[Congressional Bills 110th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3970 Introduced in House (IH)]







110th CONGRESS
  1st Session
                                H. R. 3970

 To amend the Internal Revenue Code of 1986 to provide additional tax 
relief to low and moderate income individuals, to repeal the individual 
 alternative minimum tax, to reform the corporate income tax, and for 
                            other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                            October 25, 2007

  Mr. Rangel introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to provide additional tax 
relief to low and moderate income individuals, to repeal the individual 
 alternative minimum tax, to reform the corporate income tax, 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 ``Tax Reduction and 
Reform Act of 2007''.
    (b) Reference.--Except as otherwise expressly provided, whenever in 
this Act an amendment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference shall be 
considered to be made to a section or other provision of the Internal 
Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title, etc.
                   TITLE I--INDIVIDUAL TAX PROVISIONS

                   Subtitle A--Individual Tax Relief

                     Part 1--General Tax Reductions

Sec. 1001. Increase in standard deduction.
Sec. 1002. Modification of earned income credit amount for individuals 
                            with no qualifying children.
Sec. 1003. Change in refundable child credit.
                           Part 2--AMT Relief

                   subpart a--amt extension for 2007

Sec. 1011. Extension of alternative minimum tax relief for 
                            nonrefundable personal credits.
Sec. 1012. Extension of increased alternative minimum tax exemption 
                            amount.
                subpart b--repeal of the individual amt

Sec. 1021. Repeal of alternative minimum tax on individuals.
Sec. 1022. Limitation of benefits of individual AMT repeal.
Sec. 1023. High income individuals subject to overall limitation on 
                            itemized deductions and phaseout of 
                            deductions for personal exemptions.
Sec. 1024. Modification of 2-percent floor on miscellaneous itemized 
                            deductions.
                    subpart c--conforming amendments

Sec. 1031. Conforming amendments, etc.
                       Subtitle B--Other Reforms

     Part 1--Provisions Related to Certain Investment Partnerships

Sec. 1201. Income of partners for performing investment management 
                            services treated as ordinary income 
                            received for performance of services.
Sec. 1202. Nonqualified deferred compensation for investment services.
Sec. 1203. Indebtedness incurred by a partnership in acquiring 
                            securities and commodities not treated as 
                            acquisition indebtedness for organizations 
                            which are partners with limited liability.
Sec. 1204. Application to partnership interests and tax sharing 
                            agreements of rule treating certain gain on 
                            sales between related persons as ordinary 
                            income.
 Part 2--Self-Employment Tax Treatment of Certain Interest Holders in 
                       Service Providing Entities

Sec. 1211. Certain service providing S corporation shareholders and 
                            partners subject to self-employment taxes.
Part 3--Broker Reporting of Customer's Basis in Securities Transactions

Sec. 1221. Broker reporting of customer's basis in securities 
                            transactions.
                      TITLE II--ONE-YEAR EXTENDERS

Sec. 2001. Research credit.
Sec. 2002. Indian employment credit.
Sec. 2003. New markets tax credit.
Sec. 2004. Railroad track maintenance.
Sec. 2005. Mortgage insurance premiums treated as interest.
Sec. 2006. Deduction for State and local sales taxes.
Sec. 2007. Fifteen-year straight-line cost recovery for qualified 
                            leasehold improvements and qualified 
                            restaurant property.
Sec. 2008. Seven-year cost recovery period for motorsports racing track 
                            facility.
Sec. 2009. Accelerated depreciation for business property on Indian 
                            reservation.
Sec. 2010. Expensing of environmental remediation costs.
Sec. 2011. Deduction allowable with respect to income attributable to 
                            domestic production activities in Puerto 
                            Rico.
Sec. 2012. Deduction of qualified tuition and related expenses.
Sec. 2013. Modification of tax treatment of certain payments to 
                            controlling exempt organizations.
Sec. 2014. Treatment of certain dividends of regulated investment 
                            companies.
Sec. 2015. Extension and modification of credit to holders of qualified 
                            zone academy bonds.
Sec. 2016. Tax incentives for investment in the District of Columbia.
Sec. 2017. Disclosure for combined employment tax reporting.
Sec. 2018. Disclosure of return information to apprise appropriate 
                            officials of terrorist activities.
Sec. 2019. Disclosure upon request of information relating to terrorist 
                            activities.
Sec. 2020. Disclosure of return information to carry out income 
                            contingent repayment of student loans.
Sec. 2021. Authority for undercover operations.
Sec. 2022. Increase in limit on cover over of rum excise tax to Puerto 
                            Rico and the Virgin Islands.
Sec. 2023. Parity in the application of certain limits to mental health 
                            benefits.
Sec. 2024. Extension of economic development credit for American Samoa.
Sec. 2025. Qualified conservation contributions.
Sec. 2026. Enhanced charitable deduction for contributions of food 
                            inventory.
Sec. 2027. Enhanced charitable deduction for contributions of book 
                            inventory to public schools.
Sec. 2028. Enhanced deduction for qualified computer contributions.
Sec. 2029. Tax-free distributions from individual retirement plans for 
                            charitable purposes.
Sec. 2030. Basis adjustment to stock of S corporations making 
                            charitable contributions of property.
Sec. 2031. Deduction for certain expenses of elementary and secondary 
                            school teachers.
Sec. 2032. Election to include combat pay as earned income for purposes 
                            of earned income tax credit.
Sec. 2033. Modification of mortgage revenue bonds for veterans.
Sec. 2034. Distributions from retirement plans to individuals called to 
                            active duty.
Sec. 2035. Stock in RIC for purposes of determining estates of 
                            nonresidents not citizens.
Sec. 2036. Qualified investment entities.
Sec. 2037. Disclosure of return information for certain veterans 
                            programs.
                    TITLE III--CORPORATE TAX REFORM

                  Subtitle A--Corporate Rate Reduction

Sec. 3001. Reduction in top corporate marginal rate.
  Subtitle B--Repeal of Deduction for Income Attributable to Domestic 
                         Production Activities

Sec. 3101. Repeal of deduction for income attributable to domestic 
                            production activities.
        Subtitle C--Provisions Related to Foreign Source Income

Sec. 3201. Allocation of expenses and taxes on basis of repatriation of 
                            foreign income.
Sec. 3202. Foreign currency conversion for determination of foreign 
                            taxes and foreign corporation's earnings 
                            and profits.
Sec. 3203. Repeal of worldwide allocation of interest.
Sec. 3204. Limitation on treaty benefits for certain deductible 
                            payments.
              Subtitle D--Modification of Accounting Rules

Sec. 3301. Repeal of last-in, first-out method of inventory.
Sec. 3302. Repeal of lower of cost or market method of inventory.
Sec. 3303. Special rule for service providers on accrual method not 
                            applicable to C corporations.
      Subtitle E--Modification to Expensing and Depreciation Rules

Sec. 3401.  Small business expensing provisions made permanent.
Sec. 3402. Amortization of goodwill and other intangibles.
        Subtitle F--Codification of Economic Substance Doctrine

Sec. 3501. Codification of economic substance doctrine.
Sec. 3502. Penalties for underpayments.
     Subtitle G--Modifications to Deductions for Dividends Received

Sec. 3601. Modifications to deductions for dividends received.
                      Subtitle H--Other Provisions

Sec. 3701. Recognition of ordinary income on sale or exercise of stock 
                            option in S corporation with an ESOP.
Sec. 3702. Termination of special rules for domestic international 
                            sales corporations.
Sec. 3703. Treatment of securities of a controlled corporation 
                            exchanged for assets in certain 
                            reorganizations.

                   TITLE I--INDIVIDUAL TAX PROVISIONS

                   Subtitle A--Individual Tax Relief

                     PART 1--GENERAL TAX REDUCTIONS

SEC. 1001. INCREASE IN STANDARD DEDUCTION.

    (a) In General.--Paragraph (1) of section 63(c) (defining standard 
deduction) is amended by striking ``and'' at the end of subparagraph 
(A), by striking the period at the end of subparagraph (B) and 
inserting ``, and'', and by inserting after subparagraph (B) the 
following:
                    ``(C) the additional amount.''.
    (b) Additional Amount.--Subsection (c) of section 63 (defining 
standard deduction) is amended by adding at the end the following new 
paragraph:
            ``(8) Additional amount.--For purposes of paragraph (1), 
        the additional amount is--
                    ``(A) 200 percent of the amount in effect under 
                subparagraph (C) for the taxable year in the case of a 
                joint return or a surviving spouse (as defined in 
                section 2(a)),
                    ``(B) $625 in the case of a head of household (as 
                defined in section 2(b)), and
                    ``(C) $425 in any other case.''.
    (c) Adjustment for Inflation.--
            (1) In general.--Section 63(c)(4) (relating to adjustments 
        for inflation) is amended--
                    (A) in the matter preceding subparagraph (A) by 
                striking ``or (5)'' and inserting ``(5), (8)(B), or 
                (8)(C)'', and
                    (B) in subparagraph (B) by striking ``and'' at the 
                end of clause (i), by striking the period at the end of 
                clause (ii) and inserting ``, and'', and by inserting 
                after clause (ii) the following new clause:
                            ``(iii) `calendar year 2007' in the case of 
                        the dollar amounts contained in paragraph 
                        (8)(B) or (8)(C).''.
            (2) Rounding.--Section 1(f)(6) (relating to rounding) is 
        amended by adding at the end the following new subparagraph:
                    ``(C) Special rule for standard deduction 
                additional amount.--In the case of an increase with 
                respect to section 63(c)(8) by reason of section 
                63(c)(4), subparagraph (A) shall be applied by 
                substituting `$25' for `$50' each place it appears and 
                subparagraph (B) shall not apply.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 1002. MODIFICATION OF EARNED INCOME CREDIT AMOUNT FOR INDIVIDUALS 
              WITH NO QUALIFYING CHILDREN.

    (a) Increase in Credit Percentage and Phaseout Percentage for 
Individuals With No Children.--The table contained in subparagraph (A) 
of section 32(b)(1) is amended by striking ``7.65'' each place it 
appears and inserting ``15.3''.
    (b) Increase in Beginning Phaseout Amount.--
            (1) In general.--The table contained in subparagraph (A) of 
        section 32(b)(2) is amended by striking ``$5,280'' and 
        inserting ``$10,900''.
            (2) Inflation adjustment.--Subparagraph (B) of section 
        32(j)(1) is amended--
                    (A) by striking ``and'' at the end of clause (i), 
                by redesignating clause (ii) as clause (iii), and by 
                inserting after clause (i) the following new clause:
                            ``(ii) in the case of the $10,900 amount in 
                        subsection (b)(2)(A), by substituting `calendar 
                        year 2007' for `calendar year 1992' in 
                        subparagraph (B) thereof, and'', and
                    (B) in clause (i) by inserting ``except as provided 
                in clause (ii),'' before ``in the case of''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 1003. CHANGE IN REFUNDABLE CHILD CREDIT.

    (a) Modification of Threshold Amount.--Clause (i) of section 
24(d)(1)(B) is amended by striking ``$10,000'' and inserting 
``$8,500''.
    (b) Repeal of Inflation Adjustment to Earned Income Base.--
Subsection (d) of section 24 (relating to portion of credit refundable) 
is amended by striking paragraph (3).
    (c) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2007.

                           PART 2--AMT RELIEF

                   Subpart A--AMT Extension for 2007

SEC. 1011. EXTENSION OF ALTERNATIVE MINIMUM TAX RELIEF FOR 
              NONREFUNDABLE PERSONAL CREDITS.

    (a) In General.--Paragraph (2) of section 26(a) (relating to 
special rule for taxable years 2000 through 2006) is amended--
            (1) by striking ``or 2006'' and inserting ``2006, or 
        2007'', and
            (2) by striking ``2006'' in the heading thereof and 
        inserting ``2007''.
    (b)  Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 1012. EXTENSION OF INCREASED ALTERNATIVE MINIMUM TAX EXEMPTION 
              AMOUNT.

    (a) In General.--Paragraph (1) of section 55(d) (relating to 
exemption amount) is amended--
            (1) by striking ``($62,550 in the case of taxable years 
        beginning in 2006)'' in subparagraph (A) and inserting 
        ``($64,950 in the case of taxable years beginning in 2007)'', 
        and
            (2) by striking ``($42,500 in the case of taxable years 
        beginning in 2006)'' in subparagraph (B) and inserting 
        ``($44,150 in the case of taxable years beginning in 2007)''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

                Subpart B--Repeal of the Individual AMT

SEC. 1021. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDIVIDUALS.

    (a) In General.--Subsection (a) of section 55 (relating to 
alternative minimum tax imposed) is amended by adding at the end the 
following new flush sentence:
``Except in the case of a corporation, no tax shall be imposed by this 
section for any taxable year beginning after December 31, 2007, and the 
tentative minimum tax of any taxpayer other than a corporation for any 
such taxable year shall be zero for purposes of this title.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 1022. LIMITATION OF BENEFITS OF INDIVIDUAL AMT REPEAL.

    (a) In General.--Part VI of subchapter A of chapter 1 (relating to 
alternative minimum tax) is amended by inserting after section 55 the 
following new section:

``SEC. 55A. LIMITATION OF BENEFITS OF INDIVIDUAL AMT REPEAL.

    ``(a) General Rule.--In the case of a taxpayer other than a 
corporation, there is hereby imposed (in addition to any other tax 
imposed by this subtitle) a tax equal to the sum of--
            ``(1) 4 percent of so much of modified adjusted gross 
        income as exceeds the initial threshold amount, plus
            ``(2) 0.6 percent of so much of modified adjusted gross 
        income as exceeds $250,000 ($500,000 in the case of a joint 
        return or a surviving spouse (as defined in section 2(a)).
    ``(b) Initial Threshold Amount.--For purposes of this section--
            ``(1) In general.--The term `initial threshold amount' 
        means--
                    ``(A) in the case of a joint return or a surviving 
                spouse (as defined in section 2(a)), the greater of--
                            ``(i) the amount which the Secretary 
                        estimates is the lowest adjusted gross income 
                        level (rounded to the nearest multiple of 
                        $10,000) above which at least 90 percent of 
                        married individuals filing a joint return would 
                        (but for the repeal of such tax) be affected by 
                        the alternative minimum tax for their first 
                        taxable year beginning in 2008, or
                            ``(ii) $200,000,
                    ``(B) in the case of any married individual filing 
                a separate return, \1/2\ of the amount determined under 
                subparagraph (A), and
                    ``(C) in any other case, \3/4\ of the amount 
                determined under subparagraph (A).
            ``(2) Citizens and residents living abroad.--The initial 
        threshold amount determined under paragraph (1) shall be 
        decreased by any amount excluded from the taxpayer's gross 
        income under section 911.
    ``(c) Modified Adjusted Gross Income.--For purposes of this 
section, the term `modified adjusted gross income' means adjusted gross 
income reduced by any deduction allowed for investment interest (as 
defined in section 163(d)).
    ``(d) Nonresident Alien.--In the case of a nonresident alien 
individual, only amounts taken into account in connection with the tax 
imposed under section 871(b) shall be taken into account under this 
section.
    ``(e) Inflation Adjustments.--
            ``(1) In general.--In the case of taxable years beginning 
        after 2008, the amount in effect under subsection (b)(1)(A) for 
        taxable years beginning in 2008 shall be increased by an amount 
        equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                2007' for `calendar year 1992' in subparagraph (B) 
                thereof.
            ``(2) Rounding.--If any amount as adjusted under paragraph 
        (1) is not a multiple of $5,000, such amount shall be rounded 
        to the next lowest multiple of $5,000.
    ``(f) Marital Status.--For purposes of this section, marital status 
shall be determined under section 7703.''.
    (b) Conforming Amendment.--Subparagraph (A) of section 26(b)(2) is 
amended by striking ``section 55'' and inserting ``sections 55 and 
55A''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 1023. HIGH INCOME INDIVIDUALS SUBJECT TO OVERALL LIMITATION ON 
              ITEMIZED DEDUCTIONS AND PHASEOUT OF DEDUCTIONS FOR 
              PERSONAL EXEMPTIONS.

