1.Short title; amendment of
1986 code
(a)This Act may be cited
as the American Business
Competitiveness Act of 2010
.
(b)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)
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.
<enum>I</enum><header>Corporate income
tax rate reduction</header>
<section display-inline="no-display-inline" id="H7AB92B97FB864A0895A2E801369C87C8" section-type="subsequent-section"><enum>101.</enum><header>Reduction in top
corporate marginal rate</header>
<subsection id="H760B46DC3F674938AFF6B04B28C16DEF"><enum>(a)</enum><header>General
rule</header><text display-inline="yes-display-inline">Paragraph (1) of section
11(b) (relating to amount of tax) is amended—</text>
<paragraph id="H9DBD79DD7FD444F0AB775B0083549768"><enum>(1)</enum><text>by inserting “and”
at the end of subparagraph (A),</text>
</paragraph><paragraph id="H4DCBC06B991B4EEB85FEFEF3D6C11206"><enum>(2)</enum><text>by striking
subparagraphs (B), (C), and (D) and inserting the following:</text>
<quoted-block display-inline="no-display-inline" id="HECF3A8A7C3844664868B08BA141928DB" style="OLC">
<subparagraph id="H23419DCAD8824695953DBE3B980FCFDE"><enum>(B)</enum><text>23 percent of so
much of the taxable income as exceeds
$50,000.</text>
</subparagraph><after-quoted-block>,
and</after-quoted-block></quoted-block>
</paragraph><paragraph id="HF505A04DB3F44618870FBDD5AE8E57A4"><enum>(3)</enum><text>by striking
“$11,750” and all that follows and inserting <quote>$9,500.</quote>.</text>
</paragraph></subsection><subsection id="H750AEA4561B74E9F931ED5448C505700"><enum>(b)</enum><header>Personal service
corporations</header><text>Paragraph (2) of section 11(b) is amended by
striking <quote>35 percent</quote> and inserting <quote>23
percent</quote>.</text>
</subsection><subsection id="H3013202CEBBC4423B626874E92AFB9A8"><enum>(c)</enum><header>Conforming
amendments</header>
<paragraph id="HA14A55FF791D4F1EB47E4BC20DD6A4D9"><enum>(1)</enum><text display-inline="yes-display-inline">Section 1201 is amended by striking
<quote>35 percent</quote> each place it appears and inserting <quote>23
percent</quote>.</text>
</paragraph><paragraph id="HC3CF0C326702439795937C2B0C25BA64"><enum>(2)</enum><text>Paragraphs (1) and
(2) of section 1445(e) are each amended by striking <quote>35 percent</quote>
and inserting <quote>23 percent</quote>.</text>
</paragraph></subsection><subsection id="H9E39730FB24C4B45B054F6E7DF194F7D"><enum>(d)</enum><header>Effective
date</header><text>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.</text>
</subsection></section><enum>II</enum><header>Provisions
related to foreign source income</header>
<section display-inline="no-display-inline" id="H67DB8AD9420D486D91F345426326C824" section-type="subsequent-section"><enum>201.</enum><header>Allocation of
expenses and taxes on basis of repatriation of foreign income</header>
<subsection id="HA970EDF9EE28454FA653EFC0248BB2AD"><enum>(a)</enum><header>In
general</header><text>Part III of subchapter N of chapter 1 is amended by
inserting after subpart G the following new subpart:</text>
<quoted-block display-inline="no-display-inline" id="HE3B4014208914E7C928D5EBDD9215B0E" style="OLC">
<subpart id="H7611EE85A40D46019961331EAF69B655"><enum>H</enum><header>Special Rules for
Allocation of Foreign-Related Deductions and Foreign Tax Credits</header>
<toc container-level="subpart-container" idref="H7611EE85A40D46019961331EAF69B655" lowest-bolded-level="division-lowest-bolded" lowest-level="section" quoted-block="no-quoted-block" regeneration="yes-regeneration">
<toc-entry idref="H24F8D95BA34E490A9BA7CAB427A1DB7B" level="section">Sec. 975. Deductions allocated to deferred foreign income may
not offset United States source income.</toc-entry>
<toc-entry idref="HDB12C9C483D5440A94F528798B85A628" level="section">Sec. 976. Amount of foreign taxes computed on overall
basis.</toc-entry>
<toc-entry idref="HBEDB7A2391C940A3952729DC390362B0" level="section">Sec. 977. Application of subpart.</toc-entry>
</toc>
<section id="H24F8D95BA34E490A9BA7CAB427A1DB7B"><enum>975.</enum><header>Deductions
allocated to deferred foreign income may not offset United States source
income</header>
<subsection id="HD74FBA57706B4778A0F337FA28D915A4"><enum>(a)</enum><header>Current year
deductions</header><text display-inline="yes-display-inline">For purposes of
this chapter, foreign-related deductions for any taxable year—</text>
<paragraph id="H371BC57FB0E8478F9DF0798C3DF9FA93"><enum>(1)</enum><text>shall be taken
into account for such taxable year only to the extent that such deductions are
allocable to currently-taxed foreign income, and</text>
</paragraph><paragraph id="H9EAFBDB27DDF48C699B6E19C60A9A15A"><enum>(2)</enum><text>to the extent not
so allowed, shall be taken into account in subsequent taxable years as provided
in subsection (b).</text>
</paragraph><continuation-text continuation-text-level="subsection">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.</continuation-text></subsection><subsection id="H61CED0FD3D1A47269EF0B29195C5DCF1"><enum>(b)</enum><header>Deductions
related to repatriated deferred foreign income</header>
<paragraph id="H6AB4CA67FE21409883DB3FA0D799A702"><enum>(1)</enum><header>In
general</header><text>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.</text>
</paragraph><paragraph id="H91673FB471274332B531A26AFAF47FAF"><enum>(2)</enum><header>Portion of
previously deferred deductions</header><text>For purposes of paragraph (1), the
portion of the previously deferred deductions allocated to repatriated foreign
income is—</text>
<subparagraph id="HE979B6E727054B46AC86ADFE3FDBA165"><enum>(A)</enum><text>the amount which
bears the same proportion to such deductions, as</text>
</subparagraph><subparagraph id="H8383395C9EDA4AC3A0F115B30BDFA395"><enum>(B)</enum><text>the repatriated
income bears to the previously deferred foreign income.</text>
</subparagraph></paragraph></subsection><subsection id="HAB6BF3B7C93D49B1AC52694FC0ECDF66"><enum>(c)</enum><header>Definitions and
