[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1475 Introduced in Senate (IS)]






108th CONGRESS
  1st Session
                                S. 1475

       To amend the Internal Revenue Code of 1986 to promote the 
    competitiveness of American businesses, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                July 28 (legislative day, July 21), 2003

   Mr. Hatch introduced the following bill; which was read twice and 
                  referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
       To amend the Internal Revenue Code of 1986 to promote the 
    competitiveness of American businesses, and for other purposes.

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

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

    (a) Short Title.--This Act may be cited as the ``Promote Growth and 
Jobs in the USA Act of 2003'' (the PRO GROW USA 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.--

Sec. 1. Short title; references; table of contents.
        TITLE I--REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME

Sec. 101. Repeal of exclusion for extraterritorial income.
TITLE II--SIMPLIFICATION OF RULES RELATING TO TAXATION OF UNITED STATES 
                      BUSINESSES OPERATING ABROAD

        Subtitle A--Treatment of Controlled Foreign Corporations

Sec. 201. Exceptions from foreign base company sales and services 
                            income rules.
Sec. 202. Look-thru treatment of payments between related controlled 
                            foreign corporations under foreign personal 
                            holding company income rules.
Sec. 203. Look-thru treatment for sales of partnership interests.
Sec. 204. Repeal of foreign personal holding company rules and foreign 
                            investment company rules.
Sec. 205. Clarification of treatment of pipeline transportation income.
Sec. 206. Permanent extension and modification of subpart F exemption 
                            for active financing.
Sec. 207. Expansion of de minimis rule under subpart F.
Sec. 208. Modification of interaction between subpart F and passive 
                            foreign investment company rules.
Sec. 209. Determination of foreign personal holding company income with 
                            respect to transactions in commodities.
Sec. 210. Repeal of foreign base company shipping income rules.
Sec. 211. Reduced tax on repatriated earnings previously exempt from 
                            tax under subpart F.
Sec. 212. Effective date.
         Subtitle B--Provisions Relating to Foreign Tax Credit

Sec. 221. Interest expense allocation rules.
Sec. 222. Extension of period to which excess foreign taxes may be 
                            carried.
Sec. 223. Ordering rules for foreign tax credit carryforwards.
Sec. 224. Repeal of limitation of foreign tax credit under alternative 
                            minimum tax.
Sec. 225. Look-thru rules to apply to dividends from noncontrolled 
                            section 902 corporations.
Sec. 226. Reduction to 2 foreign tax credit baskets.
Sec. 227. Recharacterization of overall domestic loss.
Sec. 228. Repeal of special rules for applying foreign tax credit in 
                            case of foreign oil and gas income.
Sec. 229. Increase in individual exemption from foreign tax credit 
                            limitation.
Sec. 230. United States property not to include certain assets of 
                            controlled foreign corporation.
Sec. 231. Attribution of stock ownership through partnerships to apply 
                            in determining section 902 and 960 credits.
Sec. 232. Provide equal treatment for interest paid by foreign 
                            partnerships and foreign corporations.
Sec. 233. Application of look-thru rules to interest, rents, and 
                            royalties.
Sec. 234. Clarification of treatment of certain transfers of intangible 
                            property.
                      Subtitle C--Other Provisions

Sec. 251. Application of uniform capitalization rules to foreign 
                            persons.
Sec. 252. Treatment of certain dividends of regulated investment 
                            companies.
Sec. 253. Repeal of withholding tax on dividends from certain foreign 
                            corporations.
Sec. 254. Airline mileage awards to certain foreign persons.
Sec. 255. Interest payments deductible where disqualified guarantee has 
                            no economic effect.
Sec. 256. Modifications of reporting requirements for certain foreign-
                            owned corporations.
Sec. 257. Repeal of tax on certain United States source capital gains 
                            of nonresident aliens.
Sec. 258. Election not to use average exchange rate for foreign tax 
                            paid other than in functional currency.
Sec. 259. Study of impact of international tax laws on taxpayers other 
                            than large corporations.
          TITLE III--CREDIT FOR INCREASING RESEARCH ACTIVITIES

Sec. 301. Permanent extension of research credit.
Sec. 302. Increase in rates of alternative incremental credit.
Sec. 303. Alternative simplified credit for qualified research 
                            expenses.
         TITLE IV--REFORM OF DEPRECIATION OF BUSINESS PROPERTY

Sec. 401. 100-percent expensing for certain property through 2006.
Sec. 402. Extension of expensing for small business.
Sec. 403. Election to increase minimum tax credit limitation in lieu of 
                            bonus depreciation.

        TITLE I--REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME

SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

    (a) Repeal.--Section 114 (relating to extraterritorial income) is 
repealed.
    (b) Conforming Amendments.--
            (1)(A) Subpart E of part III of subchapter N of chapter 1 
        (relating to qualifying foreign trade income) is repealed.
            (B) The table of subparts for such part III is amended by 
        striking the item relating to subpart E.
            (2) The table of sections for part III of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        114.
            (3) The second sentence of section 56(g)(4)(B)(i) is 
        amended by striking ``or under section 114''.
            (4) Section 275(a) is amended--
                    (A) by inserting ``or'' at the end of paragraph 
                (4)(A), by striking ``or'' at the end of paragraph 
                (4)(B) and inserting a period, and by striking 
                subparagraph (C), and
                    (B) by striking the last sentence.
            (5) Paragraph (3) of section 864(e) is amended--
                    (A) by striking:
            ``(3) Tax-exempt assets not taken into account.--
                    ``(A) In general.--For purposes of''; and 
                inserting:
            ``(3) Tax-exempt assets not taken into account.--For 
        purposes of'', and
                    (B) by striking subparagraph (B).
            (6) Section 903 is amended by striking ``114, 164(a),'' and 
        inserting ``164(a)''.
            (7) Section 999(c)(1) is amended by striking 
        ``941(a)(5),''.
    (c) Effective Date.--Except as provided in subsections (d) and (f), 
the amendments made by this section shall apply to transactions after 
December 31, 2003.
    (d) Transitional Rules for 2004, 2005, and 2006.--
            (1) In general.--In the case of transactions during 2004, 
        2005, and 2006, the amount includible in gross income by reason 
        of the amendments made by this section shall not exceed the 
        applicable percentage of the amount which would have been so 
        included but for this subsection.
            (2) Applicable percentage.--For purposes of paragraph (1), 
        the applicable percentage is--
                    (A) 25 percent for 2004,
                    (B) 50 percent for 2005, and
                    (C) 75 percent for 2006.
    (e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of 
this Act, a corporation for which an election is in effect under 
section 943(e) of the Internal Revenue Code of 1986 revokes such 
election, no gain or loss shall be recognized with respect to property 
treated as transferred under clause (ii) of section 943(e)(4)(B) of 
such Code to the extent such property--
            (1) was treated as transferred under clause (i) thereof, or
            (2) was acquired during a taxable year to which such 
        election applies and before May 1, 2003, in the ordinary course 
        of its trade or business.
The Secretary of the Treasury (or such Secretary's delegate) may 
prescribe such regulations as may be necessary to prevent the abuse of 
the purposes of this subsection.
    (f) Clarification of Transition Rule to Repeal of Provisions 
Relating to Foreign Sales Corporations.--
            (1) In general.--The last sentence of section 5(c)(1) of 
        the FSC Repeal and Extraterritorial Income Exclusion Act of 
        2000 (Public Law 106-519) is amended by inserting ``, once 
        exercised by the purchaser or lessee (and, if required by the 
        contract, accepted by the seller or lessor),'' before ``is 
        enforceable''.
            (2)  Effective date.--The amendment made by this section 
        shall take effect as if included in the provisions of the FSC 
        Repeal and Extraterritorial Income Exclusion Act of 2000.

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

        Subtitle A--Treatment of Controlled Foreign Corporations

SEC. 201. EXCEPTIONS FROM FOREIGN BASE COMPANY SALES AND SERVICES 
              INCOME RULES.

    (a) In General.--Section 954(b) (relating to exclusions and special 
rules regarding foreign base company income) is amended by adding at 
the end the following new paragraph:
            ``(9) Exceptions from foreign sales and services income.--
        For purposes of subsection (a), foreign base company income of 
        a controlled foreign corporation for a taxable year shall not 
        include foreign base company sales income or foreign base 
        company services income for the taxable year--
                    ``(A) if the controlled foreign corporation is 
                eligible for benefits of a comprehensive income tax 
                treaty with the United States (other than the treaty 
                with Barbados in force on July 28, 2003) which the 
                Secretary determines is satisfactory for purposes of 
                this paragraph and which includes an exchange of 
                information program, or
                    ``(B) to the extent that the foreign base company 
                sales income or foreign base company services income is 
                derived in connection with an exempt transaction (as 
                defined in subsection (j)).''
    (b) Exempt Transactions Defined.--Section 954 (defining foreign 
base company income) is amended by adding at the end the following new 
subsection:
    ``(j) Exempt Transactions.--For purposes of subsection (b)(9)--
            ``(1) In general.--The term `exempt transaction' means any 
        transaction--
                    ``(A) which is subject to an advance pricing 
                agreement under section 482 or is treated as subject to 
                such an agreement under paragraph (2)(C),
                    ``(B) with respect to which the corresponding 
                related person transaction described in subsection 
                (d)(1) or (e)(1), whichever is applicable, is subject 
                to an advance pricing agreement under section 482 or is 
                treated as subject to such an agreement under paragraph 
                (2)(C), or
                    ``(C) with respect to which the related person 
                described in subsection (d)(1) or (e)(1), whichever is 
                applicable, with respect to the transaction is, at the 
                time of the transaction--
                            ``(i) a controlled foreign corporation, or
                            ``(ii) to the extent provided in 
                        regulations, a foreign person or a foreign 
                        branch.
            ``(2) Advance pricing agreement approval process.--
                    ``(A) In general.--A United States shareholder of a 
                controlled foreign corporation may file an application 
                for an advance pricing agreement under section 482 
                which would be applicable to transactions of the 
                controlled foreign corporation or any related person 
                during any 3-taxable year period of the controlled 
                foreign corporation specified in the application. Such 
                application shall be filed at such time and manner, and 
                shall contain such information, as the Secretary shall 
                prescribe.
                    ``(B) Secretarial action.--Within 180 days of 
                receipt of an application under subparagraph (A) (or 
                such longer period as the Secretary and the applicant 
                may agree upon), the Secretary shall--
                            ``(i) enter into an advance pricing 
                        agreement under section 482 for the taxable 
                        years covered by the application (or such 
                        greater number of taxable years specified in 
                        the agreement),
                            ``(ii) notify the applicant 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 applicant 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 applicant 
                shall be treated for purposes of this paragraph as 
                having received notice under clause (ii).
                    ``(C) Effect of approval notice.--For purposes of 
                paragraph (1)(B)(ii), an advance pricing agreement 
                under section 482 shall be treated as in effect with 
                respect to transactions of the controlled foreign 
                corporation or related person which would otherwise be 
                covered by the agreement during the period--
                            ``(i) beginning on the date notice under 
                        subparagraph (B)(ii) is received or treated as 
                        received (or, if later, the first day of the 
                        first taxable year to which the agreement was 
                        to apply), and
                            ``(ii) ending on the effective date of an 
                        advance pricing agreement entered into pursuant 
                        to the application or the date the Secretary 
                        determines the parties will not be able to 
                        enter into such an agreement.
            ``(3) Multiple shareholders.--An application may be filed 
        under paragraph (1) only with the consent of United States 
        shareholders who own (or are treated as owning) under section 
        958 more than 50 percent (by vote or value) of stock of the 
        controlled foreign corporation.''
    (c) Certain Sales.--Paragraph (1) of section 954(c) is amended by 
adding at the end the following new subparagraph:
                    ``(H) Certain sales.--Income (whether in the form 
                of profits, commissions, fees, or otherwise) derived in 
                connection with the purchase of personal property from 
                a related person and its sale to any person, the sale 
                of personal property to any person on behalf of a 
                related person, the purchase of personal property from 
                any person and its sale to a related person, or the 
                purchase of personal property from any person on behalf 
                of a related person if--
                            ``(i) the property which is purchased (or 
                        in the case of property sold on behalf of a 
                        related person, the property which is sold) is 
                        manufactured, produced, grown, or extracted in 
                        the United States, and
                            ``(ii) the property is sold for use, 
                        consumption, or disposition in the United 
                        States, or, in the case of property purchased 
                        on behalf of a related person, is purchased for 
                        use, consumption, or disposition in the United 
                        States.
                This subparagraph shall not apply to income otherwise 
                treated as foreign base company income for the taxable 
                year.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2005, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 202. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED 
              FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING 
              COMPANY INCOME RULES.

