[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1054 Placed on Calendar Senate (PCS)]

                                                        Calendar No. 97
108th CONGRESS
  1st Session
                                S. 1054

To provide for reconciliation pursuant to section 201 of the concurrent 
             resolution on the budget for fiscal year 2004.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                              May 13, 2003

  Mr. Grassley, from the Committee on Finance, reported the following 
     original bill; which was read twice and placed on the calendar

_______________________________________________________________________

                                 A BILL


 
To provide for reconciliation pursuant to section 201 of the concurrent 
             resolution on the budget for fiscal year 2004.

    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 
Tax Relief Reconciliation 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--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS; 
                INCREASED EXPENSING FOR SMALL BUSINESSES

Sec. 101. Acceleration of 10-percent individual income tax rate bracket 
                            expansion.
Sec. 102. Acceleration of reduction in individual income tax rates.
Sec. 103. Minimum tax relief to individuals.
Sec. 104. Acceleration of increase in standard deduction for married 
                            taxpayers filing joint returns.
Sec. 105. Acceleration of 15-percent individual income tax rate bracket 
                            expansion for married taxpayers filing 
                            joint returns.
Sec. 106. Acceleration of increase in, and refundability of, child tax 
                            credit.
Sec. 107. Increased expensing for small business.
Sec. 108. Application of EGTRRA sunset to this title.
                TITLE II--PARTIAL EXCLUSION OF DIVIDENDS

Sec. 201. Partial exclusion of dividends received by individuals.
                     TITLE III--REVENUE PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for failing to disclose reportable transaction.
Sec. 303. Accuracy-related penalty for listed transactions and other 
                            reportable transactions having a 
                            significant tax avoidance purpose.
Sec. 304. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 305. Modifications of substantial understatement penalty for 
                            nonreportable transactions.
Sec. 306. Tax shelter exception to confidentiality privileges relating 
                            to taxpayer communications.
Sec. 307. Disclosure of reportable transactions.
Sec. 308. Modifications to penalty for failure to register tax 
                            shelters.
Sec. 309. Modification of penalty for failure to maintain lists of 
                            investors.
Sec. 310. Modification of actions to enjoin certain conduct related to 
                            tax shelters and reportable transactions.
Sec. 311. Understatement of taxpayer's liability by income tax return 
                            preparer.
Sec. 312. Penalty on failure to report interests in foreign financial 
                            accounts.
Sec. 313. Frivolous tax submissions.
Sec. 314. Penalty on promoters of tax shelters.
Sec. 315. Statute of limitations for taxable years for which listed 
                            transactions not reported.
Sec. 316. Denial of deduction for interest on underpayments 
                            attributable to nondisclosed reportable and 
                            noneconomic substance transactions.
            Subtitle B--Enron-Related Tax Shelter Provisions

Sec. 321. Limitation on transfer or importation of built-in losses.
Sec. 322. No reduction of basis under section 734 in stock held by 
                            partnership in corporate partner.
Sec. 323. Repeal of special rules for FASITs.
Sec. 324. Expanded disallowance of deduction for interest on 
                            convertible debt.
Sec. 325. Expanded authority to disallow tax benefits under section 
                            269.
Sec. 326. Modifications of certain rules relating to controlled foreign 
                            corporations.
Sec. 327. Controlled entities ineligible for REIT status.
           Subtitle C--Other Corporate Governance Provisions

                       Part I--General Provisions

Sec. 331. Affirmation of consolidated return regulation authority.
Sec. 332. Signing of corporate tax returns by chief executive officer.
Sec. 333. Denial of deduction for certain fines, penalties, and other 
                            amounts.
Sec. 334. Disallowance of deduction for punitive damages.
                 Part II--Executive Compensation Reform

Sec. 335. Treatment of nonqualified deferred compensation funded with 
                            assets located outside the United States.
Sec. 336. Inclusion in gross income of funded deferred compensation of 
                            corporate insiders.
Sec. 337. Prohibition on deferral of gain from the exercise of stock 
                            options and restricted stock gains through 
                            deferred compensation arrangements.
Sec. 338. Increase in withholding from supplemental wage payments in 
                            excess of $1,000,000.
                  Subtitle D--International Provisions

             Part I--Provisions to Discourage Expatriation

Sec. 340. Revision of tax rules on expatriation.
Sec. 341. Tax treatment of inverted corporate entities.
Sec. 342. Excise tax on stock compensation of insiders in inverted 
                            corporations.
Sec. 343. Reinsurance of United States risks in foreign jurisdictions.
                       Part II--Other Provisions

Sec. 344. Doubling of certain penalties, fines, and interest on 
                            underpayments related to certain offshore 
                            financial arrangement.
Sec. 345. Effectively connected income to include certain foreign 
                            source income.
Sec. 346. Determination of basis of amounts paid from foreign pension 
                            plans.
Sec. 347. Recapture of overall foreign losses on sale of controlled 
                            foreign corporation.
Sec. 348. Prevention of mismatching of interest and original issue 
                            discount deductions and income inclusions 
                            in transactions with related foreign 
                            persons.
Sec. 349. Sale of gasoline and diesel fuel at duty-free sales 
                            enterprises.
Sec. 350. Repeal of earned income exclusion of citizens or residents 
                            living abroad.
                  Subtitle E--Other Revenue Provisions

Sec. 351. Extension of Internal Revenue Service user fees.
Sec. 352. Addition of vaccines against hepatitis A to list of taxable 
                            vaccines.
Sec. 353. Disallowance of certain partnership loss transfers.
Sec. 354. Treatment of stripped interests in bond and preferred stock 
                            funds, etc.
Sec. 355. Reporting of taxable mergers and acquisitions.
Sec. 356. Minimum holding period for foreign tax credit on withholding 
                            taxes on income other than dividends.
Sec. 357. Qualified tax collection contracts.
Sec. 358. Extension of customs user fees.
Sec. 359. Clarification of exemption from tax for small property and 
                            casualty insurance companies.
Sec. 360. Partial payment of tax liability in installment agreements.
Sec. 361. Extension of amortization of intangibles to sports 
                            franchises.
Sec. 362. Deposits made to suspend running of interest on potential 
                            underpayments.
Sec. 363. Clarification of rules for payment of estimated tax for 
                            certain deemed asset sales.
Sec. 364. Limitation on deduction for charitable contributions of 
                            patents and similar property.
Sec. 365. Extension of provision permitting qualified transfers of 
                            excess pension assets to retiree health 
                            accounts.
Sec. 366. Proration rules for life insurance business of property and 
                            casualty insurance companies.
Sec. 367. Modification of treatment of transfers to creditors in 
                            divisive reorganizations.
                      Subtitle F--Other Provisions

Sec. 371. Temporary State Fiscal Relief Fund.
Sec. 372. Review of State agency blindness and disability 
                            determinations.
Sec. 373. Prohibition on use of SCHIP funds to provide coverage for 
                            childless adults.
          TITLE IV--SMALL BUSINESS AND AGRICULTURAL PROVISIONS

                 Subtitle A--Small Business Provisions

Sec. 401. Exclusion of certain indebtedness of small business 
                            investment companies from acquisition 
                            indebtedness.
Sec. 402. Repeal of occupational taxes relating to distilled spirits, 
                            wine, and beer.
Sec. 403. Custom gunsmiths.
Sec. 404. Simplification of excise tax imposed on bows and arrows.
                  Subtitle B--Agricultural Provisions

Sec. 411. Capital gain treatment under section 631(b) to apply to 
                            outright sales by landowners.
Sec. 412. Special rules for livestock sold on account of weather-
                            related conditions.
Sec. 413. Exclusion for loan payments under national health service 
                            corps loan repayment program.
Sec. 414. Payment of dividends on stock of cooperatives without 
                            reducing patronage dividends.
              TITLE V--SIMPLIFICATION AND OTHER PROVISIONS

                Subtitle A--Uniform Definition of Child

Sec. 501. Uniform definition of child, etc.
Sec. 502. Modifications of definition of head of household.
Sec. 503. Modifications of dependent care credit.
Sec. 504. Modifications of child tax credit.
Sec. 505. Modifications of earned income credit.
Sec. 506. Modifications of deduction for personal exemption for 
                            dependents.
Sec. 507. Technical and conforming amendments.
Sec. 508. Effective date.
                       Subtitle B--Simplification

Sec. 511. Consolidation of life and non-life insurance company returns.
Sec. 512. Special rules for taxation of life insurance companies.
Sec. 513. Modification of active business definition under section 355.
                      Subtitle C--Other Provisions

Sec. 521. Civil rights tax relief.
Sec. 522. Increase in section 382 limitation for companies emerging 
                            from bankruptcy.
Sec. 523. Increase in historic rehabilitation credit for certain low-
                            income housing for the elderly.
Sec. 524. Modification of application of income forecast method of 
                            depreciation.
Sec. 525. Additional advance refundings of certain governmental bonds.
Sec. 526. Exclusion of income derived from certain wagers on horse 
                            races from gross income of nonresident 
                            alien individuals.
Sec. 527. Federal reimbursement of emergency health services furnished 
                            to undocumented aliens.
Sec. 528. Premiums for mortgage insurance.
                            TITLE VI--SUNSET

Sec. 601. Sunset.

  TITLE I--ACCELERATION OF CERTAIN PREVIOUSLY ENACTED TAX REDUCTIONS; 
                INCREASED EXPENSING FOR SMALL BUSINESSES

SEC. 101. 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 Beginning in 2004.--Subparagraph (C) of 
section 1(i)(1) (relating to inflation adjustment) is amended to read 
as follows:
                    ``(C) Inflation adjustment.--In prescribing the 
                tables under subsection (f) which apply with respect to 
                taxable years beginning in calendar years after 2003--
                            ``(i) the cost-of-living adjustment used in 
                        making adjustments to the initial bracket 
                        amount shall be determined under subsection 
                        (f)(3) by substituting `2002' for `1992' in 
                        subparagraph (B) thereof, and
                            ``(ii) such adjustment shall not apply to 
                        the amount referred to in subparagraph 
                        (B)(iii).
                If any amount after adjustment under the preceding 
                sentence is not a multiple of $50, such amount shall be 
                rounded to the next lowest multiple of $50.''.
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxable years beginning after December 31, 2002.
            (2) Subsection (b).--The amendment made by subsection (b) 
        shall apply to taxable years beginning after December 31, 2003.
            (3) Tables for 2003.--The Secretary of the Treasury shall 
        modify each table which has been prescribed for taxable years 
        beginning in 2003 and which relates to the amendment made by 
        subsection (a), section 102, or section 103 to reflect each 
        such amendment.

SEC. 102. ACCELERATION OF REDUCTION IN INDIVIDUAL INCOME TAX RATES.

    (a) In General.--The table in paragraph (2) of section 1(i) 
(relating to reductions in rates after June 30, 2001) is amended to 
read as follows:

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       ``In the case of taxable years                                                                                                              The corresponding percentages shall be substituted for  the following percentages:
                          beginning during calendar   ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                    year:                28%      31%      36%                                                                                                                                         39.6%
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       2001..........................   27.5%    30.5%    35.5%                                                                                                                                        39.1%
                       2002..........................   27.0%    30.0%    35.0%                                                                                                                                        38.6%
                       2003 and thereafter...........   25.0%    28.0%    33.0%                                                                                                                                      35.0%''.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2002.

SEC. 103. MINIMUM TAX RELIEF TO INDIVIDUALS.

    (a) In General.--So much of paragraph (1) of section 55(d) 
(relating to exemption amount for taxpayers other than corporations) as 
precedes subparagraph (C) thereof is amended to read as follows:
            ``(1) Exemption amount for taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation, the term `exemption amount' means as follows:
                    ``(A) Joint return and surviving spouse.--In the 
                case of a joint return or a surviving spouse, the 
                amount under the following table:

``In the case of taxable years      The exemption
        beginning:                  amount is:
        Before 2001........................................    $45,000 
        In 2001 and 2002...................................    $49,000 
        In 2003, 2004, and 2005............................    $61,000 
        After 2005.........................................    $45,000.
                    ``(B) Individual not married and not a surviving 
                spouse.--In the case of an individual who is not a 
                married individual and is not a surviving spouse, the 
                amount under the following table:

``In the case of taxable years      The exemption
        beginning:                  amount is:
        Before 2001........................................    $33,750 
        In 2001 and 2002...................................    $35,750 
        In 2003, 2004, and 2005............................    $41,750 
        After 2005......................................... $33,750.''.
    (b) Conforming Amendments.--
            (1) Section 55(d)(1)(C) is amended--
                    (A) by striking ``, and'' and inserting a period, 
                and
                    (B) by striking ``50 percent'' and inserting 
                ``Married individual filing a separate return.--50 
                percent''.
            (2) Section 55(d)(1)(D) is amended by striking ``$22,500'' 
        and inserting ``Estate and trust.--$22,500''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 104. ACCELERATION OF INCREASE IN STANDARD DEDUCTION FOR MARRIED 
              TAXPAYERS FILING JOINT RETURNS.

    (a) In General.--Paragraph (2) of section 63(c) (relating to basic 
standard deduction) is amended to read as follows:
            ``(2) Basic standard deduction.--For purposes of paragraph 
        (1), the basic standard deduction is--
                    ``(A) 200 percent of the dollar amount in effect 
                under subparagraph (C) for the taxable year in the case 
                of--
                            ``(i) a joint return, or
                            ``(ii) a surviving spouse (as defined in 
                        section 2(a)),
                    ``(B) $4,400 in the case of a head of household (as 
                defined in section 2(b)), or
                    ``(C) $3,000 in any other case.''.
    (b) Conforming Amendments.--
            (1) Section 63(c)(4) is amended by striking ``(2)(D)'' each 
        place it occurs and inserting ``(2)(C)''.
            (2) Section 63(c) is amended by striking paragraph (7).
            (3) Section 301(d) of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is amended by striking ``2004'' and 
        inserting ``2002''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 105. ACCELERATION OF 15-PERCENT INDIVIDUAL INCOME TAX RATE BRACKET 
              EXPANSION FOR MARRIED TAXPAYERS FILING JOINT RETURNS.

    (a) In General.--Paragraph (8) of section 1(f) (relating to 
phaseout of marriage penalty in 15-percent bracket) is amended to read 
as follows:
            ``(8) Elimination of marriage penalty in 15-percent 
        bracket.--With respect to taxable years beginning after 
        December 31, 2002, in prescribing the tables under paragraph 
        (1)--
                    ``(A) the maximum taxable income in the 15 percent 
                rate bracket in the table contained in subsection (a) 
                (and the minimum taxable income in the next higher 
                taxable income bracket in such table) shall be 200 
                percent of the maximum taxable income in the 15-percent 
                rate bracket in the table contained in subsection (c) 
                (after any other adjustment under this subsection), and
                    ``(B) the comparable taxable income amounts in the 
                table contained in subsection (d) shall be \1/2\ of the 
                amounts determined under subparagraph (A).''.
    (b) Conforming Amendments.--
            (1) The heading for subsection (f) of section 1 is amended 
        by striking ``Phaseout'' and inserting ``Elimination''.
            (2) Section 302(c) of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is amended by striking ``2004'' and 
        inserting ``2002''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 106. ACCELERATION OF INCREASE IN, AND REFUNDABILITY OF, CHILD TAX 
              CREDIT.

    (a) Acceleration of Increase in Credit.--Subsection (a) of section 
24 (relating to child tax credit) is amended to read as follows:
    ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year with 
respect to each qualifying child of the taxpayer an amount equal to 
$1,000.''.
    (b) Expansion of Credit Refundability.--Section 24(d)(1)(B)(i) 
(relating to portion of credit refundable) is amended by striking ``(10 
percent in the case of taxable years beginning before January 1, 
2005)''.
    (c) Advance Payment of Portion of Increased Credit in 2003.--
            (1) In general.--Subchapter B of chapter 65 (relating to 
        abatements, credits, and refunds) is amended by adding at the 
        end the following new section:

``SEC. 6429. ADVANCE PAYMENT OF PORTION OF INCREASED CHILD CREDIT FOR 
              2003.

    ``(a) In General.--Each taxpayer who claimed a credit under section 
24 on the return for the taxpayer's first taxable year beginning in 
2002 shall be treated as having made a payment against the tax imposed 
by chapter 1 for such taxable year in an amount equal to the child tax 
credit refund amount (if any) for such taxable year.
    ``(b) Child Tax Credit Refund Amount.--For purposes of this 
section, the child tax credit refund amount is the amount by which the 
aggregate credits allowed under part IV of subchapter A of chapter 1 
for such first taxable year would have been increased if--
            ``(1) the per child amount under section 24(a)(2) for such 
        year were $1,000,
            ``(2) only qualifying children (as defined in section 
        24(c)) of the taxpayer for such year who had not attained age 
        17 as of December 31, 2003, were taken into account, and
            ``(3) section 24(d)(1)(B)(ii) did not apply.
    ``(c) Timing of Payments.--In the case of any overpayment 
attributable to this section, the Secretary shall, subject to the 
provisions of this title, refund or credit such overpayment as rapidly 
as possible and, to the extent practicable, before October 1, 2003. No 
refund or credit shall be made or allowed under this section after 
December 31, 2003.
    ``(d) Coordination with Child Tax Credit.--
            ``(1) In general.--The amount of credit which would (but 
        for this subsection and section 26) be allowed under section 24 
        for the taxpayer's first taxable year beginning in 2003 shall 
        be reduced (but not below zero) by the payments made to the 
        taxpayer under this section. Any failure to so reduce the 
        credit shall be treated as arising out of a mathematical or 
        clerical error and assessed according to section 6213(b)(1).
            ``(2) Joint returns.--In the case of a payment under this 
        section with respect to a joint return, half of such payment 
        shall be treated as having been made to each individual filing 
        such return.
    ``(e) No Interest.--No interest shall be allowed on any overpayment 
attributable to this section.''.
            (2) Clerical amendment.--The table of sections for 
        subchapter B of chapter 65 is amended by adding at the end the 
        following new item:

        ``Sec. 6429. Advance payment of portion of increased child 
                            credit for 2003.''.
    (d) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2002.
            (2) Subsection (c).--The amendments made by subsection (c) 
        shall take effect on the date of the enactment of this Act.

SEC. 107. 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 $75,000.''.
    (b) Increase in Qualifying Investment at Which Phaseout Begins.--
Paragraph (2) of section 179(b) (relating to reduction in limitation) 
is amended by striking ``$200,000'' and inserting ``$325,000''.
    (c) Off-the-Shelf Computer Software.--Paragraph (1) of section 
179(d) (defining section 179 property) is amended to read as follows:
            ``(1) Section 179 property.--For purposes of this section, 
        the term `section 179 property' means property--
                    ``(A) which is--
                            ``(i) tangible property (to which section 
                        168 applies), or
                            ``(ii) computer software (as defined in 
                        section 197(e)(3)(B)) which is described in 
                        section 197(e)(3)(A)(i) and to which section 
                        167 applies,
                    ``(B) which is section 1245 property (as defined in 
                section 1245(a)(3)), and
                    ``(C) which is acquired by purchase for use in the 
                active conduct of a trade or business.
        Such term shall not include any property described in section 
        50(b) and shall not include air conditioning or heating 
        units.''.
    (d) Adjustment of Dollar Limit and Phaseout Threshold for 
Inflation.--Subsection (b) of section 179 (relating to limitations) is 
amended by adding at the end the following new paragraph:
            ``(5) Inflation adjustments.--
                    ``(A) In general.--In the case of any taxable year 
                beginning in a calendar year after 2003, the dollar 
                amounts in paragraphs (1) and (2) shall each be 
                increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        by substituting `calendar year 2002' for 
                        `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--
                            ``(i) Dollar limitation.--If the amount in 
                        paragraph (1) as increased under subparagraph 
                        (A) is not a multiple of $1,000, such amount 
                        shall be rounded to the nearest multiple of 
                        $1,000.
                            ``(ii) Phaseout amount.--If the amount in 
                        paragraph (2) as increased under subparagraph 
                        (A) is not a multiple of $10,000, such amount 
                        shall be rounded to the nearest multiple of 
                        $10,000.''.
    (e) Revocation of Election.--Paragraph (2) of section 179(c) 
(relating to election irrevocable) is amended to read as follows:
            ``(2) Revocation of election.--The taxpayer may revoke an 
        election under paragraph (1), and any specification contained 
        in any such election, with respect to any property. Such 
        revocation, once made, shall be irrevocable.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 108. APPLICATION OF EGTRRA SUNSET TO THIS TITLE.

    Each amendment made by this title (other than section 107) shall be 
subject to title IX of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 to the same extent and in the same manner as 
the provision of such Act to which such amendment relates.

                TITLE II--PARTIAL EXCLUSION OF DIVIDENDS

SEC. 201. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS.

    (a) General Rule.--Part III of subchapter B of chapter 1 is amended 
by inserting after section 115 the following new section:

``SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS RECEIVED BY INDIVIDUALS.