special rule</header><text display-inline="yes-display-inline">For purposes of
this section—</text>
<paragraph id="H1F1A53ACB60C430484F43B4E43F9B37E"><enum>(1)</enum><header>Foreign-related
deductions</header><text>The term <term>foreign-related deductions</term> 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.</text>
</paragraph><paragraph display-inline="no-display-inline" id="H9170BB7FFA5C4F778D110FF60ED1BF7C"><enum>(2)</enum><header>Currently-taxed
foreign income</header><text>The term <term>currently-taxed foreign
income</term> 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).</text>
</paragraph><paragraph display-inline="no-display-inline" id="HA4CD6DF6881549F7AC5B59E8D74BA413"><enum>(3)</enum><header>Deferred foreign
income</header><text>The term <term>deferred foreign income</term> means the
excess of—</text>
<subparagraph id="HB1FFB1EBA86A4629BF577EC1CA599A80"><enum>(A)</enum><text display-inline="yes-display-inline">the amount that would be includible in
gross income under subpart F of this part for the taxable year if—</text>
<clause id="H1385B6CED64F45A8ABC8ABE6034F6C49"><enum>(i)</enum><text>all controlled
foreign corporations were treated as one controlled foreign corporation,
and</text>
</clause><clause id="HFB83CA30235F49B49AC9978EB63577EB"><enum>(ii)</enum><text>all earnings and
profits of all controlled foreign corporations were subpart F income (as
defined in section 952), over</text>
</clause></subparagraph><subparagraph id="H36CBCFA1B646454F851AAFBC516F4050"><enum>(B)</enum><text>the sum of—</text>
<clause id="HA8DA2B38AE0A4BA2AFBE5EE092346017"><enum>(i)</enum><text>all dividends
received during the taxable year from controlled foreign corporations,
plus</text>
</clause><clause id="H999E05127EFF4C3B8923F111A32DC30D"><enum>(ii)</enum><text>amounts
includible in gross income under section 951(a).</text>
</clause></subparagraph></paragraph><paragraph id="H8B08171853664FAE877DBCC51789EF67"><enum>(4)</enum><header>Previously
deferred foreign income</header><text display-inline="yes-display-inline">The
term <term>previously deferred foreign income</term> 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.</text>
</paragraph><paragraph id="H4A9BD99A8CEA474C945196AFB730028B"><enum>(5)</enum><header>Repatriated
foreign income</header><text>The term <term>repatriated foreign income</term>
means the amount included in gross income on account of distributions out of
previously deferred foreign income.</text>
</paragraph><paragraph id="HA8238CBC6AF54538A0B3D1137462BF1A"><enum>(6)</enum><header>Previously
deferred deductions</header><text display-inline="yes-display-inline">The term
<term>previously deferred deductions</term> 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.</text>
</paragraph><paragraph id="H05D93AD7E0384B51B39F06EDF768F77A"><enum>(7)</enum><header>Treatment of
certain foreign taxes</header>
<subparagraph id="HB5C3EE34C38D4004960C833EC2C6E684"><enum>(A)</enum><header>Paid by
controlled foreign corporation</header><text display-inline="yes-display-inline">Section 78 shall not apply for purposes of
determining currently-taxed foreign income and deferred foreign income.</text>
</subparagraph><subparagraph id="H0880587A0FAA477486DC790692673DE5"><enum>(B)</enum><header>Paid by
taxpayer</header><text>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.</text>
</subparagraph></paragraph><paragraph id="H7B7D50CC81C44FB2AA38D5F482F433D6"><enum>(8)</enum><header>Coordination
with section 976</header><text>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.</text>
</paragraph></subsection></section><section id="HDB12C9C483D5440A94F528798B85A628"><enum>976.</enum><header>Amount of
foreign taxes computed on overall basis</header>
<subsection id="HDB3C496CD7634B269C3DC81BCAE789B1"><enum>(a)</enum><header>Current year
allowance</header><text display-inline="yes-display-inline">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—</text>
<paragraph id="HAC75E2F1758447249DE19B5943DD825B"><enum>(1)</enum><text>the
currently-taxed foreign income for such taxable year, bears to</text>
</paragraph><paragraph id="H476EB710536A4FA3A1D75CF3F6EF222A"><enum>(2)</enum><text>the sum of the
currently-taxed foreign income and deferred foreign income for such
year.</text>
</paragraph><continuation-text continuation-text-level="subsection">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).</continuation-text></subsection><subsection display-inline="no-display-inline" id="H054AB8C658854B06BE80991489D94EB1"><enum>(b)</enum><header>Allowance
related to repatriated deferred foreign income</header>
<paragraph id="H39F5591B8CAB4E50BAEA28C37C5B676C"><enum>(1)</enum><header>In
general</header><text display-inline="yes-display-inline">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.</text>
</paragraph><paragraph id="HD4D4625442014B788A50DBE00FBCE1A7"><enum>(2)</enum><header>Portion of
previously deferred foreign income taxes</header><text>For purposes of
paragraph (1), the portion of the previously deferred foreign income taxes
allocated to repatriated deferred foreign income is—</text>
<subparagraph id="HAA64481FE22748CC94DADA77A81735FF"><enum>(A)</enum><text>the amount which
bears the same proportion to such taxes, as</text>
</subparagraph><subparagraph id="HDAA1C614A97242518EBA60C39DF1AE56"><enum>(B)</enum><text>the repatriated
deferred income bears to the previously deferred foreign income.</text>
</subparagraph></paragraph></subsection><subsection id="H15B85730EF6D41B0813142A5D56DA387"><enum>(c)</enum><header>Definitions and
special rule</header><text display-inline="yes-display-inline">For purposes of
this section—</text>
<paragraph id="HE70F75F867854AB081B6580DB3212C62"><enum>(1)</enum><header>Previously
deferred foreign income taxes</header><text display-inline="yes-display-inline">The term <term>previously deferred foreign
income taxes</term> 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.</text>
</paragraph><paragraph id="H1B8E766DD48B46BEBCF7E1FA24B532AD"><enum>(2)</enum><header>Total foreign