    Subsection (c) of section 954 is amended by adding at the end the 
following new paragraph:
            ``(4) Look-thru in the case of related controlled foreign 
        corporations.--For purposes of this subsection, dividends, 
        interest, rents, and royalties received or accrued from a 
        controlled foreign corporation which is a related person (as 
        defined in subsection (d)(3)) shall not be treated as foreign 
        personal holding company income to the extent properly 
        allocable or attributable (determined under rules similar to 
        the rules of subparagraphs (C) and (D) of section 904(d)(3)) to 
        income of the related person which is not subpart F income. The 
        Secretary shall prescribe such regulations as may be 
        appropriate to prevent the abuse of the purposes of this 
        paragraph.''

SEC. 203. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.

    Section 954(c) (defining foreign personal holding company income), 
as amended by section 202, is amended by adding at the end the 
following new paragraph:
            ``(5) Look-through rule for certain partnership sales.--
                    ``(A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest in a 
                partnership with respect to which such corporation is a 
                25-percent owner, such corporation shall be treated for 
                purposes of this subsection as selling the 
                proportionate share of the assets of the partnership 
                attributable to such interest.
                    ``(B) 25-percent owner.--For purposes of this 
                paragraph, the term `25-percent owner' means a 
                controlled foreign corporation which owns (within the 
                meaning of section 958(a)) 25 percent or more of the 
                capital or profits interest in the partnership.''

SEC. 204. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN 
              INVESTMENT COMPANY RULES.

    (a) General Rule.--The following provisions are hereby repealed:
            (1) Part III of subchapter G of chapter 1 (relating to 
        foreign personal holding companies).
            (2) Section 1246 (relating to gain on foreign investment 
        company stock).
            (3) Section 1247 (relating to election by foreign 
        investment companies to distribute income currently).
    (b) Exemption of Foreign Corporations From Personal Holding Company 
Rules.--
            (1) In general.--Subsection (c) of section 542 (relating to 
        exceptions) is amended--
                    (A) by striking paragraph (5) and inserting the 
                following:
            ``(5) a foreign corporation,'',
                    (B) by striking paragraphs (7) and (10) and by 
                redesignating paragraphs (8) and (9) as paragraphs (7) 
                and (8), respectively,
                    (C) by inserting ``and'' at the end of paragraph 
                (7) (as so redesignated), and
                    (D) by striking ``; and'' at the end of paragraph 
                (8) (as so redesignated) and inserting a period.
            (2) Treatment of income from personal service contracts.--
        Paragraph (1) of section 954(c), as amended by section 201(c), 
        is amended by adding at the end the following new subparagraph:
                    ``(I) Personal service contracts.--
                            ``(i) Amounts received under a contract 
                        under which the corporation is to furnish 
                        personal services if--
                                    ``(I) some person other than the 
                                corporation has the right to designate 
                                (by name or by description) the 
                                individual who is to perform the 
                                services, or
                                    ``(II) the individual who is to 
                                perform the services is designated (by 
                                name or by description) in the 
                                contract, and
                            ``(ii) amounts received from the sale or 
                        other disposition of such a contract.
                This subparagraph shall apply with respect to amounts 
                received for services under a particular contract only 
                if at some time during the taxable year 25 percent or 
                more in value of the outstanding stock of the 
                corporation is owned, directly or indirectly, by or for 
                the individual who has performed, is to perform, or may 
                be designated (by name or by description) as the one to 
                perform, such services.''
    (c) Conforming Amendments.--
            (1) Clause (iii) of section 1(h)(11)(C) is amended by 
        striking ``a foreign personal holding company (as defined in 
        section 552), a foreign investment company (as defined in 
        section 1246(b)), or''.
            (2) Paragraph (2) of section 171(c) is amended--
                    (A) by striking ``, or by a foreign personal 
                holding company, as defined in section 552'', and
                    (B) by striking ``, or foreign personal holding 
                company''.
            (3) Paragraph (2) of section 245(a) is amended by striking 
        ``foreign personal holding company or''.
            (4) Section 312 is amended by striking subsection (j).
            (5) Subsection (m) of section 312 is amended by striking 
        ``, a foreign investment company (within the meaning of section 
        1246(b)), or a foreign personal holding company (within the 
        meaning of section 552)''.
            (6) Subsection (e) of section 443 is amended by striking 
        paragraph (3) and by redesignating paragraphs (4) and (5) as 
        paragraphs (3) and (4), respectively.
            (7) Subparagraph (B) of section 465(c)(7) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (8) Paragraph (1) of section 543(b) is amended by inserting 
        ``and'' at the end of subparagraph (A), by striking ``, and'' 
        at the end of subparagraph (B) and inserting a period, and by 
        striking subparagraph (C).
            (9) Paragraph (1) of section 562(b) is amended by striking 
        ``or a foreign personal holding company described in section 
        552''.
            (10) Section 563 is amended--
                    (A) by striking subsection (c),
                    (B) by redesignating subsection (d) as subsection 
                (c), and
                    (C) by striking ``subsection (a), (b), or (c)'' in 
                subsection (c) (as so redesignated) and inserting 
                ``subsection (a) or (b)''.
            (11) Subsection (d) of section 751 is amended by adding 
        ``and'' at the end of paragraph (2), by striking paragraph (3), 
        by redesignating paragraph (4) as paragraph (3), and by 
        striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so 
        redesignated) and inserting ``paragraph (1) or (2)''.
            (12) Paragraph (2) of section 864(d) is amended by striking 
        subparagraph (A) and by redesignating subparagraphs (B) and (C) 
        as subparagraphs (A) and (B), respectively.
            (13)(A) Subparagraph (A) of section 898(b)(1) is amended to 
        read as follows:
                    ``(A) which is treated as a controlled foreign 
                corporation for any purpose under subpart F of part III 
                of this subchapter, and''.
            (B) Subparagraph (B) of section 898(b)(2) is amended by 
        striking ``and sections 551(f) and 554, whichever are 
        applicable,''.
            (C) Paragraph (3) of section 898(b) is amended to read as 
        follows:
            ``(3) United states shareholder.--The term `United States 
        shareholder' has the meaning given to such term by section 
951(b), except that, in the case of a foreign corporation having 
related person insurance income (as defined in section 953(c)(2)), the 
Secretary may treat any person as a United States shareholder for 
purposes of this section if such person is treated as a United States 
shareholder under section 953(c)(1).''
            (D) Subsection (c) of section 898 is amended to read as 
        follows:
    ``(c) Determination of Required Year.--
            ``(1) In general.--The required year is--
                    ``(A) the majority U.S. shareholder year, or
                    ``(B) if there is no majority U.S. shareholder 
                year, the taxable year prescribed under regulations.
            ``(2) 1-month deferral allowed.--A specified foreign 
        corporation may elect, in lieu of the taxable year under 
        paragraph (1)(A), a taxable year beginning 1 month earlier than 
        the majority U.S. shareholder year.
            ``(3) Majority u.s. shareholder year.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `majority U.S. shareholder year' means the 
                taxable year (if any) which, on each testing day, 
                constituted the taxable year of--
                            ``(i) each United States shareholder 
                        described in subsection (b)(2)(A), and
                            ``(ii) each United States shareholder not 
                        described in clause (i) whose stock was treated 
                        as owned under subsection (b)(2)(B) by any 
                        shareholder described in such clause.
                    ``(B) Testing day.--The testing days shall be--
                            ``(i) the first day of the corporation's 
                        taxable year (determined without regard to this 
                        section), or
                            ``(ii) the days during such representative 
                        period as the Secretary may prescribe.''
            (14) Clause (ii) of section 904(d)(2)(A) is amended to read 
        as follows:
                            ``(ii) Certain amounts included.--Except as 
                        provided in clause (iii), the term `passive 
                        income' includes, except as provided in 
                        subparagraph (E)(iii) or paragraph (3)(I), any 
                        amount includible in gross income under section 
                        1293 (relating to certain passive foreign 
                        investment companies).''
            (15)(A) Subparagraph (A) of section 904(g)(1) is amended by 
        adding ``or'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
            (B) The paragraph heading of paragraph (2) of section 
        904(g) is amended by striking ``foreign personal holding or''.
            (16) Section 951 is amended by striking subsections (c) and 
        (d) and by redesignating subsections (e) and (f) as subsections 
        (c) and (d), respectively.
            (17) Paragraph (3) of section 989(b) is amended by striking 
        ``, 551(a),''.
            (18) Paragraph (5) of section 1014(b) is amended by 
        inserting ``and before January 1, 2005,'' after ``August 26, 
        1937,''.
            (19) Subsection (a) of section 1016 is amended by striking 
        paragraph (13).
            (20)(A) Paragraph (3) of section 1212(a) is amended to read 
        as follows:
            ``(3) Special rules on carrybacks.--A net capital loss of a 
        corporation shall not be carried back under paragraph (1)(A) to 
        a taxable year--
                    ``(A) for which it is a regulated investment 
                company (as defined in section 851), or
                    ``(B) for which it is a real estate investment 
                trust (as defined in section 856).''
            (B) The amendment made by subparagraph (A) shall apply to 
        taxable years beginning after December 31, 2007.
            (21) Section 1223 is amended by striking paragraph (10) and 
        by redesignating the following paragraphs accordingly.
            (22) Subsection (d) of section 1248 is amended by striking 
        paragraph (5) and by redesignating paragraphs (6) and (7) as 
        paragraphs (5) and (6), respectively.
            (23) Paragraph (2) of section 1260(c) is amended by 
        striking subparagraphs (H) and (I) and by redesignating 
        subparagraph (J) as subparagraph (H).
            (24)(A) Subparagraph (F) of section 1291(b)(3) is amended 
        by striking ``551(d), 959(a),'' and inserting ``959(a)''.
            (B) Subsection (e) of section 1291 is amended by inserting 
        ``(as in effect on the day before the date of the enactment of 
        the PRO GROW USA Act of 2003)'' after ``section 1246''.
            (25) Paragraph (2) of section 1294(a) is amended to read as 
        follows:
            ``(2) Election not permitted where amounts otherwise 
        includible under section 951.--The taxpayer may not make an 
        election under paragraph (1) with respect to the undistributed 
        PFIC earnings tax liability attributable to a qualified 
        electing fund for the taxable year if any amount is includible 
        in the gross income of the taxpayer under section 951 with 
        respect to such fund for such taxable year.''
            (26) Section 6035 is hereby repealed.
            (27) Subparagraph (D) of section 6103(e)(1) is amended by 
        striking clause (iv) and redesignating clauses (v) and (vi) as 
        clauses (iv) and (v), respectively.
            (28) Subparagraph (B) of section 6501(e)(1) is amended to 
        read as follows:
                    ``(B) Constructive dividends.--If the taxpayer 
                omits from gross income an amount properly includible 
                therein under section 951(a), the tax may be assessed, 
                or a proceeding in court for the collection of such tax 
                may be done without assessing, at any time within 6 
                years after the return was filed.''
            (29) Subsection (a) of section 6679 is amended--
                    (A) by striking ``6035, 6046, and 6046A'' in 
                paragraph (1) and inserting ``6046 and 6046A'', and
                    (B) by striking paragraph (3).
            (30) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) 
        are each amended by striking ``556(b)(2),'' each place it 
        appears.
            (31) The table of parts for subchapter G of chapter 1 is 
        amended by striking the item relating to part III.
            (32) The table of sections for part IV of subchapter P of 
        chapter 1 is amended by striking the items relating to sections 
        1246 and 1247.
            (33) The table of sections for subpart A of part III of 
        subchapter A of chapter 61 is amended by striking the item 
        relating to section 6035.

SEC. 205. CLARIFICATION OF TREATMENT OF PIPELINE TRANSPORTATION INCOME.

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

SEC. 206. PERMANENT EXTENSION AND MODIFICATION OF SUBPART F EXEMPTION 
              FOR ACTIVE FINANCING.