    (a) Overall Limitation on Itemized Deductions.--Section 68 
(relating to overall limitation on itemized deductions) is amended by 
striking subsections (f) and (g) and inserting the following new 
subsection:
    ``(f) Phaseout of Limitation.--
            ``(1) In general.--In the case of a taxpayer whose adjusted 
        gross income is not more than $250,000 ($500,000 in the case of 
        a joint return or a surviving spouse (as defined in section 
        2(a))--
                    ``(A) in the case of any taxable year beginning in 
                2008 or 2009, the reduction under subsection (a) shall 
                be equal to \1/3\ of the amount which would (but for 
                this subsection) be the amount of such reduction, and
                    ``(B) in the case of any taxable year beginning 
                after 2009, subsection (a) shall not apply.
            ``(2) Phaseout based on income.--
                    ``(A) In general.--In the case of a taxpayer whose 
                adjusted gross income is more than $250,000 ($500,000 
                in the case of a joint return or a surviving spouse (as 
                defined in section 2(a)), the reduction under 
                subsection (a) shall be equal to the applicable 
                fraction of the amount which would (but for this 
                subsection) be the amount of such reduction.
                    ``(B) Applicable fraction.--For purposes of 
                subparagraph (A), the term `applicable fraction' 
                means--
                            ``(i) in the case of any taxable year 
                        beginning in 2008 or 2009, a fraction (not in 
                        excess of 1) equal to the sum of--
                                    ``(I) \1/3\, plus
                                    ``(II) \1/30\ for each $1,000 (or 
                                fraction thereof) by which the 
                                taxpayer's adjusted gross income 
                                exceeds $250,000 ($500,000 in the case 
                                of a joint return or a surviving spouse 
                                (as defined in section 2(a)), and
                            ``(ii) in the case of any taxable year 
                        beginning in 2010, a fraction (not in excess of 
                        1) equal to \1/20\ for each $1,000 (or fraction 
                        thereof) by which the taxpayer's adjusted gross 
                        income exceeds $250,000 ($500,000 in the case 
                        of a joint return or a surviving spouse (as 
                        defined in section 2(a)).''.
    (b) Phaseout of Deductions for Personal Exemptions.--Paragraph (3) 
of section 151(d) is amended by striking subparagraphs (E) and (F) and 
inserting the following new subparagraphs:
                    ``(E) Reduction of phaseout.--In the case of a 
                taxpayer whose adjusted gross income is not more than 
                $250,000 ($500,000 in the case of a joint return or a 
                surviving spouse (as defined in section 2(a))--
                            ``(i) in the case of any taxable year 
                        beginning in 2008 or 2009, the reduction under 
                        subparagraph (A) shall be equal to \1/3\ of the 
                        amount which would (but for this subparagraph) 
                        be the amount of such reduction, and
                            ``(ii) in the case of any taxable year 
                        beginning after 2009, subparagraph (A) shall 
                        not apply.
                    ``(F) Phaseout based on income.--In the case of a 
                taxpayer whose adjusted gross income is more than 
                $250,000 ($500,000 in the case of a joint return or a 
                surviving spouse (as defined in section 2(a)), the 
                reduction under subparagraph (A) shall be equal to the 
                applicable fraction of the amount which would (but for 
                this subparagraph) be the amount of such reduction.
                    ``(G) Applicable fraction.--For purposes of 
                subparagraph (F), the term `applicable fraction' 
                means--
                            ``(i) in the case of any taxable year 
                        beginning in 2008 or 2009, the fraction (not in 
                        excess of 1) equal to the sum of--
                                    ``(I) \1/3\, plus
                                    ``(II) \1/30\ for each $1,000 (or 
                                fraction thereof) by which the 
                                taxpayer's adjusted gross income 
                                exceeds $250,000 ($500,000 in the case 
                                of a joint return or a surviving spouse 
                                (as defined in section 2(a)), and
                            ``(ii) in the case of any taxable year 
                        beginning in 2010, the fraction (not in excess 
                        of 1) equal to \1/20\ for each $1,000 (or 
                        fraction thereof) by which the taxpayer's 
                        adjusted gross income exceeds $250,000 
                        ($500,000 in the case of a joint return or a 
                        surviving spouse (as defined in section 
                        2(a)).''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 1024. MODIFICATION OF 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED 
              DEDUCTIONS.

    (a) In General.--Subsection (a) of section 67 is amended by 
striking ``exceeds'' and all that follows and inserting ``exceeds the 
sum of--
            ``(1) 2 percent of so much of modified adjusted gross 
        income (as defined in section 55A(c)) as does not exceed the 
        initial threshold amount applicable to the taxpayer under 
        section 55A, plus
            ``(2) 5 percent of so much of modified adjusted gross 
        income (as so defined) as exceeds such initial threshold 
        amount.''.
    (b) Conforming Amendment.--
            (1) The heading for section 67 is amended by striking ``2-
        percent floor'' and inserting ``floor''.
            (2) The item in the table of sections for part I of 
        subchapter B of chapter 1 relating to section 67 is amended by 
        striking ``2-percent floor'' and inserting ``Floor''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

                    Subpart C--Conforming Amendments

SEC. 1031. CONFORMING AMENDMENTS, ETC.

    (a) Conforming Amendments Related to Repeal of Alternative Minimum 
Tax on Individuals.--
            (1) Subparagraph (B) of section 1(g)(7) is amended by 
        adding ``and'' at the end of clause (i), by striking ``, and'' 
        at the end of clause (ii) and inserting a period, and by 
        striking clause (iii).
            (2) Section 2(d) is amended by striking ``taxes imposed by 
        sections 1 and 55'' and inserting ``tax imposed by section 1''.
            (3) Section 5(a) is amended by striking paragraph (4).
            (4) Section 23 is amended--
                    (A) by striking subsection (b)(4), and
                    (B) by amending subsection (c) by striking 
                paragraphs (1) and (2), by redesignating paragraph (3) 
                as paragraph (2) and inserting before paragraph (2) (as 
                so redesignated) the following:
            ``(1) In general.--If the credit allowable under subsection 
        (a) for any taxable year exceeds the limitation imposed by 
        section 26(a) for such taxable year reduced by the sum of the 
        credits allowable under this subpart (other than this section 
        and sections 25D and 1400C), such excess shall be carried to 
        the next succeeding taxable year and added to the credit 
        allowable under subsection (a) for such succeeding taxable 
        year.''.
            (5) Section 24(b) is amended by striking paragraph (3).
            (6) Section 24(d)(1) is amended--
                    (A) by striking ``section 26(a)(2) or subsection 
                (b)(3), as the case may be'' in subparagraph (A) and 
                inserting ``section 26(a)'', and
                    (B) by striking ``section 26(a)(2) or subsection 
                (b)(3), as the case may be,'' in subparagraph (B) and 
                inserting ``section 26(a)''.
            (7) Section 25(e)(1)(C) is amended to read as follows:
                    ``(C) Applicable tax limit.--For purposes of this 
                paragraph, the term `applicable tax limit' means the 
                limitation imposed by section 26(a) for the taxable 
                year reduced by the sum of the credits allowable under 
                this subpart (other than this section and sections 23, 
                25D, and 1400C).''.
            (8) Section 25B is amended by striking subsection (g).
            (9) Section 25D(c) is amended to read as follows:
    ``(c) Carryforward of Unused Credit.--If the credit allowable under 
subsection (a) for any taxable year exceeds the limitation imposed by 
section 26(a) for such taxable year reduced by the sum of the credits 
allowable under this subpart (other than this section), such excess 
shall be carried to the next succeeding taxable year and added to the 
credit allowable under subsection (a) for such succeeding taxable 
year.''.
            (10) Section 26 is amended--
                    (A) by striking subsection (c), and
                    (B) by amending subsection (a) to read as follows:
    ``(a) In General.--The aggregate amount of credits allowable by 
this subpart for the taxable year shall not exceed the taxpayer's 
regular tax liability for the taxable year.''.
            (11) Sections 30B(g)(2) and 30C(d)(2) are each amended to 
        read as follows:
            ``(2) Personal credit.--The credit allowed under subsection 
        (a) (after the application of paragraph (1)) shall be treated 
        as a credit allowable under subpart A.''.
            (12) Subsection (c) of section 38 is amended by inserting 
        at the end the following new paragraph:
            ``(6) Tentative minimum tax.--For purposes of this part, 
        the term `tentative minimum tax' has the meaning given to such 
        term by section 55.''.
            (13) Section 53 is amended--
                    (A) by striking ``adjusted net minimum tax'' in 
                subsection (b)(1) and inserting ``tax imposed by 
                section 55'',
                    (B) by striking subsection (d), and
                    (C) by inserting at the end of subsection (b) the 
                following flush sentence:
``For purposes of paragraph (1), the tax imposed by section 55 for 
taxable years beginning before January 1, 2008, shall be the adjusted 
net minimum tax (as defined in section 53(d), as in effect before its 
repeal).''.
            (14)(A) Subsection (b) of section 55 (relating to 
        alternative minimum tax imposed) is amended to read as follows:
    ``(b) Tentative Minimum Tax.--For purposes of this part--
            ``(1) Amount of tentative tax.--The tentative minimum tax 
        for the taxable year is--
                    ``(A) 20 percent of so much of the alternative 
                minimum taxable income for the taxable year as exceeds 
                the exemption amount, reduced by
                    ``(B) the alternative minimum tax foreign tax 
                credit for the taxable year.
            ``(2) Alternative minimum taxable income.--The term 
        `alternative minimum taxable income' means the taxable income 
        of the taxpayer for the taxable year--
                    ``(A) determined with the adjustments provided in 
                section 56, and
                    ``(B) increased by the amount of the items of tax 
                preference described in section 57.
        If a taxpayer is subject to the regular tax, such taxpayer 
        shall be subject to the tax imposed by this section (and, if 
        the regular tax is determined by reference to an amount other 
        than taxable income, such amount shall be treated as the 
        taxable income of such taxpayer for purposes of the preceding 
        sentence).''.
            (B) Subsection (c) of section 55 is amended by striking all 
        that follows paragraph (1) and inserting the following:
            ``(2) Cross reference.--For provision providing that 
        portions of the general business credit are not allowable 
        against the tax imposed by this section, see section 38(c).''.
            (C) Subsection (d) of section 55 is amended to read as 
        follows:
    ``(d) Exemption Amount.--For purposes of this section, the term 
`exemption amount' means $40,000 reduced (but not below zero) by an 
amount equal to 25 percent of the amount by which the alternative 
minimum taxable income of the taxpayer exceeds $150,000.''.
            (15)(A) Paragraph (6) of section 56(a) is amended to read 
        as follows:
            ``(6) Adjusted basis.--The adjusted basis of any property 
        to which paragraph (1) or (5) applies (or with respect to which 
        there are any expenditures to which paragraph (2) applies) 
        shall be determined on the basis of the treatment prescribed in 
        paragraph (1), (2), or (5), whichever applies.''.
            (B) Section 56 is amended by striking subsection (b).
            (C) Subsection (c) of section 56 is amended by striking so 
        much of the subsection as precedes paragraph (1), by 
        redesignating paragraphs (1), (2), and (3) as paragraphs (8), 
        (9), and (10), respectively, and moving them to the end of 
        subsection (a).
            (D) Paragraph (8) of section 56(a), as redesignated by 
        subparagraph (C), is amended by striking ``subsection (g)'' and 
        inserting ``subsection (c)''.
            (E) Section 56 is amended by striking subsection (e) and by 
        redesignating subsections (d) and (g) as subsections (b) and 
        (c), respectively.
            (16)(A) Section 58 is hereby repealed.
            (B) Clause (i) of section 56(b)(2)(A) is amended by 
        striking ``and section 58''.
            (C) Subsection (h) of section 59 is amended--
                    (i) by striking ``, 465, and 1366(d)'' and 
                inserting ``and 465'', and
                    (ii) by striking ``56, 57, and 58'' and inserting 
                ``56 and 57''.
            (17)(A) Subparagraph (C) of section 59(a)(1) is amended--
                    (i) by striking ``subparagraph (A)(i) or (B)(i) of 
                section 55(b)(1) (whichever applies)'' and inserting 
                ``section 55(b)(1)(A)'', and
                    (ii) by striking ``section 1 or 11 (whichever 
                applies)'' and inserting ``section 11''.
            (B) Paragraph (2) of section 59(a) is amended to read as 
        follows:
            ``(2) Pre-credit tentative minimum tax.--For purposes of 
        this subsection, the term `pre-credit tentative minimum tax' 
        means the amount determined under section 55(b)(1)(A).''.
            (C) Section 59 is amended by striking subsection (c).
            (D) Section 59 is amended by striking subsection (j).
            (18) Paragraph (1) of section 59A(b) and paragraph (7) of 
        section 382(l) are each amended by striking ``section 56(d)'' 
        and inserting ``section 56(b)''.
            (19) Paragraph (2) of section 641(c) is amended by striking 
        subparagraph (B) and by redesignating subparagraphs (C) and (D) 
        as subparagraphs (B) and (C), respectively.
            (20) Subsections (b) and (c) of section 666 are each 
        amended by striking ``(other than the tax imposed by section 
        55)''.
            (21) Subsections (c)(5) and (d)(3)(B) of section 772 are 
        each amended by striking ``56, 57, and 58'' and inserting ``56 
        and 57''.
            (22) Sections 847 and 848(l) are each amended by striking 
        ``section 56(g)'' and inserting ``section 56(c)''.
            (23) Sections 871(b)(1) and 877(b) are each amended by 
        striking ``or 55''.
            (24) Subsection (a) of section 897 is amended to read as 
        follows:
    ``(a) General Rule.--For purposes of this title, gain or loss of a 
nonresident alien individual or a foreign corporation from the 
disposition of a United States real property interest shall be taken 
into account--
            ``(1) in the case of a nonresident alien individual, under 
        section 871(b)(1), or
            ``(2) in the case of a foreign corporation, under section 
        882(a)(1),
as if the taxpayer were engaged in a trade or business within the 
United States during the taxable year and as if such gain or loss were 
effectively connected with such trade or business.''.
            (25) Section 904 is amended by striking subsection (i).
            (26) The first sentence of section 911(f) is amended to 
        read as follows: ``For purposes of this chapter, if any amount 
        is excluded from the gross income of a taxpayer under 
        subsection (a) for any taxable year, then, notwithstanding 
        section 1, the tax imposed by such section on the taxpayer for 
        such taxable year shall be equal to the excess (if any) of--
            ``(1) the tax which would be imposed by such section for 
        the taxable year if the taxpayer's taxable income were 
        increased by the amount excluded under subsection (a) for the 
        taxable year, over
            ``(2) the tax which would be imposed by such section for 
        the taxable year if the taxpayer's taxable income were equal to 
        the amount excluded under subsection (a) for the taxable 
        year.''.
            (27) Paragraph (1) of section 962(a) is amended by striking 
        ``sections 1 and 55'' and inserting ``section 1''.
            (28) Section 1400C(d) is amended to read as follows:
    ``(d) Carryforward of Unused Credit.--If the credit allowable under 
subsection (a) for any taxable year exceeds the limitation imposed by 
section 26(a) for such taxable year reduced by the sum of the credits 
allowable under this subpart (other than this section and section 25D), 
such excess shall be carried to the next succeeding taxable year and 
added to the credit allowable under subsection (a) for such succeeding 
taxable year.''.
            (29) The last sentence of section 1563(a) is amended by 
        striking ``section 55(d)(3)'' and inserting ``section 55(d)''.
            (30) Subparagraph (B) of section 6015(d)(2) is amended by 
        striking ``or 55''.
            (31) Clause (i) of section 6654(d)(2)(C) is amended by 
        striking ``, alternative minimum taxable income,''.
    (b) Application of EGTRRA Sunset.--
            (1) Section 901 of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 shall not apply to sections 201(d) 
        and 303(c) of such Act.
            (2) Section 901 of the Economic Growth and Tax Relief 
        Reconciliation Act of 2001 shall apply to--
                    (A) the amendments made by section 1023(a) to the 
                same extent and in the same manner as section 901 of 
                such Act applies to the amendments made by section 103 
                of such Act, and
                    (B) the amendments made by section 1023(b) to the 
                same extent and in the same manner as section 901 of 
                such Act applies to the amendments made by section 102 
                of such Act.
    (c) Effective Date.--The amendments made by subsection (a) shall 
apply to taxable years beginning after December 31, 2007.

