[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 2761 Introduced in Senate (IS)]







108th CONGRESS
  2d Session
                                S. 2761

 To amend the Internal Revenue Code of 1986 to provide tax relief for 
       farmers, ranchers, and fishermen, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             July 22, 2004

 Mr. Grassley (for himself, Mr. Baucus, Mr. Smith, Mr. Conrad, and Mr. 
   Daschle) 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 tax relief for 
       farmers, ranchers, and fishermen, 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 ``Heartland 
Investment and Rural Employment (HIRE) 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.--

Sec. 1. Short title; etc.
                    TITLE I--AGRICULTURAL TAX RELIEF

            Subtitle A--Provisions Relating To Cooperatives

Sec. 101. Modification to cooperative marketing rules to include value 
                            added processing involving animals.
Sec. 102. Extension of declaratory judgment procedures to farmers' 
                            cooperative organizations.
Sec. 103. Payment of dividends on stock of cooperatives without 
                            reducing patronage dividends.
Sec. 104. Apportionment of credits.
Sec. 105. Subchapter T Commission.
                     Subtitle B--General Provisions

Sec. 111. Exclusion of rental income from self-employment tax.
Sec. 112. Exclusion of conservation reserve program payments from self-
                            employment tax.
Sec. 113. Exemption of agricultural bonds from private activity bond 
                            volume limits.
Sec. 114. Modifications to section 512(b)(13).
Sec. 115. Coordinate farmers and fishermen income averaging and the 
                            alternative minimum tax.
Sec. 116. Special rules for livestock sold on account of weather-
                            related conditions.
Sec. 117. Reduction of holding period to 12 months for purposes of 
                            determining whether horses are section 1231 
                            assets.
Sec. 118. Charitable deduction for contributions of food inventories.
Sec. 119. Farm, Fishing, and Ranch Risk Management Accounts.
            TITLE II--PROVISIONS RELATING TO SMALL BUSINESS

     Subtitle A--Maximum Number of Shareholders of an S Corporation

Sec. 201. Members of family treated as 1 shareholder.
Sec. 202. Increase in number of eligible shareholders to 100.
Sec. 203. Nonresident aliens allowed as beneficiaries of an electing 
                            small business trust.
Subtitle B--Termination of Election and Additions To Tax Due To Passive 
                           Investment Income

Sec. 211. Modifications to passive income rules.
          Subtitle C--Treatment of S Corporation Shareholders

Sec. 221. Transfer of suspended losses incident to divorce.
Sec. 222. Use of passive activity loss and at-risk amounts by qualified 
                            subchapter S trust income beneficiaries.
Sec. 223. Disregard of unexercised powers of appointment in determining 
                            potential current beneficiaries of ESBT.
Sec. 224. Clarification of electing small business trust distribution 
                            rules.
                Subtitle D--Provisions Relating To Banks

Sec. 231. Sale of stock in IRA relating to S corporation election 
                            exempt from prohibited transaction rules.
Sec. 232. Exclusion of investment securities income from passive income 
                            test for bank S corporations.
Sec. 233. Treatment of qualifying director shares.
            Subtitle E--Qualified Subchapter S Subsidiaries

Sec. 241. Relief from inadvertently invalid qualified subchapter S 
                            subsidiary elections and terminations.
Sec. 242. Information returns for qualified subchapter S subsidiaries.
                   Subtitle F--Additional Provisions

Sec. 251. Elimination of all earnings and profits attributable to pre-
                            1983 years.
Sec. 252. Reduced recognition period for built-in gains.
Sec. 253. Repeal of special occupational taxes on producers and 
                            marketers of alcoholic beverages.
                      TITLE III--RURAL TAX RELIEF

Sec. 301. Expansion of designated renewal community area based on 2000 
                            census data.
Sec. 302. Exemption of qualified 501(c)(3) bonds for nursing homes from 
                            Federal guarantee prohibitions.
Sec. 303. Rural investment tax credit.
Sec. 304. Qualified rural small business investment credit.
Sec. 305. Modifications of treatment of qualified zone academy bonds.
Sec. 306. Certain expenses of rural letter carriers.
Sec. 307. New markets tax credit for Native American reservations.
Sec. 308. Modifications of authority of Indian tribal governments to 
                            issue tax-exempt bonds.
Sec. 309. Indian school construction.
Sec. 310. Community homeownership credit.

                    TITLE I--AGRICULTURAL TAX RELIEF

            Subtitle A--Provisions Relating To Cooperatives

SEC. 101. MODIFICATION TO COOPERATIVE MARKETING RULES TO INCLUDE VALUE 
              ADDED PROCESSING INVOLVING ANIMALS.

    (a) In General.--Section 1388 (relating to definitions and special 
rules) is amended by adding at the end the following new subsection:
    ``(k) Cooperative Marketing Includes Value-Added Processing 
Involving Animals.--For purposes of section 521 and this subchapter, 
the term `marketing the products of members or other producers' 
includes feeding the products of members or other producers to cattle, 
hogs, fish, chickens, or other animals and selling the resulting 
animals or animal products.''.
    (b) Conforming Amendment.--Section 521(b) is amended by adding at 
the end the following new paragraph:
    ``(7) Cross Reference.--

                                ``For treatment of value-added 
processing involving animals, see section 1388(k).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 102. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO FARMERS' 
              COOPERATIVE ORGANIZATIONS.

    (a) In General.--Section 7428(a)(1) (relating to declaratory 
judgments of tax exempt organizations) is amended by striking ``or'' at 
the end of subparagraph (B) and by adding at the end the following new 
subparagraph:
                    ``(D) with respect to the initial classification or 
                continuing classification of a cooperative as described 
                in section 521(b) which is exempt from tax under 
                section 521(a), or''.
    (b) Effective Date.--The amendments made by this section shall 
apply with respect to pleadings filed after the date of the enactment 
of this Act.

SEC. 103. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT 
              REDUCING PATRONAGE DIVIDENDS.

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

SEC. 104. APPORTIONMENT OF CREDITS.

    (a) In General.--Section 1388 (relating to definitions and special 
rules), as amended by this Act, is amended by adding at the end the 
following new subsection:
    ``(l) Apportionment of Credit.--
            ``(1) In general.--In the case of any organization to which 
        part I of this subchapter applies, any portion of any credit 
        determined under any section of this chapter for the taxable 
        year may, at the election of the organization, be apportioned 
        among patrons eligible to share in patronage dividends on the 
        basis of the quantity or value of business done with or for 
        such patrons for the taxable year. Such an election shall be 
        made on a timely filed return for the taxable year and, once 
        made, shall be irrevocable for such taxable year.
            ``(2) Treatment of organizations and patrons.--
                    ``(A) Organizations.--The amount of the credit not 
                apportioned to patrons pursuant to paragraph (1) shall 
                be included in the amount determined under the 
                applicable section of this chapter for the taxable year 
                of the organization.
                    ``(B) Patrons.--The amount of the credit 
                apportioned to patrons pursuant to paragraph (1) shall 
                be included in the amount determined under such 
                applicable section for the first taxable year of each 
                patron ending on or after the last day of the payment 
                period (as defined in section 1382(d)) for the taxable 
                year of the organization or, if earlier, for the 
                taxable year of each patron ending on or after the date 
                on which the patron receives notice from the 
                cooperative of the apportionment.
                    ``(C) Special rules for decrease in credits for 
                taxable year.--If the amount of the credit of the 
                organization determined under such applicable section 
                for a taxable year is less than the amount of such 
                credit shown on the return of the organization for such 
                year, an amount equal to the excess of--
                            ``(i) such reduction, over
                            ``(ii) the amount not apportioned to such 
                        patrons under paragraph (1) for the taxable 
                        year,
                shall be treated as an increase in tax imposed by this 
                chapter on the organization. Such increase shall not be 
                treated as tax imposed by this chapter for purposes of 
                determining the amount of any credit under this chapter 
                or for purposes of section 55.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 105. SUBCHAPTER T COMMISSION.

    (a) Findings.--The Senate finds the following:
            (1) The National Conference of Commissioners on Uniform 
        State Laws adopted a resolution at its 2002 Annual Meeting 
        authorizing the formation of a Study Committee on a Business 
        Cooperative Act. The text of the resolution charges the Study 
        Committee ``to review State cooperative law, with an initial 
        charge to contact potentially interested groups . . . to 
        evaluate the viability, need, and support for such a project.'' 
        The initial scope of the study is to be limited to farm and 
        related cooperatives.
            (2) Cooperatives and specifically cooperative taxation does 
        not exist in a vacuum. As business corporations, cooperatives 
        are subject to many of the tax rules applicable to other 
        business forms. However, cooperatives have special features 
        that justify unique approaches to certain aspects of taxation.
            (3) The Committee on Finance of the Senate has specific 
        interest in the future of cooperatives organized under 
        subchapter T of the Internal Revenue Code of 1986. Subchapter T 
        is the basis for cooperative taxation and the taxation of 
        patrons.
            (4) Soon after the income tax was enacted, a statutory 
        exemption was created for farmer cooperatives that met certain 
        operational tests. In 1951, the tax law was changed through a 
        repeal of the farmer cooperative exemption and the addition of 
        deductions for previously exempt farmer cooperatives for stock 
        dividends and patronage-based distributions on nonpatronage 
        income. In 1962, the tax law was rewritten to ensure that a 
        single current tax was paid on cooperative margins, because the 
        courts began allowing both cooperatives and patrons to exclude 
        patronage refunds from taxable income.
            (5) It has been over 40 years since the cooperative tax 
        laws were examined by Congress.
    (b) Establishment of Commission.--
            (1) In general.--There is established the ``Subchapter T 
        Commission'' (in this section referred to as the 
        ``Commission'').
            (2) Membership.--
                    (A) Composition.--The Commission shall be composed 
                of 8 members of whom--
                            (i) 5 shall be appointed by the chairman of 
                        the Committee on Finance of the Senate, and 
                        shall consist of the chairman of the 
                        Commission, 1 cooperative tax specialist, 1 
                        cooperative attorney, and 2 cooperative chief 
                        executive officers;
                            (ii) 2 shall be appointed by the Secretary 
                        of Agriculture, and shall consist of 1 
                        cooperative bank chief executive officer and 1 
                        farmer; and
                            (iii) 1 shall be appointed by the Secretary 
                        of the Treasury, and shall consist of a 
                        cooperative specialist from the Department of 
                        the Treasury.
                    (B) Date.--The appointments of the members of the 
                Commission shall be made not later than 30 days after 
                the enactment of this Act.
            (3) Period of appointment; vacancies.--Members shall be 
        appointed for the life of the Commission. Any vacancy in the 
        Commission shall not affect its powers, but shall be filled in 
        the same manner as the original appointment.
            (4) Initial meeting.--Not later than 30 days after the date 
        on which all members of the Commission have been appointed, the 
        Commission shall hold its first meeting.
            (5) Meetings.--The Commission shall meet at the call of the 
        Chairman.
            (6) Quorum.--A majority of the members of the Commission 
        shall constitute a quorum, but a lesser number of members may 
        hold hearings.
    (c) Duties of the Commission.--
            (1) Study.--The Commission shall conduct a thorough study 
        of subchapter T of chapter 1 of the Internal Revenue Code of 
        1986 and shall determine--
                    (A) whether the subchapter should be modernized;
                    (B) what are the barriers to raising equity within 
                a cooperative;
                    (C) whether a new limited liability cooperative 
                structure should be created for cooperatives that would 
                benefit from being taxed, and for business purposes be 
                treated under the more flexible rules of a limited 
                liability company, while at the same time benefiting 
                from the ownership structure of traditional 
                cooperatives; and
                    (D) whether Federal securities law and other 
                Federal law other than tax law are barriers to the 
                ongoing development and growth of cooperatives.
            (2) Recommendations.--The Commission shall develop 
        recommendations based on the determinations made under 
        paragraph (1).
            (3) Report.--Not later than 1 year after the date of the 
        enactment of this Act, the Commission shall submit a report to 
        the President and Congress which shall contain a detailed 
        statement of the findings and conclusions of the Commission, 
        together with its recommendations for such legislation and 
        administrative actions as it considers appropriate.
    (d) Powers of the Commission.--
            (1) Hearings.--The Commission may hold such hearings, sit 
        and act at such times and places, take such testimony, and 
        receive such evidence as the Commission considers advisable to 
        carry out this Act.
            (2) Information from federal agencies.--The Commission may 
        secure directly from any Federal department or agency such 
        information as the Commission considers necessary to carry out 
        this Act. Upon request of the Chairman of the Commission, the 
        head of such department or agency shall furnish such 
        information to the Commission.
            (3) Postal services.--The Commission may use the United 
        States mails in the same manner and under the same conditions 
        as other departments and agencies of the Federal Government.
            (4) Gifts.--The Commission may accept, use, and dispose of 
        gifts or donations of services or property.
    (e) Commission Personnel Matters.--
            (1) Compensation of members.--Each member of the Commission 
        who is not an officer or employee of the Federal Government 
        shall be compensated at a rate equal to the daily equivalent of 
        the annual rate of basic pay prescribed for level IV of the 
        Executive Schedule under section 5315 of title 5, United States 
        Code, for each day (including travel time) during which such 
        member is engaged in the performance of the duties of the 
        Commission. All members of the Commission who are officers or 
        employees of the United States shall serve without compensation 
        in addition to that received for their services as officers or 
        employees of the United States.
            (2) Travel expenses.--The members of the Commission shall 
        be allowed travel expenses, including per diem in lieu of 
        subsistence, at rates authorized for employees of agencies 
        under subchapter I of chapter 57 of title 5, United States 
        Code, while away from their homes or regular places of business 
        in the performance of services for the Commission.
            (3) Staff.--
                    (A) In general.--The Chairman of the Commission 
                may, without regard to the civil service laws and 
                regulations, appoint and terminate such other 
                additional personnel as may be necessary to enable the 
                Commission to perform its duties.
                    (B) Compensation.--The Chairman of the Commission 
                may fix the compensation of the Commission personnel 
                without regard to chapter 51 and subchapter III of 
                chapter 53 of title 5, United States Code, relating to 
                classification of positions and General Schedule pay 
                rates, except that the rate of pay for such personnel 
                may not exceed the rate payable for level V of the 
                Executive Schedule under section 5316 of such title.
            (4) Detail of government employees.--Any Federal Government 
        employee may be detailed to the Commission without 
        reimbursement, and such detail shall be without interruption or 
        loss of civil service status or privilege.
            (5) Procurement of temporary and intermittent services.--
        The Chairman of the Commission may procure temporary and 
        intermittent services under section 3109(b) of title 5, United 
        States Code, at rates for individuals which do not exceed the 
        daily equivalent of the annual rate of basic pay prescribed for 
        level V of the Executive Schedule under section 5316 of such 
        title.
    (f) Termination of the Commission.--The Commission shall terminate 
90 days after the date on which the Commission submits its report under 
subsection (b).
    (g) Authorization of Appropriations.--There are authorized to be 
appropriated such sums as are necessary to the Commission to carry out 
this section.

                     Subtitle B--General Provisions

SEC. 111. EXCLUSION OF RENTAL INCOME FROM SELF-EMPLOYMENT TAX.

    (a) Internal Revenue Code.--Section 1402(a)(1)(A) (relating to net 
earnings from self-employment) is amended by striking ``an 
arrangement'' and inserting ``a written lease agreement''.
    (b) Social Security Act.--Section 211(a)(1)(A) of the Social 
Security Act is amended by striking ``an arrangement'' and inserting 
``a written lease agreement''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 112. EXCLUSION OF CONSERVATION RESERVE PROGRAM PAYMENTS FROM SELF-
              EMPLOYMENT TAX.

    (a) Internal Revenue Code.--Section 1402(a)(1) (relating to net 
earnings from self-employment) is amended by inserting ``and including 
payments under section 1233(2) of the Food Security Act of 1985 (16 
U.S.C. 3833(2))'' after ``crop shares''.
    (b) Social Security Act.--Section 211(a)(1) of the Social Security 
Act is amended by inserting ``and including payments under section 
1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2))'' after 
``crop shares''.
    (c) Effective Date.--The amendments made by this section shall 
apply to payments made after the date of the enactment of this Act.

SEC. 113. EXEMPTION OF AGRICULTURAL BONDS FROM PRIVATE ACTIVITY BOND 
              VOLUME LIMITS.

    (a) In General.--Section 146(g) (relating to exception for certain 
bonds) is amended by striking ``and'' at the end of paragraph (3), by 
striking the period at the end of paragraph (4) and inserting ``, 
and'', and by inserting after paragraph (4) the following new 
paragraph:
            ``(5) any qualified small issue bond described in section 
        144(a)(12)(B)(ii).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to bonds issued after the date of the enactment of this Act.

SEC. 114. MODIFICATIONS TO SECTION 512(B)(13).

    (a) In General.--Paragraph (13) of section 512(b) (relating to 
special rules for certain amounts received from controlled entities) is 
amended by redesignating subparagraph (E) as subparagraph (F) and by 
inserting after subparagraph (D) the following new subparagraph:
                    ``(E) Paragraph to apply only to excess payments.--
                            ``(i) In general.--Subparagraph (A) shall 
                        apply only to the portion of a specified 
                        payment received or accrued by the controlling 
                        organization that exceeds the amount which 
                        would have been paid or accrued if such payment 
                        met the requirements prescribed under section 
                        482.
                            ``(ii) Addition to tax for valuation 
                        misstatements.--The tax imposed by this chapter 
                        on the controlling organization shall be 
                        increased by an amount equal to 20 percent of 
                        the larger of--
                                    ``(I) such excess determined 
                                without regard to any amendment or 
                                supplement to a return of tax, or
                                    ``(II) such excess determined with 
                                regard to all such amendments and 
                                supplements.''.
    (b) Effective Date.--
            (1) In general.--The amendment made by this section shall 
        apply to payments received or accrued after December 31, 2000.
            (2) Payments subject to binding contract transition rule.--
        If the amendments made by section 1041 of the Taxpayer Relief 
        Act of 1997 did not apply to any amount received or accrued in 
        the first 2 taxable years beginning on or after the date of the 
        enactment of the Taxpayer Relief Act of 1997 under any contract 
        described in subsection (b)(2) of such section, such amendments 
        also shall not apply to amounts received or accrued under such 
        contract before January 1, 2001.

SEC. 115. COORDINATE FARMERS AND FISHERMEN INCOME AVERAGING AND THE 
              ALTERNATIVE MINIMUM TAX.

