subtitle F, any tax imposed by this section shall be treated as 
        a tax imposed by subtitle A.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''
    (b) Denial of Deduction.--
            (1) In general.--Paragraph (6) of section 275(a) is amended 
        by inserting ``48,'' after ``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 5000A directly or indirectly by the 
                expatriated corporation (as defined in such section) or 
                by any member of the expanded affiliated group (as 
                defined in such section) which includes such 
                corporation.''
    (c) Conforming Amendments.--
            (1) The last sentence of section 3121(v)(2)(A) is amended 
        by inserting before the period ``or to any specified stock 
        compensation (as defined in section 5000A) on which tax is 
        imposed by section 5000A''.
            (2) The table of chapters for subtitle D is amended by 
        adding at the end the following new item:

                              ``Chapter 48. Stock compensation of 
                                        insiders in expatriated 
                                        corporations.''
    (d) Effective Date.--The amendments made by this section shall take 
effect on July 11, 2002; except that periods before such date shall not 
be taken into account in applying the periods in subsections (a) and 
(e)(1) of section 5000A of the Internal Revenue Code of 1986, as added 
by this section.

SEC. 204. 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.--The acquiring corporation in any taxable 
acquisition shall make a return (according to the forms or regulations 
prescribed by the Secretary) 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) Nominee 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).
    ``(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.--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:
                            ``(ii) section 6043A(a) (relating to 
                        returns relating to taxable mergers and 
                        acquisitions),''.
            (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (F) through (AA) as subparagraphs 
        (G) through (BB), respectively, and by inserting after 
        subparagraph (E) the following new subparagraph:
                    ``(F) subsections (b) and (d) of section 6043A 
                (relating to returns relating to taxable mergers and 
                acquisitions).''.
    (c) Clerical Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 61 is amended by inserting after 
the item relating to section 6043 the following new item:

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

SEC. 205. 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 December 31, 2002, 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, 2002, such Secretary or delegate shall submit 
to the Congress a report of such study.
    (c) Impact of Expatriation Provisions.--The Secretary of the 
Treasury or the Secretary's delegate shall conduct a study of the 
impact of the provisions of this title on corporate earnings stripping 
and 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, 
2004, such Secretary or delegate shall submit to the Congress a report 
of such study.

 TITLE III--SIMPLIFICATION OF RULES RELATING TO THE TAXATION OF UNITED 
                   STATES BUSINESSES OPERATING ABROAD

        Subtitle A--Treatment of Controlled Foreign Corporations

SEC. 301. 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:
                    ``(H) Certain sales.--Income (whether in the form 
                of profits, commissions, fees, or otherwise) derived in 
                connection with the purchase of personal property from 
                a related person and its sale to any person, the sale 
                of personal property to any person on behalf of a 
                related person, the purchase of personal property from 
                any person and its sale to a related person, or the 
                purchase of personal property from any person on behalf 
                of a related person where--
                            ``(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.''
    (c) Conforming Amendments.--
            (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)''.

SEC. 302. 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:
            ``(4) Look-thru in the case of related controlled foreign 
        corporations.--For purposes of this subsection, dividends, 
        interest, rents, and royalties received from a controlled 
        foreign corporation which is a related person (as defined in 
        subsection (b)(9)) shall not be treated as foreign personal 
        holding company income to the extent attributable (determined 
        under rules similar to the rules of subparagraphs (C) and (D) 
        of section 904(d)(3)) to income of the related person which is 
        not subpart F income (as defined in section 952).''

SEC. 303. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

    Section 954(c) (defining foreign personal holding company income) 
is amended by adding after paragraph (4) the following new paragraph:
            ``(5) Look-through rule for certain partnership sales.--
                    ``(A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest in a 
                partnership with respect to which such corporation is a 
                25-percent owner, such corporation shall be treated for 
                purposes of this subsection as selling the 
                proportionate share of the assets of the partnership 
                attributable to such interest.
                    ``(B) 25-percent owner.--For purposes of this 
                paragraph, the term `25-percent owner' means a 
                controlled foreign corporation which owns 25 percent or 
                more of the capital or profits interest in the 
                partnership. The constructive ownership rules of 
                section 958(b) shall apply for purposes of the 
                preceding sentence.''

SEC. 304. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN 
              INVESTMENT COMPANY RULES.