income taxes</header><text display-inline="yes-display-inline">The term
<term>total foreign income taxes</term> 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—</text>
<subparagraph id="HECAF5FCD2F5F484780CA96938F5082D4"><enum>(A)</enum><text>all controlled
foreign corporations were treated as one controlled foreign corporation,
and</text>
</subparagraph><subparagraph id="HE1D371691F3F49FDB6B62F97D20CCFD6"><enum>(B)</enum><text>all earnings and
profits of all controlled foreign corporations were subpart F income (as
defined in section 952).</text>
</subparagraph></paragraph><paragraph id="H927E341C5CBD479BADB19090531A8EB1"><enum>(3)</enum><header>Foreign income
taxes</header><text display-inline="yes-display-inline">The term <term>foreign
income taxes</term> means any income, war profits, or excess profits taxes paid
by the taxpayer to any foreign country or possession of the United
States.</text>
</paragraph><paragraph id="H32971512C8E04C6BA9C98DF006890653"><enum>(4)</enum><header>Currently-taxed
foreign income and deferred foreign income</header><text display-inline="yes-display-inline">The terms <term>currently-taxed foreign
income</term> and <term>deferred foreign income</term> have the meanings given
such terms by section 975(c).</text>
</paragraph></subsection></section><section id="HBEDB7A2391C940A3952729DC390362B0"><enum>977.</enum><header>Application of
subpart</header><text display-inline="no-display-inline">This subpart—</text>
<paragraph id="H165B0B0432DD451DBFAB5AD9CC160ADC"><enum>(1)</enum><text>shall be applied
before subpart A, and</text>
</paragraph><paragraph id="H158A177CBD464ACB8277A82D79C3CA9F"><enum>(2)</enum><text>shall be applied
separately with respect to the categories of income specified in section
904(d)(1).</text>
</paragraph></section></subpart><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="H14BBB5AB053F42DB92633A36417B5291"><enum>(b)</enum><header>Clerical
amendment</header><text>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:</text>
<quoted-block display-inline="no-display-inline" id="H99CDE075E5AA48D982C42FB9DF6AB06F" style="OLC">
<toc container-level="quoted-block-container" idref="HE3B4014208914E7C928D5EBDD9215B0E" lowest-bolded-level="division-lowest-bolded" lowest-level="section" quoted-block="no-quoted-block" regeneration="yes-regeneration">
<toc-entry idref="H7611EE85A40D46019961331EAF69B655" level="subpart">Subpart H. Special Rules for Allocation of Foreign-Related
Deductions and Foreign Tax
Credits</toc-entry>
</toc>
<after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="H5B6305DFD97B4246AF8049F9B64134FA"><enum>(c)</enum><header>Effective
date</header><text display-inline="yes-display-inline">The amendments made by
this section shall apply to taxable years beginning after December 31,
2010.</text>
</subsection></section><section display-inline="no-display-inline" id="H8EEF1CAEEA80418A80483EA2324F8C34"><enum>202.</enum><header>Repeal of
worldwide allocation of interest</header>
<subsection id="H5A79CAE0D2684C0C8905511E65FBE8DD"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">Section 864 is
amended by striking subsection (f) and by redesignating subsection (g) as
subsection (f).</text>
</subsection><subsection id="HE0180360566C4DB38114E78FE95B0C59"><enum>(b)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2010.</text>
</subsection></section><section display-inline="no-display-inline" id="H41E71D3845BA4D8D922992EC98EEF583" section-type="subsequent-section"><enum>203.</enum><header>Limitation on treaty
benefits for certain deductible payments</header>
<subsection id="HB55E1DE9A9B14B748A7C30D279C39A0A"><enum>(a)</enum><header>In
general</header><text>Section 894 (relating to income affected by treaty) is
amended by adding at the end the following new subsection:</text>
<quoted-block id="H753ACC47AD93451893E40314B78BD44E">
<subsection id="HE11C610B83824DFAAAF1B571D84ABE1B"><enum>(d)</enum><header>Limitation on
treaty benefits for certain deductible payments</header>
<paragraph id="H30A0ACBE11464E73800237C8A135DDFC"><enum>(1)</enum><header>In
general</header><text display-inline="yes-display-inline">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.</text>
</paragraph><paragraph id="H9A0C2DFA1B464199A2990D11BF6B2719"><enum>(2)</enum><header>Deductible
related-party payment</header><text>For purposes of this subsection, the term
<term>deductible related-party payment</term> 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.</text>
</paragraph><paragraph id="HEB07C7F79002455C8F328F712CA63848"><enum>(3)</enum><header>Foreign
controlled group of entities</header><text display-inline="yes-display-inline">For purposes of this subsection—</text>
<subparagraph id="HC7F6ADAA159A418D8B2DD7707157AAF6"><enum>(A)</enum><header>In
general</header><text display-inline="yes-display-inline">The term
<term>foreign controlled group of entities</term> means a controlled group of
entities the common parent of which is a foreign corporation.</text>
</subparagraph><subparagraph id="H62BF8155F1054CD28F5F4F60422397C0"><enum>(B)</enum><header>Controlled group
of entities</header><text display-inline="yes-display-inline">The term
<term>controlled group of entities</term> means a controlled group of
corporations as defined in section 1563(a)(1), except that—</text>
<clause id="H1AD3F2F847EA4F5697C2A6FF2775E284"><enum>(i)</enum><text><quote>more than
50 percent</quote> shall be substituted for <quote>at least 80 percent</quote>
each place it appears therein, and</text>
</clause><clause id="H5B77610C1EE840F0B94B2D2396865344"><enum>(ii)</enum><text>the determination
shall be made without regard to subsections (a)(4) and (b)(2) of section
1563.</text>
</clause><continuation-text continuation-text-level="subparagraph">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).</continuation-text></subparagraph></paragraph><paragraph id="HC9232B0B10F14B62945DBE8389DF1036"><enum>(4)</enum><header>Foreign parent
corporation</header><text>For purposes of this subsection, the term