    (a) In General.--Section 55(c) (defining regular tax) is amended by 
redesignating paragraph (2) as paragraph (3) and by inserting after 
paragraph (1) the following new paragraph:
            ``(2) Coordination with income averaging for farmers and 
        fishermen.--Solely for purposes of this section, section 1301 
        (relating to averaging of farm and fishing income) shall not 
        apply in computing the regular tax.''.
    (b) Allowing Income Averaging for Fishermen.--
            (1) In general.--Section 1301(a) is amended by striking 
        ``farming business'' and inserting ``farming business or 
        fishing business''.
            (2) Definition of elected farm income.--
                    (A) In general.--Clause (i) of section 
                1301(b)(1)(A) is amended by inserting ``or fishing 
                business'' before the semicolon.
                    (B) Conforming amendment.--Subparagraph (B) of 
                section 1301(b)(1) is amended by inserting ``or fishing 
business'' after ``farming business'' both places it occurs.
            (3) Definition of fishing business.--Section 1301(b) is 
        amended by adding at the end the following new paragraph:
            ``(4) Fishing business.--The term `fishing business' means 
        the conduct of commercial fishing as defined in section 3 of 
        the Magnuson-Stevens Fishery Conservation and Management Act 
        (16 U.S.C. 1802).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

SEC. 116. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
              RELATED CONDITIONS.

    (a) Replacement of Livestock With Other Farm Property.--Subsection 
(f) of section 1033 (relating to involuntary conversions) is amended--
            (1) by inserting ``drought, flood, or other weather-related 
        conditions, or'' after ``because of'',
            (2) by inserting ``in the case of soil contamination or 
        other environmental contamination'' after ``including real 
        property'', and
            (3) by striking ``Where There Has Been Environmental 
        Contamination'' in the heading and inserting ``in Certain 
        Cases''.
    (b) Extension of Replacement Period of Involuntarily Converted 
Livestock.--Subsection (e) of section 1033 (relating to involuntary 
conversions) is amended--
            (1) by striking ``Conditions.--For purposes'' and inserting 
        ``Conditions.--
            ``(1) In general.--For purposes'', and
            (2) by adding at the end the following new paragraph:
            ``(2) Extension of replacement period.--
                    ``(A) In general.--In the case of drought, flood, 
                or other weather-related conditions described in 
                paragraph (1) which result in the area being designated 
                as eligible for assistance by the Federal Government, 
                subsection (a)(2)(B) shall be applied with respect to 
                any converted property by substituting `4 years' for `2 
                years'.
                    ``(B) Further extension by secretary.--The 
                Secretary may extend on a regional basis the period for 
                replacement under this section (after the application 
                of subparagraph (A)) for such additional time as the 
                Secretary determines appropriate if the weather-related 
                conditions which resulted in such application continue 
                for more than 3 years.''.
    (c) Income Inclusion Rules.--Section 451(e) (relating to special 
rule for proceeds from livestock sold on account of drought, flood, or 
other weather-related conditions) is amended by adding at the end the 
following new paragraph:
            ``(3) Special election rules.--If section 1033(e)(2) 
        applies to a sale or exchange of livestock described in 
        paragraph (1), the election under paragraph (1) shall be deemed 
        valid if made during the replacement period described in such 
        section.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2001.

SEC. 117. REDUCTION OF HOLDING PERIOD TO 12 MONTHS FOR PURPOSES OF 
              DETERMINING WHETHER HORSES ARE SECTION 1231 ASSETS.

    (a) In General.--Subparagraph (A) of section 1231(b)(3) (relating 
to definition of property used in the trade or business) is amended by 
striking ``and horses''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 118. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORIES.

    (a) In General.--Subsection (e) of section 170 (relating to certain 
contributions of ordinary income and capital gain property) is amended 
by adding at the end the following new paragraph:
            ``(7) Application of paragraph (3) to certain contributions 
        of food inventory.--For purposes of this section--
                    ``(A) Extension to individuals.--In the case of a 
                charitable contribution of apparently wholesome food--
                            ``(i) paragraph (3)(A) shall be applied 
                        without regard to whether the contribution is 
                        made by a C corporation, and
                            ``(ii) in the case of a taxpayer other than 
                        a C corporation, the aggregate amount of such 
                        contributions from any trade or business (or 
                        interest therein) of the taxpayer for any 
                        taxable year which may be taken into account 
                        under this section shall not exceed 10 percent 
                        of the taxpayer's net income from any such 
                        trade or business, computed without regard to 
                        this section, for such taxable year.
                    ``(B) Limitation on reduction.--In the case of a 
                charitable contribution of apparently wholesome food, 
                notwithstanding paragraph (3)(B), the amount of the 
                reduction determined under paragraph (1)(A) shall not 
                exceed the amount by which the fair market value of 
                such property exceeds twice the basis of such property.
                    ``(C) Determination of basis.--If a taxpayer--
                            ``(i) does not account for inventories 
                        under section 471, and
                            ``(ii) is not required to capitalize 
                        indirect costs under section 263A,
                the taxpayer may elect, solely for purposes of 
                paragraph (3)(B), to treat the basis of any apparently 
                wholesome food as being equal to 25 percent of the fair 
                market value of such food.
                    ``(D) Determination of fair market value.--In the 
                case of a charitable contribution of apparently 
                wholesome food which is a qualified contribution 
                (within the meaning of paragraph (3), as modified by 
subparagraph (A) of this paragraph) and which, solely by reason of 
internal standards of the taxpayer or lack of market, cannot or will 
not be sold, the fair market value of such contribution shall be 
determined--
                            ``(i) without regard to such internal 
                        standards or such lack of market and
                            ``(ii) by taking into account the price at 
                        which the same or substantially the same food 
                        items (as to both type and quality) are sold by 
                        the taxpayer at the time of the contribution 
                        (or, if not so sold at such time, in the recent 
                        past).
                    ``(E) Apparently wholesome food.--For purposes of 
                this paragraph, the term `apparently wholesome food' 
                has the meaning given such term by section 22(b)(2) of 
                the Bill Emerson Good Samaritan Food Donation Act (42 
                U.S.C. 1791(b)(2)), as in effect on the date of the 
                enactment of this paragraph.
                    ``(F) Apportionment of deduction.--In the case of 
                any organization to which part I of subchapter T 
                applies, any portion of any deduction determined under 
                this section with respect to any charitable 
                contribution of apparently wholesome food for the 
                taxable year may, at the election of the organization, 
                be apportioned among patrons eligible to share in 
                patronage dividends on the basis of the quantity or 
                value of business done with or for such patrons for the 
                taxable year. Such an election shall be made on a 
                timely filed return for the taxable year and, once 
                made, shall be irrevocable for such taxable year.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after the date of the enactment of this Act.

SEC. 119. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

    (a) In General.--Subpart C of part II of subchapter E of chapter 1 
(relating to taxable year for which deductions taken) is amended by 
inserting after section 468B the following new section:

``SEC. 468C. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual engaged in 
an eligible farming business or commercial fishing, there shall be 
allowed as a deduction for any taxable year the amount paid in cash by 
the taxpayer during the taxable year to a Farm, Fishing, and Ranch Risk 
Management Account (hereinafter referred to as the `FFARRM Account').
    ``(b) Limitation.--
            ``(1) Contributions.--The amount which a taxpayer may pay 
        into the FFARRM Account for any taxable year shall not exceed 
        20 percent of so much of the taxable income of the taxpayer 
        (determined without regard to this section) which is 
        attributable (determined in the manner applicable under section 
        1301) to any eligible farming business or commercial fishing.
            ``(2) Distributions.--Distributions from a FFARRM Account 
        may not be used to purchase, lease, or finance any new fishing 
        vessel, add capacity to any fishery, or otherwise contribute to 
        the overcapitalization of any fishery. The Secretary of 
        Commerce shall implement regulations to enforce this paragraph.
    ``(c) Eligible Businesses.--For purposes of this section--
            ``(1) Eligible farming business.--The term `eligible 
        farming business' means any farming business (as defined in 
        section 263A(e)(4)) which is not a passive activity (within the 
        meaning of section 469(c)) of the taxpayer.
            ``(2) Commercial fishing.--The term `commercial fishing' 
        has the meaning given such term by section (3) of the Magnuson-
        Stevens Fishery Conservation and Management Act (16 U.S.C. 
        1802) but only if such fishing is not a passive activity 
        (within the meaning of section 469(c)) of the taxpayer.
    ``(d) FFARRM Account.--For purposes of this section--
            ``(1) In general.--The term `FFARRM Account' means a trust 
        created or organized in the United States for the exclusive 
        benefit of the taxpayer, but only if the written governing 
        instrument creating the trust meets the following requirements:
                    ``(A) No contribution will be accepted for any 
                taxable year in excess of the amount allowed as a 
                deduction under subsection (a) for such year.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) The assets of the trust consist entirely of 
                cash or of obligations which have adequate stated 
                interest (as defined in section 1274(c)(2)) and which 
                pay such interest not less often than annually.
                    ``(D) All income of the trust is distributed 
                currently to the grantor.
                    ``(E) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
            ``(2) Account taxed as grantor trust.--The grantor of a 
        FFARRM Account shall be treated for purposes of this title as 
        the owner of such Account and shall be subject to tax thereon 
        in accordance with subpart E of part I of subchapter J of this 
        chapter (relating to grantors and others treated as substantial 
        owners).
    ``(e) Inclusion of Amounts Distributed.--
            ``(1) In general.--Except as provided in paragraph (2), 
        there shall be includible in the gross income of the taxpayer 
        for any taxable year--
                    ``(A) any amount distributed from a FFARRM Account 
                of the taxpayer during such taxable year, and
                    ``(B) any deemed distribution under--
                            ``(i) subsection (f)(1) (relating to 
                        deposits not distributed within 5 years),
                            ``(ii) subsection (f)(2) (relating to 
                        cessation in eligible farming business), and
                            ``(iii) subparagraph (B) or (C) of 
                        subsection (f)(3) (relating to prohibited 
                        transactions and pledging account as security).
            ``(2) Exceptions.--Paragraph (1)(A) shall not apply to--
                    ``(A) any distribution to the extent attributable 
                to income of the Account, and
                    ``(B) the distribution of any contribution paid 
                during a taxable year to a FFARRM Account to the extent 
                that such contribution exceeds the limitation 
                applicable under subsection (b) if requirements similar 
                to the requirements of section 408(d)(4) are met.
        For purposes of subparagraph (A), distributions shall be 
        treated as first attributable to income and then to other 
        amounts.
    ``(f) Special Rules.--
            ``(1) Tax on deposits in account which are not distributed 
        within 5 years.--
                    ``(A) In general.--If, at the close of any taxable 
                year, there is a nonqualified balance in any FFARRM 
                Account--
                            ``(i) there shall be deemed distributed 
                        from such Account during such taxable year an 
                        amount equal to such balance, and
                            ``(ii) the taxpayer's tax imposed by this 
                        chapter for such taxable year shall be 
                        increased by 10 percent of such deemed 
                        distribution.
                The preceding sentence shall not apply if an amount 
                equal to such nonqualified balance is distributed from 
                such Account to the taxpayer before the due date 
                (including extensions) for filing the return of tax 
                imposed by this chapter for such year (or, if earlier, 
                the date the taxpayer files such return for such year).
                    ``(B) Nonqualified balance.--For purposes of 
                subparagraph (A), the term `nonqualified balance' means 
                any balance in the Account on the last day of the 
                taxable year which is attributable to amounts deposited 
                in such Account before the 4th preceding taxable year.
                    ``(C) Ordering rule.--For purposes of this 
                paragraph, distributions from a FFARRM Account (other 
                than distributions of current income) shall be treated 
                as made from deposits in the order in which such 
                deposits were made, beginning with the earliest 
                deposits.
            ``(2) Cessation in eligible business.--At the close of the 
        first disqualification period after a period for which the 
        taxpayer was engaged in an eligible farming business or 
        commercial fishing, there shall be deemed distributed from the 
        FFARRM Account of the taxpayer an amount equal to the balance 
        in such Account (if any) at the close of such disqualification 
        period. For purposes of the preceding sentence, the term 
        `disqualification period' means any period of 2 consecutive 
        taxable years for which the taxpayer is not engaged in an 
        eligible farming business or commercial fishing.
            ``(3) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 220(f)(8) (relating to treatment 
                after death of account holder).
                    ``(B) Section 408(e)(2) (relating to loss of 
                exemption of account where individual engages in 
                prohibited transaction).
                    ``(C) Section 408(e)(4) (relating to effect of 
                pledging account as security).
                    ``(D) Section 408(g) (relating to community 
                property laws).
                    ``(E) Section 408(h) (relating to custodial 
                accounts).
            ``(4) Time when payments deemed made.--For purposes of this 
        section, a taxpayer shall be deemed to have made a payment to a 
        FFARRM Account on the last day of a taxable year if such 
        payment is made on account of such taxable year and is made on 
        or before the due date (without regard to extensions) for 
        filing the return of tax for such taxable year.
            ``(5) Individual.--For purposes of this section, the term 
        `individual' shall not include an estate or trust.
            ``(6) Deduction not allowed for self-employment tax.--The 
        deduction allowable by reason of subsection (a) shall not be 
        taken into account in determining an individual's net earnings 
        from self-employment (within the meaning of section 1402(a)) 
        for purposes of chapter 2.
    ``(g) Reports.--The trustee of a FFARRM Account shall make such 
reports regarding such Account to the Secretary and to the person for 
whose benefit the Account is maintained with respect to contributions, 
distributions, and such other matters as the Secretary may require 
under regulations. The reports required by this subsection shall be 
filed at such time and in such manner and furnished to such persons at 
such time and in such manner as may be required by such regulations.''.
    (b) Tax on Excess Contributions.--
            (1) Subsection (a) of section 4973 (relating to tax on 
        excess contributions to certain tax-favored accounts and 
        annuities) is amended by striking ``or'' at the end of 
        paragraph (4), by adding ``or'' at the end of paragraph (5), 
        and by inserting after paragraph (5) the following new 
        paragraph:
            ``(6) a FFARRM Account (within the meaning of section 
        468C(d)),''.
            (2) Section 4973 is amended by adding at the end the 
        following new subsection:
    ``(h) Excess Contributions to FFARRM Accounts.--For purposes of 
this section, in the case of a FFARRM Account (within the meaning of 
section 468C(d)), the term `excess contributions' means the amount by 
which the amount contributed for the taxable year to the Account 
exceeds the amount which may be contributed to the Account under 
section 468C(b) for such taxable year. For purposes of this subsection, 
any contribution which is distributed out of the FFARRM Account in a 
distribution to which section 468C(e)(2)(B) applies shall be treated as 
an amount not contributed.''.
    (c) Tax on Prohibited Transactions.--
            (1) Subsection (c) of section 4975 (relating to tax on 
        prohibited transactions) is amended by adding at the end the 
        following new paragraph:
            ``(7) Special rule for ffarrm accounts.--A person for whose 
        benefit a FFARRM Account (within the meaning of section 
        468C(d)) is established shall be exempt from the tax imposed by 
        this section with respect to any transaction concerning such 
        account (which would otherwise be taxable under this section) 
        if, with respect to such transaction, the account ceases to be 
        a FFARRM Account by reason of the application of section 
        468C(f)(3)(A) to such account.''.
            (2) Paragraph (1) of section 4975(e) is amended by 
        redesignating subparagraphs (F) and (G) as subparagraphs (G) 
        and (H), respectively, and by inserting after subparagraph (E) 
        the following new subparagraph:
                    ``(F) a FFARRM Account described in section 
                468C(d),''.
    (d) Failure To Provide Reports on FFARRM Accounts.--Paragraph (2) 
of section 6693(a) (relating to failure to provide reports on certain 
tax-favored accounts or annuities) is amended by redesignating 
subparagraphs (C) and (D) as subparagraphs (D) and (E), respectively, 
and by inserting after subparagraph (B) the following new subparagraph:
                    ``(C) section 468C(g) (relating to FFARRM 
                Accounts),''.
    (e) Clerical Amendment.--The table of sections for subpart C of 
part II of subchapter E of chapter 1 is amended by inserting after the 
item relating to section 468B the following new item:

                              ``Sec. 468C. Farm, Fishing, and Ranch 
                                        Risk Management Accounts.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

            TITLE II--PROVISIONS RELATING TO SMALL BUSINESS

     Subtitle A--Maximum Number of Shareholders of an S Corporation

SEC. 201. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    (a) In General.--Paragraph (1) of section 1361(c) (relating to 
special rules for applying subsection (b)) is amended to read as 
follows:
            ``(1) Members of family treated as 1 shareholder.--
                    ``(A) In general.--For purpose of subsection 
                (b)(1)(A)--
                            ``(i) except as provided in clause (ii), a 
                        husband and wife (and their estates) shall be 
                        treated as 1 shareholder, and
                            ``(ii) in the case of a family with respect 
                        to which an election is in effect under 
                        subparagraph (D), all members of the family 
                        shall be treated as 1 shareholder.
                    ``(B) Members of the family.--For purpose of 
                subparagraph (A)(ii)--
                            ``(i) In general.--The term `members of the 
                        family' means the common ancestor, lineal 
                        descendants of the common ancestor, and the 
                        spouses (or former spouses) of such lineal 
                        descendants or common ancestor.
                            ``(ii) Common ancestor.--For purposes of 
                        this paragraph, an individual shall not be 
                        considered a common ancestor if, as of the 
                        later of the effective date of this paragraph 
                        or the time the election under section 1362(a) 
                        is made, the individual is more than 3 
                        generations removed from the youngest 
                        generation of shareholders who would (but for 
                        this clause) be members of the family. For 
                        purposes of the preceding sentence, a spouse 
                        (or former spouse) shall be treated as being of 
                        the same generation as the individual to which 
                        such spouse is (or was) married.
                    ``(C) Effect of adoption, etc.--In determining 
                whether any relationship specified in subparagraph (B) 
                exists, the rules of section 152(b)(2) shall apply.
                    ``(D) Election.--An election under subparagraph 
                (A)(ii)--
                            ``(i) may, except as otherwise provided in 
                        regulations prescribed by the Secretary, be 
                        made by any member of the family, and
                            ``(ii) shall remain in effect until 
                        terminated as provided in regulations 
                        prescribed by the Secretary.''.
    (b) Relief From Inadvertent Invalid Election or Termination.--
Section 1362(f) (relating to inadvertent invalid elections or 
terminations), as amended by section 229, is amended--
            (1) by inserting ``or section 1361(c)(1)(A)(ii)'' after 
        ``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
            (2) by inserting ``or section 1361(c)(1)(D)(iii)'' after 
        ``section 1361(b)(3)(C),'' in paragraph (1)(B).
    (c) Effective Dates.--
            (1) Subsection (a).--The amendment made by subsection (a) 
        shall apply to taxable years beginning after December 31, 2004.
            (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to elections and terminations made after December 
        31, 2004.

SEC. 202. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

    (a) In General.--Section 1361(b)(1)(A) (defining small business 
corporation) is amended by striking ``75'' and inserting ``100''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 203. NONRESIDENT ALIENS ALLOWED AS BENEFICIARIES OF AN ELECTING 
              SMALL BUSINESS TRUST.

    (a) In General.--Section 1361(e)(1)(A)(i)(I) is amended by 
inserting ``(including a nonresident alien individual)'' after 
``individual''.
    (b) Conforming Amendment.--Clause (v) of section 1361(c)(2)(B) is 
amended by adding at the end the following new sentence: ``This clause 
shall not apply for purposes of subsection (b)(1)(C).''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

Subtitle B--Termination of Election and Additions To Tax Due To Passive 
                           Investment Income

SEC. 211. MODIFICATIONS TO PASSIVE INCOME RULES.