    ``(a) Exclusion From Gross Income.--
            ``(1) In general.--Gross income does not include qualified 
        dividend income received during the taxable year by an 
        individual.
            ``(2) Limitation.--Paragraph (1) shall apply to qualified 
        dividend income of a taxpayer only to the extent such income 
        does not exceed the sum of--
                    ``(A) $500 ($250 in the case of a married 
                individual filing a separate return), plus
                    ``(B) 10 percent (20 percent in the case of taxable 
                years beginning after 2007) of such income in excess of 
                the amount applicable under subparagraph (A).
    ``(b) Qualified Dividend Income.--For purposes of this subsection--
            ``(1) In general.--The term `qualified dividend income' 
        means dividends received with respect to any share of stock 
        of--
                    ``(A) any domestic corporation, or
                    ``(B) any foreign corporation but only if such 
                share of stock is readily tradable on an established 
                securities market.
            ``(2) Certain dividends excluded.--Such term shall not 
        include--
                    ``(A) any dividend from a corporation which for the 
                taxable year of the corporation in which the 
                distribution is made, or the preceding taxable year, is 
                a corporation exempt from tax under section 501 or 521,
                    ``(B) any amount allowed as a deduction under 
                section 591 (relating to deduction for dividends paid 
                by mutual savings banks, etc.), and
                    ``(C) any dividend described in section 404(k).
            ``(3) Exclusion of dividends of certain foreign 
        corporations.--Such term shall not include any dividend from a 
        foreign corporation which for the taxable year of the 
        corporation in which the distribution was made, or the 
        preceding taxable year, is a foreign personal holding company 
        (as defined in section 552), a foreign investment company (as 
        defined in section 1246(b)), or a passive foreign investment 
        company (as defined in section 1297).
            ``(4) Coordination with section 246(c).--Such term shall 
        not include any dividend on any share of stock--
                    ``(A) with respect to which the holding period 
                requirements of section 246(c) are not met, or
                    ``(B) to the extent that the taxpayer is under an 
                obligation (whether pursuant to a short sale or 
                otherwise) to make related payments with respect to 
                positions in substantially similar or related property.
    ``(c) Special Rules.--
            ``(1) Amounts taken into account as investment income.--
        Qualified dividend income shall not include any amount which 
        the taxpayer takes into account as investment income under 
        section 163(d)(4)(B).
            ``(2) Coordination with foreign tax credit and deduction.--
        No credit shall be allowed under section 901, and no deduction 
        shall be allowed under this chapter, for any taxes paid or 
        accrued with respect to any income excludable under this 
        section.
            ``(3) Extraordinary dividends.--If an individual receives, 
        with respect to any share of stock, qualified dividend income 
        from 1 or more dividends which are extraordinary dividends 
        (within the meaning of section 1059(c)), any loss on the sale 
        or exchange of such share shall, to the extent of such 
        dividends, be treated as long-term capital loss.
            ``(4) Certain nonresident aliens ineligible for 
        exclusion.--In the case of a nonresident alien individual, 
        subsection (a) shall apply only in determining the tax imposed 
        for the taxable year by sections 871(b)(1) and 877(b).
            ``(5) Exclusion disregarded in determining income for 
        certain purposes.--Subsection (a) shall not apply for purposes 
        of determining amounts of income under sections 32(i), 86(b), 
        135(b), 137(b), 219(g), 221(b), 222(b), 408A(c)(3), 469(i), and 
        530(c), or subpart A of part IV of subchapter A.
            ``(6) Treatment of dividends from regulated investment 
        companies and real estate investment trusts.--A dividend from a 
        regulated investment company or real estate investment trust 
        shall be subject to the limitations prescribed in sections 854 
        and 857.''.
    (b) Exclusion of Dividends From Investment Income.--Subparagraph 
(B) of section 163(d)(4) (defining net investment income) is amended by 
adding at the end the following flush sentence:
                ``Such term shall include qualified dividend income (as 
                defined in section 116(b)) only to the extent the 
                taxpayer elects to treat such income as investment 
                income for purposes of this subsection.''.
    (c) Treatment of Dividends From Regulated Investment Companies.--
            (1) Subsection (a) of section 854 (relating to dividends 
        received from regulated investment companies) is amended by 
        inserting ``section 116 (relating to partial exclusion of 
        dividends received by individuals) and'' after ``For purposes 
        of''.
            (2) Paragraph (1) of section 854(b) (relating to other 
        dividends) is amended by redesignating subparagraph (B) as 
        subparagraph (C) and by inserting after subparagraph (A) the 
        following new subparagraph:
                    ``(B) Exclusion under section 116.--
                            ``(i) In general.--If the aggregate 
                        dividends received by a regulated investment 
                        company during any taxable year are less than 
                        95 percent of its gross income, then, in 
                        computing the exclusion under section 116, 
                        rules similar to the rules of subparagraph (A) 
                        shall apply.
                            ``(ii) Gross income.--For purposes of 
                        clause (i), in the case of 1 or more sales or 
                        other dispositions of stock or securities, the 
                        term `gross income' includes only the excess 
                        of--
                                    ``(I) the net short-term capital 
                                gain from such sales or dispositions, 
                                over
                                    ``(II) the net long-term capital 
                                loss from such sales or 
                                dispositions.''.
            (3) Subparagraph (C) of section 854(b)(1), as redesignated 
        by paragraph (2), is amended by striking ``subparagraph (A)'' 
        and inserting ``subparagraph (A) or (B)''.
            (4) Paragraph (2) of section 854(b) is amended by inserting 
        ``the exclusion under section 116 and'' after ``for purposes 
        of''.
            (5) Subsection (b) of section 854 is amended by adding at 
        the end the following new paragraph:
            ``(5) Coordination with section 116.--For purposes of 
        paragraph (1)(B), an amount shall be treated as a dividend only 
        if the amount is qualified dividend income (within the meaning 
        of section 116(b)).''.
    (d) Treatment of Dividends Received From Real Estate Investment 
Trusts.--Section 857(c) (relating to restrictions applicable to 
dividends received from real estate investment trusts) is amended to 
read as follows:
    ``(c) Restrictions Applicable To Dividends Received From Real 
Estate Investment Trusts.--
            ``(1) Section 243.--For purposes of section 243 (relating 
        to deductions for dividends received by corporations), a 
        dividend received from a real estate investment trust which 
        meets the requirements of this part shall not be considered a 
        dividend.
            ``(2) Section 116.--For purposes of section 116 (relating 
        to exclusion of dividends), rules similar to the rules of 
        section 854(b)(1)(B) shall apply to dividends received from a 
        real estate trust which meets the requirements of this part.''.
    (e) Conforming Amendments.--
            (1) Subsection (f) of section 301 is amended adding at the 
        end the following new paragraph:
            ``(4) For partial exclusion from gross income of dividends 
        received by individuals, see section 116.''.
            (2) Paragraph (1) of section 306(a) is amended by adding at 
        the end the following new subparagraph:
                    ``(D) Treatment as dividend.--For purposes of 
                section 116, any amount treated as ordinary income 
                under this paragraph shall be treated as a dividend 
                received from the corporation.''.
            (3)(A) Subpart C of part II of subchapter C of chapter 1 
        (relating to collapsible corporations) is repealed.
            (B)(i) Section 338(h) is amended by striking paragraph 
        (14).
            (ii) Sections 467(c)(5)(C), 1255(b)(2), and 1257(d) are 
        each amended by striking ``, 341(e)(12),''.
            (iii) The table of subparts for part II of subchapter C of 
        chapter 1 is amended by striking the item related to subpart C.
            (4) Section 531(a) is amended by inserting ``90 percent (80 
        percent in the case of taxable years beginning after 2007) of'' 
        after ``equal to''.
            (5) Section 541(a) is amended by inserting ``90 percent (80 
        percent in the case of taxable years beginning after 2007) of'' 
        after ``equal to''.
            (6) Section 584(c) is amended by adding at the end the 
        following new flush sentence:
``The proportionate share of each participant in the amount of 
dividends received by the common trust fund and to which section 116 
applies shall be considered for purposes of such paragraph as having 
been received by such participant.''.
            (7) Section 643(a) is amended by redesignating paragraph 
        (7) as paragraph (8) and by inserting after paragraph (6) the 
        following new paragraph:
            ``(7) Excluded dividends.--There shall be included the 
        amount of any dividends excluded from gross income under 
        section 116 (relating to partial exclusion of dividends).''.
            (8) Paragraph (5) of section 702(a) is amended to read as 
        follows:
            ``(5) dividends with respect to which section 116 or part 
        VII of subchapter B applies,''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

                     TITLE III--REVENUE PROVISIONS

        Subtitle A--Provisions Designed To Curtail Tax Shelters

SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (n) as subsection (o) and by inserting after subsection (m) 
the following new subsection:
    ``(n) 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) 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.
                        In applying subclause (II), 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.
                            ``(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) 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.
                    ``(D) Treatment of lessors.--A lessor of tangible 
                property subject to a lease shall be treated as 
                satisfying the requirements of paragraph (1)(B)(ii) 
                with respect to the leased property if such lease 
                satisfies such requirements as provided by the 
                Secretary.
            ``(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 on or after May 8, 2003.

SEC. 302. 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. 303. 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 
                (2), (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. 304. 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(n)(1)) for the transaction 
                giving rise to the claimed benefit or the transaction 
                was not respected under section 7701(n)(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 (2), (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 on or after May 8, 2003.

SEC. 305. 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. 306. 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. 307. 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. 308. 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 listed 
                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. 309. 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. 310. 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. 311. 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. 312. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL 
              ACCOUNTS.

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

SEC. 313. 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. 314. 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. 315. 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 in taxable years beginning after the date of the 
enactment of this Act.

SEC. 316. 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 in taxable years beginning after the date of the 
enactment of this Act.

            Subtitle B--Enron-Related Tax Shelter Provisions

SEC. 321. 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 
                subparagraph 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 by a 
                        transferor 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 such 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 February 13, 2003.

SEC. 322. 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 
        (or any person which is related (within the meaning of section 
        267(b) or 707(b)(1)) to such corporation) which is a partner in 
        the partnership, and
            ``(2) any amount not allocable to stock by reason of 
        paragraph (1) shall be allocated under subsection (a) to other 
        partnership property.
Gain shall be recognized to the partnership to the extent that the 
amount required to be allocated under paragraph (2) to other 
partnership property exceeds the aggregate adjusted basis of such other 
property immediately before the allocation required by paragraph 
(2).''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions after February 13, 2003.

SEC. 323. 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 take effect on February 
        14, 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 to the extent that regular interests issued by 
                the FASIT before such date continue to remain 
                outstanding in accordance with the original terms of 
                issuance.
                    (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. 324. 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) Exception for Certain Instruments Issued By Dealers In 
Securities.--Section 163(l) is amended by redesignating paragraphs (4) 
and (5) as paragraphs (5) and (6) and by inserting after paragraph (3) 
the following new paragraph:
            ``(4) Exception for certain instruments issued by dealers 
        in securities.--For purposes of this subsection, the term 
        `disqualified debt instrument' does not include indebtedness 
        issued by a dealer in securities (or a related party) which is 
        payable in, or by reference to, equity (other than equity of 
        the issuer or a related party) held by such dealer in its 
        capacity as a dealer in securities. For purposes of this 
        paragraph, the term `dealer in securities' has the meaning 
        given such term by section 475.''.
    (c) 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''.
    (d) Effective Date.--The amendments made by this section shall 
apply to debt instruments issued after February 13, 2003.

SEC. 325. 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. 326. 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) Effective Date.--The amendment 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. 327. CONTROLLED ENTITIES INELIGIBLE FOR REIT STATUS.

    (a) In General.--Subsection (a) of section 856 (relating to 
definition of real estate investment trust) is amended by striking 
``and'' at the end of paragraph (6), by redesignating paragraph (7) as 
paragraph (8), and by inserting after paragraph (6) the following new 
paragraph:
            ``(7) which is not a controlled entity (as defined in 
        subsection (l)); and''.
    (b) Controlled Entity.--Section 856 is amended by adding at the end 
the following new subsection:
    ``(l) Controlled Entity.--
            ``(1) In general.--For purposes of subsection (a)(7), an 
        entity is a controlled entity if, at any time during the 
        taxable year, one person (other than a qualified entity)--
                    ``(A) in the case of a corporation, owns stock--
                            ``(i) possessing at least 50 percent of the 
                        total voting power of the stock of such 
                        corporation, or
                            ``(ii) having a value equal to at least 50 
                        percent of the total value of the stock of such 
                        corporation, or
                    ``(B) in the case of a trust, owns beneficial 
                interests in the trust which would meet the 
                requirements of subparagraph (A) if such interests were 
                stock.
            ``(2) Qualified entity.--For purposes of paragraph (1), the 
        term `qualified entity' means--
                    ``(A) any real estate investment trust, and
                    ``(B) any partnership in which one real estate 
                investment trust owns at least 50 percent of the 
                capital and profits interests in the partnership.
            ``(3) Attribution rules.--For purposes of this paragraphs 
        (1) and (2)--
                    ``(A) In general.--Rules similar to the rules of 
                subsections (d)(5) and (h)(3) shall apply; except that 
                section 318(a)(3)(C) shall not be applied under such 
                rules to treat stock owned by a qualified entity as 
                being owned by a person which is not a qualified 
                entity.
                    ``(B) Stapled entities.--A group of entities which 
                are stapled entities (as defined in section 269B(c)(2)) 
                shall be treated as one person.
            ``(4) Exception for certain new reits.--
                    ``(A) In general.--The term `controlled entity' 
                shall not include an incubator REIT.
                    ``(B) Incubator reit.--A corporation shall be 
                treated as an incubator REIT for any taxable year 
                during the eligibility period if it meets all the 
                following requirements for such year:
                            ``(i) The corporation elects to be treated 
                        as an incubator REIT.
                            ``(ii) The corporation has only voting 
                        common stock outstanding.
                            ``(iii) Not more than 50 percent of the 
                        corporation's real estate assets consist of 
                        mortgages.
                            ``(iv) From not later than the beginning of 
                        the last half of the second taxable year, at 
                        least 10 percent of the corporation's capital 
                        is provided by lenders or equity investors who 
                        are unrelated to the corporation's largest 
                        shareholder.
                            ``(v) The corporation annually increases 
                        the value of its real estate assets by at least 
                        10 percent.
                            ``(vi) The directors of the corporation 
                        adopt a resolution setting forth an intent to 
                        engage in a going public transaction.
                No election may be made with respect to any REIT if an 
                election under this subsection was in effect for any 
                predecessor of such REIT.
                    ``(C) Eligibility period.--
                            ``(i) In general.--The eligibility period 
                        (for which an incubator REIT election can be 
                        made) begins with the REIT's second taxable 
                        year and ends at the close of the REIT's third 
                        taxable year, except that the REIT may, subject 
                        to clauses (ii), (iii), and (iv), elect to 
                        extend such period for an additional 2 taxable 
                        years.
                            ``(ii) Going public transaction.--A REIT 
                        may not elect to extend the eligibility period 
                        under clause (i) unless it enters into an 
                        agreement with the Secretary that if it does 
                        not engage in a going public transaction by the 
                        end of the extended eligibility period, it 
                        shall pay Federal income taxes for the 2 years 
                        of the extended eligibility period as if it had 
                        not made an incubator REIT election and had 
                        ceased to qualify as a REIT for those 2 taxable 
                        years.
                            ``(iii) Returns, interest, and notice.--
                                    ``(I) Returns.--In the event the 
                                corporation ceases to be treated as a 
                                REIT by operation of clause (ii), the 
                                corporation shall file any appropriate 
                                amended returns reflecting the change 
                                in status within 3 months of the close 
                                of the extended eligibility period.
                                    ``(II) Interest.--Interest shall be 
                                payable on any tax imposed by reason of 
                                clause (ii) for any taxable year but, 
                                unless there was a finding under 
                                subparagraph (D), no substantial 
                                underpayment penalties shall be 
                                imposed.
                                    ``(III) Notice.--The corporation 
                                shall, at the same time it files its 
                                returns under subclause (I), notify its 
                                shareholders and any other persons 
                                whose tax position is, or may 
                                reasonably be expected to be, affected 
                                by the change in status so they also 
                                may file any appropriate amended 
                                returns to conform their tax treatment 
                                consistent with the corporation's loss 
                                of REIT status.
                                    ``(IV) Regulations.--The Secretary 
                                shall provide appropriate regulations 
                                setting forth transferee liability and 
                                other provisions to ensure collection 
                                of tax and the proper administration of 
                                this provision.
                            ``(iv) Clauses (ii) and (iii) shall not 
                        apply if the corporation allows its incubator 
                        REIT status to lapse at the end of the initial 
                        2-year eligibility period without engaging in a 
                        going public transaction if the corporation is 
                        not a controlled entity as of the beginning of 
                        its fourth taxable year. In such a case, the 
                        corporation's directors may still be liable for 
                        the penalties described in subparagraph (D) 
                        during the eligibility period.
                    ``(D) Special penalties.--If the Secretary 
                determines that an incubator REIT election was filed 
                for a principal purpose other than as part of a 
                reasonable plan to undertake a going public 
                transaction, an excise tax of $20,000 shall be imposed 
                on each of the corporation's directors for each taxable 
                year for which an election was in effect.
                    ``(E) Going public transaction.--For purposes of 
                this paragraph, a going public transaction means--
                            ``(i) a public offering of shares of the 
                        stock of the incubator REIT;
                            ``(ii) a transaction, or series of 
                        transactions, that results in the stock of the 
                        incubator REIT being regularly traded on an 
                        established securities market and that results 
                        in at least 50 percent of such stock being held 
                        by shareholders who are unrelated to persons 
                        who held such stock before it began to be so 
                        regularly traded; or
                            ``(iii) any transaction resulting in 
                        ownership of the REIT by 200 or more persons 
                        (excluding the largest single shareholder) who 
                        in the aggregate own at least 50 percent of the 
                        stock of the REIT.
                For the purposes of this subparagraph, the rules of 
                paragraph (3) shall apply in determining the ownership 
                of stock.
                    ``(F) Definitions.--The term `established 
                securities market' shall have the meaning set forth in 
                the regulations under section 897.''.
    (c) Conforming Amendment.--Paragraph (2) of section 856(h) is 
amended by striking ``and (6)'' each place it appears and inserting ``, 
(6), and (7)''.
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after May 8, 2003.
            (2) Exception for existing controlled entities.--The 
        amendments made by this section shall not apply to any entity 
        which is a controlled entity (as defined in section 856(l) of 
        the Internal Revenue Code of 1986, as added by this section) as 
        of May 8, 2003, which is a real estate investment trust for the 
        taxable year which includes such date, and which has 
        significant business assets or activities as of such date. For 
        purposes of the preceding sentence, an entity shall be treated 
        as such a controlled entity on May 8, 2003, if it becomes such 
        an entity after such date in a transaction--
                    (A) made pursuant to a written agreement which was 
                binding on such date and at all times thereafter, or
                    (B) described on or before such date in a filing 
                with the Securities and Exchange Commission required 
                solely by reason of the transaction.

           Subtitle C--Other Corporate Governance Provisions

                       PART I--GENERAL PROVISIONS

SEC. 331. 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.

SEC. 332. SIGNING OF CORPORATE TAX RETURNS BY CHIEF EXECUTIVE OFFICER.

    (a) In General.--Section 6062 (relating to signing of corporation 
returns) is amended by striking the first sentence and inserting the 
following new sentence: ``The return of a corporation with respect to 
income shall be signed by the chief executive officer of such 
corporation (or other such officer of the corporation as the Secretary 
may designate if the corporation does not have a chief executive 
officer). The preceding sentence shall not apply to any return of a 
regulated investment company (within the meaning of section 851).''.
    (b) Effective Date.--The amendment made by this section shall apply 
to returns filed after the date of the enactment of this Act.

SEC. 333. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER 
              AMOUNTS.

    (a) In General.--Subsection (f) of section 162 (relating to trade 
or business expenses) is amended to read as follows:
    ``(f) Fines, Penalties, and Other Amounts.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        deduction otherwise allowable shall be allowed under this 
        chapter for any amount paid or incurred (whether by suit, 
        agreement, or otherwise) to, or at the direction of, a 
        government or entity described in paragraph (3) in relation to 
        the violation of any law or the investigation or inquiry into 
        the potential violation of any law.
            ``(2) Exception for amounts constituting restitution.--
        Paragraph (1) shall not apply to any amount which the taxpayer 
        establishes constitutes restitution for damage or harm caused 
        by the violation of any law or the potential violation of any 
        law. This paragraph shall not apply to any amount paid or 
        incurred as reimbursement to the government or entity for the 
        costs of any investigation or litigation.
            ``(3) Certain nongovernmental regulatory entities.--An 
        entity is described in this paragraph if it is--
                    ``(A) a nongovernmental entity which exercises 
                self-regulatory powers (including imposing sanctions) 
                in connection with a qualified board or exchange (as 
                defined in section 1256(g)(7)), or
                    ``(B) to the extent provided in regulations, a 
                nongovernmental entity which exercises self-regulatory 
                powers (including imposing sanctions) as part of 
                performing an essential governmental function.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid or incurred after April 27, 2003, except that such 
amendment shall not apply to amounts paid or incurred under any binding 
order or agreement entered into on or before April 27, 2003. Such 
exception shall not apply to an order or agreement requiring court 
approval unless the approval was obtained on or before April 27, 2003.

SEC. 334. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.

    (a) Disallowance of Deduction.--
            (1) In general.--Section 162(g) (relating to treble damage 
        payments under the antitrust laws) is amended by adding at the 
        end the following new paragraph:
            ``(2) Punitive damages.--No deduction shall be allowed 
        under this chapter for any amount paid or incurred for punitive 
        damages in connection with any judgment in, or settlement of, 
        any action. This paragraph shall not apply to punitive damages 
        described in section 104(c).''.
            (2) Conforming amendments.--
                    (A) Section 162(g) is amended--
                            (i) by striking ``If'' and inserting:
            ``(1) Treble damages.--If'', and
                            (ii) by redesignating paragraphs (1) and 
                        (2) as subparagraphs (A) and (B), respectively.
                    (B) The heading for section 162(g) is amended by 
                inserting ``or Punitive Damages'' after ``Laws''.
    (b) Inclusion in Income of Punitive Damages Paid by Insurer or 
Otherwise.--
            (1) In general.--Part II of subchapter B of chapter 1 
        (relating to items specifically included in gross income) is 
        amended by adding at the end the following new section:

``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR OTHERWISE.

    ``Gross income shall include any amount paid to or on behalf of a 
taxpayer as insurance or otherwise by reason of the taxpayer's 
liability (or agreement) to pay punitive damages.''.
            (2) Reporting requirements.--Section 6041 (relating to 
        information at source) is amended by adding at the end the 
        following new subsection:
    ``(f) Section To Apply to Punitive Damages Compensation.--This 
section shall apply to payments by a person to or on behalf of another 
person as insurance or otherwise by reason of the other person's 
liability (or agreement) to pay punitive damages.''.
            (3) Conforming amendment.--The table of sections for part 
        II of subchapter B of chapter 1 is amended by adding at the end 
        the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to damages paid or incurred on or after the date of the enactment 
of this Act.

                 PART II--EXECUTIVE COMPENSATION REFORM

SEC. 335. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION FUNDED WITH 
              ASSETS LOCATED OUTSIDE THE UNITED STATES.

    (a) In General.--Section 83(c) (relating to special rules for 
property transferred in connection with performance of services) is 
amended by adding at the end the following new paragraph:
            ``(4) Foreign assets funding nonqualified deferred 
        compensation arrangements.--
                    ``(A) In general.--In determining whether there is 
                a transfer of property for purposes of subsection (a), 
                if assets are--
                            ``(i) designated or otherwise available for 
                        the payment of nonqualified deferred 
                        compensation, and
                            ``(ii) located outside the United States,
                such assets shall not be treated as subject to the 
                claims of creditors.
                    ``(B) Compensation for services performed in 
                foreign jurisdiction.--Subparagraph (A) shall not apply 
                to assets located in a foreign jurisdiction if 
                substantially all of the services to which the 
                nonqualified deferred compensation relates are 
                performed in such jurisdiction.
                    ``(C) Regulations.--The Secretary shall prescribe 
                such regulations as are necessary to carry out the 
                provisions of this paragraph, including regulations to 
                exempt arrangements from the application of this 
                paragraph if--
                            ``(i) the arrangement will not result in an 
                        improper deferral of United States tax, and
                            ``(ii) the assets involved in the 
                        arrangement will be readily accessible in any 
                        insolvency or bankruptcy proceeding.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to amounts deferred in taxable years beginning after December 31, 
2003.

SEC. 336. 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),
                    ``(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), and
                    ``(D) the investment options which a participant 
                may elect under the plan are the same as the investment 
                options which a participant may elect under the 
                qualified employer plan of the employer which has the 
                fewest investment options.
        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, disability (within the meaning 
                        of section 1614(a)(3) of the Social Security 
                        Act (42 U.S.C. 1382c(a)(3))), 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 unless 
                substantially all of the services to which the 
                nonqualified deferred compensation relates are 
                performed outside the United States. Such regulations 
                may exempt any such trust if the trust will not result 
                in an improper deferral of United States tax, and the 
                assets involved in the trust will be readily accessible 
                in any insolvency or bankruptcy proceeding.
    ``(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.--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.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts deferred in taxable years beginning after December 31, 
2003.

SEC. 337. PROHIBITION ON DEFERRAL OF GAIN FROM THE EXERCISE OF STOCK 
              OPTIONS AND RESTRICTED STOCK GAINS THROUGH DEFERRED 
              COMPENSATION ARRANGEMENTS.

    (a) In General.--Section 83 (relating to property transferred in 
connection with performance of services) is amending by adding at the 
end the following new subsection:
    ``(i) Prohibition on Additional Deferral Through Deferred 
Compensation Arrangements.--If a taxpayer elects to exchange an option 
to purchase employer securities--
            ``(1) to which subsection (a) applies, or
            ``(2) which is described in subsection (e)(3),
or any other compensation based on employer securities, for a right to 
receive future payments, then, notwithstanding any other provision of 
this title, there shall be included in gross income for the taxable 
year of the exchange an amount equal to the present value of such right 
(or such other amount as the Secretary may by regulations specify). For 
purposes of this subsection, the term `employer securities' has the 
meaning given such term by section 409(l).''.
    (b) Effective Date.--The amendment made by this section shall apply 
to any exchange after December 31, 2003.

SEC. 338. INCREASE IN WITHHOLDING FROM SUPPLEMENTAL WAGE PAYMENTS IN 
              EXCESS OF $1,000,000.

    (a) In General.--If an employer elects under Treasury Regulation 
31.3402(g)-1 to determine the amount to be deducted and withheld from 
any supplemental wage payment by using a flat percentage rate, the rate 
to be used in determining the amount to be so deducted and withheld 
shall not be less than 28 percent (or the corresponding rate in effect 
under section 1(i)(2) of the Internal Revenue Code of 1986 for taxable 
years beginning in the calendar year in which the payment is made).
    (b) Special Rule for Large Payments.--
            (1) In general.--Notwithstanding subsection (a), if the 
        supplemental wage payment, when added to all such payments 
        previously made by the employer to the employee during the 
        calendar year, exceeds $1,000,000, the rate used with respect 
        to such excess shall be equal to the maximum rate of tax in 
        effect under section 1 of such Code for taxable years beginning 
        in such calendar year.
            (2) Aggregation.--All persons treated as a single employer 
        under subsection (a) or (b) of section 52 of the Internal 
        Revenue Code of 1986 shall be treated as a single employer for 
        purposes of this subsection.
    (c) Conforming Amendment.--Section 13273 of the Revenue 
Reconciliation Act of 1993 (Public Law 103-66) is repealed.
    (d) Effective Date.--The provisions of, and the amendment made by, 
this section shall apply to payments made after December 31, 2003.

                  Subtitle D--International Provisions

             PART I--PROVISIONS TO DISCOURAGE EXPATRIATION

SEC. 340. REVISION OF TAX RULES ON EXPATRIATION.