<term>foreign parent corporation</term> 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).</text>
</paragraph><paragraph id="HECBE1AF631F24B4599998A2DD8E2B837"><enum>(5)</enum><header>Regulations</header><text>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—</text>
<subparagraph id="H81DA577297FD4B0B8D3BA5C60184A3E7"><enum>(A)</enum><text>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</text>
</subparagraph><subparagraph id="H9EAF0F4F6DF34D12AB9AC69080B4D7C8"><enum>(B)</enum><text>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.</text>
</subparagraph></paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="HBBF23BF2948F4CF7B5CC7C2D61F02F00"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by this section shall apply to payments
made after the date of the enactment of this Act.</text>
</subsection></section><enum>III</enum><header>Modification of
accounting rules</header>
<section display-inline="no-display-inline" id="HD4677F4F858848819453C6F4A812C24A" section-type="subsequent-section"><enum>301.</enum><header>Repeal of last-in,
first-out method of inventory</header>
<subsection id="HF163A005364E4CB593C61D80735908C5"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">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).</text>
</subsection><subsection id="H1CAB4BBFCB5649E3958C60B0AC5035F7"><enum>(b)</enum><header>Conforming
amendments</header>
<paragraph id="HC9F85AF61A5D47B196F1005F7F8937FD"><enum>(1)</enum><subparagraph commented="no" display-inline="yes-display-inline" id="H898E8D58D12C4AB7828FF1F018C1ADE1"><enum>(A)</enum><text>Section 312(n) is
amended by striking paragraph (4) and by redesignating paragraphs (5) through
(8) as paragraphs (4) through (7), respectively.</text>
</subparagraph><subparagraph id="H1363BBC004A043C09D8FB807501DE742" indent="up1"><enum>(B)</enum><text>Section 312(n)(7), as redesignated by
subparagraph (A), is amended—</text>
<clause id="H440CFCD1B2E04C169E5701D3339869AB"><enum>(i)</enum><text>by striking <quote>paragraphs (4)
and (6)</quote> in subparagraph (A) and inserting <quote>paragraph (5)</quote>,
and</text>
</clause><clause id="H378E2CBA8CBE4189B145318758E00812"><enum>(ii)</enum><text>by striking <quote>paragraph
(5)</quote> in subparagraph (B) and inserting <quote>paragraph
(4)</quote>.</text>
</clause></subparagraph><subparagraph id="H9CD91EC185B8497CAF7F81EC56AE5127" indent="up1"><enum>(C)</enum><text>Section 56(g)(4)(D) is amended by
striking clause (iii) and by redesignating clause (iv) as clause (iii).</text>
</subparagraph></paragraph><paragraph id="H05F2F1C59B88409D9AEC8870C79C1EFB"><enum>(2)</enum><text>Section 1363 is
amended by striking subsection (d).</text>
</paragraph></subsection><subsection id="H2F161B4503484C1B94E8894CF2A20822"><enum>(c)</enum><header>Effective
date</header>
<paragraph id="HC8473DBDD6FF49BFA74CA775A4D93046"><enum>(1)</enum><header>In
general</header><text>The amendments made by this section shall apply to
taxable years beginning after the date of the enactment of this Act.</text>
</paragraph><paragraph id="H0CCA601C1B474832AD9D6EA258291665"><enum>(2)</enum><header>Change in method
of accounting</header><text display-inline="yes-display-inline">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—</text>
<subparagraph id="H93E0ACAB0A4E48B491997930429D70EC"><enum>(A)</enum><text>such change shall
be treated as initiated by the taxpayer,</text>
</subparagraph><subparagraph id="H5B7B92ED9FE245CDA2F62EEA94855EE7"><enum>(B)</enum><text>such change shall
be treated as made with the consent of the Secretary of the Treasury,
and</text>
</subparagraph><subparagraph id="H5B2C77E564B24B7291732CA05522E12E"><enum>(C)</enum><text>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.</text>
</subparagraph></paragraph></subsection></section><section id="H7EAD25B0C2A24057AB30E60070ABA617"><enum>302.</enum><header>Repeal of lower
of cost or market method of inventory</header>
<subsection id="HCB9406014590474C825C94737B570568"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">Section 471 is
amended by redesignating subsection (c) as subsection (d) and by inserting
after subsection (b) the following new subsection:</text>
<quoted-block display-inline="no-display-inline" id="HD33C4D288CF14F40A6B1C7DB0EAD7A65" style="OLC">
<subsection id="H2DEB4A908D3947D7AEC6FF41BD1604EE"><enum>(c)</enum><header>Inventories
taken into account at cost</header><text display-inline="yes-display-inline">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.</text>
</subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection display-inline="no-display-inline" id="H8E17A21314714207981F897436498788"><enum>(b)</enum><header>Effective
date</header>
<paragraph id="HBE0BC6CD12734658B14E50486A792341"><enum>(1)</enum><header>In
general</header><text>The amendments made by this section shall apply to
taxable years beginning after the date of the enactment of this Act.</text>
</paragraph><paragraph id="H0C115C762BE44A62AC56FC44BB6765C9"><enum>(2)</enum><header>Change in method
of accounting</header><text display-inline="yes-display-inline">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—</text>
<subparagraph id="HB0D24561046440AF834CACA486B93147"><enum>(A)</enum><text>such change shall
be treated as initiated by the taxpayer,</text>
</subparagraph><subparagraph id="HC034BF69DB9E4E02AF90CF279C4ED4CE"><enum>(B)</enum><text>such change shall
be treated as made with the consent of the Secretary of the Treasury,
and</text>
</subparagraph><subparagraph id="H09D67CD5D6B34AB39945F67C1C955542"><enum>(C)</enum><text display-inline="yes-display-inline">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.</text>
</subparagraph></paragraph></subsection></section><section display-inline="no-display-inline" id="H07D19531F23342EA882129151A89F2D5" section-type="subsequent-section"><enum>303.</enum><header>Special rule for
service providers on accrual method not applicable to C corporations</header>
<subsection id="HA3BA9E2BB0AE4ECD843A240D6CEED56C"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">Subparagraph (A) of