                       Subtitle B--Other Reforms

     PART 1--PROVISIONS RELATED TO CERTAIN INVESTMENT PARTNERSHIPS

SEC. 1201. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT 
              SERVICES TREATED AS ORDINARY INCOME RECEIVED FOR 
              PERFORMANCE OF SERVICES.

    (a) In General.--Part I of subchapter K of chapter 1 is amended by 
adding at the end the following new section:

``SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT 
              SERVICES TO PARTNERSHIP.

    ``(a) Treatment of Distributive Share of Partnership Items.--For 
purposes of this title, in the case of an investment services 
partnership interest--
            ``(1) In general.--Notwithstanding section 702(b)--
                    ``(A) any net income with respect to such interest 
                for any partnership taxable year shall be treated as 
                ordinary income for the performance of services, and
                    ``(B) any net loss with respect to such interest 
                for such year, to the extent not disallowed under 
                paragraph (2) for such year, shall be treated as an 
                ordinary loss.
            ``(2) Treatment of losses.--
                    ``(A) Limitation.--Any net loss with respect to 
                such interest shall be allowed for any partnership 
                taxable year only to the extent that such loss does not 
                exceed the excess (if any) of--
                            ``(i) the aggregate net income with respect 
                        to such interest for all prior partnership 
                        taxable years, over
                            ``(ii) the aggregate net loss with respect 
                        to such interest not disallowed under this 
                        subparagraph for all prior partnership taxable 
                        years.
                    ``(B) Carryforward.--Any net loss for any 
                partnership taxable year which is not allowed by reason 
                of subparagraph (A) shall be treated as an item of loss 
                with respect to such partnership interest for the 
                succeeding partnership taxable year.
                    ``(C) Basis adjustment.--No adjustment to the basis 
                of a partnership interest shall be made on account of 
                any net loss which is not allowed by reason of 
                subparagraph (A).
                    ``(D) Exception for basis attributable to purchase 
                of a partnership interest.--In the case of an 
                investment services partnership interest acquired by 
                purchase, paragraph (1)(B) shall not apply to so much 
                of any net loss with respect to such interest for any 
                taxable year as does not exceed the excess of--
                            ``(i) the basis of such interest 
                        immediately after such purchase, over
                            ``(ii) the aggregate net loss with respect 
                        to such interest to which paragraph (1)(B) did 
                        not apply by reason of this subparagraph for 
                        all prior taxable years.
                Any net loss to which paragraph (1)(B) does not apply 
                by reason of this subparagraph shall not be taken into 
                account under subparagraph (A).
                    ``(E) Prior partnership years.--Any reference in 
                this paragraph to prior partnership taxable years shall 
                only include prior partnership taxable years to which 
                this section applies.
            ``(3) Net income and loss.--For purposes of this section--
                    ``(A) Net income.--The term `net income' means, 
                with respect to any investment services partnership 
                interest, for any partnership taxable year, the excess 
                (if any) of--
                            ``(i) all items of income and gain taken 
                        into account by the holder of such interest 
                        under section 702 with respect to such interest 
                        for such year, over
                            ``(ii) all items of deduction and loss so 
                        taken into account.
                    ``(B) Net loss.--The term `net loss' means with 
                respect to such interest for such year, the excess (if 
                any) of the amount described in subparagraph (A)(ii) 
                over the amount described in subparagraph (A)(i).
    ``(b) Dispositions of Partnership Interests.--
            ``(1) Gain.--Any gain on the disposition of an investment 
        services partnership interest shall be treated as ordinary 
        income for the performance of services.
            ``(2) Loss.--Any loss on the disposition of an investment 
        services partnership interest shall be treated as an ordinary 
        loss to the extent of the excess (if any) of--
                    ``(A) the aggregate net income with respect to such 
                interest for all partnership taxable years, over
                    ``(B) the aggregate net loss with respect to such 
                interest allowed under subsection (a)(2) for all 
                partnership taxable years.
            ``(3) Disposition of portion of interest.--In the case of 
        any disposition of an investment services partnership interest, 
        the amount of net loss which otherwise would have (but for 
        subsection (a)(2)(C)) applied to reduce the basis of such 
        interest shall be disregarded for purposes of this section for 
        all succeeding partnership taxable years.
            ``(4) Distributions of partnership property.--In the case 
        of any distribution of appreciated property by a partnership 
        with respect to any investment services partnership interest, 
        gain shall be recognized by the partnership in the same manner 
        as if the partnership sold such property at fair market value 
        at the time of the distribution. For purposes of this 
        paragraph, the term `appreciated property' means any property 
        with respect to which gain would be determined if sold as 
        described in the preceding sentence.
            ``(5) Application of section 751.--In applying section 
        751(a), an investment services partnership interest shall be 
        treated as an inventory item.
    ``(c) Investment Services Partnership Interest.--For purposes of 
this section--
            ``(1) In general.--The term `investment services 
        partnership interest' means any interest in a partnership which 
        is held by any person if such person provides (directly or 
        indirectly) a substantial quantity of any of the following 
        services with respect to the assets of the partnership in the 
        conduct of the trade or business of providing such services:
                    ``(A) Advising as to the advisability of investing 
                in, purchasing, or selling any specified asset.
                    ``(B) Managing, acquiring, or disposing of any 
                specified asset.
                    ``(C) Arranging financing with respect to acquiring 
                specified assets.
                    ``(D) Any activity in support of any service 
                described in subparagraphs (A) through (C).
        For purposes of this paragraph, the term `specified asset' 
        means securities (as defined in section 475(c)(2) without 
        regard to the last sentence thereof), real estate, commodities 
        (as defined in section 475(e)(2))), or options or derivative 
        contracts with respect to securities (as so defined), real 
        estate, or commodities (as so defined).
            ``(2) Exception for certain capital interests.--
                    ``(A) In general.--If--
                            ``(i) a portion of an investment services 
                        partnership interest is acquired on account of 
                        a contribution of invested capital, and
                            ``(ii) the partnership makes a reasonable 
                        allocation of partnership items between the 
                        portion of the distributive share that is with 
                        respect to invested capital and the portion of 
                        such distributive share that is not with 
                        respect to invested capital,
                then subsection (a) shall not apply to the portion of 
                the distributive share that is with respect to invested 
                capital. An allocation will not be treated as 
                reasonable for purposes of this subparagraph if such 
                allocation would result in the partnership allocating a 
                greater portion of income to invested capital than any 
                other partner not providing services would have been 
                allocated with respect to the same amount of invested 
                capital.
                    ``(B) Special rule for dispositions.--In any case 
                to which subparagraph (A) applies, subsection (b) shall 
                not apply to any gain or loss allocable to invested 
                capital. The portion of any gain or loss attributable 
                to invested capital is the proportion of such gain or 
                loss which is based on the distributive share of gain 
                or loss that would have been allocable to invested 
                capital under subparagraph (A) if the partnership sold 
                all of its assets immediately before the disposition.
                    ``(C) Invested capital.--For purposes of this 
                paragraph, the term `invested capital' means, the fair 
                market value at the time of contribution of any money 
                or other property contributed to the partnership.
                    ``(D) Treatment of certain loans.--
                            ``(i) Proceeds of partnership loans not 
                        treated as invested capital of service 
                        providing partners.--For purposes of this 
                        paragraph, an investment services partnership 
                        interest shall not be treated as acquired on 
                        account of a contribution of invested capital 
                        to the extent that such capital is attributable 
                        to the proceeds of any loan or other advance 
                        made or guaranteed, directly or indirectly, by 
                        any partner or the partnership.
                            ``(ii) Loans from nonservice providing 
                        partners to the partnership treated as invested 
                        capital.--For purposes of this paragraph, any 
                        loan or other advance to the partnership made 
                        or guaranteed, directly or indirectly, by a 
                        partner not providing services to the 
                        partnership shall be treated as invested 
                        capital of such partner and amounts of income 
                        and loss treated as allocable to invested 
                        capital shall be adjusted accordingly.
    ``(d) Other Income and Gain in Connection With Investment 
Management Services.--
            ``(1) In general.--If--
                    ``(A) a person performs (directly or indirectly) 
                investment management services for any entity,
                    ``(B) such person holds a disqualified interest 
                with respect to such entity, and
                    ``(C) the value of such interest (or payments 
                thereunder) is substantially related to the amount of 
                income or gain (whether or not realized) from the 
                assets with respect to which the investment management 
                services are performed,
        any income or gain with respect to such interest shall be 
        treated as ordinary income for the performance of services. 
        Rules similar to the rules of subsection (c)(2) shall apply 
        where such interest was acquired on account of invested capital 
        in such entity.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Disqualified interest.--The term 
                `disqualified interest' means, with respect to any 
                entity--
                            ``(i) any interest in such entity other 
                        than indebtedness,
                            ``(ii) convertible or contingent debt of 
                        such entity,
                            ``(iii) any option or other right to 
                        acquire property described in clause (i) or 
                        (ii), and
                            ``(iv) any derivative instrument entered 
                        into (directly or indirectly) with such entity 
                        or any investor in such entity.
                Such term shall not include a partnership interest and 
                shall not include stock in a taxable corporation.
                    ``(B) Taxable corporation.--The term `taxable 
                corporation' means--
                            ``(i) a domestic C corporation, or
                            ``(ii) a foreign corporation subject to a 
                        comprehensive foreign income tax (as defined in 
                        section 457A(d)(4)).
                    ``(C) Investment management services.--The term 
                `investment management services' means a substantial 
                quantity of any of the services described in subsection 
                (c)(1) which are provided in the conduct of the trade 
                or business of providing such services.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as are necessary or appropriate to carry out the purposes of this 
section, including regulations to--
            ``(1) prevent the avoidance of the purposes of this 
        section, and
            ``(2) coordinate this section with the other provisions of 
        this subchapter.
    ``(f) Cross Reference.--For 40 percent no fault penalty on certain 
underpayments due to the avoidance of this section, see section 
6662.''.
    (b) Application to Real Estate Investment Trusts.--Subsection (c) 
of section 856 is amended by adding at the end the following new 
paragraph:
            ``(8) Exception from recharacterization of income from 
        investment services partnership interests.--
                    ``(A) In general.--Paragraphs (2), (3), and (4) 
                shall be applied without regard to section 710 
                (relating to special rules for partners providing 
                investment management services to partnership).
                    ``(B) Special rule for partnerships owned by 
                reits.--Section 7704 shall be applied without regard to 
                section 710 in the case of a partnership which meets 
                each of the following requirements:
                            ``(i) Such partnership is treated as 
                        publicly traded under section 7704 solely by 
                        reason of interests in such partnership being 
                        convertible into interests in a real estate 
                        investment trust which is publicly traded.
                            ``(ii) 50 percent or more of the capital 
                        and profits interests of such partnership are 
                        owned, directly or indirectly, at all times 
                        during the taxable year by such real estate 
                        investment trust (determined with the 
                        application of section 267(c)).
                            ``(iii) Such partnership meets the 
                        requirements of paragraphs (2), (3), and (4) 
                        (applied without regard to section 710).''.
    (c) Imposition of Penalty on Underpayments.--
            (1) In general.--Subsection (b) of section 6662 is amended 
        by inserting after paragraph (5) the following new paragraph:
            ``(6) The application of subsection (d) of section 710 or 
        the regulations prescribed under section 710(e) to prevent the 
        avoidance of the purposes of section 710.''.
            (2) Amount of penalty.--
                    (A) In general.--Section 6662 is amended by adding 
                at the end the following new subsection:
    ``(i) Increase in Penalty in Case of Property Transferred for 
Investment Management Services.--In the case of any portion of an 
underpayment to which this section applies by reason of subsection 
(b)(6), subsection (a) shall be applied with respect to such portion by 
substituting `40 percent' for `20 percent'.''.
                    (B) Conforming amendments.--Subparagraph (B) of 
                section 6662A(e)(2) is amended--
                            (i) by striking ``section 6662(h)'' and 
                        inserting ``subsection (h) or (i) of section 
                        6662'', and
                            (ii) by striking ``gross valuation 
                        misstatement penalty'' in the heading and 
                        inserting ``certain increased underpayment 
                        penalties''.
            (3) Reasonable cause exception not applicable.--Subsection 
        (c) of section 6664 is amended--
                    (A) by redesignating paragraphs (2) and (3) as 
                paragraphs (3) and (4), respectively,
                    (B) by striking ``paragraph (2)'' in paragraph (4), 
                as so redesignated, and inserting ``paragraph (3)'', 
                and
                    (C) by inserting after paragraph (1) the following 
                new paragraph:
            ``(2) Exception.--Paragraph (1) shall not apply to any 
        portion of an underpayment to which this section applies by 
        reason of subsection (b)(6).''.
    (d) Conforming Amendments.--
            (1) Subsection (d) of section 731 is amended by inserting 
        ``section 710(b)(4) (relating to distributions of partnership 
        property),'' before ``section 736''.
            (2) Section 741 is amended by inserting ``or section 710 
        (relating to special rules for partners providing investment 
        management services to partnership)'' before the period at the 
        end.
            (3) Paragraph (13) of section 1402(a) is amended--
                    (A) by striking ``other than guaranteed'' and 
                inserting ``other than--
                    ``(A) guaranteed'',
                    (B) by striking the semi-colon at the end and 
                inserting ``, and'', and
                    (C) by adding at the end the following new 
                subparagraph:
                    ``(B) any income treated as ordinary income under 
                section 710 received by an individual who provides 
                investment management services (as defined in section 
                710(d)(2));''.
            (4) Paragraph (12) of section 211(a) of the Social Security 
        Act is amended--
                    (A) by striking ``other than guaranteed'' and 
                inserting ``other than--
                    ``(A) guaranteed'',
                    (B) by striking the semi-colon at the end and 
                inserting ``, and'', and
                    (C) by adding at the end the following new 
                subparagraph:
                    ``(B) any income treated as ordinary income under 
                section 710 of the Internal Revenue Code of 1986 
                received by an individual who provides investment 
                management services (as defined in section 710(d)(2) of 
                such Code);''.
            (5) The table of sections for part I of subchapter K of 
        chapter 1 is amended by adding at the end the following new 
        item:

``Sec. 710. Special rules for partners providing investment management 
                            services to partnership.''.
    (e) Effective Date.--
            (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after ____.
            (2) Partnership taxable years which include effective 
        date.--In applying section 710(a) of the Internal Revenue Code 
        of 1986 (as added by this section) in the case of any 
        partnership taxable year which includes ____, the amount of the 
        net income referred to in such section shall be treated as 
        being the lesser of the net income for the entire partnership 
        taxable year or the net income determined by only taking into 
        account items attributable to the portion of the partnership 
        taxable year which is after such date.
            (3) Dispositions of partnership interests.--Except as 
        provided in paragraph (3), section 710(b) of the Internal 
        Revenue Code of 1986 (as added by this section) shall apply to 
        dispositions and distributions after ____.
            (4) Other income and gain in connection with investment 
        management services.--Section 710(d) of such Code (as added by 
        this section) shall take effect on ____.