    (a) Increased Percentage Limit.--
            (1) In general.--Subsection (a)(2) of section 1375 
        (relating to tax imposed when passive investment income of 
        corporation having accumulated earnings and profits exceeds 25 
        percent of gross receipts) is amended by striking ``25 
        percent'' and inserting ``60 percent''.
            (2) Conforming amendments.--
                    (A) Section 26(b)(2)(J) is amended by striking ``25 
                percent'' and inserting ``60 percent''.
                    (B) Section 1362(d)(3)(A)(i)(II) is amended by 
                striking ``25 percent'' and inserting ``60 percent''.
                    (C) The heading for paragraph (3) of section 
                1362(d) is amended by striking ``25 percent'' and 
                inserting ``60 percent''.
                    (D) Section 1375(b)(1)(A)(i) is amended by striking 
                ``25 percent'' and inserting ``60 percent''.
                    (E) The heading for section 1375 is amended by 
                striking ``25 percent'' and inserting ``60 percent''.
                    (F) The table of sections for part III of 
                subchapter S of chapter 1 is amended by striking ``25 
                percent'' in the item relating to section 1375 and 
                inserting ``60 percent''.
    (b) Capital Gain Not Treated as Passive Investment Income.--Section 
1362(d)(3) is amended--
            (1) by striking ``annuities,'' and all that follows in 
        subparagraph (C)(i) and inserting ``and annuities.'', and
            (2) by striking subparagraphs (C)(iv) and (D) and by 
        redesignating subparagraph (E) as subparagraph (D).
    (c) Conforming Amendments.--Section 1375(d) is amended by striking 
``subchapter C'' both places it appears and inserting ``accumulated''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

          Subtitle C--Treatment of S Corporation Shareholders

SEC. 221. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE.

    (a) In General.--Section 1366(d) (relating to special rules for 
losses and deductions) is amended by adding at the end the following 
new paragraph:
            ``(4) Transfer of suspended losses and deductions when 
        stock is transferred incident to divorce.--For purposes of 
        paragraph (2), the transfer of any shareholder's stock in an S 
        corporation incident to a decree of divorce shall include any 
        loss or deduction described in such paragraph attributable to 
        such stock.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to transfers in taxable years beginning after December 31, 2003.

SEC. 222. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY QUALIFIED 
              SUBCHAPTER S TRUST INCOME BENEFICIARIES.

    (a) In General.--Section 1361(d)(1) (relating to special rule for 
qualified subchapter S trust) is amended--
            (1) by striking ``and'' at the end of subparagraph (A),
            (2) by striking the period at the end of subparagraph (B) 
        and inserting ``, and'', and
            (3) by adding at the end the following new subparagraph:
                    ``(C) for purposes of applying sections 465 and 
                469(g) to the beneficiary of the trust, the disposition 
                of the S corporation stock by the trust shall be 
                treated as a disposition by such beneficiary.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transfers in taxable years beginning after December 31, 2003.

SEC. 223. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN DETERMINING 
              POTENTIAL CURRENT BENEFICIARIES OF ESBT.

    (a) In General.--Section 1361(e)(2) (defining potential current 
beneficiary) is amended by inserting ``(determined without regard to 
any unexercised (in whole or in part) power of appointment during such 
period)'' after ``of the trust'' in the first sentence.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 224. CLARIFICATION OF ELECTING SMALL BUSINESS TRUST DISTRIBUTION 
              RULES.

    (a) In General.--Section 641(c)(1) (relating to special rules for 
taxation of electing small business trusts) is amended--
            (1) by striking ``and'' at the end of subparagraph (A),
            (2) by redesignating subparagraph (B) as subparagraph (C), 
        and
            (3) by inserting after subparagraph (A) the following new 
        subparagraph:
                    ``(B) any distribution attributable to the portion 
                treated as a separate trust shall be treated separately 
                from any distribution attributable to the portion not 
                so treated, and''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

                Subtitle D--Provisions Relating To Banks

SEC. 231. SALE OF STOCK IN IRA RELATING TO S CORPORATION ELECTION 
              EXEMPT FROM PROHIBITED TRANSACTION RULES.

    (a) In General.--Section 4975(d) (relating to exemptions) is 
amended by striking ``or'' at the end of paragraph (14), by striking 
the period at the end of paragraph (15) and inserting ``; or'', and by 
adding at the end the following new paragraph:
            ``(16) a sale of stock held by a trust which constitutes an 
        individual retirement account under section 408(a) to the 
        individual for whose benefit such account is established if 
        such sale is pursuant to an election under section 1362(a).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to sales of stock held by individual retirement accounts on the 
date of the enactment of this Act.

SEC. 232. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE INCOME 
              TEST FOR BANK S CORPORATIONS.

    (a) In General.--Section 1362(d)(3) (relating to where passive 
investment income exceeds certain percentage of gross receipts for 3 
consecutive taxable years and corporation has accumulated earnings and 
profits), as amended by this Act, is amended by adding at the end the 
following new subparagraph:
                    ``(E) Exception for banks; etc.--In the case of a 
                bank (as defined in section 581), a bank holding 
                company (as defined in section 246A(c)(3)(B)(ii)), or a 
                qualified subchapter S subsidiary which is a bank, the 
                term `passive investment income' shall not include--
                            ``(i) interest income earned by such bank, 
                        bank holding company, or qualified subchapter S 
                        subsidiary, or
                            ``(ii) dividends on assets required to be 
                        held by such bank, bank holding company, or 
                        qualified subchapter S subsidiary to conduct a 
                        banking business, including stock in the 
                        Federal Reserve Bank, the Federal Home Loan 
                        Bank, or the Federal Agricultural Mortgage Bank 
                        or participation certificates issued by a 
                        Federal Intermediate Credit Bank.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 233. TREATMENT OF QUALIFYING DIRECTOR SHARES.

    (a) In General.--Section 1361 (defining S corporation) is amended 
by adding at the end the following new subsection:
    ``(f) Treatment of Qualifying Director Shares.--
            ``(1) In general.--For purposes of this subchapter--
                    ``(A) qualifying director shares shall not be 
                treated as a second class of stock, and
                    ``(B) no person shall be treated as a shareholder 
                of the corporation by reason of holding qualifying 
                director shares.
            ``(2) Qualifying director shares defined.--For purposes of 
        this subsection, the term `qualifying director shares' means 
        any shares of stock in a bank (as defined in section 581) or in 
        a bank holding company registered as such with the Federal 
        Reserve System--
                            ``(i) which are held by an individual 
                        solely by reason of status as a director of 
                        such bank or company or its controlled 
                        subsidiary; and
                            ``(ii) which are subject to an agreement 
                        pursuant to which the holder is required to 
                        dispose of the shares of stock upon termination 
                        of the holder's status as a director at the 
                        same price as the individual acquired such 
                        shares of stock.
            ``(3) Distributions.--A distribution (not in part or full 
        payment in exchange for stock) made by the corporation with 
        respect to qualifying director shares shall be includible as 
        ordinary income of the holder and deductible to the corporation 
        as an expense in computing taxable income under section 1363(b) 
        in the year such distribution is received.''.
    (b) Conforming Amendment.--Section 1366(a) is amended by adding at 
the end the following new paragraph:
            ``(3) Allocation with respect to qualifying director 
        shares.--The holders of qualifying director shares (as defined 
        in section 1361(f)) shall not, with respect to such shares of 
        stock, be allocated any of the items described in paragraph 
        (1).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

            Subtitle E--Qualified Subchapter S Subsidiaries

SEC. 241. RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S 
              SUBSIDIARY ELECTIONS AND TERMINATIONS.

    (a) In General.--Section 1362(f) (relating to inadvertent invalid 
elections or terminations) is amended--
            (1) by inserting ``or under section 1361(b)(3)(B)(ii)'' 
        after ``subsection (a)'' in paragraph (1),
            (2) by inserting ``or under section 1361(b)(3)(C)'' after 
        ``subsection (d)'' in paragraph (1)(B),
            (3) by inserting ``or a qualified subchapter S subsidiary, 
        as the case may be'' after ``small business corporation'' in 
        paragraph (3)(A),
            (4) by inserting ``or a qualified subchapter S subsidiary, 
        as the case may be'' after ``S corporation'' in paragraph (4), 
        and
            (5) by inserting ``or a qualified subchapter S subsidiary, 
        as the case may be'' after ``S corporation'' in the matter 
        following paragraph (4).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 242. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.

    (a) In General.--Section 1361(b)(3)(A) (relating to treatment of 
certain wholly owned subsidiaries) is amended by inserting ``and in the 
case of information returns required under part III of subchapter A of 
chapter 61'' after ``Secretary''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

                   Subtitle F--Additional Provisions

SEC. 251. ELIMINATION OF ALL EARNINGS AND PROFITS ATTRIBUTABLE TO PRE-
              1983 YEARS.

    (a) In General.--Subsection (a) of section 1311 of the Small 
Business Job Protection Act of 1996 is amended to read as follows:
    ``(a) In General.--If a corporation was an electing small business 
corporation under subchapter S of chapter 1 of the Internal Revenue 
Code of 1986 for any taxable year beginning before January 1, 1983, the 
amount of such corporation's accumulated earnings and profits (as of 
the beginning of the first taxable year beginning after December 31, 
2003) shall be reduced by an amount equal to the portion (if any) of 
such accumulated earnings and profits which were accumulated in any 
taxable year beginning before January 1, 1983, for which such 
corporation was an electing small business corporation under such 
subchapter S.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.

SEC. 252. REDUCED RECOGNITION PERIOD FOR BUILT-IN GAINS.

    (a) In General.--Paragraph (7) of section 1374(d) (relating to 
definitions and special rules) is amended to read as follows:
            ``(7) Recognition period.--The term `recognition period' 
        means the 7-year period beginning with the 1st day of the 1st 
        taxable year for which the corporation was an S corporation. 
        For purposes of applying this section to any amount includible 
        in income by reason of distributions to shareholders pursuant 
        to section 593(e), the preceding sentence shall be applied 
        without regard to the duration of the recognition period in 
        effect on the date of such distribution.''.
    (b) Effective Date.--
            (1) General rule.--The amendment made by this section shall 
        apply to any recognition period in effect on or after the date 
        of the enactment of this Act.
            (2) Special application to existing periods exceeding 7 
        years.-- Any recognition period in effect on the date of the 
        enactment of this Act, the length of which is greater than 7 
        years, shall end on such date.

SEC. 253. REPEAL OF SPECIAL OCCUPATIONAL TAXES ON PRODUCERS AND 
              MARKETERS OF ALCOHOLIC BEVERAGES.

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

                  ``PART II--MISCELLANEOUS PROVISIONS

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

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

                 ``Subpart C--Recordkeeping by Dealers

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

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

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

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

                    (ii) by striking ``section 5146'' in subsection (c) 
                and inserting ``section 5123'', and
                    (iii) by redesignating subsection (c) as subsection 
                (d) and inserting after subsection (b) the following 
                new subsection:
    ``(c) Retail Dealers.--For purposes of this section--
            ``(1) Retail dealer in liquors.--The term `retail dealer in 
        liquors' means any dealer (other than a retail dealer in beer 
        or a limited retail dealer) who sells, or offers for sale, 
        distilled spirits, wines, or beer, to any person other than a 
        dealer.
            ``(2) Retail dealer in beer.--The term `retail dealer in 
        beer' means any dealer (other than a limited retail dealer) who 
        sells, or offers for sale, beer, but not distilled spirits or 
        wines, to any person other than a dealer.
            ``(3) Limited retail dealer.--The term `limited retail 
        dealer' means any fraternal, civic, church, labor, charitable, 
        benevolent, or ex-servicemen's organization making sales of 
        distilled spirits, wine or beer on the occasion of any kind of 
        entertainment, dance, picnic, bazaar, or festival held by it, 
        or any person making sales of distilled spirits, wine or beer 
        to the members, guests, or patrons of bona fide fairs, 
        reunions, picnics, carnivals, or other similar outings, if such 
        organization or person is not otherwise engaged in business as 
        a dealer.
            ``(4) Dealer.--The term `dealer' has the meaning given such 
        term by section 5121(c)(3).''.
            (7) Section 5146 is moved to subpart C of part II of 
        subchapter A of chapter 51, inserted after section 5122, and 
        redesignated as section 5123.
            (8) Part II of subchapter A of chapter 51 is amended by 
        inserting after subpart C the following new subpart:

                     ``Subpart D--Other Provisions

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

``SEC. 5132. PROHIBITED PURCHASES BY DEALERS.

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

                                ``For penalty and forfeiture provisions 
applicable to violations of subsection (a), see sections 5687 and 
7302.''.
            (11) Subsection (b) of section 5002 is amended--
                    (A) by striking ``section 5112(a)'' and inserting 
                ``section 5121(c)(3)'',
                    (B) by striking ``section 5112'' and inserting 
                ``section 5121(c)'',
                    (C) by striking ``section 5122'' and inserting 
                ``section 5122(c)''.
            (12) Subparagraph (A) of section 5010(c)(2) is amended by 
        striking ``section 5134'' and inserting ``section 5114''.
            (13) Subsection (d) of section 5052 is amended to read as 
        follows:
    ``(d) Brewer.--For purposes of this chapter, the term `brewer' 
means any person who brews beer or produces beer for sale. Such term 
shall not include any person who produces only beer exempt from tax 
under section 5053(e).''.
            (14) The text of section 5182 is amended to read as 
        follows:
            ``For provisions requiring recordkeeping by wholesale 
        liquor dealers, see section 5121, and by retail liquor dealers, 
        see section 5122.''.
            (15) Subsection (b) of section 5402 is amended by striking 
        ``section 5092'' and inserting ``section 5052(d)''.
            (16) Section 5671 is amended by striking ``or 5091''.
            (17)(A) Part V of subchapter J of chapter 51 is hereby 
        repealed.
            (B) The table of parts for such subchapter J is amended by 
        striking the item relating to part V.
            (18)(A) Sections 5142, 5143, and 5145 are moved to 
        subchapter D of chapter 52, inserted after section 5731, 
        redesignated as sections 5732, 5733, and 5734, respectively, 
        and amended by striking ``this part'' each place it appears and 
        inserting ``this subchapter''.
            (B) Section 5732, as redesignated by subparagraph (A), is 
        amended by striking ``(except the tax imposed by section 
        5131)'' each place it appears.
            (C) Paragraph (2) of section 5733(c), as redesignated by 
        subparagraph (A), is amended by striking ``liquors'' both 
        places it appears and inserting ``tobacco products and 
        cigarette papers and tubes''.
            (D) The table of sections for subchapter D of chapter 52 is 
        amended by adding at the end thereof the following:

``Sec. 5732. Payment of tax.
``Sec. 5733. Provisions relating to liability for occupational taxes.
``Sec. 5734. Application of State laws.''.
            (E) Section 5731 is amended by striking subsection (c) and 
        by redesignating subsection (d) as subsection (c).
            (19) Subsection (c) of section 6071 is amended by striking 
        ``section 5142'' and inserting ``section 5732''.
            (20) Paragraph (1) of section 7652(g) is amended--
                    (A) by striking ``subpart F'' and inserting 
                ``subpart B'', and
                    (B) by striking ``section 5131(a)'' and inserting 
                ``section 5111''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on July 1, 2004, but shall not apply to taxes imposed for 
periods before such date.

                      TITLE III--RURAL TAX RELIEF

SEC. 301. EXPANSION OF DESIGNATED RENEWAL COMMUNITY AREA BASED ON 2000 
              CENSUS DATA.

    (a) Renewal Communities.--Section 1400E (relating to designation of 
renewal communities) is amended by adding at the end the following new 
subsection:
    ``(g) Expansion of Designated Areas.--
            ``(1) Expansion based on 2000 census.--At the request of 
        the nominating entity with respect to a renewal community, the 
        Secretary of Housing and Urban Development may expand the area 
        of a renewal community to include any census tract--
                    ``(A) which, at the time such community was 
                nominated, met the requirements of this section for 
                inclusion in such community but for the failure of such 
                tract to meet 1 or more of the population and poverty 
                rate requirements of this section using 1990 census 
                data, and
                    ``(B) which meets all failed population and poverty 
                rate requirements of this section using 2000 census 
                data.
            ``(2) Expansion to certain areas which do not meet 
        population requirements.--
                    ``(A) In general.--At the request of 1 or more 
                local governments and the State or States in which an 
                area described in subparagraph (B) is located, the 
                Secretary of Housing and Urban Development may expand a 
                designated area to include such area.
                    ``(B) Area.--An area is described in this 
                subparagraph if--
                            ``(i) the area is adjacent to at least 1 
                        other area designated as a renewal community,
                            ``(ii) the area has a population less than 
                        the population required under subsection 
                        (c)(2)(C), and
                            ``(iii)(I) the area meets the requirements 
                        of subparagraphs (A) and (B) of subsection 
                        (c)(2) and subparagraph (A) of subsection 
                        (c)(3), or
                            ``(II) the area contains a population of 
                        less than 100 people.
            ``(3) Applicability.--Any expansion of a renewal community 
        under this section shall take effect as provided in subsection 
        (b).''.
    (b) Effective Date.--The amendment made by this subsection shall 
take effect as if included in the amendments made by section 101 of the 
Community Renewal Tax Relief Act of 2000.

SEC. 302. EXEMPTION OF QUALIFIED 501(C)(3) BONDS FOR NURSING HOMES FROM 
              FEDERAL GUARANTEE PROHIBITIONS.

    (a) In General.--Section 149(b)(3) (relating to exceptions) is 
amended by adding at the end the following new subparagraph:
                    ``(E) Exception for qualified 501(c)(3) bonds for 
                nursing homes.--
                            ``(i) In general.--Paragraph (1) shall not 
                        apply to any qualified 501(c)(3) bond issued 
                        before the date which is 1 year after the date 
                        of the enactment of this subparagraph for the 
                        benefit of an organization described in section 
                        501(c)(3), if such bond is part of an issue the 
                        proceeds of which are used to finance 1 or more 
                        of the following facilities primarily for the 
                        benefit of the elderly:
                                    ``(I) Licensed nursing home 
                                facility.
                                    ``(II) Licensed or certified 
                                assisted living facility.
                                    ``(III) Licensed personal care 
                                facility.
                                    ``(IV) Continuing care retirement 
                                community.
                            ``(ii) Limitation.--With respect to any 
                        calendar year, clause (i) shall not apply to 
                        any bond described in such clause if the 
                        aggregate authorized face amount of the issue 
                        of which such bond is a part when increased by 
                        the outstanding amount of such bonds issued by 
                        the issuer for such calendar year exceeds 
                        $15,000,000.
                            ``(iii) Continuing care retirement 
                        community.--For purposes of this subparagraph, 
                        the term `continuing care retirement community' 
                        means a community which provides, on the same 
                        campus, a continuum of residential living 
                        options and support services to persons at 
                        least 60 years of age under a written 
                        agreement. For purposes of the preceding 
                        sentence, the residential living options shall 
                        include independent living units, nursing home 
                        beds, and either assisted living units or 
                        personal care beds.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to bonds issued after the date of the enactment of this Act.