section 448(d)(5) is amended by inserting <quote>(other than a C
corporation)</quote> after <quote>any person</quote>.</text>
</subsection><subsection display-inline="no-display-inline" id="HB4636F12FDB74867A09E3D244A9E6C14"><enum>(b)</enum><header>Effective
date</header>
<paragraph id="HD68AEF1EE24F4CE58D713F34B828BBDF"><enum>(1)</enum><header>In
general</header><text>The amendments made by this section shall apply to
taxable years beginning after the date of the enactment of this Act.</text>
</paragraph><paragraph id="HDCC27CD95E9D45BFBB89E3026EC1C32E"><enum>(2)</enum><header>Change in method
of accounting</header><text display-inline="yes-display-inline">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—</text>
<subparagraph id="HEA1CB08D449C4B3996E515EF510131F8"><enum>(A)</enum><text>such change shall
be treated as initiated by the taxpayer,</text>
</subparagraph><subparagraph id="H655DF3BDDFB54451BB5D60F196A9F8BF"><enum>(B)</enum><text>such change shall
be treated as made with the consent of the Secretary of the Treasury,
and</text>
</subparagraph><subparagraph id="HEBBFFF1F08D24FAB8BBBC3AF76A3487A"><enum>(C)</enum><text display-inline="yes-display-inline">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.</text>
</subparagraph></paragraph></subsection></section><enum>IV</enum><header>Modification to
expensing and depreciation rules</header>
<section id="H3FC4E06698F64F63B1919E7C0291D3E7"><enum>401.</enum><header>Small business
expensing provisions made permanent</header>
<subsection id="H4DC37395F4BD498D8BBE2DD6AEA49C99"><enum>(a)</enum><header>Increase in
small business expensing made permanent</header><text display-inline="yes-display-inline">Subsection (b) of section 179 is
amended—</text>
<paragraph id="HEC3D3E6B64CE46D290E51D4A4322F899"><enum>(1)</enum><text>by striking
<quote>$25,000 ($250,000 in the case of taxable years beginning after 2007 and
before 2011)</quote> in paragraph (1) and inserting <quote>$250,000</quote>,
and</text>
</paragraph><paragraph id="HE7E0FD8F9FA348EEB217534C204D2A3B"><enum>(2)</enum><text>by striking
<quote>$200,000 ($800,000 in the case of taxable years beginning after 2007 and
before 2011)</quote> in paragraph (2) and inserting
<quote>$800,000</quote>.</text>
</paragraph></subsection><subsection id="H6FC3605EE9374F20B2E7F5D5C748B470"><enum>(b)</enum><header>Expensing for
computer software made permanent</header><text>Clause (ii) of section
179(d)(1)(A) is amended by striking <quote>and which is placed in service in a
taxable year beginning after 2002 and before 2011,</quote>.</text>
</subsection><subsection id="H2C79A43D30214195B03EA607A770D316"><enum>(c)</enum><header>Effective
date</header>
<paragraph id="H39E69034DFAC4E1CA49D0E6C41A578DA"><enum>(1)</enum><header>In
general</header><text>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.</text>
</paragraph><paragraph id="HD07B5D3170174325BE6D0DA9F057247B"><enum>(2)</enum><header>Computer
software</header><text>The amendment made by subsection (b) shall apply to
property placed in service after the date of the enactment of this Act.</text>
</paragraph></subsection></section><section id="HFCC497ADFEF6487EBEC4ACD4C3025115" section-type="subsequent-section"><enum>402.</enum><header>Amortization of
goodwill and other intangibles</header>
<subsection id="HE91B191D68B7417197E60723498BC75D"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">Subsection (a) of
section 197 (relating to general rule) is amended by striking
<quote>15-year</quote> and inserting <quote>20-year</quote>.</text>
</subsection><subsection id="HC60A87FF0FBE423F850F500D272DC318"><enum>(b)</enum><header>Certain
interests or rights acquired separately</header><text>Clause (i) of section
197(e)(4)(D) is amended by striking <quote>15 years</quote> and inserting
<quote>20 years</quote>.</text>
</subsection><subsection id="HE867C8BEB35D48AA83D1C48ADAF091FF"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to property
acquired after the date of the enactment of this Act.</text>
</subsection></section><enum>V</enum><header>Codification of
economic substance doctrine</header>
<section display-inline="no-display-inline" id="HFC299F2B235C40E7B04459AD6C496A88" section-type="subsequent-section"><enum>501.</enum><header>Codification of
economic substance doctrine</header>
<subsection commented="no" display-inline="no-display-inline" id="HD106815B2B6641B889D2AF134736B54A"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">Section 7701 is
amended by redesignating subsection (p) as subsection (q) and by inserting
after subsection (o) the following new subsection:</text>
<quoted-block display-inline="no-display-inline" id="H2D3935A2E333499DA80B873F3F6725CF" style="OLC">
<subsection commented="no" display-inline="no-display-inline" id="H751B8B2910BA41319FCF928C8D3F3CD5"><enum>(p)</enum><header display-inline="yes-display-inline">Clarification of economic substance
doctrine</header>
<paragraph commented="no" display-inline="no-display-inline" id="H6F9D6FD9BC0C4CE7A45459D41EAA4F5A"><enum>(1)</enum><header display-inline="yes-display-inline">Application of doctrine</header><text>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—</text>
<subparagraph commented="no" display-inline="no-display-inline" id="H5EDCE6E8642847F38DDDDA3188780D4F"><enum>(A)</enum><text display-inline="yes-display-inline">the transaction changes in a meaningful way
(apart from Federal income tax effects) the taxpayer’s economic position,
and</text>
</subparagraph><subparagraph commented="no" display-inline="no-display-inline" id="H2D9D0C08D43F4394853EEA9C5EA22F40"><enum>(B)</enum><text display-inline="yes-display-inline">the taxpayer has a substantial purpose
(apart from Federal income tax effects) for entering into such
transaction.</text>
</subparagraph></paragraph><paragraph commented="no" display-inline="no-display-inline" id="HF4EE473407D54E8C8B6455D1C1284082"><enum>(2)</enum><header display-inline="yes-display-inline">Special rule where taxpayer relies on
