[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2046 Introduced in House (IH)]







108th CONGRESS
  1st Session
                                H. R. 2046

 To amend the Internal Revenue Code of 1986 to rebuild America through 
                             job creation.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              May 9, 2003

     Mr. Rangel (for himself, Mr. Andrews, Mr. Baca, Mr. Bell, Mr. 
  Blumenauer, Mr. Brown of Ohio, Mrs. Christensen, Mr. Cummings, Mr. 
Davis of Illinois, Mr. Delahunt, Ms. DeLauro, Mr. Engel, Ms. Eshoo, Mr. 
Etheridge, Mr. Gutierrez, Mr. Hill, Mr. Holt, Mr. Honda, Mr. Hoyer, Mr. 
 Lantos, Ms. Lee, Mr. Levin, Mr. McGovern, Mr. Menendez, Mr. Michaud, 
Ms. Millender-McDonald, Mr. George Miller of California, Mr. Oberstar, 
 Mr. Ortiz, Mr. Pallone, Ms. Pelosi, Mr. Price of North Carolina, Mr. 
 Rothman, Mr. Ryan of Ohio, Mr. Sabo, Mr. Sandlin, Ms. Slaughter, Mrs. 
Jones of Ohio, Ms. Waters, Mr. Waxman, and Mr. Ballance) 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 rebuild America through 
                             job creation.

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

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Jobs and Growth 
Reconciliation Tax Act of 2003''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; references; table of contents.
              TITLE I--IMMEDIATE STIMULUS AND JOB CREATION

                     Subtitle A--Family Tax Relief

Sec. 101. Acceleration of increase in child tax credit.
Sec. 102. Increase in standard deduction for married taxpayers filing 
                            joint returns accelerated.
Sec. 103. Acceleration of 10-percent individual income tax rate bracket 
                            expansion.
Sec. 104. Acceleration of elimination of marriage penalty in earned 
                            income credit.
        Subtitle B--Incentives to Hire the Long-Term Unemployed

Sec. 111. Incentives to hire the long-term unemployed.
             Subtitle C--Extension of Unemployment Benefits

Sec. 121. Short title.
          Part I--Temporary Extended Unemployment Compensation

Sec. 131. References.
Sec. 132. Extension of the Temporary Extended Unemployment Compensation 
                            Act of 2002.
Sec. 133. Entitlement to additional weeks of temporary extended 
                            unemployment compensation.
Sec. 134. Extended benefit periods.
  Part II--Unemployment Benefits for Individuals Qualifying Based on 
              Part-time Work or an Alternative Base Period

Sec. 141. Federal-State agreements.
Sec. 142. Payments to States having agreements under this part.
Sec. 143. Financing provisions.
Sec. 144. Definitions.
Sec. 145. Applicability.
                Part III--Enhanced Unemployment Benefits

Sec. 151. Federal-State agreements.
Sec. 152. Payments to States having agreements under this part.
Sec. 153. Definitions.
Sec. 154. Applicability.
         Subtitle D--Trust Fund to Meet Nation's Pressing Needs

Sec. 161. Trust fund to meet nation's pressing needs.
              TITLE II--LONG-TERM JOB CREATION AND GROWTH

Sec. 201. Increase and extension of bonus depreciation.
Sec. 202. Increased expensing for small business.
Sec. 203. Deduction relating to income attributable to United States 
                            production activities.
 TITLE III--FISCAL RESPONSIBILITY AND PROVISIONS ADDRESSING CORPORATE 
                                 ABUSE

                    Subtitle A-- General Provisions

Sec. 301. Freeze of top individual income tax rates.
Sec. 302. Restoration of phaseouts of deductions for personal 
                            exemptions and of itemized deductions.
Sec. 303. Repeal of exclusion for extraterritorial income.
  Subtitle B--Abusive Tax Shelter Shutdown and Taxpayer Accountability

          Part I--Provisions Designed to Curtail Tax Shelters

Sec. 311. Clarification of economic substance doctrine.
Sec. 312. Penalty for failing to disclose reportable transaction.
Sec. 313. Accuracy-related penalty for listed transactions and other 
                            reportable transactions having a 
                            significant tax avoidance purpose.
Sec. 314. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 315. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
Sec. 316. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 317. Disclosure of reportable transactions.
Sec. 318. Modifications to penalty for failure to register tax 
                            shelters.
Sec. 319. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 320. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 321. Understatement of taxpayer's liability by income tax return 
                            preparer.
Sec. 322. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 323. Frivolous tax submissions.
Sec. 324. Regulation of individuals practicing before the department of 
                            treasury.
Sec. 325. Penalty on promoters of tax shelters.
Sec. 326. Statute of limitations for taxable years for which listed 
                            transactions not reported.
Sec. 327. Denial of deduction for interest on underpayments 
                            attributable to nondisclosed reportable and 
                            noneconomic substance transactions.
                       Part II--Other Provisions

Sec. 331. Limitation on transfer or importation of built-in losses.
Sec. 332. Disallowance of certain partnership loss transfers.
Sec. 333. No reduction of basis under section 734 in stock held by 
                            partnership in corporate partner.
Sec. 334. Repeal of special rules for fasits.
Sec. 335. Expanded disallowance of deduction for interest on 
                            convertible debt.
Sec. 336. Expanded authority to disallow tax benefits under section 
                            269.
Sec. 337. Modifications of certain rules relating to controlled foreign 
                            corporations.
Sec. 338. Basis for determining loss always reduced by nontaxed portion 
                            of dividends.
Sec. 339. Affirmation of consolidated return regulation authority.
Subtitle C--Prevention of Corporate Expatriation To Avoid United States 
                               Income Tax

Sec. 341. Prevention of corporate expatriation to avoid United States 
                            income tax.
 Subtitle D--Inclusion in Gross Income of Funded Deferred Compensation 
                         of Corporate Insiders

Sec. 351. Inclusion in gross income of funded deferred compensation of 
                            corporate insiders.

              TITLE I--IMMEDIATE STIMULUS AND JOB CREATION

                     Subtitle A--Family Tax Relief

SEC. 101. ACCELERATION OF INCREASE IN CHILD TAX CREDIT.

    (a) In General.--The items relating to calendar years 2001 through 
2008 in the table contained in paragraph (2) of section 24(a) (relating 
to per child amount) are amended to read as follows:

    ``2003 thru 2009..............................                $800 
     2010 or thereafter...........................             1,000''.

    (b) Acceleration of Increase in Refundable Portion of Credit.--
            (1) In general.--Clause (i) of section 24(d)(1)(B) is 
        amended to read as follows:
                            ``(i) 15 percent of so much of the 
                        taxpayer's earned income (within the meaning of 
                        section 32) which is taken into account in 
                        computing taxable income for the taxable year 
                        as exceeds $7,500, or''.
            (2) Conforming amendment.--Paragraph (3) of section 24(d) 
        is amended--
                    (A) by striking ``$10,000'' and inserting 
                ``$7,500'', and
                    (B) by striking ``2000'' and inserting ``2002''.
    (c) Effective Dates.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 102. INCREASE IN STANDARD DEDUCTION FOR MARRIED TAXPAYERS FILING 
              JOINT RETURNS ACCELERATED.

    (a) In General.--Subparagraph (A) of section 63(c)(2), as amended 
by the Economic Growth and Tax Relief Reconciliation Act of 2001, is 
amended by striking ``the applicable percentage of'' and inserting 
``twice''.
    (b) Conforming Amendments.--
            (1) Section 301(d) of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is amended by striking ``2004'' and 
        inserting ``2002''.
            (2) Section 63(c) is amended by striking paragraph (7).
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 103. ACCELERATION OF 10-PERCENT INDIVIDUAL INCOME TAX RATE BRACKET 
              EXPANSION.

    (a) In General.--Clause (i) of section 1(i)(1)(B) (relating to the 
initial bracket amount) is amended by striking ``($12,000 in the case 
of taxable years beginning before January 1, 2008)''.
    (b) Inflation Adjustment.--Subparagraph (C) of section 1(i)(1) is 
amended to read as follows:
                    ``(C) Inflation adjustment.--In prescribing the 
                tables under subsection (f)--
                            ``(i) no adjustment shall be made in the 
                        $14,000 amount for any taxable year beginning 
                        before 2004, and
                            ``(ii) the adjustment in such amount with 
                        respect to taxable years beginning after 2003 
                        shall be determined under subsection (f)(3) by 
                        substituting `2003' for `1992' in subparagraph 
                        (B) thereof.''
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2002.
            (2) Tables for 2003.--The Secretary of the Treasury shall 
        modify each table which has been prescribed under section 1(f) 
        of the Internal Revenue Code of 1986 for taxable years 
        beginning in 2003 and which relates to the amendment made by 
        this section to reflect such amendment.

SEC. 104. ACCELERATION OF ELIMINATION OF MARRIAGE PENALTY IN EARNED 
              INCOME CREDIT.

    (a) In General.--Subparagraph (B) of section 32(b)(2) is amended to 
read as follows:
                    ``(B) Joint returns.--In the case of a joint return 
                filed by an eligible individual and such individual's 
                spouse, the phaseout amount determined under 
                subparagraph (A) shall be increased by $3,000.''
    (b) Conforming Amendment.--Clause (ii) of section 32(j)(1)(B) is 
amended by striking ``2007'' and inserting ``2002''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

        Subtitle B--Incentives to Hire the Long-Term Unemployed

SEC. 111. INCENTIVES TO HIRE THE LONG-TERM UNEMPLOYED.

    (a) In General.--Paragraph (1) of section 51(d) (relating to 
members of targeted groups) is amended by striking ``or'' at the end of 
subparagraph (G), by striking the period at the end of subparagraph (H) 
and inserting ``, or'', and by adding at the end the following new 
subparagraph:
                    ``(I) a qualified long-term unemployed 
                individual.''
    (b) Qualified Long-Term Unemployed Individual.--Subsection (d) of 
section 51 is amended by redesignating paragraphs (10), (11), and (12) 
as paragraphs (11), (12), and (13), respectively, and by inserting 
after paragraph (9) the following new paragraph:
            ``(10) Qualified long-term unemployed individual.--
                    ``(A) In general.--The term `qualified long-term 
                unemployed individual' means any individual who is 
                certified by the designated local agency--
                            ``(i) as having exhausted, during the 1-
                        year period ending on the hiring date, all 
                        rights to regular unemployment compensation 
                        under State or Federal law, and
                            ``(ii) as having a hiring date which is 
                        during the 1-year period beginning on the date 
                        of the enactment of this paragraph.
                Subsection (c)(4) shall not apply to any qualified 
                long-term unemployed individual.
                    ``(B) Exhaustion of benefits.--For purposes of 
                subparagraph (A), an individual shall be deemed to have 
                exhausted such individual's rights to regular 
                compensation when--
                            ``(i) no payments of regular compensation 
                        can be made under such law because such 
                        individual has received all regular 
                        compensation available to such individual based 
                        on employment or wages during such individual's 
                        base period, or
                            ``(ii) such individual's rights to such 
                        compensation have been terminated by reason of 
                        the expiration of the benefit year with respect 
                        to which such rights existed.''
    (c) Effective Date.--The amendments made by this section shall 
apply to individuals who begin work for the employer after the date of 
the enactment of this Act.

