[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 2155 Introduced in Senate (IS)]







108th CONGRESS
  2d Session
                                S. 2155

      To amend the Internal Revenue Code of 1986 to provide for a 
          manufacturer's jobs credit, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             March 2, 2004

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

_______________________________________________________________________

                                 A BILL


 
      To amend the Internal Revenue Code of 1986 to provide for a 
          manufacturer's jobs credit, 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; ETC.

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

Sec. 1. Short title; etc.
               TITLE I--GENERAL MANUFACTURING PROVISIONS

Sec. 101. Manufacturer's jobs credit.
Sec. 102. Deduction relating to income attributable to United States 
                            production activities.
               TITLE II--MANUFACTURING RELATING TO TIMBER

Sec. 201. Expensing of certain reforestation expenditures.
Sec. 202. Election to treat cutting of timber as a sale or exchange.
Sec. 203. Capital gain treatment under section 631(b) to apply to 
                            outright sales by landowners.
                     TITLE III--REVENUE PROVISIONS

Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Tax treatment of inverted corporate entities.

               TITLE I--GENERAL MANUFACTURING PROVISIONS

SEC. 101. MANUFACTURER'S JOBS CREDIT.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to business-related 
credits) is amended by adding at the end the following:

``SEC. 45G. MANUFACTURER'S JOBS CREDIT.

    ``(a) General Rule.--For purposes of section 38, in the case of an 
eligible taxpayer, the manufacturer's jobs credit determined under this 
section is an amount equal to the lesser of the following:
            ``(1) The excess of the W-2 wages paid by the taxpayer 
        during the taxable year over the W-2 wages paid by the taxpayer 
        during the preceding taxable year.
            ``(2) The W-2 wages paid by the taxpayer during the taxable 
        year to any employee who is an eligible TAA recipient (as 
        defined in section 35(c)(2)) for any month during such taxable 
        year.
            ``(3) 22.4 percent of the W-2 wages paid by the taxpayer 
        during the taxable year.
    ``(b) Limitation.--The amount of credit determined under subsection 
(a) shall be reduced by an amount which bears the same ratio to the 
amount of the credit (determined without regard to this subsection) 
as--
            ``(1) the excess of the W-2 wages paid by the taxpayer to 
        employees outside the United States during the taxable year 
        over such wages paid during the most recent taxable year ending 
        before the date of the enactment of this section, bears to
            ``(2) the excess of the W-2 wages paid by the taxpayer to 
        employees within the United States during the taxable year over 
        such wages paid during such most recent taxable year.
    ``(c) Eligible Taxpayer.--For purposes of this section, the term 
`eligible taxpayer' means any taxpayer--
            ``(1) which has domestic production gross receipts for the 
        taxable year and the preceding taxable year, and
            ``(2) which is not treated at any time during the taxable 
        year as an inverted domestic corporation under section 7874.
    ``(d) Definitions.--For purposes of this section, W-2 wages and 
domestic production gross receipts shall be determined in the same 
manner as under section 199.
    ``(e) Certain Rules Made Applicable.--For purposes of this section, 
rules similar to the rules of section 52 shall apply.
    ``(f) Termination.--This section shall not apply to any taxable 
year beginning after December 31, 2005.''.
    (b) Credit To Be Part of General Business Credit.--Section 38(b) 
(relating to current year business credit) is amended by striking 
``plus'' at the end of paragraph (14), by striking the period at the 
end of paragraph (15) and inserting ``, plus'', and by adding at the 
end the following:
            ``(16) the manufacturer's jobs credit determined under 
        section 45G.''.
    (c) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 is amended by adding at the end 
the following:

                              ``Sec. 45G. Manufacturer's jobs 
                                        credit.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO UNITED STATES 
              PRODUCTION ACTIVITIES.

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

``SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.