    (a) Permanent Extension.--
            (1) Exempt insurance income.--Section 953(e)(10) is 
        amended--
                    (A) by striking ``, and before January 1, 2007,'', 
                and
                    (B) by striking the second sentence.
            (2) Foreign personal holding company income.--Section 
        954(h)(9) is amended by striking ``, and before January 1, 
        2007,''.
    (b) Direct Conduct of Activities.--Section 954(h)(3) is amended by 
adding at the end the following:
                    ``(E) Direct conduct of activities.--For purposes 
                of subparagraph (A)(ii)(II), an activity shall be 
                treated as conducted directly by an eligible controlled 
                foreign corporation or qualified business unit in its 
                home country if the activity is performed by employees 
                of a related person and--
                            ``(i) the related person is an eligible 
                        controlled foreign corporation the home country 
                        of which is the same as the home country of the 
                        corporation or unit to which subparagraph 
                        (A)(ii)(II) is being applied,
                            ``(ii) the activity is performed in the 
                        home country of the related person, and
                            ``(iii) the related person is compensated 
                        on an arm's-length basis for the performance of 
                        the activity by its employees and such 
                        compensation is treated as earned by such 
                        person in its home country for purposes of the 
                        home country's tax laws.''

SEC. 207. EXPANSION OF DE MINIMIS RULE UNDER SUBPART F.

    (a) In General.--Clause (ii) of section 954(b)(3)(A) (relating to 
de minimis, etc., rules) is amended by striking ``$1,000,000'' and 
inserting ``$5,000,000''.
    (b) Technical Amendments.--
            (1) Clause (ii) of section 864(d)(5)(A) is amended by 
        striking ``$1,000,000'' and inserting ``$5,000,000''.
            (2) Clause (i) of section 881(c)(5)(A) is amended by 
        striking ``$1,000,000'' and inserting ``$5,000,000''.

SEC. 208. MODIFICATION OF INTERACTION BETWEEN SUBPART F AND PASSIVE 
              FOREIGN INVESTMENT COMPANY RULES.

    (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 the earning 
                of subpart F income by such corporation during such 
                period would only result in a remote likelihood of an 
                inclusion in gross income under section 
                951(a)(1)(A)(i).''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of controlled foreign corporations beginning after 
December 31, 2003, and to taxable years of United States shareholders 
in which or with which such taxable years of controlled foreign 
corporations end.

SEC. 209. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH 
              RESPECT TO TRANSACTIONS IN COMMODITIES.

    (a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C) 
(relating to commodity transactions) are amended to read as follows:
                            ``(i) arise out of commodity hedging 
                        transactions (as defined in paragraph (6)(A)),
                            ``(ii) are active business gains or losses 
                        from the sale of commodities, but only if 
                        substantially all of the controlled foreign 
                        corporation's commodities are property 
                        described in paragraph (1), (2), or (8) of 
                        section 1221(a), or''.
    (b) Definition and Special Rules.--Subsection (c) of section 954, 
as amended by sections 202 and 203, is amended by adding at the end the 
following new paragraph:
            ``(6) Definition and special rules relating to commodity 
        transactions.--
                    ``(A) Commodity hedging transactions.--For purposes 
                of paragraph (1)(C)(i), the term `commodity hedging 
                transaction' means any transaction with respect to a 
                commodity if such transaction--
                            ``(i) is a hedging transaction as defined 
                        in section 1221(b)(2), determined--
                                    ``(I) without regard to 
                                subparagraph (A)(ii) thereof,
                                    ``(II) by applying subparagraph 
                                (A)(i) thereof by substituting 
                                `ordinary property or property 
                                described in section 1231(b)' for 
                                `ordinary property', and
                                    ``(III) by substituting `controlled 
                                foreign corporation' for `taxpayer' 
                                each place it appears, and
                            ``(ii) is clearly identified as such in 
                        accordance with section 1221(a)(7).
                    ``(B) Regulations.--The Secretary shall prescribe 
                such regulations as are appropriate to carry out the 
                purposes of paragraph (1)(C) in the case of 
                transactions involving related persons.''
    (c) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after December 31, 2004.

SEC. 210. REPEAL OF FOREIGN BASE COMPANY SHIPPING INCOME RULES.

    (a) Elimination of Foreign Base Company Shipping Income.--Section 
954 (relating to foreign base company income) is amended--
            (1) in subsection (a), by striking paragraph (4) and by 
        redesignating paragraph (5) as paragraph (4), and
            (2) by striking subsection (f) (relating to foreign base 
        company shipping income).
    (b) Active Leasing Income From Aircraft and Vessels.--
            (1) In general.--Section 954(c)(2) is amended by adding at 
        the end the following new subparagraph:
                    ``(D) Certain rents, etc.--
                            ``(i) In general.--Foreign personal holding 
                        company income shall not include qualified 
                        leasing income derived from or in connection 
                        with the leasing or rental of any aircraft or 
                        vessel.
                            ``(ii) Qualified leasing income.--For 
                        purposes of this subparagraph, the term 
                        `qualified leasing income' means rents and 
                        gains derived in the active conduct of a trade 
                        or business of leasing with respect to which 
                        the controlled foreign corporation conducts 
                        substantial activity, but only if--
                                    ``(I) the leased property is used 
                                by the lessee or other end-user in 
                                foreign commerce and predominantly 
                                outside the United States, and
                                    ``(II) the lessee or other end-user 
                                is not a related person (as defined in 
                                subsection (d)(3)).
                        Any amount not treated as foreign personal 
                        holding income under this subparagraph shall 
                        not be treated as foreign base company income 
                        under any other provision of this section.''
            (2) Conforming amendment.--Section 954(c)(1)(B) is amended 
        by inserting ``or (2)(D)'' after ``paragraph (2)(A)''.
    (c) Conforming Amendments.--
            (1) Section 952(c)(1)(B)(iii) is amended by striking 
        subclause (I) and redesignating subclauses (II) through (VI) as 
        subclauses (I) through (V), respectively.
            (2) Subsection (b) of section 954 is amended--
                    (A) by striking ``the foreign base shipping 
                income,'' in paragraph (5),
                    (B) by striking paragraphs (6) and (7), and
                    (C) by redesignating paragraph (8) as paragraph 
                (6).
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2005, and to taxable years of United States shareholders with or 
within which such taxable years of foreign corporations end.

SEC. 211. REDUCED TAX ON REPATRIATED EARNINGS PREVIOUSLY EXEMPT FROM 
              TAX UNDER SUBPART F.

    (a) In General.--Subpart F of part III of subchapter N of chapter 1 
is amended by adding at the end the following new section:

``SEC. 965. REDUCED TAX ON REPATRIATED EARNINGS PREVIOUSLY EXEMPT FROM 
              TAX.

    ``(a) In General.--If a corporation which is a United States 
shareholder elects the application of this section, a tax shall be 
imposed on the taxpayer in an amount equal to the applicable percentage 
of--
            ``(1) the taxpayer's qualified foreign distribution amount, 
        and
            ``(2) the amount determined under section 78 which is 
        attributable to the qualified foreign distribution amount.
Such tax shall be imposed in lieu of the tax imposed under section 11 
or 55 on the amounts described in paragraphs (1) and (2) for such 
taxable year. For purposes of this subsection, the applicable 
percentage for any taxable year is the percentage equal to 15 percent 
of the highest rate of tax in effect under section 11(b) for the 
taxable year.
    ``(b) Qualified Foreign Distribution Amount.--For purposes of this 
section--
            ``(1) In general.--The term `qualified foreign distribution 
        amount' means the lesser of--
                    ``(A) the aggregate dividends received by the 
                taxpayer during the taxable year which are from 1 or 
                more corporations which are controlled foreign 
                corporations in which the taxpayer is a United States 
                shareholder on the date such dividends are paid, or
                    ``(B) the amount designated by the taxpayer under 
                subsection (c)(6).
            ``(2) Limitation based on qualified innovation spending.--
                    ``(A) In general.--The qualified foreign 
                distribution amount for any taxable year shall not 
                exceed the excess (if any) of--
                            ``(i) the qualified innovation expenses of 
                        the taxpayer for the taxable year, over
                            ``(ii) the base innovation expense amount.
                    ``(B) Qualified innovation expenses.--For purposes 
                of this paragraph, the term `qualified innovation 
                expenses' means the sum of the following amounts for 
                the taxable year:
                            ``(i) Qualified research expenses taken 
                        into account in determining the credit 
                        determined under section 41 for the taxable 
                        year.
                            ``(ii) The aggregate adjusted bases of all 
                        property placed in service during the taxable 
                        year to which section 168(k) applies.
                    ``(C) Base innovation expense amount.--For purposes 
                of this paragraph, the base innovation expense amount 
                is 85 percent of the average of the taxpayer's 
                qualified innovation expenses during the base period.
            ``(3) Base period.--
                    ``(A) In general.--The term `base period' means, 
                with respect to any taxable year, the 3-taxable-year 
                period ending with the taxable year preceding the 
                taxable year.
                    ``(B) Shorter period.--If the taxpayer has fewer 
                than 3 taxable years immediately preceding the taxable 
                year, then in lieu of applying subparagraph (A), the 
                base period shall include all preceding taxable years 
                of the taxpayer.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Dividends.--The term `dividend' has the meaning given 
        such term by section 316, except that such term shall not 
        include amounts described in sections 78 and 959.
            ``(2) Foreign tax credits and deductions.--The amount of 
        any income, war, profits, or excess profit taxes paid (or 
        deemed paid under sections 902 and 960) or accrued by the 
        taxpayer with respect to the qualified foreign distribution 
        amount for which a credit would be allowable under section 901 
        without regard to this section shall be reduced by 85 percent. 
        No deduction shall be allowed under this chapter for the 
        portion of any tax for which credit is not allowable by reason 
        of the preceding sentence.
            ``(3) Foreign tax credit limitation.--For purposes of 
        section 904, there shall be disregarded 85 percent of--
                    ``(A) the qualified foreign distribution amount,
                    ``(B) the amount determined under section 78 which 
                is attributable to such qualified foreign distribution 
                amount, and
                    ``(C) the amounts (including assets, gross income, 
                and other relevant bases of apportionment) which are 
                attributable to the qualified foreign distribution 
                amount which would, determined without regard to this 
                section, be used to apportion the expenses, losses, and 
                deductions of the taxpayer under section 861 and 864 in 
                determining its taxable income from sources without the 
                United States.
        For purposes of applying subparagraph (C), the principles of 
        section 864(e)(3)(A) shall apply.
            ``(4) Treatment of acquisitions and dispositions.--Rules 
        similar to the rules of section 41(f)(3) shall apply in the 
        case of acquisitions or dispositions of controlled foreign 
        corporations occurring on or after the first day of the 
        earliest taxable year taken into account in determining the 
        base period.
            ``(5) Treatment of consolidated groups.--Members of an 
        affiliated group of corporations filing a consolidated return 
        under section 1501 shall be treated as a single taxpayer for 
        purposes of this section.
            ``(6) Designation of dividends.--For purposes of subsection 
        (b)(1)(B), the taxpayer may designate the particular dividends 
        received during the taxable year from 1 or more corporations 
        which are controlled foreign corporations in which the taxpayer 
        is a United States shareholder on the date the dividends are 
        paid which are to be treated as the taxpayer's qualified 
        foreign distribution amount.
            ``(7) Treatment of expenses, losses, and deductions and 
        credits.--
                    ``(A) Expenses, losses, and deductions.--Any 
                expenses, losses, or deductions of the taxpayer 
                allowable under subchapter B--
                            ``(i) shall not be applied to reduce any 
                        amount described in subsection (a) (1) or (2), 
                        and
                            ``(ii) shall be applied to reduce other 
                        income of the taxpayer (determined without 
                        regard to any amount described in subsection 
                        (a) (1) or (2)).
                    ``(B) Denial of credit.--No credit shall be allowed 
                under this chapter against the tax imposed by 
                subsection (a).
            ``(8) Transition rule for 2004 for look-thru on 
        dividends.--For purposes of this section, a United States 
        shareholder shall be treated for purposes of this section as 
        having received a dividend from a controlled foreign 
        corporation to the extent of any amount included in gross 
        income by such shareholder under section 951(a)(1)(A) as a 
        result of any dividend paid during any taxable year of such 
        corporation beginning in 2004 to--
                    ``(A) such corporation from another controlled 
                foreign corporation which is in a chain of ownerships 
                described in section 958(a), or
                    ``(B) any other controlled foreign corporation in 
                such chain of ownership, but only to the extent of 
                distributions described in section 959(b) which are 
                made during such taxable year to the controlled foreign 
                corporation from which such shareholder received such 
                dividend.
    ``(d) Election.--
            ``(1) In general.--An election under this section for any 
        taxable year shall be made no later than the due date for the 
        taxpayer's income tax return for the taxable year (determined 
        by taking extensions into account) and shall be included on 
        such return. Such election, once made, may be revoked only with 
the consent of the Secretary.
            ``(2) All controlled foreign corporations.--An election 
        under paragraph (1) shall apply to all corporations which are 
        controlled foreign corporations in which the taxpayer is a 
        United States shareholder during the taxable year.
            ``(3) Consolidated groups.--If a taxpayer is a member of an 
        affiliated group of corporations filing a consolidated return 
        under section 1501 for the taxable year, an election under this 
        section shall be made by the common parent of the affiliated 
        group which includes the taxpayer and shall apply to all 
        members of the affiliated group.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations relating to the application of section 
55 and regulations addressing corporations which, during the base 
period or thereafter, join or leave an affiliated group of corporations 
filing a consolidated return.''
    (b) Conforming Amendment.--The table of sections for subpart F of 
part III of subchapter N of chapter 1 is amended by adding at the end 
the following new item:

                              ``Sec. 965. Reduced tax on repatriated 
                                        earnings previously exempt from 
                                        tax.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 212. EFFECTIVE DATE.