             Subtitle C--Extension of Unemployment Benefits

SEC. 121. SHORT TITLE.

    This subtitle may be cited as the ``Unemployment Benefits Extension 
Act''.

          PART I--TEMPORARY EXTENDED UNEMPLOYMENT COMPENSATION

SEC. 131. REFERENCES.

    Except as otherwise expressly provided, whenever in this part an 
amendment is expressed in terms of an amendment to a section or other 
provision, the reference shall be considered to be made to a section or 
other provision of the Temporary Extended Unemployment Compensation Act 
of 2002 (Public Law 107-147; 26 U.S.C. 3304 note).

SEC. 132. EXTENSION OF THE TEMPORARY EXTENDED UNEMPLOYMENT COMPENSATION 
              ACT OF 2002.

    (a) Extension of Program.--Section 208 is amended to read as 
follows:

``SEC. 208. APPLICABILITY.

    ``(a) In General.--Subject to subsection (b), an agreement entered 
into under this title shall apply to weeks of unemployment--
            ``(1) beginning after the date on which such agreement is 
        entered into; and
            ``(2) ending before March 1, 2004.
    ``(b) Transition.--In the case of an individual who is receiving 
temporary extended unemployment compensation for the week which 
immediately precedes the first day of the week that includes March 1, 
2004, temporary extended unemployment compensation shall continue to be 
payable to such individual for any week thereafter from the account 
from which such individual received compensation for the week 
immediately preceding that termination date. No compensation shall be 
payable by reason of the preceding sentence for any week beginning 
after October 31, 2004.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect as if included in the enactment of the Temporary Extended 
Unemployment Compensation Act of 2002 (Public Law 107-147; 116 Stat. 
21).

SEC. 133. ENTITLEMENT TO ADDITIONAL WEEKS OF TEMPORARY EXTENDED 
              UNEMPLOYMENT COMPENSATION.

    (a) Weeks of TEUC Amounts.--Paragraph (1) of section 203(b) is 
amended to read as follows:
            ``(1) In general.--The amount established in an account 
        under subsection (a) shall be equal to 26 times the 
        individual's weekly benefit amount for the benefit year.''.
    (b) Weeks of TEUC-X Amounts.--Section 203(c)(1) is amended by 
striking ``an amount equal to the amount originally established in such 
account (as determined under subsection (b)(1))'' and inserting ``7 
times the individual's weekly benefit amount for the benefit year''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section--
                    (A) shall take effect as if included in the 
                enactment of the Temporary Extended Unemployment 
                Compensation Act of 2002 (Public Law 107-147; 116 Stat. 
                21); but
                    (B) shall apply only with respect to weeks of 
                unemployment beginning on or after the date of 
                enactment of this Act, subject to paragraph (2).
            (2) Special rules.--In the case of an individual for whom a 
        temporary extended unemployment account was established before 
        the date of enactment of this Act, the Temporary Extended 
        Unemployment Compensation Act of 2002 (as amended by this part) 
        shall be applied subject to the following:
                    (A) Any amounts deposited in the individual's 
                temporary extended unemployment compensation account by 
                reason of section 203(c) of such Act (commonly known as 
                ``TEUC-X amounts'') before the date of enactment of 
                this Act shall be treated as amounts deposited by 
                reason of section 203(b) of such Act (commonly known as 
                ``TEUC amounts''), as amended by subsection (a).
                    (B) For purposes of determining whether the 
                individual is eligible for any TEUC-X amounts under 
                such Act, as amended by this part--
                            (i) any determination made under section 
                        203(c) of such Act before the application of 
                        the amendments made by this part shall be 
                        disregarded; and
                            (ii) any such determination shall instead 
                        be made by applying section 203(c) of such Act, 
                        as amended by this part--
                                    (I) as of the time that all amounts 
                                established in such account in 
                                accordance with section 203(b) of such 
                                Act (as amended by this part, and 
                                including any amounts described in 
                                subparagraph (A)) are in fact 
                                exhausted, except that
                                    (II) if such individual's account 
                                was both augmented by and exhausted of 
                                all TEUC-X amounts before the date of 
                                enactment of this Act, such 
                                determination shall be made as if 
                                exhaustion (as described in section 
                                203(c)(1) of such Act) had not occurred 
                                until such date of enactment.

SEC. 134. EXTENDED BENEFIT PERIODS.

    (a) Application of Revised Rate of Insured Unemployment.--Section 
207 is amended--
            (1) by striking ``In'' and inserting ``(a) In General.--
        In''; and
            (2) by adding at the end the following:
    ``(b) Insured Unemployment Rate.--For purposes of carrying out 
section 203(c) with respect to weeks of unemployment beginning on or 
after the date of enactment of this subsection, the term `rate of 
insured unemployment', as used in section 203(d) of the Federal-State 
Extended Unemployment Compensation Act of 1970 (26 U.S.C. 3304 note), 
has the meaning given such term under section 203(e)(1) of such Act, 
except that individuals exhausting their right to regular compensation 
during the most recent 3 calendar months for which data are available 
before the close of the period for which such rate is being determined 
shall be taken into account as if they were individuals filing claims 
for regular compensation for each week during the period for which such 
rate is being determined, and section 203(d)(1)(A) of such Act shall be 
applied by substituting `either (or both)' for `each'.''.
    (b) Additional Extended Benefit Period Trigger.--
            (1) In general.--Section 203(c) is amended by adding at the 
        end the following:
            ``(3) Additional extended benefit period trigger.--
                    ``(A) In general.--Effective with respect to 
                compensation for weeks of unemployment beginning on or 
                after the date of enactment of this paragraph, an 
                agreement under this title shall provide that, in 
                addition to any other extended benefit period trigger, 
                for purposes of beginning or ending any extended 
                benefit period under this section--
                            ``(i) there is a State `on' indicator for a 
                        week if--
                                    ``(I) the average rate of total 
                                unemployment in such State (seasonally 
                                adjusted) for the period consisting of 
                                the most recent 3 months for which data 
                                for all States are published before the 
                                close of such week equals or exceeds 6 
                                percent; and
                                    ``(II) the average rate of total 
                                unemployment in such State (seasonally 
                                adjusted) for the 3-month period 
                                referred to in subclause (I) equals or 
                                exceeds 110 percent of such average 
                                rate for either (or both) of the 
                                corresponding 3-month periods ending in 
                                the 2 preceding calendar years; and
                            ``(ii) there is a State `off' indicator for 
                        a week if either the requirements of subclause 
                        (I) or (II) of clause (i) are not satisfied.
                    ``(B) No effect on other determinations.--
                Notwithstanding the provisions of any agreement 
                described in subparagraph (A), any week for which there 
                would otherwise be a State `on' indicator shall 
                continue to be such a week and shall not be determined 
                to be a week for which there is a State `off' 
                indicator.
                    ``(C) Determinations made by the secretary.--For 
                purposes of this subsection, determinations of the rate 
                of total unemployment in any State for any period (and 
                of any seasonal adjustment) shall be made by the 
                Secretary.''.
            (2) Conforming amendment.--Section 203(c)(1) is amended by 
        inserting ``or (3)'' after ``paragraph (2)''.

  PART II--UNEMPLOYMENT BENEFITS FOR INDIVIDUALS QUALIFYING BASED ON 
              PART-TIME WORK OR AN ALTERNATIVE BASE PERIOD

SEC. 141. FEDERAL-STATE AGREEMENTS.

    (a) In General.--Any State which desires to do so may enter into 
and participate in an agreement under this part with the Secretary of 
Labor (hereinafter in this part referred to as the ``Secretary''). Any 
State which is a party to an agreement under this part may, upon 
providing 30 days' written notice to the Secretary, terminate such 
agreement.
    (b) Provisions of Agreement.--
            (1) In general.--Any agreement under subsection (a) shall 
        provide that the State agency of the State will make payments 
        of regular compensation to individuals in amounts and to the 
        extent that they would be determined if the State law were 
        applied with the modifications described in paragraph (2).
            (2) Modifications described.--The modifications described 
        in this paragraph are as follows:
                    (A) In the case of an individual who is not 
                eligible for regular compensation under the State law 
                because of the use of a definition of base period that 
                does not count wages earned in the most recently 
                completed calendar quarter, eligibility for 
                compensation under this part shall be determined by 
                applying a base period ending at the close of the most 
                recently completed calendar quarter.
                    (B) In the case of an individual who is not 
                eligible for regular compensation under the State law 
                because such individual does not meet requirements 
                relating to availability for work, active search for 
                work, or refusal to accept work, because such 
                individual is seeking, or is available for, less than 
                full-time work, compensation under this part shall not 
                be denied by such State to an otherwise eligible 
                individual who seeks less than full-time work or fails 
                to accept full-time work.
    (c) Coordination Rule.--The modifications described in subsection 
(b)(2) shall also apply in determining the amount of benefits payable 
under any Federal law to the extent that those benefits are determined 
by reference to regular compensation payable under the State law of the 
State involved.

SEC. 142. PAYMENTS TO STATES HAVING AGREEMENTS UNDER THIS PART.

    (a) General Rule.--There shall be paid to each State which has 
entered into an agreement under this part an amount equal to--
            (1) 100 percent of any regular compensation made payable to 
        individuals by such State by virtue of the modifications which 
        are described in section 141(b)(2) and deemed to be in effect 
        with respect to such State pursuant to section 141(b)(1), and
            (2) 100 percent of any regular compensation--
                    (A) which is paid to individuals by such State by 
                reason of the fact that its State law contains 
                provisions comparable to the modifications described in 
                section 141(b)(2), but only
                    (B) to the extent that those amounts would, if such 
                amounts were instead payable by virtue of the State 
                law's being deemed to be so modified pursuant to 
                section 141(b)(1), have been reimbursable under 
                paragraph (1).
    (b) Determination of Amount.--Sums under subsection (a) payable to 
any State by reason of such State having an agreement under this part 
shall be payable, either in advance or by way of reimbursement (as may 
be determined by the Secretary), in such amounts as the Secretary 
estimates the State will be entitled to receive under this part for 
each calendar month, reduced or increased, as the case may be, by any 
amount by which the Secretary finds that the Secretary's estimates for 
any prior calendar month were greater or less than the amounts which 
should have been paid to the State. Such estimates may be made on the 
basis of such statistical, sampling, or other method as may be agreed 
upon by the Secretary and the State agency of the State involved.
    (c) Administrative and Other Expenses.--There is hereby 
appropriated out of the employment security administration account of 
the Unemployment Trust Fund (as established by section 901(a) of the 
Social Security Act) $500,000,000 to reimburse States for the costs of 
the administration of agreements under this part (including any 
improvements in technology in connection therewith) and to provide 
reemployment services to unemployment compensation claimants in States 
having agreements under this part. Each State's share of the amount 
appropriated by the preceding sentence shall be determined by the 
Secretary according to the factors described in section 302(a) of the 
Social Security Act and certified by the Secretary to the Secretary of 
the Treasury.