    (a) General Rule.--The following provisions are hereby repealed:
            (1) Part III of subchapter G of chapter 1 (relating to 
        foreign personal holding companies).
            (2) Section 1246 (relating to gain on foreign investment 
        company stock).
            (3) Section 1247 (relating to election by foreign 
        investment companies to distribute income currently).
    (b) Exemption of Foreign Corporations From Personal Holding Company 
Rules.--
            (1) In general.--Subsection (c) of section 542 (relating to 
        exceptions) is amended--
                    (A) by striking paragraph (5) and inserting the 
                following:
            ``(5) a foreign corporation,'',
                    (B) by striking paragraphs (7) and (10) and by 
                redesignating paragraphs (8) and (9) as paragraphs (7) 
                and (8), respectively,
                    (C) by inserting ``and'' at the end of paragraph 
                (7) (as so redesignated), and
                    (D) by striking ``; and'' at the end of paragraph 
                (8) (as so redesignated) and inserting a period.
            (2) Treatment of income from personal service contracts.--
        Paragraph (1) of section 954(c) is amended by adding at the end 
        the following new subparagraph:
                    ``(H) Personal service contracts.--
                            ``(i) Amounts received under a contract 
                        under which the corporation is to furnish 
                        personal services; if 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 if the individual 
                        who is to perform the services is designated 
                        (by name or by description) in the contract; 
                        and
                            ``(ii) amounts received from the sale or 
                        other disposition of such a contract.
                This subparagraph shall apply with respect to amounts 
                received for services under a particular contract only 
                if at some time during the taxable year 25 percent or 
                more in value of the outstanding stock of the 
                corporation is owned, directly or indirectly, by or for 
                the individual who has performed, is to perform, or may 
                be designated (by name or by description) as the one to 
                perform, such services.''
    (c) Conforming Amendments.--
            (1) 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 a foreign personal holding 
                company''.
            (2) Paragraph (2) of section 245(a) is amended by striking 
        ``foreign personal holding company or''
            (3) Section 312 is amended by striking subsection (j).
            (4) 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)''.
            (5) Subsection (e) of section 443 is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) and (5) as 
        paragraphs (3) and (4), respectively.
            (6) Subparagraph (B) of section 465(c)(7) is amended to by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (7) 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).
            (8) Paragraph (1) of section 562(b) is amended by striking 
        ``or a foreign personal holding company described in section 
        552''.
            (9) 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)''.
            (10) 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)''.
            (11) 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.
            (12)(A) Subparagraph (A) of section 898(b)(1) is amended to 
        read as follows:
                    ``(A) which is treated as a controlled foreign 
                corporation for any purpose under subpart F of part III 
                of this subchapter, and''.
            (B) Subparagraph (B) of section 898(b)(2) is amended by 
        striking ``and sections 551(f) and 554, whichever are 
        applicable,''.
            (C) Paragraph (3) of section 898(b) is amended to read as 
        follows:
            ``(3) United states shareholder.--The term `United States 
        shareholder' has the meaning given to such term by section 
        951(b), except that, in the case of a foreign corporation 
        having related person insurance income (as defined in section 
        953(c)(2)), the Secretary may treat any person as a United 
        States shareholder for purposes of this section if such person 
        is treated as a United States shareholder under section 
        953(c)(1).''
            (D) Subsection (c) of section 898 is amended to read as 
        follows:
    ``(c) Determination of Required Year.--
            ``(1) In general.--The required year is--
                    ``(A) the majority U.S. shareholder year, or
                    ``(B) if there is no majority U.S. shareholder 
                year, the taxable year prescribed under regulations.
            ``(2) 1-month deferral allowed.--A specified foreign 
        corporation may elect, in lieu of the taxable year under 
        paragraph (1)(A), a taxable year beginning 1 month earlier than 
        the majority U.S. shareholder year.
            ``(3) Majority u.s. shareholder year.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `majority U.S. shareholder year' means the 
                taxable year (if any) which, on each testing day, 
                constituted the taxable year of--
                            ``(i) each United States shareholder 
                        described in subsection (b)(2)(A), and
                            ``(ii) each United States shareholder not 
                        described in clause (i) whose stock was treated 
                        as owned under subsection (b)(2)(B) by any 
                        shareholder described in such clause.
                    ``(B) Testing day.--The testing days shall be--
                            ``(i) the first day of the corporation's 
                        taxable year (determined without regard to this 
                        section), or
                            ``(ii) the days during such representative 
                        period as the Secretary may prescribe.''
            (13) Clause (ii) of section 904(d)(2)(A) is amended to read 
        as follows:
                            ``(ii) Certain amounts included.--Except as 
                        provided in clause (iii), the term `passive 
                        income' includes, except as provided in 
                        subparagraph (E)(iii) or paragraph (3)(I), any 
                        amount includible in gross income under section 
                        1293 (relating to certain passive foreign 
                        investment companies).''
            (14)(A) Subparagraph (A) of section 904(g)(1) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (B) The paragraph heading of paragraph (2) of section 
        904(g) is amended by striking ``foreign personal holding or''.
            (15) Section 951 is amended by striking subsections (c) and 
        (d) and by redesignating subsections (e) and (f) as subsections 
        (c) and (d), respectively.
            (16) Paragraph (3) of section 989(b) is amended by striking 
        ``, 551(a),''.
            (17) Paragraph (5) of section 1014(b) is amended by 
        inserting ``and before January 1, 2003,'' after ``August 26, 
        1937,''.
            (18) Subsection (a) of section 1016 is amended by striking 
        paragraph (13) and by redesignating the following paragraphs 
        accordingly.
            (19)(A) Paragraph (3) of section 1212(a) is amended to read 
        as follows:
            ``(3) Special rules on carrybacks.--A net capital loss of a 
        corporation shall not be carried back under paragraph (1)(A) to 
        a taxable year--
                    ``(A) for which it is a regulated investment 
                company (as defined in section 851), or
                    ``(B) for which it is a real estate investment 
                trust (as defined in section 856).''
            (B) The amendment made by subparagraph (A) shall apply to 
        taxable years beginning after December 31, 2004.
            (20) Section 1223 is amended by striking paragraph (10) and 
        by redesignating the following paragraphs accordingly.
            (21) Subsection (d) of section 1248 is amended by striking 
        paragraph (5) and by redesignating paragraphs (6) and (7) as 
        paragraphs (5) and (6), respectively.
            (22) Paragraph (2) of section 1260(c) is amended by 
        striking subparagraphs (H) and (I) and by redesignating 
        subparagraph (J) as subparagraph (H).
            (23) Subparagraph (F) of section 1291(b)(3) is amended by 
        striking ``551(d), 959(a),'' and inserting ``959(a)''.
            (24) 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.''
            (25) Section 6035 is hereby repealed.
            (26) 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.
            (27) 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.''
            (28) 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).
            (29) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
        are each amended by striking ``556(b)(2),'' each place it 
        appears.
            (30) The table of parts for subchapter G of chapter 1 is 
        amended by striking the item relating to part III.
            (31) 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.
            (32) 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.

SEC. 305. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION INCOME.