SEC. 1202. NONQUALIFIED DEFERRED COMPENSATION FOR INVESTMENT SERVICES.

    (a) In General.--Subpart B of part II of subchapter E of chapter 1 
(relating to taxable year for which items of gross income included) is 
amended by inserting after section 457 the following new section:

``SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION FOR INVESTMENT 
              SERVICES.

    ``(a) In General.--Any compensation for investment services which 
is deferred under a nonqualified deferred compensation plan of a 
nonqualified entity shall be taken into account for purposes of this 
chapter when there is no substantial risk of forfeiture of the rights 
to such compensation.
    ``(b) Nonqualified Entity.--For purposes of this section, the term 
`nonqualified entity' means--
            ``(1) any foreign corporation which has investment related 
        income unless substantially all of such income is--
                    ``(A) effectively connected with the conduct of a 
                trade or business in the United States, or
                    ``(B) subject to a comprehensive foreign income 
                tax, and
            ``(2) any partnership which has investment related income 
        unless substantially all of such income is allocated to persons 
        other than--
                    ``(A) foreign persons with respect to whom such 
                income is not subject to a comprehensive foreign income 
                tax, and
                    ``(B) organizations which are exempt from tax under 
                this title.
    ``(c) Ascertainability of Amounts of Compensation.--
            ``(1) In general.--If the amount of any compensation is not 
        ascertainable at the time that such compensation is otherwise 
        to be taken into account under subsection (a)--
                    ``(A) such amount shall be so taken into account 
                when ascertainable, and
                    ``(B) the tax imposed under this chapter for the 
                taxable year in which such compensation is taken into 
                account under subparagraph (A) shall be increased by 
                the sum of--
                            ``(i) the amount of interest determined 
                        under paragraph (2), and
                            ``(ii) an amount equal to 20 percent of the 
                        amount of such compensation.
            ``(2) Interest.--For purposes of paragraph (1)(B)(i), the 
        interest determined under this paragraph for any taxable year 
        is the amount of interest at the underpayment rate under 
        section 6621 plus 1 percentage point on the underpayments that 
        would have occurred had the deferred compensation been 
        includible in gross income for the taxable year in which first 
        deferred or, if later, the first taxable year in which such 
        deferred compensation is not subject to a substantial risk of 
        forfeiture.
    ``(d) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Investment services.--The term `investment services' 
        means all services provided during any taxable year if a 
        substantial quantity of such services are services described in 
        section 710(c)(1).
            ``(2) Investment related income.--The term `investment 
        related income' means any income attributable (directly or 
        indirectly) to--
                    ``(A) the assets with respect to which the 
                investment services referred in subsection (a) were 
                performed, or
                    ``(B) the investment services referred to in 
                subsection (a).
            ``(3) Substantial risk of forfeiture.--The rights of a 
        person to compensation shall be treated as subject to a 
        substantial risk of forfeiture only if such person's rights to 
        such compensation are conditioned upon the future performance 
        of substantial services by any individual.
            ``(4) Comprehensive foreign income tax.--The term 
        `comprehensive foreign income tax' means, with respect to any 
        foreign person, the income tax of a foreign country if--
                    ``(A) such person is eligible for the benefits of a 
                comprehensive income tax treaty between such foreign 
                country and the United States, or
                    ``(B) such person demonstrates to the satisfaction 
                of the Secretary that such foreign country has a 
                comprehensive income tax.
        Such term shall not include any tax unless such tax includes 
        rules for the deductibility of deferred compensation which are 
        similar to the rules of this title.
            ``(5) Nonqualified deferred compensation plan.--The term 
        `nonqualified deferred compensation plan' has the meaning given 
        such term under section 409A(d), except that such term shall 
        include any plan that provides a right to compensation based on 
        the appreciation in value of a specified number of equity units 
        of the service recipient.
            ``(6) Application of rules.--Rules similar to the rules of 
        paragraphs (5) and (6) of section 409A(d) shall apply.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including regulations disregarding a substantial risk of 
forfeiture in cases where necessary to carry out the purposes of this 
section.''.
    (b) Conforming Amendment.--Section 26(b)(2) is amended by striking 
``and'' at the end of subparagraph (S), by striking the period at the 
end of subparagraph (T) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                    ``(U) section 457A(c)(1)(B) (relating to 
                ascertainability of amounts of compensation).''.
    (c) Clerical Amendment.--The table of sections of subpart B of part 
II of subchapter E of chapter 1 is amended by inserting after the item 
relating to section 457 the following new item:

``Sec. 457A. Nonqualified deferred compensation for investment 
                            services.''.
    (d) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2007.
            (2) Treatment as change in method of accounting.--For 
        purposes of section 481 of the Internal Revenue Code of 1986--
                    (A) the amendments made by this section shall be 
                treated as a change in method of accounting which is 
                initiated by the taxpayer and made with the consent of 
                the Secretary of the Treasury, and
                    (B) the period for taking into account the 
                adjustments under such section by reason of such change 
                shall be 4 years.

SEC. 1203. INDEBTEDNESS INCURRED BY A PARTNERSHIP IN ACQUIRING 
              SECURITIES AND COMMODITIES NOT TREATED AS ACQUISITION 
              INDEBTEDNESS FOR ORGANIZATIONS WHICH ARE PARTNERS WITH 
              LIMITED LIABILITY.

    (a) In General.--Subsection (c) of section 514 (relating to 
acquisition indebtedness) is amended by adding at the end the following 
new paragraph:
            ``(10) Securities and commodities acquired by partnerships 
        in which an organization is a partner with limited liability.--
                    ``(A) In general.--In the case of any organization 
                which is a partner with limited liability in a 
                partnership, the term `acquisition indebtedness' does 
                not, for purposes of this section, include indebtedness 
                incurred or continued by such partnership in purchasing 
                or carrying any qualified security or commodity.
                    ``(B) Qualified security or commodity.--For 
                purposes of this paragraph, the term `qualified 
                security or commodity' means any security (as defined 
                in section 475(c)(2) without regard to the last 
                sentence thereof), any commodity (as defined in section 
                475(e)(2)), or any option or derivative contract with 
                respect to such a security or commodity.
                    ``(C) Application to tiered partnerships and other 
                pass-thru entities.--Rules similar to the rules of 
                subparagraph (A) shall apply in the case of tiered 
                partnerships and other pass-thru entities.
                    ``(D) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or appropriate to 
                carry out the purposes of this paragraph, including 
                regulations to prevent the abuse of this paragraph.''.
    (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. 1204. APPLICATION TO PARTNERSHIP INTERESTS AND TAX SHARING 
              AGREEMENTS OF RULE TREATING CERTAIN GAIN ON SALES BETWEEN 
              RELATED PERSONS AS ORDINARY INCOME.

    (a) Partnership Interests.--Subsection (a) of section 1239 is 
amended to read as follows:
    ``(a) Treatment of Gain as Ordinary Income.--In the case of a sale 
or exchange of property, directly or indirectly, between related 
persons, any gain recognized to the transferor shall be treated as 
ordinary income if--
            ``(1) such property is, in the hands of the transferee, of 
        a character which is subject to the allowance for depreciation 
        provided in section 167, or
            ``(2) such property is an interest in a partnership, but 
        only to the extent of gain attributable to unrealized 
        appreciation in property which is of a character subject to the 
        allowance for depreciation provided in section 167.''.
    (b) Tax Sharing Agreements.--Section 1239 (relating to gain from 
sale of depreciable property between certain related taxpayers) is 
amended by adding at the end the following new subsection:
    ``(f) Application to Tax Sharing Agreements.--
            ``(1) In general.--If there is a tax sharing agreement with 
        respect to any sale or exchange, the transferee and the 
        transferor shall be treated as related persons for purposes of 
        this section.
            ``(2) Tax sharing agreement.--For purposes of this 
        subsection, the term `tax sharing agreement' means any 
        agreement which provides for the payment to the transferor of 
        any amount which is determined by reference to any portion of 
        the tax benefit realized by the transferee with respect to the 
        depreciation (or amortization) of the property transferred.''.
    (c) Effective Date.--The amendment made by this section shall apply 
to sales and exchanges after the date of the enactment of this Act.

 PART 2--SELF-EMPLOYMENT TAX TREATMENT OF CERTAIN INTEREST HOLDERS IN 
                       SERVICE PROVIDING ENTITIES

SEC. 1211. CERTAIN SERVICE PROVIDING S CORPORATION SHAREHOLDERS AND 
              PARTNERS SUBJECT TO SELF-EMPLOYMENT TAXES.

    (a) In General.--Section 1402 is amended by adding at the end the 
following new subsection:
    ``(l) Special Rules for Service Providing S Corporation 
Shareholders and Partners.--
            ``(1) S corporation shareholders.--In the case of any S 
        corporation which is engaged in a trade or business consisting 
        primarily of the performance of services, any shareholder of 
        such S corporation who provides substantial services with 
        respect to such trade or business shall take into account such 
        shareholder's pro rata share of all items of income or loss 
        described in section 1366 which are attributable to such trade 
        or business in determining the shareholder's net earnings from 
        self-employment.
            ``(2) Partners.--In the case of any partnership which is 
        engaged in a trade or business consisting primarily of the 
        performance of services, subsection (a)(13) shall not apply to 
        any partner who provides substantial services with respect to 
        such trade or business.
            ``(3) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection, including regulations which 
        prevent the avoidance of the purposes of this subsection 
        through tiered entities or otherwise.
            ``(4) Cross reference.--For employment tax treatment of 
        wages paid to shareholders of S corporations, see subtitle 
        C.''.
    (b) Conforming Amendment.--Section 211 of the Social Security Act 
is amended by adding at the end the following new subsection:
    ``(k) Special Rules for Service Providing S Corporation 
Shareholders and Partners.--
            ``(1) S corporation shareholders.--In the case of any S 
        corporation which is engaged in a trade or business consisting 
        primarily of the performance of services, any shareholder of 
        such S corporation who provides substantial services with 
        respect to such trade or business shall take into account such 
        shareholder's pro rata share of all items of income and loss 
        described in section 1366 of the Internal Revenue Code of 1986 
        which are attributable to such trade or business in determining 
        the shareholder's net earnings from self-employment.
            ``(2) Partners.--In the case of any partnership which is 
        engaged in a trade or business consisting primarily of the 
        performance of services, subsection (a)(12) shall not apply to 
        any partner who provides substantial services with respect to 
        such trade or business.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

PART 3--BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES TRANSACTIONS

SEC. 1221. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES 
              TRANSACTIONS.