SEC. 143. FINANCING PROVISIONS.

    (a) In General.--Funds in the extended unemployment compensation 
account (as established by section 905(a) of the Social Security Act), 
and the Federal unemployment account (as established by section 904(g) 
of the Social Security Act), of the Unemployment Trust Fund shall be 
used, in accordance with subsection (b), for the making of payments 
(described in section 142(a)) to States having agreements entered into 
under this part.
    (b) Certification.--The Secretary shall from time to time certify 
to the Secretary of the Treasury for payment to each State the sums 
described in section 142(a) which are payable to such State under this 
part. The Secretary of the Treasury, prior to audit or settlement by 
the General Accounting Office, shall make payments to the State in 
accordance with such certification by transfers from the extended 
unemployment compensation account (or, to the extent that there are 
insufficient funds in that account, from the Federal unemployment 
account) to the account of such State in the Unemployment Trust Fund.

SEC. 144. DEFINITIONS.

    For purposes of this part:
            (1) In general.--The terms ``compensation'', ``regular 
        compensation'', ``base period'', ``State'', ``State agency'', 
        ``State law'', and ``week'' have the respective meanings given 
        such terms under section 205 of the Federal-State Extended 
        Unemployment Compensation Act of 1970, subject to paragraph 
        (2).
            (2) State law and regular compensation.--In the case of a 
        State entering into an agreement under this part--
                    (A) ``State law'' shall be considered to refer to 
                the State law of such State, applied in conformance 
                with the modifications described in section 201(b)(2), 
                and
                    (B) ``regular compensation'' shall be considered to 
                refer to such compensation, determined under its State 
                law (applied in the manner described in subparagraph 
                (A)),
        except as otherwise provided or where the context clearly 
        indicates otherwise.

SEC. 145. APPLICABILITY.

    An agreement entered into under this part shall apply to weeks of 
unemployment--
            (1) beginning after the date on which such agreement is 
        entered into, and
            (2) ending before July 1, 2004.

                PART III--ENHANCED UNEMPLOYMENT BENEFITS

SEC. 151. FEDERAL-STATE AGREEMENTS.

    (a) In General.--Any State which desires to do so may enter into 
and participate in an agreement under this part with the Secretary of 
Labor (hereinafter in this part referred to as the ``Secretary''). Any 
State which is a party to an agreement under this part may, upon 
providing 30 days' written notice to the Secretary, terminate such 
agreement.
    (b) Provisions of Agreement.--
            (1) In general.--Any agreement under subsection (a) shall 
        provide that the State agency of the State will make payments 
        of regular compensation to individuals in amounts and to the 
        extent that they would be determined if the State law were 
        applied with the modification described in paragraph (2).
            (2) Modification described.--The modification described in 
        this paragraph is that the amount of regular compensation 
        (including dependents' allowances) payable for any week shall 
        be equal to the amount determined under the State law (before 
        the application of this paragraph), plus an additional--
                    (A) 15 percent, or
                    (B) $25,
        whichever is greater.
    (c) Nonreduction Rule.--Each agreement shall provide that such 
agreement shall not apply (or shall cease to apply) upon a 
determination by the Secretary that the method governing the 
computation of regular compensation under the State law of that State 
has been modified in a way such that--
            (1) the average weekly amount of regular compensation which 
        will be payable during the period of the agreement (determined 
        disregarding the modification described in subsection (b)(2)) 
        will be less than
            (2) the average weekly amount of regular compensation which 
        would otherwise have been payable during such period under the 
        State law, as in effect on September 11, 2001.
    (d) Coordination Rule.--The modification described in subsection 
(b)(2) shall also apply in determining the amount of benefits payable 
under any Federal law to the extent that those benefits are determined 
by reference to regular compensation payable under the State law of the 
State involved.

SEC. 152. PAYMENTS TO STATES HAVING AGREEMENTS UNDER THIS PART.

    (a) General Rule.--There shall be paid to each State which has 
entered into an agreement under this part an amount equal to 100 
percent of any regular compensation made payable to individuals by such 
State by virtue of the modification described in section 151(b)(2) and 
deemed to be in effect with respect to such State pursuant to section 
151(b)(1).
    (b) Determination of Amount.--Sums under subsection (a) payable to 
any State by reason of such State having an agreement under this part 
shall be payable, either in advance or by way of reimbursement (as may 
be determined by the Secretary), in such amounts as the Secretary 
estimates the State will be entitled to receive under this part for 
each calendar month, reduced or increased, as the case may be, by any 
amount by which the Secretary finds that the Secretary's estimates for 
any prior calendar month were greater or less than the amounts which 
should have been paid to the State. Such estimates may be made on the 
basis of such statistical, sampling, or other method as may be agreed 
upon by the Secretary and the State agency of the State involved.

SEC. 153. DEFINITIONS.

    For purposes of this part:
            (1) In general.--The terms ``compensation'', ``regular 
        compensation'', ``extended compensation'', ``additional 
        compensation'', ``benefit year'', ``base period'', ``State'', 
        ``State agency'', ``State law'', and ``week'' have the 
        respective meanings given such terms under section 205 of the 
        Federal-State Extended Unemployment Compensation Act of 1970, 
        subject to paragraph (2).
            (2) State law and regular compensation.--In the case of a 
        State entering into an agreement under this part--
                    (A) ``State law'' shall be considered to refer to 
                the State law of such State, applied in conformance 
                with the modification described in section 151(b)(2), 
                subject to section 151(c), and
                    (B) ``regular compensation'' shall be considered to 
                refer to such compensation, determined under its State 
                law (applied in the manner described in subparagraph 
                (A)),
        except as otherwise provided or where the context clearly 
        indicates otherwise.

SEC. 154. APPLICABILITY.

    (a) In General.--An agreement entered into under this part shall 
apply to weeks of unemployment--
            (1) beginning after the date on which such agreement is 
        entered into, and
            (2) ending before January 1, 2004.

         Subtitle D--Trust Fund to Meet Nation's Pressing Needs

SEC. 161. TRUST FUND TO MEET NATION'S PRESSING NEEDS.

    (a) Creation of Trust Fund.--There is established in the Treasury 
of the United States a trust fund to be known as the `Pressing Domestic 
Needs Trust Fund', consisting of such amounts as may be transferred to 
the Trust Fund as provided in this section.
    (b) Transfers to Fund.--There are hereby transferred from the 
general Fund of the Treasury to the Pressing Domestic Needs Trust Fund 
so much of the additional amounts received in the Treasury by reason of 
the amendments made by title III of this Act as does not exceed--
            (1) $18,000,000,000 to be used for increasing Federal 
        matching funds under medicaid, and
            (2) $26,000,000,000 to be used for infrastructure 
        improvements, homeland security, community development, and 
        education.
    (c) Expenditures.--Amounts in the Pressing Domestic Needs Trust 
Fund shall be available, as provided by appropriation Acts, for 
purposes and in the amount specified in subsection (b).

         Subtitle D--Trust Fund to Meet Nation's Pressing Needs

SEC. 161. TRUST FUND TO MEET NATION'S PRESSING NEEDS.

    (a) Creation of Trust Fund.--There is established in the Treasury 
of the United States a trust fund to be known as the `Pressing Domestic 
Needs Trust Fund', consisting of such amounts as may be transferred to 
the Trust Fund as provided in this section.
    (b) Transfers to Fund.--There are hereby transferred from the 
general Fund of the Treasury to the Pressing Domestic Needs Trust Fund 
so much of the additional amounts received in the Treasury by reason of 
the amendments made by title III of this Act as does not exceed--
            (1) $18,000,000,000 to be used for increasing Federal 
        matching funds under medicaid, and
            (2) $26,000,000,000 to be used for infrastructure 
        improvements, homeland security, community development, and 
        education.
    (c) Expenditures.--Amounts in the Pressing Domestic Needs Trust 
Fund shall be available, as provided by appropriation Acts, for 
purposes and in the amount specified in subsection (b).

              TITLE II--LONG-TERM JOB CREATION AND GROWTH

SEC. 201. INCREASE AND EXTENSION OF BONUS DEPRECIATION.

    (a) In General.--Section 168(k) (relating to special allowance for 
certain property acquired after September 10, 2001, and before 
September 11, 2004) is amended by adding at the end the following new 
paragraph:
            ``(4) 50-percent bonus depreciation for certain property.--
                    ``(A) In general.--In the case of 50-percent bonus 
                depreciation property--
                            ``(i) paragraph (1)(A) shall be applied by 
                        substituting `50 percent' for `30 percent', and
                            ``(ii) except as provided in paragraph 
                        (2)(C), such property shall be treated as 
                        qualified property for purposes of this 
                        subsection.
                    ``(B) 50-percent bonus depreciation property.--For 
                purposes of this subsection, the term `50-percent bonus 
                depreciation property' means property described in 
                paragraph (2)(A)(i)--
                            ``(i) the original use of which commences 
                        with the taxpayer after April 30, 2003,
                            ``(ii) which is acquired by the taxpayer 
                        after April 30, 2003, and before May 1, 2004, 
                        but only if no written binding contract for the 
                        acquisition was in effect before May 1, 2003, 
                        and
                            ``(iii) which is placed in service by the 
                        taxpayer before January 1, 2005, or, in the 
                        case of property described in paragraph (2)(B) 
                        (as modified by subparagraph (C) of this 
                        paragraph), before January 1, 2006.
                    ``(C) Special rules.--Rules similar to the rules of 
                subparagraphs (B) and (D) of paragraph (2) shall apply 
                for purposes of this paragraph; except that reference 
                to September 10, 2001, shall be treated as references 
                to April 30, 2003.
                    ``(D) Automobiles.--Paragraph (2)(E) shall be 
                applied by substituting `$9,200' for `$4,600' in the 
                case of 50-percent bonus depreciation property.
                    ``(E) Election of 30 percent bonus.--If a taxpayer 
                makes an election under this subparagraph with respect 
                to any class of property for any taxable year, 
                subparagraph (A)(i) shall not apply to all property in 
                such class placed in service during such taxable 
                year.''
     (b) Modification to 30-Percent Bonus Depreciation Property.--
            (1) Portion of basis taken into account.--Subparagraphs 
        (B)(ii) and (D)(i) of section 168(k)(2) are each amended by 
        striking ``September 11, 2004'' each place it appears and 
        inserting ``January 1, 2005''.
            (2) Election.--Clause (iii) of section 168(k)(2)(C) is 
        amended by adding at the end the following: ``The preceding 
        sentence shall be applied separately with respect to property 
        treated as qualified property by paragraph (4) and other 
        qualified property.''
            (3) Acquisition date.--Clause (iii) of section 168(k)(2)(A) 
        is amended by striking ``September 11, 2004'' each place it 
        appears and inserting ``January 1, 2005''.
    (c) Conforming Amendments.--
            (1) The subsection heading for section 168(k) is amended by 
        striking ``September 11, 2004'' and inserting ``January 1, 
        2005''.
            (2) The heading for clause (i) of section 1400L(b)(2)(C) is 
        amended by striking ``30-percent additional allowable 
        property'' and inserting ``Bonus depreciation property under 
        section 168(k)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

SEC. 202. INCREASED EXPENSING FOR SMALL BUSINESS.