profit potential</header>
<subparagraph id="H4A6B432E7BE848EB856F57C31E7850E5"><enum>(A)</enum><header>In
general</header><text>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.</text>
</subparagraph><subparagraph commented="no" display-inline="no-display-inline" id="HB536FA94D0CA4886810CCC012E588611"><enum>(B)</enum><header display-inline="yes-display-inline">Treatment of fees and foreign
taxes</header><text display-inline="yes-display-inline">Fees and other
transaction expenses and foreign taxes shall be taken into account as expenses
in determining pre-tax profit under subparagraph (A).</text>
</subparagraph></paragraph><paragraph id="HAC9D20A5C9D1480C96391AFA6E5C3220"><enum>(3)</enum><header>State and local
tax benefits</header><text>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.</text>
</paragraph><paragraph id="HEAB393D2019A48C2B7806455BE0E50DF"><enum>(4)</enum><header>Financial
accounting benefits</header><text>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.</text>
</paragraph><paragraph commented="no" display-inline="no-display-inline" id="H2F94C51462564D29A15F537BAAA0F3E6"><enum>(5)</enum><header display-inline="yes-display-inline">Definitions and special rules</header><text display-inline="yes-display-inline">For purposes of this subsection—</text>
<subparagraph commented="no" display-inline="no-display-inline" id="H858A856183A444FCAE06F90F7E6B6167"><enum>(A)</enum><header display-inline="yes-display-inline">Economic substance doctrine</header><text display-inline="yes-display-inline">The term <term>economic substance
doctrine</term> 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.</text>
</subparagraph><subparagraph commented="no" display-inline="no-display-inline" id="HEFB986165DE84C7DAFA5E6A1674EAF58"><enum>(B)</enum><header display-inline="yes-display-inline">Exception for personal transactions of
individuals</header><text display-inline="yes-display-inline">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.</text>
</subparagraph><subparagraph commented="no" display-inline="no-display-inline" id="HEE6D2111C58E4AF5901CD6ADEE3E6CC1"><enum>(C)</enum><header display-inline="yes-display-inline">Other common law doctrines not
affected</header><text display-inline="yes-display-inline">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.</text>
</subparagraph><subparagraph id="H1F4434F00A5D44D79FACF5FAAD800955"><enum>(D)</enum><header>Determination of
application of doctrine not affected</header><text display-inline="yes-display-inline">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.</text>
</subparagraph></paragraph><paragraph commented="no" display-inline="no-display-inline" id="H98DDAC79138C4F40BB617429CFB6FD8B"><enum>(6)</enum><header display-inline="yes-display-inline">Regulations</header><text display-inline="yes-display-inline">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.</text>
</paragraph></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection commented="no" display-inline="no-display-inline" id="HE6EAEC8105CC4F789E07DBF9367F4E1F"><enum>(b)</enum><header display-inline="yes-display-inline">Effective
Date</header><text display-inline="yes-display-inline">The amendments made by
this section shall apply to transactions entered into after the date of the
enactment of this Act.</text>
</subsection></section><enum>VI</enum><header>Modifications to
deductions for dividends received</header>
<section id="H70F5B134FEA941A2B47CE596A1D04341"><enum>601.</enum><header>Modifications
to deductions for dividends received</header>
<subsection id="H527CC464A8CC4DA0AC68821AF9BADEBD"><enum>(a)</enum><header>General
reduction in percentage of deduction</header>
<paragraph id="HB45B4E1964224906B3477C7BD33D3B45"><enum>(1)</enum><header>In
general</header><text>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 <quote>70 percent</quote> and inserting <quote>60
percent</quote>.</text>
</paragraph><paragraph id="H0F1ED5A2561843F48F580BD036610CB8"><enum>(2)</enum><header>Conforming
amendments</header><text>Paragraph (2) of section 861(a), before amendment by
subsection (c), is amended by striking <quote>100/70th</quote> both places it
appears and inserting <quote>100/60th</quote>.</text>
</paragraph></subsection><subsection id="HE45A8C40AC8147C481067F69D79C7D49"><enum>(b)</enum><header>Reduction in
percentage for 20-Percent owned corporations</header>
<paragraph id="H57B1BB772C3B4DE8AF692C653AD9931B"><enum>(1)</enum><header>In
general</header><text>Sections 243(c)(1), 245(c)(1)(B), 246(b)(3)(A),
246A(a)(1) is amended by striking <quote>80 percent</quote> and inserting
<quote>70 percent</quote>.</text>
</paragraph><paragraph id="HA504647D43A54FBA8F3E02AB97EE0A08"><enum>(2)</enum><header>Conforming
amendment</header><text display-inline="yes-display-inline">Paragraph (2) of
section 861(a) is amended by striking <quote>100/80th</quote> and inserting
<quote>100/70th</quote>.</text>
</paragraph></subsection><subsection id="H310DDF26A76F43A1A761BB67A6D650D6"><enum>(c)</enum><header>Repeal of NOL
exception to limitation on aggregate deductions; establishment of
carryforward</header>
<paragraph id="H135B0FCFD217455CA1EDEB87A663BA1D"><enum>(1)</enum><header>In
general</header><text>Paragraph (2) of section 246(b) is amended to read as
follows:</text>
<quoted-block display-inline="no-display-inline" id="HF001D94D5D064C54A98B745F42D8E261" style="OLC">
<paragraph id="H45488E925A75494A91CAD4F8577085DC"><enum>(2)</enum><header>Carryforward</header><text display-inline="yes-display-inline">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).</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph id="HFE7BCAAE8B5648DDA8B6FCDF76123C1C"><enum>(2)</enum><header>Conforming
amendments</header>
<subparagraph id="HF509B6D93E9D4691BA58475EA4F7F247"><enum>(A)</enum><text>Subsection (d) of
section 172 is amended by striking paragraph (5) and by redesignating paragraph
(6) as paragraph (5).</text>
</subparagraph><subparagraph id="HEA0BE17B41D94D92AABC483D87AD4A78"><enum>(B)</enum><text>Subparagraph (A)
