[Congressional Bills 107th Congress]
[From the U.S. Government Publishing Office]
[S. 2119 Introduced in Senate (IS)]







107th CONGRESS
  2d Session
                                S. 2119

   To amend the Internal Revenue Code of 1986 to provide for the tax 
treatment of inverted corporate entities and of transactions with such 
                   entities, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             April 11, 2002

  Mr. Grassley (for himself and Mr. Baucus) introduced the following 
  bill; which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
   To amend the Internal Revenue Code of 1986 to provide for the tax 
treatment of inverted corporate entities and of transactions with such 
                   entities, 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.

    This Act may be cited as the ``Reversing the Expatriation of 
Profits Offshore Act''.

SEC. 2. TAX TREATMENT OF INVERTED CORPORATE ENTITIES.

    (a) In General.--Subchapter C of chapter 80 of the Internal Revenue 
Code of 1986 (relating to provisions affecting more than one subtitle) 
is amended by adding at the end the following new section:

``SEC. 7874. RULES RELATING TO INVERTED CORPORATE ENTITIES.

    ``(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) 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, 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.
    ``(b) Preservation of Domestic Tax Base In Certain Inversion 
Transactions To Which Subsection (a) Does Not Apply.--
            ``(1) In general.--If a foreign incorporated entity would 
        be treated as an inverted domestic corporation with respect to 
        an acquired entity if either--
                    ``(A) subsection (a)(2)(A) were applied by 
                substituting `on or before March 20, 2002' for `after 
                March 20, 2002' and subsection (a)(2)(B) were applied 
                by substituting `more than 50 percent' for `at least 80 
                percent', or
                    ``(B) subsection (a)(2)(B) were applied by 
                substituting `more than 50 percent' for `at least 80 
                percent',
        then the rules of subsection (c) shall apply to any inversion 
        gain of the acquired entity during the applicable period and 
        the rules of subsection (d) shall apply to any related party 
        transaction of the acquired entity during the applicable 
        period. This subsection shall not apply for any taxable year if 
        subsection (a) applies to such foreign incorporated entity for 
        such taxable year.
            ``(2) Acquired entity.--For purposes of this section--
                    ``(A) In general.--The term `acquired entity' means 
                the domestic corporation or partnership substantially 
                all of the properties of which are directly or 
                indirectly acquired in an acquisition described in 
                subsection (a)(2)(A) to which this subsection applies.
                    ``(B) Aggregation rules.--Any domestic person 
                bearing a relationship described in section 267(b) or 
                707(b) to an acquired entity shall be treated as an 
                acquired entity with respect to the acquisition 
                described in subparagraph (A).
            ``(3) Applicable period.--For purposes of this section--
                    ``(A) In general.--The term `applicable period' 
                means the period--
                            ``(i) beginning on the first date 
                        properties are acquired as part of the 
                        acquisition described in subsection (a)(2)(A) 
                        to which this subsection applies, and
                            ``(ii) ending on the date which is 10 years 
                        after the last date properties are acquired as 
                        part of such acquisition.
                    ``(B) Special rule for inversions occurring before 
                march 21, 2002.--In the case of any acquired entity to 
                which paragraph (1)(A) applies, the applicable period 
                shall be the 10-year period beginning on January 1, 
                2002.
    ``(c) Tax on Inversion Gains May Not Be Offset.--If subsection (b) 
applies--
            ``(1) In general.--The taxable income of an acquired 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) Credits not allowed against tax on inversion gain.--
        Credits shall be allowed against the tax imposed by chapter 1 
        on an acquired entity for any taxable year described in 
        paragraph (1) only to the extent such tax exceeds the product 
        of--
                    ``(A) the amount of taxable income described in 
                paragraph (1) for the taxable year, and
                    ``(B) the highest rate of tax specified in section 
                11(b)(1).
            ``(3) Special rules for partnerships.--In the case of an 
        acquired entity which is a partnership--
                    ``(A) the limitations of this subsection 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 required to be recognized for 
                        the taxable year by the partner under section 
                        367(a), 741, or 1001, or under any other 
                        provision of chapter 1, by reason of the 
                        transfer during the applicable period of any 
                        partnership interest of the partner in such 
                        partnership to the foreign incorporated entity, 
                        and
                    ``(C) the highest rate of tax specified in the rate 
                schedule applicable to the partner under chapter 1 
                shall be substituted for the rate of tax under 
                paragraph (2)(B).
            ``(4) Inversion gain.--For purposes of this section, the 
        term `inversion gain' means the gain required to be recognized 
        under section 304, 311(b), 367, 1001, or 1248, or under any 
        other provision of chapter 1, by reason of the transfer during 
        the applicable period of stock or other properties by an 
        acquired entity--
                    ``(A) as part of the acquisition described in 
                subsection (a)(2)(A) to which subsection (b) applies, 
                or
                    ``(B) after such acquisition to a foreign related 
                person.
            ``(5) 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 this subsection.
    ``(d) Special Rules Applicable to Related Party Transactions.--
            ``(1) Annual preapproval required.--
                    ``(A) In general.--An acquired entity to which 
                subsection (b) applies shall enter into an annual 
                preapproval agreement under subparagraph (C) with the 
                Secretary for each taxable year which includes a 
                portion of the applicable period.
                    ``(B) Failures to enter agreements.--If an acquired 
                entity fails to meet the requirements of subparagraph 
                (A) for any taxable year, then for such taxable year--