    ``(a) Allowance of Deduction.--There shall be allowed as a 
deduction an amount equal to 9 percent of the qualified production 
activities income of the taxpayer for the taxable year.
    ``(b) Deduction Limited to Wages Paid.--
            ``(1) In general.--The amount of the deduction allowable 
        under subsection (a) for any taxable year shall not exceed 50 
        percent of the W-2 wages of the employer for the taxable year.
            ``(2) W-2 wages.--For purposes of paragraph (1), the term 
        `W-2 wages' means the sum of the aggregate amounts the taxpayer 
        is required to include on statements under paragraphs (3) and 
        (8) of section 6051(a) with respect to employment of employees 
        of the taxpayer during the taxpayer's taxable year.
            ``(3) Special rules.--
                    ``(A) Pass-thru entities.--In the case of an S 
                corporation, partnership, estate or trust, or other 
                pass-thru entity, the limitation under this subsection 
                shall apply at the entity level.
                    ``(B) Acquisitions and dispositions.--The Secretary 
                shall provide for the application of this subsection in 
                cases where the taxpayer acquires, or disposes of, the 
                major portion of a trade or business or the major 
                portion of a separate unit of a trade or business 
                during the taxable year.
    ``(c) Qualified Production Activities Income.--For purposes of this 
section--
            ``(1) In general.--The term `qualified production 
        activities income' means an amount equal to the portion of the 
        modified taxable income of the taxpayer which is attributable 
        to domestic production activities.
            ``(2) Reduction for taxable years beginning before 2013.--
        The amount otherwise determined under paragraph (1) (the 
        `unreduced amount') shall not exceed the product of the 
        unreduced amount and the domestic/worldwide fraction.
    ``(d) Determination of Income Attributable to Domestic Production 
Activities.--For purposes of this section--
            ``(1) In general.--The portion of the modified taxable 
        income which is attributable to domestic production activities 
        is so much of the modified taxable income for the taxable year 
        as does not exceed--
                    ``(A) the taxpayer's domestic production gross 
                receipts for such taxable year, reduced by
                    ``(B) the sum of--
                            ``(i) the costs of goods sold that are 
                        allocable to such receipts,
                            ``(ii) other deductions, expenses, or 
                        losses directly allocable to such receipts, and
                            ``(iii) a proper share of other deductions, 
                        expenses, and losses that are not directly 
                        allocable to such receipts or another class of 
                        income.
            ``(2) Allocation method.--The Secretary shall prescribe 
        rules for the proper allocation of items of income, deduction, 
        expense, and loss for purposes of determining income 
        attributable to domestic production activities.
            ``(3) Special rules for determining costs.--
                    ``(A) In general.--For purposes of determining 
                costs under clause (i) of paragraph (1)(B), any item or 
                service brought into the United States shall be treated 
                as acquired by purchase, and its cost shall be treated 
                as not less than its fair market value immediately 
                after it entered the United States. A similar rule 
                shall apply in determining the adjusted basis of leased 
                or rented property where the lease or rental gives rise 
                to domestic production gross receipts.
                    ``(B) Exports for further manufacture.--In the case 
                of any property described in subparagraph (A) that had 
                been exported by the taxpayer for further manufacture, 
                the increase in cost or adjusted basis under 
                subparagraph (A) shall not exceed the difference 
                between the value of the property when exported and the 
                value of the property when brought back into the United 
                States after the further manufacture.
            ``(4) Modified taxable income.--The term `modified taxable 
        income' means taxable income computed without regard to the 
        deduction allowable under this section.
    ``(e) Domestic Production Gross Receipts.--For purposes of this 
section--
            ``(1) In general.--The term `domestic production gross 
        receipts' means the gross receipts of the taxpayer which are 
        derived from--
                    ``(A) any sale, exchange, or other disposition of, 
                or
                    ``(B) any lease, rental, or license of,
        qualifying production property which was manufactured, 
        produced, grown, or extracted in whole or in significant part 
        by the taxpayer within the United States.
            ``(2) Special rules for certain property.--In the case of 
        any qualifying production property described in subsection 
        (f)(1)(C)--
                    ``(A) such property shall be treated for purposes 
                of paragraph (1) as produced in significant part by the 
                taxpayer within the United States if more than 50 
                percent of the aggregate development and production 
                costs are incurred by the taxpayer within the United 
                States, and
                    ``(B) if a taxpayer acquires such property before 
                such property begins to generate substantial gross 
                receipts, any development or production costs incurred 
                before the acquisition shall be treated as incurred by 
                the taxpayer for purposes of subparagraph (A) and 
                paragraph (1).
    ``(f) Qualifying Production Property.--For purposes of this 
section--
            ``(1) In general.--Except as otherwise provided in this 
        paragraph, the term `qualifying production property' means--
                    ``(A) any tangible personal property,
                    ``(B) any computer software, and
                    ``(C) any property described in section 168(f) (3) 
                or (4), including any underlying copyright or 
                trademark.
            ``(2) Exclusions from qualifying production property.--The 
        term `qualifying production property' shall not include--
                    ``(A) consumable property that is sold, leased, or 
                licensed by the taxpayer as an integral part of the 
                provision of services,
                    ``(B) oil or gas,
                    ``(C) electricity,
                    ``(D) water supplied by pipeline to the consumer,
                    ``(E) utility services, or
                    ``(F) any film, tape, recording, book, magazine, 
                newspaper, or similar property the market for which is 
                primarily topical or otherwise essentially transitory 
                in nature.
    ``(g) Domestic/Worldwide Fraction.--For purposes of this section--
            ``(1) In general.--The term `domestic/worldwide fraction' 
        means a fraction (not greater than 1)--
                    ``(A) the numerator of which is the value of the 
                domestic production of the taxpayer, and
                    ``(B) the denominator of which is the value of the 
                worldwide production of the taxpayer.
            ``(2) Value of domestic production.--The value of domestic 
        production is the excess (if any) of--
                    ``(A) the domestic production gross receipts, over
                    ``(B) the cost of purchased inputs allocable to 
                such receipts that are deductible under this chapter 
                for the taxable year.
            ``(3) Purchased inputs.--
                    ``(A) In general.--Purchased inputs are any of the 
                following items acquired by purchase:
                            ``(i) Services (other than services of 