    Except as otherwise provided in this subtitle, the amendments made 
by this subtitle shall apply to taxable years of foreign corporations 
beginning after December 31, 2004, and to taxable years of United 
States shareholders with or within which such taxable years of foreign 
corporations end.

         Subtitle B--Provisions Relating to Foreign Tax Credit

SEC. 221. INTEREST EXPENSE ALLOCATION RULES.

    (a) Election To Allocate on Worldwide Basis.--Section 864 is 
amended by redesignating subsection (f) as subsection (g) and by 
inserting after subsection (e) the following new subsection:
    ``(f) Election To Allocate Interest, Etc. on Worldwide Basis.--For 
purposes of this subchapter, at the election of the worldwide 
affiliated group--
            ``(1) Allocation and apportionment of interest expense.--
                    ``(A) In general.--The taxable income of each 
                domestic corporation which is a member of a worldwide 
                affiliated group shall be determined by allocating and 
                apportioning interest expense of each member as if all 
                members of such group were a single corporation.
                    ``(B) Treatment of worldwide affiliated group.--The 
                taxable income of the domestic members of a worldwide 
                affiliated group from sources outside the United States 
                shall be determined by allocating and apportioning the 
                interest expense of such domestic members to such 
                income in an amount equal to the excess (if any) of--
                            ``(i) the total interest expense of the 
                        worldwide affiliated group multiplied by the 
                        ratio which the foreign assets of the worldwide 
                        affiliated group bears to all the assets of the 
                        worldwide affiliated group, over
                            ``(ii) the interest expense of all foreign 
                        corporations which are members of the worldwide 
                        affiliated group to the extent such interest 
                        expense of such foreign corporations would have 
                        been allocated and apportioned to foreign 
                        source income if this subsection were applied 
                        to a group consisting of all the foreign 
                        corporations in such worldwide affiliated 
                        group.
                    ``(C) Worldwide affiliated group.--For purposes of 
                this paragraph, the term `worldwide affiliated group' 
                means a group consisting of--
                            ``(i) the includible members of an 
                        affiliated group (as defined in section 
                        1504(a), determined without regard to 
                        paragraphs (2) and (4) of section 1504(b)), and
                            ``(ii) all controlled foreign corporations 
                        in which such members in the aggregate meet the 
                        ownership requirements of section 1504(a)(2) 
                        either directly or indirectly through applying 
                        paragraph (2) of section 958(a) or through 
                        applying rules similar to the rules of such 
                        paragraph to stock owned directly or indirectly 
                        by domestic partnerships, trusts, or estates.
            ``(2) Allocation and apportionment of other expenses.--
        Expenses other than interest which are not directly allocable 
        or apportioned to any specific income producing activity shall 
        be allocated and apportioned as if all members of the 
        affiliated group were a single corporation. For purposes of the 
        preceding sentence, the term `affiliated group' has the meaning 
        given such term by section 1504 (determined without regard to 
        paragraph (4) of section 1504(b)).
            ``(3) Treatment of tax-exempt assets; basis of stock in 
        nonaffiliated 10-percent owned corporations.--The rules of 
        paragraphs (3) and (4) of subsection (e) shall apply for 
        purposes of this subsection, except that paragraph (4) shall be 
        applied on worldwide affiliated group basis.
            ``(4) Treatment of certain financial institutions.--
                    ``(A) In general.--For purposes of paragraph (1), 
                any corporation described in subparagraph (B) shall be 
                treated as an includible corporation for purposes of 
                section 1504 only for purposes of applying this 
                subsection separately to corporations so described.
                    ``(B) Description.--A corporation is described in 
                this subparagraph if--
                            ``(i) such corporation is a financial 
                        institution described in section 581 or 591,
                            ``(ii) the business of such financial 
                        institution is predominantly with persons other 
                        than related persons (within the meaning of 
                        subsection (d)(4)) or their customers, and
                            ``(iii) such financial institution is 
                        required by State or Federal law to be operated 
                        separately from any other entity which is not 
                        such an institution.
                    ``(C) Treatment of bank holding companies.--To the 
                extent provided in regulations--
                            ``(i) a bank holding company (within the 
                        meaning of section 2(a) of the Bank Holding 
                        Company Act of 1956), and
                            ``(ii) any subsidiary of a financial 
                        institution described in section 581 or 591 or 
                        of any bank holding company if such subsidiary 
                        is predominantly engaged (directly or 
                        indirectly) in the active conduct of a banking, 
                        financing, or similar business,
                shall be treated as a corporation described in 
                subparagraph (B).
            ``(5) Election to expand financial institution group of 
        worldwide group.--
                    ``(A) In general.--If a worldwide affiliated group 
                elects the application of this subsection, all 
                financial corporations which--
                            ``(i) are members of such worldwide 
                        affiliated group, but
                            ``(ii) are not corporations described in 
                        paragraph (4)(B),
                shall be treated as described in paragraph (4)(B) for 
                purposes of applying paragraph (4)(A). This subsection 
                (other than this paragraph) shall apply to any such 
                group in the same manner as this subsection (other than 
                this paragraph) applies to the pre-election worldwide 
                affiliated group of which such group is a part.
                    ``(B) Financial corporation.--For purposes of this 
                paragraph, the term `financial corporation' means any 
                corporation if at least 80 percent of its gross income 
                is income described in section 904(d)(2)(D)(ii) and the 
                regulations thereunder which is derived from 
                transactions with persons who are not related (within 
                the meaning of section 267(b) or 707(b)(1)) to the 
                corporation. For purposes of the preceding sentence, 
                there shall be disregarded any item of income or gain 
                from a transaction or series of transactions a 
                principal purpose of which is the qualification of any 
                corporation as a financial corporation.
                    ``(C) Antiabuse rules.--In the case of a 
                corporation which is a member of an electing financial 
                institution group, to the extent that such 
                corporation--
                            ``(i) distributes dividends or makes other 
                        distributions with respect to its stock after 
                        the date of the enactment of this paragraph to 
                        any member of the pre-election worldwide 
                        affiliated group (other than to a member of the 
                        electing financial institution group) in excess 
                        of the greater of--
                                    ``(I) its average annual dividend 
                                (expressed as a percentage of current 
                                earnings and profits) during the 5-
                                taxable-year period ending with the 
                                taxable year preceding the taxable 
                                year, or
                                    ``(II) 25 percent of its average 
                                annual earnings and profits for such 5-
                                taxable-year period, or
                            ``(ii) deals with any person in any manner 
                        not clearly reflecting the income of the 
                        corporation (as determined under principles 
                        similar to the principles of section 482),
                an amount of indebtedness of the electing financial 
                institution group equal to the excess distribution or 
                the understatement or overstatement of income, as the 
                case may be, shall be recharacterized (for the taxable 
                year and subsequent taxable years) for purposes of this 
                paragraph as indebtedness of the worldwide affiliated 
                group (excluding the electing financial institution 
                group). If a corporation has not been in existence for 
                5 taxable years, this subparagraph shall be applied 
                with respect to the period it was in existence.
                    ``(D) Election.--An election under this paragraph 
                with respect to any financial institution group may be 
                made only by the common parent of the pre-election 
                worldwide affiliated group and may be made only for the 
                first taxable year beginning after December 31, 2005, 
                in which such affiliated group includes 1 or more 
                financial corporations. Such an election, once made, 
                shall apply to all financial corporations which are 
                members of the electing financial institution group for 
                such taxable year and all subsequent years unless 
                revoked with the consent of the Secretary.
                    ``(E) Definitions relating to groups.--For purposes 
                of this paragraph--
                            ``(i) Pre-election worldwide affiliated 
                        group.--The term `pre-election worldwide 
                        affiliated group' means, with respect to a 
                        corporation, the worldwide affiliated group of 
                        which such corporation would (but for an 
                        election under this paragraph) be a member for 
                        purposes of applying paragraph (1).
                            ``(ii) Electing financial institution 
                        group.--The term `electing financial 
                        institution group' means the group of 
                        corporations to which this subsection applies 
                        separately by reason of the application of 
                        paragraph (4)(A) and which includes financial 
                        corporations by reason of an election under 
                        subparagraph (A).
                    ``(F) Regulations.--The Secretary shall prescribe 
                such regulations as may be appropriate to carry out 
                this subsection, including regulations--
                            ``(i) providing for the direct allocation 
                        of interest expense in other circumstances 
                        where such allocation would be appropriate to 
                        carry out the purposes of this subsection,
                            ``(ii) preventing assets or interest 
                        expense from being taken into account more than 
                        once, and
                            ``(iii) dealing with changes in members of 
                        any group (through acquisitions or otherwise) 
                        treated under this paragraph as an affiliated 
                        group for purposes of this subsection.
            ``(6) Election.--An election to have this subsection apply 
        with respect to any worldwide affiliated group may be made only 
        by the common parent of the domestic affiliated group referred 
        to in paragraph (1)(C) and may be made only for the first 
        taxable year beginning after December 31, 2005, in which a 
        worldwide affiliated group exists which includes such 
        affiliated group and at least one foreign corporation. Such an 
        election, once made, shall apply to such common parent and all 
        other corporations which are members of such worldwide 
        affiliated group for such taxable year and all subsequent years 
        unless revoked with the consent of the Secretary.''.
    (b) Expansion of Regulatory Authority.--Paragraph (7) of section 
864(e) is amended--
            (1) by inserting before the comma at the end of 
        subparagraph (B) ``and in other circumstances where such 
        allocation would be appropriate to carry out the purposes of 
        this subsection'', and
            (2) by striking ``and'' at the end of subparagraph (E), by 
        redesignating subparagraph (F) as subparagraph (G), and by 
        inserting after subparagraph (E) the following new 
        subparagraph:
                    ``(F) preventing assets or interest expense from 
                being taken into account more than once, and''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 222. EXTENSION OF PERIOD TO WHICH EXCESS FOREIGN TAXES MAY BE 
              CARRIED.

    (a) General Rule.--Section 904(c) (relating to carryback and 
carryover of excess tax paid) is amended by striking ``in the first, 
second, third, fourth, or fifth'' and inserting ``in any of the first 
20''.
    (b) Excess Extraction Taxes.--Paragraph (1) of section 907(f) is 
amended by striking ``in the first, second, third, fourth, or fifth'' 
and inserting ``in any of the first 20''.
    (c) Effective Date.--The amendments made by this section shall 
apply to excess foreign taxes arising in taxable years beginning after 
December 31, 2003.

SEC. 223. ORDERING RULES FOR FOREIGN TAX CREDIT CARRYFORWARDS.