    Section 954(g)(1) (defining foreign base company oil related 
income) is amended by striking ``or'' at the end of subparagraph (A), 
by striking the period at the end of subparagraph (B) and inserting ``, 
or'', and by inserting after subparagraph (B) the following new 
subparagraph:
                    ``(C) the pipeline transportation of oil or gas 
                within such foreign country.''

SEC. 306. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH 
              RESPECT TO TRANSACTIONS IN COMMODITIES.

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

SEC. 307. EFFECTIVE DATE.

    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, 2002, and taxable years of United States 
persons owning stock in such corporations with or within which such 
corporations' taxable years end.

         Subtitle B--Provisions Relating to Foreign Tax Credit

SEC. 311. INTEREST EXPENSE ALLOCATION RULES.

    (a) Allocation on Worldwide Basis.--
            (1) In general.--Paragraphs (1) and (2) of section 864(e) 
        (relating to rules for allocating interest, etc.) are amended 
        to read as follows:
            ``(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 an affiliated group as defined in section 
                1504(a), determined without regard to paragraphs (2), 
                (3), and (4) of section 1504(b).
            ``(2) Allocation and apportionment of other expenses.--
        Expenses other than interest which are not directly allocable 
        or apportioned to any specific income producing activity shall 
        be allocated and apportioned as if all members of the 
        affiliated group were a single corporation. For purposes of the 
        preceding sentence, the term `affiliated group' has the meaning 
        given such term by section 1504 (determined without regard to 
        paragraph (4) of section 1504(b)).''
            (2) Conforming amendments.--
                    (A) Clauses (i) and (ii) of section 864(e)(4)(B) 
                are each amended by striking ``affiliated group'' and 
                inserting ``worldwide affiliated group (as defined in 
                paragraph (1)(C))''.
                    (B) Subsection (e) of section 864 is amended by 
                striking paragraph (6).
    (b) Treatment of Financial Institutions.--
            (1) Treatment as separate worldwide group.--
                    (A) In general.--Paragraph (5) of section 864(e) is 
                amended by striking so much of such paragraph as 
                precedes subparagraph (C), by redesignating 
                subparagraphs (C) and (D) as subparagraphs (B) and (C), 
                respectively, and by inserting before subparagraph (B) 
                (as so redesignated) the following:
            ``(5) 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) Conforming amendment.--Subparagraph (C) of 
                section 864(e)(5), as redesignated by subparagraph (A), 
                is amended by striking ``subparagraph (C)'' and 
                inserting ``subparagraph (B)''.
            (2) Election to expand financial institution group of 
        worldwide group.--Subsection (e) of section 864 is amended by 
        inserting after paragraph (5) the following new paragraph:
            ``(6) 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 (5)(B),
                shall be treated as described in paragraph (5)(B) for 
                purposes of applying paragraph (5)(A). This subsection 
                (other than this paragraph) shall apply to any such 
                group in the same manner as this subsection (other than 
                this paragraph) applies to the pre-election worldwide 
                affiliated group of which such group is a part.
                    ``(B) Financial corporation.--For purposes of this 
                paragraph, the term `financial corporation' means any 
                corporation if at least 80 percent of its gross income 
                is income described in section 904(d)(2)(C)(ii) and the 
                regulations thereunder which is derived from 
                transactions with persons who are not related (within 
                the meaning of section 267(b) or 707(b)(1)) to the 
                corporation. For purposes of the preceding sentence, 
                there shall be disregarded any item of income or gain 
                from a transaction or series of transactions a 
                principal purpose of which is the qualification of any 
                corporation as a financial corporation.
                    ``(C) Antiabuse rules.--In the case of a 
                corporation which is a member of an electing financial 
                institution group, to the extent that such 
                corporation--
                            ``(i) distributes dividends or makes other 
                        distributions with respect to its stock after 
                        the date of the enactment of this paragraph to 
                        any member of the pre-election worldwide 
                        affiliated group (other than to a member of the 
                        electing financial institution group) in excess 
                        of the greater of--
                                    ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5-
                                taxable-year period ending with the 
                                taxable year preceding the taxable 
                                year, or
                                    ``(II) 25 percent of its average 
                                annual earnings and profits for such 5-
                                taxable-year period, or
                            ``(ii) deals with any person in any manner 
                        not clearly reflecting the income of the 
                        corporation (as determined under principles 
                        similar to the principles of section 482),
                an amount of indebtedness of the electing financial 
                institution group equal to the excess distribution or 
                the understatement or overstatement of income, as the 
                case may be, shall be recharacterized (for the taxable 
                year and subsequent taxable years) for purposes of this 
                paragraph as indebtedness of the worldwide affiliated 
                group (excluding the electing financial institution 
                group). If a corporation has not been in existence for 
                5 taxable years, this subparagraph shall be applied 
                with respect to the period it was in existence.
                    ``(D) Election.--An election under this paragraph 
                with respect to any financial institution group may be 
                made only by the common parent of the pre-election 
                worldwide affiliated group and may be made only for the 
                first taxable year beginning after December 31, 2002, 
                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 (5)(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.''.
    (c) 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''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 312. 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, 2002, 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, 2002.