    (a) In General.--
            (1) Broker reporting for securities transactions.--Section 
        6045 (relating to returns of brokers) is amended by adding at 
        the end the following new subsection:
    ``(g) Additional Information Required in the Case of Securities 
Transactions.--
            ``(1) In general.--If a broker is otherwise required to 
        make a return under subsection (a) with respect to the gross 
        proceeds of the sale of a covered security, the broker shall 
        include in such return the information described in paragraph 
        (2).
            ``(2) Additional information required.--
                    ``(A) In general.--The information required under 
                paragraph (1) to be shown on a return with respect to a 
                covered security of a customer shall include the 
                customer's adjusted basis in such security and whether 
                any gain or loss with respect to such security is long-
                term or short-term (within the meaning of section 
                1222).
                    ``(B) Determination of adjusted basis.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--The customer's adjusted 
                        basis shall be determined--
                                    ``(I) in the case of any stock 
                                (other than any stock in an open-end 
                                fund), in accordance with the first-in 
                                first-out method unless the customer 
                                notifies the broker by means of making 
                                an adequate identification of the stock 
                                sold or transferred,
                                    ``(II) in the case of any interest 
                                in an open-end fund acquired before 
                                January 1, 2011, in accordance with any 
                                acceptable method under section 1012 
                                with respect to the account in which 
                                such interest is held,
                                    ``(III) in the case of any interest 
                                in an open-end fund acquired after 
                                December 31, 2010, in accordance with 
                                the broker's default method unless the 
                                customer notifies the broker that he 
                                elects another acceptable method under 
                                section 1012 with respect to the 
                                account in which such interest is held, 
                                and
                                    ``(IV) in any other case, under the 
                                method for making such determination 
                                under section 1012.
                            ``(ii) Exception for wash sales.--Except as 
                        otherwise provided by the Secretary, the 
                        customer's adjusted basis shall be determined 
                        without regard to section 1091 (relating to 
                        loss from wash sales of stock or securities) 
                        unless the transactions occur in the same 
                        account with respect to identical securities.
            ``(3) Covered security.--For purposes of this subsection--
                    ``(A) In general.--The term `covered security' 
                means any specified security acquired on or after the 
                applicable date if such security--
                            ``(i) was acquired through a transaction in 
                        the account in which such security is held, or
                            ``(ii) was transferred to such account from 
                        an account in which such security was a covered 
                        security, but only if the broker received a 
                        statement under section 6045A with respect to 
                        the transfer.
                    ``(B) Specified security.--The term `specified 
                security' means--
                            ``(i) any share of stock in a corporation,
                            ``(ii) any note, bond, debenture, or other 
                        evidence of indebtedness,
                            ``(iii) any commodity, or contract or 
                        derivative with respect to such commodity, if 
                        the Secretary determines that adjusted basis 
                        reporting is appropriate for purposes of this 
                        subsection, and
                            ``(iv) any other financial instrument with 
                        respect to which the Secretary determines that 
                        adjusted basis reporting is appropriate for 
                        purposes of this subsection.
                    ``(C) Applicable date.--The term `applicable date' 
                means--
                            ``(i) January 1, 2009, in the case of any 
                        specified security which is stock in a 
                        corporation, and
                            ``(ii) January 1, 2011, or such later date 
                        determined by the Secretary in the case of any 
                        other specified security.
            ``(4) Open-end fund.--For purposes of this subsection, the 
        term `open-end fund' means a regulated investment company (as 
        defined in section 851) which is offering for sale or has 
        outstanding any redeemable security of which it is the issuer 
        and the shares of which are not traded on an established 
        securities exchange.
            ``(5) Treatment of s corporations.--For purposes of this 
        section, a S corporation (other than a financial institution) 
        shall be treated in the same manner as a partnership.''.
            (2) Broker information required with respect to publicly 
        traded options.--Section 6045, as amended by subsection (a), is 
        amended by adding at the end the following new subsection:
    ``(h) Application to Options on Covered Securities.--
            ``(1) Exercise of option.--For purposes of this section, in 
        the case of any exercise of an option on a covered security 
        where the taxpayer is the grantor of the option and the option 
        was acquired in the same account as the covered security, the 
        amount received for the grant of an option on a covered 
        security shall be treated as an adjustment to gross proceeds or 
        as an adjustment to basis, as the case may be. A similar rule 
        shall apply in the case of the exercise of an option where the 
        taxpayer is not the grantor of the option.
            ``(2) Lapse or closing transaction.--For purposes of this 
        section, in the case of the lapse (or closing transaction (as 
        defined in section 1234(b)(2)(A))) of an option on a covered 
        security where the taxpayer is the grantor of the option, this 
        section shall apply as if the premium received for such option 
        were gross proceeds received on the date of the lapse or 
        closing transaction, and the cost (if any) of the closing 
        transaction shall be taken into account as adjusted basis. A 
        similar rule shall apply in the case of a lapse or closing 
        transaction where the taxpayer is not the grantor of the 
        option.
            ``(3) Application limited to options granted on or after 
        applicable date.--Paragraphs (1) and (2) shall not apply to any 
        option on a covered security which is granted or acquired 
        before the applicable date with respect to such covered 
        security.
            ``(4) Definitions.--For purposes of this subsection, the 
        terms `covered security' and `applicable date' shall have the 
        meaning given such terms in subsection (g)(3).''.
            (3) Extension of period for statements sent to customers.--
                    (A) In general.--Subsection (b) of section 6045 is 
                amended by striking ``January 31'' and inserting 
                ``February 15''.
                    (B) Statements related to substitute payments.--
                Subsection (d) of section 6045 is amended--
                            (i) by striking ``at such time and'', and
                            (ii) by inserting after ``other item.'' the 
                        following new sentence: ``The written statement 
                        required under the preceding sentence shall be 
                        furnished on or before February 15 of the year 
                        following the calendar year during which such 
                        payment was made.''.
                    (C) Other statements.--Subsection (b) of section 
                6045 is amended by adding at the end the following: 
                ``In the case that a substantial portion of the assets 
                in the account of a customer gives rise to the 
                requirement to furnish a statement under this 
                subsection, section 6042(c), 6049(c)(2)(A), or 
                6050N(b), any statement otherwise required to be 
                furnished to the customer with respect to any item in 
                such account on or before January 31 shall instead be 
                required to be furnished to such customer on or before 
                February 15.''.
    (b) Determination of Basis of Certain Securities on Account by 
Account Method.--Section 1012 (relating to basis of property-cost) is 
amended--
            (1) by striking ``The basis of property'' and inserting the 
        following:
    ``(a) In General.--The basis of property'',
            (2) by striking ``The cost of real property'' and inserting 
        the following:
    ``(b) Special Rule for Apportioned Real Estate Taxes.--The cost of 
real property'', and
            (3) by adding at the end the following new subsection:
    ``(c) Determinations by Account.--
            ``(1) In general.--In the case of the sale, exchange, or 
        other disposition of a specified security on or after the 
        applicable date, the conventions prescribed by regulations 
        under this section shall be applied on an account by account 
        basis.
            ``(2) Application to open-end funds.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), any stock in an open-end fund 
                acquired before January 1, 2009, shall be treated as a 
                separate account from any such stock acquired on or 
                after such date.
                    ``(B) Election by open-end fund for treatment as 
                single account.--If an open-end fund elects (at such 
                time and in such form and manner as the Secretary may 
                prescribe) to have this subparagraph apply with respect 
                to one or more of its stockholders--
                            ``(i) subparagraph (A) shall not apply with 
                        respect to any stock in such fund held by such 
                        stockholders, and
                            ``(ii) all stock in such fund which is held 
                        by such stockholders shall be treated as 
                        covered securities described in section 
                        6045(g)(3) without regard to the date of the 
                        acquisition of such stock.
            ``(3) Definitions.--For purposes of this section, the terms 
        `specified security', `applicable date', and `open-end fund' 
        shall have the meaning given such terms in section 6045(g).''.
    (c) Information by Transferors To Aid Brokers.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 is amended by inserting after section 6045 the 
        following new section:

``SEC. 6045A. INFORMATION REQUIRED IN CONNECTION WITH TRANSFERS OF 
              COVERED SECURITIES TO BROKERS.

    ``(a) Furnishing of Information.--Every applicable person which 
transfers to a broker (as defined in section 6045(c)(1)) a security 
which is a covered security (as defined in section 6045(g)(3)) in the 
hands of such applicable person shall furnish to such broker a written 
statement in such manner and setting forth such information as the 
Secretary may by regulations prescribe for purposes of enabling such 
broker to meet the requirements of section 6045(g).
    ``(b) Applicable Person.--For purposes of subsection (a), the term 
`applicable person' means--
            ``(1) any broker (as defined in section 6045(c)(1)), and
            ``(2) any other person as provided by the Secretary in 
        regulations.
    ``(c) Time for Furnishing Statement.--Any statement required by 
subsection (a) shall be furnished not later than the earlier of--
            ``(1) 45 days after the date of the transfer described in 
        subsection (a), or
            ``(2) January 15 of the year following the calendar year 
        during which such transfer occurred.''.
            (2) Assessable penalties.--Paragraph (2) of section 6724(d) 
        (defining payee statement) is amended by redesignating 
        subparagraphs (I) through (CC) as subparagraphs (J) through 
        (DD), respectively, and by inserting after subparagraph (H) the 
        following new subparagraph:
                    ``(I) section 6045A (relating to information 
                required in connection with transfers of covered 
                securities to brokers).''.
            (3) Clerical amendment.--The table of sections for subpart 
        B of part III of subchapter A of chapter 61 is amended by 
        inserting after the item relating to section 6045 the following 
        new item:

``Sec. 6045A. Information required in connection with transfers of 
                            covered securities to brokers.''.
    (d) Additional Issuer Information To Aid Brokers.--
            (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 of the Internal Revenue Code of 1986, as amended by 
        subsection (b), is amended by inserting after section 6045A the 
        following new section:

``SEC. 6045B. RETURNS RELATING TO ACTIONS AFFECTING BASIS OF SPECIFIED 
              SECURITIES.

    ``(a) In General.--According to the forms or regulations prescribed 
by the Secretary, any issuer of a specified security shall make a 
return setting forth--
            ``(1) a description of any organizational action which 
        affects the basis of such specified security of such issuer,
            ``(2) the quantitative effect on the basis of such 
        specified security resulting from such action, and
            ``(3) such other information as the Secretary may 
        prescribe.
    ``(b) Time for Filing Return.--Any return required by subsection 
(a) shall be filed not later than the earlier of--
            ``(1) 45 days after the date of the action described in 
        subsection (a), or
            ``(2) January 31 of the year following the calendar year 
        during which such action occurred.
    ``(c) Statements To Be Furnished to Holders of Specified Securities 
or Their Nominees.--According to the forms or regulations prescribed by 
the Secretary, every person required to make a return under subsection 
(a) with respect to a specified security shall furnish to the nominee 
with respect to the specified security (or certificate holder if there 
is no nominee) a written statement showing--
            ``(1) the name, address, and phone number of the 
        information contact of the person required to make such return,
            ``(2) the information required to be shown on such return 
        with respect to such security, and
            ``(3) such other information as the Secretary may 
        prescribe.
The written statement required under the preceding sentence shall be 
furnished to the holder on or before January 31 of the year following 
the calendar year during which the action described in subsection (a) 
occurred.
    ``(d) Specified Security.--For purposes of this section, the term 
`specified security' has the meaning given such term by section 
6045(g)(3)(B). No return shall be required under this section with 
respect to actions described in subsection (a) with respect to a 
specified security which occur before the applicable date (as defined 
in section 6045(g)(3)(C) with respect to such security.
    ``(e) Public Reporting in Lieu of Return.--The Secretary may waive 
the requirement to file a return under subsections (a) and (c) with 
respect to a specified security, if the person required to make the 
return under subsections (a) and (c) makes publicly available, in such 
form and manner as the Secretary determines necessary to carry out the 
purposes of this section--
            ``(1) the name, address, phone number, and email address of 
        the information contact of such person, and
            ``(2) the information described in paragraphs (1), (2), and 
        (3) of subsection (a).''.
            (2) Assessable penalties.--
                    (A) Subparagraph (B) of section 6724(d)(1) of such 
                Code (defining information return) is amended by 
                redesignating clauses (iv) through (xix) as clauses (v) 
                through (xx), respectively, and by inserting after 
                clause (iii) the following new clause:
                            ``(iv) section 6045B(a) (relating to 
                        returns relating to actions affecting basis of 
                        specified securities),''.
                    (B) Paragraph (2) of section 6724(d) of such Code 
                (defining payee statement), as amended by subsection 
                (c)(2), is amended by redesignating subparagraphs (J) 
                through (DD) as subparagraphs (K) through (EE), 
                respectively, and by inserting after subparagraph (I) 
                the following new subparagraph:
                    ``(J) subsections (d) and (e) of section 6045B 
                (relating to returns relating to actions affecting 
                basis of specified securities).''.
            (3) Clerical amendment.--The table of sections for subpart 
        B of part III of subchapter A of chapter 61 of such Code, as 
        amended by subsection (b)(3), is amended by inserting after the 
        item relating to section 6045A the following new item:

``Sec. 6045B. Returns relating to actions affecting basis of specified 
                            securities.''.
    (e) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2009.

                      TITLE II--ONE-YEAR EXTENDERS

SEC. 2001. RESEARCH CREDIT.

    (a) In General.--Subparagraph (B) of section 41(h)(1) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Conforming Amendment.--Subparagraph (D) of section 45C(b)(1) 
(relating to qualified clinical testing expenses) is amended by 
striking ``December 31, 2007'' and inserting ``December 31, 2008''.
    (c) Effective Date.--The amendments made by this section shall 
apply to amounts paid or incurred after December 31, 2007.

SEC. 2002. INDIAN EMPLOYMENT CREDIT.

    (a) In General.--Subsection (f) of section 45A (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 2003. NEW MARKETS TAX CREDIT.

    Subparagraph (D) of section 45D(f)(1) (relating to national 
limitation on amount of investments designated) is amended by striking 
``and 2008'' and inserting ``2008, and 2009''.

SEC. 2004. RAILROAD TRACK MAINTENANCE.

    (a) In General.--Subsection (f) of section 45G (relating to 
application of section) is amended by striking ``January 1, 2008'' and 
inserting ``January 1, 2009''.
    (b) Effective Date.--The amendment made by this section shall apply 
to expenditures paid or incurred during taxable years beginning after 
December 31, 2007.

SEC. 2005. MORTGAGE INSURANCE PREMIUMS TREATED AS INTEREST.

    (a) In General.--Subclause (I) of section 163(h)(3)(E)(iv) 
(relating to termination) is amended by striking ``December 31, 2007'' 
and inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid or accrued after December 31, 2007.

SEC. 2006. DEDUCTION FOR STATE AND LOCAL SALES TAXES.

    (a) In General.--Subparagraph (I) of section 164(b)(5) is amended 
by striking ``January 1, 2008'' and inserting ``January 1, 2009''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 2007. FIFTEEN-YEAR STRAIGHT-LINE COST RECOVERY FOR QUALIFIED 
              LEASEHOLD IMPROVEMENTS AND QUALIFIED RESTAURANT PROPERTY.

    (a) In General.--Clauses (iv) and (v) of section 168(e)(3)(E) 
(relating to 15-year property) are each amended by striking ``January 
1, 2008'' and inserting ``January 1, 2009''.
    (b) Effective Date.--The amendments made by this section shall 
apply to property placed in service after December 31, 2007.

SEC. 2008. SEVEN-YEAR COST RECOVERY PERIOD FOR MOTORSPORTS RACING TRACK 
              FACILITY.

    (a) In General.--Subparagraph (D) of section 168(i)(15) (relating 
to termination) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to property placed in service after December 31, 2007.

SEC. 2009. ACCELERATED DEPRECIATION FOR BUSINESS PROPERTY ON INDIAN 
              RESERVATION.

    (a) In General.--Paragraph (8) of section 168(j) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to property placed in service after December 31, 2007.

SEC. 2010. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

    (a) In General.--Subsection (h) of section 198 (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to expenditures paid or incurred after December 31, 2007.

SEC. 2011. DEDUCTION ALLOWABLE WITH RESPECT TO INCOME ATTRIBUTABLE TO 
              DOMESTIC PRODUCTION ACTIVITIES IN PUERTO RICO.

    (a) In General.--Subparagraph (C) of section 199(d)(8) (relating to 
termination) is amended--
            (1) by striking ``first 2 taxable years'' and inserting 
        ``first 3 taxable years'', and
            (2) by striking ``January 1, 2008'' and inserting ``January 
        1, 2009''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 2012. DEDUCTION OF QUALIFIED TUITION AND RELATED EXPENSES.

    (a) In General.--Subsection (e) of section 222 (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 2013. MODIFICATION OF TAX TREATMENT OF CERTAIN PAYMENTS TO 
              CONTROLLING EXEMPT ORGANIZATIONS.

    (a) In General.--Clause (iv) of section 512(b)(13)(E) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments received or accrued after December 31, 2007.

SEC. 2014. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT 
              COMPANIES.

    (a) Interest-Related Dividends.--Subparagraph (C) of section 
871(k)(1) (defining interest-related dividend) is amended by striking 
``December 31, 2007'' and inserting ``December 31, 2008''.
    (b) Short-Term Capital Gain Dividends.--Subparagraph (C) of section 
871(k)(2) (defining short-term capital gain dividend) is amended by 
striking ``December 31, 2007'' and inserting ``December 31, 2008''.
    (c) Effective Date.--The amendments made by this section shall 
apply to dividends with respect to taxable years of regulated 
investment companies beginning after December 31, 2007.

SEC. 2015. EXTENSION AND MODIFICATION OF CREDIT TO HOLDERS OF QUALIFIED 
              ZONE ACADEMY BONDS.

    (a) In General.--Subsection (e) of section 1397E (relating to 
limitation on amount of bonds designated) is amended by striking 
``1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, and 2007'' and 
inserting ``each of calendar years 1998 through 2008''.
    (b) Modification of Arbitrage Rules.--
            (1) In general.--Subsection (g) of section 1397E (relating 
        to special rules relating to arbitrage) is amended to read as 
        follows:
    ``(g) Special Rules Relating to Arbitrage.--
            ``(1) In general.--An issue shall be treated as meeting the 
        requirements of this subsection if the issuer satisfies the 
        requirements of section 148 with respect to the proceeds of the 
        issue.
            ``(2) Special rule for investments during expenditure 
        period.--An issue shall not be treated as failing to meet the 
        requirements of paragraph (1) by reason of any investment of 
        available project proceeds during the 5-year period described 
        in subsection (f)(1)(A) (including any extension of such period 
        under subsection (f)(2)).
            ``(3) Special rule for reserve funds.--An issue shall not 
        be treated as failing to meet the requirements of paragraph (1) 
        by reason of any fund which is expected to be used to repay 
        such issue if--
                    ``(A) such fund is funded at a rate not more rapid 
                than equal annual installments,
                    ``(B) such fund is funded in a manner that such 
                fund will not exceed the amount necessary to repay the 
                issue if invested at the maximum rate permitted under 
                subparagraph (C), and
                    ``(C) the yield on such fund is not greater than 
                the discount rate determined under subsection (d)(3) 
                with respect to the issue.''.
            (2) Application of available project proceeds to other 
        requirements.--Subsections (d)(1)(A), (d)(2)(A), (f)(1)(A), 
        (f)(1)(B), (f)(1)(C), and (f)(3) of section 1397E are each 
        amended by striking ``proceeds'' and inserting ``available 
        project proceeds''
            (3) Available project proceeds defined.--Subsection (i) of 
        section 1397E (relating to definitions) is amended by adding at 
        the end the following new paragraph:
            ``(4) Available project proceeds.--The term `available 
        project proceeds' means--
                    ``(A) the excess of--
                            ``(i) the proceeds from the sale of an 
                        issue, over
                            ``(ii) the issuance costs financed by the 
                        issue (to the extent that such costs do not 
                        exceed 2 percent of such proceeds), and
                    ``(B) the proceeds from any investment of the 
                excess described in subparagraph (A).''.
    (c) Effective Date.--
            (1) Extension.--The amendment made by subsection (a) shall 
        apply to obligations issued after December 31, 2007.
            (2) Modification of arbitrage rules.--The amendments made 
        by subsection (b) shall apply to obligations issued after the 
        date of the enactment of this Act.