SEC. 303. RURAL INVESTMENT TAX CREDIT.

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

``SEC. 42A. RURAL INVESTMENT CREDIT.

    ``(a) In General.--For purposes of section 38, the amount of the 
rural investment credit determined under this section for any taxable 
year in the credit period shall be an amount equal to the applicable 
percentage of the eligible basis of each qualified rural investment 
building.
    ``(b) Applicable Percentage: 70 Percent Present Value Credit for 
New Buildings; 30 Percent Present Value Credit for Existing 
Buildings.--For purposes of this section--
            ``(1) In general.--The term `applicable percentage' means 
        the appropriate percentage prescribed by the Secretary for the 
        earlier of--
                    ``(A) the first month of the credit period with 
                respect to a rural investment building, or
                    ``(B) at the election of the taxpayer, the month in 
                which the taxpayer and the rural investment credit 
                agency enter into an agreement with respect to such 
                building (which is binding on such agency, the 
                taxpayer, and all successors in interest) as to the 
                rural investment credit dollar amount to be allocated 
                to such building.
        A month may be elected under subparagraph (B) only if the 
        election is made not later than the 5th day after the close of 
        such month. Such an election, once made, shall be irrevocable.
            ``(2) Method of prescribing percentages.--The percentages 
        prescribed by the Secretary for any month shall be percentages 
        which will yield over a 10-year period amounts of credit under 
        subsection (a) which have a present value equal to--
                    ``(A) 70 percent of the eligible basis of a new 
                building, and
                    ``(B) 30 percent of the eligible basis of an 
                existing building.
            ``(3) Method of discounting.--The present value under 
        paragraph (2) shall be determined--
                    ``(A) as of the last day of the 1st year of the 10-
                year period referred to in paragraph (2),
                    ``(B) by using a discount rate equal to 72 percent 
                of the average of the annual Federal mid-term rate and 
                the annual Federal long-term rate applicable under 
                section 1274(d)(1) to the month applicable under 
                subparagraph (A) or (B) of paragraph (1) and compounded 
                annually, and
                    ``(C) by assuming that the credit allowable under 
                this section for any year is received on the last day 
                of such year.
    ``(c) Eligible Basis; Qualified Rural Investment Building.--For 
purposes of this section--
            ``(1) Eligible basis.--
                    ``(A) In general.--The eligible basis of any 
                qualified rural investment building for any taxable 
                year shall be determined under rules similar to the 
                rules under section 42(d), except that--
                            ``(i) the determination of the adjusted 
                        basis of any building shall be made as of the 
                        beginning of the credit period, and
                            ``(ii) such basis shall include development 
                        costs properly attributable to such building.
                    ``(B) Development costs.--For purposes of 
                subparagraph (A)(ii), the term `development costs' 
                includes--
                            ``(i) site preparation costs,
                            ``(ii) State and local impact fees,
                            ``(iii) reasonable development costs,
                            ``(iv) professional fees related to basis 
                        items,
                            ``(v) construction financing costs related 
                        to basis items other than land, and
                            ``(vi) on-site and adjacent improvements 
                        required by State and local governments.
            ``(2) Qualified rural investment building.--The term 
        `qualified rural investment building' means any building which 
        is part of a qualified rural investment project at all times 
        during the period--
                    ``(A) beginning on the 1st day in the compliance 
                period on which such building is part of such an 
                investment project, and
                    ``(B) ending on the last day of the compliance 
                period with respect to such building.
    ``(d) Rehabilitation Expenditures Treated as Separate New 
Building.--Rehabilitation expenditures paid or incurred by the taxpayer 
with respect to any building shall be treated for purposes of this 
section as a separate new building under the rules of section 42(e).
    ``(e) Definition and Special Rules Relating to Credit Period.--
            ``(1) Credit period defined.--For purposes of this section, 
        the term `credit period' means, with respect to any building, 
        the period of 10 taxable years beginning with the taxable year 
in which the building is first placed in service.
            ``(2) Special rule for 1st year of credit period.--
                    ``(A) In general.--The credit allowable under 
                subsection (a) with respect to any building for the 1st 
                taxable year of the credit period shall be determined 
                by multiplying such credit by the fraction--
                            ``(i) the numerator of which is the number 
                        of full months of such year during which such 
                        building was in service, and
                            ``(ii) the denominator of which is 12.
                    ``(B) Disallowed 1st year credit allowed in 11th 
                year.--Any reduction by reason of subparagraph (A) in 
                the credit allowable (without regard to subparagraph 
                (A)) for the 1st taxable year of the credit period 
                shall be allowable under subsection (a) for the 1st 
                taxable year following the credit period.
            ``(3) Credit period for existing buildings not to begin 
        before rehabilitation credit allowed.--The credit period for an 
        existing building shall not begin before the 1st taxable year 
        of the credit period for rehabilitation expenditures with 
        respect to the building.
    ``(f) Qualified Rural Investment Project; Qualifying County.--For 
purposes of this section--
            ``(1) Qualified rural investment project.--The term 
        `qualified rural investment project' means any investment 
        project of 1 or more qualified rural investment buildings 
        located in a qualifying county (and, if necessary to the 
        project, any contiguous county) and selected by the State 
        according to its qualified rural investment plan.
            ``(2) Qualifying county.--The term `qualifying county' 
        means any county which--
                    ``(A) is outside a metropolitan statistical area 
                (defined as such by the Office of Management and 
                Budget), and
                    ``(B) during the 20-year period ending with the 
                year in which the most recent census was conducted, has 
                a net out-migration of inhabitants from the county of 
                at least 10 percent of the population of the county at 
                the beginning of such period.
    ``(g) Limitation on Aggregate Credit Allowable With Respect to 
Investment Projects Located in a State.--
            ``(1) Credit may not exceed credit amount allocated to 
        building.--The amount of the credit determined under this 
        section for any taxable year with respect to any building shall 
        not exceed the rural investment credit dollar amount allocated 
        to such building under rules similar to the rules of section 
        42(h)(1).
            ``(2) Allocated credit amount to apply to all taxable years 
        ending during or after credit allocation year.--Any rural 
        investment credit dollar amount allocated to any building for 
        any calendar year--
                    ``(A) shall apply to such building for all taxable 
                years in the credit period ending during or after such 
                calendar year, and
                    ``(B) shall reduce the aggregate rural investment 
                credit dollar amount of the allocating agency only for 
                such calendar year.
            ``(3) Rural investment credit dollar amount for agencies.--
                    ``(A) In general.--The aggregate rural investment 
                credit dollar amount which a rural investment credit 
                agency may allocate for any calendar year is the 
                portion of the State rural investment credit ceiling 
                allocated under this paragraph for such calendar year 
                to such agency.
                    ``(B) State ceiling initially allocated to state 
                rural investment credit agencies.--Except as provided 
                in subparagraphs (D) and (E), the State rural 
                investment credit ceiling for each calendar year shall 
                be allocated to the rural investment credit agency of 
                such State. If there is more than 1 rural investment 
                credit agency of a State, all such agencies shall be 
                treated as a single agency.
                    ``(C) State rural investment credit ceiling.--The 
                State rural investment credit ceiling applicable to any 
                State and any calendar year shall be an amount equal to 
                the sum of--
                            ``(i) the unused State rural investment 
                        credit ceiling (if any) of such State for the 
                        preceding calendar year,
                            ``(ii) $185,000 for each qualifying county 
                        in the State,
                            ``(iii) the amount of State rural 
                        investment credit ceiling returned in the 
                        calendar year, plus
                            ``(iv) the amount (if any) allocated under 
                        subparagraph (D) to such State by the 
                        Secretary.
                For purposes of clause (i), the unused State rural 
                investment credit ceiling for any calendar year is the 
                excess (if any) of the sum of the amounts described in 
                clauses (ii) through (iv) over the aggregate rural 
                investment credit dollar amount allocated for such 
                year. For purposes of clause (iii), the amount of State 
                rural investment credit ceiling returned in the 
                calendar year equals the rural investment credit dollar 
                amount previously allocated within the State to any 
                investment project which fails to meet the 10 percent 
                test under section 42(h)(1)(E)(ii) on a date after the 
                close of the calendar year in which the allocation was 
                made or which does not become a qualified rural 
                investment project within the period required by this 
                section or the terms of the allocation or to any 
                investment project with respect to which an allocation 
                is canceled by mutual consent of the rural investment 
                credit agency and the allocation recipient.
                    ``(D) Unused rural investment credit carryovers 
                allocated among certain states.--
                            ``(i) In general.--The unused rural 
                        investment credit carryover of a State for any 
                        calendar year shall be assigned to the 
                        Secretary for allocation among qualified States 
                        for the succeeding calendar year.
                            ``(ii) Unused rural investment credit 
                        carryover.--For purposes of this subparagraph, 
                        the unused rural investment credit carryover of 
                        a State for any calendar year is the excess (if 
                        any) of the unused State rural investment 
                        credit ceiling for such year (as defined in 
                        subparagraph (C)(i)) over the excess (if any) 
                        of--
                                    ``(I) the unused State rural 
                                investment credit ceiling for the year 
                                preceding such year, over
                                    ``(II) the aggregate rural 
                                investment credit dollar amount 
                                allocated for such year.
                            ``(iii) Formula for allocation of unused 
                        rural investment credit carryovers among 
                        qualified states.--The amount allocated under 
                        this subparagraph to a qualified State for any 
                        calendar year shall be the amount determined by 
                        the Secretary to bear the same ratio to the 
                        aggregate unused rural investment credit 
                        carryovers of all States for the preceding 
                        calendar year as such State's population for 
                        the calendar year bears to the population of 
                        all qualified States for the calendar year. For 
                        purposes of the preceding sentence, population 
                        shall be determined in accordance with section 
                        146(j).
                            ``(iv) Qualified state.--For purposes of 
                        this subparagraph, the term `qualified State' 
                        means, with respect to a calendar year, any 
                        State--
                                    ``(I) which allocated its entire 
                                State rural investment credit ceiling 
                                for the preceding calendar year, and
                                    ``(II) for which a request is made 
                                (not later than May 1 of the calendar 
                                year) to receive an allocation under 
                                clause (iii).
                    ``(E) State may provide for different allocation.--
                Rules similar to the rules of section 146(e) (other 
                than paragraph (2)(B) thereof) shall apply for purposes 
                of this paragraph.
                    ``(F) Population.--For purposes of this paragraph, 
                population shall be determined in accordance with 
                section 146(j).
                    ``(G) Cost-of-living adjustment.--
                            ``(i) In general.--In the case of a 
                        calendar year after 2005, the $185,000 amount 
                        in subparagraph (C) shall be increased by an 
                        amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under section 
                                1(f)(3) for such calendar year by 
                                substituting `calendar year 2004' for 
                                `calendar year 1992' in subparagraph 
                                (B) thereof.
                            ``(ii) Rounding.--Any increase under clause 
                        (i) which is not a multiple of $5,000 shall be 
                        rounded to the next lowest multiple of $5,000.
            ``(4) Portion of state ceiling set-aside for certain 
        investment projects involving qualified nonprofit 
        organizations.--
                    ``(A) In general.--At least 10 percent of the State 
                rural investment credit ceiling for any State for any 
                calendar year shall be allocated to qualified rural 
                investment projects described in subparagraph (B).
                    ``(B) Investment projects involving qualified 
                nonprofit organizations.--For purposes of subparagraph 
                (A), a qualified rural investment project is described 
                in this subparagraph if a qualified nonprofit 
                organization is to materially participate (within the 
                meaning of section 469(h)) in the development and 
                operation of the investment project throughout the 
                compliance period.
                    ``(C) Qualified nonprofit organization.--For 
                purposes of this paragraph, the term `qualified 
                nonprofit organization' means any organization if--
                            ``(i) such organization is described in any 
                        paragraph of section 501(c) and is exempt from 
                        tax under section 501(a),
                            ``(ii) such organization is determined by 
                        the State rural investment credit agency not to 
                        be affiliated with or controlled by a for-
                        profit organization; and
                            ``(iii) 1 of the exempt purposes of such 
                        organization includes the fostering of rural 
                        investment.
                    ``(D) Treatment of certain subsidiaries.--
                            ``(i) In general.--For purposes of this 
                        paragraph, a qualified nonprofit organization 
                        shall be treated as satisfying the ownership 
                        and material participation test of subparagraph 
                        (B) if any qualified corporation in which such 
                        organization holds stock satisfies such test.
                            ``(ii) Qualified corporation.--For purposes 
                        of clause (i), the term `qualified corporation' 
                        means any corporation if 100 percent of the 
                        stock of such corporation is held by 1 or more 
                        qualified nonprofit organizations at all times 
                        during the period such corporation is in 
                        existence.
                    ``(E) State may not override set-aside.--Nothing in 
                subparagraph (F) of paragraph (3) shall be construed to 
                permit a State not to comply with subparagraph (A) of 
                this paragraph.
                    ``(F) Credits for qualified nonprofit 
                organizations.--
                            ``(i) Allowance of credit.--Any credit 
                        which would be allowable under subsection (a) 
                        with respect to a qualified rural investment 
                        building of a qualified nonprofit organization 
                        if such organization were not exempt from tax 
                        under this chapter shall be treated as a credit 
                        allowable under subpart C to such organization.
                            ``(ii) Use of credit.--A qualified 
                        nonprofit organization may assign, trade, sell, 
                        or otherwise transfer any credit allowable to 
                        such organization under subparagraph (A) to any 
                        taxpayer.
                            ``(iii) Credit not income.--A transfer 
                        under subparagraph (B) of any credit allowable 
                        under subparagraph (A) shall not result in 
                        income for purposes of section 511.
            ``(5) Special rules.--
                    ``(A) Building must be located within jurisdiction 
                of credit agency.--A rural investment credit agency may 
                allocate its aggregate rural investment credit dollar 
                amount only to buildings located in the jurisdiction of 
                the governmental unit of which such agency is a part.
                    ``(B) Agency allocations in excess of limit.--If 
                the aggregate rural investment credit dollar amounts 
                allocated by a rural investment credit agency for any 
                calendar year exceed the portion of the State rural 
                investment credit ceiling allocated to such agency for 
                such calendar year, the rural investment credit dollar 
                amounts so allocated shall be reduced (to the extent of 
                such excess) for buildings in the reverse of the order 
                in which the allocations of such amounts were made.
                    ``(C) Credit reduced if allocated credit dollar 
                amount is less than credit which would be allowable 
                without regard to sales convention, etc.--
                            ``(i) In general.--The amount of the credit 
                        determined under this section with respect to 
                        any building shall not exceed the clause (ii) 
                        percentage of the amount of the credit which 
                        would (but for this subparagraph) be determined 
                        under this section with respect to such 
                        building.
                            ``(ii) Determination of percentage.--For 
                        purposes of clause (i), the clause (ii) 
                        percentage with respect to any building is the 
                        percentage which--
                                    ``(I) the rural investment credit 
                                dollar amount allocated to such 
                                building bears to
                                    ``(II) the credit amount determined 
                                in accordance with clause (iii).
                            ``(iii) Determination of credit amount.--
                        The credit amount determined in accordance with 
                        this clause is the amount of the credit which 
                        would (but for this subparagraph) be determined 
                        under this section with respect to the building 
                        if this section were applied without regard to 
                        paragraph (2)(A) of subsection (e).
                    ``(D) Rural investment credit agency to specify 
                applicable percentage and maximum eligible basis.--In 
                allocating a rural investment credit dollar amount to 
                any building, the rural investment credit agency shall 
                specify the applicable percentage and the maximum 
                eligible basis which may be taken into account under 
                this section with respect to such building. The 
                applicable percentage and maximum eligible basis so 
                specified shall not exceed the applicable percentage 
                and eligible basis determined under this section 
                without regard to this subsection.
            ``(6) Other definitions.--For purposes of this subsection--
                    ``(A) Rural investment credit agency.--The term 
                `rural investment credit agency' means any agency 
                authorized to carry out this subsection.
                    ``(B) Possessions treated as States.--The term 
                `State' includes a possession of the United States.
            ``(7) Portion of state ceiling set-aside for qualified 
        rural small business investment credits.--Not more than 20 
        percent of the State rural investment credit ceiling for any 
        State for any calendar year may be allocated to qualified rural 
        small business investment credits under section 42B.
    ``(h) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Compliance period.--The term `compliance period' 
        means, with respect to any building, the period of 10 taxable 
        years beginning with the 1st taxable year of the credit period 
        with respect thereto.
            ``(2) New building.--The term `new building' means a 
        building the original use of which begins with the taxpayer.
            ``(3) Existing building.--The term `existing building' 
        means any building which is not a new building.
            ``(4) Application to estates and trusts.--In the case of an 
        estate or trust, the amount of the credit determined under 
        subsection (a) and any increase in tax under subsection (i) 
        shall be apportioned between the estate or trust and the 
        beneficiaries on the basis of the income of the estate or trust 
        allocable to each.
    ``(i) Recapture of Credit.--If--
            ``(1) as of the close of any taxable year in the compliance 
        period, the amount of the eligible basis of any building with 
        respect to the taxpayer is less than
            ``(2) the amount of such basis as of the close of the 
        preceding taxable year,
        then the taxpayer's tax under this chapter for the taxable year 
        shall be increased by the credit recapture amount determined 
        under rules similar to the rules of section 42(j).
    ``(j) Certifications and Other Reports to Secretary.--
            ``(1) Certification with respect to 1st year of credit 
        period.--Following the close of the 1st taxable year in the 
        credit period with respect to any qualified rural investment 
        building, the taxpayer shall certify to the Secretary (at such 
        time and in such form and in such manner as the Secretary 
        prescribes)--
                    ``(A) the taxable year, and calendar year, in which 
                such building was first placed in service,
                    ``(B) the eligible basis of such building as of the 
                beginning of the credit period,
                    ``(C) the maximum applicable percentage and 
                eligible basis permitted to be taken into account by 
                the appropriate rural investment credit agency under 
                subsection (g),
                    ``(D) the election made under subsection (f) with 
                respect to the qualified rural investment project of 
                which such building is a part, and
                    ``(E) such other information as the Secretary may 
                require.
        In the case of a failure to make the certification required by 
        the preceding sentence on the date prescribed therefor, unless 
        it is shown that such failure is due to reasonable cause and 
        not to willful neglect, no credit shall be allowable by reason 
        of subsection (a) with respect to such building for any taxable 
        year ending before such certification is made.
            ``(2) Annual reports to the secretary.--The Secretary may 
        require taxpayers to submit an information return (at such time 
        and in such form and manner as the Secretary prescribes) for 
        each taxable year setting forth--
                    ``(A) the eligible basis for the taxable year of 
                each qualified rural investment building of the 
                taxpayer,
                    ``(B) the information described in paragraph (1)(C) 
                for the taxable year, and
                    ``(C) such other information as the Secretary may 
                require.
        The penalty under section 6652(j) shall apply to any failure to 
        submit the return required by the Secretary under the preceding 
        sentence on the date prescribed therefor.
            ``(3) Annual reports from rural investment credit 
        agencies.--Each agency which allocates any rural investment 
        credit amount to any building for any calendar year shall 
        submit to the Secretary (at such time and in such manner as the 
        Secretary shall prescribe) an annual report specifying--
                    ``(A) the amount of rural investment credit amount 
                allocated to each building for such year,
                    ``(B) sufficient information to identify each such 
                building and the taxpayer with respect thereto, and
                    ``(C) such other information as the Secretary may 
                require.
        The penalty under section 6652(j) shall apply to any failure to 
        submit the report required by the preceding sentence on the 
        date prescribed therefor.
    ``(k) Responsibilities of Rural Investment Credit Agencies.--
            ``(1) Plans for allocation of credit among investment 
        projects.--
                    ``(A) In general.--Notwithstanding any other 
                provision of this section, the rural investment credit 
                dollar amount with respect to any building shall be 
                zero unless--
                            ``(i) such amount was allocated pursuant to 
                        a qualified rural investment plan of the agency 
                        which is approved by the governmental unit (in 
                        accordance with rules similar to the rules of 
                        section 147(f)(2) (other than subparagraph 
                        (B)(ii) thereof)) of which such agency is a 
                        part,
                            ``(ii) such agency notifies the chief 
                        executive officer (or the equivalent) of the 
                        local jurisdiction within which the building is 
                        located of such investment project and provides 
                        such individual a reasonable opportunity to 
                        comment on the investment project,
                            ``(iii) a comprehensive market study of the 
                        development needs of individuals in the 
                        qualifying county to be served by the 
                        investment project is conducted before the 
                        credit allocation is made and at the 
                        developer's expense by a disinterested party 
                        who is approved by such agency, and
                            ``(iv) a written explanation is available 
                        to the general public for any allocation of a 
                        rural investment credit dollar amount which is 
                        not made in accordance with established 
                        priorities and selection criteria of the rural 
                        investment credit agency.
                    ``(B) Qualified rural investment plan.--For 
                purposes of this section, the term `qualified rural 
                investment plan' means any plan--
                            ``(i) which sets forth selection criteria 
                        to be used to determine priorities of the rural 
                        investment credit agency which are appropriate 
                        to qualifying counties,
                            ``(ii) which also gives preference in 
                        allocating rural investment credit dollar 
                        amounts among selected investment projects to--
                                    ``(I) investment projects that 
                                target those small rural counties with 
                                consistently high rates of net out-
                                migration,
                                    ``(II) investment projects that 
                                link the economic development and job 
                                creation efforts of 2 or more small 
                                rural counties with high rates of net 
                                out-migration, and
                                    ``(III) investment projects that 
                                link the economic development and job 
                                creation efforts of 1 or more small 
                                rural counties in the State with high 
                                rates of net out-migration to related 
                                efforts in regions of such State 
                                experiencing economic growth, and
                            ``(iii) which provides a procedure that the 
                        agency (or an agent or other private contractor 
                        of such agency) will follow in monitoring for 
                        noncompliance with the provisions of this 
                        section and in notifying the Internal Revenue 
                        Service of such noncompliance which such agency 
                        becomes aware of and in monitoring for 
                        noncompliance through regular site visits.
                    ``(C) Certain selection criteria must be used.--The 
                selection criteria set forth in a qualified rural 
                investment plan must include--
                            ``(i) investment project location,
                            ``(ii) technology and transportation 
                        infrastructure needs, and
                            ``(iii) private development trends.
            ``(2) Credit allocated to building not to exceed amount 
        necessary to assure investment project feasibility.--
                    ``(A) In general.--The rural investment credit 
                dollar amount allocated to an investment project shall 
                not exceed the amount the rural investment credit 
                agency determines is necessary for the financial 
                feasibility of the investment project and its viability 
                as a qualified rural investment project throughout the 
                compliance period.
                    ``(B) Agency evaluation.--In making the 
                determination under subparagraph (A), the rural 
                investment credit agency shall consider--
                            ``(i) the sources and uses of funds and the 
                        total financing planned for the investment 
                        project,
                            ``(ii) any proceeds or receipts expected to 
                        be generated by reason of tax benefits,
                            ``(iii) the percentage of the rural 
                        investment credit dollar amount used for 
                        investment project costs other than the cost of 
                        intermediaries, and
                            ``(iv) the reasonableness of the 
                        developmental and operational costs of the 
                        investment project.
                Clause (iii) shall not be applied so as to impede the 
                development of investment projects in hard-to-develop 
                areas.
                    ``(C) Determination made when credit amount applied 
                for and when building placed in service.--
                            ``(i) In general.--A determination under 
                        subparagraph (A) shall be made as of each of 
                        the following times:
                                    ``(I) The application for the rural 
                                investment credit dollar amount.
                                    ``(II) The allocation of the rural 
                                investment credit dollar amount.
                                    ``(III) The date the building is 
                                first placed in service.
                            ``(ii) Certification as to amount of other 
                        subsidies.--Prior to each determination under 
                        clause (i), the taxpayer shall certify to the 
                        rural investment credit agency the full extent 
                        of all Federal, State, and local subsidies 
                        which apply (or which the taxpayer expects to 
                        apply) with respect to the building.
    ``(l) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations--
            ``(1) dealing with--
                    ``(A) investment projects which include more than 1 
                building or only a portion of a building, and
                    ``(B) buildings which are sold in portions,
            ``(2) providing for the application of this section to 
        short taxable years,
            ``(3) preventing the avoidance of the rules of this 
        section, and
            ``(4) providing the opportunity for rural investment credit 
        agencies to correct administrative errors and omissions with 
        respect to allocations and record keeping within a reasonable 
        period after their discovery, taking into account the 
        availability of regulations and other administrative guidance 
        from the Secretary.''.
    (b) Current Year Business Credit Calculation.--Section 38(b) 
(relating to current year business credit), as amended by this Act, is 
amended by striking ``plus'' at the end of paragraph (15), by striking 
the period at the end of paragraph (16) and inserting ``, plus'', and 
by adding at the end the following:
            ``(17) the rural investment credit determined under section 
        42A(a).''.
    (c) Limitation on Carryback.--Subsection (d) of section 39 
(relating to carryback and carryforward of unused credits), as amended 
by this Act, is amended by adding at the end the following:
            ``(12) No carryback of rural investment credit before 
        effective date.--No portion of the unused business credit for 
        any taxable year which is attributable to the rural investment 
        credit determined under section 42A may be carried back to a 
        taxable year beginning before the date of the enactment of this 
        paragraph.''.
    (d) Conforming Amendments.--
            (1) Section 55(c)(1) is amended by inserting ``or 
        subsection (i) or (j) of section 42A'' after ``section 42''.
            (2) Subsections (i)(c)(3), (i)(c)(6)(B)(i), and (k)(1) of 
        section 469 are each amended by inserting ``or 42A'' after 
        ``section 42''.
            (3) Section 772(a) is amended by striking ``and'' at the 
        end of paragraph (10), by redesignating paragraph (11) as 
        paragraph (12), and by inserting after paragraph (10) the 
        following:
            ``(11) the rural investment credit determined under section 
        42A, and''.
            (4) Section 774(b)(4) is amended by inserting ``, 42A(i),'' 
        after ``section 42(j)''.
    (e) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 is amended by inserting after the 
item relating to section 42 the following:

                              ``Sec. 42A. Rural investment credit.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to expenditures made in taxable years beginning after the date of 
the enactment of this Act.

SEC. 304. QUALIFIED RURAL SMALL BUSINESS INVESTMENT CREDIT.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits), as amended by this Act, is 
amended by adding at the end the following:

``SEC. 42B. QUALIFIED RURAL SMALL BUSINESS INVESTMENT CREDIT.

    ``(a) In General.--For purposes of section 38, in the case of a 
qualified rural small business, the amount of the qualified rural small 
business investment credit determined under this section for any 
taxable year is equal to 30 percent of the qualified expenditures for 
the taxable year of such business.
    ``(b) Dollar Limitation.--
            ``(1) In general.--The credit allowable under subsection 
        (a) for any taxable year shall not exceed the lesser of--
                    ``(A) $5,000, or
                    ``(B) the amount when added to the aggregate 
                credits allowable to the taxpayer under subsection (a) 
                for all preceding taxable years does not exceed 
                $25,000.
            ``(2) No double credit allowed.--In the case of any 
        qualified rural small business which places in service a 
        qualified rural investment building with respect to which a 
        rural investment credit is allowed under section 42A for any 
        taxable year, paragraph (1)(A) shall be applied with respect to 
        such taxable year by substituting `zero' for `$5,000'.
    ``(c) Qualified Rural Small Business.--For purposes of this 
section, the term `qualified rural small business' means any person if 
such person--
            ``(1) employed not more than 5 full-time employees during 
        the taxable year,
            ``(2) materially and substantially participates in 
        management,
            ``(3) is located in a qualifying county, and
            ``(4) submitted a qualified business plan with respect to 
        which the rural investment credit agency with jurisdiction over 
        such qualifying county has allocated a portion of the State 
        rural investment ceiling for such taxable year under section 
        42A(g)(7).
For purposes of paragraph (1), an employee shall be considered full-
time if such employee is employed at least 30 hours per week for 20 or 
more calendar weeks in the taxable year.
    ``(d) Qualified Expenditures.--For purposes of this section--
            ``(1) In general.--The term `qualified expenditures' means 
        expenditures normally associated with starting or expanding a 
        business and included in a qualified business plan, including 
        costs for capital, plant and equipment, inventory expenses, and 
        wages, but not including interest costs.
            ``(2) Only certain expenditures included for existing 
        businesses.--In the case of a qualified rural small business 
        with respect to which a credit under subsection (a) was allowed 
        for a preceding taxable year, such term shall include only so 
        much of the expenditures described in paragraph (1) for the 
        taxable year as exceed the aggregate of such expenditures for 
        the preceding taxable year.
    ``(e) Qualified Business Plan.--For purposes of this section, the 
term `qualified business plan' means a business plan which--
            ``(1) has been approved by the rural investment credit 
        agency with jurisdiction over the qualifying county in which 
        the qualified rural small business is located pursuant to such 
        agency's rural investment plan, and
            ``(2) meets such requirements as the agency may specify.
    ``(f) Denial of Double Benefit.--In the case of the amount of the 
credit determined under this section--
            ``(1) no deduction or credit shall be allowed for such 
        amount under any other provision of this chapter, and
            ``(2) no increase in the adjusted basis of any property 
        shall result from such amount.
    ``(g) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) any term which is used in this section which is used 
        in section 42A shall have the meaning given such term by 
        section 42A, and
            ``(2) rules similar to the rules under subsections (j)(2), 
        (j)(3), and (k) of section 42A shall apply.''.
    (b) Current Year Business Credit Calculation.--Section 38(b) 
(relating to current year business credit), as amended by this Act, is 
amended by striking ``plus'' at the end of paragraph (16), by striking 
the period at the end of paragraph (17) and inserting ``, plus'', and 
by adding at the end the following:
            ``(18) the qualified rural small business investment credit 
        determined under section 42B(a).''.
    (c) Limitation on Carryback.--Subsection (d) of section 39 
(relating to carryback and carryforward of unused credits), as amended 
by this Act, is amended by adding at the end the following:
            ``(13) No carryback of qualified rural small business 
        investment credit before effective date.--No portion of the 
        unused business credit for any taxable year which is 
        attributable to the qualified rural small business investment 
        credit determined under section 42B may be carried back to a 
        taxable year beginning before the date of the enactment of this 
        paragraph.''.
    (d) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1, as amended by this Act, is 
amended by inserting after the item relating to section 42A the 
following:

                              ``Sec. 42B. Qualified rural small 
                                        business investment credit.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to expenditures made in taxable years beginning after the date of 
the enactment of this Act.

SEC. 305. MODIFICATIONS OF TREATMENT OF QUALIFIED ZONE ACADEMY BONDS.

    (a) Proceeds of Bonds May Be Used for Construction and Land 
Acquisition.--Paragraph (5) of section 1397E(d) (defining qualified 
purpose) is amended--
            (1) by striking ``rehabilitating or repairing'' in 
        subparagraph (A) and inserting ``constructing, rehabilitating, 
        or repairing'', and
            (2) by redesignating subparagraphs (B), (C), and (D) as 
        subparagraphs (C), (D), and (E), respectively, and by inserting 
        after subparagraph (A) the following:
                    ``(B) acquiring the land on which the facility is 
                to be constructed,''.
    (b) Effective Date.--The amendments made by this section shall 
apply to obligations issued after December 31, 2003.

SEC. 306. CERTAIN EXPENSES OF RURAL LETTER CARRIERS.

    (a) In General.--Section 162(o) (relating to treatment of certain 
reimbursed expenses of rural mail carriers) is amended by redesignating 
paragraph (2) as paragraph (3) and by inserting after paragraph (1) the 
following:
            ``(2) Special rule where expenses exceed reimbursements.--
        Notwithstanding paragraph (1)(A), if the expenses incurred by 
        an employee for the use of a vehicle in performing services 
        described in paragraph (1) exceed the qualified reimbursements 
        for such expenses, such excess shall be taken into account in 
        computing the miscellaneous itemized deductions of the employee 
        under section 67.''.
    (b) Conforming Amendment.--The heading for section 162(o) is 
amended by striking ``Reimbursed''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 307. NEW MARKETS TAX CREDIT FOR NATIVE AMERICAN RESERVATIONS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
(relating to business related credits) is amended by redesignating 
sections 45E and 45F as sections 45F and 45G, respectively, and by 
inserting after section 45D the following new section:

``SEC. 45E. NEW MARKETS TAX CREDIT FOR NATIVE AMERICAN RESERVATIONS.