    (a) In General.--Section 904(c) (relating to carryback and 
carryover of excess tax paid), as amended by section 222, is amended to 
read as follows:
    ``(c) Carryback and Carryforward of Excess Tax Paid.--
            ``(1) In general.--If, for any taxable year for which the 
        taxpayer elects to have the benefits of this subpart apply, the 
        sum of--
                    ``(A) the foreign tax credit carryforwards under 
                this subsection to a taxable year, plus
                    ``(B) the amount of foreign taxes paid or accrued 
                for the taxable year,
        exceeds the limitation under subsection (a), such excess (to 
        the extent attributable to the taxes described in subparagraph 
        (B)) shall be a foreign tax credit carryback to each of the 2 
        preceding taxable years and a foreign tax credit carryforward 
        to each of the 20 following taxable years.
            ``(2) Amounts carried to earliest years.--The excess 
        described in paragraph (1) for any taxable year shall be 
        carried to the earliest of the 22 taxable years to which (by 
        reason of paragraph (1)) such excess may be carried. The amount 
        of such excess shall be carried to each of the other 21 taxable 
        years to the extent that such excess may not be taken into 
        account under subsection (a) for a prior taxable year because 
        of the limitations of paragraph (4).
            ``(3) Ordering rules.--For purposes of determining under 
        this subsection whether foreign taxes are taken into account 
        for a taxable year or as a carryback or carryforward, such 
        taxes shall be treated as taken into account in the order of 
        the taxable years in which such taxes were actually paid or 
        accrued, beginning with the earliest such year.
            ``(4) Limitations.--
                    ``(A) Carrybacks used last.--The excess described 
                in paragraph (1) for any taxable year (in this 
                paragraph referred to as the `current taxable year') 
                which is carried to any preceding taxable year shall 
                not exceed the amount by which the limitation under 
                subsection (a) for such preceding taxable year exceeds 
                the sum of--
                            ``(i) the foreign taxes paid or accrued for 
                        such preceding taxable year, and
                            ``(ii) the amount of the foreign taxes paid 
                        or accrued for any taxable year earlier than 
                        the current taxable year which have been 
                        carried to such preceding taxable year.
                    ``(B) Carryforwards used first.--The excess 
                described in paragraph (1) for a taxable year which is 
                carried to any succeeding taxable year shall not exceed 
                the amount by which the limitation under subsection (a) 
                for such succeeding taxable year exceeds the sum of the 
                amounts which, by reason of this subsection, are 
                carried to such succeeding taxable year and are 
                attributable to taxable years preceding the taxable 
                year of such excess.
                    ``(C) Credit only.--The excess described in 
                paragraph (1) may be carried to a taxable year under 
                this subsection only if the taxpayer elects to have the 
                benefits of this subpart apply to foreign taxes paid or 
                accrued for such taxable year. Any amount so carried 
                may be allowed only as a credit and not a deduction.
            ``(5) Treatment of amounts carried back or forward.--The 
        amount of any foreign tax carryback or foreign tax carryforward 
        to a taxable year under this subsection shall, for purposes of 
        section 901, be treated as foreign taxes paid or accrued in 
        such year.
            ``(6) Foreign taxes.--For purposes of this subsection, the 
        term `foreign taxes' means taxes paid or accrued to foreign 
        countries or any possessions of the United States.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxes paid or accrued for taxable years beginning after December 31, 
2003, and to carryforwards of taxes from taxable years beginning after 
December 31, 1997.

SEC. 224. REPEAL OF LIMITATION OF FOREIGN TAX CREDIT UNDER ALTERNATIVE 
              MINIMUM TAX.

    (a) In General.--Section 59(a) (relating to alternative minimum tax 
foreign tax credit) is amended by striking paragraph (2) and by 
redesignating paragraphs (3) and (4) as paragraphs (2) and (3), 
respectively.
    (b) Conforming Amendment.--Section 53(d)(1)(B)(i)(II) is amended by 
striking ``and if section 59(a)(2) did not apply''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 225. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED 
              SECTION 902 CORPORATIONS.

    (a) In General.--Paragraph (4) of section 904(d) (relating to 
separate application of section with respect to certain categories of 
income) is amended to read as follows:
            ``(4) Look-thru applies to dividends from noncontrolled 
        section 902 corporations.--
                    ``(A) In general.--For purposes of this subsection, 
                any dividend from a noncontrolled section 902 
                corporation with respect to the taxpayer shall be 
                treated as income in a separate category in proportion 
                to the ratio of--
                            ``(i) the portion of earnings and profits 
                        attributable to income in such category, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(B) Earnings and profits of controlled foreign 
                corporations.--In the case of any distribution from a 
                controlled foreign corporation to a United States 
                shareholder, rules similar to the rules of subparagraph 
                (A) shall apply in determining the extent to which 
                earnings and profits of the controlled foreign 
                corporation which are attributable to a noncontrolled 
                section 902 corporation may be treated as income in a 
                separate category.
                    ``(C) Special rules.--For purposes of this 
                paragraph--
                            ``(i) In general.--Rules similar to the 
                        rules of paragraph (3)(F) shall apply.
                            ``(ii) Earnings and profits.--
                                    ``(I) In general.--The rules of 
                                section 316 shall apply.
                                    ``(II) Regulations.--The Secretary 
                                may prescribe regulations regarding the 
                                treatment of distributions out of 
                                earnings and profits for periods before 
                                the taxpayer's acquisition of the stock 
                                to which the distributions relate.
                            ``(iii) Dividends not allocable to separate 
                        category.--The portion of any dividend from a 
                        noncontrolled section 902 corporation which is 
                        not treated as income in a separate category 
                        under subparagraph (A) or (B) shall be treated 
                        as a dividend to which subparagraph (A) or (B) 
                        does not apply.
                            ``(iv) Look-thru with respect to 
                        carryforwards of credit.--Rules similar to the 
                        rules of subparagraph (A) shall apply to any 
                        carryforward under subsection (c) from a 
                        taxable year beginning before January 1, 2003, 
                        of tax allocable to a dividend from a 
                        noncontrolled section 902 corporation with 
                        respect to the taxpayer.''.
    (b) Conforming Amendments.--
            (1) Subparagraph (E) of section 904(d)(1) is hereby 
        repealed.
            (2) Section 904(d)(2)(C)(iii) is amended by striking 
        subclause (II) and by redesignating subclause (III) as 
        subclause (II).
            (3) The last sentence of section 904(d)(2)(D) is amended to 
        read as follows: ``Such term does not include any financial 
        services income.''.
            (4) Section 904(d)(2)(E) is amended--
                    (A) by inserting ``or (4)'' after ``paragraph (3)'' 
                in clause (i), and
                    (B) by striking clauses (ii) and (iv) and by 
                redesignating clause (iii) as clause (ii).
            (5) Section 904(d)(3)(F) is amended by striking ``(D), or 
        (E)'' and inserting ``or (D)''.
            (6) Section 864(d)(5)(A)(i) is amended by striking 
        ``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 226. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.

    (a) In General.--Paragraph (1) of section 904(d) (relating to 
separate application of section with respect to certain categories of 
income), as amended by section 225, is amended to read as follows:
            ``(1) In general.--The provisions of subsections (a), (b), 
        and (c) and sections 902, 907, and 960 shall be applied 
        separately with respect to--
                    ``(A) typically low-taxed income, and
                    ``(B) general category income.''
    (b) Categories.--Paragraph (2) of section 904(d), as amended by 
section 204(c)(14), is amended by striking subparagraph (B), by 
redesignating subparagraph (A) as subparagraph (B), and by inserting 
before subparagraph (B) (as so redesignated) the following new 
subparagraph:
                    ``(A) Categories.--
                            ``(i) Typically low-taxed income.--The term 
                        `typically low-taxed income' means passive 
                        income and specified typically low-taxed 
                        income.
                            ``(ii) General category income.--The term 
                        `general category income' means income other 
                        than typically low-taxed income.''
    (c) Specified Typically Low-Taxed Income.--Subparagraph (B) of 
section 904(d)(2), as redesignated by subsection (b), is amended by 
adding at the end the following new clause:
                            ``(v) Specified typically low-taxed 
                        income.--The term `specified typically low-
                        taxed income' means--
                                    ``(I) dividends from a DISC or 
                                former DISC (as defined in section 
                                992(a)) to the extent such dividends 
                                are treated as income from sources 
                                without the United States,
                                    ``(II) taxable income attributable 
                                to foreign trade income (within the 
                                meaning of section 923(b)),
                                    ``(III) distributions from a FSC 
                                (or a former FSC) out of earnings and 
                                profits attributable to foreign trade 
                                income (within the meaning of section 
                                923(b)) or interest or carrying charges 
                                (as defined in section 927(d)(1)) 
                                derived from a transaction which 
                                results in foreign trade income (as 
                                defined in section 923(b)), and
                                    ``(IV) shipping income.''
    (d) Treatment of Financial Services.--Paragraph (2) of section 
904(d) is amended by redesignating subparagraphs (H) and (I) as 
subparagraphs (I) and (J) and by inserting after subparagraph (G) the 
following new subparagraph:
                    ``(H) Treatment of financial services income and 
                companies.--
                            ``(i) In general.--Financial services 
                        income shall be treated as general category 
                        income in the case of--
                                    ``(I) a member of a financial 
                                services group, and
                                    ``(II) any other person if such 
                                person is predominantly engaged in the 
                                active conduct of a banking, insurance, 
                                financing, or similar business.
                            ``(ii) Financial services group.--The term 
                        `financial services group' means any affiliated 
                        group (as defined in section 1504(a) without 
                        regard to paragraphs (2) and (3) of section 
                        1504(b)) which is predominantly engaged in the 
                        active conduct of a banking, insurance, 
                        financing, or similar business. In determining 
                        whether such a group is so engaged, there shall 
                        be taken into account only the income of 
                        members of the group that are--
                                    ``(I) United States corporations, 
                                or
                                    ``(II) controlled foreign 
                                corporations in which United States 
                                corporations own, directly or 
                                indirectly, at least 80 percent of the 
                                total voting power and value of the 
                                stock.
                            ``(iii) Pass-thru entities.--The Secretary 
                        shall by regulation specify for purposes of 
                        this subparagraph the treatment of financial 
                        services income received or accrued by 
                        partnerships and by other pass-thru entities 
                        which are not members of a financial services 
                        group.''
    (e) Conforming Amendments.--
            (1) Clause (iii) of section 904(d)(2)(B) (relating to 
        exceptions from passive income), as redesignated by subsection 
        (b), is amended by striking subclause (I) and by redesignating 
        subclauses (II) and (III) as subclauses (I) and (II), 
        respectively.
            (2) Clause (i) of section 904(d)(2)(C) (defining financial 
        services income) is amended by adding ``or'' at the end of 
        subclause (I) and by striking subclauses (II) and (III) and 
        inserting the following new subclause:
                                    ``(II) passive income (determined 
                                without regard to subparagraph 
                                (B)(iii)(II)).''
            (3) Section 904(d)(2)(C) (defining financial services 
        income), as amended by section 225(b)(2), is amended by 
        striking clause (iii).
            (4) Paragraph (3) of section 904(d), as amended by section 
        225(b)(5), is amended to read as follows:
            ``(3) Look-thru in case of controlled foreign 
        corporations.--
                    ``(A) In general.--Except as otherwise provided in 
                this paragraph, dividends, interest, rents, and 
                royalties received or accrued by the taxpayer from a 
                controlled foreign corporation in which the taxpayer is 
                a United States shareholder shall not be treated as 
                typically low-taxed income.
                    ``(B) Subpart f inclusions.--Any amount included in 
                gross income under section 951(a)(1)(A) shall be 
                treated as typically low-taxed income to the extent the 
                amount so included is attributable to typically low-
                taxed income.
                    ``(C) Interest, rents, and royalties.--Any 
                interest, rent, or royalty which is received or accrued 
                from a controlled foreign corporation in which the 
                taxpayer is a United States shareholder shall be 
                treated as typically low-taxed income to the extent it 
                is properly allocable (under regulations prescribed by 
                the Secretary) to typically low-taxed income of the 
                controlled foreign corporation.
                    ``(D) Dividends.--Any dividend paid out of the 
                earnings and profits of any controlled foreign 
                corporation in which the taxpayer is a United States 
                shareholder shall be treated as typically low-taxed 
                income in proportion to the ratio of--
                            ``(i) the portion of the earnings and 
                        profits attributable to typically low-taxed 
                        income, to
                            ``(ii) the total amount of earnings and 
                        profits.
                    ``(E) Look-thru applies only where subpart f 
                applies.--If a controlled foreign corporation meets the 
                requirements of section 954(b)(3)(A) (relating to de 
                minimis rule) for any taxable year, for purposes of 
                this paragraph, none of its foreign base company income 
                (as defined in section 954(a) without regard to section 
                954(b)(5)) and none of its gross insurance income (as 
                defined in section 954(b)(3)(C)) for such taxable year 
                shall be treated as typically low-taxed income, except 
                that this sentence shall not apply to any income which 
                (without regard to this sentence) would be treated as 
                financial services income. Solely for purposes of 
                applying subparagraph (D), passive income of a 
                controlled foreign corporation shall not be treated as 
                typically low-taxed income if the requirements of 
                section 954(b)(4) are met with respect to such income.
                    ``(F) Coordination with high-taxed income 
                provisions.--
                            ``(i) In determining whether any income of 
                        a controlled foreign corporation is typically 
                        low-taxed income, subclause (II) of paragraph 
                        (2)(B)(iii) shall not apply.
                            ``(ii) Any income of the taxpayer which is 
                        treated as typically low-taxed income under 
                        this paragraph shall be so treated 
                        notwithstanding any provision of paragraph (2); 
                        except that the determination of whether any 
                        amount is high-taxed income shall be made after 
                        the application of this paragraph.''
            (5) Treatment of income tax base differences.--Paragraph 
        (2) of section 904(d), as amended by subsection (d), is amended 
        by redesignating subparagraphs (I) and (J) as subparagraphs (J) 
        and (K), respectively, and by inserting after subparagraph (H) 
        the following new subparagraph:
                    ``(I) Treatment of income tax base differences.--
                Tax imposed under the law of a foreign country or 
                possession of the United States on an amount which does 
                not constitute income under United States tax 
                principles shall be treated as imposed on income 
                described in paragraph (1)(B).''
            (6) Paragraph (3) of section 904(d) is amended by striking 
        subparagraph (H) and by redesignating subparagraph (I) as 
        subparagraph (H).
            (7) Paragraph (2) of section 904(d), as amended by this 
        subsection, is amended by adding at the end the following new 
        subparagraph:
                    ``(L) Transitional rules for 2004 changes.--For 
                purposes of paragraph (1)--
                            ``(i) taxes carried from any taxable year 
                        beginning before January 1, 2005, to any 
                        taxable year beginning on or after such date, 
                        with respect to any item of income, shall be 
                        treated as described in the subparagraph of 
                        paragraph (1) in which such income would be 
                        described were such taxes paid or accrued in a 
                        taxable year beginning on or after such date,
                            ``(ii) the Secretary may by regulations 
                        provide for the allocation of any carryback of 
                        taxes with respect to income to such a taxable 
                        year for purposes of allocating such income 
                        among the separate categories in effect for 
                        such taxable year, and
                            ``(iii) the Secretary may by regulations 
                        provide for the allocation under subsection (f) 
                        of any overall foreign loss for such a taxable 
                        year to income among the separate categories 
                        for taxable years beginning on or after such 
                        date.''
            (8) Section 904(j)(3)(A)(i) is amended by striking 
        ``subsection (d)(2)(A)'' and inserting ``subsection 
        (d)(2)(B)''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 227. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.