    (a) 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 ($75,000 in the case of taxable years 
        beginning in 2003 or 2004).''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2002.

SEC. 203. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED STATES 
              PRODUCTION ACTIVITIES.

    (a) In General.--Part VIII of subchapter B of chapter 1 (relating 
to special deductions for corporations) is amended by adding at the end 
the following new section:

``SEC. 250. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.

    ``(a) In General.--In the case of a corporation, there shall be 
allowed as a deduction an amount equal to 10 percent of the qualified 
production activities income of the corporation for the taxable year.
    ``(b) Phasein.--In the case of taxable years beginning in 2006, 
2007, 2008 or 2009, subsection (a) shall be applied by substituting for 
the percentage contained therein the transition percentage determined 
under the following table:

            ``Taxable years                              The transition
            beginning in:                       percentage is:
                    2006..............................                1
                    2007..............................                2
                    2008..............................                4
                    2009..............................                9
    ``(c) Qualified Production Activities Income.--For purposes of this 
section, the term `qualified production activities income' means the 
product of--
            ``(1) the portion of the modified taxable income of the 
        taxpayer which is attributable to domestic production 
        activities, and
            ``(2) the domestic/foreign fraction.
    ``(d) Determination of Income Attributable to Domestic Production 
Activities.--For purposes of this section--
            ``(1) In general.--The portion of the modified taxable 
        income which is attributable to domestic production activities 
        is so much of the modified taxable income for the taxable year 
        as does not exceed--
                    ``(A) the taxpayer's domestic production gross 
                receipts for such taxable year, reduced by
                    ``(B) the sum of--
                            ``(i) the costs of goods sold that are 
                        allocable to such receipts,
                            ``(ii) other deductions, expenses, or 
                        losses directly allocable to such receipts, and
                            ``(iii) a ratable portion of other 
                        deductions, expenses, and losses that are not 
                        directly allocable to such receipts or another 
                        class of income.
            ``(2) Allocation method.--Except as provided in 
        regulations, allocations under clauses (ii) and (iii) of 
        paragraph (1)(B) shall be made under the principles used in 
        determining the portion of taxable income from sources within 
        and without the United States.
            ``(3) Special rule.--
                    ``(A) For purposes of determining costs under 
                clause (i) of paragraph (1)(B), any item or service 
                brought into the United States without a transfer price 
                meeting the requirements of section 482 shall be 
                treated as acquired by purchase, and its cost shall be 
                treated as not less than its value when it entered the 
                United States. A similar rule shall apply in 
                determining the adjusted basis of leased or rented 
                property where the lease or rental gives rise to 
                domestic production gross receipts.
                    ``(B) In the case of any property described in 
                subparagraph (A) that had been exported by the taxpayer 
                for further manufacture, the increase in cost (or 
                adjusted basis) under subparagraph (A) shall not exceed 
                the difference between the value of the property when 
                exported and the value of the property when brought 
                back into the United States after the further 
                manufacture.
            ``(4) Modified taxable income.--The term `modified taxable 
        income' means taxable income computed without regard to the 
        deduction allowable under this section.
    ``(e) Domestic Production Gross Receipts.--For purposes of this 
section--
            ``(1) In general.--The term `domestic production gross 
        receipts' means the gross receipts of the taxpayer which are 
        derived from--
                    ``(A) any sale, exchange, or other disposition of, 
                or
                    ``(B) any lease, rental or license of,
        qualifying production property which was manufactured, 
        produced, grown, or extracted in whole or in significant part 
        by the taxpayer within the United States.
            ``(2) Special rule.--The term `domestic production gross 
        receipts' includes gross receipts of the taxpayer from the 
        sale, exchange, or other disposition of replacement parts if--
                    ``(A) such parts are sold by the taxpayer as 
                replacement parts for qualified production property 
                produced or manufactured in whole or significant part 
                by the taxpayer in the United States, and
                    ``(B) the taxpayer (or a related party) owns the 
                designs for such parts.
            ``(3) Related party.--The term `related party' means any 
        corporation which is a member of the taxpayer's expanded 
        affiliated group.
    ``(f) Qualifying Production Property.--For purposes of this 
section--
            ``(1) In general.--Except as otherwise provided in this 
        paragraph, the term `qualifying production property' means--
                    ``(A) any tangible personal property,
                    ``(B) any computer software, and
                    ``(C) any films, tapes, records, or similar 
                reproductions.
            ``(2) Exclusions from qualifying production property.--The 
        term `qualifying production property' shall not include--
                    ``(A) consumable property that is sold, leased, or 
                licensed by the taxpayer as an integral part of the 
                provision of services,
                    ``(B) oil or gas (or any primary product thereof),
                    ``(C) electricity,
                    ``(D) water supplied by pipeline to the consumer,
                    ``(E) any unprocessed timber which is softwood,
                    ``(F) utility services, or
                    ``(G) any property (not described in paragraph 
                (1)(B)) which is a film, tape, recording, book, 
                magazine, newspaper, or similar property the market for 
                which is primarily topical or otherwise essentially 
                transitory in nature.
        For purposes of subparagraph (E), the term `unprocessed timber' 
        means any log, cant, or similar form of timber.
    ``(g) Domestic/Foreign Fraction.--For purposes of this section--
            ``(1) In general.--The term `domestic/foreign fraction' 
        means a fraction--
                    ``(A) the numerator of which is the value of the 
                domestic production of the taxpayer, and
                    ``(B) the denominator of which is the value of the 
                worldwide production of the taxpayer.
            ``(2) Value of domestic production.--The value of domestic 
        production is the excess of--
                    ``(A) the domestic production gross receipts, over
                    ``(B) the cost of purchased inputs allocable to 
                such receipts that are deductible under this chapter 
                for the taxable year.
            ``(3) Purchased inputs.--
                    ``(A) In general.--Purchased inputs are any of the 
                following items acquired by purchase:
                            ``(i) Services (other than services of 
                        employees) used in manufacture, production, 
                        growth, or extraction activities.
                            ``(ii) Items consumed in connection with 
                        such activities.
                            ``(iii) Items incorporated as part of the 
                        property being manufactured, produced, grown, 
                        or extracted.
                    ``(B) Special rule.--Rules similar to the rules of 
                subsection (d)(3) shall apply for purposes of this 
                subsection.
            ``(4) Value of worldwide production.--
                    ``(A) In general.--The value of worldwide 
                production shall be determined under the principles of 
                paragraph (2), except that--
                            ``(i) worldwide production gross receipts 
                        shall be taken into account, and
                            ``(ii) paragraph (3)(B) shall not apply.
                    ``(B) Worldwide production gross receipts.--The 
                worldwide production gross receipts is the amount that 
                would be determined under subsection (e) if such 
                subsection were applied without any reference to the 
                United States.
            ``(5) Special rule for affiliated groups.--
                    ``(A) In general.--In the case of a taxpayer that 
                is a member of an expanded affiliated group, the 
                domestic/foreign fraction shall be the amount 
                determined under the preceding provisions of this 
                subsection by treating all members of such group as a 
                single corporation.
                    ``(B) Expanded affiliated group.--The term 
                `expanded affiliated group' means an affiliated group 
                as defined in section 1504(a), determined--
                            ``(i) by substituting `50 percent' for `80 
                        percent' each place it appears, and
                            ``(ii) without regard to paragraphs (2), 
                        (3), and (4) of section 1504(b).
    ``(h) Definitions and Special Rules.--
            ``(1) United states.--For purposes of this section, the 
        term `United States' includes the Commonwealth of Puerto Rico 
        and any other possession of the United States.
            ``(2) Special rule for partnerships.--For purposes of this 
        section, a corporation's distributive share of any partnership 
        item shall be taken into account as if directly realized by the 
        corporation.
            ``(3) Coordination with minimum tax.--The deduction under 
        this section shall be allowed for purposes of the tax imposed 
        by section 55; except that for purposes of section 55, 
        alternative minimum taxable income shall be taken into account 
        in determining the deduction under this section.
            ``(4) Ordering rule.--The amount of any other deduction 
        allowable under this chapter shall be determined as if this 
        section had not been enacted.
            ``(5) Coordination with transition rules.--For purposes of 
        this section--
                    ``(A) domestic production gross receipts shall not 
                include gross receipts from any transaction if the 
                binding contract transition relief of section 303(c)(2) 
                of the Jobs and Growth Reconciliation Tax Act of 2003 
                applies to such transaction, and
                    ``(B) any deduction allowed under section 2(e) of 
                such Act shall be disregarded in determining the 
                portion of the taxable income which is attributable to 
                domestic production gross receipts.''.
    (b) Clerical Amendment.--The table of sections for part VIII of 
subchapter B of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 250. Income attributable to 
                                        domestic production 
                                        activities.''.

    (c) Effective Date.--
            ``(1) In general.--The amendments made by this section 
        shall apply to taxable years beginning after 2005.
            ``(2) Application of section 15.--Section 15 of the 
        Internal Revenue Code of 1986 shall apply to the amendments 
        made by this section as if they were changes in a rate of tax.

 TITLE III--FISCAL RESPONSIBILITY AND PROVISIONS ADDRESSING CORPORATE 
                                 ABUSE

                    Subtitle A-- General Provisions

SEC. 301. FREEZE OF TOP INDIVIDUAL INCOME TAX RATES.

    (a) Freeze of Top Individual Income Tax Rates.--Paragraph (2) of 
section 1(i) (relating to reductions in rates after June 30, 2001) is 
amended--
            (1) in the column for the highest rate--
                    (A) by striking ``37.6'' and inserting ``38.6'', 
                and
                    (B) by striking ``35.0'' and inserting ``38.6'', 
                and
            (2) in the column for the next highest rate--
                    (A) by striking ``34.0'' and inserting ``35.0'', 
                and
                    (B) by striking ``33.0'' and inserting ``35.0''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.
    (c) Restoration of Rate Reductions If Funds Not Committed to Meet 
Nation's Pressing Needs.--
            (1) In general.--On December 31, 2003, the Director of the 
        Office of Management and Budget shall determine whether there 
        is a noncommitted balance in the Pressing Domestic Needs Trust 
        Fund (established by section 161 of this Act). If such a 
        noncommitted balance is determined, the Secretary of the 
        Treasury shall reduce the rates otherwise applicable under the 
        amendment made by subsection (a) so that the total revenue 
        raised by such amendment is reduced by the amount of such 
        noncommitted balance.
            (2) Noncommitted balance.--For purposes of paragraph (1), 
        the noncommitted balance of the trust fund is the portion of 
        the amounts in the trust fund which are not committed to 
        meeting the pressing needs specified in section 161.
    (d) Restoration of Rate Reductions If Balanced Budget.--The 
amendments made by this section shall cease to apply to any taxable 
year beginning after a calendar year if there is no deficit in the 
Federal budget for the fiscal year ending in such calendar year.