                        employees) used in manufacture, production, 
                        growth, or extraction activities.
                            ``(ii) Items consumed in connection with 
                        such activities.
                            ``(iii) Items incorporated as part of the 
                        property being manufactured, produced, grown, 
                        or extracted.
                    ``(B) Special rule.--Rules similar to the rules of 
                subsection (d)(3) shall apply for purposes of this 
                subsection.
            ``(4) Value of worldwide production.--
                    ``(A) In general.--The value of worldwide 
                production shall be determined under the principles of 
                paragraph (2), except that--
                            ``(i) worldwide production gross receipts 
                        shall be taken into account, and
                            ``(ii) paragraph (3)(B) shall not apply.
                    ``(B) Worldwide production gross receipts.--The 
                worldwide production gross receipts is the amount that 
                would be determined under subsection (e) if such 
                subsection were applied without any reference to the 
                United States.
    ``(h) Definitions and Special Rules.--
            ``(1) Application of section to pass-thru entities.--In the 
        case of an S corporation, partnership, estate or trust, or 
        other pass-thru entity--
                    ``(A) subject to the provisions of paragraph (2) 
                and subsection (b)(3)(A), this section shall be applied 
                at the shareholder, partner, or similar level, and
                    ``(B) the Secretary shall prescribe rules for the 
                application of this section, including rules relating 
                to--
                            ``(i) restrictions on the allocation of the 
                        deduction to taxpayers at the partner or 
                        similar level, and
                            ``(ii) additional reporting requirements.
            ``(2) Exclusion for patrons of agricultural and 
        horticultural cooperatives.--
                    ``(A) In general.--If any amount described in 
                paragraph (1) or (3) of section 1385 (a)--
                            ``(i) is received by a person from an 
                        organization to which part I of subchapter T 
applies which is engaged in the marketing of agricultural or 
horticultural products, and
                            ``(ii) is allocable to the portion of the 
                        qualified production activities income of the 
                        organization which is deductible under 
                        subsection (a) and designated as such by the 
                        organization in a written notice mailed to its 
                        patrons during the payment period described in 
                        section 1382(d),
                then such person shall be allowed an exclusion from 
                gross income with respect to such amount. The taxable 
                income of the organization shall not be reduced under 
                section 1382 by the portion of any such amount with 
                respect to which an exclusion is allowable to a person 
                by reason of this paragraph.
                    ``(B) Special rules.--For purposes of applying 
                subparagraph (A), in determining the qualified 
                production activities income of the organization under 
                this section--
                            ``(i) there shall not be taken into account 
                        in computing the organization's modified 
                        taxable income any deduction allowable under 
                        subsection (b) or (c) of section 1382 (relating 
                        to patronage dividends, per-unit retain 
                        allocations, and nonpatronage distributions), 
                        and
                            ``(ii) the organization shall be treated as 
                        having manufactured, produced, grown, or 
                        extracted in whole or significant part any 
                        qualifying production property marketed by the 
                        organization which its patrons have so 
                        manufactured, produced, grown, or extracted.
            ``(3) Special rule for affiliated groups.--
                    ``(A) In general.--All members of an expanded 
                affiliated group shall be treated as a single 
                corporation for purposes of this section.
                    ``(B) Expanded affiliated group.--The term 
                `expanded affiliated group' means an affiliated group 
                as defined in section 1504(a), determined--
                            ``(i) by substituting `50 percent' for `80 
                        percent' each place it appears, and
                            ``(ii) without regard to paragraphs (2) and 
                        (4) of section 1504(b).
                For purposes of determining the domestic/worldwide 
                fraction under subsection (g), clause (ii) shall be 
                applied by also disregarding paragraphs (3) and (8) of 
                section 1504(b).
            ``(4) Coordination with minimum tax.--The deduction under 
        this section shall be allowed for purposes of the tax imposed 
        by section 55; except that for purposes of section 55, 
        alternative minimum taxable income shall be taken into account 
        in determining the deduction under this section.
            ``(5) Ordering rule.--The amount of any other deduction 
        allowable under this chapter shall be determined as if this 
        section had not been enacted.
            ``(6) Trade or business requirement.--This section shall be 
        applied by only taking into account items which are 
        attributable to the actual conduct of a trade or business.
            ``(7) Possessions, etc.--
                    ``(A) In general.--For purposes of subsections (d) 
                and (e), the term `United States' includes the 
                Commonwealth of Puerto Rico, Guam, American Samoa, the 
                Commonwealth of the Northern Mariana Islands, and the 
                Virgin Islands of the United States.
                    ``(B) Special rules for applying wage limitation.--
                For purposes of applying the limitation under 
                subsection (b) for any taxable year--
                            ``(i) the determination of W-2 wages of a 
                        taxpayer shall be made without regard to any 
                        exclusion under section 3401(a)(8) for 
                        remuneration paid for services performed in a 
                        jurisdiction described in subparagraph (A), and
                            ``(ii) in determining the amount of any 
                        credit allowable under section 30A or 936 for 
                        the taxable year, there shall not be taken into 
                        account any wages which are taken into account 
                        in applying such limitation.
    ``(i) Termination.--This section shall not apply to any taxable 
year beginning after December 31, 2005.''.
    (b) Minimum Tax.--Section 56(g)(4)(C) (relating to disallowance of 
items not deductible in computing earnings and profits) is amended by 
adding at the end the following new clause:
                            ``(v) Deduction for domestic production.--
                        Clause (i) shall not apply to any amount 
                        allowable as a deduction under section 199.''.
    (c) Clerical Amendment.--The table of sections for part VI of 
subchapter B of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 199. Income attributable to 
                                        domestic production 
                                        activities.''.
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2003.
            (2) Application of section 15.--Section 15 of the Internal 
        Revenue Code of 1986 shall apply to the amendments made by this 
        section as if they were changes in a rate of tax.