SEC. 2016. TAX INCENTIVES FOR INVESTMENT IN THE DISTRICT OF COLUMBIA.

    (a) Designation of Zone.--
            (1) In general.--Subsection (f) of section 1400 is amended 
        by striking ``2007'' both places it appears and inserting 
        ``2008''.
            (2) Effective date.--The amendments made by this subsection 
        shall apply to periods beginning after December 31, 2007.
    (b) Tax-Exempt Economic Development Bonds.--
            (1) In general.--Subsection (b) of section 1400A is amended 
        by striking ``2007'' and inserting ``2008''.
            (2) Effective date.--The amendment made by this subsection 
        shall apply to bonds issued after December 31, 2007.
    (c) Zero Percent Capital Gains Rate.--
            (1) In general.--Subsection (b) of section 1400B is amended 
        by striking ``2008'' each place it appears and inserting 
        ``2009''.
            (2) Conforming amendments.--
                    (A) Section 1400B(e)(2) is amended--
                            (i) by striking ``2012'' and inserting 
                        ``2013'', and
                            (ii) by striking ``2012'' in the heading 
                        thereof and inserting ``2013''.
                    (B) Section 1400B(g)(2) is amended by striking 
                ``2012'' and inserting ``2013''.
                    (C) Section 1400F(d) is amended by striking 
                ``2012'' and inserting ``2013''.
            (3) Effective dates.--
                    (A) Extension.--The amendments made by paragraph 
                (1) shall apply to acquisitions after December 31, 
                2007.
                    (B) Conforming amendments.--The amendments made by 
                paragraph (2) shall take effect on the date of the 
                enactment of this Act.
    (d) First-Time Homebuyer Credit.--
            (1) In general.--Subsection (i) of section 1400C is amended 
        by striking ``2008'' and inserting ``2009''.
            (2) Effective date.--The amendment made by this subsection 
        shall apply to property purchased after December 31, 2007.

SEC. 2017. DISCLOSURE FOR COMBINED EMPLOYMENT TAX REPORTING.

    (a) In General.--Subparagraph (B) of section 6103(d)(5) (relating 
to termination) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to disclosures after December 31, 2007.

SEC. 2018. DISCLOSURE OF RETURN INFORMATION TO APPRISE APPROPRIATE 
              OFFICIALS OF TERRORIST ACTIVITIES.

    (a) In General.--Clause (iv) of section 6103(i)(3)(C) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to disclosures after December 31, 2007.

SEC. 2019. DISCLOSURE UPON REQUEST OF INFORMATION RELATING TO TERRORIST 
              ACTIVITIES.

    (a) In General.--Subparagraph (E) of section 6103(i)(7) (relating 
to termination) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to disclosures after December 31, 2007.

SEC. 2020. DISCLOSURE OF RETURN INFORMATION TO CARRY OUT INCOME 
              CONTINGENT REPAYMENT OF STUDENT LOANS.

    (a) In General.--Subparagraph (D) of section 6103(l)(13) (relating 
to termination) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to requests made after December 31, 2007.

SEC. 2021. AUTHORITY FOR UNDERCOVER OPERATIONS.

    (a) In General.--Paragraph (6) of section 7608(c) (relating to 
application of section) is amended by striking ``January 1, 2008'' each 
place it appears and inserting ``January 1, 2009''.
    (b) Effective Date.--The amendment made by this section shall take 
effect on January 1, 2008.

SEC. 2022. INCREASE IN LIMIT ON COVER OVER OF RUM EXCISE TAX TO PUERTO 
              RICO AND THE VIRGIN ISLANDS.

    (a) In General.--Paragraph (1) of section 7652(f) is amended by 
striking ``January 1, 2008'' and inserting ``January 1, 2009''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distilled spirits brought into the United States after December 31, 
2007.

SEC. 2023. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH 
              BENEFITS.

    (a) In General.--Paragraph (3) of section 9812(f) (relating to 
application of section) is amended by striking ``December 31, 2007'' 
and inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to benefits for services furnished after December 31, 2007.

SEC. 2024. EXTENSION OF ECONOMIC DEVELOPMENT CREDIT FOR AMERICAN SAMOA.

    (a) In General.--Subsection (d) of section 119 of division A of the 
Tax Relief and Health Care Act of 2006 is amended--
            (1) by striking ``first two taxable years'' and inserting 
        ``first 3 taxable years'', and
            (2) by striking ``January 1, 2008'' and inserting ``January 
        1, 2009''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 2025. QUALIFIED CONSERVATION CONTRIBUTIONS.

    (a) In General.--Clause (vi) of section 170(b)(1)(E) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to contributions made in taxable years beginning after December 31, 
2007.

SEC. 2026. ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD 
              INVENTORY.

    (a) In General.--Clause (iv) of section 170(e)(3)(C) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after December 31, 2007.

SEC. 2027. ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF BOOK 
              INVENTORY TO PUBLIC SCHOOLS.

    (a) In General.--Clause (iv) of section 170(e)(3)(D) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after December 31, 2007.

SEC. 2028. ENHANCED DEDUCTION FOR QUALIFIED COMPUTER CONTRIBUTIONS.

    (a) In General.--Subparagraph (G) of section 170(e)(6) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to contributions made during taxable years beginning after December 31, 
2007.

SEC. 2029. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR 
              CHARITABLE PURPOSES.

    (a) In General.--Subparagraph (F) of section 408(d)(8) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to distributions made in taxable years beginning after December 31, 
2007.

SEC. 2030. BASIS ADJUSTMENT TO STOCK OF S CORPORATIONS MAKING 
              CHARITABLE CONTRIBUTIONS OF PROPERTY.

    (a) In General.--The last sentence of section 1367(a)(2) (relating 
to decreases in basis) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
    (b) Technical Amendment Related to Section 1203 of the Pension 
Protection Act of 2006.--Subsection (d) of section 1366 is amended by 
adding at the end the following new paragraph:
            ``(4) Application of limitation on charitable 
        contributions.--In the case of any charitable contribution of 
        property to which the second sentence of section 1367(a)(2) 
        applies, paragraph (1) shall not apply to the extent of the 
        excess (if any) of--
                    ``(A) the shareholder's pro rata share of such 
                contribution, over
                    ``(B) the shareholder's pro rata share of the 
                adjusted basis of such property.''.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to contributions 
        made in taxable years beginning after December 31, 2007.
            (2) Technical amendment.--The amendment made by subsection 
        (b)shall take effect as if included in the provision of the 
        Pension Protection Act of 2006 to which it relates.

SEC. 2031. DEDUCTION FOR CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY 
              SCHOOL TEACHERS.

    (a) In General.--Subparagraph (D) of section 62(a)(2) (relating to 
certain expenses of elementary and secondary school teachers) is 
amended by striking ``or 2007'' and inserting ``2007, or 2008''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2007.

SEC. 2032. ELECTION TO INCLUDE COMBAT PAY AS EARNED INCOME FOR PURPOSES 
              OF EARNED INCOME TAX CREDIT.

    (a) In General.--Subclause (II) of section 32(c)(2)(B)(vi) 
(defining earned income) is amended by striking ``January 1, 2008'' and 
inserting ``January 1, 2009''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years ending after December 31, 2007.

SEC. 2033. MODIFICATION OF MORTGAGE REVENUE BONDS FOR VETERANS.

    (a) Qualified Mortgage Bonds Used To Finance Residences for 
Veterans Without Regard to First-Time Homebuyer Requirement.--
Subparagraph (D) of section 143(d)(2) (relating to exceptions) is 
amended by striking ``January 1, 2008'' and inserting ``January 1, 
2009''.
    (b) Effective Date.--The amendment made by this section shall apply 
to bonds issued after December 31, 2007.

SEC. 2034. DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVIDUALS CALLED TO 
              ACTIVE DUTY.

    (a) In General.--Clause (iv) of section 72(t)(2)(G) is amended by 
striking ``December 31, 2007'' and inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to individuals ordered or called to active duty on or after December 
31, 2007.

SEC. 2035. STOCK IN RIC FOR PURPOSES OF DETERMINING ESTATES OF 
              NONRESIDENTS NOT CITIZENS.

    (a) In General.--Paragraph (3) of section 2105(d) (relating to 
stock in a RIC) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
    (b) Effective Date.--The amendment made by this section shall apply 
to decedents dying after December 31, 2007.

SEC. 2036. QUALIFIED INVESTMENT ENTITIES.

    (a) In General.--Clause (ii) of section 897(h)(4)(A) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
take effect on January 1, 2008.

SEC. 2037. DISCLOSURE OF RETURN INFORMATION FOR CERTAIN VETERANS 
              PROGRAMS.

    (a) In General.--The last sentence of paragraph (7) of section 
6103(l) is amended by striking ``September 30, 2008'' and inserting 
``December 31, 2008''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to requests made after September 30, 2008.

                    TITLE III--CORPORATE TAX REFORM

                  Subtitle A--Corporate Rate Reduction

SEC. 3001. REDUCTION IN TOP CORPORATE MARGINAL RATE.

    (a) General Rule.--Paragraph (1) of section 11(b) (relating to 
amount of tax) is amended--
            (1) by inserting ``and'' at the end of subparagraph (B),
            (2) by striking subparagraphs (C) and (D) and inserting the 
        following:
                    ``(C) 30.5 percent of so much of the taxable income 
                as exceeds $75,000.'', and
            (3) by striking ``$11,750'' and all that follows and 
        inserting ``$9,125.''.
    (b) Personal Service Corporations.--Paragraph (2) of section 11(b) 
is amended by striking ``35 percent'' and inserting ``30.5 percent''.
    (c) Conforming Amendments.--Paragraphs (1) and (2) of section 
1445(e) are each amended by striking ``35 percent'' and inserting 
``30.5 percent''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008, except that 
the amendments made by subsection (c) shall take effect on January 1, 
2009.

  Subtitle B--Repeal of Deduction for Income Attributable to Domestic 
                         Production Activities

SEC. 3101. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC 
              PRODUCTION ACTIVITIES.

    (a) In General.--Section 199 is repealed.
    (b) Conforming Amendments.--
            (1) Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), 
        219(g)(3)(A)(ii), 221(b)(2)(C), 222(b)(2)(C), 246(b)(1), and 
        469(i)(3)(F) are each amended by striking ``199,''.
            (2) Clauses (i)(II) and (ii)(II) of section 56(d)(1)(A) are 
        each amended by striking ``and the deduction under section 
        199''.
            (3) Clause (i) of section 163(j)(6)(A) is amended by 
        inserting ``and'' at the end of subclause (II), by striking 
        subclause (III) and by redesignating subclause (IV) as 
        subclause (III).
            (4) Subparagraph (C) of section 170(b)(2) is amended by 
        striking clause (iv), by redesignating clause (v) as clause 
        (iv), and by inserting ``and'' at the end of clause (iii).
            (5) Subsection (d) of section 172 is amended by striking 
        paragraph (7).
            (6) Subsection (a) of section 613 is amended by striking 
        ``and without the deduction under section 199''.
            (7) Paragraph (1) of section 613A(d) is amended by 
        redesignating subparagraphs (C), (D), and (E) as subparagraphs 
        (B), (C), and (D), respectively, and by striking subparagraph 
        (B).
            (8) Subsection (a) of section 1402 is amended by inserting 
        ``and'' at the end of paragraph (15), by striking paragraph 
        (16), and by redesignating paragraph (17) as paragraph (16).
            (9) The table of sections for part VI of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        199.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

        Subtitle C--Provisions Related to Foreign Source Income

SEC. 3201. ALLOCATION OF EXPENSES AND TAXES ON BASIS OF REPATRIATION OF 
              FOREIGN INCOME.

    (a) In General.--Part III of subchapter N of chapter 1 is amended 
by inserting after subpart G the following new subpart:

``Subpart H--Special Rules for Allocation of Foreign-Related Deductions 
                        and Foreign Tax Credits

``Sec. 975. Deductions allocated to deferred foreign income may not 
                            offset United States source income.
``Sec. 976. Amount of foreign taxes computed on overall basis.
``Sec. 977. Application of subpart.

``SEC. 975. DEDUCTIONS ALLOCATED TO DEFERRED FOREIGN INCOME MAY NOT 
              OFFSET UNITED STATES SOURCE INCOME.

    ``(a) Current Year Deductions.--For purposes of this chapter, 
foreign-related deductions for any taxable year--
            ``(1) shall be taken into account for such taxable year 
        only to the extent that such deductions are allocable to 
        currently-taxed foreign income, and
            ``(2) to the extent not so allowed, shall be taken into 
        account in subsequent taxable years as provided in subsection 
        (b).
Foreign-related deductions shall be allocated to currently-taxed 
foreign income in the same proportion which currently-taxed foreign 
income bears to the sum of currently-taxed foreign income and deferred 
foreign income.
    ``(b) Deductions Related to Repatriated Deferred Foreign Income.--
            ``(1) In general.--If there is repatriated foreign income 
        for a taxable year, the portion of the previously deferred 
        deductions allocated to the repatriated foreign income shall be 
        taken into account for the taxable year as a deduction 
        allocated to income from sources outside the United States. Any 
        such amount shall not be included in foreign-related deductions 
        for purposes of applying subsection (a) to such taxable year.
            ``(2) Portion of previously deferred deductions.--For 
        purposes of paragraph (1), the portion of the previously 
        deferred deductions allocated to repatriated foreign income 
        is--
                    ``(A) the amount which bears the same proportion to 
                such deductions, as
                    ``(B) the repatriated income bears to the 
                previously deferred foreign income.
    ``(c) Definitions and Special Rule.--For purposes of this section--
            ``(1) Foreign-related deductions.--The term `foreign-
        related deductions' means the total amount of deductions and 
        expenses which would be allocated or apportioned to gross 
        income from sources without the United States for the taxable 
        year if both the currently-taxed foreign income and deferred 
        foreign income were taken into account.
            ``(2) Currently-taxed foreign income.--The term `currently-
        taxed foreign income' means the amount of gross income from 
        sources without the United States for the taxable year 
        (determined without regard to repatriated foreign income for 
        such year).
            ``(3) Deferred foreign income.--The term `deferred foreign 
        income' means the excess of--
                    ``(A) the amount that would be includible in gross 
                income under subpart F of this part for the taxable 
                year if--
                            ``(i) all controlled foreign corporations 
                        were treated as one controlled foreign 
                        corporation, and
                            ``(ii) all earnings and profits of all 
                        controlled foreign corporations were subpart F 
                        income (as defined in section 952), over
                    ``(B) the sum of--
                            ``(i) all dividends received during the 
                        taxable year from controlled foreign 
                        corporations, plus
                            ``(ii) amounts includible in gross income 
                        under section 951(a).
            ``(4) Previously deferred foreign income.--The term 
        `previously deferred foreign income' means the aggregate amount 
        of deferred foreign income for all prior taxable years to which 
        this part applies, determined as of the beginning of the 
        taxable year, reduced by the repatriated foreign income for all 
        such prior taxable years.
            ``(5) Repatriated foreign income.--The term `repatriated 
        foreign income' means the amount included in gross income on 
        account of distributions out of previously deferred foreign 
        income.
            ``(6) Previously deferred deductions.--The term `previously 
        deferred deductions' means the aggregate amount of foreign-
        related deductions not taken into account under subsection (a) 
        for all prior taxable years (determined as of the beginning of 
        the taxable year), reduced by any amounts taken into account 
        under subsection (b) for such prior taxable years.
            ``(7) Treatment of certain foreign taxes.--
                    ``(A) Paid by controlled foreign corporation.--
                Section 78 shall not apply for purposes of determining 
                currently-taxed foreign income and deferred foreign 
                income.
                    ``(B) Paid by taxpayer.--For purposes of 
                determining currently-taxed foreign income, gross 
                income from sources without the United States shall be 
                reduced by the aggregate amount of taxes described in 
                the applicable paragraph of section 901(b) which are 
                paid by the taxpayer (without regard to sections 902 
                and 960) during the taxable year.
            ``(8) Coordination with section 976.--In determining 
        currently-taxed foreign income and deferred foreign income, the 
        amount of deemed foreign tax credits shall be determined with 
        regard to section 976.