    (a) In General.--Subpart A of part II of subchapter N of chapter 1 
is amended by inserting after section 877 the following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

    ``(a) General Rules.--For purposes of this subtitle--
            ``(1) Mark to market.--Except as provided in subsections 
        (d) and (f), all property of a covered expatriate to whom this 
        section applies shall be treated as sold on the day before the 
        expatriation date for its fair market value.
            ``(2) Recognition of gain or loss.--In the case of any sale 
        under paragraph (1)--
                    ``(A) notwithstanding any other provision of this 
                title, any gain arising from such sale shall be taken 
                into account for the taxable year of the sale, and
                    ``(B) any loss arising from such sale shall be 
                taken into account for the taxable year of the sale to 
                the extent otherwise provided by this title, except 
                that section 1091 shall not apply to any such loss.
        Proper adjustment shall be made in the amount of any gain or 
        loss subsequently realized for gain or loss taken into account 
        under the preceding sentence.
            ``(3) Exclusion for certain gain.--
                    ``(A) In general.--The amount which, but for this 
                paragraph, would be includible in the gross income of 
                any individual by reason of this section shall be 
                reduced (but not below zero) by $600,000. For purposes 
                of this paragraph, allocable expatriation gain taken 
                into account under subsection (f)(2) shall be treated 
                in the same manner as an amount required to be 
                includible in gross income.
                    ``(B) Cost-of-living adjustment.--
                            ``(i) In general.--In the case of an 
                        expatriation date occurring in any calendar 
                        year after 2003, the $600,000 amount under 
                        subparagraph (A) shall be increased by an 
                        amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for such calendar year, 
                                determined by substituting `calendar 
                                year 2002' for `calendar year 1992' in 
                                subparagraph (B) thereof.
                            ``(ii) Rounding rules.--If any amount after 
                        adjustment under clause (i) is not a multiple 
                        of $1,000, such amount shall be rounded to the 
                        next lower multiple of $1,000.
            ``(4) Election to continue to be taxed as united states 
        citizen.--
                    ``(A) In general.--If a covered expatriate elects 
                the application of this paragraph--
                            ``(i) this section (other than this 
                        paragraph and subsection (i)) shall not apply 
                        to the expatriate, but
                            ``(ii) in the case of property to which 
                        this section would apply but for such election, 
                        the expatriate shall be subject to tax under 
                        this title in the same manner as if the 
                        individual were a United States citizen.
                    ``(B) Requirements.--Subparagraph (A) shall not 
                apply to an individual unless the individual--
                            ``(i) provides security for payment of tax 
                        in such form and manner, and in such amount, as 
                        the Secretary may require,
                            ``(ii) consents to the waiver of any right 
                        of the individual under any treaty of the 
                        United States which would preclude assessment 
                        or collection of any tax which may be imposed 
                        by reason of this paragraph, and
                            ``(iii) complies with such other 
                        requirements as the Secretary may prescribe.
                    ``(C) Election.--An election under subparagraph (A) 
                shall apply to all property to which this section would 
                apply but for the election and, once made, shall be 
                irrevocable. Such election shall also apply to property 
                the basis of which is determined in whole or in part by 
                reference to the property with respect to which the 
                election was made.
    ``(b) Election To Defer Tax.--
            ``(1) In general.--If the taxpayer elects the application 
        of this subsection with respect to any property treated as sold 
        by reason of subsection (a), the payment of the additional tax 
        attributable to such property shall be postponed until the due 
        date of the return for the taxable year in which such property 
        is disposed of (or, in the case of property disposed of in a 
        transaction in which gain is not recognized in whole or in 
        part, until such other date as the Secretary may prescribe).
            ``(2) Determination of tax with respect to property.--For 
        purposes of paragraph (1), the additional tax attributable to 
        any property is an amount which bears the same ratio to the 
        additional tax imposed by this chapter for the taxable year 
        solely by reason of subsection (a) as the gain taken into 
        account under subsection (a) with respect to such property 
        bears to the total gain taken into account under subsection (a) 
        with respect to all property to which subsection (a) applies.
            ``(3) Termination of postponement.--No tax may be postponed 
        under this subsection later than the due date for the return of 
        tax imposed by this chapter for the taxable year which includes 
        the date of death of the expatriate (or, if earlier, the time 
        that the security provided with respect to the property fails 
        to meet the requirements of paragraph (4), unless the taxpayer 
        corrects such failure within the time specified by the 
        Secretary).
            ``(4) Security.--
                    ``(A) In general.--No election may be made under 
                paragraph (1) with respect to any property unless 
                adequate security is provided to the Secretary with 
                respect to such property.
                    ``(B) Adequate security.--For purposes of 
                subparagraph (A), security with respect to any property 
                shall be treated as adequate security if--
                            ``(i) it is a bond in an amount equal to 
                        the deferred tax amount under paragraph (2) for 
                        the property, or
                            ``(ii) the taxpayer otherwise establishes 
                        to the satisfaction of the Secretary that the 
                        security is adequate.
            ``(5) Waiver of certain rights.--No election may be made 
        under paragraph (1) unless the taxpayer consents to the waiver 
        of any right under any treaty of the United States which would 
        preclude assessment or collection of any tax imposed by reason 
        of this section.
            ``(6) Elections.--An election under paragraph (1) shall 
        only apply to property described in the election and, once 
        made, is irrevocable. An election may be made under paragraph 
        (1) with respect to an interest in a trust with respect to 
        which gain is required to be recognized under subsection 
        (f)(1).
            ``(7) Interest.--For purposes of section 6601--
                    ``(A) the last date for the payment of tax shall be 
                determined without regard to the election under this 
                subsection, and
                    ``(B) section 6621(a)(2) shall be applied by 
                substituting `5 percentage points' for `3 percentage 
                points' in subparagraph (B) thereof.
    ``(c) Covered Expatriate.--For purposes of this section--
            ``(1) In general.--Except as provided in paragraph (2), the 
        term `covered expatriate' means an expatriate.
            ``(2) Exceptions.--An individual shall not be treated as a 
        covered expatriate if--
                    ``(A) the individual--
                            ``(i) became at birth a citizen of the 
                        United States and a citizen of another country 
                        and, as of the expatriation date, continues to 
                        be a citizen of, and is taxed as a resident of, 
                        such other country, and
                            ``(ii) has not been a resident of the 
                        United States (as defined in section 
                        7701(b)(1)(A)(ii)) during the 5 taxable years 
                        ending with the taxable year during which the 
                        expatriation date occurs, or
                    ``(B)(i) the individual's relinquishment of United 
                States citizenship occurs before such individual 
                attains age 18\1/2\, and
                    ``(ii) the individual has been a resident of the 
                United States (as so defined) for not more than 5 
                taxable years before the date of relinquishment.
    ``(d) Exempt Property; Special Rules for Pension Plans.--
            ``(1) Exempt property.--This section shall not apply to the 
        following:
                    ``(A) United states real property interests.--Any 
                United States real property interest (as defined in 
                section 897(c)(1)), other than stock of a United States 
                real property holding corporation which does not, on 
                the day before the expatriation date, meet the 
                requirements of section 897(c)(2).
                    ``(B) Specified property.--Any property or interest 
                in property not described in subparagraph (A) which the 
                Secretary specifies in regulations.
            ``(2) Special rules for certain retirement plans.--
                    ``(A) In general.--If a covered expatriate holds on 
                the day before the expatriation date any interest in a 
                retirement plan to which this paragraph applies--
                            ``(i) such interest shall not be treated as 
                        sold for purposes of subsection (a)(1), but
                            ``(ii) an amount equal to the present value 
                        of the expatriate's nonforfeitable accrued 
                        benefit shall be treated as having been 
                        received by such individual on such date as a 
                        distribution under the plan.
                    ``(B) Treatment of subsequent distributions.--In 
                the case of any distribution on or after the 
                expatriation date to or on behalf of the covered 
                expatriate from a plan from which the expatriate was 
                treated as receiving a distribution under subparagraph 
                (A), the amount otherwise includible in gross income by 
                reason of the subsequent distribution shall be reduced 
                by the excess of the amount includible in gross income 
                under subparagraph (A) over any portion of such amount 
                to which this subparagraph previously applied.
                    ``(C) Treatment of subsequent distributions by 
                plan.--For purposes of this title, a retirement plan to 
                which this paragraph applies, and any person acting on 
                the plan's behalf, shall treat any subsequent 
                distribution described in subparagraph (B) in the same 
                manner as such distribution would be treated without 
                regard to this paragraph.
                    ``(D) Applicable plans.--This paragraph shall apply 
                to--
                            ``(i) any qualified retirement plan (as 
                        defined in section 4974(c)),
                            ``(ii) an eligible deferred compensation 
                        plan (as defined in section 457(b)) of an 
                        eligible employer described in section 
                        457(e)(1)(A), and
                            ``(iii) to the extent provided in 
                        regulations, any foreign pension plan or 
                        similar retirement arrangements or programs.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Expatriate.--The term `expatriate' means--
                    ``(A) any United States citizen who relinquishes 
                citizenship, and
                    ``(B) any long-term resident of the United States 
                who--
                            ``(i) ceases to be a lawful permanent 
                        resident of the United States (within the 
                        meaning of section 7701(b)(6)), or
                            ``(ii) commences to be treated as a 
                        resident of a foreign country under the 
                        provisions of a tax treaty between the United 
                        States and the foreign country and who does not 
                        waive the benefits of such treaty applicable to 
                        residents of the foreign country.
            ``(2) Expatriation date.--The term `expatriation date' 
        means--
                    ``(A) the date an individual relinquishes United 
                States citizenship, or
                    ``(B) in the case of a long-term resident of the 
                United States, the date of the event described in 
                clause (i) or (ii) of paragraph (1)(B).
            ``(3) Relinquishment of citizenship.--A citizen shall be 
        treated as relinquishing United States citizenship on the 
        earliest of--
                    ``(A) the date the individual renounces such 
                individual's United States nationality before a 
                diplomatic or consular officer of the United States 
                pursuant to paragraph (5) of section 349(a) of the 
                Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
                    ``(B) the date the individual furnishes to the 
                United States Department of State a signed statement of 
                voluntary relinquishment of United States nationality 
                confirming the performance of an act of expatriation 
                specified in paragraph (1), (2), (3), or (4) of section 
                349(a) of the Immigration and Nationality Act (8 U.S.C. 
                1481(a)(1)-(4)),
                    ``(C) the date the United States Department of 
                State issues to the individual a certificate of loss of 
                nationality, or
                    ``(D) the date a court of the United States cancels 
                a naturalized citizen's certificate of naturalization.
        Subparagraph (A) or (B) shall not apply to any individual 
        unless the renunciation or voluntary relinquishment is 
        subsequently approved by the issuance to the individual of a 
        certificate of loss of nationality by the United States 
        Department of State.
            ``(4) Long-term resident.--The term `long-term resident' 
        has the meaning given to such term by section 877(e)(2).
    ``(f) Special Rules Applicable to Beneficiaries' Interests in 
Trust.--
            ``(1) In general.--Except as provided in paragraph (2), if 
        an individual is determined under paragraph (3) to hold an 
        interest in a trust on the day before the expatriation date--
                    ``(A) the individual shall not be treated as having 
                sold such interest,
                    ``(B) such interest shall be treated as a separate 
                share in the trust, and
                    ``(C)(i) such separate share shall be treated as a 
                separate trust consisting of the assets allocable to 
                such share,
                    ``(ii) the separate trust shall be treated as 
                having sold its assets on the day before the 
                expatriation date for their fair market value and as 
                having distributed all of its assets to the individual 
                as of such time, and
                    ``(iii) the individual shall be treated as having 
                recontributed the assets to the separate trust.
        Subsection (a)(2) shall apply to any income, gain, or loss of 
        the individual arising from a distribution described in 
        subparagraph (C)(ii). In determining the amount of such 
        distribution, proper adjustments shall be made for liabilities 
        of the trust allocable to an individual's share in the trust.
            ``(2) Special rules for interests in qualified trusts.--
                    ``(A) In general.--If the trust interest described 
                in paragraph (1) is an interest in a qualified trust--
                            ``(i) paragraph (1) and subsection (a) 
                        shall not apply, and
                            ``(ii) in addition to any other tax imposed 
                        by this title, there is hereby imposed on each 
                        distribution with respect to such interest a 
                        tax in the amount determined under subparagraph 
                        (B).
                    ``(B) Amount of tax.--The amount of tax under 
                subparagraph (A)(ii) shall be equal to the lesser of--
                            ``(i) the highest rate of tax imposed by 
                        section 1(e) for the taxable year which 
                        includes the day before the expatriation date, 
                        multiplied by the amount of the distribution, 
                        or
                            ``(ii) the balance in the deferred tax 
                        account immediately before the distribution 
                        determined without regard to any increases 
                        under subparagraph (C)(ii) after the 30th day 
                        preceding the distribution.
                    ``(C) Deferred tax account.--For purposes of 
                subparagraph (B)(ii)--
                            ``(i) Opening balance.--The opening balance 
                        in a deferred tax account with respect to any 
                        trust interest is an amount equal to the tax 
                        which would have been imposed on the allocable 
                        expatriation gain with respect to the trust 
                        interest if such gain had been included in 
                        gross income under subsection (a).
                            ``(ii) Increase for interest.--The balance 
                        in the deferred tax account shall be increased 
                        by the amount of interest determined (on the 
                        balance in the account at the time the interest 
                        accrues), for periods after the 90th day after 
                        the expatriation date, by using the rates and 
                        method applicable under section 6621 for 
                        underpayments of tax for such periods, except 
                        that section 6621(a)(2) shall be applied by 
                        substituting `5 percentage points' for `3 
                        percentage points' in subparagraph (B) thereof.
                            ``(iii) Decrease for taxes previously 
                        paid.--The balance in the tax deferred account 
                        shall be reduced--
                                    ``(I) by the amount of taxes 
                                imposed by subparagraph (A) on any 
                                distribution to the person holding the 
                                trust interest, and
                                    ``(II) in the case of a person 
                                holding a nonvested interest, to the 
                                extent provided in regulations, by the 
                                amount of taxes imposed by subparagraph 
                                (A) on distributions from the trust 
                                with respect to nonvested interests not 
                                held by such person.
                    ``(D) Allocable expatriation gain.--For purposes of 
                this paragraph, the allocable expatriation gain with 
                respect to any beneficiary's interest in a trust is the 
                amount of gain which would be allocable to such 
                beneficiary's vested and nonvested interests in the 
                trust if the beneficiary held directly all assets 
                allocable to such interests.
                    ``(E) Tax deducted and withheld.--
                            ``(i) In general.--The tax imposed by 
                        subparagraph (A)(ii) shall be deducted and 
                        withheld by the trustees from the distribution 
                        to which it relates.
                            ``(ii) Exception where failure to waive 
                        treaty rights.--If an amount may not be 
                        deducted and withheld under clause (i) by 
                        reason of the distributee failing to waive any 
                        treaty right with respect to such 
                        distribution--
                                    ``(I) the tax imposed by 
                                subparagraph (A)(ii) shall be imposed 
                                on the trust and each trustee shall be 
                                personally liable for the amount of 
                                such tax, and
                                    ``(II) any other beneficiary of the 
                                trust shall be entitled to recover from 
                                the distributee the amount of such tax 
                                imposed on the other beneficiary.
                    ``(F) Disposition.--If a trust ceases to be a 
                qualified trust at any time, a covered expatriate 
                disposes of an interest in a qualified trust, or a 
                covered expatriate holding an interest in a qualified 
                trust dies, then, in lieu of the tax imposed by 
                subparagraph (A)(ii), there is hereby imposed a tax 
                equal to the lesser of--
                            ``(i) the tax determined under paragraph 
                        (1) as if the day before the expatriation date 
                        were the date of such cessation, disposition, 
                        or death, whichever is applicable, or
                            ``(ii) the balance in the tax deferred 
                        account immediately before such date.
                Such tax shall be imposed on the trust and each trustee 
                shall be personally liable for the amount of such tax 
                and any other beneficiary of the trust shall be 
                entitled to recover from the covered expatriate or the 
                estate the amount of such tax imposed on the other 
                beneficiary.
                    ``(G) Definitions and special rules.--For purposes 
                of this paragraph--
                            ``(i) Qualified trust.--The term `qualified 
                        trust' means a trust which is described in 
                        section 7701(a)(30)(E).
                            ``(ii) Vested interest.--The term `vested 
                        interest' means any interest which, as of the 
                        day before the expatriation date, is vested in 
                        the beneficiary.
                            ``(iii) Nonvested interest.--The term 
                        `nonvested interest' means, with respect to any 
                        beneficiary, any interest in a trust which is 
                        not a vested interest. Such interest shall be 
                        determined by assuming the maximum exercise of 
                        discretion in favor of the beneficiary and the 
                        occurrence of all contingencies in favor of the 
                        beneficiary.
                            ``(iv) Adjustments.--The Secretary may 
                        provide for such adjustments to the bases of 
                        assets in a trust or a deferred tax account, 
                        and the timing of such adjustments, in order to 
                        ensure that gain is taxed only once.
                            ``(v) Coordination with retirement plan 
                        rules.--This subsection shall not apply to an 
                        interest in a trust which is part of a 
                        retirement plan to which subsection (d)(2) 
                        applies.
            ``(3) Determination of beneficiaries' interest in trust.--
                    ``(A) Determinations under paragraph (1).--For 
                purposes of paragraph (1), a beneficiary's interest in 
                a trust shall be based upon all relevant facts and 
                circumstances, including the terms of the trust 
                instrument and any letter of wishes or similar 
                document, historical patterns of trust distributions, 
                and the existence of and functions performed by a trust 
                protector or any similar adviser.
                    ``(B) Other determinations.--For purposes of this 
                section--
                            ``(i) Constructive ownership.--If a 
                        beneficiary of a trust is a corporation, 
                        partnership, trust, or estate, the 
                        shareholders, partners, or beneficiaries shall 
                        be deemed to be the trust beneficiaries for 
                        purposes of this section.
                            ``(ii) Taxpayer return position.--A 
                        taxpayer shall clearly indicate on its income 
                        tax return--
                                    ``(I) the methodology used to 
                                determine that taxpayer's trust 
                                interest under this section, and
                                    ``(II) if the taxpayer knows (or 
                                has reason to know) that any other 
                                beneficiary of such trust is using a 
                                different methodology to determine such 
                                beneficiary's trust interest under this 
                                section.
    ``(g) Termination of Deferrals, etc.--In the case of any covered 
expatriate, notwithstanding any other provision of this title--
            ``(1) any period during which recognition of income or gain 
        is deferred shall terminate on the day before the expatriation 
        date, and
            ``(2) any extension of time for payment of tax shall cease 
        to apply on the day before the expatriation date and the unpaid 
        portion of such tax shall be due and payable at the time and in 
        the manner prescribed by the Secretary.
    ``(h) Imposition of Tentative Tax.--
            ``(1) In general.--If an individual is required to include 
        any amount in gross income under subsection (a) for any taxable 
        year, there is hereby imposed, immediately before the 
        expatriation date, a tax in an amount equal to the amount of 
        tax which would be imposed if the taxable year were a short 
        taxable year ending on the expatriation date.
            ``(2) Due date.--The due date for any tax imposed by 
        paragraph (1) shall be the 90th day after the expatriation 
        date.
            ``(3) Treatment of tax.--Any tax paid under paragraph (1) 
        shall be treated as a payment of the tax imposed by this 
        chapter for the taxable year to which subsection (a) applies.
            ``(4) Deferral of tax.--The provisions of subsection (b) 
        shall apply to the tax imposed by this subsection to the extent 
        attributable to gain includible in gross income by reason of 
        this section.
    ``(i) Special Liens for Deferred Tax Amounts.--
            ``(1) Imposition of lien.--
                    ``(A) In general.--If a covered expatriate makes an 
                election under subsection (a)(4) or (b) which results 
                in the deferral of any tax imposed by reason of 
                subsection (a), the deferred amount (including any 
                interest, additional amount, addition to tax, 
                assessable penalty, and costs attributable to the 
                deferred amount) shall be a lien in favor of the United 
                States on all property of the expatriate located in the 
                United States (without regard to whether this section 
                applies to the property).
                    ``(B) Deferred amount.--For purposes of this 
                subsection, the deferred amount is the amount of the 
                increase in the covered expatriate's income tax which, 
                but for the election under subsection (a)(4) or (b), 
                would have occurred by reason of this section for the 
                taxable year including the expatriation date.
            ``(2) Period of lien.--The lien imposed by this subsection 
        shall arise on the expatriation date and continue until--
                    ``(A) the liability for tax by reason of this 
                section is satisfied or has become unenforceable by 
                reason of lapse of time, or
                    ``(B) it is established to the satisfaction of the 
                Secretary that no further tax liability may arise by 
                reason of this section.
            ``(3) Certain rules apply.--The rules set forth in 
        paragraphs (1), (3), and (4) of section 6324A(d) shall apply 
        with respect to the lien imposed by this subsection as if it 
        were a lien imposed by section 6324A.
    ``(j) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (b) Inclusion in Income of Gifts and Bequests Received by United 
States Citizens and Residents From Expatriates.--Section 102 (relating 
to gifts, etc. not included in gross income) is amended by adding at 
the end the following new subsection:
    ``(d) Gifts and Inheritances From Covered Expatriates.--
            ``(1) In general.--Subsection (a) shall not exclude from 
        gross income the value of any property acquired by gift, 
        bequest, devise, or inheritance from a covered expatriate after 
        the expatriation date. For purposes of this subsection, any 
        term used in this subsection which is also used in section 877A 
        shall have the same meaning as when used in section 877A.
            ``(2) Exceptions for transfers otherwise subject to estate 
        or gift tax.--Paragraph (1) shall not apply to any property if 
        either--
                    ``(A) the gift, bequest, devise, or inheritance 
                is--
                            ``(i) shown on a timely filed return of tax 
                        imposed by chapter 12 as a taxable gift by the 
                        covered expatriate, or
                            ``(ii) included in the gross estate of the 
                        covered expatriate for purposes of chapter 11 
                        and shown on a timely filed return of tax 
                        imposed by chapter 11 of the estate of the 
                        covered expatriate, or
                    ``(B) no such return was timely filed but no such 
                return would have been required to be filed even if the 
                covered expatriate were a citizen or long-term resident 
                of the United States.''.
    (c) Definition of Termination of United States Citizenship.--
Section 7701(a) is amended by adding at the end the following new 
paragraph:
            ``(48) Termination of united states citizenship.--
                    ``(A) In general.--An individual shall not cease to 
                be treated as a United States citizen before the date 
                on which the individual's citizenship is treated as 
                relinquished under section 877A(e)(3).
                    ``(B) Dual citizens.--Under regulations prescribed 
                by the Secretary, subparagraph (A) shall not apply to 
                an individual who became at birth a citizen of the 
                United States and a citizen of another country.''.
    (d) Ineligibility for Visa or Admission to United States.--
            (1) In general.--Section 212(a)(10)(E) of the Immigration 
        and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to 
        read as follows:
                    ``(E) Former citizens not in compliance with 
                expatriation revenue provisions.--Any alien who is a 
                former citizen of the United States who relinquishes 
                United States citizenship (within the meaning of 
                section 877A(e)(3) of the Internal Revenue Code of 
                1986) and who is not in compliance with section 877A of 
                such Code (relating to expatriation).''.
            (2) Availability of information.--
                    (A) In general.--Section 6103(l) (relating to 
                disclosure of returns and return information for 
                purposes other than tax administration) is amended by 
                adding at the end the following new paragraph:
            ``(19) Disclosure to deny visa or admission to certain 
        expatriates.--Upon written request of the Attorney General or 
        the Attorney General's delegate, the Secretary shall disclose 
        whether an individual is in compliance with section 877A (and 
        if not in compliance, any items of noncompliance) to officers 
        and employees of the Federal agency responsible for 
        administering section 212(a)(10)(E) of the Immigration and 
        Nationality Act solely for the purpose of, and to the extent 
        necessary in, administering such section 212(a)(10)(E).''.
                    (B) Safeguards.--
                            (i) Technical amendments.--Paragraph (4) of 
                        section 6103(p) of the Internal Revenue Code of 
                        1986, as amended by section 202(b)(2)(B) of the 
                        Trade Act of 2002 (Public Law 107-210; 116 
                        Stat. 961), is amended by striking ``or (17)'' 
                        after ``any other person described in 
                        subsection (l)(16)'' each place it appears and 
                        inserting ``or (18)''.
                            (ii) Conforming amendments.--Section 
                        6103(p)(4) (relating to safeguards), as amended 
                        by clause (i), is amended by striking ``or 
                        (18)'' after ``any other person described in 
                        subsection (l)(16)'' each place it appears and 
                        inserting ``(18), or (19)''.
            (3) Effective dates.--
                    (A) In general.--Except as provided in subparagraph 
                (B), the amendments made by this subsection shall apply 
                to individuals who relinquish United States citizenship 
                on or after the date of the enactment of this Act.
                    (B) Technical amendments.--The amendments made by 
                paragraph (2)(B)(i) shall take effect as if included in 
                the amendments made by section 202(b)(2)(B) of the 
                Trade Act of 2002 (Public Law 107-210; 116 Stat. 961).
    (e) Conforming Amendments.--
            (1) Section 877 is amended by adding at the end the 
        following new subsection:
    ``(g) Application.--This section shall not apply to an expatriate 
(as defined in section 877A(e)) whose expatriation date (as so defined) 
occurs on or after February 5, 2003.''.
            (2) Section 2107 is amended by adding at the end the 
        following new subsection:
    ``(f) Application.--This section shall not apply to any expatriate 
subject to section 877A.''.
            (3) Section 2501(a)(3) is amended by adding at the end the 
        following new subparagraph:
                    ``(F) Application.--This paragraph shall not apply 
                to any expatriate subject to section 877A.''.
            (4)(A) Paragraph (1) of section 6039G(d) is amended by 
        inserting ``or 877A'' after ``section 877''.
            (B) The second sentence of section 6039G(e) is amended by 
        inserting ``or who relinquishes United States citizenship 
        (within the meaning of section 877A(e)(3))'' after ``877(a))''.
            (C) Section 6039G(f) is amended by inserting ``or 
        877A(e)(2)(B)'' after ``877(e)(1)''.
    (f) Clerical Amendment.--The table of sections for subpart A of 
part II of subchapter N of chapter 1 is amended by inserting after the 
item relating to section 877 the following new item:

                              ``Sec. 877A. Tax responsibilities of 
                                        expatriation.''.
    (g) Effective Date.--
            (1) In general.--Except as provided in this subsection, the 
        amendments made by this section shall apply to expatriates 
        (within the meaning of section 877A(e) of the Internal Revenue 
        Code of 1986, as added by this section) whose expatriation date 
        (as so defined) occurs on or after February 5, 2003.
            (2) Gifts and bequests.--Section 102(d) of the Internal 
        Revenue Code of 1986 (as added by subsection (b)) shall apply 
        to gifts and bequests received on or after February 5, 2003, 
        from an individual or the estate of an individual whose 
        expatriation date (as so defined) occurs after such date.
            (3) Due date for tentative tax.--The due date under section 
        877A(h)(2) of the Internal Revenue Code of 1986, as added by 
        this section, shall in no event occur before the 90th day after 
        the date of the enactment of this Act.