SEC. 302. RESTORATION OF PHASEOUTS OF DEDUCTIONS FOR PERSONAL 
              EXEMPTIONS AND OF ITEMIZED DEDUCTIONS.

    (a) Phaseout of Personal Exemptions.--Paragraph (3) of section 
151(d) is amended by striking subparagraphs (E) and (F).
    (b) Phaseout of Itemized Deductions.--Section 68 (relating to 
overall limitation on itemized deductions) is amended by striking 
subsections (f) and (g).
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 303. 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.--
            (1) In general.--The amendments made by this section shall 
        apply to transactions occurring after the date of the enactment 
        of this Act.
            (2) Binding contracts.--The amendments made by this section 
        shall not apply to any transaction in the ordinary course of a 
        trade or business which occurs pursuant to a binding contract--
                    (A) which is between the taxpayer and a person who 
                is not a related person (as defined in section 
                943(b)(3) of such Code, as in effect on the day before 
                the date of the enactment of this Act), and
                    (B) which is in effect on April 11, 2003, and at 
                all times thereafter.
        For purposes of this paragraph, a binding contract shall 
        include a purchase option, renewal option, or replacement 
        option which is included in such contract.
    (d) Revocation of Section 943(e) Elections.--
            (1) In general.--In the case of a corporation that elected 
        to be treated as a domestic corporation under section 943(e) of 
        the Internal Revenue Code of 1986 (as in effect on the day 
        before the date of the enactment of this Act)--
                    (A) the corporation may revoke such election, 
                effective as of the date of the enactment of this Act, 
                and
                    (B) if the corporation does revoke such election--
                            (i) such corporation shall be treated as a 
                        domestic corporation transferring (as of the 
                        date of the enactment of this Act) all of its 
                        property to a foreign corporation in connection 
                        with an exchange described in section 354 of 
                        the Internal Revenue Code of 1986, and
                            (ii) no gain or loss shall be recognized on 
                        such transfer.
            (2) Exception.--Subparagraph (B)(ii) of paragraph (1) shall 
        not apply to gain on any asset held by the revoking corporation 
        if--
                    (A) the basis of such asset is determined in whole 
                or in part by reference to the basis of such asset in 
                the hands of the person from whom the revoking 
                corporation acquired such asset,
                    (B) the asset was acquired by transfer (not as a 
                result of the election under section 943(e) of such 
                Code) occurring on or after the 1st day on which its 
                election under section 943(e) of such Code was 
                effective, and
                    (C) a principal purpose of the acquisition was the 
                reduction or avoidance of tax.
    (e) General Transition.--
            (1) In general.--In the case of a taxable year ending after 
        the date of the enactment of this Act and beginning before 
        January 1, 2009, for purposes of chapter 1 of such Code, each 
        current FSC/ETI beneficiary shall be allowed a deduction equal 
        to the transition amount determined under this subsection with 
        respect to such beneficiary for such year.
            (2) Current fsc/eti beneficiary.--The term ``current FSC/
        ETI beneficiary'' means any corporation which entered into one 
        or more transactions during its taxable year beginning in 
        calendar year 2001 with respect to which FSC/ETI benefits were 
        allowable.
            (3) Transition amount.--For purposes of this subsection--
                    (A) In general.--The transition amount applicable 
                to any current FSC/ETI beneficiary for any taxable year 
                is the phaseout percentage of the adjusted base period 
                amount.
                    (B) Phaseout percentage.--
                            (i) In general.--In the case of a taxpayer 
                        using the calendar year as its taxable year, 
                        the phaseout percentage shall be determined 
                        under the following table:

                                                           The phaseout
            ``Years:                                     percentage is:

                    2004 and 2005...................                100
                    2006............................                 75
                    2007............................                 75
                    2008............................                 50
                    2009 and thereafter............                   0
                            (ii) Special rule for 2003.--The phaseout 
                        percentage for 2003 shall be the amount that 
                        bears the same ratio to 100 percent as the 
                        number of days after the date of the enactment 
                        of this Act bears to 365.
                            (iii) Special rule for fiscal year 
                        taxpayers.--In the case of a taxpayer not using 
                        the calendar year as its taxable year, the 
                        phaseout percentage is the weighted average of 
                        the phaseout percentages determined under the 
                        preceding provisions of this paragraph with 
                        respect to calendar years any portion of which 
                        is included in the taxpayer's taxable year. The 
                        weighted average shall be determined on the 
                        basis of the respective portions of the taxable 
                        year in each calendar year.
                    (4) Adjusted base period amount.--For purposes of 
                this subsection--
                            (A) In general.--In the case of a taxpayer 
                        using the calendar year as its taxable year, 
                        the adjusted base period amount for any taxable 
                        year is the base period amount multiplied by 
                        the applicable percentage, as determined in the 
                        following table:

                                                         The applicable
            ``Years:                                     percentage is:

                    2003............................                100
                    2004............................                100
                    2005............................                105
                    2006............................                110
                    2007............................                115
                    2008............................                120
                    2009 and thereafter............                   0
                            (B) Base period amount.--The base period 
                        amount is the aggregate FSC/ETI benefits for 
                        the taxpayer's taxable year beginning in 
                        calendar year 2001.
                            (C) Special rules for fiscal year 
                        taxpayers, etc.--Rules similar to rules of 
                        clauses (ii) and (iii) of paragraph (3)(B) 
                        shall apply for purposes of this paragraph.
            (5) FSC/ETI benefit.--For purposes of this subsection, the 
        term ``FSC/ETI benefit'' means--
                    (A) amounts excludable from gross income under 
                section 114 of such Code, and
                    (B) the exempt foreign trade income of related 
                foreign sales corporations from property acquired from 
                the taxpayer (determined without regard to section 
                923(a)(5) of such Code (relating to special rule for 
                military property), as in effect on the day before the 
                date of the enactment of the FSC Repeal and 
                Extraterritorial Income Exclusion Act of 2000).
        In determining the FSC/ETI benefit there shall be excluded any 
        amount attributable to a transaction with respect to which the 
        taxpayer is the lessor unless the leased property was 
        manufactured or produced in whole or in part by the taxpayer.
            (6) Special rule for farm cooperatives.--Under regulations 
        prescribed by the Secretary, determinations under this 
        subsection with respect to an organization described in section 
        943(g)(1) of such Code, as in effect on the day before the date 
        of the enactment of this Act, shall be made at the cooperative 
        level and the purposes of this subsection shall be carried out 
        by excluding amounts from the gross income of its patrons.
            (7) Certain rules to apply.--Rules similar to the rules of 
        section 41(f) of such Code shall apply for purposes of this 
        subsection.
            (8) Coordination with binding contract rule.--The deduction 
        determined under paragraph (1) for any taxable year shall be 
        reduced by the phaseout percentage of any FSC/ETI benefit 
        realized for the taxable year by reason of subsection (c)(2). 
        The preceding sentence shall not apply to any FSC/ETI benefit 
        attributable to a transaction described in the last sentence of 
        paragraph (5).
            (9) Special rule for taxable year which includes date of 
        enactment.--In the case of a taxable year which includes the 
        date of the enactment of this Act, the deduction allowed under 
        this subsection to any current FSC/ETI beneficiary shall in no 
        event exceed--
                    (A) 100 percent of such beneficiary's adjusted base 
                period amount for calendar year 2003, reduced by
                    (B) the aggregate FSC/ETI benefits of such 
                beneficiary with respect to transactions occurring 
                during the portion of the taxable year ending on the 
                date of the enactment of this Act.

  Subtitle B--Abusive Tax Shelter Shutdown and Taxpayer Accountability

          PART I--PROVISIONS DESIGNED TO CURTAIL TAX SHELTERS

SEC. 311. 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)--
                            ``(i) In general.--A transaction has 
                        economic substance only if--
                                    ``(I) the transaction changes in a 
                                meaningful way (apart from Federal tax 
                                effects and, if there is any Federal 
                                tax effects, also apart from any 
                                foreign, State, or local 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.
                            ``(ii) Special rule where taxpayer relies 
                        on profit potential.--A transaction shall not 
                        be treated as having economic substance by 
                        reason of having a potential for profit 
                        unless--
                                    ``(I) the present value of the 
                                reasonably expected pre-tax profit from 
                                the transaction is substantial in 
                                relation to the present value of the 
                                expected net tax benefits that would be 
                                allowed if the transaction were 
                                respected, and
                                    ``(II) the reasonably expected pre-
                                tax profit from the transaction exceeds 
                                a risk-free rate of return.
                    ``(C) Treatment of fees and foreign taxes.--Fees 
                and other transaction expenses and foreign taxes shall 
                be taken into account as expenses in determining pre-
                tax profit under subparagraph (B)(ii).
            ``(2) Special rules for transactions with tax-indifferent 
        parties.--
                    ``(A) Special rules for financing transactions.--
                The form of a transaction which is in substance the 
                borrowing of money or the acquisition of financial 
                capital directly or indirectly from a tax-indifferent 
                party shall not be respected if the present value of 
                the deductions to be claimed with respect to the 
                transaction is substantially in excess of the present 
                value of the anticipated economic returns of the person 
                lending the money or providing the financial capital. A 
                public offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected that at 
                least 50 percent of the offering will be placed with 
                tax-indifferent parties.
                    ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a tax-
                indifferent party shall not be respected if--
                            ``(i) it results in an allocation of income 
                        or gain to the tax-indifferent party in excess 
                        of such party's economic income or gain, or
                            ``(ii) it results in a basis adjustment or 
                        shifting of basis on account of overstating the 
                        income or gain of the tax-indifferent party.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--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.
                    ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity not 
                subject to tax imposed by subtitle A. A person shall be 
                treated as a tax-indifferent party with respect to a 
                transaction if the items taken into account with 
                respect to the transaction have no substantial impact 
                on such person's liability under subtitle A.
                    ``(C) Substantial nontax purpose.--In applying 
                subclause (II) of paragraph (1)(B)(i), a purpose of 
                achieving a financial accounting benefit shall not be 
                taken into account in determining whether a transaction 
                has a substantial nontax purpose if the origin of such 
                financial accounting benefit is a reduction of income 
                tax.
                    ``(D) Exception for personal transactions of 
                individuals.--In the case of an individual, this 
                subsection shall apply only to transactions entered 
                into in connection with a trade or business or an 
                activity engaged in for the production of income.
                    ``(E) Treatment of lessors.--In applying subclause 
                (I) of paragraph (1)(B)(ii) to the lessor of tangible 
                property subject to a lease, the expected net tax 
                benefits shall not include the benefits of 
                depreciation, or any tax credit, with respect to the 
                leased property and subclause (II) of paragraph 
                (1)(B)(ii) shall be disregarded in determining whether 
                any of such benefits are allowable.
            ``(4) Other common law doctrines not affected.--Except as 
        specifically provided in this subsection, the provisions of 
        this subsection shall not be construed as altering or 
        supplanting any other rule of law, and the requirements of this 
        subsection shall be construed as being in addition to any such 
        other rule of law.
            ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection. Such regulations may include 
        exemptions from the application of this subsection.''
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after February 13, 2003.