               TITLE II--MANUFACTURING RELATING TO TIMBER

SEC. 201. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.

    (a) In General.--So much of subsection (b) of section 194 (relating 
to amortization of reforestation expenditures) as precedes paragraph 
(2) is amended to read as follows:
    ``(b) Treatment as Expenses.--
            ``(1) Election to treat certain reforestation expenditures 
        as expenses.--
                    ``(A) In general.--In the case of any qualified 
                timber property with respect to which the taxpayer has 
made (in accordance with regulations prescribed by the Secretary) an 
election under this subsection, the taxpayer shall treat reforestation 
expenditures which are paid or incurred during the taxable year with 
respect to such property as an expense which is not chargeable to 
capital account. The reforestation expenditures so treated shall be 
allowed as a deduction.
                    ``(B) Dollar limitation.--The aggregate amount of 
                reforestation expenditures which may be taken into 
                account under subparagraph (A) with respect to each 
                qualified timber property for any taxable year shall 
                not exceed $10,000 ($5,000 in the case of a separate 
                return by a married individual (as defined in section 
                7703)).''.
    (b) Net Amortizable Basis.--Section 194(c)(2) (defining amortizable 
basis) is amended by inserting ``which have not been taken into account 
under subsection (b)'' after ``expenditures''.
    (c) Conforming Amendments.--
            (1) Section 194(b) is amended by striking paragraphs (3) 
        and (4).
            (2) Section 194(b)(2) is amended by striking ``paragraph 
        (1)'' both places it appears and inserting ``paragraph 
        (1)(B)''.
            (3) Section 194(c) is amended by striking paragraph (4) and 
        inserting the following new paragraphs:
            ``(4) Treatment of trusts and estates.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), this section shall not apply to 
                trusts and estates.
                    ``(B) Amortization deduction allowed to estates.--
                The benefit of the deduction for amortization provided 
                by subsection (a) shall be allowed to estates in the 
                same manner as in the case of an individual. The 
                allowable deduction shall be apportioned between the 
                income beneficiary and the fiduciary under regulations 
                prescribed by the Secretary. Any amount so apportioned 
                to a beneficiary shall be taken into account for 
                purposes of determining the amount allowable as a 
                deduction under subsection (a) to such beneficiary.
            ``(5) Application with other deductions.--No deduction 
        shall be allowed under any other provision of this chapter with 
        respect to any expenditure with respect to which a deduction is 
        allowed or allowable under this section to the 
        taxpayer.''.
            (4) The heading for section 194 is amended by striking 
        ``amortization'' and inserting ``treatment''.
            (5) The item relating to section 194 in the table of 
        sections for part VI of subchapter B of chapter 1 is amended by 
        striking ``Amortization'' and inserting ``Treatment''.
    (d) Repeal of Reforestation Credit.--
            (1) In general.--Section 46 (relating to amount of credit) 
        is amended--
                    (A) by adding ``and'' at the end of paragraph (1),
                    (B) by striking ``, and '' at the end of paragraph 
                (2) and inserting a period, and
                    (C) by striking paragraph (3).
            (2) Conforming amendments.--
                    (A) Section 48 is amended--
                            (i) by striking subsection (b),
                            (ii) by striking ``this subsection'' in 
                        paragraph (5) of subsection (a) and inserting 
                        ``subsection (a)'', and
                            (iii) by redesignating such paragraph (5) 
                        as subsection (b).
                    (B) The heading for section 48 is amended by 
                striking ``; reforestation credit''.
                    (C) The item relating to section 48 in the table of 
                sections for subpart E of part IV of subchapter A of 
                chapter 1 is amended by striking ``, reforestation 
                credit''.
                    (D) Section 50(c)(3) is amended by striking ``or 
                reforestation credit''.
    (e) Effective Date.--The amendments made by this section shall 
apply with respect to expenditures paid or incurred after the date of 
the enactment of this Act.