                            ``(i) there shall not be allowed any 
                        deduction, or addition to basis or cost of 
                        goods sold, for amounts paid or incurred, or 
                        losses incurred, by reason of a transaction 
                        between the acquired entity and a foreign 
                        related person,
                            ``(ii) any transfer or license of 
                        intangible property (as defined in section 
                        936(h)(3)(B)) between the acquired entity and a 
                        foreign related person shall be disregarded, 
                        and
                            ``(iii) any cost-sharing arrangement 
                        between the acquired entity and a foreign 
                        related person shall be disregarded.
                    ``(C) Preapproval agreement.--For purposes of 
                subparagraph (A), the term `preapproval agreement' 
                means a prefiling, advance pricing, or other agreement 
                specified by the Secretary which--
                            ``(i) is entered into at such time as may 
                        be specified by the Secretary, and
                            ``(ii) contains such provisions as the 
                        Secretary determines necessary to ensure that 
                        the requirements of sections 163(j), 267(a)(3), 
                        482, and 845, and any other provision of this 
                        title applicable to transactions between 
                        related persons and specified by the Secretary, 
                        are met.
            ``(2) Modifications of limitation on interest deduction.--
        In the case of an acquired entity to which subsection (b) 
        applies, section 163(j) shall be applied--
                    ``(A) without regard to paragraph (2)(A)(ii) 
                thereof, and
                    ``(B) by substituting `25 percent' for `50 percent' 
                each place it appears in paragraph (2)(B) thereof.
    ``(e) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Rules for application of subsection (a)(2).--In 
        applying subsection (a)(2) for purposes of subsections (a) and 
        (b), the following rules shall apply:
                    ``(A) Certain stock disregarded.--There shall not 
                be taken into account in determining ownership for 
                purposes of subsection (a)(2)(B)--
                            ``(i) stock held by members of the expanded 
                        affiliated group which includes the foreign 
                        incorporated entity, or
                            ``(ii) stock of such entity which is sold 
                        in a public offering related to the acquisition 
                        described in subsection (a)(2)(A).
                    ``(B) 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 subsection (a)(2)(B) are met, 
such actions shall be treated as pursuant to a plan.
                    ``(C) 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.
                    ``(D) Special rule for related partnerships.--For 
                purposes of applying subsection (a)(2) 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.
            ``(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) Foreign incorporated entity.--The term `foreign 
        incorporated entity' means any entity which is, or but for 
        subsection (a)(1) would be, treated as a foreign corporation 
        for purposes of this title.
            ``(4) Foreign related person.--The term `foreign related 
        person' means, with respect to any acquired entity, a foreign 
        person which--
                    ``(A) bears a relationship to such entity described 
                in section 267(b) or 707(b), or
                    ``(B) is under the same common control (within the 
                meaning of section 482) as such entity.
    ``(f) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including regulations 
providing for such adjustments to the application of this section as 
are necessary to prevent the avoidance of the purposes of this section, 
including the avoidance of such purposes through--
            ``(1) the use of related persons, pass-through or other 
        noncorporate entities, or other intermediaries, or
            ``(2) transactions designed to have persons cease to be (or 
        not become) members of expanded affiliated groups or related 
        persons.''.
    (b) Treatment of Agreements.--
            (1) Confidentiality.--
                    (A) Treatment as return information.--Section 
                6103(b)(2) of the Internal Revenue Code of 1986 
                (relating to return information) is amended by striking 
                ``and'' at the end of subparagraph (C), by inserting 
                ``and'' at the end of subparagraph (D), and by 
                inserting after subparagraph (D) the following new 
                subparagraph:
                    ``(E) any preapproval agreement under section 
                7874(d)(1) to which any preceding subparagraph does not 
                apply and any background information related to the 
                agreement or any application for the agreement,''.
                    (B) Exception from public inspection as written 
                determination.--Section 6110(b)(1)(B) of such Code is 
                amended by striking ``or (D)'' and inserting ``, (D), 
                or (E)''.
            (2) Reporting.--The Secretary of the Treasury shall include 
        with any report on advance pricing agreements required to be 
        submitted after the date of the enactment of this Act under 
        section 521(b) of the Ticket to Work and Work Incentives 
        Improvement Act of 1999 (Public Law 106-170) a report regarding 
        preapproval agreements under section 7874(d)(1) of the Internal 
        Revenue Code of 1986. Such report shall include information 
        similar to the information required with respect to advance 
        pricing agreements and shall be treated for confidentiality 
        purposes in the same manner as the reports on advance pricing 
        agreements are treated under section 521(b)(3) of such Act.
    (c) Conforming Amendments.--The table of sections for subchapter C 
of chapter 80 of the Internal Revenue Code of 1986 is amended by adding 
at the end the following new item:

                              ``Sec. 7874. Rules relating to inverted 
                                        corporate entities.''

SEC. 3. REINSURANCE OF UNITED STATES RISKS IN FOREIGN JURISDICTIONS.

    (a) In General.--Section 845(a) of the Internal Revenue Code of 
1986 (relating to allocation in case of reinsurance agreement involving 
tax avoidance or evasion) is amended by striking ``source and 
character'' and inserting ``amount, source, or character''.
    (b) Effective Date.--The amendments made by this section shall 
apply to any risk reinsured after April 11, 2002.
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