SEC. 341. TAX TREATMENT OF INVERTED CORPORATE ENTITIES.

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

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

    ``(a) Inverted Corporations Treated as Domestic Corporations.--
            ``(1) In general.--If a foreign incorporated entity is 
        treated as an inverted domestic corporation, then, 
        notwithstanding section 7701(a)(4), such entity shall be 
        treated for purposes of this title as a domestic corporation.
            ``(2) Inverted domestic corporation.--For purposes of this 
        section, a foreign incorporated entity shall be treated as an 
        inverted domestic corporation if, pursuant to a plan (or a 
        series of related transactions)--
                    ``(A) the entity completes after March 20, 2002, 
                the direct or indirect acquisition of substantially all 
                of the properties held directly or indirectly by a 
                domestic corporation or substantially all of the 
                properties constituting a trade or business of a 
                domestic partnership,
                    ``(B) after the acquisition at least 80 percent of 
                the stock (by vote or value) of the entity is held--
                            ``(i) in the case of an acquisition with 
                        respect to a domestic corporation, by former 
                        shareholders of the domestic corporation by 
                        reason of holding stock in the domestic 
                        corporation, or
                            ``(ii) in the case of an acquisition with 
                        respect to a domestic partnership, by former 
                        partners of the domestic partnership by reason 
                        of holding a capital or profits interest in the 
                        domestic partnership, and
                    ``(C) the expanded affiliated group which after the 
                acquisition includes the entity does not have 
                substantial business activities in the foreign country 
                in which or under the law of which the entity is 
                created or organized when compared to the total 
                business activities of such expanded affiliated group.
        Except as provided in regulations, an acquisition of properties 
        of a domestic corporation shall not be treated as described in 
        subparagraph (A) if none of the corporation's stock was readily 
        tradeable on an established securities market at any time 
        during the 4-year period ending on the date of the acquisition.
    ``(b) Preservation of Domestic Tax Base In Certain Inversion 
Transactions To Which Subsection (a) Does Not Apply.--
            ``(1) In general.--If a foreign incorporated entity would 
        be treated as an inverted domestic corporation with respect to 
        an acquired entity if either--
                    ``(A) subsection (a)(2)(A) were applied by 
                substituting `after December 31, 1996, and on or before 
                March 20, 2002' for `after March 20, 2002' and 
                subsection (a)(2)(B) were applied by substituting `more 
                than 50 percent' for `at least 80 percent', or
                    ``(B) subsection (a)(2)(B) were applied by 
                substituting `more than 50 percent' for `at least 80 
                percent',
        then the rules of subsection (c) shall apply to any inversion 
        gain of the acquired entity during the applicable period and 
        the rules of subsection (d) shall apply to any related party 
        transaction of the acquired entity during the applicable 
        period. This subsection shall not apply for any taxable year if 
        subsection (a) applies to such foreign incorporated entity for 
        such taxable year.
            ``(2) Acquired entity.--For purposes of this section--
                    ``(A) In general.--The term `acquired entity' means 
                the domestic corporation or partnership substantially 
                all of the properties of which are directly or 
                indirectly acquired in an acquisition described in 
                subsection (a)(2)(A) to which this subsection applies.
                    ``(B) Aggregation rules.--Any domestic person 
                bearing a relationship described in section 267(b) or 
                707(b) to an acquired entity shall be treated as an 
                acquired entity with respect to the acquisition 
                described in subparagraph (A).
            ``(3) Applicable period.--For purposes of this section--
                    ``(A) In general.--The term `applicable period' 
                means the period--
                            ``(i) beginning on the first date 
                        properties are acquired as part of the 
                        acquisition described in subsection (a)(2)(A) 
                        to which this subsection applies, and
                            ``(ii) ending on the date which is 10 years 
                        after the last date properties are acquired as 
                        part of such acquisition.
                    ``(B) Special rule for inversions occurring before 
                march 21, 2002.--In the case of any acquired entity to 
                which paragraph (1)(A) applies, the applicable period 
                shall be the 10-year period beginning on January 1, 
                2003.
    ``(c) Tax on Inversion Gains May Not Be Offset.--If subsection (b) 
applies--
            ``(1) In general.--The taxable income of an acquired entity 
        (or any expanded affiliated group which includes such entity) 
        for any taxable year which includes any portion of the 
        applicable period shall in no event be less than the inversion 
        gain of the entity for the taxable year.
            ``(2) Credits not allowed against tax on inversion gain.--
        Credits shall be allowed against the tax imposed by this 
        chapter on an acquired entity for any taxable year described in 
        paragraph (1) only to the extent such tax exceeds the product 
        of--
                    ``(A) the amount of the inversion gain for the 
                taxable year, and
                    ``(B) the highest rate of tax specified in section 
                11(b)(1).
        For purposes of determining the credit allowed by section 901 
        inversion gain shall be treated as from sources within the 
        United States.
            ``(3) Special rules for partnerships.--In the case of an 
        acquired entity which is a partnership--
                    ``(A) the limitations of this subsection shall 
                apply at the partner rather than the partnership level,
                    ``(B) the inversion gain of any partner for any 
                taxable year shall be equal to the sum of--
                            ``(i) the partner's distributive share of 
                        inversion gain of the partnership for such 
                        taxable year, plus
                            ``(ii) income or gain required to be 
                        recognized for the taxable year by the partner 
                        under section 367(a), 741, or 1001, or under 
                        any other provision of chapter 1, by reason of 
                        the transfer during the applicable period of 
                        any partnership interest of the partner in such 
                        partnership to the foreign incorporated entity, 
                        and
                    ``(C) the highest rate of tax specified in the rate 
                schedule applicable to the partner under chapter 1 
                shall be substituted for the rate of tax under 
                paragraph (2)(B).
            ``(4) Inversion gain.--For purposes of this section, the 
        term `inversion gain' means any income or gain required to be 
        recognized under section 304, 311(b), 367, 1001, or 1248, or 
        under any other provision of chapter 1, by reason of the 
        transfer during the applicable period of stock or other 
        properties by an acquired entity--
                    ``(A) as part of the acquisition described in 
                subsection (a)(2)(A) to which subsection (b) applies, 
                or
                    ``(B) after such acquisition to a foreign related 
                person.
        The Secretary may provide that income or gain from the sale of 
        inventories or other transactions in the ordinary course of a 
        trade or business shall not be treated as inversion gain under 
        subparagraph (B) to the extent the Secretary determines such 
        treatment would not be inconsistent with the purposes of this 
        section.
            ``(5) Coordination with section 172 and minimum tax.--Rules 
        similar to the rules of paragraphs (3) and (4) of section 
        860E(a) shall apply for purposes of this section.
            ``(6) Statute of limitations.--
                    ``(A) In general.--The statutory period for the 
                assessment of any deficiency attributable to the 
                inversion gain of any taxpayer for any pre-inversion 
                year shall not expire before the expiration of 3 years 
                from the date the Secretary is notified by the taxpayer 
                (in such manner as the Secretary may prescribe) of the 
                acquisition described in subsection (a)(2)(A) to which 
                such gain relates and such deficiency may be assessed 
                before the expiration of such 3-year period 
                notwithstanding the provisions of any other law or rule 
                of law which would otherwise prevent such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' means 
                any taxable year if--
                            ``(i) any portion of the applicable period 
                        is included in such taxable year, and
                            ``(ii) such year ends before the taxable 
                        year in which the acquisition described in 
                        subsection (a)(2)(A) is completed.
    ``(d) Special Rules Applicable to Related Party Transactions.--
            ``(1) Annual application for agreements on return 
        positions.--
                    ``(A) In general.--Each acquired entity to which 
                subsection (b) applies shall file with the Secretary an 
                application for an approval agreement under 
                subparagraph (D) for each taxable year which includes a 
                portion of the applicable period. Such application 
                shall be filed at such time and manner, and shall 
                contain such information, as the Secretary may 
                prescribe.
                    ``(B) Secretarial action.--Within 90 days of 
                receipt of an application under subparagraph (A) (or 
                such longer period as the Secretary and entity may 
                agree upon), the Secretary shall--
                            ``(i) enter into an agreement described in 
                        subparagraph (D) for the taxable year covered 
                        by the application,
                            ``(ii) notify the entity that the Secretary 
                        has determined that the application was filed 
                        in good faith and substantially complies with 
                        the requirements for the application under 
                        subparagraph (A), or
                            ``(iii) notify the entity that the 
                        Secretary has determined that the application 
                        was not filed in good faith or does not 
                        substantially comply with such requirements.
                If the Secretary fails to act within the time 
                prescribed under the preceding sentence, the entity 
                shall be treated for purposes of this paragraph as 
                having received notice under clause (ii).
                    ``(C) Failures to comply.--If an acquired entity 
                fails to file an application under subparagraph (A), or 
                the acquired entity receives a notice under 
                subparagraph (B)(iii), for any taxable year, then for 
                such taxable year--
                            ``(i) there shall not be allowed any 
                        deduction, or addition to basis or cost of 
                        goods sold, for amounts paid or incurred, or 
                        losses incurred, by reason of a transaction 
                        between the acquired entity and a foreign 
                        related person,
                            ``(ii) any transfer or license of 
                        intangible property (as defined in section 
                        936(h)(3)(B)) between the acquired entity and a 
                        foreign related person shall be disregarded, 
                        and
                            ``(iii) any cost-sharing arrangement 
                        between the acquired entity and a foreign 
                        related person shall be disregarded.
                    ``(D) Approval agreement.--For purposes of 
                subparagraph (A), the term `approval agreement' means a 
                prefiling, advance pricing, or other agreement 
                specified by the Secretary which contains such 
                provisions as the Secretary determines necessary to 
                ensure that the requirements of sections 163(j), 
                267(a)(3), 482, and 845, and any other provision of 
                this title applicable to transactions between related 
                persons and specified by the Secretary, are met.
                    ``(E) Tax court review.--
                            ``(i) In general.--The Tax Court shall have 
                        jurisdiction over any action brought by an 
                        acquired entity receiving a notice under 
                        subparagraph (B)(iii) to determine whether the 
                        issuance of the notice was an abuse of 
                        discretion, but only if the action is brought 
                        within 30 days after the date of the mailing 
                        (determined under rules similar to section 
                        6213) of the notice.
                            ``(ii) Court action.--The Tax Court shall 
                        issue its decision within 30 days after the 
                        filing of the action under clause (i) and may 
                        order the Secretary to issue a notice described 
                        in subparagraph (B)(ii).
                            ``(iii) Review.--An order of the Tax Court 
                        under this subparagraph shall be reviewable in 
                        the same manner as any other decision of the 
                        Tax Court.
            ``(2) Modifications of limitation on interest deduction.--
        In the case of an acquired entity to which subsection (b) 
        applies, section 163(j) shall be applied--
                    ``(A) without regard to paragraph (2)(A)(ii) 
                thereof, and
                    ``(B) by substituting `25 percent' for `50 percent' 
                each place it appears in paragraph (2)(B) thereof.
    ``(e) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Rules for application of subsection (a)(2).--In 
        applying subsection (a)(2) for purposes of subsections (a) and 
        (b), the following rules shall apply:
                    ``(A) Certain stock disregarded.--There shall not 
                be taken into account in determining ownership for 
                purposes of subsection (a)(2)(B)--
                            ``(i) stock held by members of the expanded 
                        affiliated group which includes the foreign 
                        incorporated entity, or
                            ``(ii) stock of such entity which is sold 
                        in a public offering or private placement 
                        related to the acquisition described in 
                        subsection (a)(2)(A).
                    ``(B) Plan deemed in certain cases.--If a foreign 
                incorporated entity acquires directly or indirectly 
                substantially all of the properties of a domestic 
                corporation or partnership during the 4-year period 
                beginning on the date which is 2 years before the 
                ownership requirements of subsection (a)(2)(B) are met 
                with respect to such domestic corporation or 
                partnership, such actions shall be treated as pursuant 
                to a plan.
                    ``(C) Certain transfers disregarded.--The transfer 
                of properties or liabilities (including by contribution 
                or distribution) shall be disregarded if such transfers 
                are part of a plan a principal purpose of which is to 
                avoid the purposes of this section.
                    ``(D) Special rule for related partnerships.--For 
                purposes of applying subsection (a)(2) to the 
                acquisition of a domestic partnership, except as 
                provided in regulations, all partnerships which are 
                under common control (within the meaning of section 
                482) shall be treated as 1 partnership.
                    ``(E) Treatment of certain rights.--The Secretary 
                shall prescribe such regulations as may be necessary--
                            ``(i) to treat warrants, options, contracts 
                        to acquire stock, convertible debt instruments, 
                        and other similar interests as stock, and
                            ``(ii) to treat stock as not stock.
            ``(2) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group as defined in 
        section 1504(a) but without regard to section 1504(b)(3), 
        except that section 1504(a) shall be applied by substituting 
        `more than 50 percent' for `at least 80 percent' each place it 
        appears.
            ``(3) Foreign incorporated entity.--The term `foreign 
        incorporated entity' means any entity which is, or but for 
        subsection (a)(1) would be, treated as a foreign corporation 
        for purposes of this title.
            ``(4) Foreign related person.--The term `foreign related 
        person' means, with respect to any acquired entity, a foreign 
        person which--
                    ``(A) bears a relationship to such entity described 
                in section 267(b) or 707(b), or
                    ``(B) is under the same common control (within the 
                meaning of section 482) as such entity.
            ``(5) Subsequent acquisitions by unrelated domestic 
        corporations.--
                    ``(A) In general.--Subject to such conditions, 
                limitations, and exceptions as the Secretary may 
                prescribe, if, after an acquisition described in 
                subsection (a)(2)(A) to which subsection (b) applies, a 
                domestic corporation stock of which is traded on an 
                established securities market acquires directly or 
                indirectly any properties of one or more acquired 
                entities in a transaction with respect to which the 
                requirements of subparagraph (B) are met, this section 
                shall cease to apply to any such acquired entity with 
                respect to which such requirements are met.
                    ``(B) Requirements.--The requirements of the 
                subparagraph are met with respect to a transaction 
                involving any acquisition described in subparagraph (A) 
                if--
                            ``(i) before such transaction the domestic 
                        corporation did not have a relationship 
                        described in section 267(b) or 707(b), and was 
                        not under common control (within the meaning of 
                        section 482), with the acquired entity, or any 
                        member of an expanded affiliated group 
                        including such entity, and
                            ``(ii) after such transaction, such 
                        acquired entity--
                                    ``(I) is a member of the same 
                                expanded affiliated group which 
                                includes the domestic corporation or 
                                has such a relationship or is under 
                                such common control with any member of 
                                such group, and
                                    ``(II) is not a member of, and does 
                                not have such a relationship and is not 
                                under such common control with any 
                                member of, the expanded affiliated 
                                group which before such acquisition 
                                included such entity.
    ``(f) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including regulations 
providing for such adjustments to the application of this section as 
are necessary to prevent the avoidance of the purposes of this section, 
including the avoidance of such purposes through--
            ``(1) the use of related persons, pass-through or other 
        noncorporate entities, or other intermediaries, or
            ``(2) transactions designed to have persons cease to be (or 
        not become) members of expanded affiliated groups or related 
        persons.''.
    (b) Treatment of Agreements.--
            (1) Confidentiality.--
                    (A) Treatment as return information.--Section 
                6103(b)(2) (relating to return information) is amended 
                by striking ``and'' at the end of subparagraph (C), by 
                inserting ``and'' at the end of subparagraph (D), and 
                by inserting after subparagraph (D) the following new 
                subparagraph:
                    ``(E) any approval agreement under section 
                7874(d)(1) to which any preceding subparagraph does not 
                apply and any background information related to the 
                agreement or any application for the agreement,''.
                    (B) Exception from public inspection as written 
                determination.--Section 6110(b)(1)(B) is amended by 
                striking ``or (D)'' and inserting ``, (D), or (E)''.
            (2) Reporting.--The Secretary of the Treasury shall include 
        with any report on advance pricing agreements required to be 
        submitted after the date of the enactment of this Act under 
        section 521(b) of the Ticket to Work and Work Incentives 
        Improvement Act of 1999 (Public Law 106-170) a report regarding 
        approval agreements under section 7874(d)(1) of the Internal 
        Revenue Code of 1986. Such report shall include information 
        similar to the information required with respect to advance 
        pricing agreements and shall be treated for confidentiality 
        purposes in the same manner as the reports on advance pricing 
        agreements are treated under section 521(b)(3) of such Act.
    (c) Information Reporting.--The Secretary of the Treasury shall 
exercise the Secretary's authority under the Internal Revenue Code of 
1986 to require entities involved in transactions to which section 7874 
of such Code (as added by subsection (a)) applies to report to the 
Secretary, shareholders, partners, and such other persons as the 
Secretary may prescribe such information as is necessary to ensure the 
proper tax treatment of such transactions.
    (d) Conforming Amendment.--The table of sections for subchapter C 
of chapter 80 is amended by adding at the end the following new item:

                              ``Sec. 7874. Rules relating to inverted 
                                        corporate entities.''.
    (e) Transition Rule for Certain Regulated Investment Companies and 
Unit Investment Trusts.--Notwithstanding section 7874 of the Internal 
Revenue Code of 1986 (as added by subsection (a)), a regulated 
investment company, or other pooled fund or trust specified by the 
Secretary of the Treasury, may elect to recognize gain by reason of 
section 367(a) of such Code with respect to a transaction under which a 
foreign incorporated entity is treated as an inverted domestic 
corporation under section 7874(a) of such Code by reason of an 
acquisition completed after March 20, 2002, and before January 1, 2004.

SEC. 342. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN INVERTED 
              CORPORATIONS.

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

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

                              ``Sec. 5000A. Stock compensation of 
                                        insiders in inverted 
                                        corporations entities.

``SEC. 5000A. STOCK COMPENSATION OF INSIDERS IN INVERTED CORPORATIONS.

    ``(a) Imposition of Tax.--In the case of an individual who is a 
disqualified individual with respect to any inverted corporation, there 
is hereby imposed on such person a tax equal to 20 percent of the value 
(determined under subsection (b)) of the specified stock compensation 
held (directly or indirectly) by or for the benefit of such individual 
or a member of such individual's family (as defined in section 267) at 
any time during the 12-month period beginning on the date which is 6 
months before the inversion date.
    ``(b) Value.--For purposes of subsection (a)--
            ``(1) In general.--The value of specified stock 
        compensation shall be--
                    ``(A) in the case of a stock option (or other 
                similar right) or any stock appreciation right, the 
                fair value of such option or right, and
                    ``(B) in any other case, the fair market value of 
                such compensation.
            ``(2) Date for determining value.--The determination of 
        value shall be made--
                    ``(A) in the case of specified stock compensation 
                held on the inversion date, on such date,
                    ``(B) in the case of such compensation which is 
                canceled during the 6 months before the inversion date, 
                on the day before such cancellation, and
                    ``(C) in the case of such compensation which is 
                granted after the inversion date, on the date such 
                compensation is granted.
    ``(c) Tax To Apply Only If Shareholder Gain Recognized.--Subsection 
(a) shall apply to any disqualified individual with respect to an 
inverted corporation only if gain (if any) on any stock in such 
corporation is recognized in whole or part by any shareholder by reason 
of the acquisition referred to in section 7874(a)(2)(A) (determined by 
substituting `July 10, 2002' for `March 20, 2002') with respect to such 
corporation.
    ``(d) Exception Where Gain Recognized on Compensation.--Subsection 
(a) shall not apply to--
            ``(1) any stock option which is exercised on the inversion 
        date or during the 6-month period before such date and to the 
        stock acquired in such exercise, and
            ``(2) any specified stock compensation which is sold, 
        exchanged, or distributed during such period in a transaction 
        in which gain or loss is recognized in full.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Disqualified individual.--The term `disqualified 
        individual' means, with respect to a corporation, any 
        individual who, at any time during the 12-month period 
        beginning on the date which is 6 months before the inversion 
        date--
                    ``(A) is subject to the requirements of section 
                16(a) of the Securities Exchange Act of 1934 with 
                respect to such corporation or any member of the 
                expanded affiliated group which includes such 
                corporation, or
                    ``(B) would be subject to such requirements if such 
                corporation or member were an issuer of equity 
                securities referred to in such section.
            ``(2) Inverted corporation; inversion date.--
                    ``(A) Inverted corporation.--The term `inverted 
                corporation' means any corporation to which subsection 
                (a) or (b) of section 7874 applies determined--
                            ``(i) by substituting `July 10, 2002' for 
                        `March 20, 2002' in section 7874(a)(2)(A), and
                            ``(ii) without regard to subsection 
                        (b)(1)(A).
                Such term includes any predecessor or successor of such 
                a corporation.
                    ``(B) Inversion date.--The term `inversion date' 
                means, with respect to a corporation, the date on which 
                the corporation first becomes an inverted corporation.
            ``(3) Specified stock compensation.--
                    ``(A) In general.--The term `specified stock 
                compensation' means payment (or right to payment) 
                granted by the inverted corporation (or by any member 
                of the expanded affiliated group which includes such 
                corporation) to any person in connection with the 
                performance of services by a disqualified individual 
                for such corporation or member if the value of such 
                payment or right is based on (or determined by 
                reference to) the value (or change in value) of stock 
                in such corporation (or any such member).
                    ``(B) Exceptions.--Such term shall not include--
                            ``(i) any option to which part II of 
                        subchapter D of chapter 1 applies, or
                            ``(ii) any payment or right to payment from 
                        a plan referred to in section 280G(b)(6).
            ``(4) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group (as defined in 
        section 1504(a) without regard to section 1504(b)(3)); except 
        that section 1504(a) shall be applied by substituting `more 
        than 50 percent' for `at least 80 percent' each place it 
        appears.
    ``(f) Special Rules.--For purposes of this section--
            ``(1) Cancellation of restriction.--The cancellation of a 
        restriction which by its terms will never lapse shall be 
        treated as a grant.
            ``(2) Payment or reimbursement of tax by corporation 
        treated as specified stock compensation.--Any payment of the 
        tax imposed by this section directly or indirectly by the 
        inverted corporation or by any member of the expanded 
        affiliated group which includes such corporation--
                    ``(A) shall be treated as specified stock 
                compensation, and
                    ``(B) shall not be allowed as a deduction under any 
                provision of chapter 1.
            ``(3) Certain restrictions ignored.--Whether there is 
        specified stock compensation, and the value thereof, shall be 
        determined without regard to any restriction other than a 
        restriction which by its terms will never lapse.
            ``(4) Property transfers.--Any transfer of property shall 
        be treated as a payment and any right to a transfer of property 
        shall be treated as a right to a payment.
            ``(5) Other administrative provisions.--For purposes of 
        subtitle F, any tax imposed by this section shall be treated as 
        a tax imposed by subtitle A.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (b) Denial of Deduction.--
            (1) In general.--Paragraph (6) of section 275(a) is amended 
        by inserting ``48,'' after ``46,''.
            (2) $1,000,000 limit on deductible compensation reduced by 
        payment of excise tax on specified stock compensation.--
        Paragraph (4) of section 162(m) is amended by adding at the end 
        the following new subparagraph:
                    ``(G) Coordination with excise tax on specified 
                stock compensation.--The dollar limitation contained in 
                paragraph (1) with respect to any covered employee 
                shall be reduced (but not below zero) by the amount of 
                any payment (with respect to such employee) of the tax 
                imposed by section 5000A directly or indirectly by the 
                inverted corporation (as defined in such section) or by 
                any member of the expanded affiliated group (as defined 
                in such section) which includes such corporation.''.
    (c) Conforming Amendments.--
            (1) The last sentence of section 3121(v)(2)(A) is amended 
        by inserting before the period ``or to any specified stock 
        compensation (as defined in section 5000A) on which tax is 
        imposed by section 5000A''.
            (2) The table of chapters for subtitle D is amended by 
        adding at the end the following new item:

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

SEC. 343. REINSURANCE OF UNITED STATES RISKS IN FOREIGN JURISDICTIONS.