SEC. 202. ELECTION TO TREAT CUTTING OF TIMBER AS A SALE OR EXCHANGE.

    Any election under section 631(a) of the Internal Revenue Code of 
1986 made for a taxable year ending on or before the date of the 
enactment of this Act may be revoked by the taxpayer for any taxable 
year ending after such date. For purposes of determining whether the 
taxpayer may make a further election under such section, such election 
(and any revocation under this section) shall not be taken into 
account.

SEC. 203. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO 
              OUTRIGHT SALES BY LANDOWNERS.

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

                     TITLE III--REVENUE PROVISIONS

SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (n) as subsection (o) and by inserting after subsection (m) 
the following new subsection:
    ``(n) Clarification of Economic Substance Doctrine; Etc.--
            ``(1) General rules.--
                    ``(A) In general.--In any case in which a court 
                determines that the economic substance doctrine is 
                relevant for purposes of this title to a transaction 
                (or series of transactions), such transaction (or 
                series of transactions) shall have economic substance 
                only if the requirements of this paragraph are met.
                    ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--A transaction has 
                        economic substance only if--
                                    ``(I) the transaction changes in a 
                                meaningful way (apart from Federal tax 
                                effects) the taxpayer's economic 
                                position, and
                                    ``(II) the taxpayer has a 
                                substantial nontax purpose for entering 
                                into such transaction and the 
                                transaction is a reasonable means of 
                                accomplishing such purpose.
                        In applying subclause (II), a purpose of 
                        achieving a financial accounting benefit shall 
                        not be taken into account in determining 
                        whether a transaction has a substantial nontax 
                        purpose if the origin of such financial 
                        accounting benefit is a reduction of income 
                        tax.
                            ``(ii) Special rule where taxpayer relies 
                        on profit potential.--A transaction shall not 
                        be treated as having economic substance by 
                        reason of having a potential for profit 
                        unless--
                                    ``(I) the present value of the 
                                reasonably expected pre-tax profit from 
                                the transaction is substantial in 
                                relation to the present value of the 
                                expected net tax benefits that would be 
                                allowed if the transaction were 
                                respected, and
                                    ``(II) the reasonably expected pre-
                                tax profit from the transaction exceeds 
                                a risk-free rate of return.
                    ``(C) Treatment of fees and foreign taxes.--Fees 
                and other transaction expenses and foreign taxes shall 
                be taken into account as expenses in determining pre-
                tax profit under subparagraph (B)(ii).
            ``(2) Special rules for transactions with tax-indifferent 
        parties.--
                    ``(A) Special rules for financing transactions.--
                The form of a transaction which is in substance the 
                borrowing of money or the acquisition of financial 
                capital directly or indirectly from a tax-indifferent 
                party shall not be respected if the present value of 
                the deductions to be claimed with respect to the 
                transaction is substantially in excess of the present 
                value of the anticipated economic returns of the person 
                lending the money or providing the financial capital. A 
                public offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected that at 
                least 50 percent of the offering will be placed with 
                tax-indifferent parties.
                    ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a tax-
                indifferent party shall not be respected if--
                            ``(i) it results in an allocation of income 
                        or gain to the tax-indifferent party in excess 
                        of such party's economic income or gain, or
                            ``(ii) it results in a basis adjustment or 
                        shifting of basis on account of overstating the 
                        income or gain of the tax-indifferent party.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common law 
                doctrine under which tax benefits under subtitle A with 
                respect to a transaction are not allowable if the 
                transaction does not have economic substance or lacks a 
                business purpose.
                    ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity not 
subject to tax imposed by subtitle A. A person shall be treated as a 
tax-indifferent party with respect to a transaction if the items taken 
into account with respect to the transaction have no substantial impact 
on such person's liability under subtitle A.
                    ``(C) Exception for personal transactions of 
                individuals.--In the case of an individual, this 
                subsection shall apply only to transactions entered 
                into in connection with a trade or business or an 
                activity engaged in for the production of income.
                    ``(D) Treatment of lessors.--In applying paragraph 
                (1)(B)(ii) to the lessor of tangible property subject 
                to a lease--
                            ``(i) the expected net tax benefits with 
                        respect to the leased property shall not 
                        include the benefits of--
                                    ``(I) depreciation,
                                    ``(II) any tax credit, or
                                    ``(III) any other deduction as 
                                provided in guidance by the Secretary, 
                                and
                            ``(ii) subclause (II) of paragraph 
                        (1)(B)(ii) shall be disregarded in determining 
                        whether any of such benefits are allowable.
            ``(4) Other common law doctrines not affected.--Except as 
        specifically provided in this subsection, the provisions of 
        this subsection shall not be construed as altering or 
        supplanting any other rule of law, and the requirements of this 
        subsection shall be construed as being in addition to any such 
        other rule of law.
            ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection. Such regulations may include 
        exemptions from the application of this subsection.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 302. TAX TREATMENT OF INVERTED CORPORATE ENTITIES

