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






                                                       Calendar No. 465
107th CONGRESS
  2d Session
                                S. 2119

                          [Report No. 107-188]

   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, Mr. Baucus, Mr. Dodd, Mr. Lieberman, Mr. 
 Wellstone, Mr. Carper, and Mr. McCain) introduced the following bill; 
     which was read twice and referred to the Committee on Finance

                             June 28, 2002

               Reported by Mr. Baucus, with an amendment
 [Strike out all after the enacting clause and insert the part printed 
                               in italic]

_______________________________________________________________________

                                 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,

<DELETED>SECTION 1. SHORT TITLE.</DELETED>

<DELETED>    This Act may be cited as the ``Reversing the Expatriation 
of Profits Offshore Act''.</DELETED>

<DELETED>SEC. 2. TAX TREATMENT OF INVERTED CORPORATE 
              ENTITIES.</DELETED>

<DELETED>    (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:</DELETED>

<DELETED>``SEC. 7874. RULES RELATING TO INVERTED CORPORATE 
              ENTITIES.</DELETED>

<DELETED>    ``(a) Inverted Corporations Treated as Domestic 
Corporations.--</DELETED>
        <DELETED>    ``(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.</DELETED>
        <DELETED>    ``(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)--</DELETED>
                <DELETED>    ``(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,</DELETED>
                <DELETED>    ``(B) after the acquisition at least 80 
                percent of the stock (by vote or value) of the entity 
                is held--</DELETED>
                        <DELETED>    ``(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</DELETED>
                        <DELETED>    ``(ii) in the case of an 
                        acquisition with respect to a domestic 
                        partnership, by former partners of the domestic 
                        partnership, and</DELETED>
                <DELETED>    ``(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.</DELETED>
<DELETED>    ``(b) Preservation of Domestic Tax Base In Certain 
Inversion Transactions To Which Subsection (a) Does Not Apply.--
</DELETED>
        <DELETED>    ``(1) In general.--If a foreign incorporated 
        entity would be treated as an inverted domestic corporation 
        with respect to an acquired entity if either--</DELETED>
                <DELETED>    ``(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</DELETED>
                <DELETED>    ``(B) subsection (a)(2)(B) were applied by 
                substituting `more than 50 percent' for `at least 80 
                percent',</DELETED>
        <DELETED>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.</DELETED>
        <DELETED>    ``(2) Acquired entity.--For purposes of this 
        section--</DELETED>
                <DELETED>    ``(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.</DELETED>
                <DELETED>    ``(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).</DELETED>
        <DELETED>    ``(3) Applicable period.--For purposes of this 
        section--</DELETED>
                <DELETED>    ``(A) In general.--The term `applicable 
                period' means the period--</DELETED>
                        <DELETED>    ``(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</DELETED>
                        <DELETED>    ``(ii) ending on the date which is 
                        10 years after the last date properties are 
                        acquired as part of such acquisition.</DELETED>
                <DELETED>    ``(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.</DELETED>
<DELETED>    ``(c) Tax on Inversion Gains May Not Be Offset.--If 
subsection (b) applies--</DELETED>
        <DELETED>    ``(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.</DELETED>
        <DELETED>    ``(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--</DELETED>
                <DELETED>    ``(A) the amount of taxable income 
                described in paragraph (1) for the taxable year, 
                and</DELETED>
                <DELETED>    ``(B) the highest rate of tax specified in 
                section 11(b)(1).</DELETED>
        <DELETED>    ``(3) Special rules for partnerships.--In the case 
        of an acquired entity which is a partnership--</DELETED>
                <DELETED>    ``(A) the limitations of this subsection 
                shall apply at the partner rather than the partnership 
                level,</DELETED>
                <DELETED>    ``(B) the inversion gain of any partner 
                for any taxable year shall be equal to the sum of--
                </DELETED>
                        <DELETED>    ``(i) the partner's distributive 
                        share of inversion gain of the partnership for 
