[Congressional Bills 111th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5962 Introduced in House (IH)]

111th CONGRESS
  2d Session
                                H. R. 5962

   To amend the Internal Revenue Code of 1986 to reduce the maximum 
 corporate income tax rate and to offset the revenue cost by repealing 
                    certain corporate tax benefits.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             July 29, 2010

  Mr. Maffei 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 reduce the maximum 
 corporate income tax rate and to offset the revenue cost by repealing 
                    certain corporate tax benefits.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

    (a) Short Title.--This Act may be cited as the ``American Business 
Competitiveness Act of 2010''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--

Sec. 1. Short title; amendment of 1986 code.
              TITLE I--CORPORATE INCOME TAX RATE REDUCTION

Sec. 101. Reduction in top corporate marginal rate.
         TITLE II--PROVISIONS RELATED TO FOREIGN SOURCE INCOME

Sec. 201. Allocation of expenses and taxes on basis of repatriation of 
                            foreign income.
Sec. 202. Repeal of worldwide allocation of interest.
Sec. 203. Limitation on treaty benefits for certain deductible 
                            payments.
              TITLE III--MODIFICATION OF ACCOUNTING RULES

Sec. 301. Repeal of last-in, first-out method of inventory.
Sec. 302. Repeal of lower of cost or market method of inventory.
Sec. 303. Special rule for service providers on accrual method not 
                            applicable to C corporations.
       TITLE IV--MODIFICATION TO EXPENSING AND DEPRECIATION RULES

Sec. 401. Small business expensing provisions made permanent.
Sec. 402. Amortization of goodwill and other intangibles.
          TITLE V--CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE

Sec. 501. Codification of economic substance doctrine.
      TITLE VI--MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS RECEIVED

Sec. 601. Modifications to deductions for dividends received.
                      TITLE VII--OTHER PROVISIONS

Sec. 701. Recognition of ordinary income on sale or exercise of stock 
                            option in S corporation with an ESOP.
Sec. 702. Treatment of securities of a controlled corporation exchanged 
                            for assets in certain reorganizations.

              TITLE I--CORPORATE INCOME TAX RATE REDUCTION

SEC. 101. 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 (A),
            (2) by striking subparagraphs (B), (C), and (D) and 
        inserting the following:
                    ``(B) 23 percent of so much of the taxable income 
                as exceeds $50,000.'', and
            (3) by striking ``$11,750'' and all that follows and 
        inserting ``$9,500.''.
    (b) Personal Service Corporations.--Paragraph (2) of section 11(b) 
is amended by striking ``35 percent'' and inserting ``23 percent''.
    (c) Conforming Amendments.--
            (1) Section 1201 is amended by striking ``35 percent'' each 
        place it appears and inserting ``23 percent''.
            (2) Paragraphs (1) and (2) of section 1445(e) are each 
        amended by striking ``35 percent'' and inserting ``23 
        percent''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2010, except that 
the amendments made by subsection (c) shall take effect on January 1, 
2011.

         TITLE II--PROVISIONS RELATED TO FOREIGN SOURCE INCOME

SEC. 201. 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, 2010.

SEC. 202. 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, 2010.

SEC. 203. 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.

              TITLE III--MODIFICATION OF ACCOUNTING RULES

SEC. 301. 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. 302. 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. 303. 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.

       TITLE IV--MODIFICATION TO EXPENSING AND DEPRECIATION RULES

SEC. 401. 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 ($250,000 in the case of taxable 
        years beginning after 2007 and before 2011)'' in paragraph (1) 
        and inserting ``$250,000'', and
            (2) by striking ``$200,000 ($800,000 in the case of taxable 
        years beginning after 2007 and before 2011)'' in paragraph (2) 
        and inserting ``$800,000''.
    (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) 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. 402. 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.

          TITLE V--CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE

SEC. 501. 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.

      TITLE VI--MODIFICATIONS TO DEDUCTIONS FOR DIVIDENDS RECEIVED

SEC. 601. 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.

                      TITLE VII--OTHER PROVISIONS

SEC. 701. 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) is amended by striking ``and'' at the 
        end of subparagraph (W), by striking the period at the end of 
        subparagraph (X) and inserting ``, and'', and by adding at the 
        end the following new subparagraph:
                    ``(Y) 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. 702. 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>