SEC. 313. REDUCTION TO 3 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 income described in each of the 
        following items of income:
                    ``(A) passive income and other passive category 
                income,
                    ``(B) financial services income, and
                    ``(C) income other than income described in 
                subparagraph (A) or (B).''
    (b) Other Passive Category Income.--Subparagraph (A) of section 
904(d)(2) is amended by adding at the end the following new clause:
                            ``(v) Other passive category income.--The 
                        term `other passive category income' means--
                                    ``(I) dividends from a DISC or 
                                former DISC (as defined in section 
                                992(a)) to the extent such dividends 
                                are treated as income from sources 
                                without the United States,
                                    ``(II) taxable income attributable 
                                to foreign trade income (within the 
                                meaning of section 923(b)), and
                                    ``(III) distributions from a FSC 
                                (or a former FSC) out of earnings and 
                                profits attributable to foreign trade 
                                income (within the meaning of section 
                                923(b)) or interest or carrying charges 
                                (as defined in section 927(d)(1)) 
                                derived from a transaction which 
                                results in foreign trade income (as 
                                defined in section 923(b)).''
    (c) Conforming Amendments.--
            (1) Paragraph (2) of section 904(d) is amended by striking 
        subparagraphs (B) and (D).
            (2)(A) Subclause (III) of section 904(d)(2)(C)(i) is 
        amended to read as follows:
                                    ``(III) high-taxed export financing 
                                interest.''
            (B) Subparagraph (C) of section 904(d)(2) is amended by 
        adding at the end the following new clause:
                            ``(iv) High-taxed export financing 
                        interest.--The term `high-taxed export 
                        financing interest' means any interest if--
                                    ``(I) such interest is subject to a 
                                withholding tax of a foreign country or 
                                possession of the United States (or 
                                other tax determined on a gross basis), 
                                and
                                    ``(II) the rate of such tax 
                                applicable to such interest is at least 
                                5 percent.
                        The Secretary may by regulations provide that 
                        export financing interest (not otherwise high-
                        taxed export financing interest) shall be 
                        treated as high-taxed export financing interest 
                        where necessary to prevent avoidance of the 
                        purposes of this subparagraph, and a tax shall 
                        not be treated as a withholding tax or other 
                        tax imposed on a gross basis if such tax is in 
                        the nature of a prepayment of a tax imposed on 
                        a net basis.''
            (3) Clause (iii) of section 904(d)(2)(C) is amended to read 
        as follows:
                            ``(iii) Exceptions.--The term `financial 
                        services income' does not include--
                                    ``(I) in the case of a corporation, 
                                dividends from noncontrolled section 
                                902 corporations out of earnings and 
                                profits accumulated in taxable years 
                                beginning before January 1, 2003, and
                                    ``(II) any export financing 
                                interest which is not high-taxed export 
                                financing interest.''
            (4) Subparagraph (E) of section 904(d)(2) is amended by 
        striking clause (ii) and by redesignating clauses (iii) and 
        (iv) as clauses (ii) and (iii), respectively.
            (5) Clause (i) of section 904(d)(3)(F) is amended to read 
        as follows:
                            ``(i) In general.--Except as provided in 
                        clause (ii), the separate categories are--
                                    ``(I) passive income and other 
                                passive category income, and
                                    ``(II) financial services income.''
            (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:
                    ``(I) Transitional rule for 2002 changes.--For 
                purposes of paragraph (1), taxes carried from any 
                taxable year beginning before January 1, 2003, 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.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 314. 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, 2002.

SEC. 315. REPEAL OF LIMITATION OF FOREIGN TAX CREDIT UNDER ALTERNATIVE 
              MINIMUM TAX.

    (a) In General.--Section 59(a) (relating to alternative minimum tax 
foreign tax credit) is amended by striking paragraph (2) and by 
redesignating paragraphs (3) and (4) as paragraphs (2) and (3), 
respectively.
    (b) Conforming Amendment.--Section 53(d)(1)(B)(i)(II) is amended by 
striking ``and if section 59(a)(2) did not apply''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 316. 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 in a separate category in proportion 
                to the ratio of--
                            ``(i) the portion of earnings and profits 
                        attributable to income in such category, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(B) Special rules.--For purposes of this 
                paragraph--
                            ``(i) In general.--Rules similar to the 
                        rules of paragraph (3)(F) shall apply.
                            ``(ii) 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.
                            ``(iii) Dividends not allocable to separate 
                        category.--The portion of any dividend from a 
                        noncontrolled section 902 corporation which is 
                        not treated as income in a separate category 
                        under subparagraph (A) shall be treated as a 
                        dividend to which subparagraph (A) does not 
                        apply.
                            ``(iv) 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.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (E) of section 904(d)(1), as in effect 
        both before and after the amendments made by section 1105 of 
        the Taxpayer Relief Act of 1997, is hereby repealed.
            (2) Section 904(d)(2)(C)(iii), as so in effect, is amended 
        by striking subclause (II) and by redesignating subclause (III) 
        as subclause (II).
            (3) The last sentence of section 904(d)(2)(D), as so in 
        effect, is amended to read as follows: ``Such term does not 
        include any financial services income.''
            (4) Section 904(d)(2)(E) is amended by striking clauses 
        (ii) and (iv) and by redesignating clause (iii) as clause (ii).
            (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
        (E)'' and inserting ``or (D)''.
            (6) Section 864(d)(5)(A)(i) is amended by striking 
        ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 317. 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) Effective Date.--The amendment made by this section shall apply 
to taxes of foreign corporations for taxable years of such corporations 
beginning after December 31, 2002.

                      Subtitle C--Other Provisions

SEC. 321. 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.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2002. Section 481 
of the Internal Revenue Code of 1986 shall not apply to any change in a 
method of accounting by reason of such amendment.

SEC. 322. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS ACQUIRED 
              BY DEALERS IN ORDINARY COURSE OF TRADE OR BUSINESS.