    ``(a) Allowance of Credit.--
            ``(1) In general.--For purposes of section 38, in the case 
        of a taxpayer who holds a qualified equity investment on a 
        credit allowance date of such investment which occurs during 
        the taxable year, the Native American new markets tax credit 
        determined under this section for such taxable year is an 
        amount equal to the applicable percentage of the amount paid to 
        the reservation development entity for such investment at its 
        original issue.
            ``(2) Applicable percentage.--For purposes of paragraph 
        (1), the applicable percentage is--
                    ``(A) 5 percent with respect to the first 3 credit 
                allowance dates, and
                    ``(B) 6 percent with respect to the remainder of 
                the credit allowance dates.
            ``(3) Credit allowance date.--For purposes of paragraph 
        (1), the term `credit allowance date' means, with respect to 
        any qualified equity investment--
                    ``(A) the date on which such investment is 
                initially made, and
                    ``(B) each of the 6 anniversary dates of such date 
                thereafter.
    ``(b) Qualified Equity Investment.--For purposes of this section--
            ``(1) In general.--The term `qualified equity investment' 
        means any equity investment in a reservation development entity 
        if--
                    ``(A) such investment is acquired by the taxpayer 
                at its original issue (directly or through an 
                underwriter) solely in exchange for cash,
                    ``(B) substantially all of such cash is used by the 
                reservation development entity to make qualified low-
                income reservation investments, and
                    ``(C) such investment is designated for purposes of 
                this section by the reservation development entity.
        Such term shall not include any equity investment issued by a 
        reservation development entity more than 5 years after the date 
        that such entity receives an allocation under subsection (f). 
        Any allocation not used within such 5-year period may be 
        reallocated by the Secretary under subsection (f).
            ``(2) Limitation.--The maximum amount of equity investments 
        issued by a reservation development entity which may be 
        designated under paragraph (1)(C) by such entity shall not 
        exceed the portion of the limitation amount allocated under 
        subsection (f) to such entity.
            ``(3) Safe harbor for determining use of cash.--The 
        requirement of paragraph (1)(B) shall be treated as met if at 
        least 85 percent of the aggregate gross assets of the 
        reservation development entity are invested in qualified low-
        income reservation investments.
            ``(4) Treatment of subsequent purchasers.--The term 
        `qualified equity investment' includes any equity investment 
        which would (but for paragraph (1)(A)) be a qualified equity 
        investment in the hands of the taxpayer if such investment was 
        a qualified equity investment in the hands of a prior holder.
            ``(5) Redemptions.--A rule similar to the rule of section 
        1202(c)(3) shall apply for purposes of this subsection.
            ``(6) Equity investment.--The term `equity investment' 
        means--
                    ``(A) any stock (other than nonqualified preferred 
                stock as defined in section 351(g)(2)) in an entity 
                which is a corporation, and
                    ``(B) any capital interest in an entity which is a 
                partnership.
    ``(c) Reservation Development Entity.--For purposes of this 
section--
            ``(1) In general.--The term `reservation development 
        entity' means any domestic corporation or partnership if--
                    ``(A) the primary mission of the entity is serving, 
                or providing investment capital for, low-income 
                reservations,
                    ``(B) the entity maintains accountability to 
                residents of low-income reservations through their 
                representation on any governing board of the entity or 
                on any advisory board to the entity, and
                    ``(C) the entity is certified by the Secretary for 
                purposes of this section as being a reservation 
                development entity.
            ``(2) Exception.--For purposes of subparagraph (C) of 
        paragraph (1), the Secretary shall not certify an entity as a 
        reservation development entity if such entity is also certified 
        as a qualified community development entity under section 
        45D(c).
    ``(d) Qualified Low-Income Reservation Investments.--For purposes 
of this section--
            ``(1) In general.--The term `qualified low-income 
        reservation investment' means--
                    ``(A) any capital or equity investment in, or loan 
                to, any qualified active low-income reservation 
                business,
                    ``(B) the purchase from another reservation 
                development entity of any loan made by such entity 
                which is a qualified low-income reservation investment,
                    ``(C) financial counseling and other services 
                specified in regulations prescribed by the Secretary to 
                businesses located in, and residents of, low-income 
                reservations, and
                    ``(D) any equity investment in, or loan to, any 
                reservation development entity.
            ``(2) Qualified active low-income reservation business.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `qualified active low-income reservation 
                business' means, with respect to any taxable year, any 
corporation (including a nonprofit corporation) or partnership if for 
such year--
                            ``(i) at least 50 percent of the total 
                        gross income of such entity is derived from the 
                        active conduct of a qualified business within 
                        any low-income reservation,
                            ``(ii) a substantial portion of the use of 
                        the tangible property of such entity (whether 
                        owned or leased) is within any low-income 
                        reservation,
                            ``(iii) a substantial portion of the 
                        services performed for such entity by its 
                        employees are performed in any low-income 
                        reservation,
                            ``(iv) less than 5 percent of the average 
                        of the aggregate unadjusted bases of the 
                        property of such entity is attributable to 
                        collectibles (as defined in section 408(m)(2)) 
                        other than collectibles that are held primarily 
                        for sale to customers in the ordinary course of 
                        such business, and
                            ``(v) less than 5 percent of the average of 
                        the aggregate unadjusted bases of the property 
                        of such entity is attributable to nonqualified 
                        financial property (as defined in section 
                        1397C(e)).
                    ``(B) Proprietorship.--Such term shall include any 
                business carried on by an individual as a proprietor if 
                such business would meet the requirements of 
                subparagraph (A) were it incorporated.
                    ``(C) Portions of business may be qualified active 
                low-income reservation business.--The term `qualified 
                active low-income reservation business' includes any 
                trades or businesses which would qualify as a qualified 
                active low-income reservation business if such trades 
                or businesses were separately incorporated.
            ``(3) Qualified business.--For purposes of this subsection, 
        the term `qualified business' has the meaning given to such 
        term by section 45D(d)(3).
    ``(e) Low-Income Reservation.--For purposes of this section, the 
term `low-income reservation' means any Indian reservation (as defined 
in section 168(j)(6)) which has a poverty rate of at least 40 percent.
    ``(f) National Limitation on Amount of Investments Designated.--
            ``(1) In general.--There is a Native American new markets 
        tax credit limitation of $50,000,000 for each of calendar years 
        2004 through 2007.
            ``(2) Allocation of limitation.--The limitation under 
        paragraph (1) shall be allocated by the Secretary among 
        reservation development entities selected by the Secretary. In 
        making allocations under the preceding sentence, the Secretary 
        shall give priority to any entity--
                    ``(A) with a record of having successfully provided 
                capital or technical assistance to disadvantaged 
                businesses or communities, or
                    ``(B) which intends to satisfy the requirement 
                under subsection (b)(1)(B) by making qualified low-
                income reservation investments in 1 or more businesses 
                in which persons unrelated to such entity (within the 
                meaning of section 267(b) or 707(b)(1)) hold the 
                majority equity interest.
            ``(3) Carryover of unused limitation.--If the Native 
        American new markets tax credit limitation for any calendar 
        year exceeds the aggregate amount allocated under paragraph (2) 
        for such year, such limitation for the succeeding calendar year 
        shall be increased by the amount of such excess. No amount may 
        be carried under the preceding sentence to any calendar year 
        after 2014.
    ``(g) Recapture of Credit in Certain Cases.--
            ``(1) In general.--If, at any time during the 7-year period 
        beginning on the date of the original issue of a qualified 
        equity investment in a reservation development entity, there is 
        a recapture event with respect to such investment, then the tax 
        imposed by this chapter for the taxable year in which such 
        event occurs shall be increased by the credit recapture amount.
            ``(2) Credit recapture amount.--For purposes of paragraph 
        (1), the credit recapture amount is an amount equal to the sum 
        of--
                    ``(A) the aggregate decrease in the credits allowed 
                to the taxpayer under section 38 for all prior taxable 
                years which would have resulted if no credit had been 
                determined under this section with respect to such 
                investment, plus
                    ``(B) interest at the underpayment rate established 
                under section 6621 on the amount determined under 
                subparagraph (A) for each prior taxable year for the 
                period beginning on the due date for filing the return 
                for the prior taxable year involved.
        No deduction shall be allowed under this chapter for interest 
        described in subparagraph (B).
            ``(3) Recapture event.--For purposes of paragraph (1), 
        there is a recapture event with respect to an equity investment 
        in a reservation development entity if--
                    ``(A) such entity ceases to be a reservation 
                development entity,
                    ``(B) the proceeds of the investment cease to be 
                used as required in subsection (b)(1)(B), or
                    ``(C) such investment is redeemed by such entity.
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the taxable 
                year shall be increased under paragraph (1) only with 
                respect to credits allowed by reason of this section 
                which were used to reduce tax liability. In the case of 
                credits not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 shall be 
                appropriately adjusted.
                    ``(B) No credits against tax.--Any increase in tax 
                under this subsection shall not be treated as a tax 
                imposed by this chapter for purposes of determining the 
amount of any credit under this chapter or for purposes of section 55.
    ``(h) Basis Reduction.--The basis of any qualified equity 
investment shall be reduced by the amount of any credit determined 
under this section with respect to such investment. This subsection 
shall not apply for purposes of sections 1202, 1400B, and 1400F.
    ``(i) Regulations.--The Secretary shall prescribe such regulations 
as may be appropriate to carry out this section, including 
regulations--
            ``(1) which limit the credit for investments which are 
        directly or indirectly subsidized by other Federal tax benefits 
        (including the credit under section 42 and the exclusion from 
        gross income under section 103),
            ``(2) which prevent the abuse of the purposes of this 
        section,
            ``(3) which provide rules for determining whether the 
        requirement of subsection (b)(1)(B) is treated as met,
            ``(4) which impose appropriate reporting requirements, and
            ``(5) which apply the provisions of this section to newly 
        formed entities.''.
    (b) Credit Made Part of General Business Credit.--
            (1) In general.--Subsection (b) of section 38 is amended by 
        redesignating paragraphs (14) and (15) as paragraphs (15) and 
        (16), respectively, and by inserting after paragraph (13) the 
        following new paragraph:
            ``(14) the Native American new markets tax credit 
        determined under section 45E(a),''.
            (2) Limitation on carryback.--Subsection (d) of section 39 
        is amended by redesignating paragraph (10) as paragraph (11) 
        and by inserting after paragraph (9) the following new 
        paragraph:
            ``(10) No carryback of native american new markets tax 
        credit before january 1, 2004.--No portion of the unused 
        business credit for any taxable year which is attributable to 
        the credit under section 45E may be carried back to a taxable 
        year ending before January 1, 2004.''.
    (c) Deduction for Unused Credit.--Subsection (c) of section 196 is 
amended by redesignating paragraph (10) as paragraph (11), by striking 
``and'' at the end of paragraph (9), and by inserting after paragraph 
(9) the following new paragraph:
            ``(10) the Native American new markets tax credit 
        determined under section 45E(a), and''.
    (d) Conforming Amendments.--
            (1) Section 38(b)(15), as redesignated by subsection 
        (b)(1), is amended--
                    (A) by striking ``45E(c)'' and inserting 
                ``45F(c)'', and
                    (B) by striking ``45E(a)'' and inserting 
                ``45F(a)''.
            (2) Section 38(b)(16), as redesignated by subsection 
        (b)(1), is amended by striking ``45F(a)'' and inserting 
        ``45G(a)''.
            (3) Section 39(d)(11), as redesignated by subsection 
        (b)(2), is amended by striking ``section 45E'' and inserting 
        ``section 45F''.
            (4) Section 196(c)(11), as redesignated by subsection (c), 
        is amended by striking ``45E(a)'' and inserting ``45F(a)''.
            (5) Section 1016(a)(28) is amended--
                    (A) by striking ``under section 45F'' and inserting 
                ``under section 45G'', and
                    (B) by striking ``section 45F(f)(1)'' and inserting 
                ``section 45G(f)(1)''.
    (e) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 is amended by striking the items 
relating to sections 45E and 45F and inserting the following:

                              ``Sec. 45E. New markets tax credit for 
                                        Native American reservations.
                              ``Sec. 45F. Small employer pension plan 
                                        startup costs.
                              ``Sec. 45G. Employer-provided child care 
                                        credit.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to investments made after December 31, 2003.
    (f) Guidance on Allocation of National Limitation.--Not later than 
120 days after the date of the enactment of this Act, the Secretary of 
the Treasury or the Secretary's delegate shall issue guidance which 
specifies--
            (1) how entities shall apply for an allocation under 
        section 45E(f)(2) of the Internal Revenue Code of 1986, as 
        added by this section;
            (2) the competitive procedure through which such 
        allocations are made; and
            (3) the actions that such Secretary or delegate shall take 
        to ensure that such allocations are properly made to 
        appropriate entities.
    (g) Audit and Report.--Not later than January 31 of 2007 and 2010, 
the Comptroller General of the United States shall, pursuant to an 
audit of the Native American new markets tax credit program established 
under section 45E of the Internal Revenue Code of 1986 (as added by 
subsection (a)), report to Congress on such program, including all 
reservation development entities that receive an allocation under the 
Native American new markets credit under such section.
    (h) Grants in Coordination With Credit.--
            (1) In general.--The Secretary of the Treasury is 
        authorized to award a grant of not more than $1,000,000 to the 
        First Nations Oweesta Corporation.
            (2) Use of funds.--The grant awarded under paragraph (1) 
        may be used--
                    (A) to enhance the capacity of people living on 
                low-income reservations (within the meaning of section 
                45E(e) of the Internal Revenue Code of 1986, as added 
                by this section) to access, apply, control, create, 
                leverage, utilize, and retain the financial benefits to 
                such low-income reservations which are attributable to 
                qualified low-income reservation investments (within 
                the meaning of section 45E(d) of such Code), and
                    (B) to provide access to appropriate financial 
                capital for the development of such low-income 
                reservations.
            (3) Authorization of appropriations.--There are authorized 
        to be appropriated $1,000,000 for fiscal years 2005 through 
2015 to carry out the provisions of this subsection.

SEC. 308. MODIFICATIONS OF AUTHORITY OF INDIAN TRIBAL GOVERNMENTS TO 
              ISSUE TAX-EXEMPT BONDS.

    (a) In General.--Paragraph (1) of section 7871(c) (relating to 
Indian tribal governments treated as States for certain purposes) is 
amended to read as follows:
            ``(1) In general.--Subsection (a) of section 103 shall 
        apply to any obligation issued by an Indian tribal government 
        (or subdivision thereof) only if--
                    ``(A) such obligation--
                            ``(i) is part of an issue 95 percent or 
                        more of the net proceeds of which are to be 
                        used to finance any facility located on an 
                        Indian reservation, and
                            ``(ii) is issued before January 1, 2006, or
                    ``(B) such obligation is part of an issue 
                substantially all of the proceeds of which are to be 
                used in the exercise of any essential governmental 
                function.''.
    (b) Special Rules and Definitions.--Subsection (c) of section 7871 
is amended by inserting at the end the following new paragraph:
            ``(4) Special rules and definitions.--
                    ``(A) Exclusion of gaming.--An obligation described 
                in subparagraph (A) or (B) of paragraph (1) may not be 
                used to finance any portion of a building in which 
                class II or III gaming (as defined in section 4 of the 
                Indian Gaming Regulatory Act (25 U.S.C. 2702)) is 
                conducted or housed.
                    ``(B) Indian reservation.--For purposes of 
                paragraph (1), the term `Indian reservation' means--
                            ``(i) a reservation, as defined in section 
                        4(10) of the Indian Child Welfare Act of 1978 
                        (25 U.S.C. 1903(10)), and
                            ``(ii) lands held under the provisions of 
                        the Alaska Native Claims Settlement Act (43 
                        U.S.C. 1601 et seq.) by a Native corporation as 
                        defined in section 3(m) of such Act (43 U.S.C. 
                        1602(m)).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to obligations issued after the date of the enactment of this 
Act.

SEC. 309. INDIAN SCHOOL CONSTRUCTION.

    (a) Definitions.--In this section:
            (1) Bureau.--The term ``Bureau'' means the Bureau of Indian 
        Affairs of the Department.
            (2) Department.--The term ``Department'' means the 
        Department of the Interior.
            (3) Escrow account.--The term ``escrow account'' means the 
        tribal school modernization escrow account established under 
        subsection (b)(6)(B)(i).
            (4) Indian.--The term ``Indian'' means any individual who 
        is a member of an Indian tribe.
            (5) Indian tribe.--
                    (A) In general.--The term ``Indian tribe'' has the 
                meaning given the term ``Indian tribal government'' by 
                section 7701(a)(40) of the Internal Revenue Code of 
                1986 (including the application of section 7871(d) of 
                that Code).
                    (B) Inclusion.--The term ``Indian tribe'' includes 
                a consortium of Indian tribes approved by the 
                Secretary.
            (6) Secretary.--The term ``Secretary'' means the Secretary 
        of the Interior.
            (7) Tribal school.--The term ``tribal school'' means an 
        elementary school, secondary school, or dormitory that--
                    (A) is operated by a tribal organization or the 
                Bureau for the education of Indian children; and
                    (B) under a contract, a grant, or an agreement, or 
                for a Bureau-operated school, receives financial 
                assistance to pay the costs of operation from funds 
                made available under--
                            (i) section 102, 103(a), or 208 of the 
                        Indian Self-Determination and Education 
                        Assistance Act (25 U.S.C. 450f, 450h(a), 458d); 
                        or
                            (ii) the Tribally Controlled Schools Act of 
                        1988 (25 U.S.C. 2501 et seq.).
    (b) Issuance of Bonds.--
            (1) In general.--The Secretary shall establish a pilot 
        program under which eligible Indian tribes may issue qualified 
        tribal school modernization bonds to provide funding for the 
        construction, rehabilitation, or repair of tribal schools 
        (including the advance planning and design of tribal schools).
            (2) Eligibility.--
                    (A) In general.--To be eligible to issue any 
                qualified tribal school modernization bond under the 
                program under paragraph (1), an Indian tribe shall--
                            (i) prepare and submit to the Secretary a 
                        plan of construction that meets the 
                        requirements of subparagraph (B);
                            (ii) provide for quarterly and final 
                        inspection of the project by the Bureau; and
                            (iii) pledge that the facilities financed 
                        by the bond will be used primarily for 
                        elementary and secondary educational purposes 
                        for not less than the period during which the 
                        bond remains outstanding.
                    (B) Plan of construction.--A plan of construction 
                referred to in subparagraph (A)(i) meets the 
                requirements of this subparagraph if the plan--
                            (i) contains a description of the 
                        construction to be carried out with funding 
                        provided under a qualified tribal school 
                        modernization bond;
                            (ii) demonstrates that a comprehensive 
                        survey has been completed to determine the 
                        construction needs of the tribal school 
                        involved;
                            (iii) contains assurances that funding 
                        under the bond will be used only for the 
                        activities described in the plan;
                            (iv) contains a response to the evaluation 
                        criteria contained in Instructions and 
                        Application for Replacement School 
                        Construction, Revision 6, dated February 6, 
                        1999; and
                            (v) contains any other reasonable and 
                        related information determined to be 
                        appropriate by the Secretary.
                    (C) Priority.--In determining whether an Indian 
                tribe is eligible to participate in the program under 
                this subsection, the Secretary shall give priority to 
                an Indian tribe that, as demonstrated by the relevant 
                plans of construction, will fund projects--
                            (i) described in the Education Facilities 
                        Replacement Construction Priorities List, as of 
                        fiscal year 2000, of the Bureau (65 Fed. Reg. 
                        4623);
                            (ii) described in any subsequent priorities 
                        list published in the Federal Register; or
                            (iii) that meet the criteria for ranking 
                        schools as described in Instructions and 
                        Application for Replacement School 
                        Construction, Revision 6, dated February 6, 
                        1999.
                    (D) Advance planning and design funding.--
                            (i) In general.--An Indian tribe may 
                        propose in the plan of construction of the 
                        Indian tribe to receive advance planning and 
                        design funding from the escrow account.
                            (ii) Conditions on allocation of funds.--As 
                        a condition to the allocation to an Indian 
                        tribe of advance planning and design funds from 
                        the escrow account under clause (i), the Indian 
                        tribe shall agree--
                                    (I) to issue qualified tribal 
                                school modernization bonds after the 
                                date of receipt of the funds; and
                                    (II) as a condition of each bond 
                                issuance, that the Indian tribe will 
                                deposit into the escrow account, or a 
                                fund managed by the trustee as 
                                described in paragraph (4)(C), an 
                                amount equal to the amount of funds 
                                received from the escrow account.
            (3) Permissible activities.--In addition to the use of 
        funds permitted under paragraph (1), an Indian tribe may use 
        amounts received through the issuance of a qualified tribal 
        school modernization bond--
                    (A) to enter into and make payments under contracts 
                with licensed and bonded architects, engineers, and 
                construction firms--
                            (i) to determine the needs of the tribal 
                        school; and
                            (ii) for the design and engineering of the 
                        tribal school;
                    (B) to enter into and make payments under contracts 
                with financial advisers, underwriters, attorneys, 
                trustees, and other professionals who would be able to 
                provide assistance to the Indian tribe in issuing 
                bonds; and
                    (C) to carry out other activities determined to be 
                appropriate by the Secretary.
            (4) Bond trustee.--
                    (A) In general.--Notwithstanding any other 
                provision of law, any qualified tribal school 
                modernization bond issued by an Indian tribe under this 
                subsection shall be subject to a trust agreement 
                between the Indian tribe and a trustee.
                    (B) Trustee.--Any bank or trust company that meets 
                requirements established by the Secretary may be 
                designated as a trustee under subparagraph (A).
                    (C) Content of trust agreement.--A trust agreement 
                entered into by an Indian tribe under this paragraph 
                shall specify that the trustee, with respect to any 
                bond issued under this subsection, shall--
                            (i) act as a repository for the proceeds of 
                        the bond;
                            (ii) make payments to bondholders;
                            (iii) receive, as a condition to the 
                        issuance of the bond, a transfer of funds from 
                        the escrow account, or from other funds 
                        furnished by or on behalf of the Indian tribe, 
                        in an amount that (including interest earnings 
                        from the investment of the funds in obligations 
                        of, or fully guaranteed by, the United States, 
                        or from other investments authorized by 
                        paragraph (10)) will produce funds sufficient 
                        to timely pay in full the entire principal 
                        amount of the bond on the stated maturity date 
                        of the bond;
                            (iv) invest the funds transferred under 
                        clause (iii) in an investment described in that 
                        clause; and
                            (v)(I) hold and invest the funds 
                        transferred under clause (iii) in a segregated 
                        fund or account under the agreement; and
                            (II) use the fund or account solely for 
                        payment of the costs of items described in 
                        paragraph (3).
                    (D) Requirements for making direct payments.--
                            (i) Payments.--
                                    (I) In general.--Notwithstanding 
                                any other provision of law, the trustee 
                                shall make any payment referred to in 
                                subparagraph (C)(v) in accordance with 
                                such requirements as the Indian tribe 
                                shall prescribe in the trust agreement 
                                entered into under subparagraph (C).
                                    (II) Inspection.--Before making a 
                                payment for a project to a contractor 
                                under subparagraph (C)(v), to ensure 
                                completion of the project, the trustee 
                                shall require an inspection of the 
                                project by--
                                            (aa) a local financial 
                                        institution; or
                                            (bb) an independent 
                                        inspecting architect or 
                                        engineer.
                            (ii) Contracts.--Each contract referred to 
                        in paragraph (3) shall specify, or be 
                        renegotiated to specify, that payments under 
                        the contract shall be made in accordance with 
                        this paragraph.
            (5) Payments of principal and interest.--
                    (A) Principal.--
                            (i) In general.--No principal payment on 
                        any qualified tribal school modernization bond 
                        shall be required under this subsection until 
                        the final, stated date on which the bond 
                        reaches maturity.
                            (ii) Maturity; outstanding principal.--With 
                        respect to a qualified tribal school 
                        modernization bond issued under this 
                        subsection--
                                    (I) the bond shall reach maturity 
                                not later than 15 years after the date 
                                of issuance of the bond; and
                                    (II) on the date on which the bond 
                                reaches maturity, the entire 
                                outstanding principal under the bond 
                                shall become due and payable.
                    (B) Interest.--There shall be awarded a tax credit 
                under section 1400M of the Internal Revenue Code of 
                1986 in lieu of interest on a qualified tribal school 
                modernization bond issued under this subsection.
            (6) Bond guarantees.--
                    (A) In general.--Payment of the principal portion 
                of a qualified tribal school modernization bond issued 
                under this subsection shall be guaranteed solely by 
                amounts deposited with each respective bond trustee as 
                described in paragraph (4)(C)(iii).
                    (B) Establishment of account.--
                            (i) In general.--Notwithstanding any other 
                        provision of law, the Secretary may--
                                    (I) establish a tribal school 
                                modernization escrow account; and
                                    (II) beginning in fiscal year 2005, 
                                from amounts made available for school 
                                replacement under the construction 
                                account of the Bureau, deposit not more 
                                than $30,000,000 for each fiscal year 
                                into the escrow account.
                            (ii) Transfers of excess proceeds.--Excess 
                        proceeds held under any trust agreement that 
                        are not needed for any of the purposes 
                        described in clauses (iii) and (v) of paragraph 
                        (4)(C) shall be transferred, from time to time, 
                        by the trustee for deposit into the escrow 
                        account.
                            (iii) Payments.--The Secretary shall use 
                        any amounts deposited in the escrow account 
                        under clauses (i) and (ii)--
                                    (I) to make payments to trustees 
                                appointed and acting in accordance with 
                                paragraph (4); or
                                    (II) to make payments described in 
                                paragraph (2)(D).
            (7) Limitations.--
                    (A) Obligation to repay.--
                            (i) In general.--Notwithstanding any other 
                        provision of law, the principal amount on any 
                        qualified tribal school modernization bond 
                        issued under this subsection shall be repaid 
                        only to the extent of any escrowed funds 
                        provided under paragraph (4)(C)(iii).
                            (ii) No guarantee.--No qualified tribal 
                        school modernization bond issued by an Indian 
                        tribe under this subsection shall be an 
                        obligation of, and no payment of the principal 
                        of such a bond shall be guaranteed by--
                                    (I) the United States;
                                    (II) the Indian tribe; or
                                    (III) the tribal school for which 
                                the bond was issued.
                    (B) Land and facilities.--No land or facility 
                purchased or improved with amounts derived from a 
                qualified tribal school modernization bond issued under 
                this subsection shall be mortgaged or used as 
                collateral for the bond.
            (8) Sale of bonds.--A qualified tribal school modernization 
        bond may be sold at a purchase price equal to, in excess of, or 
        at a discount from, the par amount of the bond.
            (9) Treatment of trust agreement earnings.--No amount 
        earned through the investment of funds under the control of a 
        trustee under any trust agreement described in paragraph (4) 
        shall be subject to Federal income taxation.
            (10) Investment of sinking funds.--A sinking fund 
        established for the purpose of the payment of principal on a 
        qualified tribal school modernization bond issued under this 
        subsection shall be invested in--
                    (A) obligations issued by or guaranteed by the 
                United States; or
                    (B) such other assets as the Secretary of the 
                Treasury may by regulation allow.
    (c) Expansion of Incentives for Tribal Schools.--Chapter 1 is 
amended by adding at the end the following new subchapter:

         ``Subchapter Z--Tribal School Modernization Provisions

``Sec. 1400M. Credit to holders of qualified tribal school 
                            modernization bonds.

``SEC. 1400M. CREDIT TO HOLDERS OF QUALIFIED TRIBAL SCHOOL 
              MODERNIZATION BONDS.

    ``(a) Allowance of Credit.--In the case of a taxpayer who holds a 
qualified tribal school modernization bond on a credit allowance date 
of such bond which occurs during the taxable year, there shall be 
allowed as a credit against the tax imposed by this chapter for such 
taxable year an amount equal to the sum of the credits determined under 
subsection (b) with respect to credit allowance dates during such year 
on which the taxpayer holds such bond.
    ``(b) Amount of Credit.--
            ``(1) In general.--The amount of the credit determined 
        under this subsection with respect to any credit allowance date 
        for a qualified tribal school modernization bond is 25 percent 
        of the annual credit determined with respect to such bond.
            ``(2) Annual credit.--The annual credit determined with 
        respect to any qualified tribal school modernization bond is 
        the product of--
                    ``(A) the applicable credit rate, multiplied by
                    ``(B) the outstanding face amount of the bond.
            ``(3) Applicable credit rate.--For purposes of paragraph 
        (1), the applicable credit rate with respect to an issue is the 
        rate equal to an average market yield (as of the date of sale 
of the issue) on outstanding long-term corporate obligations (as 
determined by the Secretary).
            ``(4) Special rule for issuance and redemption.--In the 
        case of a bond which is issued during the 3-month period ending 
        on a credit allowance date, the amount of the credit determined 
        under this subsection with respect to such credit allowance 
        date shall be a ratable portion of the credit otherwise 
        determined based on the portion of the 3-month period during 
        which the bond is outstanding. A similar rule shall apply when 
        the bond is redeemed.
    ``(c) Limitation Based on Amount of Tax.--
            ``(1) In general.--The credit allowed under subsection (a) 
        for any taxable year shall not exceed the excess of--
                    ``(A) the sum of the regular tax liability (as 
                defined in section 26(b)) plus the tax imposed by 
                section 55, over
                    ``(B) the sum of the credits allowable under part 
                IV of subchapter A (other than subpart C thereof, 
                relating to refundable credits).
            ``(2) Carryover of unused credit.--If the credit allowable 
        under subsection (a) exceeds the limitation imposed by 
        paragraph (1) for such taxable year, such excess shall be 
        carried to the succeeding taxable year and added to the credit 
        allowable under subsection (a) for such taxable year.
    ``(d) Qualified Tribal School Modernization Bond; Other 
Definitions.--For purposes of this section--
            ``(1) Qualified tribal school modernization bond.--
                    ``(A) In general.--The term `qualified tribal 
                school modernization bond' means, subject to 
                subparagraph (B), any bond issued as part of an issue 
                under section 309(b) of the Heartland Investment and 
                Rural Employment (HIRE) Act, as in effect on the date 
                of the enactment of this section, if--
                            ``(i) 95 percent or more of the proceeds of 
                        such issue are to be used for the construction, 
                        rehabilitation, or repair of a school facility 
                        funded by the Bureau of Indian Affairs of the 
                        Department of the Interior or for the 
                        acquisition of land on which such a facility is 
                        to be constructed with part of the proceeds of 
                        such issue,
                            ``(ii) the bond is issued by an Indian 
                        tribe,
                            ``(iii) the issuer designates such bond for 
                        purposes of this section, and
                            ``(iv) the term of each bond which is part 
                        of such issue does not exceed 15 years.
                    ``(B) National limitation on amount of bonds 
                designated.--
                            ``(i) National limitation.--There is a 
                        national qualified tribal school modernization 
                        bond limitation for each calendar year. Such 
                        limitation is--
                                    ``(I) $200,000,000 for 2005,
                                    ``(II) $200,000,000 for 2006, and
                                    ``(III) zero after 2006.
                            ``(ii) Allocation of limitation.--The 
                        national qualified tribal school modernization 
                        bond limitation shall be allocated to Indian 
                        tribes by the Secretary of the Interior subject 
                        to the provisions of section 309 of the 
                        Heartland Investment and Rural Employment 
                        (HIRE) Act, as in effect on the date of the 
                        enactment of this section.
                            ``(iii) Designation subject to limitation 
                        amount.--The maximum aggregate face amount of 
                        bonds issued during any calendar year which may 
                        be designated under subsection (d)(1) with 
                        respect to any Indian tribe shall not exceed 
                        the limitation amount allocated to such 
                        government under clause (ii) for such calendar 
                        year.
                            ``(iv) Carryover of unused limitation.--If 
                        for any calendar year--
                                    ``(I) the limitation amount under 
                                this subparagraph, exceeds
                                    ``(II) the amount of qualified 
                                tribal school modernization bonds 
                                issued during such year,
                        the limitation amount under this subparagraph 
                        for the following calendar year shall be 
                        increased by the amount of such excess. The 
                        preceding sentence shall not apply if such 
                        following calendar year is after 2012.
            ``(2) Credit allowance date.--The term `credit allowance 
        date' means--
                    ``(A) March 15,
                    ``(B) June 15,
                    ``(C) September 15, and
                    ``(D) December 15.
        Such term includes the last day on which the bond is 
        outstanding.
            ``(3) Bond.--The term `bond' includes any obligation.
            ``(4) Tribe.--The term `tribe' has the meaning given the 
        term `Indian tribal government' by section 7701(a)(40), 
        including the application of section 7871(d). Such term 
        includes any consortium of tribes approved by the Secretary of 
        the Interior.
    ``(e) Credit Included in Gross Income.--Gross income includes the 
amount of the credit allowed to the taxpayer under this section 
(determined without regard to subsection (c)) and the amount so 
included shall be treated as interest income.
    ``(f) Bonds Held by Regulated Investment Companies.--If any 
qualified tribal school modernization bond is held by a regulated 
investment company, the credit determined under subsection (a) shall be 
allowed to shareholders of such company under procedures prescribed by 
the Secretary.
    ``(g) Treatment for Estimated Tax Purposes.--Solely for purposes of 
sections 6654 and 6655, the credit allowed by this section to a 
taxpayer by reason of holding a qualified tribal school modernization 
bonds on a credit allowance date shall be treated as if it were a 
payment of estimated tax made by the taxpayer on such date.
    ``(h) Credit Treated as Allowed Under Part IV of Subchapter A.--For 
purposes of subtitle F, the credit allowed by this section shall be 
treated as a credit allowable under part IV of subchapter A of this 
chapter.
    ``(i) Reporting.--Issuers of qualified tribal school modernization 
bonds shall submit reports similar to the reports required under 
section 149(e).''.
    (d) Conforming Amendment.--The table of subchapters for chapter 1 
is amended by adding at the end the following new item:

                              ``Subchapter Z. Tribal school 
                                        modernization provisions.''.
    (e) Additional Provisions.--
            (1) Sovereign immunity.--This section and the amendments 
        made by this section shall not be construed to impact, limit, 
        or affect the sovereign immunity of the Federal Government or 
        any State or tribal government.
            (2) Application.--This section and the amendments made by 
        this section shall take effect on the date of the enactment of 
        this Act with respect to bonds issued after December 31, 2004, 
        regardless of the status of regulations promulgated thereunder.

SEC. 310. COMMUNITY HOMEOWNERSHIP CREDIT.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1, 
as amended by this Act, is amended by inserting after section 42B the 
following new section:

``SEC. 42C. COMMUNITY HOMEOWNERSHIP CREDIT.