SEC. 312. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTION.

    (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 OR STATEMENT.

    ``(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 paragraphs (2) and 
        (3), the amount of the penalty under subsection (a) shall be 
        $50,000.
            ``(2) Listed transaction.--The amount of the penalty under 
        subsection (a) with respect to a listed transaction shall be 
        $100,000.
            ``(3) Increase in penalty for large entities and high net 
        worth individuals.--
                    ``(A) In general.--In the case of a failure under 
                subsection (a) by--
                            ``(i) a large entity, or
                            ``(ii) a high net worth individual,
                the penalty under paragraph (1) or (2) shall be twice 
                the amount determined without regard to this paragraph.
                    ``(B) Large entity.--For purposes of subparagraph 
                (A), the term `large entity' means, with respect to any 
                taxable year, a person (other than a natural person) 
                with gross receipts in excess of $10,000,000 for the 
                taxable year in which the reportable transaction occurs 
                or the preceding taxable year. Rules similar to the 
                rules of paragraph (2) and subparagraphs (B), (C), and 
                (D) of paragraph (3) of section 448(c) shall apply for 
                purposes of this subparagraph.
                    ``(C) High net worth individual.--For purposes of 
                subparagraph (A), the term `high net worth individual' 
                means, with respect to a reportable transaction, a 
                natural person whose net worth exceeds $2,000,000 
                immediately before the transaction.
    ``(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.--Except as provided in 
        regulations, the term `listed transaction' means a reportable 
        transaction which is the same as, or substantially similar to, 
        a transaction specifically identified by the Secretary as a tax 
        avoidance transaction for purposes of section 6011.
    ``(d) Authority To Rescind Penalty.--
            ``(1) In general.--The Commissioner of Internal Revenue may 
        rescind all or any portion of any penalty imposed by this 
        section with respect to any violation if--
                    ``(A) the violation is with respect to a reportable 
                transaction other than a listed transaction,
                    ``(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 the 
        Commissioner's 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 facts and circumstances of the 
                transaction,
                    ``(B) the reasons for the rescission, and
                    ``(C) the amount of the penalty rescinded.
            ``(5) Report.--The Commissioner shall each year report to 
        the Committee on Ways and Means of the House of Representatives 
        and the Committee on Finance of the Senate--
                    ``(A) a summary of the total number and aggregate 
                amount of penalties imposed, and rescinded, under this 
                section, and
                    ``(B) a description of each penalty rescinded under 
                this subsection and the reasons therefor.
    ``(e) Penalty Reported to SEC.--In the case of a person--
            ``(1) which is required to file periodic reports under 
        section 13 or 15(d) of the Securities Exchange Act of 1934 or 
        is required to be consolidated with another person for purposes 
        of such reports, and
            ``(2) which--
                    ``(A) is required to pay a penalty under this 
                section with respect to a listed transaction,
                    ``(B) is required to pay a penalty under section 
                6662A with respect to any reportable transaction at a 
                rate prescribed under section 6662A(c), or
                    ``(C) is required to pay a penalty under section 
                6662B with respect to any noneconomic substance 
                transaction,
the requirement to pay such penalty shall be disclosed in such reports 
filed by such person for such periods as the Secretary shall specify. 
Failure to make a disclosure in accordance with the preceding sentence 
shall be treated as a failure to which the penalty under subsection 
(b)(2) applies.
    ``(f) Coordination With Other Penalties.--The penalty imposed by 
this section is in addition to any penalty imposed under 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 or 
                                        statement.''
    (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.

SEC. 313. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS AND OTHER 
              REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX 
              AVOIDANCE PURPOSE.

    (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 Listed and Other Avoidance 
Transactions.--
            ``(1) In general.--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.
            ``(2) Rules applicable to compromise of penalty.--
                    ``(A) In general.--If the 1st letter of proposed 
                deficiency which allows the taxpayer an opportunity for 
                administrative review in the Internal Revenue Service 
                Office of Appeals has been sent with respect to a 
                penalty to which paragraph (1) applies, only the 
                Commissioner of Internal Revenue may compromise all or 
                any portion of such penalty.
                    ``(B) Applicable rules.--The rules of paragraphs 
                (3), (4), and (5) of section 6707A(d) shall apply for 
                purposes of subparagraph (A).
    ``(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 a noneconomic substance transaction 
                understatement.
                    ``(B) No double penalty.--This section shall not 
                apply to any portion of an understatement on which a 
                penalty is imposed under section 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 such term by section 6662B(c).
                    ``(5) Cross reference.--

                                ``For reporting of section 6662A(c) 
penalty to the Securities and Exchange Commission, see section 
6707A(e).''
    (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.
        A taxpayer failing to adequately disclose in accordance with 
        section 6011 shall be treated as meeting the requirements of 
        subparagraph (A) if the penalty for such failure was rescinded 
        under section 6707A(d).
            ``(3) Rules relating to reasonable belief.--For purposes of 
        paragraph (2)(C)--
                    ``(A) In general.--A taxpayer shall be treated as 
                having a reasonable belief with respect to the tax 
                treatment of an item only if such belief--
                            ``(i) is based on the facts and law that 
                        exist at the time the return of tax which 
                        includes such tax treatment is filed, and
                            ``(ii) relates solely to the taxpayer's 
                        chances of success on the merits of such 
                        treatment and does not take into account the 
                        possibility that a return will not be audited, 
                        such treatment will not be raised on audit, or 
                        such treatment will be resolved through 
                        settlement if it is raised.
                    ``(B) Certain opinions may not be relied upon.--
                            ``(i) In general.--An opinion of a tax 
                        advisor may not be relied upon to establish the 
                        reasonable belief of a taxpayer if--
                                    ``(I) the tax advisor is described 
                                in clause (ii), or
                                    ``(II) the opinion is described in 
                                clause (iii).
                            ``(ii) Disqualified tax advisors.--A tax 
                        advisor is described in this clause if the tax 
                        advisor--
                                    ``(I) is a material advisor (within 
                                the meaning of section 6111(b)(1)) who 
                                participates in the organization, 
                                management, promotion, or sale of the 
                                transaction or who 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 amendment.--The heading for subsection (c) 
        of section 6664 is amended by inserting ``for Underpayments'' 
        after ``Exception''.
    (d) Conforming Amendments.--
            (1) Subparagraph (C) of section 461(i)(3) is amended by 
        striking ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
        1274(b)(3)(C)''.
            (2) Paragraph (3) of section 1274(b) is amended--
                    (A) by striking ``(as defined in section 
                6662(d)(2)(C)(iii))'' in subparagraph (B)(i), and
                    (B) by adding at the end the following new 
                subparagraph:
                    ``(C) Tax shelter.--For purposes of subparagraph 
                (B), 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.''
            (3) Section 6662(d)(2) is amended by striking subparagraphs 
        (C) and (D).
            (4) Section 6664(c)(1) is amended by striking ``this part'' 
        and inserting ``section 6662 or 6663''.
            (5) Subsection (b) of section 7525 is amended by striking 
        ``section 6662(d)(2)(C)(iii)'' and inserting ``section 
        1274(b)(3)(C)''.
            (6)(A) The heading for section 6662 is amended to read as 
        follows:

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

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

SEC. 314. 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 the return or a 
statement attached to the return.
    ``(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 section 6662A were 
        applied by taking into account items attributable to 
        noneconomic substance transactions rather than items to which 
        section 6662A would apply without regard to this paragraph.
            ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any transaction if--
                    ``(A) there is a lack of economic substance (within 
                the meaning of section 7701(m)(1)) for the transaction 
                giving rise to the claimed tax benefit or the 
                transaction was not respected under section 7701(m)(2), 
                or
                    ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
    ``(d) Rules Applicable To Compromise of Penalty.--
            ``(1) In general.--If the 1st letter of proposed deficiency 
        which allows the taxpayer an opportunity for administrative 
        review in the Internal Revenue Service Office of Appeals has 
        been sent with respect to a penalty to which this section 
        applies, only the Commissioner of Internal Revenue may 
        compromise all or any portion of such penalty.
            ``(2) Applicable rules.--The rules of paragraphs (3), (4), 
        and (5) of section 6707A(d) shall apply for purposes of 
        paragraph (1).
    ``(e) Coordination With Other Penalties.--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.
    ``(f) Cross References.--

                                ``(1) For coordination of penalty with 
understatements under section 6662 and other special rules, see section 
6662A(e).
                                ``(2) For reporting of penalty imposed 
under this section to the Securities and Exchange Commission, see 
section 6707A(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 entered into after February 13, 2003.

SEC. 315. 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.--
            (1) In general.--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''.
            (2) Conforming amendment.--Section 6662(d) is amended by 
        adding at the end the following new paragraph:
            ``(3) Secretarial list.--For purposes of this subsection, 
        section 6664(d)(2), and section 6694(a)(1), the Secretary may 
        prescribe a list of positions for which the Secretary believes 
        there is not substantial authority or there is no reasonable 
        belief that the tax treatment is more likely than not the 
        proper tax treatment. Such list (and any revisions thereof) 
        shall be published in the Federal Register or the Internal 
        Revenue Bulletin.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 316. 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 1274(b)(3)(C)).''
    (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. 317. 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 
                        for such aid, assistance, or advice.
                    ``(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)(A) 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.

    ``(a) In General.--Each material advisor (as defined in section 
6111) with respect to any reportable transaction (as defined in section 
6707A(c)) shall 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 such a material advisor with respect to such 
        transaction, and
            ``(2) containing such other information as the Secretary 
        may by regulations require.
This section shall apply without regard to whether a material advisor 
is required to file a return under section 6111 with respect to such 
transaction.''
            (B) Section 6112 is amended by redesignating subsection (c) 
        as subsection (b).
            (C) Section 6112(b), as redesignated by subparagraph (B), 
        is amended--
                    (i) by inserting ``written'' before ``request'' in 
                paragraph (1)(A), and
                    (ii) by striking ``shall prescribe'' in paragraph 
                (2) and inserting ``may prescribe''.
            (D) 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.''
            (3)(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. 318. MODIFICATIONS TO PENALTY FOR FAILURE TO REGISTER TAX 
              SHELTERS.

    (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 reportable 
                transaction before the date the return including the 
                transaction 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.--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. 319. 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)(1)(A) within 20 business days after the 
        date of the Secretary's 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. 320. 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. 321. UNDERSTATEMENT OF TAXPAYER'S LIABILITY BY INCOME TAX RETURN 
              PREPARER.