    (a) In General.--Section 956(c)(2) (relating to exceptions from 
property treated as United States property) is amended by striking 
``and'' at the end of subparagraph (J), by striking the period at the 
end of subparagraph (K) and inserting ``; and'', and by adding at the 
end the following new subparagraph:
                    ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if (i) the dealer 
                accounts for the securities as securities held 
                primarily for sale to customers in the ordinary course 
                of business, and (ii) the dealer disposes of the 
                securities (or such securities mature while held by the 
                dealer) within a period consistent with the holding of 
                securities for sale to customers in the ordinary course 
                of business.''
    (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2002, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 323. 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).--In the case of dividends received from a 
                regulated investment company before January 1, 2003, 
                subparagraph (A) shall not apply in the case of any 
                nonresident alien individual subject to tax under 
                subsection (a)(2).
                    ``(C) Short-term capital gain dividend.--For 
                purposes of this paragraph, a short-term capital gain 
                dividend is any dividend (or part thereof) which is 
                designated by the regulated investment company as a 
                short-term capital gain dividend in a written notice 
                mailed to its shareholders not later than 60 days after 
                the close of its taxable year. If the aggregate amount 
                so designated with respect to a taxable year of the 
                company (including amounts so designated with respect 
                to dividends paid after the close of the taxable year 
                described in section 855) is greater than the qualified 
                short-term gain of the company for such taxable year, 
                the portion of each distribution which shall be a 
                short-term capital gain dividend shall be only that 
                portion of the amounts so designated which such 
                qualified short-term gain bears to the aggregate amount 
                so designated.
                    ``(D) Qualified short-term gain.--For purposes of 
                subparagraph (C), the term `qualified short-term gain' 
                means the excess of the net short-term capital gain of 
                the regulated investment company for the taxable year 
                over the net long-term capital loss (if any) of such 
                company for such taxable year. For purposes of this 
                subparagraph--
                            ``(i) the net short-term capital gain of 
                        the regulated investment company shall be 
                        computed by treating any short-term capital 
                        gain dividend includible in gross income with 
                        respect to stock of another regulated 
                        investment company as a short-term capital 
                        gain, and
                            ``(ii) the excess of the net short-term 
                        capital gain for a taxable year over the net 
                        long-term capital loss for a taxable year (to 
                        which an election under section 4982(e)(4) does 
                        not apply) shall be determined without regard 
                        to any net capital loss or net short-term 
                        capital loss attributable to transactions after 
                        October 31 of such year, and any such net 
                        capital loss or net short-term capital loss 
                        shall be treated as arising on the 1st day of 
                        the next taxable year.
                To the extent provided in regulations, clause (ii) 
                shall apply also for purposes of computing the taxable 
                income of the regulated investment company.''
            (2) Foreign corporations.--Section 881 (relating to tax on 
        income of foreign corporations not connected with United States 
        business) is amended by redesignating subsection (e) as 
        subsection (f) and by inserting after subsection (d) the 
        following new subsection:
    ``(e) Tax Not To Apply to Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1) of subsection (a) on any interest-related 
                dividend (as defined in section 871(k)(1)) received 
                from a regulated investment company.
                    ``(B) Exception.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any dividend referred to in 
                        section 871(k)(1)(B), and
                            ``(ii) to any interest-related dividend 
                        received by a controlled foreign corporation 
                        (within the meaning of section 957(a)) to the 
                        extent such dividend is attributable to 
                        interest received by the regulated investment 
                        company from a person who is a related person 
                        (within the meaning of section 864(d)(4)) with 
                        respect to such controlled foreign corporation.
                    ``(C) Treatment of dividends received by controlled 
                foreign corporations.--The rules of subsection 
                (c)(5)(A) shall apply to any interest-related dividend 
                received by a controlled foreign corporation (within 
                the meaning of section 957(a)) to the extent such 
                dividend is attributable to interest received by the 
                regulated investment company which is described in 
                clause (ii) of section 871(k)(1)(E) (and not described 
                in clause (i) or (iii) of such section).
            ``(2) Short-term capital gain dividends.--No tax shall be 
        imposed under paragraph (1) of subsection (a) on any short-term 
        capital gain dividend (as defined in section 871(k)(2)) 
        received from a regulated investment company.''
            (3) Withholding taxes.--
                    (A) Section 1441(c) (relating to exceptions) is 
                amended by adding at the end the following new 
                paragraph:
            ``(12) Certain dividends received from regulated investment 
        companies.--
                    ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
                871(a)(1)(A) by reason of section 871(k).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), clause (i) of section 871(k)(1)(B) shall not apply 
                to any dividend unless the regulated investment company 
                knows that such dividend is a dividend referred to in 
                such clause. A similar rule shall apply with respect to 
                the exception contained in section 871(k)(2)(B).''
                    (B) Section 1442(a) (relating to withholding of tax 
                on foreign corporations) is amended--
                            (i) by striking ``and the reference in 
                        section 1441(c)(10)'' and inserting ``the 
                        reference in section 1441(c)(10)'', and
                            (ii) by inserting before the period at the 
                        end the following: ``, and the references in 
                        section 1441(c)(12) to sections 871(a) and 
                        871(k) shall be treated as referring to 
                        sections 881(a) and 881(e) (except that for 
                        purposes of applying subparagraph (A) of 
                        section 1441(c)(12), as so modified, clause 
                        (ii) of section 881(e)(1)(B) shall not apply to 
                        any dividend unless the regulated investment 
                        company knows that such dividend is a dividend 
                        referred to in such clause)''.
    (b) Estate Tax Treatment of Interest in Certain Regulated 
Investment Companies.--Section 2105 (relating to property without the 
United States for estate tax purposes) is amended by adding at the end 
the following new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, stock 
        in a regulated investment company (as defined in section 851) 
        owned by a nonresident not a citizen of the United States shall 
        not be deemed property within the United States in the 
        proportion that, at the end of the quarter of such investment 
        company's taxable year immediately preceding a decedent's date 
        of death (or at such other time as the Secretary may designate 
        in regulations), the assets of the investment company that were 
        qualifying assets with respect to the decedent bore to the 
        total assets of the investment company.
            ``(2) Qualifying assets.--For purposes of this subsection, 
        qualifying assets with respect to a decedent are assets that, 
        if owned directly by the decedent, would have been--
                    ``(A) amounts, deposits, or debt obligations 
                described in subsection (b) of this section,
                    ``(B) debt obligations described in the last 
                sentence of section 2104(c), or
                    ``(C) other property not within the United 
                States.''
    (c) Treatment of Regulated Investment Companies Under Section 
897.--
            (1) Paragraph (1) of section 897(h) is amended by striking 
        ``REIT'' each place it appears and inserting ``qualified 
        investment entity''.
            (2) Paragraphs (2) and (3) of section 897(h) are amended to 
        read as follows:
            ``(2) Sale of stock in domestically controlled entity not 
        taxed.--The term `United States real property interest' does 
        not include any interest in a domestically controlled qualified 
        investment entity.
            ``(3) Distributions by domestically controlled qualified 
        investment entities.--In the case of a domestically controlled 
        qualified investment entity, rules similar to the rules of 
        subsection (d) shall apply to the foreign ownership percentage 
        of any gain.''
            (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
        amended to read as follows:
                    ``(A) Qualified investment entity.--The term 
                `qualified investment entity' means any real estate 
                investment trust and any regulated investment company.
                    ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment entity' 
                means any qualified investment entity in which at all 
                times during the testing period less than 50 percent in 
                value of the stock was held directly or indirectly by 
                foreign persons.''
            (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
        amended by striking ``REIT'' and inserting ``qualified 
        investment entity''.
            (5) The subsection heading for subsection (h) of section 
        897 is amended by striking ``REITS'' and inserting ``Certain 
        Investment Entities''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        dividends with respect to taxable years of regulated investment 
        companies beginning after the date of the enactment of this 
        Act.
            (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after the date of 
        the enactment of this Act.
            (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect on the date of the enactment of this Act.