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

                       PART II--OTHER PROVISIONS

SEC. 344. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST ON 
              UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE FINANCIAL 
              ARRANGEMENT.

    (a) General Rule.--If--
            (1) a taxpayer eligible to participate in the Department of 
        the Treasury's Offshore Voluntary Compliance Initiative did not 
        participate in such initiative, and
            (2) any interest or applicable penalty is imposed with 
        respect to any arrangement to which such initiative applied or 
        to any underpayment of Federal income tax attributable to items 
        arising in connection with such arrangement,
then, notwithstanding any other provision of law, the amount of such 
interest or penalty shall be equal to twice that determined without 
regard to this section.
    (b) Definitions and Rules.--For purposes of this section--
            (1) Applicable penalty.--The term ``applicable penalty'' 
        means any penalty, addition to tax, or fine imposed under 
        chapter 68 of the Internal Revenue Code of 1986.
            (2) Voluntary offshore compliance initiative.--The term 
        ``Voluntary Offshore Compliance Initiative'' means the program 
        established by the Department of the Treasury in January of 
        2003 under which any taxpayer was eligible to voluntarily 
        disclose previously undisclosed income on assets placed in 
        offshore accounts and accessed through credit card and other 
        financial arrangements.
            (3) Participation.--A taxpayer shall be treated as having 
        participated in the Voluntary Offshore Compliance Initiative if 
        the taxpayer submitted the request in a timely manner and all 
        information requested by the Secretary of the Treasury or his 
        delegate within a reasonable period of time following the 
        request.
    (c) Effective Date.--The provisions of this section shall apply to 
interest penalties, additions to tax, and fines with respect to any 
taxable year if as of May 8, 2003, the assessment of any tax, penalty, 
or interest with respect to such taxable year is not prevented by the 
operation of any law or rule of law.

SEC. 345. EFFECTIVELY CONNECTED INCOME TO INCLUDE CERTAIN FOREIGN 
              SOURCE INCOME.

    (a) In General.--Section 864(c)(4)(B) (relating to treatment of 
income from sources without the United States as effectively connected 
income) is amended by adding at the end the following new flush 
sentence:
                ``Any income or gain which is equivalent to any item of 
                income or gain described in clause (i), (ii), or (iii) 
                shall be treated in the same manner as such item for 
                purposes of this subparagraph.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 346. DETERMINATION OF BASIS OF AMOUNTS PAID FROM FOREIGN PENSION 
              PLANS.

    (a) In General.--Section 72 (relating to annuities and certain 
proceeds of endowment and life insurance contracts) is amended by 
redesignating subsection (w) as subsection (x) by inserting subsection 
(v) the following new subsection:
    ``(w) Determination of Basis of Foreign Pension Plans.--
Notwithstanding any other provision of this section, for purposes of 
determining the portion of any distribution from a foreign pension plan 
which is includible in gross income of the distributee, the investment 
in the contract with respect to the plan shall not include employer or 
employee contributions to the plan (or any earnings on such 
contributions) unless such contributions or earnings were subject to 
taxation by the United States or any foreign government.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions on or after the date of the enactment of this 
Act.

SEC. 347. RECAPTURE OF OVERALL FOREIGN LOSSES ON SALE OF CONTROLLED 
              FOREIGN CORPORATION.

    (a) In General.--Section 904(f)(3) (relating to dispositions) is 
amending by adding at the end the following new subparagraph:
                    ``(D) Application to dispositions of stock in 
                controlled foreign corporations.--In the case of any 
                disposition by a taxpayer of any share of stock in a 
                controlled foreign corporation (as defined in section 
                957), this paragraph shall apply to such disposition in 
                the same manner as if it were a disposition of property 
                described in subparagraph (A), except that the 
                exception contained in subparagraph (C)(i) shall not 
                apply.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to dispositions after the date of the enactment of this Act.

SEC. 348. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL ISSUE 
              DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS IN TRANSACTIONS 
              WITH RELATED FOREIGN PERSONS.

    (a) Original Issue Discount.--Section 163(e)(3) (relating to 
special rule for original issue discount on obligation held by related 
foreign person) is amended by redesignating subparagraph (B) as 
subparagraph (C) and by inserting after subparagraph (A) the following 
new subparagraph:
                    ``(B) Special rule for certain foreign entities.--
                Notwithstanding subparagraph (A) (and any regulations 
                thereunder), in the case of any debt instrument having 
                original issue discount which is held by a related 
                foreign person which is a foreign personal holding 
                company (as defined in section 552), a controlled 
                foreign corporation (as defined in section 957), or a 
                passive foreign investment company (as defined in 
                section 1297), a deduction shall be allowable to the 
                issuer with respect to such original issue discount for 
                any taxable year only to the extent such original issue 
                discount is included during such taxable year in the 
                gross income of a United States person who owns (within 
                the meaning of section 958(a)) stock in such 
                corporation. For purposes of this subparagraph, the 
                determination as to the proper allocation of the 
                original issue discount to shareholders shall be made 
                in such manner as the Secretary may prescribe.''.
    (b) Interest and Other Deductible Amounts.--Section 267(a)(3) is 
amended--
            (1) by striking ``The Secretary'' and inserting:
                    ``(A) In general.--The Secretary'', and
            (2) by adding at the end the following new subparagraph:
                    ``(B) Special rule for certain foreign entities.--
                Notwithstanding any regulations issued under 
                subparagraph (A), in the case of any amount payable to 
                a foreign personal holding company (as defined in 
                section 552), a controlled foreign corporation (as 
                defined in section 957), or a passive foreign 
                investment company (as defined in section 1297), a 
                deduction shall be allowable to the payor with respect 
                to such amount for any taxable year only to the extent 
                such amount is included during such taxable year in the 
                gross income of a United States person who owns (within 
                the meaning of section 958(a)) stock in such 
                corporation. For purposes of this subparagraph, the 
                determination as to the proper allocation of such 
                amount to shareholders shall be made in such manner as 
                the Secretary may prescribe.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to payments accrued on or after May 8, 2003.

SEC. 349. SALE OF GASOLINE AND DIESEL FUEL AT DUTY-FREE SALES 
              ENTERPRISES.

    (a) Prohibition.--Section 555(b) of the Tariff Act of 1930 (19 
U.S.C. 1555(b)) is amended--
            (1) by redesignating paragraphs (6) through (8) as 
        paragraphs (7) through (9), respectively; and
            (2) by inserting after paragraph (5) the following:
            ``(6) Any gasoline or diesel fuel sold at a duty-free sales 
        enterprise shall be considered to be entered for consumption 
        into the customs territory of the United States.''.
    (b) Construction.--The amendments made by this section shall not be 
construed to create any inference with respect to the interpretation of 
any provision of law as such provision was in effect on the day before 
the date of enactment of this Act.
    (c) Effective date.--The amendments made by this section shall take 
effect on the date of enactment of this Act.

SEC. 350. REPEAL OF EARNED INCOME EXCLUSION OF CITIZENS OR RESIDENTS 
              LIVING ABROAD.

    (a) Repeal.--Section 911 (relating to citizens or residents living 
abroad) is amended by adding at the end the following new subsection:
    ``(g) Termination.--This section shall not apply to any taxable 
year beginning after December 31, 2003.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

                  Subtitle E--Other Revenue Provisions

SEC. 351. EXTENSION OF INTERNAL REVENUE SERVICE USER FEES.

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

``SEC. 7528. INTERNAL REVENUE SERVICE USER FEES.

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

                                                                Average
``Category                                                          Fee
    Employee plan ruling and opinion..............                $250 
    Exempt organization ruling....................                $350 
    Employee plan determination...................                $300 
    Exempt organization determination.............                $275 
    Chief counsel ruling..........................                $200.
    ``(c) Termination.--No fee shall be imposed under this section with 
respect to requests made after September 30, 2013.''.
    (b) Conforming Amendments.--
            (1) The table of sections for chapter 77 is amended by 
        adding at the end the following new item:

                              ``Sec. 7528. Internal Revenue Service 
                                        user fees.''.
            (2) Section 10511 of the Revenue Act of 1987 is repealed.
            (3) Section 620 of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 is repealed.
    (c) Limitations.--Notwithstanding any other provision of law, any 
fees collected pursuant to section 7528 of the Internal Revenue Code of 
1986, as added by subsection (a), shall not be expended by the Internal 
Revenue Service unless provided by an appropriations Act.
    (d) Effective Date.--The amendments made by this section shall 
apply to requests made after the date of the enactment of this Act.

SEC. 352. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF TAXABLE 
              VACCINES.

    (a) In General.--Section 4132(a)(1) (defining taxable vaccine) is 
amended by redesignating subparagraphs (I), (J), (K), and (L) as 
subparagraphs (J), (K), (L), and (M), respectively, and by inserting 
after subparagraph (H) the following new subparagraph:
                    ``(I) Any vaccine against hepatitis A.''.
    (b) Conforming Amendment.--Section 9510(c)(1)(A) is amended by 
striking ``October 18, 2000'' and inserting ``May 8, 2003''.
    (c) Effective Date.--
            (1) Sales, etc.--The amendments made by this section shall 
        apply to sales and uses on or after the first day of the first 
        month which begins more than 4 weeks after the date of the 
        enactment of this Act.
            (2) Deliveries.--For purposes of paragraph (1) and section 
        4131 of the Internal Revenue Code of 1986, in the case of sales 
        on or before the effective date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.

SEC. 353. 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. 354. TREATMENT OF STRIPPED INTERESTS IN BOND AND PREFERRED STOCK 
              FUNDS, ETC.

    (a) In General.--Section 1286 (relating to tax treatment of 
stripped bonds) is amended by redesignating subsection (f) as 
subsection (g) and by inserting after subsection (e) the following new 
subsection:
    ``(f) Treatment of Stripped Interests in Bond and Preferred Stock 
Funds, Etc.--In the case of an account or entity substantially all of 
the assets of which consist of bonds, preferred stock, or a combination 
thereof, the Secretary may by regulations provide that rules similar to 
the rules of this section and 305(e), as appropriate, shall apply to 
interests in such account or entity to which (but for this subsection) 
this section or section 305(e), as the case may be, would not apply.''.
    (b) Cross Reference.--Subsection (e) of section 305 is amended by 
adding at the end the following new paragraph:
            ``(7) Cross reference.--

                                ``For treatment of stripped interests 
in certain accounts or entities holding preferred stock, see section 
1286(f).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to purchases and dispositions after the date of the enactment of 
this Act.

SEC. 355. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.

    (a) In General.--Subpart B of part III of subchapter A of chapter 
61 is amended by inserting after section 6043 the following new 
section:

``SEC. 6043A. TAXABLE MERGERS AND ACQUISITIONS.

    ``(a) In General.--The acquiring corporation in any taxable 
acquisition shall make a return (according to the forms or regulations 
prescribed by the Secretary) setting forth--
            ``(1) a description of the acquisition,
            ``(2) the name and address of each shareholder of the 
        acquired corporation who is required to recognize gain (if any) 
        as a result of the acquisition,
            ``(3) the amount of money and the fair market value of 
        other property transferred to each such shareholder as part of 
        such acquisition, and
            ``(4) such other information as the Secretary may 
        prescribe.
To the extent provided by the Secretary, the requirements of this 
section applicable to the acquiring corporation shall be applicable to 
the acquired corporation and not to the acquiring corporation.
    ``(b) Nominee Reporting.--Any person who holds stock as a nominee 
for another person shall furnish in the manner prescribed by the 
Secretary to such other person the information provided by the 
corporation under subsection (d).
    ``(c) Taxable Acquisition.--For purposes of this section, the term 
`taxable acquisition' means any acquisition by a corporation of stock 
in or property of another corporation if any shareholder of the 
acquired corporation is required to recognize gain (if any) as a result 
of such acquisition.
    ``(d) Statements to Be Furnished to Shareholders.--Every person 
required to make a return under subsection (a) shall furnish to each 
shareholder whose name is required to be set forth in such return a 
written statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return,
            ``(2) the information required to be shown on such return 
        with respect to such shareholder, and
            ``(3) such other information as the Secretary may 
        prescribe.
The written statement required under the preceding sentence shall be 
furnished to the shareholder on or before January 31 of the year 
following the calendar year during which the taxable acquisition 
occurred.''.
    (b) Assessable Penalties.--
            (1) Subparagraph (B) of section 6724(d)(1) (relating to 
        definitions) is amended by redesignating clauses (ii) through 
        (xvii) as clauses (iii) through (xviii), respectively, and by 
        inserting after clause (i) the following new clause:
                            ``(ii) section 6043A(a) (relating to 
                        returns relating to taxable mergers and 
                        acquisitions),''.
            (2) Paragraph (2) of section 6724(d) is amended by 
        redesignating subparagraphs (F) through (AA) as subparagraphs 
        (G) through (BB), respectively, and by inserting after 
        subparagraph (E) the following new subparagraph:
                    ``(F) subsections (b) and (d) of section 6043A 
                (relating to returns relating to taxable mergers and 
                acquisitions).''.
    (c) Clerical Amendment.--The table of sections for subpart B of 
part III of subchapter A of chapter 61 is amended by inserting after 
the item relating to section 6043 the following new item:

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

SEC. 356. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON WITHHOLDING 
              TAXES ON INCOME OTHER THAN DIVIDENDS.

    (a) In General.--Section 901 is amended by redesignating subsection 
(l) as subsection (m) and by inserting after subsection (k) the 
following new subsection:
    ``(l) Minimum Holding Period for Withholding Taxes on Gain and 
Income Other than Dividends Etc.--
            ``(1) In general.--In no event shall a credit be allowed 
        under subsection (a) for any withholding tax (as defined in 
        subsection (k)) on any item of income or gain with respect to 
        any property if--
                    ``(A) such property is held by the recipient of the 
                item for 15 days or less during the 30-day period 
                beginning on the date which is 15 days before the date 
                on which the right to receive payment of such item 
                arises, or
                    ``(B) to the extent that the recipient of the item 
                is under an obligation (whether pursuant to a short 
                sale or otherwise) to make related payments with 
                respect to positions in substantially similar or 
                related property.
        This paragraph shall not apply to any dividend to which 
        subsection (k) applies.
            ``(2) Exception for taxes paid by dealers.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any qualified tax with respect to any property held in 
                the active conduct in a foreign country of a business 
                as a dealer in such property.
                    ``(B) Qualified tax.--For purposes of subparagraph 
                (A), the term `qualified tax' means a tax paid to a 
                foreign country (other than the foreign country 
                referred to in subparagraph (A)) if--
                            ``(i) the item to which such tax is 
                        attributable is subject to taxation on a net 
                        basis by the country referred to in 
                        subparagraph (A), and
                            ``(ii) such country allows a credit against 
                        its net basis tax for the full amount of the 
                        tax paid to such other foreign country.
                    ``(C) Dealer.--For purposes of subparagraph (A), 
                the term `dealer' means--
                            ``(i) with respect to a security, any 
                        person to whom paragraphs (1) and (2) of 
                        subsection (k) would not apply by reason of 
                        paragraph (4) thereof if such security were 
                        stock, and
                            ``(ii) with respect to any other property, 
                        any person with respect to whom such property 
                        is described in section 1221(a)(1).
                    ``(D) Regulations.--The Secretary may prescribe 
                such regulations as may be appropriate to carry out 
                this paragraph, including regulations to prevent the 
                abuse of the exception provided by this paragraph and 
                to treat other taxes as qualified taxes.
            ``(3) Exceptions.--The Secretary may by regulation provide 
        that paragraph (1) shall not apply to property where the 
        Secretary determines that the application of paragraph (1) to 
        such property is not necessary to carry out the purposes of 
        this subsection.
            ``(4) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (5), (6), and (7) of subsection (k) shall apply 
        for purposes of this subsection.
            ``(5) Determination of holding period.--Holding periods 
        shall be determined for purposes of this subsection without 
        regard to section 1235 or any similar rule.''.
    (b) Conforming Amendment.--The heading of subsection (k) of section 
901 is amended by inserting ``on Dividends'' after ``Taxes''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or accrued more than 30 days after the date of 
the enactment of this Act.

SEC. 357. QUALIFIED TAX COLLECTION CONTRACTS.

    (a) Contract Requirements.--
            (1) In general.--Subchapter A of chapter 64 (relating to 
        collection) is amended by adding at the end the following new 
        section:

``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.

    ``(a) In General.--Nothing in any provision of law shall be 
construed to prevent the Secretary from entering into a qualified tax 
collection contract.
    ``(b) Qualified Tax Collection Contract.--For purposes of this 
section, the term `qualified tax collection contract' means any 
contract which--
            ``(1) is for the services of any person (other than an 
        officer or employee of the Treasury Department) to locate and 
        contact any taxpayer specified by the Secretary, to request 
        payment from such taxpayer of an amount of Federal tax 
        specified by the Secretary, and to obtain financial information 
        specified by the Secretary with respect to such taxpayer, and
            ``(2) prohibits each person providing such services under 
        such contract from committing any act or omission which 
        employees of the Internal Revenue Service are prohibited from 
        committing in the performance of similar services.
    ``(c) Fees.--The Secretary may retain and use an amount not in 
excess of 25 percent of the amount collected under any qualified tax 
collection contract for the costs of services performed under such 
contract. The Secretary shall keep adequate records regarding amounts 
so retained and used. The amount credited as paid by any taxpayer shall 
be determined without regard to this subsection.
    ``(d) No Federal Liability.--The United States shall not be liable 
for any act or omission of any person performing services under a 
qualified tax collection contract.
    ``(e) Application of Fair Debt Collection Practices Act.--The 
provisions of the Fair Debt Collection Practices Act (15 U.S.C. 1692 et 
seq.) shall apply to any qualified tax collection contract, except to 
the extent superseded by any provision of this title.
    ``(f) Cross References.--
            ``(1) For damages for certain unauthorized collection 
        actions by persons performing services under a qualified tax 
        collection contract, see section 7433A.
            ``(2) For application of Taxpayer Assistance Orders to 
        persons performing services under a qualified tax collection 
        contract, see section 7811(a)(4).''.
            (2) Conforming amendments.--
                    (A) Section 7809(a) is amended by inserting 
                ``6306,'' before ``7651''.
                    (B) The table of sections for subchapter A of 
                chapter 64 is amended by adding at the end the 
                following new item:

                              ``Sec. 6306. Qualified Tax Collection 
                                        Contracts.''.
    (b) Civil Damages for Certain Unauthorized Collection Actions by 
Persons Performing Services Under Qualified Tax Collection Contracts.--
            (1) In general.--Subchapter B of chapter 76 (relating to 
        proceedings by taxpayers and third parties) is amended by 
        inserting after section 7433 the following new section:

``SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION ACTIONS 
              BY PERSONS PERFORMING SERVICES UNDER QUALIFIED TAX 
              COLLECTION CONTRACTS.

    ``(a) In General.--Subject to the modifications provided by 
subsection (b), section 7433 shall apply to the acts and omissions of 
any person performing services under a qualified tax collection 
contract (as defined in section 6306(b)) to the same extent and in the 
same manner as if such person were an employee of the Internal Revenue 
Service.
    ``(b) Modifications.--For purposes of subsection (a)--
            ``(1) Any civil action brought under section 7433 by reason 
        of this section shall be brought against the person who entered 
        into the qualified tax collection contract with the Secretary 
        and shall not be brought against the United States.
            ``(2) Such person and not the United States shall be liable 
        for any damages and costs determined in such civil action.
            ``(3) Such civil action shall not be an exclusive remedy 
        with respect to such person.
            ``(4) Subsections (c) and (d)(1) of section 7433 shall not 
        apply.''.
            (2) Clerical amendment.--The table of sections for 
        subchapter B of chapter 76 is amended by inserting after the 
        item relating to section 7433 the following new item:

                              ``Sec. 7433A. Civil damages for certain 
                                        unauthorized collection actions 
                                        by persons performing services 
                                        under a qualified tax 
                                        collection contract.''.
    (c) Application of Taxpayer Assistance Orders to Persons Performing 
Services Under a Qualified Tax Collection Contract.--Section 7811 
(relating to taxpayer assistance orders) is amended by adding at the 
end the following new subsection:
    ``(g) Application to Persons Performing Services Under a Qualified 
Tax Collection Contract.--Any order issued or action taken by the 
National Taxpayer Advocate pursuant to this section shall apply to 
persons performing services under a qualified tax collection contract 
(as defined in section 6306(b)) to the same extent and in the same 
manner as such order or action applies to the Secretary.''.
    (d) Ineligibility of Individuals who Commit Misconduct to Perform 
Under Contract.--Section 1203 of the Internal Revenue Service 
Restructuring Act of 1998 (relating to termination of employment for 
misconduct) is amended by adding at the end the following new 
subsection:
    ``(e) Individuals Performing Services Under a Qualified Tax 
Collection Contract.-- An individual shall cease to be permitted to 
perform any services under any qualified tax collection contract (as 
defined in section 6306(b) of the Internal Revenue Code of 1986) if 
there is a final determination by the Secretary of the Treasury under 
such contract that such individual committed any act or omission 
described under subsection (b) in connection with the performance of 
such services.''.
    (e) Effective Date.--The amendments made to this section shall take 
effect on the date of the enactment of this Act.

SEC. 358. EXTENSION OF CUSTOMS USER FEES.

    Section 13031(j)(3) of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (19 U.S.C. 58c(j)(3)) is amended by striking 
``September 30, 2003'' and inserting ``September 30, 2013''.

SEC. 359. CLARIFICATION OF EXEMPTION FROM TAX FOR SMALL PROPERTY AND 
              CASUALTY INSURANCE COMPANIES.

    (a) In General.--Section 501(c)(15)(A) is amended to read as 
follows:
                    ``(A) Insurance companies or associations other 
                than life (including interinsurers and reciprocal 
                underwriters) if--
                            ``(i) the gross receipts for the taxable 
                        year do not exceed $600,000, and
                            ``(ii) more than 50 percent of such gross 
                        receipts consist of premiums.''.
    (b) Controlled Group Rule.--Section 501(c)(15)(C) is amended by 
inserting ``, except that in applying section 1563 for purposes of 
section 831(b)(2)(B)(ii), subparagraphs (B) and (C) of section 
1563(b)(2) shall be disregarded'' before the period at the end.
    (c) Conforming Amendment.--Clause (i) of section 831(b)(2)(A) is 
amended by striking ``exceed $350,000 but''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 360. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.

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

SEC. 361. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS 
              FRANCHISES.

    (a) In General.--Section 197(e) (relating to exceptions to 
definition of section 197 intangible) is amended by striking paragraph 
(6) and by redesignating paragraphs (7) and (8) as paragraphs (6) and 
(7), respectively.
    (b) Conforming Amendments.--
            (1)(A) Section 1056 (relating to basis limitation for 
        player contracts transferred in connection with the sale of a 
        franchise) is repealed.
            (B) The table of sections for part IV of subchapter O of 
        chapter 1 is amended by striking the item relating to section 
        1056.
            (2) Section 1253 (relating to transfers of franchises, 
        trademarks, and trade names) is amended by striking subsection 
        (e).
    (c) Effective Date.--The amendments made by this section shall 
apply to property acquired after the date of the enactment of this Act.

SEC. 362. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL 
              UNDERPAYMENTS.

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

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

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

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

SEC. 363. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX FOR 
              CERTAIN DEEMED ASSET SALES.

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

SEC. 364. LIMITATION OF DEDUCTION FOR CHARITABLE CONTRIBUTIONS OF 
              PATENTS AND SIMILAR PROPERTY.

    (a) In General.--Section 170(e)(1)(B) (relating to certain 
contributions of ordinary income and capital gain property) is amended 
by striking ``or'' at the end of clause (i), by adding ``or'' at the 
end of clause (ii), and by inserting after clause (ii) the following 
new clause:
                            ``(iii) of any patent, copyright, 
                        trademark, trade name, trade secret, know-how, 
                        software, or similar property, or applications 
                        or registrations of such property,''.
    (b) Anti-Abuse Rules.--The Secretary of the Treasury may prescribe 
such regulations or other administrative guidance as may be necessary 
or appropriate to prevent the avoidance of the purposes of section 
170(e)(1)(B)(iii) of the Internal Revenue Code of 1986 (as added by 
subsection (a)), including preventing--
            (1) the circumvention of the reduction of the charitable 
        deduction by embedding or bundling the patent or similar 
        property as part of a charitable contribution of property that 
        includes the patent or similar property,
            (2) the manipulation of the basis of the property to 
        increase the amount of the charitable deduction through the use 
        of related persons, pass-thru entities, or other 
        intermediaries, or through the use of any provision of law or 
        regulation (including the consolidated return regulations), and
            (3) a donor from changing the form of the patent or similar 
        property to property of a form for which different deduction 
        rules would apply.
    (c) Effective Date.--The amendments made by this section shall 
apply to contributions made after May 7, 2003.

SEC. 365. EXTENSION OF TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE 
              HEALTH ACCOUNTS.