of section 172(b)(2) is amended by striking <quote>paragraphs (1), (4), and
(5)</quote> and inserting <quote>paragraphs (1) and (4)</quote>.</text>
</subparagraph><subparagraph id="H3D617FE123E5430A846055C04A7E9BED"><enum>(C)</enum><text>Paragraph (1) of
section 246(b) is amended by striking <quote>Except as provided in paragraph
(2), the</quote> and inserting <quote>The</quote>.</text>
</subparagraph><subparagraph id="HC60B5677B87A43CC8544FD0D561607DB"><enum>(D)</enum><text>Paragraph (3) of
section 246(b) is amended by striking <quote>paragraph (1)</quote> and
inserting <quote>paragraphs (1) and (2)</quote>.</text>
</subparagraph><subparagraph id="HD7C2293807BC44B69D1150AC718B4569"><enum>(E)</enum><text>Subparagraph (B)
of section 805(a)(4) is amended by striking <quote>section 1212(a)(1),</quote>
and all that follows and inserting <quote>section 1212(a)(1).</quote>.</text>
</subparagraph></paragraph></subsection><subsection id="H7E1884242ADD4849B984368F40212047"><enum>(d)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to taxable
years beginning after December 31, 2008.</text>
</subsection></section><enum>VII</enum><header>Other
provisions</header>
<section commented="no" display-inline="no-display-inline" id="H15B1B040BC0D472DA8324D3DA88A78BA" section-type="subsequent-section"><enum>701.</enum><header>Recognition of
ordinary income on sale or exercise of stock option in S corporation with an
ESOP</header>
<subsection commented="no" id="H1FEE75ECF7E14FF2A4B9947BFCA1DBBA"><enum>(a)</enum><header>In
general</header><text>Subpart A of part I of subchapter D of chapter 1 is
amended by adding at the end the following new section:</text>
<quoted-block display-inline="no-display-inline" id="HFAA8F35660CC40AE917263D0335A4F00" style="OLC">
<section commented="no" id="H4128BA5305C844ED8B898D28E56F6D3F"><enum>409B.</enum><header>Recognition of
ordinary income on sale or exercise of stock option in S corporation with an
ESOP</header>
<subsection commented="no" id="H52A198692274448084CD390EF2CC99A0"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">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.</text>
</subsection><subsection commented="no" id="HDFD0FC28E0794667A596C7BE6D095B8B"><enum>(b)</enum><header>Income inclusion
amount</header><text>For purposes of this section, the term <term>income
inclusion amount</term> means, with respect to the holder of any option, the
excess (if any) of—</text>
<paragraph id="H373E97BB253646BBA1B7D36AFC93FB5C"><enum>(1)</enum><text>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</text>
</paragraph><paragraph id="HBA27D199EBD14BA7904CCF086C6518A5"><enum>(2)</enum><text>the sum of the net
loss amounts with respect to such option for all such taxable years.</text>
</paragraph></subsection><subsection id="HAE83C5710D024F3191CBDBE053177BC7"><enum>(c)</enum><header>Net income and
loss amounts</header><text>For purposes of this section, with respect to any
taxable year of the S corporation—</text>
<paragraph id="H6EDD4DE347A144AF89A10BCF56893AFE"><enum>(1)</enum><header>Net income
amount</header><text>The term <term>net income amount</term> means the excess
(if any) of—</text>
<subparagraph id="H506F2192E9474CB7B86EB8B7E2BD2567"><enum>(A)</enum><text display-inline="yes-display-inline">the pass-thru income share for such taxable
year, over</text>
</subparagraph><subparagraph id="HAA2625EB1CAD432CB643472AF0F86D3C"><enum>(B)</enum><text>the pass-thru loss
share for such taxable year.</text>
</subparagraph></paragraph><paragraph id="H7A8B7505FD0F44A7942F14987DE9A5E2"><enum>(2)</enum><header>Net loss
amount</header><text>The term <term>net loss amount</term> means the excess (if
any) of the amount described in paragraph (1)(B) over the amount described in
paragraph (1)(A).</text>
</paragraph></subsection><subsection commented="no" id="HFCA8C66BBE03496D97E0ED608AAF0697"><enum>(d)</enum><header>Pass-Thru income
and loss shares</header><text>For purposes of this section, with respect to any
taxable year of the S corporation—</text>
<paragraph commented="no" id="HC19DFB5D8C2A4CD0BAD26BCF7AAB394E"><enum>(1)</enum><header>Pass-Thru income
share</header><text>The term <term>pass-thru income share</term> means the
excess (if any) of—</text>
<subparagraph commented="no" id="HF1794470EB654D58A0020328C877D240"><enum>(A)</enum><text>the aggregate
items of income taken into account under section 1366 by the employee stock
ownership plan for such taxable year, over</text>
</subparagraph><subparagraph commented="no" id="H5FD27E37A1C5495A867C7FE6D6AE49A6"><enum>(B)</enum><text>the aggregate
items of income which would have been so taken into account if such option had
been exercised upon being granted.</text>
</subparagraph></paragraph><paragraph id="HC5A3BB8DF9F44045BBEFD10887A25F54"><enum>(2)</enum><header>Pass-Thru loss
share</header><text>The term <term>pass-thru loss share</term> means the excess
(if any) of—</text>
<subparagraph commented="no" id="H870161E487B54A3DB7745197697E1947"><enum>(A)</enum><text>the aggregate
items of deduction and loss taken into account under section 1366 by the
employee stock ownership plan for such taxable year, over</text>
</subparagraph><subparagraph commented="no" id="H456D677D6D8B4ECDA0715168965B40B8"><enum>(B)</enum><text>the aggregate
items of deduction and loss which would have been so taken into account if such
option had been exercised upon being granted.</text>
</subparagraph></paragraph></subsection><subsection commented="no" id="H2585D8FC6D554B2A8141E9E7AFB337EA"><enum>(e)</enum><header>Interest at
underpayment rate</header>
<paragraph id="H1EB572E15A8D4775A799E653CDE7E74B"><enum>(1)</enum><header>In
general</header><text>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.</text>
</paragraph><paragraph id="H4980748AAE8E480088C3E8E16F4175FA"><enum>(2)</enum><header>Reduction for
previous net loss amounts</header><text>For purposes of paragraph (1), the net
income amount for any taxable year shall be reduced by the excess of—</text>