    (a) General Rule.--Section 904, as amended by section 204, is 
amended by redesignating subsections (g), (h), (i), (j), and (k) as 
subsections (h), (i), (j), (k), and (l) respectively, and by inserting 
after subsection (f) the following new subsection:
    ``(g) Recharacterization of Overall Domestic Loss.--
            ``(1) General rule.--For purposes of this subpart and 
        section 936, in the case of any taxpayer who sustains an 
        overall domestic loss for any taxable year beginning after 
        December 31, 2004, that portion of the taxpayer's taxable 
        income from sources within the United States for each 
        succeeding taxable year which is equal to the lesser of--
                    ``(A) the amount of such loss (to the extent not 
                used under this paragraph in prior taxable years), or
                    ``(B) 50 percent of the taxpayer's taxable income 
                from sources within the United States for such 
                succeeding taxable year,
        shall be treated as income from sources without the United 
        States (and not as income from sources within the United 
        States).
            ``(2) Overall domestic loss defined.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `overall domestic loss' 
                means any domestic loss to the extent such loss offsets 
                taxable income from sources without the United States 
                for the taxable year or for any preceding taxable year 
                by reason of a carryback. For purposes of the preceding 
                sentence, the term `domestic loss' means the amount by 
                which the gross income for the taxable year from 
                sources within the United States is exceeded by the sum 
                of the deductions properly apportioned or allocated 
                thereto (determined without regard to any carryback 
                from a subsequent taxable year).
                    ``(B) Taxpayer must have elected foreign tax credit 
                for year of loss.--The term `overall domestic loss' 
                shall not include any loss for any taxable year unless 
                the taxpayer elected the benefits of this subpart for 
                such taxable year.
            ``(3) Characterization of subsequent income.--
                    ``(A) In general.--Any income from sources within 
                the United States that is treated as income from 
                sources without the United States under paragraph (1) 
                shall be allocated among and increase the income 
                categories in proportion to the loss from sources 
                within the United States previously allocated to those 
                income categories.
                    ``(B) Income category.--For purposes of this 
                paragraph, the term `income category' has the meaning 
                given such term by subsection (f)(5)(E)(i).
            ``(4) Coordination with subsection (f).--The Secretary 
        shall prescribe such regulations as may be necessary to 
        coordinate the provisions of this subsection with the 
        provisions of subsection (f).''
    (b) Conforming Amendments.--
            (1) Section 535(d)(2) is amended by striking ``section 
        904(g)(6)'' and inserting ``section 904(h)(6)''.
            (2) Subparagraph (A) of section 936(a)(2) is amended by 
        striking ``section 904(f)'' and inserting ``subsections (f) and 
        (g) of section 904''.
    (c) Effective Date.--The amendments made by this section shall 
apply to losses for taxable years beginning after December 31, 2004.

SEC. 228. REPEAL OF SPECIAL RULES FOR APPLYING FOREIGN TAX CREDIT IN 
              CASE OF FOREIGN OIL AND GAS INCOME.

    (a) In General.--Section 907 (relating to special rules in case of 
foreign oil and gas income) is repealed.
    (b) Conforming Amendments.--
            (1) Each of the following provisions are amended by 
        striking ``907,'':
                    (A) Section 245(a)(10).
                    (B) Section 865(h)(1)(B).
                    (C) Section 904(d)(1).
                    (D) Section 904(g)(10)(A).
            (2) Section 904(f)(5)(E)(iii) is amended by inserting ``, 
        as in effect before its repeal by the Promote Growth and Jobs 
        in the USA Act of 2003'' after ``section 907(c)(4)(B)''.
            (3) Section 954(g)(1) is amended by inserting ``, as in 
        effect before its repeal by the Promote Growth and Jobs in the 
        USA Act of 2003'' after ``907(c)''.
            (4) Section 6501(i) is amended--
                    (A) by striking ``, or under section 907(f) 
                (relating to carryback and carryover of disallowed oil 
                and gas extraction taxes)'', and
                    (B) by striking ``or 907(f)''.
            (5) The table of sections for subpart A of part III of 
        subchapter N of chapter 1 is amended by striking the item 
        relating to section 907.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 229. INCREASE IN INDIVIDUAL EXEMPTION FROM FOREIGN TAX CREDIT 
              LIMITATION.

    (a) In General.--Paragraph (2)(B) of section 904(k) (relating to 
certain individuals exempt), as redesignated by section 227, is amended 
by striking ``$300 ($600 in the case of a joint return)'' and inserting 
``the exemption amount (twice the exemption amount in the case of a 
joint return)''.
    (b) Exemption Amount.--Section 904(k)(3), as so redesignated, is 
amended by adding at the end the following new subparagraph:
                    ``(E) Exemption amount.--
                            ``(i) In general.--The exemption amount is 
                        $500.
                            ``(ii) Cost-of-living adjustment.--In the 
                        case of a taxable year beginning after 2004, 
                        the exemption amount shall be increased by an 
                        amount equal to the product of $500 and the 
                        cost-of-living adjustment determined under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `2003' for `1992' in subparagraph 
(B) thereof. If the exemption amount after an increase under this 
clause is not a multiple of $10, such amount shall be rounded to the 
next lowest multiple of $10.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 230. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS OF 
              CONTROLLED FOREIGN CORPORATION.

    (a) In General.--Section 956(c)(2) (relating to exceptions from 
property treated as United States property) is amended by striking 
``and'' at the end of subparagraph (J), by striking the period at the 
end of subparagraph (K) and inserting a semicolon, and by adding at the 
end the following new subparagraphs:
                    ``(L) securities acquired and held by a controlled 
                foreign corporation in the ordinary course of its 
                business as a dealer in securities if (i) the dealer 
                accounts for the securities as securities held 
                primarily for sale to customers in the ordinary course 
                of business, and (ii) the dealer disposes of the 
                securities (or such securities mature while held by the 
                dealer) within a period consistent with the holding of 
                securities for sale to customers in the ordinary course 
                of business; and
                    ``(M) an obligation of a United States person 
                which--
                            ``(i) is not a domestic corporation, and
                            ``(ii) is not--
                                    ``(I) a United States shareholder 
                                (as defined in section 951(b)) of the 
                                controlled foreign corporation, or
                                    ``(II) a partnership, estate, or 
                                trust in which the controlled foreign 
                                corporation, or any related person (as 
                                defined in section 954(d)(3)), is a 
                                partner, beneficiary, or trustee 
                                immediately after the acquisition of 
                                any obligation of such partnership, 
                                estate, or trust by the controlled 
                                foreign corporation.''
    (b) Conforming Amendment.--Section 956(c)(2) is amended by striking 
``and (K)'' in the last sentence and inserting ``, (K), (L), and (M)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years of foreign corporations beginning after December 
31, 2004, and to taxable years of United States shareholders or with or 
within which such taxable years of foreign corporations end.

SEC. 231. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS TO APPLY 
              IN DETERMINING SECTION 902 AND 960 CREDITS.

    (a) In General.--Subsection (c) of section 902 is amended by 
redesignating paragraph (7) as paragraph (8) and by inserting after 
paragraph (6) the following new paragraph:
            ``(7) Constructive ownership through partnerships.--Stock 
        owned, directly or indirectly, by or for a partnership shall be 
        considered as being owned proportionately by its partners. 
        Stock considered to be owned by a person by reason of the 
        preceding sentence shall, for purposes of applying such 
        sentence, be treated as actually owned by such person. The 
        Secretary may prescribe such regulations as may be necessary to 
        carry out the purposes of this paragraph, including rules to 
        account for special partnership allocations of dividends, 
        credits, and other incidents of ownership of stock in 
        determining proportionate ownership.''
    (b) Clarification of Comparable Attribution Under Section 
901(b)(5).--Paragraph (5) of section 901(b) is amended by striking 
``any individual'' and inserting ``any person''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxes of foreign corporations for taxable years of such 
corporations beginning after the date of the enactment of this Act.

SEC. 232. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY FOREIGN 
              PARTNERSHIPS AND FOREIGN CORPORATIONS.

    (a) In General.--Paragraph (1) of section 861(a) 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 new subparagraph:
                    ``(C) in the case of a foreign partnership, any 
                interest not paid by a trade or business engaged in by 
                the partnership in the United States and not allocable 
                to income which is effectively connected (or treated as 
                effectively connected) with the conduct of a trade or 
                business in the United States.''
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 233. APPLICATION OF LOOK-THRU RULES TO INTEREST, RENTS, AND 
              ROYALTIES.

    (a) Interest, Rents, and Royalties.--
            (1) Noncontrolled section 902 corporation.--Section 
        904(d)(4)(A), as amended by sections 204 and 225, is amended to 
        read as follows:
                    ``(A) In general.--For purposes of this 
                subsection--
                            ``(i) any applicable dividend shall be 
                        treated as income in a separate category in 
                        proportion to the ratio of--
                                    ``(I) the portion of the earnings 
                                and profits attributable to income in 
                                such category, to
                                    ``(II) the total amount of earnings 
                                and profits, and
                            ``(ii) any interest, rent, or royalty which 
                        is received or accrued from a noncontrolled 
                        section 902 corporation with respect to the 
                        taxpayer shall be treated as income in a 
                        separate category to the extent it is properly 
                        allocable (under regulations prescribed by the 
                        Secretary) to income of such corporation in 
                        such category.''
            (2) Partnerships.--Section 904(d)(6)(C) (relating to 
        regulations) is amended--
                    (A) by inserting ``or (4)(A)(ii)'' after 
                ``paragraph (3)(C)'', and
                    (B) by inserting ``or noncontrolled section 902 
                corporations, whichever is applicable'' after 
                ``controlled foreign corporations''.
            (3) Conforming amendment.--The heading for section 
        904(d)(4), as amended by sections 204 and 225, is amended by 
        inserting ``, interest, rents, or royalties'' after 
        ``dividends''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2004.

SEC. 234. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF INTANGIBLE 
              PROPERTY.

    (a) In General.--Subparagraph (C) of section 367(d)(2) is amended 
by adding at the end the following new sentence: ``For purposes of 
applying section 904(d), any such amount shall be treated in the same 
manner as if such amount were a royalty.''
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts treated as received pursuant to section 367(d)(2) of the 
Internal Revenue Code of 1986 on or after August 5, 1997.