SEC. 324. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX 
              PAID OTHER THAN IN FUNCTIONAL CURRENCY.

    (a) In General.--Paragraph (1) of section 986(a) (relating to 
determination of foreign taxes and foreign corporation's earnings and 
profits) is amended by redesignating subparagraph (D) as subparagraph 
(E) and by inserting after subparagraph (C) the following new 
subparagraph:
                    ``(D) Elective exception for taxes paid other than 
                in functional currency.--
                            ``(i) In general.--At the election of the 
                        taxpayer, subparagraph (A) shall not apply to 
                        any foreign income taxes the liability for 
                        which is denominated in any currency other than 
                        in the taxpayer's functional currency.
                            ``(ii) Application to qualified business 
                        units.--An election under this subparagraph may 
                        apply to foreign income taxes attributable to a 
                        qualified business unit in accordance with 
                        regulations prescribed by the Secretary.
                            ``(iii) Election.--Any such election shall 
                        apply to the taxable year for which made and 
                        all subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2002.

SEC. 325. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN 
              CORPORATIONS.

    (a) In General.--Paragraph (2) of section 871(i) (relating to tax 
not to apply to certain interest and dividends) is amended by adding at 
the end the following new subparagraph:
                    ``(D) Dividends paid by a foreign corporation.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2002.

SEC. 326. INCREASE IN EXPENSING UNDER SECTION 179.

    (a) Increase in Dollar Limitations.--
            (1) In general.--Paragraph (1) of section 179(b) (relating 
        to dollar limitation) is amended to read as follows:
            ``(1) Dollar limitation.--The aggregate cost which may be 
        taken into account under subsection (a) for any taxable year 
        shall not exceed $25,000 ($40,000 in the case of taxable years 
        beginning after December 31, 2012).''
            (2) Increase in phaseout threshold.--Paragraph (2) of 
        section 179(b) is amended by inserting before the period 
        ``($325,000 in the case of taxable years beginning after 
        December 31, 2012).''.
    (b) Inflation Adjustments.--
            (1) In general.--Subsection (b) of section 179 is amended 
        by redesignating paragraphs (3) and (4) as paragraphs (4) and 
        (5), respectively, and by inserting after paragraph (2) the 
        following new paragraph:
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2004, the dollar 
        amounts contained in paragraphs (1) and (2) which would (but 
        for this paragraph) apply to such taxable year shall be 
        increased by an amount equal to the product of--
                    ``(A) such dollar amount, and
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting in 
                subparagraph (B) thereof--
                            ``(i) `calendar year 2003' for `calendar 
                        year 1992' with respect to the $25,000 and 
                        $200,000 amounts, and
                            ``(ii) `calendar year 2011' for `calendar 
                        year 1992' with respect to the $40,000 and 
                        $325,000 amounts.
        If any amount after adjustment under the preceding sentence is 
        not a multiple of $1,000, such amount shall be rounded to the 
        next lowest multiple of $1,000.''
            (2) Conforming amendment.--Subparagraph (B) of section 
        179(b)(5), as redesignated by paragraph (1), is amended by 
        striking ``paragraph (3)'' and inserting ``paragraph (4)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 327. 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.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 328. REPEAL OF FSC TRANSITIONAL RULES.

    (a) In General.--Subsections (c) and (d) of section 5 of the FSC 
Repeal and Extraterritorial Income Exclusion Act of 2000 are hereby 
repealed.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the calendar year which includes the 
date of the enactment of this Act.

                       TITLE IV--OTHER PROVISIONS

SEC. 401. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

    (a) In General.--Chapter 77 (relating to miscellaneous provisions) 
is amended by adding at the end the following new section:

``SEC. 7527. INTERNAL REVENUE SERVICE USER FEES.