    (a) Amendment of Internal Revenue Code of 1986.--Paragraph (5) of 
section 420(b) (relating to expiration) is amended by striking 
``December 31, 2005'' and inserting ``December 31, 2013''.
    (b) Amendments of ERISA.--
            (1) Section 101(e)(3) of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1021(e)(3)) is amended by 
        striking ``Tax Relief Extension Act of 1999'' and inserting 
        ``Jobs and Growth Tax Relief Reconciliation Act of 2003''.
            (2) Section 403(c)(1) of such Act (29 U.S.C. 1103(c)(1)) is 
        amended by striking ``Tax Relief Extension Act of 1999'' and 
        inserting ``Jobs and Growth Tax Relief Reconciliation Act of 
        2003''.
            (3) Paragraph (13) of section 408(b) of such Act (29 U.S.C. 
        1108(b)(3)) is amended--
                    (A) by striking ``January 1, 2006'' and inserting 
                ``January 1, 2014'', and
                    (B) by striking ``Tax Relief Extension Act of 
                1999'' and inserting ``Jobs and Growth Tax Relief 
                Reconciliation Act of 2003''.

SEC. 366. PRORATION RULES FOR LIFE INSURANCE BUSINESS OF PROPERTY AND 
              CASUALTY INSURANCE COMPANIES.

    (a) In General.--Section 832(b)(4) (defining premiums earned) is 
amended--
            (1) by inserting ``, except that any deduction attributable 
        to such reserves shall be reduced in the same manner as the 
        deductions provided by sections 243, 244, and 245 for a life 
        insurance company are reduced under section 805(a)(4)'' before 
        the period at the end of the first sentence following 
        subparagraph (C), and
            (2) by adding at the end the following new sentence: ``In 
        applying section 812(d) for purposes of the reduction under the 
        third preceding sentence, only gross investment income 
        attributable to the reserves described in such sentence shall 
        be taken into account.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 367. MODIFICATION OF TREATMENT OF TRANSFERS TO CREDITORS IN 
              DIVISIVE REORGANIZATIONS.

    (a) In General.--Section 361(b)(3) (relating to treatment of 
transfers to creditors) is amended by adding at the end the following 
new sentence: ``In the case of a reorganization described in section 
368(a)(1)(D) with respect to which stock or securities of the 
corporation to which the assets are transferred are distributed in a 
transaction which qualifies under section 355, this paragraph shall 
apply only to the extent that the money or other property transferred 
to such creditors does not exceed the adjusted bases of such assets 
transferred.''.
    (b) Liabilities in Excess of Basis.--Section 357(c)(1)(B) is 
amended by inserting ``with respect to which stock or securities of the 
corporation to which the assets are transferred are distributed in a 
transaction which qualifies under section 355'' after ``section 
368(a)(1)(D)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to transfers of money or other property, or liabilities assumed, 
in connection with a reorganization occurring on or after the date of 
the enactment of this Act.

                      Subtitle F--Other Provisions

SEC. 371. TEMPORARY STATE FISCAL RELIEF FUND.

    (a) Authority To Make Payments To States.--
            (1) In general.--Not later than 45 days after the date of 
        enactment of this Act, the Secretary of the Treasury (in this 
        section referred to as the ``Secretary'') shall establish a 
        program under which the Secretary shall make a payment to each 
        State in which the chief executive officer of the State, or the 
        chief executive officer's designee, in consultation and 
        coordination with other State and local officials, notifies the 
        Secretary not later than 6 months after the date of enactment 
        of this Act that the State intends to use the payment in 
        accordance with this section.
            (2) Requirement.--In making payments to States under this 
        section, the Secretary shall ensure that not more than 50 
        percent of the aggregate amount made available for payments 
        under this section (after the application of section 1903(x)(3) 
        of the Social Security Act) is paid to States in fiscal year 
        2003.
    (b) Use of Payment.--
            (1) In general.--Subject to paragraph (2), a State shall 
        use the funds provided under a payment made under this section 
        to carry out 1 or more of the following activities:
                    (A) Improving education or job training.
                    (B) Improving health care services.
                    (C) Improving transportation or other 
                infrastructure.
                    (D) Improving law enforcement or public safety.
                    (E) Maintaining essential government services.
            (2) Limitation.--A State may only use funds provided under 
        a payment made under this section for types of expenditures 
        permitted under the most recently approved budget for the 
        State.
    (c) Certifications.--In order to receive a payment under this 
section, the State shall provide the Secretary with certifications 
that--
            (1) the State's proposed uses of the funds are consistent 
        with subsection (b); and
            (2) the State will allocate 50 percent of the funds 
        directly to units of general local government based on the 
        relative local population proportion for the State (as defined 
        in subsection (d)(5)).
    (d) Amount of Payment.--
            (1) In general.--The amount of payment made to a State 
        under this section shall be the minimum payment amount 
        described in paragraph (2) plus the relative population 
        proportion amount described in paragraph (3).
            (2) Minimum payment amount.--The minimum payment amount 
        described in this paragraph is--
                    (A) in the case of any of the several States or the 
                District of Columbia, one-half of 1 percent of the 
                aggregate amount made available for payments under this 
                section (after the application of section 1903(x)(3) of 
                the Social Security Act); and
                    (B) in the case of the Commonwealth of Puerto Rico, 
                the United States Virgin Islands, Guam, the 
                Commonwealth of the Northern Mariana Islands, or 
                American Samoa, one-tenth of 1 percent of such 
                aggregate amount (after the application of section 
                1903(x)(3) of the Social Security Act).
            (3) Relative population proportion amount.--The relative 
        population proportion amount described in this paragraph is the 
        product of--
                    (A) the aggregate amount made available for 
                payments under this section (after the application of 
                section 1903(x)(3) of the Social Security Act) minus 
                the total of all of the minimum payment amounts 
                determined under paragraph (2); and
                    (B) the relative State population proportion (as 
                defined in paragraph (4)).
            (4) Relative state population proportion defined.--In this 
        section, the term ``relative State population proportion'' 
        means, with respect to a State, the amount equal to the 
        quotient of--
                    (A) the population of the State (as reported in the 
                most recent decennial census); and
                    (B) the total population of all States (as reported 
                in the most recent decennial census).
            (5) Relative local population proportion defined.--In this 
        section, the term ``relative local population proportion'' 
        means, with respect to a unit of general local government 
        within a State, the amount equal to the quotient of--
                    (A) the population of such unit of general local 
                government (as reported in the most recent decennial 
                census); and
                    (B) the total population of the State (as reported 
                in the most recent decennial census).
    (e) Appropriation.--There is authorized to be appropriated and is 
appropriated for making payments under this section, $20,000,000,000 
for fiscal year 2003. Amounts appropriated under this subsection shall 
remain available for expenditure through December 31, 2004.
    (f) Increased Payments To States Under the Medicaid Program.--
Section 1903 of the Social Security Act (42 U.S.C. 1396b) is amended by 
adding at the end the following:
    ``(x) Temporary Increased Payments To States.--
            ``(1) In general.--From the amounts made available under 
        paragraph (3), the Secretary shall increase payments to States 
        under this section for the third and fourth calendar quarters 
        of fiscal year 2003, each calendar quarter of fiscal year 2004, 
        and the first calendar quarter of fiscal year 2005.
            ``(2) Method of increase.--The Secretary shall determine 
        the appropriate method for increasing payments to States in 
        accordance with this subsection.
            ``(3) Funding.--Notwithstanding section 371(e) of the Jobs 
        and Growth Tax Relief Reconciliation Act of 2003, from the 
        amounts appropriated in such section for fiscal year 2003, 
        $499,999 of such amount is hereby transferred and made 
        available for the purpose of increasing payments to States 
        under this section in accordance with this subsection. Amounts 
        transferred under this paragraph shall remain available for 
        expenditure through December 31, 2004.''.
    (g) Repeal.--Effective as of January 1, 2005, this section and the 
amendments made by this section are repealed.

SEC. 372. REVIEW OF STATE AGENCY BLINDNESS AND DISABILITY 
              DETERMINATIONS.

    Section 1633 of the Social Security Act (42 U.S.C. 1383b) is 
amended by adding at the end the following:
    ``(e)(1) The Commissioner of Social Security shall review 
determinations, made by State agencies pursuant to subsection (a) in 
connection with applications for benefits under this title on the basis 
of blindness or disability, that individuals who have attained 18 years 
of age are blind or disabled as of a specified onset date. The 
Commissioner of Social Security shall review such a determination 
before any action is taken to implement the determination.
    ``(2)(A) In carrying out paragraph (1), the Commissioner of Social 
Security shall review--
            ``(i) at least 25 percent of all determinations referred to 
        in paragraph (1) that are made in fiscal year 2004; and
            ``(ii) at least 50 percent of all such determinations that 
        are made in fiscal year 2005 or thereafter.
    ``(B) In carrying out subparagraph (A), the Commissioner of Social 
Security shall, to the extent feasible, select for review the 
determinations which the Commissioner of Social Security identifies as 
being the most likely to be incorrect.''.

SEC. 373. PROHIBITION ON USE OF SCHIP FUNDS TO PROVIDE COVERAGE FOR 
              CHILDLESS ADULTS.

    (a) General Limitations on Payments.--Section 2105(c)(1) of the 
Social Security Act (42 U.S.C. 1397ee(c)(1)) is amended by inserting 
before the period the following: ``and may not include coverage of a 
childless adult unless the childless adult is a pregnant woman. For 
purposes of the preceding sentence, a caretaker relative (as such term 
is defined for purposes of carrying out section 1931) shall not be 
considered a childless adult.''.
    (b) Limitation on Waiver Authority.--Section 2107 of the Social 
Security Act (42 U.S.C. 1397gg) is amended by adding at the end the 
following:
    ``(f) Limitation of Waiver Authority.--Notwithstanding subsection 
(e)(2)(A) and section 1115(a), the Secretary may not approve a waiver, 
experimental, pilot, or demonstration project, or an amendment to such 
a project that has been approved as of the date of enactment of this 
subsection, that would allow funds made available under this title to 
be used to provide child health assistance or other health benefits 
coverage to a childless adult, other than a childless adult who is a 
pregnant woman. For purposes of the preceding sentence, a caretaker 
relative (as such term is defined for purposes of carrying out section 
1931) shall not be considered a childless adult.''.
    (c) Effective Date.--The amendments made by this section take 
effect on the date of enactment of this Act and apply to proposals to 
conduct a waiver, experimental, pilot, or demonstration project 
affecting the State children's health insurance program under title XXI 
of such Act, and to any proposals to amend such a project, that are 
approved or extended on or after such date of enactment.
    (d) Rule of Construction.--Nothing in this section or the 
amendments made by this section shall be construed to--
            (1) authorize the waiver of any provision of title XXI of 
        the Social Security Act (42 U.S.C. 1397aa et seq.) that is not 
        otherwise authorized to be waived under such title or under 
        title XI of such Act (42 U.S.C. 1301 et seq.) as of the date of 
        enactment of this Act; or
            (2) imply congressional approval of any waiver, 
        experimental, pilot, or demonstration project affecting the 
        State children's health insurance program under title XXI of 
        such Act that has been approved as of such date of enactment.

          TITLE IV--SMALL BUSINESS AND AGRICULTURAL PROVISIONS

                 Subtitle A--Small Business Provisions

SEC. 401. EXCLUSION OF CERTAIN INDEBTEDNESS OF SMALL BUSINESS 
              INVESTMENT COMPANIES FROM ACQUISITION INDEBTEDNESS.

    (a) In General.--Section 514(c) (relating to acquisition 
indebtedness) is amended by adding at the end the following new 
paragraph:
            ``(10) Certain indebtedness of small business investment 
        companies.--For purposes of this section, the term `acquisition 
        indebtedness' does not include any indebtedness incurred by a 
        small business investment company licensed under the Small 
        Business Investment Act of 1958 which is evidenced by a 
        debenture--
                    ``(A) issued by such company under section 303(a) 
                of such Act, or
                    ``(B) held or guaranteed by the Small Business 
                Administration.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to any indebtedness incurred after December 31, 2002, by a small 
business investment company described in section 514(c)(10) of the 
Internal Revenue Code of 1986 (as added by this section) with respect 
to property acquired by such company after such date.

SEC. 402. REPEAL OF OCCUPATIONAL TAXES RELATING TO DISTILLED SPIRITS, 
              WINE, AND BEER.

    (a) Repeal of Occupational Taxes.--
            (1) In general.--The following provisions of part II of 
        subchapter A of chapter 51 (relating to occupational taxes) are 
        hereby repealed:
                    (A) Subpart A (relating to proprietors of distilled 
                spirits plants, bonded wine cellars, etc.).
                    (B) Subpart B (relating to brewer).
                    (C) Subpart D (relating to wholesale dealers) 
                (other than sections 5114 and 5116).
                    (D) Subpart E (relating to retail dealers) (other 
                than section 5124).
                    (E) Subpart G (relating to general provisions) 
                (other than sections 5142, 5143, 5145, and 5146).
            (2) Nonbeverage domestic drawback.--Section 5131 is amended 
        by striking ``, on payment of a special tax per annum,''.
            (3) Industrial use of distilled spirits.--Section 5276 is 
        hereby repealed.
    (b) Conforming Amendments.--
            (1)(A) The heading for part II of subchapter A of chapter 
        51 and the table of subparts for such part are amended to read 
        as follows:

                  ``PART II--MISCELLANEOUS PROVISIONS

                              ``Subpart A. Manufacturers of stills.
                              ``Subpart B. Nonbeverage domestic 
                                        drawback claimants.
                              ``Subpart C. Recordkeeping by dealers.
                              ``Subpart D. Other provisions.''.
            (B) The table of parts for such subchapter A is amended by 
        striking the item relating to part II and inserting the 
        following new item:

                              ``Part II. Miscellaneous provisions.''.
            (2) Subpart C of part II of such subchapter (relating to 
        manufacturers of stills) is redesignated as subpart A.
            (3)(A) Subpart F of such part II (relating to nonbeverage 
        domestic drawback claimants) is redesignated as subpart B and 
        sections 5131 through 5134 are redesignated as sections 5111 
        through 5114, respectively.
            (B) The table of sections for such subpart B, as so 
        redesignated, is amended--
                    (i) by redesignating the items relating to sections 
                5131 through 5134 as relating to sections 5111 through 
                5114, respectively, and
                    (ii) by striking ``and rate of tax'' in the item 
                relating to section 5111, as so redesignated.
            (C) Section 5111, as redesignated by subparagraph (A), is 
        amended--
                    (i) by striking ``and rate of tax'' in the section 
                heading,
                    (ii) by striking the subsection heading for 
                subsection (a), and
                    (iii) by striking subsection (b).
            (4) Part II of subchapter A of chapter 51 is amended by 
        adding after subpart B, as redesignated by paragraph (3), the 
        following new subpart:

                 ``Subpart C--Recordkeeping by Dealers

                              ``Sec. 5121. Recordkeeping by wholesale 
                                        dealers.
                              ``Sec. 5122. Recordkeeping by retail 
                                        dealers.
                              ``Sec. 5123. Preservation and inspection 
                                        of records, and entry of 
                                        premises for inspection.''.
            (5)(A) Section 5114 (relating to records) is moved to 
        subpart C of such part II and inserted after the table of 
        sections for such subpart.
            (B) Section 5114 is amended--
                    (i) by striking the section heading and inserting 
                the following new heading:

``SEC. 5121. RECORDKEEPING BY WHOLESALE DEALERS.'',

                and
                    (ii) by redesignating subsection (c) as subsection 
                (d) and by inserting after subsection (b) the following 
                new subsection:
    ``(c) Wholesale Dealers.--For purposes of this part--
            ``(1) Wholesale dealer in liquors.--The term `wholesale 
        dealer in liquors' means any dealer (other than a wholesale 
        dealer in beer) who sells, or offers for sale, distilled 
        spirits, wines, or beer, to another dealer.
            ``(2) Wholesale dealer in beer.--The term `wholesale dealer 
        in beer' means any dealer who sells, or offers for sale, beer, 
        but not distilled spirits or wines, to another dealer.
            ``(3) Dealer.--The term `dealer' means any person who 
        sells, or offers for sale, any distilled spirits, wines, or 
        beer.
            ``(4) Presumption in case of sale of 20 wine gallons or 
        more.--The sale, or offer for sale, of distilled spirits, 
        wines, or beer, in quantities of 20 wine gallons or more to the 
        same person at the same time, shall be presumptive evidence 
        that the person making such sale, or offer for sale, is engaged 
        in or carrying on the business of a wholesale dealer in liquors 
        or a wholesale dealer in beer, as the case may be. Such 
        presumption may be overcome by evidence satisfactorily showing 
        that such sale, or offer for sale, was made to a person other 
        than a dealer.''.
            (C) Paragraph (3) of section 5121(d), as so redesignated, 
        is amended by striking ``section 5146'' and inserting ``section 
        5123''.
            (6)(A) Section 5124 (relating to records) is moved to 
        subpart C of part II of subchapter A of chapter 51 and inserted 
        after section 5121.
            (B) Section 5124 is amended--
                    (i) by striking the section heading and inserting 
                the following new heading:

``SEC. 5122. RECORDKEEPING BY RETAIL DEALERS.'',

                    (ii) by striking ``section 5146'' in subsection (c) 
                and inserting ``section 5123'', and
                    (iii) by redesignating subsection (c) as subsection 
                (d) and inserting after subsection (b) the following 
                new subsection:
    ``(c) Retail Dealers.--For purposes of this section--
            ``(1) Retail dealer in liquors.--The term `retail dealer in 
        liquors' means any dealer (other than a retail dealer in beer) 
        who sells, or offers for sale, distilled spirits, wines, or 
        beer, to any person other than a dealer.
            ``(2) Retail dealer in beer.--The term `retail dealer in 
        beer' means any dealer who sells, or offers for sale, beer, but 
        not distilled spirits or wines, to any person other than a 
        dealer.
            ``(3) Dealer.--The term `dealer' has the meaning given such 
        term by section 5121(c)(3).''.
            (7) Section 5146 is moved to subpart C of part II of 
        subchapter A of chapter 51, inserted after section 5122, and 
        redesignated as section 5123.
            (8) Part II of subchapter A of chapter 51 is amended by 
        inserting after subpart C the following new subpart:

                     ``Subpart D--Other Provisions

                              ``Sec. 5131. Packaging distilled spirits 
                                        for industrial uses.
                              ``Sec. 5132. Prohibited purchases by 
                                        dealers.''.
            (9) Section 5116 is moved to subpart D of part II of 
        subchapter A of chapter 51, inserted after the table of 
        sections, redesignated as section 5131, and amended by 
        inserting ``(as defined in section 5121(c))'' after ``dealer'' 
        in subsection (a).
            (10) Subpart D of part II of subchapter A of chapter 51 is 
        amended by adding at the end thereof the following new section:

``SEC. 5132. PROHIBITED PURCHASES BY DEALERS.

    ``(a) In General.--Except as provided in regulations prescribed by 
the Secretary, it shall be unlawful for a dealer to purchase distilled 
spirits for resale from any person other than a wholesale dealer in 
liquors who is required to keep the records prescribed by section 5121.
    ``(b) Penalty and Forfeiture.--

                                ``For penalty and forfeiture provisions 
applicable to violations of subsection (a), see sections 5687 and 
7302.''.

            (11) Subsection (b) of section 5002 is amended--
                    (A) by striking ``section 5112(a)'' and inserting 
                ``section 5121(c)(3)'',
                    (B) by striking ``section 5112'' and inserting 
                ``section 5121(c)'',
                    (C) by striking ``section 5122'' and inserting 
                ``section 5122(c)''.
            (12) Subparagraph (A) of section 5010(c)(2) is amended by 
        striking ``section 5134'' and inserting ``section 5114''.
            (13) Subsection (d) of section 5052 is amended to read as 
        follows:
    ``(d) Brewer.--For purposes of this chapter, the term `brewer' 
means any person who brews beer or produces beer for sale. Such term 
shall not include any person who produces only beer exempt from tax 
under section 5053(e).''.
            (14) The text of section 5182 is amended to read as 
        follows:
            ``For provisions requiring recordkeeping by wholesale 
        liquor dealers, see section 5121, and by retail liquor dealers, 
        see section 5122.''.
            (15) Subsection (b) of section 5402 is amended by striking 
        ``section 5092'' and inserting ``section 5052(d)''.
            (16) Section 5671 is amended by striking ``or 5091''.
            (17)(A) Part V of subchapter J of chapter 51 is hereby 
        repealed.
            (B) The table of parts for such subchapter J is amended by 
        striking the item relating to part V.
            (18)(A) Sections 5142, 5143, and 5145 are moved to 
        subchapter D of chapter 52, inserted after section 5731, 
        redesignated as sections 5732, 5733, and 5734, respectively, 
        and amended by striking ``this part'' each place it appears and 
        inserting ``this subchapter''.
            (B) Section 5732, as redesignated by subparagraph (A), is 
        amended by striking ``(except the tax imposed by section 
        5131)'' each place it appears.
            (C) Paragraph (2) of section 5733(c), as redesignated by 
        subparagraph (A), is amended by striking ``liquors'' both 
        places it appears and inserting ``tobacco products and 
        cigarette papers and tubes''.
            (D) The table of sections for subchapter D of chapter 52 is 
        amended by adding at the end thereof the following:

                              ``Sec. 5732. Payment of tax.
                              ``Sec. 5733. Provisions relating to 
                                        liability for occupational 
                                        taxes.
                              ``Sec. 5734. Application of State 
                                        laws.''.
            (E) Section 5731 is amended by striking subsection (c) and 
        by redesignating subsection (d) as subsection (c).
            (19) Subsection (c) of section 6071 is amended by striking 
        ``section 5142'' and inserting ``section 5732''.
            (20) Paragraph (1) of section 7652(g) is amended--
                    (A) by striking ``subpart F'' and inserting 
                ``subpart B'', and
                    (B) by striking ``section 5131(a)'' and inserting 
                ``section 5111''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on July 1, 2003, but shall not apply to taxes imposed for 
periods before such date.

SEC. 403. CUSTOM GUNSMITHS.

    (a) Small Manufacturers Exempt From Firearms Excise Tax.--Section 
4182 (relating to exemptions) is amended by redesignating subsection 
(c) as subsection (d) and by inserting after subsection (b) the 
following new subsection:
    ``(c) Small Manufacturers, Etc.--
            ``(1) In general.--The tax imposed by section 4181 shall 
        not apply to any article described in such section if 
        manufactured, produced, or imported by a person who 
        manufactures, produces, and imports less than 50 of such 
        articles during the calendar year.
            ``(2) Controlled groups.--All persons treated as a single 
        employer for purposes of subsection (a) or (b) of section 52 
        shall be treated as one person for purposes of paragraph 
        (1).''.
    (b) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to articles sold by the manufacturer, producer, or 
        importer on or after the date which is the first day of the 
        month beginning at least 2 weeks after the date of the 
        enactment of this Act.
            (2) No inference.--Nothing in the amendments made by this 
        section shall be construed to create any inference with respect 
        to the proper tax treatment of any sales before the effective 
        date of such amendments.

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

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

                  Subtitle B--Agricultural Provisions

SEC. 411. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO 
              OUTRIGHT SALES BY LANDOWNERS.

    (a) In General.--The first sentence of section 631(b) (relating to 
disposal of timber with a retained economic interest) is amended by 
striking ``retains an economic interest in such timber'' and inserting 
``either retains an economic interest in such timber or makes an 
outright sale of such timber''.
    (b) Conforming Amendment.--The third sentence of section 631(b) is 
amended by striking ``The date of disposal'' and inserting ``In the 
case of disposal of timber with a retained economic interest, the date 
of disposal''.
    (c) Effective Date.--The amendments made by this section shall 
apply to sales after the date of the enactment of this Act.

SEC. 412. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
              RELATED CONDITIONS.

    (a) Rules for Replacement of Involuntarily Converted Livestock.--
Subsection (e) of section 1033 (relating to involuntary conversions) is 
amended--
            (1) by striking ``Conditions.--For purposes'' and inserting 
        ``Conditions.--
            ``(1) In general.--For purposes'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Extension of replacement period.--
                    ``(A) In general.--In the case of drought, flood, 
                or other weather-related conditions described in 
                paragraph (1) which result in the area being designated 
                as eligible for assistance by the Federal Government, 
                subsection (a)(2)(B) shall be applied with respect to 
                any converted property by substituting `4 years' for `2 
                years'.
                    ``(B) Further extension by secretary.--The 
                Secretary may extend on a regional basis the period for 
                replacement under this section (after the application 
                of subparagraph (A)) for such additional time as the 
                Secretary determines appropriate if the weather-related 
                conditions which resulted in such application continue 
                for more than 3 years.''.
    (b) Income Inclusion Rules.--Section 451(e) (relating to special 
rule for proceeds from livestock sold on account of drought, flood, or 
other weather-related conditions) is amended by adding at the end the 
following new paragraph:
            ``(3) Special election rules.--If section 1033(e)(2) 
        applies to a sale or exchange of livestock described in 
        paragraph (1), the election under paragraph (1) shall be deemed 
        valid if made during the replacement period described in such 
        section.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to any taxable year with respect to which the due date of the 
return is after December 31, 2002.