``SEC. 976. AMOUNT OF FOREIGN TAXES COMPUTED ON OVERALL BASIS.

    ``(a) Current Year Allowance.--For purposes of this chapter, the 
amount taken into account as foreign income taxes for any taxable year 
shall be an amount which bears the same ratio to the total foreign 
income taxes for that taxable year as--
            ``(1) the currently-taxed foreign income for such taxable 
        year, bears to
            ``(2) the sum of the currently-taxed foreign income and 
        deferred foreign income for such year.
The portion of the total foreign income taxes for any taxable year not 
taken into account under the preceding sentence for a taxable year 
shall only be taken into account as provided in subsection (b) (and 
shall not be taken into account for purposes of applying sections 902 
and 960).
    ``(b) Allowance Related to Repatriated Deferred Foreign Income.--
            ``(1) In general.--If there is repatriated foreign income 
        for any taxable year, the portion of the previously deferred 
        foreign income taxes paid or accrued during such taxable year 
        shall be taken into account for the taxable year as foreign 
        taxes paid or accrued. Any such taxes so taken into account 
        shall not be included in foreign income taxes for purposes of 
        applying subsection (a) to such taxable year.
            ``(2) Portion of previously deferred foreign income 
        taxes.--For purposes of paragraph (1), the portion of the 
        previously deferred foreign income taxes allocated to 
        repatriated deferred foreign income is--
                    ``(A) the amount which bears the same proportion to 
                such taxes, as
                    ``(B) the repatriated deferred income bears to the 
                previously deferred foreign income.
    ``(c) Definitions and Special Rule.--For purposes of this section--
            ``(1) Previously deferred foreign income taxes.--The term 
        `previously deferred foreign income taxes' means the aggregate 
        amount of total foreign income taxes not taken into account 
        under subsection (a) for all prior taxable years (determined as 
        of the beginning of the taxable year), reduced by any amounts 
        taken into account under subsection (b) for such prior taxable 
        years.
            ``(2) Total foreign income taxes.--The term `total foreign 
        income taxes' means the sum of foreign income taxes paid or 
        accrued during the taxable year (determined without regard to 
        section 904(c)) plus the increase in foreign income taxes that 
        would be paid or accrued during the taxable year under sections 
        902 and 960 if--
                    ``(A) all controlled foreign corporations were 
                treated as one controlled foreign corporation, and
                    ``(B) all earnings and profits of all controlled 
                foreign corporations were subpart F income (as defined 
                in section 952).
            ``(3) Foreign income taxes.--The term `foreign income 
        taxes' means any income, war profits, or excess profits taxes 
        paid by the taxpayer to any foreign country or possession of 
        the United States.
            ``(4) Currently-taxed foreign income and deferred foreign 
        income.--The terms `currently-taxed foreign income' and 
        `deferred foreign income' have the meanings given such terms by 
        section 975(c)).

``SEC. 977. APPLICATION OF SUBPART.

    ``This subpart--
            ``(1) shall be applied before subpart A, and
            ``(2) shall be applied separately with respect to the 
        categories of income specified in section 904(d)(1).''.
    (b) Clerical Amendment.--The table of subparts for part III of 
subpart N of chapter 1 is amended by inserting after the item relating 
to subpart G the following new item:

``subpart h. special rules for allocation of foreign-related deductions 
                      and foreign tax credits.''.

    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 3202. FOREIGN CURRENCY CONVERSION FOR DETERMINATION OF FOREIGN 
              TAXES AND FOREIGN CORPORATION'S EARNINGS AND PROFITS.

    (a) Earnings and Profits and Distributions.--Paragraph (2) of 
section 986(b) is amended to read as follows:
            ``(2) in the case of any United States person, the earnings 
        and profits determined under paragraph (1) shall (if necessary) 
        be translated into dollars using the average exchange rate for 
        the taxable year in which earned.''.
    (b) Previously Taxed Earnings and Profits.--Paragraph (1) of 
section 986(c) is amended by striking ``movements in exchange rates 
between the times of deemed and actual distribution'' and inserting 
``the difference between the exchange rate applicable to such earnings 
and profits under subsection (b)(2) and the exchange rate at the time 
of the actual distribution''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.

SEC. 3203. REPEAL OF WORLDWIDE ALLOCATION OF INTEREST.

    (a) In General.--Section 864 is amended by striking subsection (f) 
and by redesignating subsection (g) as subsection (f).
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

SEC. 3204. LIMITATION ON TREATY BENEFITS FOR CERTAIN DEDUCTIBLE 
              PAYMENTS.

    (a) In General.--Section 894 (relating to income affected by 
treaty) is amended by adding at the end the following new subsection:
    ``(d) Limitation on Treaty Benefits for Certain Deductible 
Payments.--
            ``(1) In general.--In the case of any deductible related-
        party payment, any withholding tax imposed under chapter 3 (and 
        any tax imposed under subpart A or B of this part) with respect 
        to such payment may not be reduced under any treaty of the 
        United States unless any such withholding tax would be reduced 
        under a treaty of the United States if such payment were made 
        directly to the foreign parent corporation.
            ``(2) Deductible related-party payment.--For purposes of 
        this subsection, the term `deductible related-party payment' 
        means any payment made, directly or indirectly, by any person 
        to any other person if the payment is allowable as a deduction 
        under this chapter and both persons are members of the same 
        foreign controlled group of entities.
            ``(3) Foreign controlled group of entities.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `foreign controlled 
                group of entities' means a controlled group of entities 
                the common parent of which is a foreign corporation.
                    ``(B) Controlled group of entities.--The term 
                `controlled group of entities' means a controlled group 
                of corporations as defined in section 1563(a)(1), 
                except that--
                            ``(i) `more than 50 percent' shall be 
                        substituted for `at least 80 percent' each 
                        place it appears therein, and
                            ``(ii) the determination shall be made 
                        without regard to subsections (a)(4) and (b)(2) 
                        of section 1563.
                A partnership or any other entity (other than a 
                corporation) shall be treated as a member of a 
                controlled group of entities if such entity is 
                controlled (within the meaning of section 954(d)(3)) by 
                members of such group (including any entity treated as 
                a member of such group by reason of this sentence).
            ``(4) Foreign parent corporation.--For purposes of this 
        subsection, the term `foreign parent corporation' means, with 
        respect to any deductible related-party payment, the common 
        parent of the foreign controlled group of entities referred to 
        in paragraph (3)(A).
            ``(5) Regulations.--The Secretary may prescribe such 
        regulations or other guidance as are necessary or appropriate 
        to carry out the purposes of this subsection, including 
        regulations or other guidance which provide for--
                    ``(A) the treatment of two or more persons as 
                members of a foreign controlled group of entities if 
                such persons would be the common parent of such group 
                if treated as one corporation, and
                    ``(B) the treatment of any member of a foreign 
                controlled group of entities as the common parent of 
                such group if such treatment is appropriate taking into 
                account the economic relationships among such 
                entities.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after the date of the enactment of this Act.

              Subtitle D--Modification of Accounting Rules

SEC. 3301. REPEAL OF LAST-IN, FIRST-OUT METHOD OF INVENTORY.

    (a) In General.--Subpart D of part II of subchapter E of chapter 1 
is amended by striking sections 472 (relating to last-in, first-out 
inventories), 473 (relating to qualified liquidations of LIFO 
inventories), and 474 (relating to simplified dollar-value LIFO method 
for certain small businesses).
    (b) Conforming Amendments.--
            (1)(A) Section 312(n) is amended by striking paragraph (4) 
        and by redesignating paragraphs (5) through (8) as paragraphs 
        (4) through (7), respectively.
            (B) Section 312(n)(7), as redesignated by subparagraph (A), 
        is amended--
                    (i) by striking ``paragraphs (4) and (6)'' in 
                subparagraph (A) and inserting ``paragraph (5)'', and
                    (ii) by striking ``paragraph (5)'' in subparagraph 
                (B) and inserting ``paragraph (4)''.
            (C) Section 56(g)(4)(D) is amended by striking clause (iii) 
        and by redesignating clause (iv) as clause (iii).
            (2) Section 1363 is amended by striking subsection (d).
    (c) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after the date of the 
        enactment of this Act.
            (2) Change in method of accounting.--In the case of any 
        taxpayer required by the amendments made by this section to 
        change its method of accounting for its first taxable year 
        beginning after the date of the enactment of this Act--
                    (A) such change shall be treated as initiated by 
                the taxpayer,
                    (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury, and
                    (C) if the net amount of the adjustments required 
                to be taken into account by the taxpayer under section 
                481 of the Internal Revenue Code of 1986 is positive, 
                such amount shall be taken into account over a period 
                of 8 years beginning with such first taxable year.

SEC. 3302. REPEAL OF LOWER OF COST OR MARKET METHOD OF INVENTORY.

    (a) In General.--Section 471 is amended by redesignating subsection 
(c) as subsection (d) and by inserting after subsection (b) the 
following new subsection:
    ``(c) Inventories Taken Into Account at Cost.--A method of 
determining inventories shall not be treated as clearly reflecting 
income unless such method provides that inventories shall be taken into 
account at cost.''.
    (b) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after the date of the 
        enactment of this Act.
            (2) Change in method of accounting.--In the case of any 
        taxpayer required by the amendments made by this section to 
        change its method of accounting for its first taxable year 
        beginning after the date of the enactment of this Act--
                    (A) such change shall be treated as initiated by 
                the taxpayer,
                    (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury, and
                    (C) if the net amount of the adjustments required 
                to be taken into account by the taxpayer under section 
                481 of the Internal Revenue Code of 1986 is positive, 
                such amount shall be taken into account over a period 
                of 8 years beginning with such first taxable year.

SEC. 3303. SPECIAL RULE FOR SERVICE PROVIDERS ON ACCRUAL METHOD NOT 
              APPLICABLE TO C CORPORATIONS.

    (a) In General.--Subparagraph (A) of section 448(d)(5) is amended 
by inserting ``(other than a C corporation)'' after ``any person''.
    (b) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after the date of the 
        enactment of this Act.
            (2) Change in method of accounting.--In the case of any 
        taxpayer required by the amendments made by this section to 
        change its method of accounting for its first taxable year 
        beginning after the date of the enactment of this Act--
                    (A) such change shall be treated as initiated by 
                the taxpayer,
                    (B) such change shall be treated as made with the 
                consent of the Secretary of the Treasury, and
                    (C) if the net amount of the adjustments required 
                to be taken into account by the taxpayer under section 
                481 of the Internal Revenue Code of 1986 is positive, 
                such amount shall be taken into account over a period 
                of 8 years beginning with such first taxable year.

      Subtitle E--Modification to Expensing and Depreciation Rules

SEC. 3401. SMALL BUSINESS EXPENSING PROVISIONS MADE PERMANENT.

    (a) Increase in Small Business Expensing Made Permanent.--
Subsection (b) of section 179 is amended--
            (1) by striking ``$25,000 ($125,000 in the case of taxable 
        years beginning after 2006 and before 2011)'' in paragraph (1) 
        and inserting ``$125,000'', and
            (2) by striking ``$200,000 ($500,000 in the case of taxable 
        years beginning after 2006 and before 2011)'' in paragraph (2) 
        and inserting ``$500,000''.
    (b) Expensing for Computer Software Made Permanent.--Clause (ii) of 
section 179(d)(1)(A) is amended by striking ``and which is placed in 
service in a taxable year beginning after 2002 and before 2011,''.
    (c) Inflation Adjustment.--Subparagraph (A) of section 179(b)(5) is 
amended by striking ``In the case of any taxable year beginning in a 
calendar year after 2007 and before 2011, the'' and inserting ``The''.
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after the date of the enactment of this Act.
            (2) Computer software.--The amendment made by subsection 
        (b) shall apply to property placed in service after the date of 
        the enactment of this Act.

SEC. 3402. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES.

    (a) In General.--Subsection (a) of section 197 (relating to general 
rule) is amended by striking ``15-year'' and inserting ``20-year''.
    (b) Certain Interests or Rights Acquired Separately.--Clause (i) of 
section 197(e)(4)(D) is amended by striking ``15 years'' and inserting 
``20 years''.
    (c) Effective Date.--The amendments made by this section shall 
apply to property acquired after the date of the enactment of this Act.