                      Subtitle C--Other Provisions

SEC. 251. APPLICATION OF UNIFORM CAPITALIZATION RULES TO FOREIGN 
              PERSONS.

    (a) In General.--Section 263A(c) (relating to exceptions) is 
amended by adding at the end the following new paragraph:
            ``(7) Foreign persons.--Except for purposes of applying 
        sections 871(b)(1) and 882(a)(1), this section shall not apply 
        to any taxpayer who is not a United States person if such 
        taxpayer capitalizes costs of produced property or property 
        acquired for resale by applying the method used to ascertain 
        the income, profit, or loss for purposes of reports or 
        statements to shareholders, partners, other proprietors, or 
        beneficiaries, or for credit purposes.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2004. Section 481 
of the Internal Revenue Code of 1986 shall not apply to any change in a 
method of accounting by reason of such amendment.

SEC. 252. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT 
              COMPANIES.

    (a) Treatment of Certain Dividends.--
            (1) Nonresident alien individuals.--Section 871 (relating 
        to tax on nonresident alien individuals) is amended by 
        redesignating subsection (k) as subsection (l) and by inserting 
        after subsection (j) the following new subsection:
    ``(k) Exemption for Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any interest-
                related dividend received from a regulated investment 
                company.
                    ``(B) Exceptions.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any interest-related dividend 
                        received from a regulated investment company by 
                        a person to the extent such dividend is 
                        attributable to interest (other than interest 
                        described in subparagraph (E) (i) or (iii)) 
                        received by such company on indebtedness issued 
                        by such person or by any corporation or 
                        partnership with respect to which such person 
                        is a 10-percent shareholder,
                            ``(ii) to any interest-related dividend 
                        with respect to stock of a regulated investment 
                        company unless the person who would otherwise 
                        be required to deduct and withhold tax from 
                        such dividend under chapter 3 receives a 
                        statement (which meets requirements similar to 
                        the requirements of subsection (h)(5)) that the 
                        beneficial owner of such stock is not a United 
                        States person, and
                            ``(iii) to any interest-related dividend 
                        paid to any person within a foreign country (or 
                        any interest-related dividend payment addressed 
                        to, or for the account of, persons within such 
                        foreign country) during any period described in 
                        subsection (h)(6) with respect to such country.
                Clause (iii) shall not apply to any dividend with 
                respect to any stock which was acquired on or before 
                the date of the publication of the Secretary's 
                determination under subsection (h)(6).
                    ``(C) Interest-related dividend.--For purposes of 
                this paragraph, an interest-related dividend is any 
                dividend (or part thereof) which is designated by the 
                regulated investment company as an interest-related 
                dividend in a written notice mailed to its shareholders 
                not later than 60 days after the close of its taxable 
                year. If the aggregate amount so designated with 
                respect to a taxable year of the company (including 
                amounts so designated with respect to dividends paid 
                after the close of the taxable year described in 
                section 855) is greater than the qualified net interest 
                income of the company for such taxable year, the 
                portion of each distribution which shall be an 
                interest-related dividend shall be only that portion of 
                the amounts so designated which such qualified net 
                interest income bears to the aggregate amount so 
                designated.
                    ``(D) Qualified net interest income.--For purposes 
                of subparagraph (C), the term `qualified net interest 
                income' means the qualified interest income of the 
                regulated investment company reduced by the deductions 
                properly allocable to such income.
                    ``(E) Qualified interest income.--For purposes of 
                subparagraph (D), the term `qualified interest income' 
                means the sum of the following amounts derived by the 
                regulated investment company from sources within the 
                United States:
                            ``(i) Any amount includible in gross income 
                        as original issue discount (within the meaning 
                        of section 1273) on an obligation payable 183 
                        days or less from the date of original issue 
                        (without regard to the period held by the 
                        company).
                            ``(ii) Any interest includible in gross 
                        income (including amounts recognized as 
                        ordinary income in respect of original issue 
                        discount or market discount or acquisition 
                        discount under part V of subchapter P and such 
                        other amounts as regulations may provide) on an 
                        obligation which is in registered form; except 
                        that this clause shall not apply to--
                                    ``(I) any interest on an obligation 
                                issued by a corporation or partnership 
                                if the regulated investment company is 
                                a 10-percent shareholder in such 
                                corporation or partnership, and
                                    ``(II) any interest which is 
                                treated as not being portfolio interest 
                                under the rules of subsection (h)(4).
                            ``(iii) Any interest referred to in 
                        subsection (i)(2)(A) (without regard to the 
                        trade or business of the regulated investment 
                        company).
                            ``(iv) Any interest-related dividend 
                        includable in gross income with respect to 
                        stock of another regulated investment company.
                    ``(F) 10-percent shareholder.--For purposes of this 
                paragraph, the term `10-percent shareholder' has the 
                meaning given such term by subsection (h)(3)(B).
            ``(2) Short-term capital gain dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1)(A) of subsection (a) on any short-term 
                capital gain dividend received from a regulated 
                investment company.
                    ``(B) Exception for aliens taxable under subsection 
                (a)(2).--Subparagraph (A) shall not apply in the case 
                of any nonresident alien individual subject to tax 
                under subsection (a)(2).
                    ``(C) Short-term capital gain dividend.--For 
                purposes of this paragraph, a short-term capital gain 
                dividend is any dividend (or part thereof) which is 
                designated by the regulated investment company as a 
                short-term capital gain dividend in a written notice 
                mailed to its shareholders not later than 60 days after 
                the close of its taxable year. If the aggregate amount 
                so designated with respect to a taxable year of the 
                company (including amounts so designated with respect 
                to dividends paid after the close of the taxable year 
                described in section 855) is greater than the qualified 
                short-term gain of the company for such taxable year, 
                the portion of each distribution which shall be a 
                short-term capital gain dividend shall be only that 
                portion of the amounts so designated which such 
                qualified short-term gain bears to the aggregate amount 
                so designated.
                    ``(D) Qualified short-term gain.--For purposes of 
                subparagraph (C), the term `qualified short-term gain' 
                means the excess of the net short-term capital gain of 
                the regulated investment company for the taxable year 
                over the net long-term capital loss (if any) of such 
                company for such taxable year. For purposes of this 
                subparagraph--
                            ``(i) the net short-term capital gain of 
                        the regulated investment company shall be 
                        computed by treating any short-term capital 
                        gain dividend includible in gross income with 
                        respect to stock of another regulated 
                        investment company as a short-term capital 
                        gain, and
                            ``(ii) the excess of the net short-term 
                        capital gain for a taxable year over the net 
                        long-term capital loss for a taxable year (to 
                        which an election under section 4982(e)(4) does 
                        not apply) shall be determined without regard 
                        to any net capital loss or net short-term 
                        capital loss attributable to transactions after 
                        October 31 of such year, and any such net 
                        capital loss or net short-term capital loss 
                        shall be treated as arising on the 1st day of 
                        the next taxable year.
                To the extent provided in regulations, clause (ii) 
                shall apply also for purposes of computing the taxable 
                income of the regulated investment company.''
            (2) Foreign corporations.--Section 881 (relating to tax on 
        income of foreign corporations not connected with United States 
        business) is amended by redesignating subsection (e) as 
        subsection (f) and by inserting after subsection (d) the 
        following new subsection:
    ``(e) Tax Not To Apply to Certain Dividends of Regulated Investment 
Companies.--
            ``(1) Interest-related dividends.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), no tax shall be imposed under 
                paragraph (1) of subsection (a) on any interest-related 
                dividend (as defined in section 871(k)(1)) received 
                from a regulated investment company.
                    ``(B) Exception.--Subparagraph (A) shall not 
                apply--
                            ``(i) to any dividend referred to in 
                        section 871(k)(1)(B), and
                            ``(ii) to any interest-related dividend 
                        received by a controlled foreign corporation 
                        (within the meaning of section 957(a)) to the 
                        extent such dividend is attributable to 
                        interest received by the regulated investment 
                        company from a person who is a related person 
                        (within the meaning of section 864(d)(4)) with 
                        respect to such controlled foreign corporation.
                    ``(C) Treatment of dividends received by controlled 
                foreign corporations.--The rules of subsection 
                (c)(5)(A) shall apply to any interest-related dividend 
                received by a controlled foreign corporation (within 
                the meaning of section 957(a)) to the extent such 
                dividend is attributable to interest received by the 
                regulated investment company which is described in 
                clause (ii) of section 871(k)(1)(E) (and not described 
                in clause (i) or (iii) of such section).
            ``(2) Short-term capital gain dividends.--No tax shall be 
        imposed under paragraph (1) of subsection (a) on any short-term 
        capital gain dividend (as defined in section 871(k)(2)) 
        received from a regulated investment company.''
            (3) Withholding taxes.--
                    (A) Section 1441(c) (relating to exceptions) is 
                amended by adding at the end the following new 
                paragraph:
            ``(12) Certain dividends received from regulated investment 
        companies.--
                    ``(A) In general.--No tax shall be required to be 
                deducted and withheld under subsection (a) from any 
                amount exempt from the tax imposed by section 
871(a)(1)(A) by reason of section 871(k).
                    ``(B) Special rule.--For purposes of subparagraph 
                (A), clause (i) of section 871(k)(1)(B) shall not apply 
                to any dividend unless the regulated investment company 
                knows that such dividend is a dividend referred to in 
                such clause. A similar rule shall apply with respect to 
                the exception contained in section 871(k)(2)(B).''
                    (B) Section 1442(a) (relating to withholding of tax 
                on foreign corporations) is amended--
                            (i) by striking ``and the reference in 
                        section 1441(c)(10)'' and inserting ``the 
                        reference in section 1441(c)(10)'', and
                            (ii) by inserting before the period at the 
                        end the following: ``, and the references in 
                        section 1441(c)(12) to sections 871(a) and 
                        871(k) shall be treated as referring to 
                        sections 881(a) and 881(e) (except that for 
                        purposes of applying subparagraph (A) of 
                        section 1441(c)(12), as so modified, clause 
                        (ii) of section 881(e)(1)(B) shall not apply to 
                        any dividend unless the regulated investment 
                        company knows that such dividend is a dividend 
                        referred to in such clause)''.
    (b) Estate Tax Treatment of Interest in Certain Regulated 
Investment Companies.--Section 2105 (relating to property without the 
United States for estate tax purposes) is amended by adding at the end 
the following new subsection:
    ``(d) Stock in a RIC.--
            ``(1) In general.--For purposes of this subchapter, stock 
        in a regulated investment company (as defined in section 851) 
        owned by a nonresident not a citizen of the United States shall 
        not be deemed property within the United States in the 
        proportion that, at the end of the quarter of such investment 
        company's taxable year immediately preceding a decedent's date 
        of death (or at such other time as the Secretary may designate 
        in regulations), the assets of the investment company that were 
        qualifying assets with respect to the decedent bore to the 
        total assets of the investment company.
            ``(2) Qualifying assets.--For purposes of this subsection, 
        qualifying assets with respect to a decedent are assets that, 
        if owned directly by the decedent, would have been--
                    ``(A) amounts, deposits, or debt obligations 
                described in subsection (b) of this section,
                    ``(B) debt obligations described in the last 
                sentence of section 2104(c), or
                    ``(C) other property not within the United 
                States.''
    (c) Treatment of Regulated Investment Companies Under Section 
897.--
            (1) Paragraph (1) of section 897(h) is amended by striking 
        ``REIT'' each place it appears and inserting ``qualified 
        investment entity''.
            (2) Paragraphs (2) and (3) of section 897(h) are amended to 
        read as follows:
            ``(2) Sale of stock in domestically controlled entity not 
        taxed.--The term `United States real property interest' does 
        not include any interest in a domestically controlled qualified 
        investment entity.
            ``(3) Distributions by domestically controlled qualified 
        investment entities.--In the case of a domestically controlled 
        qualified investment entity, rules similar to the rules of 
        subsection (d) shall apply to the foreign ownership percentage 
        of any gain.''
            (3) Subparagraphs (A) and (B) of section 897(h)(4) are 
        amended to read as follows:
                    ``(A) Qualified investment entity.--The term 
                `qualified investment entity' means any real estate 
                investment trust and any regulated investment company.
                    ``(B) Domestically controlled.--The term 
                `domestically controlled qualified investment entity' 
                means any qualified investment entity in which at all 
                times during the testing period less than 50 percent in 
                value of the stock was held directly or indirectly by 
                foreign persons.''
            (4) Subparagraphs (C) and (D) of section 897(h)(4) are each 
        amended by striking ``REIT'' and inserting ``qualified 
        investment entity''.
            (5) The subsection heading for subsection (h) of section 
        897 is amended by striking ``REITS'' and inserting ``Certain 
        Investment Entities''.
    (d) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        dividends with respect to taxable years of regulated investment 
        companies beginning after the date of the enactment of this 
        Act.
            (2) Estate tax treatment.--The amendment made by subsection 
        (b) shall apply to estates of decedents dying after the date of 
        the enactment of this Act.
            (3) Certain other provisions.--The amendments made by 
        subsection (c) (other than paragraph (1) thereof) shall take 
        effect on the date of the enactment of this Act.