SEC. 413. EXCLUSION FOR LOAN PAYMENTS UNDER NATIONAL HEALTH SERVICE 
              CORPS LOAN REPAYMENT PROGRAM.

    (a) In General.--Section 108(f) (relating to student loans) is 
amended by adding at the end the following new paragraph:
            ``(4) Loan payments under national health service corps 
        loan repayment program.--In the case of an individual, gross 
        income shall not include any amount received under section 
        338B(g) of the Public Health Service Act.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to amounts received by an individual in taxable years beginning 
after December 31, 2002.

SEC. 414. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT 
              REDUCING PATRONAGE DIVIDENDS.

    (a) In General.--Subsection (a) of section 1388 (relating to 
patronage dividend defined) is amended by adding at the end the 
following: ``For purposes of paragraph (3), net earnings shall not be 
reduced by amounts paid during the year as dividends on capital stock 
or other proprietary capital interests of the organization to the 
extent that the articles of incorporation or bylaws of such 
organization or other contract with patrons provide that such dividends 
are in addition to amounts otherwise payable to patrons which are 
derived from business done with or for patrons during the taxable 
year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions in taxable years ending after the date of the 
enactment of this Act.

              TITLE V--SIMPLIFICATION AND OTHER PROVISIONS

                Subtitle A--Uniform Definition of Child

SEC. 501. UNIFORM DEFINITION OF CHILD, ETC.

    Section 152 is amended to read as follows:

``SEC. 152. DEPENDENT DEFINED.

    ``(a) In General.--For purposes of this subtitle, the term 
`dependent' means--
            ``(1) a qualifying child, or
            ``(2) a qualifying relative.
    ``(b) Exceptions.--For purposes of this section--
            ``(1) Dependents ineligible.--If an individual is a 
        dependent of a taxpayer for any taxable year of such taxpayer 
        beginning in a calendar year, such individual shall be treated 
        as having no dependents for any taxable year of such individual 
        beginning in such calendar year.
            ``(2) Married dependents.--An individual shall not be 
        treated as a dependent of a taxpayer under subsection (a) if 
        such individual has made a joint return with the individual's 
        spouse under section 6013 for the taxable year beginning in the 
        calendar year in which the taxable year of the taxpayer begins.
            ``(3) Citizens or nationals of other countries.--
                    ``(A) In general.--The term `dependent' does not 
                include an individual who is not a citizen or national 
                of the United States unless such individual is a 
                resident of the United States or a country contiguous 
                to the United States.
                    ``(B) Exception for adopted child.--Subparagraph 
                (A) shall not exclude any child of a taxpayer (within 
                the meaning of subsection (f)(1)(B)) from the 
                definition of `dependent' if--
                            ``(i) for the taxable year of the taxpayer, 
                        the child's principal place of abode is the 
                        home of the taxpayer, and
                            ``(ii) the taxpayer is a citizen or 
                        national of the United States.
    ``(c) Qualifying Child.--For purposes of this section--
            ``(1) In general.--The term `qualifying child' means, with 
        respect to any taxpayer for any taxable year, an individual--
                    ``(A) who bears a relationship to the taxpayer 
                described in paragraph (2),
                    ``(B) who has the same principal place of abode as 
                the taxpayer for more than one-half of such taxable 
                year,
                    ``(C) who meets the age requirements of paragraph 
                (3), and
                    ``(D) who has not provided over one-half of such 
                individual's own support for the calendar year in which 
                the taxable year of the taxpayer begins.
            ``(2) Relationship test.--For purposes of paragraph (1)(A), 
        an individual bears a relationship to the taxpayer described in 
        this paragraph if such individual is--
                    ``(A) a child of the taxpayer or a descendant of 
                such a child, or
                    ``(B) a brother, sister, stepbrother, or stepsister 
                of the taxpayer or a descendant of any such relative.
            ``(3) Age requirements.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(C), an individual meets the requirements of this 
                paragraph if such individual--
                            ``(i) has not attained the age of 19 as of 
                        the close of the calendar year in which the 
                        taxable year of the taxpayer begins, or
                            ``(ii) is a student who has not attained 
                        the age of 24 as of the close of such calendar 
                        year.
                    ``(B) Special rule for disabled.--In the case of an 
                individual who is permanently and totally disabled (as 
                defined in section 22(e)(3)) at any time during such 
                calendar year, the requirements of subparagraph (A) 
                shall be treated as met with respect to such 
                individual.
            ``(4) Special rule relating to 2 or more claiming 
        qualifying child.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B) and subsection (e), if (but for this 
                paragraph) an individual may be and is claimed as a 
                qualifying child by 2 or more taxpayers for a taxable 
                year beginning in the same calendar year, such 
                individual shall be treated as the qualifying child of 
                the taxpayer who is--
                            ``(i) a parent of the individual, or
                            ``(ii) if clause (i) does not apply, the 
                        taxpayer with the highest adjusted gross income 
                        for such taxable year.
                    ``(B) More than 1 parent claiming qualifying 
                child.--If the parents claiming any qualifying child do 
                not file a joint return together, such child shall be 
                treated as the qualifying child of--
                            ``(i) the parent with whom the child 
                        resided for the longest period of time during 
                        the taxable year, or
                            ``(ii) if the child resides with both 
                        parents for the same amount of time during such 
                        taxable year, the parent with the highest 
                        adjusted gross income.
    ``(d) Qualifying Relative.--For purposes of this section--
            ``(1) In general.--The term `qualifying relative' means, 
        with respect to any taxpayer for any taxable year, an 
        individual--
                    ``(A) who bears a relationship to the taxpayer 
                described in paragraph (2),
                    ``(B) whose gross income for the calendar year in 
                which such taxable year begins is less than the 
                exemption amount (as defined in section 151(d)),
                    ``(C) with respect to whom the taxpayer provides 
                over one-half of the individual's support for the 
                calendar year in which such taxable year begins, and
                    ``(D) who is not a qualifying child of such 
                taxpayer or of any other taxpayer for any taxable year 
                beginning in the calendar year in which such taxable 
                year begins.
            ``(2) Relationship.--For purposes of paragraph (1)(A), an 
        individual bears a relationship to the taxpayer described in 
        this paragraph if the individual is any of the following with 
        respect to the taxpayer:
                    ``(A) A child or a descendant of a child.
                    ``(B) A brother, sister, stepbrother, or 
                stepsister.
                    ``(C) The father or mother, or an ancestor of 
                either.
                    ``(D) A stepfather or stepmother.
                    ``(E) A son or daughter of a brother or sister of 
                the taxpayer.
                    ``(F) A brother or sister of the father or mother 
                of the taxpayer.
                    ``(G) A son-in-law, daughter-in-law, father-in-law, 
                mother-in-law, brother-in-law, or sister-in-law.
                    ``(H) An individual (other than an individual who 
                at any time during the taxable year was the spouse, 
                determined without regard to section 7703, of the 
                taxpayer) who, for the taxable year of the taxpayer, 
                has as such individual's principal place of abode the 
                home of the taxpayer and is a member of the taxpayer's 
                household.
            ``(3) Special rule relating to multiple support 
        agreements.--For purposes of paragraph (1)(C), over one-half of 
        the support of an individual for a calendar year shall be 
        treated as received from the taxpayer if--
                    ``(A) no one person contributed over one-half of 
                such support,
                    ``(B) over one-half of such support was received 
                from 2 or more persons each of whom, but for the fact 
                that any such person alone did not contribute over one-
                half of such support, would have been entitled to claim 
                such individual as a dependent for a taxable year 
                beginning in such calendar year,
                    ``(C) the taxpayer contributed over 10 percent of 
                such support, and
                    ``(D) each person described in subparagraph (B) 
                (other than the taxpayer) who contributed over 10 
                percent of such support files a written declaration (in 
                such manner and form as the Secretary may by 
                regulations prescribe) that such person will not claim 
                such individual as a dependent for any taxable year 
                beginning in such calendar year.
            ``(4) Special rule relating to income of handicapped 
        dependents.--
                    ``(A) In general.--For purposes of paragraph 
                (1)(B), the gross income of an individual who is 
                permanently and totally disabled (as defined in section 
                22(e)(3)) at any time during the taxable year shall not 
                include income attributable to services performed by 
                the individual at a sheltered workshop if--
                            ``(i) the availability of medical care at 
                        such workshop is the principal reason for the 
                        individual's presence there, and
                            ``(ii) the income arises solely from 
                        activities at such workshop which are incident 
                        to such medical care.
                    ``(B) Sheltered workshop defined.--For purposes of 
                subparagraph (A), the term `sheltered workshop' means a 
                school--
                            ``(i) which provides special instruction or 
                        training designed to alleviate the disability 
                        of the individual, and
                            ``(ii) which is operated by an organization 
                        described in section 501(c)(3) and exempt from 
                        tax under section 501(a), or by a State, a 
                        possession of the United States, any political 
                        subdivision of any of the foregoing, the United 
                        States, or the District of Columbia.
            ``(5) Special support test in case of students.--For 
        purposes of paragraph (1)(C), in the case of an individual who 
        is--
                    ``(A) a child of the taxpayer, and
                    ``(B) a student,
        amounts received as scholarships for study at an educational 
        organization described in section 170(b)(1)(A)(ii) shall not be 
        taken into account in determining whether such individual 
        received more than one-half of such individual's support from 
        the taxpayer.
            ``(6) Special rules for support.--For purposes of this 
        subsection--
                    ``(A) payments to a spouse which are includible in 
                the gross income of such spouse under section 71 or 682 
                shall not be treated as a payment by the payor spouse 
                for the support of any dependent,
                    ``(B) amounts expended for the support of a child 
                or children shall be treated as received from the 
                noncustodial parent (as defined in subsection 
                (e)(3)(B)) to the extent that such parent provided 
                amounts for such support, and
                    ``(C) in the case of the remarriage of a parent, 
                support of a child received from the parent's spouse 
                shall be treated as received from the parent.
    ``(e) Special Rule for Divorced Parents.--
            ``(1) In general.--Notwithstanding subsection (c)(4) or 
        (d)(1)(C), if--
                    ``(A) a child receives over one-half of the child's 
                support during the calendar year from the child's 
                parents--
                            ``(i) who are divorced or legally separated 
                        under a decree of divorce or separate 
                        maintenance,
                            ``(ii) who are separated under a written 
                        separation agreement, or
                            ``(iii) who live apart at all times during 
                        the last 6 months of the calendar year, and
                    ``(B) such child is in the custody of 1 or both of 
                the child's parents for more than \1/2\ of the calendar 
                year,
        such child shall be treated as being the qualifying child or 
        qualifying relative of the noncustodial parent for a calendar 
        year if the requirements described in paragraph (2) are met.
            ``(2) Requirements.--For purposes of paragraph (1), the 
        requirements described in this paragraph are met if--
                    ``(A) a decree of divorce or separate maintenance 
                or written agreement between the parents applicable to 
                the taxable year beginning in such calendar year 
                provides that--
                            ``(i) the noncustodial parent shall be 
                        entitled to any deduction allowable under 
                        section 151 for such child, or
                            ``(ii) the custodial parent will sign a 
                        written declaration that such parent will not 
                        claim such child as a dependent for such 
                        taxable year, and
                    ``(B) in the case of such an agreement executed 
                before January 1, 1985, the noncustodial parent 
                provides at least $600 for the support of such child 
                during such calendar year.
            ``(3) Custodial parent and noncustodial parent.--For 
        purposes of this subsection--
                    ``(A) Custodial parent.--The term `custodial 
                parent' means the parent with whom a child shared the 
                same principal place of abode for the greater portion 
                of the calendar year.
                    ``(B) Noncustodial parent.--The term `noncustodial 
                parent' means the parent who is not the custodial 
                parent.
            ``(4) Exception for multiple-support agreements.--This 
        subsection shall not apply in any case where over one-half of 
        the support of the child is treated as having been received 
        from a taxpayer under the provision of subsection (d)(3).
    ``(f) Other Definitions and Rules.--For purposes of this section--
            ``(1) Child defined.--
                    ``(A) In general.--The term `child' means an 
                individual who is--
                            ``(i) a son, daughter, stepson, or 
                        stepdaughter of the taxpayer, or
                            ``(ii) an eligible foster child of the 
                        taxpayer.
                    ``(B) Adopted child.--In determining whether any of 
                the relationships specified in subparagraph (A)(i) or 
                paragraph (4) exists, a legally adopted individual of 
                the taxpayer, or an individual who is placed with the 
                taxpayer by an authorized placement agency for adoption 
                by the taxpayer, shall be treated as a child of such 
                individual by blood.
                    ``(C) Eligible foster child.--For purposes of 
                subparagraph (A)(ii), the term `eligible foster child' 
                means an individual who is placed with the taxpayer by 
                an authorized placement agency or by judgment, decree, 
                or other order of any court of competent jurisdiction.
            ``(2) Student defined.--The term `student' means an 
        individual who during each of 5 calendar months during the 
        calendar year in which the taxable year of the taxpayer 
        begins--
                    ``(A) is a full-time student at an educational 
                organization described in section 170(b)(1)(A)(ii), or
                    ``(B) is pursuing a full-time course of 
                institutional on-farm training under the supervision of 
                an accredited agent of an educational organization 
                described in section 170(b)(1)(A)(ii) or of a State or 
                political subdivision of a State.
            ``(3) Place of abode.--An individual shall not be treated 
        as having the same principal place of abode of the taxpayer if 
        at any time during the taxable year of the taxpayer the 
        relationship between the individual and the taxpayer is in 
        violation of local law.
            ``(4) Brother and sister.--The terms `brother' and `sister' 
        include a brother or sister by the half blood.
            ``(5) Treatment of missing children.--
                    ``(A) In general.--Solely for the purposes referred 
                to in subparagraph (B), a child of the taxpayer--
                            ``(i) who is presumed by law enforcement 
                        authorities to have been kidnapped by someone 
                        who is not a member of the family of such child 
                        or the taxpayer, and
                            ``(ii) who had, for the taxable year in 
                        which the kidnapping occurred, the same 
                        principal place of abode as the taxpayer for 
                        more than one-half of the portion of such year 
                        before the date of the kidnapping,
                shall be treated as meeting the requirement of 
                subsection (c)(1)(B) with respect to a taxpayer for all 
                taxable years ending during the period that the 
                individual is kidnapped.
                    ``(B) Purposes.--Subparagraph (A) shall apply 
                solely for purposes of determining--
                            ``(i) the deduction under section 151(c),
                            ``(ii) the credit under section 24 
                        (relating to child tax credit),
                            ``(iii) whether an individual is a 
                        surviving spouse or a head of a household (as 
                        such terms are defined in section 2), and
                            ``(iv) the earned income credit under 
                        section 32.
                    ``(C) Comparable treatment of certain qualifying 
                relatives.--For purposes of this section, a child of 
                the taxpayer--
                            ``(i) who is presumed by law enforcement 
                        authorities to have been kidnapped by someone 
                        who is not a member of the family of such child 
                        or the taxpayer, and
                            ``(ii) who was (without regard to this 
                        paragraph) a qualifying relative of the 
                        taxpayer for the portion of the taxable year 
                        before the date of the kidnapping,
                shall be treated as a qualifying relative of the 
                taxpayer for all taxable years ending during the period 
                that the child is kidnapped.
                    ``(D) Termination of treatment.--Subparagraphs (A) 
                and (C) shall cease to apply as of the first taxable 
                year of the taxpayer beginning after the calendar year 
                in which there is a determination that the child is 
                dead (or, if earlier, in which the child would have 
                attained age 18).
            ``(6) Cross references.--

                              ``For provision treating child as 
dependent of both parents for purposes of certain provisions, see 
sections 105(b), 132(h)(2)(B), and 213(d)(5).''.

SEC. 502. MODIFICATIONS OF DEFINITION OF HEAD OF HOUSEHOLD.

    (a) Head of Household.--Clause (i) of section 2(b)(1)(A) is amended 
to read as follows:
                            ``(i) a qualifying child of the individual 
                        (as defined in section 152(c), determined 
                        without regard to section 152(e)), but not if 
                        such child--
                                    ``(I) is married at the close of 
                                the taxpayer's taxable year, and
                                    ``(II) is not a dependent of such 
                                individual by reason of section 
                                152(b)(2) or 152(b)3), or both, or''.
    (b) Conforming Amendments.--
            (1) Section 2(b)(2) is amended by striking subparagraph (A) 
        and by redesignating subparagraphs (B), (C), and (D) as 
        subparagraphs (A), (B), and (C), respectively.
            (2) Clauses (i) and (ii) of section 2(b)(3)(B) are amended 
        to read as follows:
                            ``(i) subparagraph (H) of section 
                        152(d)(2), or
                            ``(ii) paragraph (3) of section 152(d).''.

SEC. 503. MODIFICATIONS OF DEPENDENT CARE CREDIT.

    (a) In General.--Section 21(a)(1) is amended by striking ``In the 
case of an individual who maintains a household which includes as a 
member one or more qualifying individuals (as defined in subsection 
(b)(1))'' and inserting ``In the case of an individual for which there 
are 1 or more qualifying individuals (as defined in subsection (b)(1)) 
with respect to such individual''.
    (b) Qualifying Individual.--Paragraph (1) of section 21(b) is 
amended to read as follows:
            ``(1) Qualifying individual.--The term `qualifying 
        individual' means--
                    ``(A) a dependent of the taxpayer (as defined in 
                section 152(a)(1)) who has not attained age 13,
                    ``(B) a dependent of the taxpayer who is physically 
                or mentally incapable of caring for himself or herself 
                and who has the same principal place of abode as the 
                taxpayer for more than one-half of such taxable year, 
                or
                    ``(C) the spouse of the taxpayer, if the spouse is 
                physically or mentally incapable of caring for himself 
                or herself and who has the same principal place of 
                abode as the taxpayer for more than one-half of such 
                taxable year.''.
    (c) Conforming Amendment.--Paragraph (1) of section 21(e) is 
amended to read as follows:
            ``(1) Place of abode.--An individual shall not be treated 
        as having the same principal place of abode of the taxpayer if 
        at any time during the taxable year of the taxpayer the 
        relationship between the individual and the taxpayer is in 
        violation of local law.''.

SEC. 504. MODIFICATIONS OF CHILD TAX CREDIT.

    (a) In General.--Paragraph (1) of section 24(c) is amended to read 
as follows:
            ``(1) In general.--The term `qualifying child' means a 
        qualifying child of the taxpayer (as defined in section 152(c)) 
        who has not attained age 17.''.
    (b) Conforming Amendment.--Section 24(c)(2) is amended by striking 
``the first sentence of section 152(b)(3)'' and inserting 
``subparagraph (A) of section 152(b)(3)''.

SEC. 505. MODIFICATIONS OF EARNED INCOME CREDIT.

    (a) Qualifying Child.--Paragraph (3) of section 32(c) is amended to 
read as follows:
            ``(3) Qualifying child.--
                    ``(A) In general.--The term `qualifying child' 
                means a qualifying child of the taxpayer (as defined in 
                section 152(c), determined without regard to paragraph 
                (1)(D) thereof and section 152(e)).
                    ``(B) Married individual.--The term `qualifying 
                child' shall not include an individual who is married 
                as of the close of the taxpayer's taxable year unless 
                the taxpayer is entitled to a deduction under section 
                151 for such taxable year with respect to such 
                individual (or would be so entitled but for section 
                152(e)).
                    ``(C) Place of abode.--For purposes of subparagraph 
                (A), the requirements of section 152(c)(1)(B) shall be 
                met only if the principal place of abode is in the 
                United States.
                    ``(D) Identification requirements.--
                            ``(i) In general.--A qualifying child shall 
                        not be taken into account under subsection (b) 
                        unless the taxpayer includes the name, age, and 
                        TIN of the qualifying child on the return of 
                        tax for the taxable year.
                            ``(ii) Other methods.--The Secretary may 
                        prescribe other methods for providing the 
                        information described in clause (i).''.
    (b) Conforming Amendments.--
            (1) Section 32(c)(1) is amended by striking subparagraph 
        (C) and by redesignating subparagraphs (D), (E), (F), and (G) 
        as subparagraphs (C), (D), (E), and (F), respectively.
            (2) Section 32(c)(4) is amended by striking ``(3)(E)'' and 
        inserting ``(3)(C)''.
            (3) Section 32(m) is amended by striking ``subsections 
        (c)(1)(F)'' and inserting ``subsections (c)(1)(E)''.

SEC. 506. MODIFICATIONS OF DEDUCTION FOR PERSONAL EXEMPTION FOR 
              DEPENDENTS.

    Subsection (c) of section 151 is amended to read as follows:
    ``(c) Additional Exemption for Dependents.--An exemption of the 
exemption amount for each individual who is a dependent (as defined in 
section 152) of the taxpayer for the taxable year.''.

SEC. 507. TECHNICAL AND CONFORMING AMENDMENTS.

            (1) Section 21(e)(5) is amended--
                    (A) by striking ``paragraph (2) or (4) of'' in 
                subparagraph (A), and
                    (B) by striking ``within the meaning of section 
                152(e)(1)'' and inserting ``as defined in section 
                152(e)(3)(A)''.
            (2) Section 21(e)(6)(B) is amended by striking ``section 
        151(c)(3)'' and inserting ``section 152(f)(1)''.
            (3) Section 25B(c)(2)(B) is amended by striking 
        ``151(c)(4)'' and inserting ``152(f)(2)''.
            (4)(A) Subparagraphs (A) and (B) of section 51(i)(1) are 
        each amended by striking ``paragraphs (1) through (8) of 
        section 152(a)'' both places it appears and inserting 
        ``subparagraphs (A) through (G) of section 152(d)(2)''.
            (B) Section 51(i)(1)(C) is amended by striking 
        ``152(a)(9)'' and inserting ``152(d)(2)(H)''.
            (5) Section 72(t)(7)(A)(iii) is amended by striking 
        ``151(c)(3)'' and inserting ``152(f)(1)''.
            (6) Section 129(c)(2) is amended by striking ``151(c)(3)'' 
        and inserting ``152(f)(1)''.
            (7) The first sentence of section 132(h)(2)(B) is amended 
        by striking ``151(c)(3)'' and inserting ``152(f)(1)''.
            (8) Section 153 is amended by striking paragraph (1) and by 
        redesignating paragraphs (2), (3), and (4) as paragraphs (1), 
        (2), and (3), respectively.
            (9) Section 170(g)(3) is amended by striking ``paragraphs 
        (1) through (8) of section 152(a)'' and inserting 
        ``subparagraphs (A) through (G) of section 152(d)(2)''.
            (10) The second sentence of section 213(d)(11) is amended 
        by striking ``paragraphs (1) through (8) of section 152(a)'' 
        and inserting ``subparagraphs (A) through (G) of section 
        152(d)(2)''.
            (11) Section 529(e)(2)(B) is amended by striking 
        ``paragraphs (1) through (8) of section 152(a)'' and inserting 
        ``subparagraphs (A) through (G) of section 152(d)(2)''.
            (12) Section 2032A(c)(7)(D) is amended by striking 
        ``section 151(c)(4)'' and inserting ``section 152(f)(2)''.
            (13) Section 7701(a)(17) is amended by striking 
        ``152(b)(4), 682,'' and inserting ``682''.
            (14) Section 7702B(f)(2)(C)(iii) is amended by striking 
        ``paragraphs (1) through (8) of section 152(a)'' and inserting 
        ``subparagraphs (A) through (G) of section 152(d)(2)''.
            (15) Section 7703(b)(1) is amended--
                    (A) by striking ``151(c)(3)'' and inserting 
                ``152(f)(1)'', and
                    (B) by striking ``paragraph (2) or (4) of''.

SEC. 508. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply to taxable years 
beginning after December 31, 2003.

                       Subtitle B--Simplification

SEC. 511. CONSOLIDATION OF LIFE AND NON-LIFE COMPANY RETURNS.

    (a) In General.--Section 1504 (relating to definition of affiliated 
group) is amended by striking subsection (c) and by redesignating 
subsections (d), (e), and (f) as subsections (c), (d), and (e), 
respectively.
    (b) Conforming Amendments.--
            (1) Section 243(b)(2)(A) is amended by striking ``, 
        1504(b)(4), and 1504(c)'' and inserting ``and 1504(b)(4)''.
            (2) Section 818(e)(1) is amended by striking ``If an 
        election under section 1504(c)(2) is effect with respect to an 
        affiliated group for the taxable year'' and inserting ``If an 
        affiliated group includes members which are, and which are not, 
        life insurance companies for any taxable year''.
            (3) Section 1503(c)(1) is amended by striking ``an election 
        under section 1504(c)(2) is in effect for the taxable year''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2009.
    (d) Waiver of 5-Year Waiting Period.--Under regulations prescribed 
by the Secretary of the Treasury or his delegate, an automatic waiver 
from the 5-year waiting period for reconsolidation provided in section 
1504(a)(3) of the Internal Revenue Code of 1986 shall be granted to any 
corporation which was previously an includible corporation but was 
subsequently deemed a nonincludible corporation as a result of becoming 
a subsidiary of a corporation which was not an includible corporation 
solely by operation of section 1504(c)(2) of such Code (as in effect on 
the day before the date of the enactment of this Act).
    (e) Nontermination of Group.--No affiliated group shall terminate 
solely as a result of the amendments made by this section.