    ``(a) General Rule.--The Secretary shall establish a program 
requiring the payment of user fees for--
            ``(1) requests to the Internal Revenue Service for ruling 
        letters, opinion letters, and determination letters, and
            ``(2) other similar requests.
    ``(b) Program Criteria.--
            ``(1) In general.--The fees charged under the program 
        required by subsection (a)--
                    ``(A) shall vary according to categories (or 
                subcategories) established by the Secretary,
                    ``(B) shall be determined after taking into account 
                the average time for (and difficulty of) complying with 
                requests in each category (and subcategory), and
                    ``(C) shall be payable in advance.
            ``(2) Exemptions, etc.--
                    ``(A) In general.--The Secretary shall provide for 
                such exemptions (and reduced fees) under such program 
                as the Secretary determines to be appropriate.
                    ``(B) Exemption for certain requests regarding 
                pension plans.--The Secretary shall not require payment 
                of user fees under such program for requests for 
                determination letters with respect to the qualified 
                status of a pension benefit plan maintained solely by 1 
                or more eligible employers or any trust which is part 
                of the plan. The preceding sentence shall not apply to 
                any request--
                            ``(i) made after the later of--
                                    ``(I) the fifth plan year the 
                                pension benefit plan is in existence, 
                                or
                                    ``(II) the end of any remedial 
                                amendment period with respect to the 
                                plan beginning within the first 5 plan 
                                years, or
                            ``(ii) made by the sponsor of any prototype 
                        or similar plan which the sponsor intends to 
                        market to participating employers.
                    ``(C) Definitions and special rules.--For purposes 
                of subparagraph (B)--
                            ``(i) Pension benefit plan.--The term 
                        `pension benefit plan' means a pension, profit-
                        sharing, stock bonus, annuity, or employee 
                        stock ownership plan.
                            ``(ii) Eligible employer.--The term 
                        `eligible employer' means an eligible employer 
                        (as defined in section 408(p)(2)(C)(i)(I)) 
                        which has at least 1 employee who is not a 
                        highly compensated employee (as defined in 
                        section 414(q)) and is participating in the 
                        plan. The determination of whether an employer 
                        is an eligible employer under subparagraph (B) 
                        shall be made as of the date of the request 
                        described in such subparagraph.
                            ``(iii) Determination of average fees 
                        charged.--For purposes of any determination of 
                        average fees charged, any request to which 
                        subparagraph (B) applies shall not be taken 
                        into account.
            ``(3) Average fee requirement.--The average fee charged 
        under the program required by subsection (a) shall not be less 
        than the amount determined under the following table:

                                                                Average
``Category                                                          Fee
    Employee plan ruling and opinion..............                $250 
    Exempt organization ruling....................                $350 
    Employee plan determination...................                $300 
    Exempt organization determination.............                $275 
    Chief counsel ruling..........................                $200.
    ``(c) Termination.--No fee shall be imposed under this section with 
respect to requests made after December 31, 2012.''
    (b) Conforming Amendments.--
            (1) The table of sections for chapter 77 is amended by 
        adding at the end the following new item:

                              ``Sec. 7527. Internal Revenue Service 
                                        user fees.''.
            (2) Section 10511 of the Revenue Act of 1987 is repealed.
            (3) Section 620 of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is repealed.
    (c) Limitations.--Notwithstanding any other provision of law, any 
fees collected pursuant to section 7527 of the Internal Revenue Code of 
1986, as added by subsection (a), shall not be expended by the Internal 
Revenue Service unless provided by an appropriations Act.
    (d) Effective Date.--The amendments made by this section shall 
apply to requests made after the date of the enactment of this Act.

SEC. 402. EXTENSION OF CUSTOMS USER FEES.

    (a) In General.--Section 13031(j)(3) of the Consolidated Omnibus 
Budget Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended by 
striking ``September 30, 2003'' and inserting ``December 31, 2012''.
    (b) Customs Automation Fund.--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 striking subparagraph (B) and 
        inserting the following:
            ``(B) amounts deposited into the Customs Commercial 
        Automation Account under paragraph (5).'';
            (2) in paragraph (4), by striking ``(other than the excess 
        fees determined by the Secretary under paragraph (5))''; and
            (3) by striking paragraph (5) and inserting the following:
    ``(5)(A) There is created within the general fund of the Treasury a 
separate account that shall be known as the `Customs Commercial 
Automation Account'. In each of fiscal years 2003, 2004, and 2005 there 
shall be deposited into the Customs Commercial Automation Account from 
fees collected under subsection (a)(9)(A), $350,000,000.
    ``(B) There is authorized to be appropriated from the Customs 
Commercial Automation Account in fiscal years 2003 through 2005 such 
amounts as are available in that Account for the development, 
establishment, and implementation of the Automated Commercial 
Environment computer system for the processing of merchandise that is 
entered or released. Amounts appropriated pursuant to this subparagraph 
are authorized to remain available until expended.
    ``(C) In adjusting the fee imposed by subsection (a)(9)(A) for 
fiscal year 2006, the Secretary of the Treasury shall reduce the amount 
estimated to be collected in fiscal year 2006 by the amount by which 
total fees deposited to the Customs Commercial Automation Account 
during fiscal years 2003, 2004, and 2005 exceed total appropriations 
from that Account.''.

SEC. 403. INCLUSION IN GROSS INCOME OF FUNDED DEFERRED COMPENSATION OF 
              CORPORATE INSIDERS.

    (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 FUNDED DEFERRED COMPENSATION 
              OF CORPORATE INSIDERS.