SEC. 253. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN 
              CORPORATIONS.

    (a) In General.--Paragraph (2) of section 871(i) (relating to tax 
not to apply to certain interest and dividends) is amended by adding at 
the end the following new subparagraph:
                    ``(D) Dividends paid by a foreign corporation which 
                are treated under section 861(a)(2)(B) as income from 
                sources within the United States.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2004.

SEC. 254. AIRLINE MILEAGE AWARDS TO CERTAIN FOREIGN PERSONS.

    (a) In General.--The last sentence of section 4261(e)(3)(C) 
(relating to regulations) is amended by inserting ``and mileage awards 
which are issued to individuals whose mailing addresses on record with 
the person providing the right to air transportation are outside the 
United States'' before the period at the end thereof.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid, and benefits provided, after December 31, 2003.

SEC. 255. INTEREST PAYMENTS DEDUCTIBLE WHERE DISQUALIFIED GUARANTEE HAS 
              NO ECONOMIC EFFECT.

    (a) In General.--Section 163(j)(6)(D)(ii) (relating to exceptions 
to disqualified guarantee) is amended--
            (1) by striking ``or'' at the end of subclause (I),
            (2) by striking the period at the end of subclause (II) and 
        inserting ``, or'',
            (3) by inserting after subclause (II) the following new 
        subclause:
                                    ``(III) if, in the case of a 
                                guarantee by a foreign person, the 
                                taxpayer establishes to the 
                                satisfaction of the Secretary that the 
                                taxpayer could have borrowed 
                                substantially the same principal amount 
                                from an unrelated person without the 
                                guarantee.'', and
            (4) by adding at the end the following new sentence: ``For 
        purposes of subclause (III), to the extent provided in 
        regulations, the Secretary may reject a showing that a taxpayer 
        could have borrowed substantially the same principal amount if 
        such borrowing is on terms substantially dissimilar to those of 
        the actual loan.''
    (b) Effective Date.--The amendments made by this section shall 
apply to guarantees issued on and after the date of the enactment of 
this Act.

SEC. 256. MODIFICATIONS OF REPORTING REQUIREMENTS FOR CERTAIN FOREIGN-
              OWNED CORPORATIONS.

    (a) De Minimis Exception.--Section 6038A(b) (relating to required 
information) is amended by adding at the end the following new flush 
sentence:
``The Secretary shall not require the reporting corporation to report 
any information with respect to any foreign person which is a related 
person if the aggregate value of the transactions between the 
corporation and the related person (and any person related to such 
person) during the taxable year does not exceed $5,000,000.''
    (b) Time for Providing Translations of Specific Documents.--
Notwithstanding Internal Revenue Service Regulation Sec. 1.6038A-
3(f)(2), a taxpayer shall have at least 60 days to provide translations 
of specific documents it is requested to translate. Nothing in this 
subsection shall limit the right of a taxpayer to file a written 
request for an extension of time to comply with the request.
    (c) Effective Dates.--
            (1) Exception.--The amendment made by subsection (a) shall 
        apply to taxable years beginning after December 31, 2003.
            (2) Translations.--Subsection (b) shall apply to requests 
        made by the Internal Revenue Service after December 31, 2003.

SEC. 257. REPEAL OF TAX ON CERTAIN UNITED STATES SOURCE CAPITAL GAINS 
              OF NONRESIDENT ALIENS.

    (a) In General.--Subsection (a) of section 871 is amended by 
striking paragraph (2) and by redesignating paragraph (3) as paragraph 
(2).
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 258. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX 
              PAID OTHER THAN IN FUNCTIONAL CURRENCY.

    (a) In General.--Paragraph (1) of section 986(a) (relating to 
determination of foreign taxes and foreign corporation's earnings and 
profits) is amended by redesignating subparagraph (D) as subparagraph 
(E) and by inserting after subparagraph (C) the following new 
subparagraph:
                    ``(D) Elective exception for taxes paid other than 
                in functional currency.--
                            ``(i) In general.--At the election of the 
                        taxpayer, subparagraph (A) shall not apply to 
                        any foreign income taxes the liability for 
                        which is denominated in any currency other than 
                        in the taxpayer's functional currency.
                            ``(ii) Application to qualified business 
                        units.--An election under this subparagraph may 
                        apply to foreign income taxes attributable to a 
                        qualified business unit in accordance with 
                        regulations prescribed by the Secretary.
                            ``(iii) Election.--Any such election shall 
                        apply to the taxable year for which made and 
                        all subsequent taxable years unless revoked 
                        with the consent of the Secretary.''
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2004.

SEC. 259. STUDY OF IMPACT OF INTERNATIONAL TAX LAWS ON TAXPAYERS OTHER 
              THAN LARGE CORPORATIONS.

    (a) Study.--The Secretary of the Treasury or the Secretary's 
delegate shall conduct a study of the impact of Federal international 
tax rules on taxpayers other than large corporations, including the 
burdens placed on such taxpayers in complying with such rules.
    (b) Report.--Not later than 180 days after the date of the 
enactment of this Act, the Secretary shall report to the Committee on 
Finance of the Senate and the Committee on Ways and Means of the House 
of Representatives the results of the study conducted under subsection 
(a), including any recommendations for legislative or administrative 
changes to reduce the compliance burden on taxpayers other than large 
corporations and for such other purposes as the Secretary determines 
appropriate.

          TITLE III--CREDIT FOR INCREASING RESEARCH ACTIVITIES

SEC. 301. PERMANENT EXTENSION OF RESEARCH CREDIT.

    (a) In General.--Section 41 (relating to credit for increasing 
research activities) is amended by striking subsection (h).
    (b) Conforming Amendment.--Paragraph (1) of section 45C(b) is 
amended by striking subparagraph (D).
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or incurred after the date of the enactment of 
this Act.

SEC. 302. INCREASE IN RATES OF ALTERNATIVE INCREMENTAL CREDIT.

    (a) In General.--Subparagraph (A) of section 41(c)(4) (relating to 
election of alternative incremental credit) is amended--
            (1) by striking ``2.65 percent'' and inserting ``3 
        percent'',
            (2) by striking ``3.2 percent'' and inserting ``4 
        percent'', and
            (3) by striking ``3.75 percent'' and inserting ``5 
        percent''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years ending after the date of the enactment of this Act.

SEC. 303. ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH 
              EXPENSES.

    (a) In General.--Subsection (c) of section 41 (relating to base 
amount) is amended by redesignating paragraphs (5) and (6) as 
paragraphs (6) and (7), respectively, and by inserting after paragraph 
(4) the following new paragraph:
            ``(5) Election of alternative simplified credit.--
                    ``(A) In general.--At the election of the taxpayer, 
                the credit determined under subsection (a)(1) shall be 
                equal to 12 percent of so much of the qualified 
                research expenses for the taxable year as exceeds 50 
                percent of the average qualified research expenses for 
                the 3 taxable years preceding the taxable year for 
                which the credit is being determined.
                    ``(B) Special rule in case of no qualified research 
                expenses in any of 3 preceding taxable years.--
                            ``(i) Taxpayers to which subparagraph 
                        applies.--The credit under this paragraph shall 
                        be determined under this subparagraph if the 
                        taxpayer has no qualified research expenses in 
                        any 1 of the 3 taxable years preceding the 
                        taxable year for which the credit is being 
                        determined.
                            ``(ii) Credit rate.--The credit determined 
                        under this subparagraph shall be equal to 6 
                        percent of the qualified research expenses for 
                        the taxable year.
                    ``(C) Election.--An election under this paragraph 
                shall apply to the taxable year for which made and all 
                succeeding taxable years unless revoked with the 
                consent of the Secretary. An election under this 
                paragraph may not be made for any taxable year to which 
                an election under paragraph (4) applies.''
    (b) Coordination With Election of Alternative Incremental Credit.--
            (1) In general.--Section 41(c)(4)(B) (relating to election) 
        is amended by adding at the end the following: ``An election 
        under this paragraph may not be made for any taxable year to 
        which an election under paragraph (5) applies.''
            (2) Transition rule.--In the case of an election under 
        section 41(c)(4) of the Internal Revenue Code of 1986 which 
        applies to the taxable year which includes the date of the 
        enactment of this Act, such election shall be treated as 
        revoked with the consent of the Secretary of the Treasury if 
        the taxpayer makes an election under section 41(c)(5) of such 
        Code (as added by subsection (a)) for such year.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.

         TITLE IV--REFORM OF DEPRECIATION OF BUSINESS PROPERTY

SEC. 401. 100-PERCENT EXPENSING FOR CERTAIN PROPERTY THROUGH 2006.

    (a) In General.--
            (1) Increase.--Paragraph (4) of section 168(k) is amended 
        by striking ``50-percent'' each place it appears and inserting 
        ``100-percent''.
            (2) Extension.--
                    (A) Section 168(k)(4) is amended by striking 
                ``January 1, 2005'' each place it appears and inserting 
                ``January 1, 2007''.
                    (B) Clause (iii) of section 168(k)(4)(B) is amended 
                by striking ``January 1, 2006'' and inserting ``January 
                1, 2008''.
    (b) Extension of Certain Dates for 30-Percent Bonus Depreciation 
Property.--Section 168(k)(2) is amended--
            (1) by striking ``January 1, 2005'' each place it appears 
        in the text and inserting ``January 1, 2007'',
            (2) in subparagraph (A)(iv), by striking ``January 1, 
        2006'' and inserting ``January 1, 2008'', and
            (3) in subparagraph (B)(ii), by striking ``pre-january 1, 
        2005'' in the heading and inserting ``pre-january 1, 2007''.
    (c) Conforming Amendments.--
            (1) Section 168(k)(4) is amended by striking ``50-percent'' 
        in the heading and inserting ``100-percent''.
            (2) The subsection heading for section 168(k) is amended by 
        striking ``January 1, 2005'' and inserting ``January 1, 2007''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after May 5, 2003.

SEC. 402. EXTENSION OF EXPENSING FOR SMALL BUSINESS.

    Section 179 is amended by striking ``2006'' each place it appears 
in the text and inserting ``2007''.

SEC. 403. ELECTION TO INCREASE MINIMUM TAX CREDIT LIMITATION IN LIEU OF 
              BONUS DEPRECIATION.

    (a) In General.--Section 53 (relating to credit for prior year 
minimum tax liability) is amended by adding at the end the following 
new subsection:
    ``(e) Additional Credit in Lieu of Bonus Depreciation.--
            ``(1) In general.--In the case of a corporation making an 
        election under this subsection for a taxable year, the 
        limitation under subsection (c) shall be increased by an amount 
        equal to the bonus depreciation amount.
            ``(2) Bonus depreciation amount.--For purposes of paragraph 
        (1), the bonus depreciation amount for any taxable year is an 
        amount equal to the product of--
                    ``(A) 35 percent, and
                    ``(B) the excess (if any) of--
                            ``(i) the aggregate amount of depreciation 
                        which would be determined under section 168 for 
                        property placed in service during such taxable 
                        year if no election under this subsection were 
                        made, over
                            ``(ii) the aggregate allowance for 
                        depreciation allowable with respect to such 
                        property placed in service for such taxable 
                        year.
            ``(3) Election.--Sections 168(k) (other than paragraph 
        (2)(F) thereof) shall not apply to any property placed in 
        service during a taxable year by a corporation making an 
        election under this subsection for such taxable year. An 
        election under this subsection may only be revoked with the 
        consent of the Secretary.
            ``(4) Credit refundable.--The aggregate increase in the 
        credit allowed by this section for any taxable year by reason 
        of this subsection shall for purposes of this title (other than 
        subsection (b)(2) of this section) be treated as a credit 
        allowed to the taxpayer under subpart C.''.
    (b) Conforming Amendments.--Subsection (k) of section 168, as 
amended by section 401, is amended by adding at the end the following 
new paragraph:
            ``(5) Cross reference.--For an election to claim certain 
        minimum tax credits in lieu of the allowance determined under 
        this subsection,