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

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

    ``(a) Inverted Corporations Treated as Domestic Corporations.--
            ``(1) In general.--If a foreign incorporated entity is 
        treated as an inverted domestic corporation, then, 
        notwithstanding section 7701(a)(4), such entity shall be 
        treated for purposes of this title as a domestic corporation.
            ``(2) Inverted domestic corporation.--For purposes of this 
        section, a foreign incorporated entity shall be treated as an 
        inverted domestic corporation if, pursuant to a plan (or a 
        series of related transactions)--
                    ``(A) the entity completes after March 20, 2002, 
                the direct or indirect acquisition of substantially all 
                of the properties held directly or indirectly by a 
                domestic corporation or substantially all of the 
                properties constituting a trade or business of a 
                domestic partnership,
                    ``(B) after the acquisition at least 80 percent of 
                the stock (by vote or value) of the entity is held--
                            ``(i) in the case of an acquisition with 
                        respect to a domestic corporation, by former 
                        shareholders of the domestic corporation by 
                        reason of holding stock in the domestic 
                        corporation, or
                            ``(ii) in the case of an acquisition with 
                        respect to a domestic partnership, by former 
                        partners of the domestic partnership by reason 
                        of holding a capital or profits interest in the 
                        domestic partnership, and
                    ``(C) the expanded affiliated group which after the 
                acquisition includes the entity does not have 
                substantial business activities in the foreign country 
                in which or under the law of which the entity is 
                created or organized when compared to the total 
                business activities of such expanded affiliated group.
        Except as provided in regulations, an acquisition of properties 
        of a domestic corporation shall not be treated as described in 
        subparagraph (A) if none of the corporation's stock was readily 
        tradeable on an established securities market at any time 
        during the 4-year period ending on the date of the acquisition.
    ``(b) Preservation of Domestic Tax Base in Certain Inversion 
Transactions to Which Subsection (a) Does Not Apply.--
            ``(1) In general.--If a foreign incorporated entity would 
        be treated as an inverted domestic corporation with respect to 
        an acquired entity if either--
                    ``(A) subsection (a)(2)(A) were applied by 
                substituting `after December 31, 1996, and on or before 
                March 20, 2002' for `after March 20, 2002' and 
                subsection (a)(2)(B) were applied by substituting `more 
                than 50 percent' for `at least 80 percent', or
                    ``(B) subsection (a)(2)(B) were applied by 
                substituting `more than 50 percent' for `at least 80 
                percent',
        then the rules of subsection (c) shall apply to any inversion 
        gain of the acquired entity during the applicable period and 
        the rules of subsection (d) shall apply to any related party 
        transaction of the acquired entity during the applicable 
        period. This subsection shall not apply for any taxable year if 
        subsection (a) applies to such foreign incorporated entity for 
        such taxable year.
            ``(2) Acquired entity.--For purposes of this section--
                    ``(A) In general.--The term `acquired entity' means 
                the domestic corporation or partnership substantially 
                all of the properties of which are directly or 
                indirectly acquired in an acquisition described in 
                subsection (a)(2)(A) to which this subsection applies.
                    ``(B) Aggregation rules.--Any domestic person 
                bearing a relationship described in section 267(b) or 
                707(b) to an acquired entity shall be treated as an 
                acquired entity with respect to the acquisition 
                described in subparagraph (A).
            ``(3) Applicable period.--For purposes of this section--
                    ``(A) In general.--The term `applicable period' 
                means the period--
                            ``(i) beginning on the first date 
                        properties are acquired as part of the 
                        acquisition described in subsection (a)(2)(A) 
                        to which this subsection applies, and
                            ``(ii) ending on the date which is 10 years 
                        after the last date properties are acquired as 
                        part of such acquisition.
                    ``(B) Special rule for inversions occurring before 
                march 21, 2002.--In the case of any acquired entity to 
                which paragraph (1)(A) applies, the applicable period 
                shall be the 10-year period beginning on January 1, 
                2003.
    ``(c) Tax on Inversion Gains May Not Be Offset.--If subsection (b) 
applies--
            ``(1) In general.--The taxable income of an acquired entity 
        (or any expanded affiliated group which includes such entity) 
        for any taxable year which includes any portion of the 
        applicable period shall in no event be less than the inversion 
        gain of the entity for the taxable year.
            ``(2) Credits not allowed against tax on inversion gain.--
        Credits shall be allowed against the tax imposed by this 
        chapter on an acquired entity for any taxable year described in 
        paragraph (1) only to the extent such tax exceeds the product 
        of--
                    ``(A) the amount of the inversion gain for the 