    ``(a) In General.--If an employer maintains a funded deferred 
compensation plan--
            ``(1) compensation of any disqualified individual which is 
        deferred under such funded deferred compensation plan shall be 
        included in the gross income of the disqualified individual or 
        beneficiary for the 1st taxable year in which there is no 
        substantial risk of forfeiture of the rights to such 
        compensation, and
            ``(2) the tax treatment of any amount made available under 
        the plan to a disqualified individual or beneficiary shall be 
        determined under section 72 (relating to annuities, etc.).
    ``(b) Funded Deferred Compensation Plan.--For purposes of this 
section--
            ``(1) In general.--The term `funded deferred compensation 
        plan' means any plan providing for the deferral of compensation 
        unless--
                    ``(A) the employee's rights to the compensation 
                deferred under the plan are no greater than the rights 
                of a general creditor of the employer, and
                    ``(B) all amounts set aside (directly or 
                indirectly) for purposes of paying the deferred 
                compensation, and all income attributable to such 
                amounts, remain (until made available to the 
                participant or other beneficiary) solely the property 
                of the employer (without being restricted to the 
                provision of benefits under the plan), and
                    ``(C) the amounts referred to in subparagraph (B) 
                are available to satisfy the claims of the employer's 
                general creditors at all times (not merely after 
                bankruptcy or insolvency).
        Such term shall not include a qualified employer plan.
            ``(2) Special rules.--
                    ``(A) Employee's rights.--A plan shall be treated 
                as failing to meet the requirements of paragraph (1)(A) 
                unless--
                            ``(i) the compensation deferred under the 
                        plan is payable only upon separation from 
                        service, death, or at a specified time (or 
                        pursuant to a fixed schedule), and
                            ``(ii) the plan does not permit the 
                        acceleration of the time such deferred 
                        compensation is payable by reason of any event.
                If the employer and employee agree to a modification of 
                the plan that accelerates the time for payment of any 
                deferred compensation, then all compensation previously 
                deferred under the plan shall be includible in gross 
                income for the taxable year during which such 
                modification takes effect and the taxpayer shall pay 
                interest at the underpayment rate on the underpayments 
                that would have occurred had the deferred compensation 
                been includible in gross income on the earliest date 
                that there is no substantial risk of forfeiture of the 
                rights to such compensation.
                    ``(B) Creditor's rights.--A plan shall be treated 
                as failing to meet the requirements of paragraph (1)(B) 
                with respect to amounts set aside in a trust unless--
                            ``(i) the employee has no beneficial 
                        interest in the trust,
                            ``(ii) assets in the trust are available to 
                        satisfy claims of general creditors at all 
                        times (not merely after bankruptcy or 
                        insolvency), and
                            ``(iii) there is no factor that would make 
                        it more difficult for general creditors to 
                        reach the assets in the trust than it would be 
                        if the trust assets were held directly by the 
                        employer in the United States.
                Except as provided in regulations prescribed by the 
                Secretary, such a factor shall include the location of 
                the trust outside the United States.
    ``(c) Disqualified Individual.--For purposes of this section, the 
term `disqualified individual' means, with respect to a corporation, 
any individual--
            ``(1) who is subject to the requirements of section 16(a) 
        of the Securities Exchange Act of 1934 with respect to such 
        corporation, or
            ``(2) who would be subject to such requirements if such 
        corporation were an issuer of equity securities referred to in 
        such section.
    ``(d) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) 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 other plan of an organization exempt from 
                tax under subtitle A.
            ``(2) Plan includes arrangements, etc.--The term `plan' 
        includes any agreement or arrangement.
            ``(3) 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.
            ``(4) Treatment of earnings.--Except for purposes of 
        subsection (a)(1) and the last sentence of (b)(2)(A), 
        references to deferred compensation shall be treated as 
        including references to income attributable to such 
        compensation or such income.''
    (b) Clerical Amendment.--The table of sections for such subpart A 
is amended by adding at the end the following new item:

                              ``Sec. 409A. Inclusion in gross income of 
                                        funded deferred compensation of 
                                        corporate insiders.''
    (b) Effective Date.--The amendments made by this section shall 
apply to amounts deferred after July 10, 2002.

SEC. 404. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS.

    (a) Bows.--Section 4161(b)(1) (relating to bows) is amended to read 
as follows:
            ``(1) Bows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                bow which has a draw weight of 30 pounds or more, a tax 
                equal to 11 percent of the price for which so sold.
                    ``(B) Archery equipment.--There is hereby imposed 
                on the sale by the manufacturer, producer, or 
                importer--
                            ``(i) of any part or accessory suitable for 
                        inclusion in or attachment to a bow described 
                        in subparagraph (A), and
                            ``(ii) of any quiver or broadhead suitable 
                        for use with an arrow described in paragraph 
                        (3),
                a tax equal to 11 percent of the price for which so 
                sold.''.
    (b) Arrows.--Section 4161(b) (relating to bows and arrows, etc.) is 
amended by redesignating paragraph (3) as paragraph (4) and inserting 
after paragraph (2) the following:
            ``(3) Arrows.--
                    ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                arrow, a tax equal to 12 percent of the price for which 
                so sold.
                    ``(B) Exception.--The tax imposed by subparagraph 
                (A) on an arrow shall not apply if the arrow contains 
                an arrow shaft subject to the tax imposed by paragraph 
                (2).
                    ``(C) Arrow.--For purposes of this paragraph, the 
                term `arrow' means any shaft described in paragraph (2) 
                to which additional components are attached.''.
    (c) Conforming Amendment.--The heading of section 4161(b)(2) 
(relating to arrows) is amended by striking ``Arrows.--'' and inserting 
``Arrow Components.--''.
    (d) Effective Date.--The amendments made by this section shall 
apply to articles sold by the manufacturer, producer, or importer after 
December 31, 2001.

SEC. 405. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF 
              INCOME TAX BY INDIVIDUALS.

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

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

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

                              ``Sec. 139A. Exclusion from gross income 
                                        for interest on overpayments of 
                                        income tax by individuals.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to interest received in calendar years beginning after December 
31, 2006.

SEC. 406. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS.

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

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

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

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

SEC. 407. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.

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

SEC. 408. 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, 2012''.

SEC. 409. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX FOR 
              CERTAIN DEEMED ASSET SALES.

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