    ``(a) Allowance of Credit.--For purposes of section 38, the amount 
of the homeownership credit determined under this section for any 
taxable year in the credit period shall be an amount equal to the 
applicable percentage of the eligible basis of each qualified 
residence.
    ``(b) Applicable Percentage.--For purposes of this section--
            ``(1) In general.--The term `applicable percentage' means 
        the appropriate percentage prescribed by the Secretary for the 
        month in which the taxpayer and the homeownership credit agency 
        enter into an agreement with respect to such residence (which 
        is binding on such agency, the taxpayer, and all successors in 
        interest) as to the homeownership credit dollar amount to be 
        allocated to such residence.
            ``(2) Method of prescribing percentage.--The percentage 
        prescribed by the Secretary for any month shall be the 
        percentage which will yield over a 5-year period amounts of 
        credit under subsection (a) which have a present value equal to 
        50 percent of the eligible basis of a qualified residence.
            ``(3) Method of discounting.--The present value under 
        paragraph (2) shall be determined--
                    ``(A) as of the last day of the 1st year of the 5-
                year period referred to in paragraph (2),
                    ``(B) by using a discount rate equal to 72 percent 
                of the annual Federal mid-term rate applicable under 
                section 1274(d)(1) to the month applicable under 
                paragraph (1) and compounded annually, and
                    ``(C) by assuming that the credit allowable under 
                this section for any year is received on the last day 
                of such year.
    ``(c) Qualified Residence.--For purposes of this section--
            ``(1) In general.--The term `qualified residence' means any 
        residence--
                    ``(A) which is located--
                            ``(i) in a census tract which has a median 
                        gross income which does not exceed 80 percent 
                        of the greater of national or state-wide median 
                        gross income,
                            ``(ii) in a rural area (as defined under 
                        section 520 of the Housing Act of 1949),
                            ``(iii) on a reservation for a federally 
                        recognized Indian tribe, or
                            ``(iv) in an area of chronic economic 
                        distress, and
                    ``(B) which is purchased by a qualified buyer.
        For purposes of subparagraph (A)(iv), an area is an area of 
        chronic economic distress if it is approved for designation as 
        such under section 143(j)(3); except that such designation 
        shall not require the approval of the Secretary, shall be 
        deemed to be approved by the Secretary of Housing and Urban 
        Development if not approved or disapproved by the Secretary of 
        Housing and Urban Development within 90 days after submission 
        for approval for purposes of section 143(j)(3)(A)(ii), and 
        shall cease to apply after the end of the 5th calendar year 
        after the calendar year in which the designation is made.
            ``(2) Residence.--
                    ``(A) In general.--For purposes of paragraph (1), 
                the term `residence' means--
                            ``(i) a single-family home containing 1 to 
                        4 housing units,
                            ``(ii) a condominium unit, or
                            ``(iii) stock in a cooperative housing 
                        corporation (as defined in section 216(b)).
                    ``(B) Factory-built homes included.--For purposes 
                of clause (i), (ii), or (iii) of subparagraph (A), such 
                term shall include any factory-built home.
            ``(3) Timing of determination.--For purposes of paragraph 
        (1), the determination of whether a residence is a qualified 
        residence shall be made at the time a binding commitment for an 
        allocation of credit is awarded by the homeownership credit 
        agency; except that the determination of whether a purchaser is 
        a qualified buyer shall be made at the time the residence is 
        sold.
            ``(4) Median gross income.--For purposes of this section, 
        median gross income shall be determined consistent with section 
        143(f)(2).
    ``(d) Eligible Basis.--For purposes of this section--
            ``(1) New qualified residences.--
                    ``(A) In general.--The eligible basis of a new 
                qualified residence is--
                            ``(i) in the case of a qualified residence 
                        which is sold in a transaction which meets the 
                        requirements of subparagraph (B), its adjusted 
                        basis (excluding land) immediately before such 
                        sale, and
                            ``(ii) zero in any other case.
                    ``(B) Requirements.--A sale of a qualified 
                residence meets the requirements of this subparagraph 
                if--
                            ``(i) the buyer acquires the qualified 
                        residence by purchase (as defined in section 
                        179(d)(2)),
                            ``(ii) the buyer of the qualified residence 
                        is not a related person with respect to the 
                        seller, and
                            ``(iii) in the case of a seller who 
                        materially participates in the development of 
                        the residence, the buyer's debt financing is 
                        originated by a third party who is not a 
                        related person with respect to the seller.
            ``(2) Existing qualified residences.--
                    ``(A) In general.--The eligible basis of an 
                existing qualified residence is--
                            ``(i) in the case of a qualified residence 
                        which is sold in a transaction which meets the 
                        requirements of subparagraph (B), its adjusted 
                        basis (excluding land) immediately before such 
                        sale, and
                            ``(ii) zero in any other case.
                    ``(B) Requirements.--A sale of a qualified 
                residence meets the requirements of this subparagraph 
                if--
                            ``(i) the buyer acquires the qualified 
                        residence by purchase (as defined in section 
                        179(d)(2)),
                            ``(ii) the qualified residence has 
                        undergone substantial rehabilitation in 
                        connection with the sale described in clause 
                        (i),
                            ``(iii) the buyer of the qualified 
                        residence is not a related person with respect 
                        to the seller, and
                            ``(iv) in the case of a seller who 
                        materially participates in the development of 
                        the residence, the buyer's debt financing is 
                        originated by a third party who is not a 
                        related person with respect to the seller.
                    ``(C) Substantial rehabilitation.--For purposes of 
                subparagraph (B), substantial rehabilitation means 
                rehabilitation expenditures paid or incurred with 
                respect to a qualified residence that are at least 
                $25,000.
                    ``(D) Limitation of acquisition basis.--The 
                eligible basis of an existing qualified residence may 
                not exceed 150 percent of the qualified rehabilitation 
                expenditures.
            ``(3) Effect of subsequent sale, etc.--A subsequent sale, 
        assignment, rental, or refinancing of the qualified residence 
        by the buyer or the subsequent sale, assignment, or pooling of 
        the buyer's financing by the originator shall not be considered 
        in determining whether or not the prior sales transaction 
        satisfied the requirements of subparagraph (B) of paragraph (1) 
        or (2).
            ``(4) Special rules relating to determination of adjusted 
        basis.--For purposes of this subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the adjusted basis of any qualified 
                residence--
                            ``(i) shall not include so much of the 
                        basis of such qualified residence as is 
                        determined by reference to the basis of other 
                        property held at any time by the person 
                        acquiring the residence, and
                            ``(ii) shall be determined without regard 
                        to the adjusted basis of any property which is 
                        not part of such qualified residence.
                    ``(B) Basis of property in common areas, etc., 
                included.--The adjusted basis of any qualified 
                residence shall be determined by taking into account 
                (on a pro rata basis) the adjusted basis of property 
                (other than land) used in common areas or provided as 
                comparable amenities to all residences within a 
                project.
            ``(5) Special rules for determining eligible basis.--
                    ``(A) Related person, etc.--For purposes of this 
                section, a person (in this clause referred to as the 
                `related person') is related to any person if the 
                related person bears a relationship to such person 
                specified in section 267(b) or 707(b)(1), or the 
                related person and such person are engaged in trades or 
                businesses under common control (within the meaning of 
                subsections (a) and (b) of section 52). For purposes of 
                the preceding sentence, in applying section 267(b) or 
                707(b)(1), `10 percent' shall be substituted for `50 
                percent'.
                    ``(B) Nonresidential space excluded.--No portion of 
                the eligible basis of a qualified residence shall 
                include costs attributable to nonresidential space.
                    ``(C) Limitation.--The eligible basis of any 
                residence may not exceed the mortgage limit for Federal 
                Housing Administration insured mortgages for single 
                family homes in the area in which such residence is 
                located.
    ``(e) Definition and Special Rules Relating to Credit Period.--
            ``(1) Credit period defined.--For purposes of this section, 
        the term `credit period' means, with respect to any qualified 
        residence, the period of 5 taxable years beginning with the 
        taxable year in which the sale of the qualified residence 
        occurs satisfying the requirements of subsection (d)(1)(B) or 
        (d)(2)(B).
            ``(2) Special rule for 1st year of credit period.--
                    ``(A) In general.--The credit allowable under 
                subsection (a) with respect to any qualified residence 
                for the 1st taxable year of the credit period shall be 
                determined by multiplying the eligible basis under 
                subsection (d) by the fraction--
                            ``(i) the numerator of which is the sum of 
                        the number of remaining whole months in such 
                        1st taxable year after the sale of the 
                        qualified residence, and
                            ``(ii) the denominator of which is 12.
                    ``(B) Disallowed 1st year credit allowed in 6th 
                year.--Any reduction by reason of subparagraph (A) in 
                the credit allowable (without regard to subparagraph 
                (A)) for the 1st taxable year of the credit period 
                shall be allowable under subsection (a) for the 1st 
                taxable year following the credit period.
    ``(f) Limitation on Aggregate Credit Allowable With Respect to 
Qualified Residences Located in a State.--
            ``(1) Credit may not exceed credit dollar amount allocated 
        to qualified residence.--
                    ``(A) In general.--The amount of the credit 
                determined under this section for any taxable year with 
                respect to any qualified residence shall not exceed the 
                homeownership credit dollar amount allocated to such 
                qualified residence under this subsection.
                    ``(B) Time for making allocation.--
                            ``(i) An allocation shall be taken into 
                        account under subparagraph (A) only if it is 
                        made not later than the close of the calendar 
                        year in which the qualified residence is sold.
                            ``(ii) A homeownership credit agency may 
                        allocate available homeownership credit dollar 
                        amounts to a qualified residence prior to the 
                        year of sale of such qualified residence if--
                                    ``(I) the taxpayer owns fee title 
                                or a leasehold interest of not less 
                                than 50 years in the site of the 
                                qualified residence as of the later of 
                                the date which is 6 months after the 
                                date that the allocation was made or 
                                the close of the calendar year in which 
                                the allocation is made, and
                                    ``(II) such qualified residence is 
                                completed not later than the close of 
                                the second calendar year following the 
                                calendar year in which the allocation 
                                was made.
                    ``(C) Vested right to credit dollar amount.--Once a 
                homeownership credit allocation is received by a 
                taxpayer, the right to such credit is vested in such 
                taxpayer and is not subject to recapture, except as 
                provided in paragraph (5)(B).
            ``(2) Homeownership credit dollar amount for agencies.--
                    ``(A) In general.--The aggregate homeownership 
                credit dollar amount which a homeownership credit 
                agency may allocate for any calendar year is the 
                portion of the State homeownership credit ceiling 
                allocated under this paragraph for such calendar year 
                to such agency.
                    ``(B) State ceiling initially allocated to state 
                homeownership credit agencies.--Except as provided in 
                subparagraphs (D) and (E), the State homeownership 
                credit ceiling for each calendar year shall be 
                allocated to the homeownership credit agency of such 
                State. If there is more than 1 homeownership credit 
                agency of a State, all such agencies shall be treated 
                as a single agency.
                    ``(C) State homeownership credit ceiling.--The 
                State homeownership credit ceiling applicable to any 
                State for any calendar year shall be an amount equal to 
                the sum of--
                            ``(i) the unused State homeownership credit 
                        ceiling (if any) of such State for the 
                        preceding calendar year,
                            ``(ii) the greater of--
                                    ``(I) $.50 multiplied by the State 
                                population, or
                                    ``(II) $2,000,000,
                            ``(iii) the amount of State homeownership 
                        credit ceiling returned in the calendar year, 
                        plus
                            ``(iv) the amount (if any) allocated under 
                        subparagraph (D) to such State by the 
                        Secretary.
                For purposes of clause (i), the unused State 
                homeownership credit ceiling for any calendar year is 
                the excess (if any) of the sum of the amounts described 
                in clauses (ii) through (iv) over the aggregate 
                homeownership credit dollar amount allocated for such 
                year. For purposes of clause (iii), the amount of State 
                homeownership credit ceiling returned in the calendar 
                year equals the homeownership credit dollar amount 
                previously allocated within the State to any qualified 
                residence with respect to which an allocation is 
                canceled by mutual consent of the homeownership credit 
                agency and the allocation recipient.
                    ``(D) Unused homeownership credit carryovers 
                allocated among certain states.--
                            ``(i) In general.--The unused homeownership 
                        credit carryover of a State for any calendar 
                        year shall be assigned to the Secretary for 
                        allocation among qualified States for the 
                        succeeding calendar year.
                            ``(ii) Unused homeownership credit 
                        carryover.--For purposes of this subparagraph, 
                        the unused homeownership credit carryover of a 
                        State for any calendar year is the excess (if 
                        any) of--
                                    ``(I) the unused State 
                                homeownership credit ceiling for the 
                                year preceding such year, over
                                    ``(II) the aggregate homeownership 
                                credit dollar amount allocated for such 
                                year.
                            ``(iii) Formula for allocation of unused 
                        homeownership credit carryovers among qualified 
                        states.--The amount allocated under this 
                        subparagraph to a qualified State for any 
                        calendar year shall be the amount determined by 
                        the Secretary to bear the same ratio to the 
                        aggregate unused homeownership credit 
                        carryovers of all States for the preceding 
                        calendar year as such State's population for 
                        the calendar year bears to the population of 
                        all qualified States for the calendar year.
                            ``(iv) Qualified state.--For purposes of 
                        this subparagraph, the term `qualified State' 
                        means, with respect to a calendar year, any 
                        State--
                                    ``(I) which allocated its entire 
                                State homeownership credit ceiling for 
                                the preceding calendar year, and
                                    ``(II) for which a request is made 
                                (not later than May 1 of the calendar 
                                year) to receive an allocation under 
                                clause (iii).
                    ``(E) State may provide for different allocation.--
                Rules similar to the rules of section 146(e) (other 
                than paragraph (2)(B) thereof) shall apply for purposes 
                of this paragraph.
                    ``(F) Population.--For purposes of this paragraph, 
                population shall be determined in accordance with 
                section 146(j).
            ``(3) Portion of state ceiling set-aside for certain 
        projects involving qualified nonprofit organizations.--
                    ``(A) In general.--Not more than 92.5 percent of 
                the State homeownership credit ceiling for any State 
                for any calendar year shall be allocated to projects 
                other than qualified nonprofit housing projects 
                described in subparagraph (B).
                    ``(B) Projects involving qualified nonprofit 
                organizations.--For purposes of subparagraph (A), a 
                qualified nonprofit housing project is described in 
                this subparagraph if a qualified nonprofit organization 
                is to own an interest in the project (directly or 
                through a partnership) and materially participate 
                (within the meaning of section 469(h)) in the 
                development and operation of the project throughout the 
                credit period.
                    ``(C) Qualified nonprofit organization.--For 
                purposes of this paragraph, the term `qualified 
nonprofit organization' means any organization if--
                            ``(i) such organization is described in 
                        paragraph (3) or (4) of section 501(c) and is 
                        exempt from tax under section 501(a),
                            ``(ii) such organization is determined by 
                        the State homeownership credit agency not to be 
                        affiliated with or controlled by a for-profit 
                        organization, and
                            ``(iii) 1 of the exempt purposes of such 
                        organization includes the fostering of low-
                        income housing.
                    ``(D) Treatment of certain subsidiaries.--
                            ``(i) In general.--For purposes of this 
                        paragraph, a qualified nonprofit organization 
                        shall be treated as satisfying the ownership 
                        and material participation test of subparagraph 
                        (B) if any qualified corporation in which such 
                        organization holds stock satisfies such test.
                            ``(ii) Qualified corporation.--For purposes 
                        of clause (i), the term `qualified corporation' 
                        means any corporation if 100 percent of the 
                        stock of such corporation is held by 1 or more 
                        qualified nonprofit organizations at all times 
                        during the period such corporation is in 
                        existence.
                    ``(E) State may not override set-aside.--Nothing in 
                subparagraph (E) of paragraph (2) shall be construed to 
                permit a State not to comply with subparagraph (A) of 
                this paragraph.
            ``(4) Limitation on allocations to areas of chronic 
        economic distress.--No more than 50 percent of a homeownership 
        credit agency's portion of the State homeownership credit 
        ceiling for a calendar year may be allocated to residences 
        located in areas that--
                    ``(A) are designated as areas of chronic economic 
                distress in accordance with paragraph (1) of subsection 
                (c), and
                    ``(B) do not meet the requirements of clause (i), 
                (ii), or (iii) of subsection (c)(1)(A).
            ``(5) Special rules.--
                    ``(A) Residence must be located within jurisdiction 
                of credit agency.--A homeownership credit agency may 
                allocate its aggregate homeownership credit dollar 
                amount only to qualified residences located in the 
                jurisdiction of the governmental unit of which such 
                agency is a part.
                    ``(B) Agency allocations in excess of limit.--If 
                the aggregate homeownership credit dollar amounts 
                allocated by a homeownership credit agency for any 
                calendar year exceed the portion of the State 
                homeownership credit ceiling allocated to such agency 
                for such calendar year, the homeownership credit dollar 
                amounts so allocated shall be reduced (to the extent of 
                such excess) for residences in the reverse of the order 
                in which the allocations of such amounts were made.
    ``(g) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Completed.--The term `completed' means the point in 
        time where a qualified residence is first placed in a condition 
        or state of readiness and availability for occupancy.
            ``(2) Project.--The term `project' means 1 or more 
        residences together with functionally related and subordinate 
        facilities developed and made available to inhabitants of such 
        residences, including recreational facilities and parking 
        areas. To constitute a project, each residence must--
                    ``(A) be developed by the same taxpayer pursuant to 
                common planning and feasibility studies,
                    ``(B) be financed through a common plan of 
                construction financing, and
                    ``(C) have common ownership prior to sale.
        For purposes of this paragraph, it is not necessary that all 
        residences within a project be contiguous or that all 
        residences consist only of either new residences or existing 
        residences and it is not necessary that each residence within a 
        project be a qualified residence.
            ``(3) Qualified buyer.--
                    ``(A) In general.--The term `qualified buyer' means 
                a buyer if at the time of the acquisition of the 
                qualified residence, the buyer--
                            ``(i) is 1 or more individuals whose income 
                        does not exceed 80 percent of the area median 
                        gross income (70 percent for families of less 
                        than 3 members), and
                            ``(ii) intends to occupy the residence as 
                        the buyer's principal residence (within the 
                        meaning of section 121).
                    ``(B) Special rules in qualified census tracts.--
                With respect to residences located in qualified census 
                tracts (as defined in section 42), subparagraph (A) 
                shall be applied by substituting `100 percent' for `80 
                percent' and `90 percent' for `70 percent'.
                    ``(C) Determination of income.--For purposes of 
                this paragraph, a buyer's income shall be determined in 
                accordance with section 143(f)(4), except that 
                subparagraph (B) of such section shall be applied 
                substituting `the national median gross income' for 
                `the statewide median gross income for the State in 
                which such residence is located'.
            ``(4) New qualified residence.--The term `new qualified 
        residence' means a qualified residence the original ownership 
        of which begins with the taxpayer.
            ``(5) Existing qualified residence.--The term `existing 
        qualified residence' means any qualified residence which is not 
        a new qualified residence.
            ``(6) Homeownership credit agency.--The term `homeownership 
        credit agency' means any agency authorized to carry out this 
        section.
            ``(7) Possessions treated as states.--The term `State' 
        includes the District of Columbia and a possession of the 
        United States.
            ``(8) Application to estates and trusts.--In the case of an 
        estate or trust, the amount of the credit determined under 
        subsection (a) shall be apportioned between the estate or trust 
        and the beneficiaries on the basis of the income of the estate 
        or trust allocable to each.
    ``(h) Reduction in Tax Benefits.--
            ``(1) Recapture of credit.--If within the 5-year period 
        beginning on the date of the original purchase of a qualified 
        residence, the residence is sold, the qualified buyer--
                    ``(A) shall deduct and withhold an amount equal to 
                the recapture amount from the amount realized on such 
                sale, and
                    ``(B) shall transfer such amount to the 
                homeownership credit agency which allocated the 
                homeownership credit dollar amount to such residence.
            ``(2) Recapture amount.--For purposes of paragraph (1), the 
        recapture amount is the amount equal to--
                    ``(A) 100 percent of the gain from the sale 
                referred to in paragraph (1) in the 1st or 2nd year,
                    ``(B) 80 percent of the gain from such sale in the 
                3rd year,
                    ``(C) 70 percent of the gain from such sale in the 
                4th year, or
                    ``(D) 60 percent of the gain from such sale in the 
                5th year.
            ``(3) Denial of deductions if converted to rental 
        housing.--If a qualified residence is converted to rental 
        housing within the 5-year period beginning on the date of the 
        original purchase of a qualified residence, no deduction for 
        amortization or depreciation under this chapter shall be 
        permitted with respect to such residence during such period.
    ``(i) Application of At-Risk Rules.--For purposes of this section, 
rules of section 465 shall not apply in determining the eligible basis 
of any qualified residence.
    ``(j) Reports to the Secretary.--
            ``(1) From the taxpayer.--The Secretary may require 
        taxpayers to submit an information return (at such time and in 
        such form and manner as the Secretary prescribes) for each 
        taxable year setting forth--
                    ``(A) the eligible basis for the taxable year of 
                each qualified residence with respect to which the 
                taxpayer is claiming a credit under this section,
                    ``(B) the amount of all homeownership credit 
                allocations received by the taxpayer from any and all 
                State homeownership credit agencies, and
                    ``(C) such other information as the Secretary may 
                require.
        The penalty under section 6652(j) shall apply to any failure to 
        submit the return required by the Secretary under the preceding 
        sentence on the date prescribed therefor.
            ``(2) From homeownership credit agencies.--Each agency 
        which allocates any homeownership credit dollar amount to any 
        residence for any calendar year shall submit to the Secretary 
        (at such time and in such form and manner as the Secretary 
        shall prescribe) an annual report specifying--
                    ``(A) the amount of the homeownership credit dollar 
                amount allocated to each residence for such year,
                    ``(B) sufficient information to identify each such 
                residence and the taxpayer initially entitled to claim 
                the credit under this section with respect thereto, and
                    ``(C) such other information as the Secretary may 
                require.
    ``(k) Responsibilities of Homeownership Credit Agencies.--
            ``(1) Plans for allocation of credit among residences.--
                    ``(A) In general.--Notwithstanding any other 
                provision of this section, the homeownership credit 
                dollar amount with respect to any qualified residence 
                shall be zero unless such amount was allocated pursuant 
                to a qualified allocation plan of the homeownership 
                credit agency which is approved by the governmental 
                unit (in accordance with rules similar to the rules of 
                section 147(f)(2) (other than subparagraph (B)(ii) 
                thereof)) of which such agency is a part.
                    ``(B) Qualified allocation plan.--For purposes of 
                this paragraph, the term `qualified allocation plan' 
                means any plan which sets forth selection criteria to 
                be used to determine the homeownership development 
                priorities of the homeownership credit agency which are 
                appropriate to local conditions.
                    ``(C) Certain homeownership development criteria 
                must be used.--The development criteria set forth in a 
                qualified allocation plan must include--
                            ``(i) contribution of the development to 
                        community stability and revitalization,
                            ``(ii) community and local government 
                        support for the development,
                            ``(iii) need for homeownership development 
                        within the area,
                            ``(iv) sponsor capability, and
                            ``(v) long-term sustainability of the 
                        project as owner-occupied residences.
            ``(2) Credit allocated to residence not to exceed amount 
        necessary to assure feasibility.--
                    ``(A) In general.--The homeownership credit dollar 
                amount allocated to a residence shall not exceed the 
                amount the homeownership credit agency determines is 
                necessary for the feasibility of the residence.
                    ``(B) Agency evaluation.--In making the 
                determination under subparagraph (A), the homeownership 
                credit agency shall consider--
                            ``(i) the sources and uses of funds and the 
                        total financing planned for the residence,
                            ``(ii) any proceeds or receipts expected to 
                        be generated by reason of tax benefits,
                            ``(iii) the anticipated appraised value of 
                        the residence,
                            ``(iv) the reasonableness of the 
                        developmental costs of the residence,
                            ``(v) the affordability to a reasonable 
                        range of prospective qualified buyers, and
                            ``(vi) whether the residence addresses the 
                        need for affordable homes for families with 
                        children.
                    ``(C) Determination made when credit dollar amount 
                applied for.--A determination under subparagraph (A) 
                shall be made as of each of the following times:
                            ``(i) The application for the homeownership 
                        credit dollar amount.
                            ``(ii) The allocation of the homeownership 
                        credit dollar amount.
            ``(3) Lien for recapture amount.--A homeownership credit 
        dollar amount may be allocated by a homeownership credit agency 
        to a residence only if such agency has a lien on such residence 
        for the payment of any amount potentially required to be paid 
        under subsection (h) to such agency.
    ``(l) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations--
            ``(1) dealing with--
                    ``(A) projects which include more than 1 residence 
                or only a portion of a residence, and
                    ``(B) buildings which are completed in portions,
            ``(2) providing for the application of this section to 
        short taxable years,
            ``(3) preventing the avoidance of the rules of this 
        section, and
            ``(4) providing the opportunity for homeownership credit 
        agencies to correct administrative errors and omissions with 
        respect to allocations and record keeping within a reasonable 
        period after their discovery, taking into account the 
        availability of regulations and other administrative guidance 
        from the Secretary.''.
    (b) Current Year Business Credit Calculation.--Section 38(b) 
(relating to current year business credit), as amended by this Act, is 
amended by striking ``plus'' at the end of paragraph (17), by striking 
the period at the end of paragraph (18) and inserting ``, plus'', and 
by adding at the end the following:
            ``(19) the homeownership credit determined under section 
        42C(a),''.
    (c) Limitation on Carryback.--Subsection (d) of section 39 
(relating to carryback and carryforward of unused credits), as amended 
by this Act, is amended by adding at the end the following:
            ``(14) No carryback of homeownership credit before 
        effective date.--No amount of unused business credit available 
        under section 42C may be carried back to a taxable year 
        beginning on or before the effective date of such section.''.
    (d) Conforming Amendments.--
            (1) Section 55(c)(1) is amended by inserting ``or 
        subsection (h) or (i) of section 42C'' after ``section 42A''.
            (2) Subsections (i)(3)(D), (i)(6)(B)(i), and (k)(1) of 
        section 469 are each amended by inserting ``or 42C'' after 
        ``section 42A''.
            (3) Section 772(a) is amended by striking ``and'' at the 
        end of paragraph (11), by redesignating paragraph (12) as 
        paragraph (13), and by inserting after paragraph (11) the 
        following:
            ``(12) the homeownership credit determined under section 
        42C, and''.
            (4) Section 774(b)(4) is amended by inserting ``, 42C(h),'' 
        after ``section 42A(i)''.
    (e) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1, as amended by this section, is 
amended by inserting after the item relating to section 42B the 
following:

                              ``Sec. 42C. Community homeownership 
                                        credit.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to qualified residences sold in taxable years beginning after 
December 31, 2004, and before January 1, 2006.
                                 <all>