<subparagraph id="H586BCE83BDE74D71805155832B6270B9"><enum>(A)</enum><text>the aggregate net
loss amounts for taxable years taken into account under subsection (c) with
respect to the taxpayer, over</text>
</subparagraph><subparagraph id="HAF44DE7903694CE3B3DF0FA4193CBAE7"><enum>(B)</enum><text>the amount of such
aggregate previously taken into account under this paragraph to reduce any net
income amount.</text>
</subparagraph></paragraph></subsection><subsection commented="no" id="H7B080D146EF14F50A6AE976BA2A4CDAE"><enum>(f)</enum><header>Other
definitions and special rules</header><text>For purposes of this
section—</text>
<paragraph commented="no" id="HDDF4CE403D8947C49E1E1A8D66A4FC12"><enum>(1)</enum><header>Option</header><text>The
term <term>option</term> includes any synthetic equity described in section
409(p)(6)(C).</text>
</paragraph><paragraph commented="no" id="H26CECDB82BB7459A8AA40CEDFFDBCAC9"><enum>(2)</enum><header>Effect of
starting or terminating an S corporation election</header><text>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.</text>
</paragraph><paragraph id="H72C45B99040542A9B757E16FE228E49D"><enum>(3)</enum><header>Adjustments to
basis</header>
<subparagraph commented="no" id="H25A928FB98FA4E478724C84CD54F56CB"><enum>(A)</enum><header>Increase in
basis of acquired stock</header><text display-inline="yes-display-inline">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.</text>
</subparagraph><subparagraph id="H8657C82674B0477B8F7345535DB7E5A3"><enum>(B)</enum><header>Increase in
basis of option on sale</header><text display-inline="yes-display-inline">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.</text>
</subparagraph></paragraph></subsection></section><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection commented="no" id="H2AF569ED554E4A688640A75F30D53A3F"><enum>(b)</enum><header>Conforming
amendments</header>
<paragraph commented="no" id="HF58F178349084DDCB02A303774EC347B"><enum>(1)</enum><text>Section 26(b)(2)
is amended by striking <quote>and</quote> at the end of subparagraph (W), by
striking the period at the end of subparagraph (X) and inserting <quote>,
and</quote>, and by adding at the end the following new subparagraph:</text>
<quoted-block display-inline="no-display-inline" id="H42EA766C650640AA872B03CF854881C7" style="OLC">
<subparagraph commented="no" id="HCC249AF564C745F38C8027863FFB92F3"><enum>(Y)</enum><text display-inline="yes-display-inline">subsection (e) of section 409B (relating to
interest on income recognized upon exercise of a stock option in an S
corporation with an
ESOP).</text>
</subparagraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph commented="no" id="H1B50D53FFEED492C9CAF1961C4FDD63C"><enum>(2)</enum><text>Section 1016(a) is
amended by striking <quote>and</quote> at the end of paragraph (36), by
striking the period at the end of paragraph (37) and inserting <quote>,
and</quote>, and by adding at the end the following new paragraph:</text>
<quoted-block display-inline="no-display-inline" id="H8C50F3C7A67243408A1C8BD3C76FF14C" style="OLC">
<paragraph commented="no" id="H3DD260E125544584843FD7D88521CC45"><enum>(38)</enum><text>to the extent
provided in section
409B(f)(3).</text>
</paragraph><after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph><paragraph commented="no" id="H36B2F63D6F73459B80CC42FB17342C63"><enum>(3)</enum><text display-inline="yes-display-inline">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:</text>
<quoted-block display-inline="no-display-inline" id="H351B0440790C417FABCF3D808E9AB491" style="OLC">
<toc container-level="quoted-block-container" idref="HFAA8F35660CC40AE917263D0335A4F00" lowest-bolded-level="division-lowest-bolded" lowest-level="section" quoted-block="no-quoted-block" regeneration="yes-regeneration">
<toc-entry idref="H4128BA5305C844ED8B898D28E56F6D3F" level="section">Sec. 409B. Recognition of ordinary income on sale or exercise
of stock option in S corporation with an
ESOP.</toc-entry>
</toc>
<after-quoted-block>.</after-quoted-block></quoted-block>
</paragraph></subsection><subsection commented="no" id="H631BCBFDB124443B82D338372FDDC9FD"><enum>(c)</enum><header>Effective
date</header><text>The amendments made by this section shall apply to options
granted after the date of the enactment of this Act.</text>
</subsection></section><section id="H43D01D415141459F98E743B53D8DBB04" section-type="subsequent-section"><enum>702.</enum><header>Treatment of
securities of a controlled corporation exchanged for assets in certain
reorganizations</header>
<subsection id="H97076C6338B34BDDA4E175E67FC08EF8"><enum>(a)</enum><header>In
general</header><text display-inline="yes-display-inline">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:</text>
<quoted-block display-inline="no-display-inline" id="HD2DA7C42F9484087A1957B41FE9E5026" style="OLC">
<subsection id="H7F5E65D8315A435BBEFB31B886343BA9"><enum>(d)</enum><header>Receipt of
securities, etc., in exchange for assets in certain
reorganizations</header><text display-inline="yes-display-inline">If—</text>
<paragraph id="H979818420F864509ABA702B0190A091B"><enum>(1)</enum><text>property is
transferred to a corporation (hereinafter in this subsection referred to as the
<quote>controlled corporation</quote>) pursuant to a plan of reorganization
described in section 368(a)(1)(D), and</text>
</paragraph><paragraph id="H5185888C88954A84A4825DB7E46E0C6A"><enum>(2)</enum><text>pursuant to such
plan of reorganization, stock or securities in the controlled corporation are
distributed in a transaction which qualifies under section 355,</text>
</paragraph><continuation-text continuation-text-level="subsection">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).</continuation-text></subsection><after-quoted-block>.</after-quoted-block></quoted-block>
</subsection><subsection id="HE9D77529844948568A8EAB28D8D50A5F"><enum>(b)</enum><header>Effective
date</header><text>The amendment made by subsection (a) shall apply to
distributions after the date of the enactment of this Act.</text>
</subsection></section>