        Subtitle F--Codification of Economic Substance Doctrine

SEC. 3501. CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (p) as subsection (q) and by inserting after subsection (o) 
the following new subsection:
    ``(p) Clarification of Economic Substance Doctrine.--
            ``(1) Application of doctrine.--In the case of any 
        transaction to which the economic substance doctrine is 
        relevant, such transaction shall be treated as having economic 
        substance only if--
                    ``(A) the transaction changes in a meaningful way 
                (apart from Federal income tax effects) the taxpayer's 
                economic position, and
                    ``(B) the taxpayer has a substantial purpose (apart 
                from Federal income tax effects) for entering into such 
                transaction.
            ``(2) Special rule where taxpayer relies on profit 
        potential.--
                    ``(A) In general.--The potential for profit of a 
                transaction shall be taken into account in determining 
                whether the requirements of subparagraphs (A) and (B) 
                of paragraph (1) are met with respect to the 
                transaction only if the present value of the reasonably 
                expected pre-tax profit from the transaction is 
                substantial in relation to the present value of the 
                expected net tax benefits that would be allowed if the 
                transaction were respected.
                    ``(B) Treatment of fees and foreign taxes.--Fees 
                and other transaction expenses and foreign taxes shall 
                be taken into account as expenses in determining pre-
                tax profit under subparagraph (A).
            ``(3) State and local tax benefits.--For purposes of 
        paragraph (1), any State or local income tax effect which is 
        related to a Federal income tax effect shall be treated in the 
        same manner as a Federal income tax effect.
            ``(4) Financial accounting benefits.--For purposes of 
        paragraph (1)(B), achieving a financial accounting benefit 
        shall not be taken into account as a purpose for entering into 
        a transaction if such transaction results in a Federal income 
        tax benefit.
            ``(5) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common law 
                doctrine under which tax benefits under subtitle A with 
                respect to a transaction are not allowable if the 
                transaction does not have economic substance or lacks a 
                business purpose.
                    ``(B) Exception for personal transactions of 
                individuals.--In the case of an individual, paragraph 
                (1) shall apply only to transactions entered into in 
                connection with a trade or business or an activity 
                engaged in for the production of income.
                    ``(C) Other common law doctrines not affected.--
                Except as specifically provided in this subsection, the 
                provisions of this subsection shall not be construed as 
                altering or supplanting any other rule of law, and the 
                requirements of this subsection shall be construed as 
                being in addition to any such other rule of law.
                    ``(D) Determination of application of doctrine not 
                affected.--The determination of whether the economic 
                substance doctrine is relevant to a transaction shall 
                be made in the same manner as if this subsection had 
                never been enacted.
            ``(6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection. Such regulations may include 
        exemptions from the application of this subsection.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 3502. PENALTIES FOR UNDERPAYMENTS.

    (a) Penalty for Underpayments Attributable to Transactions Lacking 
Economic Substance.--
            (1) In general.--Subsection (b) of section 6662, as amended 
        by this Act, is amended by inserting after paragraph (6) the 
        following new paragraph:
            ``(7) Any disallowance of claimed tax benefits by reason of 
        a transaction lacking economic substance (within the meaning of 
        section 7701(p)) or failing to meet the requirements of any 
        similar rule of law.''.
            (2) Increased penalty for nondisclosed transactions.--
        Section 6662, as amended by this Act, is amended by adding at 
        the end the following new subsection:
    ``(j) Increase in Penalty in Case of Nondisclosed Noneconomic 
Substance Transactions.--
            ``(1) In general.--To the extent that a portion of the 
        underpayment to which this section applies is attributable to 
        one or more nondisclosed noneconomic substance transactions, 
        subsection (a) shall be applied with respect to such portion by 
        substituting `40 percent' for `20 percent'.
            ``(2) Nondisclosed noneconomic substance transactions.--For 
        purposes of this subsection, the term `nondisclosed noneconomic 
        substance transaction' means any portion of a transaction 
        described in subsection (b)(7) with respect to which the 
        relevant facts affecting the tax treatment are not adequately 
        disclosed in the return nor in a statement attached to the 
        return.
            ``(3) Special rule for amended returns.--Except as provided 
        in regulations, in no event shall any amendment or supplement 
        to a return of tax be taken into account for purposes of this 
        subsection if the amendment or supplement is filed after the 
        earlier of the date the taxpayer is first contacted by the 
        Secretary regarding the examination of the return or such other 
        date as is specified by the Secretary.''.
            (3) Conforming amendment.--Subparagraph (B) of section 
        6662A(e)(2), as amended by this Act, is amended by striking 
        ``subsection (h) or (i)'' and inserting ``subsections (h), (i), 
        or (j)''.
    (b) Reasonable Cause Exception Not Applicable to Noneconomic 
Substance Transactions, Tax Shelters, and Certain Large Corporations.--
Paragraph (2) of section 6664(c), as amended by this Act, is amended--
            (1) by striking ``shall not apply to any portion'' and 
        inserting ``shall not apply--
                    ``(A) to any portion'',
            (2) by striking the period at the end and inserting a 
        comma, and
            (3) by adding at the end the following new subparagraphs:
                    ``(B) to any portion of an underpayment which is 
                attributable to one or more tax shelters (as defined in 
                section 6662(d)(2)(C)) or transactions described in 
                section 6662(b)(7), and
                    ``(C) to any taxpayer if such taxpayer is a 
                specified large corporation (as defined in section 
                6662(d)(2)(D)(ii)).''.
    (c) Special Understatement Reduction Rule for Certain Large 
Corporations.--
            (1) In general.--Paragraph (2) of section 6662(d) is 
        amended by adding at the end the following new subparagraph:
                    ``(D) Special reduction rule for certain large 
                corporations.--
                            ``(i) In general.--In the case of any 
                        specified large corporation--
                                    ``(I) subparagraph (B) shall not 
                                apply, and
                                    ``(II) the amount of the 
                                understatement under subparagraph (A) 
                                shall be reduced by that portion of the 
                                understatement which is attributable to 
                                any item with respect to which the 
                                taxpayer has a reasonable belief that 
                                the tax treatment of such item by the 
                                taxpayer is more likely than not the 
                                proper tax treatment of such item.
                            ``(ii) Specified large corporation.--
                                    ``(I) In general.--For purposes of 
                                this subparagraph, the term `specified 
                                large corporation' means any 
                                corporation with gross receipts in 
                                excess of $100,000,000 for the taxable 
                                year involved.
                                    ``(II) Aggregation rule.--All 
                                persons treated as a single employer 
                                under section 52(a) shall be treated as 
                                one person for purposes of subclause 
                                (I).''.
            (2) Conforming amendment.--Subparagraph (C) of section 
        6662(d)(2) is amended by striking ``Subparagraph (B)'' and 
        inserting ``Subparagraphs (B) and (D)(i)(II)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.

     Subtitle G--Modifications to Deductions for Dividends Received

SEC. 3601. MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS RECEIVED.

    (a) General Reduction in Percentage of Deduction.--
            (1) In general.--Sections 243(a)(1), 243(c)(1), 244(a)(3), 
        244(b)(2), 245(c)(1)(B), 246(b)(3)(B), and 246A(a)(1), before 
        amendment by subsection (c), are each amended by striking ``70 
        percent'' and inserting ``60 percent''.
            (2) Conforming amendments.--Paragraph (2) of section 
        861(a), before amendment by subsection (c), is amended by 
        striking ``100/70th'' both places it appears and inserting 
        ``100/60th''.
    (b) Reduction in Percentage for 20-Percent Owned Corporations.--
            (1) In general.--Sections 243(c)(1), 245(c)(1)(B), 
        246(b)(3)(A), 246A(a)(1) is amended by striking ``80 percent'' 
        and inserting ``70 percent''.
            (2) Conforming amendment.--Paragraph (2) of section 861(a) 
        is amended by striking ``100/80th'' and inserting ``100/70th''.
    (c) Repeal of NOL Exception to Limitation on Aggregate Deductions; 
Establishment of Carryforward.--
            (1) In general.--Paragraph (2) of section 246(b) is amended 
        to read as follows:
            ``(2) Carryforward.--The aggregate amount of deductions 
        disallowed under paragraph (1) for any taxable year shall be 
        treated as an increase in the amount allowable as a deduction 
        under section 243(a)(1) for the following taxable year (subject 
        to the application of paragraph (1) to such following taxable 
        year).''.
            (2) Conforming amendments.--
                    (A) Subsection (d) of section 172 is amended by 
                striking paragraph (5) and by redesignating paragraph 
                (6) as paragraph (5).
                    (B) Subparagraph (A) of section 172(b)(2) is 
                amended by striking ``paragraphs (1), (4), and (5)'' 
                and inserting ``paragraphs (1) and (4)''.
                    (C) Paragraph (1) of section 246(b) is amended by 
                striking ``Except as provided in paragraph (2), the'' 
                and inserting ``The''.
                    (D) Paragraph (3) of section 246(b) is amended by 
                striking ``paragraph (1)''and inserting ``paragraphs 
                (1) and (2)''.
                    (E) Subparagraph (B) of section 805(a)(4) is 
                amended by striking ``section 1212(a)(1),'' and all 
                that follows and inserting ``section 1212(a)(1).''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2008.

                      Subtitle H--Other Provisions

SEC. 3701. RECOGNITION OF ORDINARY INCOME ON SALE OR EXERCISE OF STOCK 
              OPTION IN S CORPORATION WITH AN ESOP.

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

``SEC. 409B. RECOGNITION OF ORDINARY INCOME ON SALE OR EXERCISE OF 
              STOCK OPTION IN S CORPORATION WITH AN ESOP.

    ``(a) In General.--If an S corporation in which an employee stock 
ownership plan is a stockholder grants an option with respect to its 
stock and such option is sold or exercised, there shall be included in 
the gross income of the holder of such option (determined immediately 
before such sale or exercise) as ordinary income an amount equal to the 
income inclusion amount.
    ``(b) Income Inclusion Amount.--For purposes of this section, the 
term `income inclusion amount' means, with respect to the holder of any 
option, the excess (if any) of--
            ``(1) the sum of the net income amounts with respect to 
        such option for all taxable years of the S corporation ending 
        during the taxpayer's holding period, over
            ``(2) the sum of the net loss amounts with respect to such 
        option for all such taxable years.
    ``(c) Net Income and Loss Amounts.--For purposes of this section, 
with respect to any taxable year of the S corporation--
            ``(1) Net income amount.--The term `net income amount' 
        means the excess (if any) of--
                    ``(A) the pass-thru income share for such taxable 
                year, over
                    ``(B) the pass-thru loss share for such taxable 
                year.
            ``(2) Net loss amount.--The term `net loss amount' means 
        the excess (if any) of the amount described in paragraph (1)(B) 
        over the amount described in paragraph (1)(A).
    ``(d) Pass-Thru Income and Loss Shares.--For purposes of this 
section, with respect to any taxable year of the S corporation--
            ``(1) Pass-thru income share.--The term `pass-thru income 
        share' means the excess (if any) of--
                    ``(A) the aggregate items of income taken into 
                account under section 1366 by the employee stock 
                ownership plan for such taxable year, over
                    ``(B) the aggregate items of income which would 
                have been so taken into account if such option had been 
                exercised upon being granted.
            ``(2) Pass-thru loss share.--The term `pass-thru loss 
        share' means the excess (if any) of--
                    ``(A) the aggregate items of deduction and loss 
                taken into account under section 1366 by the employee 
                stock ownership plan for such taxable year, over
                    ``(B) the aggregate items of deduction and loss 
                which would have been so taken into account if such 
                option had been exercised upon being granted.
    ``(e) Interest at Underpayment Rate.--
            ``(1) In general.--In the case of any taxpayer who includes 
        any amount in gross income for any taxable year under 
        subsection (a), the tax imposed by this chapter on such 
        taxpayer for such taxable year shall be increased by interest 
        at the underpayment rate determined under section 6621 on the 
        underpayments that would have occurred had the net income 
        amounts with respect to each taxable year taken into account 
        under subsection (c) been includible in the taxpayer's gross 
        income for each of taxable year of the taxpayer in or with 
        which the taxable year so taken into account ends.
            ``(2) Reduction for previous net loss amounts.--For 
        purposes of paragraph (1), the net income amount for any 
        taxable year shall be reduced by the excess of--
                    ``(A) the aggregate net loss amounts for taxable 
                years taken into account under subsection (c) with 
                respect to the taxpayer, over
                    ``(B) the amount of such aggregate previously taken 
                into account under this paragraph to reduce any net 
                income amount.
    ``(f) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Option.--The term `option' includes any synthetic 
        equity described in section 409(p)(6)(C).
            ``(2) Effect of starting or terminating an s corporation 
        election.--With respect to any option, a corporation which is 
        an S corporation for any taxable year which ends while such 
        option is outstanding shall be treated for purposes of this 
        section (other than subsection (d)) as an S corporation for all 
        taxable years which end while such option is outstanding.
            ``(3) Adjustments to basis.--
                    ``(A) Increase in basis of acquired stock.--The 
                taxpayer's basis in any stock acquired pursuant to the 
                exercise of an option to which subsection (a) applies 
                shall be increased by the amount included in gross 
                income by the taxpayer under subsection (a) with 
                respect to such option.
                    ``(B) Increase in basis of option on sale.--The 
                taxpayer's basis in any option shall be increased by 
                the amount included in gross income by the taxpayer 
                under subsection (a) with respect to such option.''.
    (b) Conforming Amendments.--
            (1) Section 26(b)(2), as amended by this Act, is amended by 
        striking ``and'' at the end of subparagraph (T), by striking 
        the period at the end of subparagraph (U) and inserting ``, 
        and'', and by adding at the end the following new subparagraph:
                    ``(V) subsection (e) of section 409B (relating to 
                interest on income recognized upon exercise of a stock 
                option in an S corporation with an ESOP).''.
            (2) Section 1016(a) is amended by striking ``and'' at the 
        end of paragraph (36), by striking the period at the end of 
        paragraph (37) and inserting ``, and'', and by adding at the 
        end the following new paragraph:
            ``(38) to the extent provided in section 409B(f)(3).''.
            (3) The table of sections for subpart A of part I of 
        subchapter D of chapter 1 is amended by adding at the end the 
        following new item:

``Sec. 409B. Recognition of ordinary income on sale or exercise of 
                            stock option in S corporation with an 
                            ESOP.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to options granted after the date of the enactment of this Act.

SEC. 3702. TERMINATION OF SPECIAL RULES FOR DOMESTIC INTERNATIONAL 
              SALES CORPORATIONS.

    (a) In General.--Part IV of subchapter N of chapter 1 (relating to 
domestic international sales corporations) is amended by adding at the 
end the following new subpart:

                        ``Subpart C--Termination

``Sec. 998. Termination of domestic international sales corporation 
                            provisions.

``SEC. 998. TERMINATION OF DOMESTIC INTERNATIONAL SALES CORPORATION 
              PROVISIONS.

    ``(a) Termination of Election.--Any election under section 992(b) 
in effect for a corporation's last taxable year beginning in 2007 shall 
be terminated effective for such corporation's next succeeding taxable 
year.
    ``(b) No New Election.--No election may be made under section 
992(b) for any taxable year beginning after December 31, 2007.
    ``(c) Effect of Termination.--A shareholder of a corporation whose 
election is terminated by reason of subsection (a) shall be deemed to 
have received a distribution to which section 995(b)(2) applies. Such 
distribution (or any actual distribution after termination to the 
extent paid out of the corporation's accumulated DISC income) shall not 
be treated as qualified dividend income (within the meaning of section 
1(h)(11)(B)).''.
    (b) Conforming Amendment.--The table of contents for part IV of 
subchapter N of chapter 1 is amended by adding at the end the following 
new item:

                      ``subpart c--termination''.

SEC. 3703. TREATMENT OF SECURITIES OF A CONTROLLED CORPORATION 
              EXCHANGED FOR ASSETS IN CERTAIN REORGANIZATIONS.

    (a) In General.--Section 361 (relating to nonrecognition of gain or 
loss to corporations; treatment of distributions) is amended by adding 
at the end the following new subsection:
    ``(d) Receipt of Securities, etc., in Exchange for Assets in 
Certain Reorganizations.--If--
            ``(1) property is transferred to a corporation (hereinafter 
        in this subsection referred to as the `controlled corporation') 
        pursuant to a plan of reorganization described in section 
        368(a)(1)(D), and
            ``(2) pursuant to such plan of reorganization, stock or 
        securities in the controlled corporation are distributed in a 
        transaction which qualifies under section 355,
then any securities and nonqualified preferred stock (as defined in 
section 351(g)(2)) of the controlled corporation shall be treated as 
other property for purposes of subsections (a) and (b).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions after the date of the enactment of this Act.
                                 <all>