    (a) Standards Conformed to Taxpayer Standards.--Section 6694(a) 
(relating to understatements due to unrealistic positions) is amended--
            (1) by striking ``realistic possibility of being sustained 
        on its merits'' in paragraph (1) and inserting ``reasonable 
        belief that the tax treatment in such position was more likely 
        than not the proper treatment'',
            (2) by striking ``or was frivolous'' in paragraph (3) and 
        inserting ``or there was no reasonable basis for the tax 
        treatment of such position'', and
            (3) by striking ``Unrealistic'' in the heading and 
        inserting ``Improper''.
    (b) Amount of Penalty.--Section 6694 is amended--
            (1) by striking ``$250'' in subsection (a) and inserting 
        ``$1,000'', and
            (2) by striking ``$1,000'' in subsection (b) and inserting 
        ``$5,000''.
    (c) Effective Date.--The amendments made by this section shall 
apply to documents prepared after the date of the enactment of this 
Act.

SEC. 322. 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 exceptionNo 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. 323. 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 based on a position which the Secretary 
                has identified as frivolous under subsection (c), 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 the 
                        Secretary has identified as frivolous under 
                        subsection (c), 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) Listing of Frivolous Positions.--The Secretary shall 
prescribe (and periodically revise) a list of positions which the 
Secretary has identified as being frivolous for purposes of this 
subsection. The Secretary shall not include in such list any position 
that the Secretary determines meets the requirement of section 
6662(d)(2)(B)(ii)(II).
    ``(d) 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.
    ``(e) Penalties in Addition to Other Penalties.--The penalties 
imposed by this section shall be in addition to any other penalty 
provided by law.''
    (b) Treatment of Frivolous Requests for Hearings Before Levy.--
            (1) Frivolous requests disregarded.--Section 6330 (relating 
        to notice and opportunity for hearing before levy) is amended 
        by adding at the end the following new subsection:
    ``(g) Frivolous Requests for Hearing, Etc.--Notwithstanding any 
other provision of this section, if the Secretary determines that any 
portion of a request for a hearing under this section or section 6320 
meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), 
then the Secretary may treat such portion as if it were never submitted 
and such portion shall not be subject to any further administrative or 
judicial review.''
            (2) Preclusion from raising frivolous issues at hearing.--
        Section 6330(c)(4) is amended--
                    (A) by striking ``(A)'' and inserting ``(A)(i)'';
                    (B) by striking ``(B)'' and inserting ``(ii)'';
                    (C) by striking the period at the end of the first 
                sentence and inserting ``; or''; and
                    (D) by inserting after subparagraph (A)(ii) (as so 
                redesignated) the following:
                    ``(B) the issue meets the requirement of clause (i) 
                or (ii) of section 6702(b)(2)(A).''
            (3) Statement of grounds.--Section 6330(b)(1) is amended by 
        striking ``under subsection (a)(3)(B)'' and inserting ``in 
        writing under subsection (a)(3)(B) and states the grounds for 
        the requested hearing''.
    (c) Treatment of Frivolous Requests for Hearings Upon Filing of 
Notice of Lien.--Section 6320 is amended--
            (1) in subsection (b)(1), by striking ``under subsection 
        (a)(3)(B)'' and inserting ``in writing under subsection 
        (a)(3)(B) and states the grounds for the requested hearing'', 
        and
            (2) in subsection (c), by striking ``and (e)'' and 
        inserting ``(e), and (g)''.
    (d) Treatment of Frivolous Applications for Offers-in-Compromise 
and Installment Agreements.--Section 7122 is amended by adding at the 
end the following new subsection:
    ``(e) Frivolous Submissions, Etc.--Notwithstanding any other 
provision of this section, if the Secretary determines that any portion 
of an application for an offer-in-compromise or installment agreement 
submitted under this section or section 6159 meets the requirement of 
clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may 
treat such portion as if it were never submitted and such portion shall 
not be subject to any further administrative or judicial review.''
    (e) 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.''
    (f) Effective Date.--The amendments made by this section shall 
apply to submissions made and issues raised after the date on which the 
Secretary first prescribes a list under section 6702(c) of the Internal 
Revenue Code of 1986, as amended by subsection (a).

SEC. 324. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF 
              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. 325. PENALTY ON PROMOTERS OF TAX SHELTERS.

    (a) Penalty on Promoting Abusive Tax Shelters.--Section 6700(a) is 
amended by adding at the end the following new sentence: 
``Notwithstanding the first sentence, if an activity with respect to 
which a penalty imposed under this subsection involves a statement 
described in paragraph (2)(A), the amount of the penalty shall be equal 
to 50 percent of the gross income derived (or to be derived) from such 
activity by the person on which the penalty is imposed.''
    (b) Effective Date.--The amendment made by this section shall apply 
to activities after the date of the enactment of this Act.

SEC. 326. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH LISTED 
              TRANSACTIONS NOT REPORTED.

    (a) In General.--Section 6501(e)(1) (relating to substantial 
omission of items for income taxes) is amended by adding at the end the 
following new subparagraph:
                    ``(C) Listed transactions.--If a taxpayer fails to 
                include on any return or statement for any taxable year 
                any information with respect to a listed transaction 
                (as defined in section 6707A(c)(2)) which is required 
                under section 6011 to be included with such return or 
                statement, the tax for such taxable year may be 
                assessed, or a proceeding in court for collection of 
                such tax may be begun without assessment, at any time 
                within 6 years after the time the return is filed. This 
                subparagraph shall not apply to any taxable year if the 
                time for assessment or beginning the proceeding in 
                court has expired before the time a transaction is 
                treated as a listed transaction under section 6011.''
    (b) Effective Date.--The amendment made by this section shall apply 
to transactions after the date of the enactment of this Act in taxable 
years ending after such date.

SEC. 327. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONDISCLOSED REPORTABLE AND NONECONOMIC 
              SUBSTANCE TRANSACTIONS.

    (a) In General.--Section 163 (relating to deduction for interest) 
is amended by redesignating subsection (m) as subsection (n) and by 
inserting after subsection (l) the following new subsection:
    ``(m) Interest on Unpaid Taxes Attributable To Nondisclosed 
Reportable Transactions and Noneconomic Substance Transactions.--No 
deduction shall be allowed under this chapter for any interest paid or 
accrued under section 6601 on any underpayment of tax which is 
attributable to--
            ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with respect to 
        which the requirement of section 6664(d)(2)(A) is not met, or
            ``(2) any noneconomic substance transaction understatement 
        (as defined in section 6662B(c)).''
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act in 
taxable years ending after such date.

                       PART II--OTHER PROVISIONS

SEC. 331. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.

    (a) In General.--Section 362 (relating to basis to corporations) is 
amended by adding at the end the following new subsection:
    ``(e) Limitations on Built-in Losses.--
            ``(1) Limitation on importation of built-in losses.--
                    ``(A) In general.--If in any transaction described 
                in subsection (a) or (b) there would (but for this 
                subsection) be an importation of a net built-in loss, 
                the basis of each property described in subparagraph 
                (B) which is acquired in such transaction shall 
                (notwithstanding subsections (a) and (b)) be its fair 
                market value immediately after such transaction.
                    ``(B) Property described.--For purposes of 
                subparagraph (A), property is described in this 
                paragraph if--
                            ``(i) gain or loss with respect to such 
                        property is not subject to tax under this 
                        subtitle in the hands of the transferor 
                        immediately before the transfer, and
                            ``(ii) gain or loss with respect to such 
                        property is subject to such tax in the hands of 
                        the transferee immediately after such transfer.
                In any case in which the transferor is a partnership, 
                the preceding sentence shall be applied by treating 
                each partner in such partnership as holding such 
                partner's proportionate share of the property of such 
                partnership.
                    ``(C) Importation of net built-in loss.--For 
                purposes of subparagraph (A), there is an importation 
                of a net built-in loss in a transaction if the 
                transferee's aggregate adjusted bases of property 
                described in subparagraph (B) which is transferred in 
                such transaction would (but for this paragraph) exceed 
                the fair market value of such property immediately 
                after such transaction.''
            ``(2) Limitation on transfer of built-in losses in section 
        351 transactions.--
                    ``(A) In general.--If--
                            ``(i) property is transferred in any 
                        transaction which is described in subsection 
                        (a) and which is not described in paragraph (1) 
                        of this subsection, and
                            ``(ii) the transferee's aggregate adjusted 
                        bases of the property so transferred would (but 
                        for this paragraph) exceed the fair market 
                        value of such property immediately after such 
                        transaction,
                then, notwithstanding subsection (a), the transferee's 
                aggregate adjusted bases of the property so transferred 
                shall not exceed the fair market value of such property 
                immediately after such transaction.
                    ``(B) Allocation of basis reduction.--The aggregate 
                reduction in basis by reason of subparagraph (A) shall 
                be allocated among the property so transferred in 
                proportion to their respective built-in losses 
                immediately before the transaction.
                    ``(C) Exception for transfers within affiliated 
                group.--Subparagraph (A) shall not apply to any 
                transaction if the transferor owns stock in the 
                transferee meeting the requirements of section 
                1504(a)(2). In the case of property to which 
                subparagraph (A) does not apply by reason of the 
                preceding sentence, the transferor's basis in the stock 
                received for such property shall not exceed its fair 
                market value immediately after the transfer.''
    (b) Comparable Treatment Where Liquidation.--Paragraph (1) of 
section 334(b) (relating to liquidation of subsidiary) is amended to 
read as follows:
            ``(1) In general.--If property is received by a corporate 
        distributee in a distribution in a complete liquidation to 
        which section 332 applies (or in a transfer described in 
        section 337(b)(1)), the basis of such property in the hands of 
        such distributee shall be the same as it would be in the hands 
        of the transferor; except that the basis of such property in 
        the hands of such distributee shall be the fair market value of 
        the property at the time of the distribution--
                    ``(A) in any case in which gain or loss is 
                recognized by the liquidating corporation with respect 
                to such property, or
                    ``(B) in any case in which the liquidating 
                corporation is a foreign corporation, the corporate 
                distributee is a domestic corporation, and the 
                corporate distributee's aggregate adjusted bases of 
                property described in section 362(e)(1)(B) which is 
                distributed in such liquidation would (but for this 
                subparagraph) exceed the fair market value of such 
                property immediately after such liquidation.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act.

SEC. 332. 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 
        (determined without regard to subparagraph (C)(ii)) 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 the transferee 
        partner's proportionate share of the adjusted basis of the 
        partnership property exceeds by more than $250,000 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 $250,000.
            ``(2) Regulations.--

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

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

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

                              ``Sec. 734. Adjustment to basis of 
                                        undistributed partnership 
                                        property where section 754 
                                        election or substantial basis 
                                        reduction.''
    (d) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to contributions made after the date of the 
        enactment of this Act.
            (2) Subsection (b).--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. 333. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY 
              PARTNERSHIP IN CORPORATE PARTNER.