                taxable year, and
                    ``(B) the highest rate of tax specified in section 
                11(b)(1).
        For purposes of determining the credit allowed by section 901 
        inversion gain shall be treated as from sources within the 
        United States.
            ``(3) Special rules for partnerships.--In the case of an 
        acquired entity which is a partnership--
                    ``(A) the limitations of this subsection shall 
                apply at the partner rather than the partnership level,
                    ``(B) the inversion gain of any partner for any 
                taxable year shall be equal to the sum of--
                            ``(i) the partner's distributive share of 
                        inversion gain of the partnership for such 
                        taxable year, plus
                            ``(ii) income or gain required to be 
                        recognized for the taxable year by the partner 
                        under section 367(a), 741, or 1001, or under 
                        any other provision of chapter 1, by reason of 
                        the transfer during the applicable period of 
                        any partnership interest of the partner in such 
                        partnership to the foreign incorporated entity, 
                        and
                    ``(C) the highest rate of tax specified in the rate 
                schedule applicable to the partner under chapter 1 
                shall be substituted for the rate of tax under 
                paragraph (2)(B).
            ``(4) Inversion gain.--For purposes of this section, the 
        term `inversion gain' means any income or gain required to be 
        recognized under section 304, 311(b), 367, 1001, or 1248, or 
        under any other provision of chapter 1, by reason of the 
        transfer during the applicable period of stock or other 
properties by an acquired entity--
                    ``(A) as part of the acquisition described in 
                subsection (a)(2)(A) to which subsection (b) applies, 
                or
                    ``(B) after such acquisition to a foreign related 
                person.
        The Secretary may provide that income or gain from the sale of 
        inventories or other transactions in the ordinary course of a 
        trade or business shall not be treated as inversion gain under 
        subparagraph (B) to the extent the Secretary determines such 
        treatment would not be inconsistent with the purposes of this 
        section.
            ``(5) Coordination with section 172 and minimum tax.--Rules 
        similar to the rules of paragraphs (3) and (4) of section 
        860E(a) shall apply for purposes of this section.
            ``(6) Statute of limitations.--
                    ``(A) In general.--The statutory period for the 
                assessment of any deficiency attributable to the 
                inversion gain of any taxpayer for any pre-inversion 
                year shall not expire before the expiration of 3 years 
                from the date the Secretary is notified by the taxpayer 
                (in such manner as the Secretary may prescribe) of the 
                acquisition described in subsection (a)(2)(A) to which 
                such gain relates and such deficiency may be assessed 
                before the expiration of such 3-year period 
                notwithstanding the provisions of any other law or rule 
                of law which would otherwise prevent such assessment.
                    ``(B) Pre-inversion year.--For purposes of 
                subparagraph (A), the term `pre-inversion year' means 
                any taxable year if--
                            ``(i) any portion of the applicable period 
                        is included in such taxable year, and
                            ``(ii) such year ends before the taxable 
                        year in which the acquisition described in 
                        subsection (a)(2)(A) is completed.
    ``(d) Special Rules Applicable to Acquired Entities to Which 
Subsection (b) Applies.--
            ``(1) Increases in accuracy-related penalties.--In the case 
        of any underpayment of tax of an acquired entity to which 
        subsection (b) applies--
                    ``(A) section 6662(a) shall be applied with respect 
                to such underpayment by substituting `30 percent' for 
                `20 percent', and
                    ``(B) if such underpayment is attributable to one 
                or more gross valuation understatements, the increase 
                in the rate of penalty under section 6662(h) shall be 
                to 50 percent rather than 40 percent.
            ``(2) Modifications of limitation on interest deduction.--
        In the case of an acquired entity to which subsection (b) 
        applies, section 163(j) shall be applied--
                    ``(A) without regard to paragraph (2)(A)(ii) 
                thereof, and
                    ``(B) by substituting `25 percent' for `50 percent' 
                each place it appears in paragraph (2)(B) thereof.
    ``(e) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Rules for application of subsection (a)(2).--In 
        applying subsection (a)(2) for purposes of subsections (a) and 
        (b), the following rules shall apply:
                    ``(A) Certain stock disregarded.--There shall not 
                be taken into account in determining ownership for 
                purposes of subsection (a)(2)(B)--
                            ``(i) stock held by members of the expanded 
                        affiliated group which includes the foreign 
                        incorporated entity, or
                            ``(ii) stock of such entity which is sold 
                        in a public offering or private placement 
                        related to the acquisition described in 
                        subsection (a)(2)(A).
                    ``(B) Plan deemed in certain cases.--If a foreign 
                incorporated entity acquires directly or indirectly 