                        such taxable year, plus</DELETED>
                        <DELETED>    ``(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</DELETED>
                <DELETED>    ``(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).</DELETED>
        <DELETED>    ``(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--</DELETED>
                <DELETED>    ``(A) as part of the acquisition described 
                in subsection (a)(2)(A) to which subsection (b) 
                applies, or</DELETED>
                <DELETED>    ``(B) after such acquisition to a foreign 
                related person.</DELETED>
        <DELETED>    ``(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.</DELETED>
<DELETED>    ``(d) Special Rules Applicable to Related Party 
Transactions.--</DELETED>
        <DELETED>    ``(1) Annual preapproval required.--</DELETED>
                <DELETED>    ``(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.</DELETED>
                <DELETED>    ``(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--</DELETED>
                        <DELETED>    ``(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,</DELETED>
                        <DELETED>    ``(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</DELETED>
                        <DELETED>    ``(iii) any cost-sharing 
                        arrangement between the acquired entity and a 
                        foreign related person shall be 
                        disregarded.</DELETED>
                <DELETED>    ``(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--</DELETED>
                        <DELETED>    ``(i) is entered into at such time 
                        as may be specified by the Secretary, 
                        and</DELETED>
                        <DELETED>    ``(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.</DELETED>
        <DELETED>    ``(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--
        </DELETED>
                <DELETED>    ``(A) without regard to paragraph 
                (2)(A)(ii) thereof, and</DELETED>
                <DELETED>    ``(B) by substituting `25 percent' for `50 
                percent' each place it appears in paragraph (2)(B) 
                thereof.</DELETED>
<DELETED>    ``(e) Other Definitions and Special Rules.--For purposes 
of this section--</DELETED>
        <DELETED>    ``(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:</DELETED>
                <DELETED>    ``(A) Certain stock disregarded.--There 
                shall not be taken into account in determining 
                ownership for purposes of subsection (a)(2)(B)--
                </DELETED>
                        <DELETED>    ``(i) stock held by members of the 
                        expanded affiliated group which includes the 
                        foreign incorporated entity, or</DELETED>
                        <DELETED>    ``(ii) stock of such entity which 
                        is sold in a public offering related to the 
                        acquisition described in subsection 
                        (a)(2)(A).</DELETED>
                <DELETED>    ``(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.</DELETED>
                <DELETED>    ``(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.</DELETED>
                <DELETED>    ``(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.</DELETED>
        <DELETED>    ``(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.</DELETED>
        <DELETED>    ``(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.</DELETED>
        <DELETED>    ``(4) Foreign related person.--The term `foreign 
        related person' means, with respect to any acquired entity, a 
        foreign person which--</DELETED>
                <DELETED>    ``(A) bears a relationship to such entity 
                described in section 267(b) or 707(b), or</DELETED>
                <DELETED>    ``(B) is under the same common control 
                (within the meaning of section 482) as such 
                entity.</DELETED>
<DELETED>    ``(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--
</DELETED>
        <DELETED>    ``(1) the use of related persons, pass-through or 
        other noncorporate entities, or other intermediaries, 
        or</DELETED>
        <DELETED>    ``(2) transactions designed to have persons cease 
        to be (or not become) members of expanded affiliated groups or 
        related persons.''.</DELETED>
<DELETED>    (b) Treatment of Agreements.--</DELETED>
        <DELETED>    (1) Confidentiality.--</DELETED>
                <DELETED>    (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:</DELETED>
                <DELETED>    ``(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,''.</DELETED>
                <DELETED>    (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)''.</DELETED>
        <DELETED>    (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.</DELETED>
<DELETED>    (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:</DELETED>