    (a) In General.--Section 755 is amended by adding at the end the 
following new subsection:
    ``(c) No Allocation of Basis Decrease to Stock of Corporate 
Partner.--In making an allocation under subsection (a) of any decrease 
in the adjusted basis of partnership property under section 734(b)--
            ``(1) no allocation may be made to stock in a corporation 
        which is a partner in the partnership, and
            ``(2) any amount not allocable to stock by reason of 
        paragraph (1) shall be allocated under subsection (a) to other 
        partnership property.
Gain shall be recognized to the partnership to the extent that the 
amount required to be allocated under paragraph (2) to other 
partnership property exceeds the aggregate adjusted basis of such other 
property immediately before the allocation required by paragraph (2).''
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions after the date of the enactment of this Act.

SEC. 334. REPEAL OF SPECIAL RULES FOR FASITS.

    (a) In General.--Part V of subchapter M of chapter 1 (relating to 
financial asset securitization investment trusts) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 56(g) is amended by striking 
        ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (2) Clause (ii) of section 382(l)(4)(B) is amended by 
        striking ``a REMIC to which part IV of subchapter M applies, or 
        a FASIT to which part V of subchapter M applies,'' and 
        inserting ``or a REMIC to which part IV of subchapter M 
        applies,''.
            (3) Paragraph (1) of section 582(c) is amended by striking 
        ``, and any regular interest in a FASIT,''.
            (4) Subparagraph (E) of section 856(c)(5) is amended by 
        striking the last sentence.
            (5) Paragraph (5) of section 860G(a) is amended by adding 
        ``and'' at the end of subparagraph (B), by striking ``, and'' 
        at the end of subparagraph (C) and inserting a period, and by 
        striking subparagraph (D).
            (6) Subparagraph (C) of section 1202(e)(4) is amended by 
        striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
            (7) Subparagraph (C) of section 7701(a)(19) is amended by 
        adding ``and'' at the end of clause (ix), by striking ``, and'' 
        at the end of clause (x) and inserting a period, and by 
        striking clause (xi).
            (8) The table of parts for subchapter M of chapter 1 is 
        amended by striking the item relating to part V.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2003.
            (2) Exception for existing fasits.--
                    (A) In general.--Paragraph (1) shall not apply to 
                any FASIT in existence on the date of the enactment of 
                this Act.
                    (B) Transfer of additional assets not permitted.--
                Except as provided in regulations prescribed by the 
                Secretary of the Treasury or the Secretary's delegate, 
                subparagraph (A) shall cease to apply as of the 
                earliest date after the date of the enactment of this 
                Act that any property is transferred to the FASIT.

SEC. 335. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON 
              CONVERTIBLE DEBT.

    (a) In General.--Paragraph (2) of section 163(l) is amended by 
striking ``or a related party'' and inserting ``or equity held by the 
issuer (or any related party) in any other person''.
    (b) Conforming Amendment.--Paragraph (3) of section 163(l) is 
amended by striking ``or a related party'' in the material preceding 
subparagraph (A) and inserting ``or any other person''.
    (c) Effective Date.--The amendments made by this section shall 
apply to debt instruments issued after the date of the enactment of 
this Act.

SEC. 336. EXPANDED AUTHORITY TO DISALLOW TAX BENEFITS UNDER SECTION 
              269.

    (a) In General.--Subsection (a) of section 269 (relating to 
acquisitions made to evade or avoid income tax) is amended to read as 
follows:
    ``(a) In General.--If--
            ``(1)(A) any person acquires stock in a corporation, or
            ``(B) any corporation acquires, directly or indirectly, 
        property of another corporation and the basis of such property, 
        in the hands of the acquiring corporation, is determined by 
        reference to the basis in the hands of the transferor 
        corporation, and
            ``(2) the principal purpose for which such acquisition was 
        made is evasion or avoidance of Federal income tax by securing 
        the benefit of a deduction, credit, or other allowance,
then the Secretary may disallow such deduction, credit, or other 
allowance.''
    (b) Effective Date.--The amendment made by this section shall apply 
to stock and property acquired after February 13, 2003.

SEC. 337. MODIFICATIONS OF CERTAIN RULES RELATING TO CONTROLLED FOREIGN 
              CORPORATIONS.

    (a) Limitation on Exception From PFIC Rules for United States 
Shareholders of Controlled Foreign Corporations.--Paragraph (2) of 
section 1297(e) (relating to passive investment company) is amended by 
adding at the end the following flush sentence:
        ``Such term shall not include any period if there is only a 
        remote likelihood of an inclusion in gross income under section 
        951(a)(1)(A)(i) of subpart F income of such corporation for 
        such period.''
    (b) Determination of Pro Rata Share of Subpart F Income.--
Subsection (a) of section 951 (relating to amounts included in gross 
income of United States shareholders) is amended by adding at the end 
the following new paragraph:
            ``(4) Special rules for determining pro rata share of 
        subpart f income.--The pro rata share under paragraph (2) shall 
        be determined by disregarding--
                    ``(A) any rights lacking substantial economic 
                effect, and
                    ``(B) stock owned by a shareholder who is a tax-
                indifferent party (as defined in section 7701(m)(3)) if 
                the amount which would (but for this paragraph) be 
                allocated to such shareholder does not reflect such 
                shareholder's economic share of the earnings and 
                profits of the corporation.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years on controlled foreign corporation beginning 
after February 13, 2003, and to taxable years of United States 
shareholder in which or with which such taxable years of controlled 
foreign corporations end.

SEC. 338. BASIS FOR DETERMINING LOSS ALWAYS REDUCED BY NONTAXED PORTION 
              OF DIVIDENDS.

    (a) In General.--Section 1059 (relating to corporate shareholder's 
basis in stock reduced by nontaxed portion of extraordinary dividends) 
is amended by redesignating subsection (g) as subsection (h) and by 
inserting after subsection (f) the following new subsection:
    ``(g) Basis for Determining Loss Always Reduced by Nontaxed Portion 
of Dividends.--The basis of stock in a corporation (for purposes of 
determining loss) shall be reduced by the nontaxed portion of any 
dividend received with respect to such stock if this section does not 
otherwise apply to such dividend.''
    (b) Effective Date.--The amendment made by this section shall apply 
to dividends received after the date of the enactment of this Act.

SEC. 339. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.

    (a) In General.--Section 1502 (relating to consolidated return 
regulations) is amended by adding at the end the following new 
sentence: ``In prescribing such regulations, the Secretary may 
prescribe rules applicable to corporations filing consolidated returns 
under section 1501 that are different from other provisions of this 
title that would apply if such corporations filed separate returns.''
    (b) Result Not Overturned.--Notwithstanding 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 type of factual situation in 255 F.3d 1357 
(Fed. Cir. 2001).
    (c) Effective Date.--The provisions of this section shall apply to 
taxable years beginning before, on, or after the date of the enactment 
of this Act.

Subtitle C--Prevention of Corporate Expatriation To Avoid United States 
                               Income Tax

SEC. 341. PREVENTION OF CORPORATE EXPATRIATION TO AVOID UNITED STATES 
              INCOME TAX.

    (a) In General.--Paragraph (4) of section 7701(a) (defining 
domestic) is amended to read as follows:
            ``(4) Domestic.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `domestic' when applied to a 
                corporation or partnership means created or organized 
                in the United States or under the law of the United 
                States or of any State unless, in the case of a 
                partnership, the Secretary provides otherwise by 
                regulations.
                    ``(B) Certain corporations treated as domestic.--
                            ``(i) In general.--The acquiring 
                        corporation in a corporate expatriation 
                        transaction shall be treated as a domestic 
                        corporation.
                            ``(ii) Corporate expatriation 
                        transaction.--For purposes of this 
                        subparagraph, the term `corporate expatriation 
                        transaction' means any transaction if--
                                    ``(I) a nominally foreign 
                                corporation (referred to in this 
                                subparagraph as the `acquiring 
                                corporation') acquires, as a result of 
                                such transaction, directly or 
                                indirectly substantially all of the 
                                properties held directly or indirectly 
                                by a domestic corporation, and
                                    ``(II) immediately after the 
                                transaction, more than 80 percent of 
                                the stock (by vote or value) of the 
                                acquiring corporation is held by former 
                                shareholders of the domestic 
                                corporation by reason of holding stock 
                                in the domestic corporation.
                            ``(iii) Lower stock ownership requirement 
                        in certain cases.--Subclause (II) of clause 
                        (ii) shall be applied by substituting `50 
                        percent' for `80 percent' with respect to any 
                        nominally foreign corporation if--
                                    ``(I) such corporation does not 
                                have substantial business activities 
                                (when compared to the total business 
                                activities of the expanded affiliated 
                                group) in the foreign country in which 
                                or under the law of which the 
                                corporation is created or organized, 
                                and
                                    ``(II) the stock of the corporation 
                                is publicly traded and the principal 
                                market for the public trading of such 
                                stock is in the United States.
                            ``(iv) Partnership transactions.--The term 
                        `corporate expatriation transaction' includes 
                        any transaction if--
                                    ``(I) a nominally foreign 
                                corporation (referred to in this 
                                subparagraph as the `acquiring 
                                corporation') acquires, as a result of 
                                such transaction, directly or 
                                indirectly properties constituting a 
                                trade or business of a domestic 
                                partnership,
                                    ``(II) immediately after the 
                                transaction, more than 80 percent of 
                                the stock (by vote or value) of the 
                                acquiring corporation is held by former 
                                partners of the domestic partnership or 
                                related foreign partnerships 
                                (determined without regard to stock of 
                                the acquiring corporation which is sold 
                                in a public offering related to the 
                                transaction), and
                                    ``(III) the acquiring corporation 
                                meets the requirements of subclauses 
                                (I) and (II) of clause (iii).
                            ``(v) Special rules.--For purposes of this 
                        subparagraph--
                                    ``(I) a series of related 
                                transactions shall be treated as 1 
                                transaction, and
                                    ``(II) stock held by members of the 
                                expanded affiliated group which 
                                includes the acquiring corporation 
                                shall not be taken into account in 
                                determining ownership.
                            ``(vi) Other definitions.--For purposes of 
                        this subparagraph--
                                    ``(I) Nominally foreign 
                                corporation.--The term `nominally 
                                foreign corporation' means any 
                                corporation which would (but for this 
                                subparagraph) be treated as a foreign 
                                corporation.
                                    ``(II) Expanded affiliated group.--
                                The term `expanded affiliated group' 
                                means an affiliated group (as defined 
                                in section 1504(a) without regard to 
                                section 1504(b)).
                                    ``(III) Related foreign 
                                partnership.--A foreign partnership is 
                                related to a domestic partnership if 
                                they are under common control (within 
                                the meaning of section 482), or they 
                                shared the same trademark or 
                                tradename.''
    (b) Effective Dates.--
            (1) In general.--The amendment made by this section shall 
        apply to corporate expatriation transactions completed after 
        September 11, 2001.
            (2) Special rule.--The amendment made by this section shall 
        also apply to corporate expatriation transactions completed on 
        or before September 11, 2001, but only with respect to taxable 
        years of the acquiring corporation beginning after December 31, 
        2003.

 Subtitle D--Inclusion in Gross Income of Funded Deferred Compensation 
                         of Corporate Insiders

SEC. 351. 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.
                                 <all>