                substantially all of the properties of a domestic 
                corporation or partnership during the 4-year period 
                beginning on the date which is 2 years before the 
                ownership requirements of subsection (a)(2)(B) are met 
                with respect to such domestic corporation or 
                partnership, such actions shall be treated as pursuant 
                to a plan.
                    ``(C) Certain transfers disregarded.--The transfer 
                of properties or liabilities (including by contribution 
                or distribution) shall be disregarded if such transfers 
                are part of a plan a principal purpose of which is to 
                avoid the purposes of this section.
                    ``(D) Special rule for related partnerships.--For 
                purposes of applying subsection (a)(2) to the 
                acquisition of a domestic partnership, except as 
                provided in regulations, all partnerships which are 
                under common control (within the meaning of section 
                482) shall be treated as 1 partnership.
                    ``(E) Treatment of certain rights.--The Secretary 
                shall prescribe such regulations as may be necessary--
                            ``(i) to treat warrants, options, contracts 
                        to acquire stock, convertible debt instruments, 
                        and other similar interests as stock, and
                            ``(ii) to treat stock as not stock.
            ``(2) Expanded affiliated group.--The term `expanded 
        affiliated group' means an affiliated group as defined in 
        section 1504(a) but without regard to section 1504(b)(3), 
        except that section 1504(a) shall be applied by substituting 
        `more than 50 percent' for `at least 80 percent' each place it 
        appears.
            ``(3) Foreign incorporated entity.--The term `foreign 
        incorporated entity' means any entity which is, or but for 
        subsection (a)(1) would be, treated as a foreign corporation 
        for purposes of this title.
            ``(4) Foreign related person.--The term `foreign related 
        person' means, with respect to any acquired entity, a foreign 
        person which--
                    ``(A) bears a relationship to such entity described 
                in section 267(b) or 707(b), or
                    ``(B) is under the same common control (within the 
                meaning of section 482) as such entity.
            ``(5) Subsequent acquisitions by unrelated domestic 
        corporations.--
                    ``(A) In general.--Subject to such conditions, 
                limitations, and exceptions as the Secretary may 
                prescribe, if, after an acquisition described in 
                subsection (a)(2)(A) to which subsection (b) applies, a 
                domestic corporation stock of which is traded on an 
                established securities market acquires directly or 
                indirectly any properties of one or more acquired 
                entities in a transaction with respect to which the 
                requirements of subparagraph (B) are met, this section 
                shall cease to apply to any such acquired entity with 
                respect to which such requirements are met.
                    ``(B) Requirements.--The requirements of the 
                subparagraph are met with respect to a transaction 
                involving any acquisition described in subparagraph (A) 
                if--
                            ``(i) before such transaction the domestic 
                        corporation did not have a relationship 
                        described in section 267(b) or 707(b), and was 
                        not under common control (within the meaning of 
                        section 482), with the acquired entity, or any 
                        member of an expanded affiliated group 
                        including such entity, and
                            ``(ii) after such transaction, such 
                        acquired entity--
                                    ``(I) is a member of the same 
                                expanded affiliated group which 
                                includes the domestic corporation or 
                                has such a relationship or is under 
                                such common control with any member of 
                                such group, and
                                    ``(II) is not a member of, and does 
                                not have such a relationship and is not 
                                under such common control with any 
                                member of, the expanded affiliated 
                                group which before such acquisition 
                                included such entity.
    ``(f) Regulations.--The Secretary shall provide such regulations as 
are necessary to carry out this section, including regulations 
providing for such adjustments to the application of this section as 
are necessary to prevent the avoidance of the purposes of this section, 
including the avoidance of such purposes through--
            ``(1) the use of related persons, pass-thru or other 
        noncorporate entities, or other intermediaries, or
            ``(2) transactions designed to have persons cease to be (or 
        not become) members of expanded affiliated groups or related 
        persons.''.
    (b) Information Reporting.--The Secretary of the Treasury shall 
exercise the Secretary's authority under the Internal Revenue Code of 
1986 to require entities involved in transactions to which section 7874 
of such Code (as added by subsection (a)) applies to report to the 
Secretary, shareholders, partners, and such other persons as the 
Secretary may prescribe such information as is necessary to ensure the 
proper tax treatment of such transactions.
    (c) Conforming Amendment.--The table of sections for subchapter C 
of chapter 80 is amended by adding at the end the following new item:

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