                              <DELETED>``Sec. 7874. Rules relating to 
                                        inverted corporate entities.''

<DELETED>SEC. 3. REINSURANCE OF UNITED STATES RISKS IN FOREIGN 
              JURISDICTIONS.</DELETED>

<DELETED>    (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''.</DELETED>
<DELETED>    (b) Effective Date.--The amendments made by this section 
shall apply to any risk reinsured after April 11, 2002.</DELETED>

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 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.
    ``(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 `after December 31, 1996, and 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 
        (or any expanded affiliated group which includes such 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 this 
        chapter 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 the inversion gain for the 
                taxable year, and
                    ``(B) the highest rate of tax specified in section 
                11(b)(1).
        The credit allowed by section 901 may be taken into account 
        under the preceding sentence only to the extent of the product 
        of such highest rate and the amount of taxable income from 
        sources without the United States that is not inversion gain.
            ``(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) income or 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 any income or 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.
        The Secretary may provide that income or gain from the sale of 
        inventories or other transactions in the ordinary course of a 
        trade or business shall not be treated as inversion gain under 
        subparagraph (B) to the extent the Secretary determines such 
        treatment would not be inconsistent with the purposes of this 
        section.
            ``(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 section.
            ``(6) Statute of limitations.--
                    ``(A) In general.--The statutory period for the 
                assessment of any deficiency attributable to the 
                inversion gain of any taxpayer for any pre-inversion 
                year shall not expire before the expiration of 3 years 
                from the date the Secretary is notified by the taxpayer 
                (in such manner as the Secretary may prescribe) of the 
                acquisition described in subsection (a)(2)(A) to which 
                such gain relates and such deficiency may be assessed 
                before the expiration of such 3-year period 
                notwithstanding the provisions of any other law or rule 
                of law which would otherwise prevent such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' means 
                any taxable year if--
                            ``(i) any portion of the applicable period 
                        is included in such taxable year, and
                            ``(ii) such year ends before the taxable 
                        year in which the acquisition described in 
                        subsection (a)(2)(A) is completed.
    ``(d) Special Rules Applicable to Related Party Transactions.--
            ``(1) Annual application for agreements on return 
        positions.--
                    ``(A) In general.--Each acquired entity to which 
                subsection (b) applies shall file with the Secretary an 
                application for an approval agreement under 
                subparagraph (D) for each taxable year which includes a 
                portion of the applicable period. Such application 
                shall be filed at such time and manner, and shall 
                contain such information, as the Secretary may 
                prescribe.
                    ``(B) Secretarial action.--Within 90 days of 
                receipt of an application under subparagraph (A) (or 
                such longer period as the Secretary and entity may 
                agree upon), the Secretary shall--
                            ``(i) enter into an agreement described in 
                        subparagraph (D) for the taxable year covered 
                        by the application,
                            ``(ii) notify the entity that the Secretary 
                        has determined that the application was filed 
                        in good faith and substantially complies with 
                        the requirements for the application under 
                        subparagraph (A), or
                            ``(iii) notify the entity that the 
                        Secretary has determined that the application 
                        was not filed in good faith or does not 
                        substantially comply with such requirements.
                If the Secretary fails to act within the time 
                prescribed under the preceding sentence, the entity 
                shall be treated for purposes of this paragraph as 
                having received notice under clause (ii).
                    ``(C) Failures to comply.--If an acquired entity 
                fails to file an application under subparagraph (A), or 
                the acquired entity receives a notice under 
                subparagraph (B)(iii), 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.
                    ``(D) Approval agreement.--For purposes of 
                subparagraph (A), the term `approval agreement' means a 
                prefiling, advance pricing, or other agreement 
                specified by the Secretary which 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.
                    ``(E) Treatment of certain rights.--The Secretary 
                shall prescribe such regulations as may be necessary--
                            ``(i) to treat warrants, options, contracts 
                        to acquire stock, convertible debt instruments, 
                        and other similar interests as stock, and
                            ``(ii) to treat stock as not stock.
            ``(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.
            ``(5) Subsequent acquisitions by unrelated domestic 
        corporations.--Subject to such conditions, limitations, and 
        exceptions as the Secretary may prescribe, if, after an 
        acquisition described in subsection (a)(2)(A) to which 
        subsection (b) applies--
                    ``(A) a domestic corporation stock of which is 
                traded on an established securities market acquires 
                directly or indirectly substantially all of the 
                properties of an acquired entity,
                    ``(B) before such acquisition such domestic 
                corporation did not have a relationship described in 
                section 267(b) or 707(b), and was not under common 
                control (within the meaning of section 482), with such 
                entity, or any member of an expanded affiliated group 
                including such entity, and
                    ``(C) after such acquisition such acquired entity 
                does not have such a relationship and was not under 
                such common control with any member of the expanded 
                affiliated group which before such acquisition included 
                such entity,
        then this section shall cease to apply to 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 approval 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 
        approval 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) Information Reporting.--The Secretary of the Treasury shall 
exercise the Secretary's authority under the Internal Revenue Code of 
1986 to require entities involved in transactions to which section 7874 
of such Code (as added by subsection (a)) applies to report to the 
Secretary, shareholders, partners, and such other persons as the 
Secretary may prescribe such information as is necessary to ensure the 
proper tax treatment of such transactions.
    (d) Conforming Amendment.--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.




                                                       Calendar No. 465

107th CONGRESS

  2d Session

                                S. 2119

                          [Report No. 107-188]

_______________________________________________________________________

                                 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.

_______________________________________________________________________

                             June 28, 2002

                       Reported with an amendment