SEC. 512. SPECIAL RULES FOR TAXATION OF LIFE INSURANCE COMPANIES.

    (a) Reduction in Mutual Life Insurance Company Deductions Not To 
Apply.--
            (1) In general.--Section 809 (relating to reduction in 
        certain deductions of material life insurance companies) is 
        amended by adding at the end the following:
    ``(j) Differential Earnings Rate Treated as Zero.--Notwithstanding 
subsection (c) or (f), the differential earnings rate shall be treated 
as zero for purposes of computing both the differential earnings amount 
and the recomputed differential earnings amount for any taxable year of 
a mutual life insurance company beginning after December 31, 2003, and 
before January 1, 2009.''.
            (2) Effective date.--The amendment made by this section 
        shall apply to taxable years beginning after December 31, 2003.
    (b) Distributions To Shareholders From Pre-1984 Policyholders 
Surplus Account.--
            (1) In general.--Section 815 (relating to distributions to 
        shareholders from pre-1984 policyholders surplus account) is 
        amended by adding at the end the following:
    ``(g) Special Rules Applicable During 2004 Through 2008.--In the 
case of any taxable year of a stock life insurance company beginning 
after December 31, 2003, and before January 1, 2009--
            ``(1) the amount under subsection (a)(2) for such taxable 
        year shall be treated as zero, and
            ``(2) notwithstanding subsection (b), in determining any 
        subtractions from an account under subsections (c)(3) and 
        (d)(3), any distribution to shareholders during such taxable 
        year shall be treated as made first out of the policyholders 
        surplus account, then out of the shareholders surplus account, 
        and finally out of other accounts.''.
            (2) Effective date.--The amendment made by this section 
        shall apply to taxable years beginning after December 31, 2003.

SEC. 513. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER SECTION 355.

    (a) In General.--Section 355(b) (defining active conduct of a trade 
or business) is amended by adding at the end the following new 
paragraph:
            ``(3) Special rules relating to active business 
        requirement.--
                    ``(A) In general.--For purposes of determining 
                whether a corporation meets the requirement of 
                paragraph (2)(A), all members of such corporation's 
                separate affiliated group shall be treated as one 
                corporation. For purposes of the preceding sentence, a 
                corporation's separate affiliated group is the 
                affiliated group which would be determined under 
                section 1504(a) if such corporation were the common 
                parent and section 1504(b) did not apply.
                    ``(B) Control.--For purposes of paragraph (2)(D), 
                all distributee corporations which are members of the 
                same affiliated group (as defined in section 1504(a) 
                without regard to section 1504(b)) shall be treated as 
                one distributee corporation.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 355(b)(2) is amended to 
        read as follows:
                    ``(A) it is engaged in the active conduct of a 
                trade or business,''.
            (2) Section 355(b)(2) is amended by striking the last 
        sentence.
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply--
                    (A) to distributions after the date of the 
                enactment of this Act, and
                    (B) for purposes of determining the continued 
                qualification under section 355(b)(2)(A) of the 
                Internal Revenue Code of 1986 (as amended by subsection 
                (b)(1)) of distributions made before such date, as a 
                result of an acquisition, disposition, or other 
                restructuring after such date.
            (2) Transition rule.--The amendments made by this section 
        shall not apply to any distribution pursuant to a transaction 
        which is--
                    (A) made pursuant to an agreement which was binding 
                on such date of enactment and at all times thereafter,
                    (B) described in a ruling request submitted to the 
                Internal Revenue Service on or before such date, or
                    (C) described on or before such date in a public 
                announcement or in a filing with the Securities and 
                Exchange Commission.
            (3) Election to have amendments apply.--Paragraph (2) shall 
        not apply if the distributing corporation elects not to have 
        such paragraph apply to distributions of such corporation. Any 
        such election, once made, shall be irrevocable.

                      Subtitle C--Other Provisions

SEC. 521. CIVIL RIGHTS TAX RELIEF.

    (a) In General.--Part VII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to additional itemized 
deductions for individuals) is amended by redesignating section 223 as 
section 224 and by inserting after section 222 the following new 
section:

``SEC. 223. ATTORNEY FEES AND COSTS IN CONNECTION WITH AMOUNTS RECEIVED 
              ON ACCOUNT OF CERTAIN UNLAWFUL DISCRIMINATION OR CIVIL 
              FRAUD AGAINST THE UNITED STATES.

    ``(a) In General.--There shall be allowed as a deduction for any 
taxable year an amount equal to the lesser of--
            ``(1) the attorney fees and court costs paid by, or on 
        behalf of, the taxpayer for such taxable year in connection 
        with any action involving a claim of unlawful discrimination or 
        a claim of a violation of subchapter III of chapter 37 of title 
        31, United States Code, or
            ``(2) the amount includible in the taxpayer's gross income 
        for such taxable year on account of a judgment or settlement 
        (whether by suit or agreement and whether as lump sums or 
        periodic payments) resulting from such claim.
    ``(b) Unlawful Discrimination Defined.--For purposes of this 
section, the term `unlawful discrimination' means an act that is 
unlawful under any of the following:
            ``(1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 
        1202).
            ``(2) Section 201, 202, 203, 204, 205, 206, or 207 of the 
        Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 
        1313, 1314, 1315, 1316, or 1317).
            ``(3) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 
        et seq.).
            ``(4) Section 4 or 15 of the Age Discrimination in 
        Employment Act of 1967 (29 U.S.C. 623 or 633a).
            ``(5) Section 501 or 504 of the Rehabilitation Act of 1973 
        (29 U.S.C. 791 or 794).
            ``(6) Section 510 of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1140).
            ``(7) Title IX of the Education Amendments of 1972 (29 
        U.S.C. 1681 et seq.).
            ``(8) The Employee Polygraph Protection Act of 1988 (29 
        U.S.C. 201 et seq.).
            ``(9) The Worker Adjustment and Retraining Notification Act 
        (29 U.S.C. 2102 et seq.).
            ``(10) Section 105 of the Family and Medical Leave Act of 
        1993 (29 U.S.C. 2615).
            ``(11) Chapter 43 of title 38, United States Code (relating 
        to employment and reemployment rights of members of the 
        uniformed services).
            ``(12) Section 1977, 1979, or 1980 of the Revised Statutes 
        (42 U.S.C. 1981, 1983, or 1985).
            ``(13) Section 703, 704, or 717 of the Civil Rights Act of 
        1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
            ``(14) Section 804, 805, 806, 808, or 818 of the Fair 
        Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).
            ``(15) Section 102, 202, 302, or 503 of the Americans with 
        Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 
        12203).
            ``(16) Section 40302 of the Violence Against Women Act of 
        1994 (42 U.S.C. 13981).
            ``(17) Any provision of Federal law (popularly known as 
        whistleblower protection provisions) prohibiting the discharge 
        of an employee, the discrimination against an employee, or any 
        other form of retaliation or reprisal against an employee for 
        asserting rights or taking other actions permitted under 
        Federal law.
            ``(18) Any provision of State or local law, or common law 
        claims permitted under Federal, State, or local law--
                    ``(A) providing for the enforcement of civil 
                rights, or
                    ``(B) regulating any aspect of the employment 
                relationship, including prohibiting the discharge of an 
                employee, the discrimination against an employee, or 
                any other form of retaliation or reprisal against an 
                employee for asserting rights or taking other actions 
                permitted by law.''.
    (b) Deduction Allowed Whether or Not Taxpayer Itemizes Other 
Deductions.--Subsection (a) of section 62 (defining adjusted gross 
income) is amended by inserting after paragraph (18) the following new 
item:
            ``(19) Costs involving discrimination suits.--The deduction 
        allowed by section 223.''.
    (c) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 is amended by striking the last item and 
inserting the following new items:

                              ``Sec. 223. Attorney fees and costs in 
                                        connection with amounts 
                                        received on account of certain 
                                        unlawful discrimination or 
                                        civil fraud against the United 
                                        States.
                              ``Sec. 224. Cross reference.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to fees and costs paid after the date of the enactment of this 
Act with respect to any judgment or settlement occurring after such 
date.

SEC. 522. INCREASE IN SECTION 382 LIMITATION FOR COMPANIES EMERGING 
              FROM BANKRUPTCY.

    (a) In General.--Section 382(b) (relating to section 382 
limitation) is amended by adding at the end the following new 
paragraph:
            ``(4) Increase in section 382 limitation for companies 
        emerging from bankruptcy.--In the case of any new loss 
        corporation which immediately before any ownership change was 
        an old loss corporation under the jurisdiction of the court in 
        a title 11 or similar case (as defined in subsection 
        (l)(5)(G)), the section 382 limitation for any post-change year 
        beginning in 2004 or 2005 shall be an amount equal to 200 
        percent of the amount otherwise determined under paragraph (1) 
        for such year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to ownership changes after December 31, 2002.

SEC. 523. INCREASE IN HISTORIC REHABILITATION CREDIT FOR CERTAIN LOW-
              INCOME HOUSING FOR THE ELDERLY.

    (a) In General.--Section 47 (relating to rehabilitation credit) is 
amended by adding at the end the following new subsection:
    ``(e) Special Rule Regarding Certain Historic Structures.--In the 
case of any qualified rehabilitation expenditure with respect to any 
certified historic structure--
            ``(1) which is placed in service after the date of the 
        enactment of this subsection,
            ``(2) which is part of a qualified low-income building with 
        respect to which a credit under section 42 is allowed, and
            ``(3) substantially all of the residential rental units of 
        which are used for tenants who have attained the age of 65,
subsection (a)(2) shall be applied by substituting `25 percent' for `20 
percent'.''.
    (b) Application of MACRS.--The Internal Revenue Code of 1986 shall 
be applied and administered as if paragraph (4)(X) of section 251(d) of 
the Tax Reform Act of 1986 as applied to the amendments made by section 
201 of such Act had not been enacted with respect to any property 
described in such paragraph and placed in service after the date of the 
enactment of this Act.
    (c) Effective Date.--The amendment made by subsection (a) shall 
apply to property placed in service after the date of the enactment of 
this Act.

SEC. 524. MODIFICATION OF APPLICATION OF INCOME FORECAST METHOD OF 
              DEPRECIATION.

    (a) In General.--Section 167(g) (relating to depreciation under 
income forecast method) is amended by adding at the end the following 
new paragraph:
            ``(7) Treatment of participations and residuals.--
                    ``(A) In general.--For purposes of determining the 
                depreciation deduction allowable with respect to a 
                property under this subsection, the taxpayer may 
                include participations and residuals with respect to 
                such property in the adjusted basis of such property 
                for the taxable year in which the property is placed in 
                service, but only to the extent that such 
                participations and residuals relate to income estimated 
                (for purposes of this subsection) to be earned in 
                connection with the property before the close of the 
                10th taxable year referred to in paragraph (1)(A).
                    ``(B) Participations and residuals.--For purposes 
                of this paragraph, the term `participations and 
                residuals' means, with respect to any property, costs 
                the amount of which by contract varies with the amount 
                of income earned in connection with such property.
                    ``(C) Special rules relating to recomputation 
                years.--If the adjusted basis of any property is 
                determined under this paragraph, paragraph (4) shall be 
                applied by substituting `for each taxable year in such 
                period' for `for such period'.
                    ``(D) Coordination with other rules.--
                            ``(i) Notwithstanding subparagraph (A), the 
                        taxpayer may exclude participations and 
                        residuals from the adjusted basis of such 
                        property and deduct such participations and 
                        residuals in the taxable year that such 
                        participations and residuals are paid.
                            ``(ii) Deductions computed in accordance 
                        with this paragraph shall be allowable 
                        notwithstanding paragraph (1)(B) or sections 
                        263, 263A, 404, 419, or 461(h).
                    ``(E) Authority to make adjustments.--The Secretary 
                shall prescribe appropriate adjustments to the basis of 
                property and to the look-back method for the additional 
                amounts allowable as a deduction solely by reason of 
                this paragraph.''.
    (b) Determination of Income.--Section 167(g)(5) (relating to 
special rules) is amended by redesignating subparagraphs (E) and (F) as 
subparagraphs (F) and (G), respectively, and inserting after 
subparagraph (D) the following new subparagraph:
                    ``(E) Treatment of distribution costs.--For 
                purposes of this subsection, the income with respect to 
                any property shall be the taxpayer's gross income from 
                such property.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to property placed in service after the date of the enactment of 
this Act.

SEC. 525. ADDITIONAL ADVANCE REFUNDINGS OF CERTAIN GOVERNMENTAL BONDS.

    (a) In General.--Section 149(d)(3)(A)(i) (relating to advance 
refundings of other bonds) is amended--
            (1) by striking ``or'' at the end of subclause (I),
            (2) by adding ``or'' at the end of subclause (II), and
            (3) by inserting after subclause (II) the following:
                                    ``(III) the 2nd advance refunding 
                                of the original bond if the original 
                                bond was issued after 1985 or the 3rd 
                                advance refunding of the original bond 
                                if the original bond was issued before 
                                1986, if, in either case, the refunding 
                                bond is issued before the date which is 
                                2 years after the date of the enactment 
                                of this subclause and the original bond 
                                was issued as part of an issue 90 
                                percent or more of the net proceeds of 
                                which were used to finance a public 
                                elementary or secondary school in any 
                                State in which the State's highest 
                                court ruled by opinion issued on 
                                November 21, 2002, that the State 
                                school funding system violated the 
                                State constitution and was 
                                constitutionally inadequate,''.
    (b) Effective Date.--The amendments made by this section shall 
apply to refunding bonds issued on or after the date of the enactment 
of this Act.

SEC. 526. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON HORSE 
              RACES FROM GROSS INCOME OF NONRESIDENT ALIEN INDIVIDUALS.

    (a) In General.--Subsection (b) of section 872 (relating to 
exclusions) is amended by redesignating paragraphs (5), (6), and (7) as 
paragraphs (6), (7), and (8), respectively, and inserting after 
paragraph (4) the following new paragraph:
            ``(5) Income derived from wagering transactions in certain 
        parimutuel pools.--Gross income derived by a nonresident alien 
        individual from a legal wagering transaction initiated outside 
        the United States in a parimutuel pool with respect to a live 
        horse race in the United States.''.
    (b) Conforming Amendment.--Section 883(a)(4) is amended by striking 
``(5), (6), and (7)'' and inserting ``(6), (7), and (8)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to proceeds from wagering transactions after September 30, 2003.

SEC. 527. FEDERAL REIMBURSEMENT OF EMERGENCY HEALTH SERVICES FURNISHED 
              TO UNDOCUMENTED ALIENS.

    (a) Total Amount Available for Allotment.--There is appropriated, 
out of any funds in the Treasury not otherwise appropriated, 
$48,000,000 for fiscal year 2004, for the purpose of making allotments 
under this section to States described in paragraph (1) or (2) of 
subsection (b). Funds appropriated under the preceding sentence shall 
remain available until expended.
    (b) State Allotments.--
            (1) Based on percentage of undocumented aliens.--
                    (A) In general.--Out of the amount appropriated 
                under subsection (a) for fiscal year 2004, the 
                Secretary shall use $32,000,000 of such amount to make 
                allotments for such fiscal year in accordance with 
                subparagraph (B).
                    (B) Formula.--The amount of the allotment for each 
                State for fiscal year 2004 shall be equal to the 
                product of--
                            (i) the total amount available for 
                        allotments under this paragraph for the fiscal 
                        year; and
                            (ii) the percentage of undocumented aliens 
                        residing in the State with respect to the total 
                        number of such aliens residing in all States, 
                        as determined by the Statistics Division of the 
                        Immigration and Naturalization Service, as of 
                        January 2003, based on the 2000 decennial 
                        census.
            (2) Based on number of undocumented alien apprehension 
        states.--
                    (A) In general.--Out of the amount appropriated 
                under subsection (a) for fiscal year 2004, the 
                Secretary shall use $16,000,000 of such amount to make 
                allotments for such fiscal year for each of the 6 
                States with the highest number of undocumented alien 
                apprehensions for such fiscal year.
                    (B) Determination of allotments.--The amount of the 
                allotment for each State described in subparagraph (A) 
                for fiscal year 2004 shall bear the same ratio to the 
                total amount available for allotments under this 
                paragraph for the fiscal year as the ratio of the 
                number of undocumented alien apprehensions in the State 
                in that fiscal year bears to the total of such numbers 
                for all such States for such fiscal year.
                    (C) Data.--For purposes of this paragraph, the 
                highest number of undocumented alien apprehensions for 
                fiscal year 2004 shall be based on the 4 most recent 
                quarterly apprehension rates for undocumented aliens in 
                such States, as reported by the Immigration and 
                Naturalization Service.
            (3) Rule of construction.--Nothing in this section shall be 
        construed as prohibiting a State that is described in both of 
        paragraphs (1) and (2) from receiving an allotment under both 
        paragraphs for fiscal year 2004.
    (c) Use of Funds.--
            (1) Authority to make payments.--From the allotments made 
        for a State under subsection (b) for fiscal year 2004, the 
        Secretary shall pay directly to local governments, hospitals, 
        or other providers located in the State (including providers of 
        services received through an Indian Health Service facility 
        whether operated by the Indian Health Service or by an Indian 
        tribe or tribal organization) that provide uncompensated 
        emergency health services furnished to undocumented aliens 
        during that fiscal year, and to the State, such amounts 
        (subject to the total amount available from such allotments) as 
        the local governments, hospitals, providers, or State 
        demonstrate were incurred for the provision of such services 
        during that fiscal year.
            (2) Limitation on state use of funds.--Funds paid to a 
        State from allotments made under subsection (b) for fiscal year 
        2004 may only be used for making payments to local governments, 
        hospitals, or other providers for costs incurred in providing 
        emergency health services to undocumented aliens or for State 
        costs incurred with respect to the provision of emergency 
        health services to such aliens.
            (3) Inclusion of costs incurred with respect to certain 
        aliens.--Uncompensated emergency health services furnished to 
        aliens who have been allowed to enter the United States for the 
        sole purpose of receiving emergency health services may be 
        included in the determination of costs incurred by a State, 
        local government, hospital, or other provider with respect to 
        the provision of such services.
    (d) Applications; Advance Payments.--
            (1) Deadline for establishment of application process.--
                    (A) In general.--Not later than September 1, 2003, 
                the Secretary shall establish a process under which 
                States, local governments, hospitals, or other 
                providers located in the State may apply for payments 
                from allotments made under subsection (b) for fiscal 
                year 2004 for uncompensated emergency health services 
                furnished to undocumented aliens during that fiscal 
                year.
                    (B) Inclusion of measures to combat fraud.--The 
                Secretary shall include in the process established 
                under subparagraph (A) measures to ensure that 
                fraudulent payments are not made from the allotments 
                determined under subsection (b).
            (2) Advance payment; Retrospective adjustment.--The process 
        established under paragraph (1) shall allow for making payments 
        under this section for each quarter of fiscal year 2004 on the 
        basis of advance estimates of expenditures submitted by 
        applicants for such payments and such other investigation as 
        the Secretary may find necessary, and for making reductions or 
        increases in the payments as necessary to adjust for any 
        overpayment or underpayment for prior quarters of such fiscal 
        year.
    (e) Definitions.--In this section:
            (1) Hospital.--The term ``hospital'' has the meaning given 
        such term in section 1861(e) of the Social Security Act (42 
        U.S.C. 1395x(e)).
            (2) Indian tribe; tribal organization.--The terms ``Indian 
        tribe'' and ``tribal organization'' have the meanings given 
        such terms in section 4 of the Indian Health Care Improvement 
        Act (25 U.S.C. 1603).
            (3) Provider.--The term ``provider'' includes a physician, 
        any other health care professional licensed under State law, 
        and any other entity that furnishes emergency health services, 
        including ambulance services.
            (4) Secretary.--The term ``Secretary'' means the Secretary 
        of Health and Human Services.
            (5) State.--The term ``State'' means the 50 States and the 
        District of Columbia.
    (f) Entitlement.--This section constitutes budget authority in 
advance of appropriations Acts and represents the obligation of the 
Federal Government to provide for the payment of amounts provided under 
this section.

SEC. 528. PREMIUMS FOR MORTGAGE INSURANCE.

    (a) Mortgage Insurance Premiums Treated as Interest.--
            (1) In general.--Paragraph (3) of section 163(h) (relating 
        to qualified residence interest) is amended by adding after 
        subparagraph (D) the following new subparagraph:
                    ``(E) Mortgage insurance premiums treated as 
                interest.--
                            ``(i) In general.--Premiums paid or accrued 
                        for qualified mortgage insurance by a taxpayer 
                        during the taxable year in connection with 
                        acquisition indebtedness with respect to a 
                        qualified residence of the taxpayer shall be 
                        treated for purposes of this subsection as 
                        qualified residence interest.
                            ``(ii) Phaseout.--The amount otherwise 
                        allowable as a deduction under clause (i) shall 
                        be reduced (but not below zero) by 10 percent 
                        of such amount for each $1,000 ($500 in the 
                        case of a married individual filing a separate 
                        return) (or fraction thereof) that the 
                        taxpayer's adjusted gross income for the 
                        taxable year exceeds $100,000 ($50,000 in the 
                        case of a married individual filing a separate 
                        return).''.
            (2) Definition and special rules.--Paragraph (4) of section 
        163(h) (relating to other definitions and special rules) is 
        amended by adding at the end the following new subparagraphs:
                    ``(E) Qualified mortgage insurance.--The term 
                `qualified mortgage insurance' means--
                            ``(i) mortgage insurance provided by the 
                        Veterans Administration, the Federal Housing 
                        Administration, or the Rural Housing 
                        Administration, and
                            ``(ii) private mortgage insurance (as 
                        defined by section 2 of the Homeowners 
                        Protection Act of 1998 (12 U.S.C. 4901), as in 
                        effect on the date of the enactment of this 
                        subparagraph).
                    ``(F) Special rules for prepaid qualified mortgage 
                insurance.--Any amount paid by the taxpayer for 
                qualified mortgage insurance that is properly allocable 
                to any mortgage the payment of which extends to periods 
                that are after the close of the taxable year in which 
                such amount is paid shall be chargeable to capital 
                account and shall be treated as paid in such periods to 
                which so allocated. No deduction shall be allowed for 
                the unamortized balance of such account if such 
                mortgage is satisfied before the end of its term. The 
                preceding sentences shall not apply to amounts paid for 
                qualified mortgage insurance provided by the Veterans 
                Administration or the Rural Housing Administration.''.
    (b) Information Returns Relating to Mortgage Insurance.--Section 
6050H (relating to returns relating to mortgage interest received in 
trade or business from individuals) is amended by adding at the end the 
following new subsection:
    ``(h) Returns Relating to Mortgage Insurance Premiums.--
            ``(1) In general.--The Secretary may prescribe, by 
        regulations, that any person who, in the course of a trade or 
        business, receives from any individual premiums for mortgage 
        insurance aggregating $600 or more for any calendar year, shall 
        make a return with respect to each such individual. Such return 
        shall be in such form, shall be made at such time, and shall 
        contain such information as the Secretary may prescribe.
            ``(2) Statement to be furnished to individuals with respect 
        to whom information is required.--Every person required to make 
        a return under paragraph (1) shall furnish to each individual 
        with respect to whom a return is made a written statement 
        showing such information as the Secretary may prescribe. Such 
        written statement shall be furnished on or before January 31 of 
        the year following the calendar year for which the return under 
        paragraph (1) was required to be made.
            ``(3) Special rules.--For purposes of this subsection--
                    ``(A) rules similar to the rules of subsection (c) 
                shall apply, and
                    ``(B) the term `mortgage insurance' means--
                            ``(i) mortgage insurance provided by the 
                        Veterans Administration, the Federal Housing 
                        Administration, or the Rural Housing 
                        Administration, and
                            ``(ii) private mortgage insurance (as 
                        defined by section 2 of the Homeowners 
                        Protection Act of 1998 (12 U.S.C. 4901), as in 
                        effect on the date of the enactment of this 
                        subparagraph).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or accrued after the date of enactment of this 
section in taxable years ending after such date.

                            TITLE VI--SUNSET

SEC. 601. SUNSET.

    (a) In General.--Except as otherwise provided, the provisions of, 
and amendments made, by this Act shall not apply to taxable years 
beginning after December 31, 2012, and the Internal Revenue Code of 
1986 shall be applied and administered to such years as if such 
amendments had never been enacted.
    (b) Exceptions.--Subsection (a) shall not apply to the following 
provisions of, and amendments made by, this Act:
            (1) Title I (other than section 107).
            (2) Title III (other than section 362).




                                                        Calendar No. 97

108th CONGRESS

  1st Session

                                S. 1054

_______________________________________________________________________

                                 A BILL

To provide for reconciliation pursuant to section 201 of the concurrent 
             resolution on the budget for fiscal year 2004.

_______________________________________________________________________

                              May 13, 2003

                 Read twice and placed on the calendar